1. FIN 370 Final Exam SET 2
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1) In terms of organizational costs, which of the following sequences is correct,
moving from lowest to highest cost?
A.
Sole proprietorship, general partnership, corporation, limited partnership
B.
Corporation, limited partnership, general partnership, sole proprietorship
C.
Sole proprietorship, general partnership, limited partnership, corporation
D.
General partnership, sole proprietorship, limited partnership, corporation
2) Which of the following best describes the goal of the firm?
A.
The maximization of the total market value of the firm’s common stock]
B.
Profit maximization
C.
Risk minimization
D.
None of the above
3) Which of the following categories of owners have limited liability?
A.
General partners

2. B.
Sole proprietors
C.
Shareholders of a corporation
D.
Both a and b
4) Money market instruments include:
A.
preferred stock.
B.
corporate bonds.
C.
bankers’ acceptances.
D.
common stock.
5) Which of the following would increase the need for external equity?
A.
A slow-down in economic growth
B.
A reduction in corporate profits
C.
Inadequate investment opportunities
D.
A seasonal reduction in sales revenues

3. 6) When public corporations decide to raise cash in the capital markets, what type
of financing vehicle is most favored?
A.
Preferred stock
B.
Common stock
C.
Retained earnings
D.
Corporate bonds
7) Which of the following is NOT a principle of basic financial management?
A.
Incremental cash flow counts
B.
Efficient capital markets
C.
Risk/return tradeoff
D.
Profit is king
8) Difficulty in finding profitable projects is due to:
A.
competitive markets.
B.
ethical dilemmas.
C.

4. social responsibility.
D.
opportunity costs.
9) According to the agency problem, _________ represent the principals of a
corporation.
A.
managers
B.
employees
C.
shareholders
D.
suppliers
10) The accounting rate of return on stockholders’ investments is measured by:
A.
return on equity.
B.
operating income return on investment.
C.
return on assets.
D.
realized rate of inflation.
11) Which of the following financial ratios is the best measure of the operating
effectiveness of a firm’s management?
A.
Gross profit margin

5. B.
Quick ratio
C.
Current ratio
D.
Return on investment
12) Marshall Networks, Inc. has a total asset turnover of 2.5% and a net profit
margin of 3.5%. The firm has a return on equity of 17.5%. Calculate Marshall’s
debt ratio.
A.
40%
B.
50%
C.
30%
D.
60%
13) If you are an investor, which of the following would you prefer?
A.
Earnings on funds invested would compound daily.
B.
Earnings on funds invested would compound monthly.
C.
Earnings on funds invested would compound annually.
D.
Earnings on funds invested would compound quarterly.

6. 14) When George Washington was president of the United States in 1797, his
salary was $25,000. If you assume an annual rate of inflation of 2.5%, how much
would his salary have been in 1997?
A.
$954,719
B.
$2,525,548
C.
$4,085,920
D.
$1,025,000
E.
$3,489,097
15) Northwest Bank pays a quoted annual (nominal) interest rate of 4.75%.
However, it pays interest (compouned) daily using a 365-day year. What is the
effective annual rate of return (APY)?
A.
5.02%
B.
3.61%
C.
4.75%
D.
4.86%
16) Which of the following is NOT a basic function of a budget?
A.
Budgets allow for performance evaluation.

7. B.
Budgets compare historical costs of the firm with its current cost performance.
C.
Budgets indicate the need for future financing.
D.
Budgets provide the basis for corrective action when actual figures differ from the
budgeted figures.
17) The primary purpose of a cash budget is to:
A.
determine the estimated income tax for the year.
B.
provide a detailed plan of future cash flows.
C.
determine the level of investment in current and fixed assets.
D.
determine accounts payable.
18) All of the following are found in the cash budget EXCEPT:
A.
new financing needed.
B.
cash disbursements.
C.
a net change in cash for the period.
D.
inventory.

8. 19) Which of the following is a non-cash expense?
A.
Administrative salaries
B.
Packaging costs
C.
Depreciation expenses
D.
Interest expense
20) A plant can remain operating when sales are depressed:
A.
unless variable costs are zero when production is zero.
B.
in an effort to cover at least some of the variable cost.
C.
if the selling price per unit exceeds the variable cost per unit.
D.
to help the local economy.
21) The break-even model enables the manager of a firm to:
A.
determine the optimal amount of debt financing to use.
B.
determine the quantity of output that must be sold to cover all operating costs.
C.
calculate the minimum price of common stock for certain situations.

9. D.
set appropriate equilibrium thresholds.
22) At what rate must $400 be compounded annually for it to grow to $716.40 in
10 years?
A.
8%
B.
7%
C.
6%
D.
5%
23) If you have $20,000 in an account earning 8% annually, what constant
amount could you withdraw each year and have nothing remaining at the end of
five years?
A.
$2,465.78
B.
$3,408.88
C.
$3,525.62
D.
$5,008.76
24) How long will it take $750 to double at 8% compounded annually?
A.
12 years

10. B.
9 years
C.
6.5 years
D.
48 months
25) Which of the following is considered to be a spontaneous source of
financing?
A.
Accounts payable
B.
Inventory
C.
Operating leases
D.
Accounts receivable
26) A toy manufacturer following the hedging principle will generally finance
seasonal inventory build-up prior to the Christmas season with:
A.
preferred stock.
B.
trade credit.
C.
common stock.
D.
selling equipment.

11. 27) Which of the following is NOT considered a permanent source of financing?
A.
Commercial paper
B.
Preferred stock
C.
Corporate bonds
D.
Common stock
28) We compute the profitability index of a capital-budgeting proposal by:
A.
dividing the present value of the annual after-tax cash flows by the cost of capital.
B.
dividing the present value of the annual after-tax cash flows by the cost of the
project.
C.
multiplying the IRR by the cost of capital.
D.
multiplying the cash inflow by the IRR.
29) Dieyard Battery Recyclers is considering a project with the following cash
flows: Initial outlay = $13,000
Cash flows: Year 1 = $5,000
Year 2 = $3,000
Year 3 = $9,000
If the appropriate discount rate is 15%, compute the NPV of this project.
A.

12. -$466
B.
$27,534
C.
$4,000
D.
$8,891
30) Compute the payback period for a project with the following cash flows, if the
company’s discount rate is 12%. Initial outlay = $450
Cash flows: Year 1 = $325
Year 2 = $ 65
Year 3 = $100
A.
3.17 years
B.
2.88 years
C.
3.43 years
D.
2.6 years
31) Many firms today continue to use the payback method but employ the NPV or
IRR methods as secondary decision methods of control for risk.
A.
True
B.
False

13. 32) Most firms use the payback period as a secondary capital-budgeting
technique, which, in a sense, allows them to control for risk.
A.
True
B.
False
33) You have been asked to analyze a capital investment proposal. The project’s
cost is $2,775,000. Cash inflows are projected to be $925,000 in Year 1;
$1,000,000 in Year 2; $1,000,000 in Year 3; $1,000,000 in Year 4; and
$1,225,000 in Year 5. Assume that your firm discounts capital projects at 15.5%.
What is the project’s MIRR?
A.
10.44%
B.
16.73%
C.
12.62%
D.
19.99%
34) The firm should accept independent projects if:
A.
the profitability index is greater than 1.0.
B.
the IRR is positive.
C.
the payback is less than the IRR.
D.

14. the NPV is greater than the discounted payback.
35) The NPV assumes cash flows are reinvested at the:
A.
NPV.
B.
real rate of return.
C.
IRR.
D.
cost of capital.
36) 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.)
A.
$4,568
B.
$7,621
C.
$1,056
D.
$6,577
37) PepsiCo uses 30-year Treasury bonds to measure the risk-free rate
because:
A.
these bonds are essentially free of business risk.
B.

15. they capture the long-term inflation expectations of investors associated with
investments in long-term assets.
C.
these bonds are essentially free of interest rate risk.
D.
none of the above.
38) The most expensive source of capital is:
A.
new common stock.
B.
debt.
C.
preferred stock.
D.
retained earnings.
39) The average cost associated with each additional dollar of financing for
investment projects is:
A.
the marginal cost of capital.
B.
risk-free rate.
C.
the incremental return.
D.
beta.

16. 40) Shawhan Supply plans to maintain its optimal capital structure of 30% debt,
20% preferred stock, and 50% common stock far into the future. The required
return on each component is: debt–10%; preferred stock–11%; and common
stock–18%. Assuming a 40% marginal tax rate, what after-tax rate of return must
Shawhan Supply earn on its investments if the value of the firm is to remain
unchanged?
A.
13.0%
B.
10.0%
C.
18.0%
D.
14.2%
41) The XYZ Company is planning a $50 million expansion. The expansion is to
be financed by selling $20 million in new debt and $30 million in new common
stock. The before-tax required rate of return on debt is 9%, and the required rate
of return on equity is 14%. If the company is in the 40% tax bracket, what is the
marginal cost of capital?
A.
9.0%
B.
10.6%
C.
14.0%
D.
11.5%
42) Given the following information, determine the risk-free rate.
Cost of equity = 12%

17. Beta = 1.50
Market risk premium = 3%
A.
8.0%
B.
7.5%
C.
6.5%
D.
7.0%
43) Zybeck Corp. projects operating income of $4 million next year. The firm’s
income tax rate is 40%. Zybeck presently has 750,000 shares of common stock
which have a market value of $10 per share, no preferred stock, and no debt. The
firm is considering two alternatives to finance a new product: (a) the issuance of
$6 million of 10% bonds, or (b) the issuance of 60,000 new shares of common
stock. If Zybeck issues common stock this year, what will projected EPS be next
year?
A.
$2.10
B.
$2.96
C.
$1.67
D.
$2.33
44) Castle Corp. generated $2 million in operating income from sales of $20
million during the latest fiscal year. The firm’s interest expense was $500,000,
and the corporate income tax rate was 40%. Investors require a rate of return of

18. 18%. Using the dependence hypothesis approach to valuation, what is the market
value of Castle?
A.
$9.6 million
B.
$8.3 million
C.
$5.1 million
D.
$7.2 million
E.
$6.5 million
45) Farar, Inc. projects operating income of $4 million next year. The firm’s
income tax rate is 40%. Farar presently has 750,000 shares of common stock, no
preferred stock, and no debt. The firm is considering the issuance of $6 million of
10% bonds to finance a new product that is not expected to generate an increase
in income for two years. If Farar issues the bonds this year, what will projected
EPS be next year?
A.
$1.53
B.
$1.98
C.
$3.12
D.
$2.33
E.

19. $2.72
46) _________ risk is generally considered only a paper gain or loss.
A.
Transaction
B.
Translation
C.
Financial
D.
Economic
47) Which of the following statements about exchange rates is true?
A.
Exchange rates were fixed prior to establishing a floating-rate international
currency system, and all countries set a specific parity rate for their currency
relative either to the Canadian or to the U.S. dollar.
B.
Day-to-day fluctuations in exchange rates currently are caused by changes in
parity rates.
C.
A floating-rate international currency system has been operating since 1973.
D.
All of the choices.
48) Capital markets in foreign countries:
A.
offer lower returns than those obtainable in the domestic capital markets.
B.

20. provide international diversification.
C.
in general are becoming less integrated due to the widespread availability of
interest rate and currency swaps.
D.
all of the choices.
49) If the quote for a forward exchange contract is greater than the computed
price, the forward contract is:
A.
overvalued.
B.
undervalued.
C.
at equilibrium.
D.
a good buy.
50) The interplay between interest rate differentials and exchange rates such that
both adjust until the foreign exchange market and the money market reach
equilibrium is called the:
A.
purchasing power parity theory.
B.
balance of payments quantum theory.
C.
arbitrage markets theory.
D.
interest rate parity theory.

21. 51) A spot transaction occurs when one currency is:
A.
deposited in a foreign bank.
B.
immediately exchanged for another currency.
C.
traded for another at an agreed-upon future price.
D.
exchanged for another currency at a specified price.
52) The purchasing power parity theory states that currency exchange rates tend
to vary ____________ with their respective purchasing powers in order to provide
_________ purchasing powers.
A.
inversely; similar
B.
directly; similar
C.
directly; greater
D.
inversely; greater
53) Buying and selling in more than one market to make a riskless profit is called:
A.
profit maximization.
B.
arbitrage.
C.

22. cannot be determined from the above information.
D.
international trading.
54) An important (additional) consideration for a direct foreign investment is:
A.
political risk.
B.
maximizing the firm’s profits.
C.
attaining a high international P/E ratio.
D.
all of the above.