FIN 301 Prof.Thistle Principals of Managerial Finance Spring 2017 FINAL EXAM VERSION D MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Roddy Richards invested $12014.88 in Wolverine Meat Distributors (W.M.D.) five years ago. The investment had yearly arithmetic returns of 9.7%, 8.1%, 15%, 7.2%, and 15.4%. What is the geometric average return of Roddyʹs Richardʹs investment? 1) A) 6.96% B) 8.78% C) 3.38% D) 4.63% 2) Incremental cash flows from a project = 2) A) Firm cash flows with the project plus firm cash flows without the project. B) Firm cash flows with the project minus firm cash flows without the project. C) Firm cash flows without the project plus or minus changes in revenue with the project. D) Firm cash flows without the project plus or minus changes in net income. 3) The capital asset pricing model 3) A) provides a risk return trade off in which risk is measured in terms of the market returns. B) provides a risk return trade off in which risk is measured in terms of beta. C) depicts the total risk of a security. D) measures risk as the correlation coefficient between a security and market rates of return. 4) Based on current market values, Shawhan Supply ʹs capital structure is 30% debt, 20% preferred stock, and 50% common stock. When using book values, capital structure is 25% debt, 10% preferred stock, and 65% common stock. The required return on each component is: debt 10%; preferred stock 11%; and common stock 18%. The marginal tax rate is 40%. What rate of return must Shawhan Supply earn on its investments if the value of the firm is to remain unchanged? 4) A) 13.0% B) 18.0% C) 14.3% D) 10.0% 5) Merrimac Brewing companyʹs total assets equal $18 million. The book value of Merrimacʹs equity is $6 million. Excess cash is $200,000. The market value of Merrimacʹs equity is $10 million. Its Debt to Enterprise Value ratio is.5. What is Merrimacʹs Debt Ratio? 5) A).67 B).75 C).33 D).25 6) Which of the following best measures an assetʹs risk? 6) A) The cash return B) The standard deviation C) The probability distribution D) Expected return 7) From the information below, select the optimal capital structure for Mountain High Corp. 7) A) Debt = 80%; Equity = 20%; EPS = $3.42; Stock price = $30.40 B) Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $31.20 C) Debt = 50%; Equity = 50%; EPS = $3.05; Stock price = $28.90 D) Debt = 40%; Equity = 60%; EPS = $2.95; Stock price = $26.50 E) Debt = 70%; Equity = 30%; EPS = $3.31; Stock price = $30.00
8) Dawn Swift discovered that 20 years ago, the average tuition for one year at an Ivy League school was $4,500. Today, the average cost is $29,000. What is the growth rate in tuition cost over this 20 year period? Round off to the nearest 0.1%. 8) A) 10.6% B) 4.2% C) 15.5% D) 9.8% 9) Jayden spends a lot of time studying charts of stocks past performance, but his investment return are only average. This outcome supports 9) A) the weak form efficient market hypothesis. B) the semi strong form efficient market hypothesis. C) the strong form efficient market hypothesis. D) all of the above. 10) You purchased the stock of Sargent Motors at a price of $75.75 one year ago today. If you sell the stock today for $89.00, what is your rate of return? 10) A) 25.00% B) 35.00% C) 12.50% D) 17.50% 11) The WACC should be computed using 11) A) balance sheet weights and target yields. B) weights based on the firmʹs ideal capital structure and target yields on debt and equity. C) market weights and opportunity costs to the firm. D) market weights and opportunity costs to investors. 12) Fitchminster Armored Car can purchase a new vehicle for $200,000 that will provide annual net cash flow over the next five years of $40,000, $45,000, $50,000, $55,000, $60,000. The salvage value of the vehicle will be $25,000. Assume that the vehicle is sold at the end of year 5. Calculate the NPV of the ambulance if the required rate of return is 9%. (Round your answer to the nearest $1.) 12) A) $7,390 B) $6,048 C) $19,483 D) $6,780 13) Which of the following techniques will always produce a single rate of return estimate? 13) A) MIRR B) Discounted payback C) PI D) IRR 14) Which of the following factors favors the use of more debt in a companyʹs financial structure? 14) A) Risk of bankruptcy would make customers reluctant to buy the companyʹs products. B) The business is basically risky with unpredictable cash flows. C) Low levels of taxable income D) High levels of taxable income 15) Colby & Company bonds pay semiannual interest of $50. They mature in 15 years and have a par value of $1,000. The market rate of interest is 8%. The market value of Colby bonds is (round to the nearest dollar) 15) A) $1,000. B) $1,173. C) $827. D) $743. 16) What is the present value of $1,000 to be received 10 years from today? Assume that the investment pays 8.5% and it is compounded monthly (round to the nearest $1). 16) A) $3,106 B) $429 C) $893 D) $833
17) What type of risk can investors reduce through diversification? 17) A) All risk B) Uncertainty C) Systematic risk only D) Unsystematic risk only 18) If SuperMart decides to offer a line of groceries at its discount retail outlet, inventories are expected to increase by $1,200,000, accounts receivable by $300,000 and accounts payable by $500,000. What is the cash outflow for working capital requirements? 18) A) $1,500,000 B) $2,000,000 C) $1,700,000 D) $1,000,000 19) McDonaldʹs stock currently sells for $103. Itʹs expected earnings per share are $5.50. The average P/E ratio for the industry is 24. If investors expected the same growth rate and risk for McDonaldʹs as for an average firm in the same industry, itʹs stock price would 19) A) rise. B) stay about the same. C) fall. D) there is not enough information. 20) In its original form, the Modigliani and Miller Capital Structure Theorem 20) A) provided important insights into capital structure policy. B) concludes that how a firm is financed is not important. C) uses unrealistic assumptions. D) all of the above. 21) Which of the following best describes the goal of the firm? 21) A) The maximization of the total market value of the firmʹs common stock B) Profit maximization C) Risk minimization D) None of the above 22) If you hold a portfolio made up of the following stocks: Investment Value Beta Stock A $2,000 1.5 Stock B $5,000 1.2 Stock C $3,000.8 What is the beta of the portfolio? 22) A) 1.32 B) 1.17 C) 1.14 D) Canʹt be determined from information given 23) Alʹs Fabrication Shop is purchasing a new rivet machine to replace an existing one. The new machine costs $8,000 and will require an additional cost of $1,000 for modification and training. It will be depreciated using simplified straight line depreciation over five years. The new machine operates much faster than the old machine and with better quality. Consequently, sales are expected to increase by $2,100 per year for the next five years. While it is faster, it is fully automated and will result in increased electricity costs for the firm by $700 per year. It will, however, save about $850 per year in labor costs. The old machine is 20 years old and has already been fully depreciated. If the firmʹs marginal tax rate is 28%, compute the after tax incremental cash flows for the new machine for years 1 through 5. 23) A) $2,124 B) $1,620 C) $2,698 D) $450
24) Little Feet Shoe Co. just paid a dividend of $1.65 on its common stock. This companyʹs dividends are expected to grow at a constant rate of 3% indefinitely. If the required rate of return on this stock is 11%, compute the current value of per share of LFS stock. 24) A) $55.00 B) $21.24 C) $20.63 D) $15.00 25) Suppose that you wish to save for your childʹs college education by opening up an educational IRA. You plan to deposit $100 per month into the IRA for the next 18 years. Assume that you will be able to earn 10%, compounded monthly, on your investment. How much will you have accumulated at the end of 18 years? 25) A) $85,920 B) $60,056 C) $33,548 D) $54,719 E) $21,600 26) A friend of yours would like you to lend him $5,000 today to be paid back in 5 annual payments. What would be the equal annual end of year payment on this loan if you charge your friend 7% interest? 26) A) $1,219.51 B) $869.45 C) $1,000.00 D) $1,350.00 27) The Fisher effect can be expressed mathematically as 27) A) the nominal rate)= the real rate of interest + the inflation rate). B) (1+ the nominal rate)= (1+the real rate of interest) (1 + the inflation rate). C) ( nominal rate)= (the real rate of interest) ( the inflation rate). D) the real rate of interest= the nominal rate the inflation rate). 28) A friend plans to buy a big screen TV/entertainment system and can afford to set aside $1,320 toward the purchase today. If your friend can earn 5.0%, compounded yearly, how much can your friend spend in four years on the purchase? Round off to the nearest $1. 28) A) $1,764 B) $1,604 C) $1,283 D) $1,444 29) The question ʺDid the common stockholders receive an adequate return on their investment?ʺ is answered through the use of 29) A) leverage ratios. B) coverage ratios. C) profitability ratios. D) liquidity ratios. 30) The expected return on MSFT next year is 12% with a standard deviation of 20%. The expected return on AAPL next year is 24% with a standard deviation of 30%. If James makes equal investments in MSFT and AAPL, what is the expected return on his portfolio. 30) A) 20% B) 16% C) 25% D) 18%% 31) The yield to maturity on a bond 31) A) is the required return on the bond. B) is generally equal to the coupon interest rate. C) is lower for higher risk bonds. D) is fixed in the indenture. 32) ABC Service can purchase a new assembler for $15,052 that will provide an annual net cash flow of $6,000 per year for five years. Calculate the NPV of the assembler if the required rate of return is 12%. (Round your answer to the nearest $1.) 32) A) $4,568 B) $7,621 C) $6,577 D) $1,056
33) Francis Peabody just won the $89,000,000 California State Lottery. The lottery offers the winner a choice of receiving the winnings in a lump sum or in 26 equal annual installments to be made at the beginning of each year. Assume that funds would be invested at 7.65%. Francis is trying to decide whether to take the lump sum or the annual installments. What is the amount of the lump sum that would be exactly equal to the present value of the annual installments? Round off to the nearest $1. 33) A) $13,092,576 B) $41,083,128 C) $38,163,612 D) $89,000,000 34) If a stock has a much higher than normal P/E ratio, investors probably expect 34) A) a declining stock price. B) rapid growth in earnings. C) slow growth in earnings. D) large increases in the price of the stock. 35) Siebling Manufacturing Companyʹs common stock has a beta of.8. If the expected risk free return is 2% and the market offers a premium of 8% over the risk free rate, what is the expected return on Sieblingʹs common stock? 35) A) 13.4% B) 7.8% C) 8.4% D) 14.4% 36) Stonehedge Dairy will expand its organic yogurt production capacity at a cost of $10,000,000. The expansion will increase after tax operating cash by $1.4 million dollars per year for the next 20 years. Stonehedgeʹs WACC is 10%. To raise the $10,000,000 Stonehedge will need to issue new securities at a weighted average flotation cost of 10%. What is the NPV of the expansion? 36) A) $918,989 B) $1,918,989 C) $807,878 D) $11,918,989 37) What is the value on 1/1/14 of the following cash flows? Use a 10% discount rate, and round your answer to the nearest $1.00. Date Cash Received Amount of Cash 1/1/16 $100 1/1/17 $200 1/1/18 $300 1/1/19 $400 1/1/20 $500 37) A) $1,500 B) $968 C) $880 D) $1,065 38) The Blackburn Group has recently issued 20 year, unsecured bonds rated BB by Moodyʹs. These bonds yield 443 basis points above the U.S. Treasury yield of 2.76%. The yield to maturity on these bonds is 38) A) mortgage bonds. B) 4.43%. C) 12.23%. D) 7.19%. 39) Given the following annual net cash flows, determine the IRR to the nearest whole percent of a project with an initial outlay of $1,800. Year Net Cash Flow 1 $1,000 2 $750 3 $500 39) A) 8% B) 14% C) 12% D) 25%
40) Schiller Construction Inc. has estimated the following revenues and expenses related to phase I of a proposed new housing development. Incremental sales= $5,000,000, total cash operating expenses $3,500,000, depreciation $500,000, taxes 35%, interest expense, $200,000. Operating cash flow equals 40) A) $1,150,000 B) $650,000 C) $975,000 D) $1,000,000 41) Which of the basic financial statements is best used to answer the questions ʺWhat does the company own and how is it financed?ʺ 41) A) Balance sheet B) Statement of shareholderʹs equity C) Income statement D) Cash flow statement 42) UVP preferred stock pays $5.00 in annual dividends. If your required rate of return is 13%, how much will you be willing to pay for one share? 42) A) $26.26 B) $46.38 C) $38.46 D) $65.46 43) Which of the following should be considered when assessing the financial impact of business decisions? 43) A) The risk return tradeoff B) The amount of projected earnings C) The timing of projected earnings; i.e., when they are expected to occur D) All of the above 44) Which of the basic financial statements is best used to answer the question, ʺHow profitable is the business?ʺ 44) A) Balance sheet B) Income statement C) Statement of shareholderʹs equity D) Accounts receivable aging schedule 45) What is the annual compounded interest rate of an investment with a stated interest rate of 6% compounded quarterly for seven years (round to the nearest.1%)? 45) A) 6.1% B) 6.7% C) 10.9% D) 51.7% 46) Which of the following is true about bonds? 46) A) Their interest rate always varies with the Consumer Price Index. B) They have a fixed maturity, and they pay an amount equal to the maturity value times the coupon rate each year. C) At maturity of the bond, the investor receives the market price of the bond. D) They are obligations from the investor to the corporation. 47) According to the traditional approach to capital structure, the value of the firm will be maximized when the A) Financial leverage is maximized. B) Cost of debt is minimized. C) Weighted average cost of capital is minimized. D) Dividend payout is maximized. 48) Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds? A) A reduction in market interest rates. B) The company s bonds are downgraded. C) An increase in the default risk premium D) An increase in the inflation rate
49) What is the NPV of the estimated cash flows for the following project? The Company has a weighted average cost of capital of 11% and investors require a 13% return on the Company s common stock. 0 1 2 3 Projec t $100 m +40m +50m +60m A) $16.14M B) B. $20.49M C) $5.55M D) $50.00M E) $2.25M 50) Which of the following statements about a capital budgeting project is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. A) The lower the required rate of return used to calculate it, the lower the calculated NPV will be. B) If a project s NPV is less than zero, then its IRR must be less than the required rate of return. C) If a project s NPV is greater than zero, then its IRR must be less than zero. D) The NPV of a relatively low risk project should be found using a relatively high required rate of return.
1) C 2) B 3) B 4) A 5) A 6) B 7) B 8) D 9) D 10) D 11) D 12) A 13) A 14) D 15) B 16) B 17) D 18) D 19) A 20) D 21) A 22) C 23) A 24) B 25) B 26) A 27) B 28) B 29) C 30) D 31) A 32) C 33) B 34) B 35) C 36) C 37) B 38) D 39) B 40) A 41) A 42) C 43) D 44) B 45) A 46) B 47) C 48) A 49) B 50) B