FIN 370 Final Exam
1. The Securities Investor Protection Corporation protects individuals from
brokerage firm failures
making poor investment decisions
fraud by corporations
other investors who fail to make delivery
2. You just purchased a parcel of land for $10,000. If you expect a 12% annual rate of return on your investment, how much will you sell the land for in 10 years?
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3. When calculating the weighted average cost of capital, which of the following has to be adjusted for taxes?
4. Buying and selling in more than one market to make a riskless profit is called:
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5. Which of the following is true about bonds?
They have a fixed maturity, and they pay an amount equal to the maturity value times the coupon rate each year.
At maturity of the bond, the investor receives the market price of the bond.
They are obligations from the investor to the corporation.
Their interest rate always varies with the Consumer Price Index
6. Compute the payback period for a project with the following cash flows, if the company's discount rate is 12%.
Initial outlay = $450
Year 1 = $325
Year 2 = $65
Year 3 = $100
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7. Which of the following best describes why cash flows are utilized rather than accounting profits when evaluating capital projects?
Cash flows have a greater present value than accounting profits.
Cash flows improve the tax position of a firm more than accounting profits.
Cash flows are more stable than accounting profits.
Cash flows reflect the timing of benefits and costs more accurately than accounting profits.
8. Delta Inc. is considering the purchase of a new machine which is expected to increase sales by $10,000 in addition to increasing non-depreciation expenses by $3,000 annually. Due to the sales increase, Delta expects its working capital to increase $1,000 during the life of the project. Delta will depreciate the machine using the straight-line method over the project's five
year life to a salvage value of zero. The machine's purchase price is $20,000. The firm has a marginal tax rate of 34 percent, and its required rate of return is 12 percent. The machine's initial cash outflow is:
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9. Which of the following is most likely to occur if a firm over-invests in net working capital?
The return on investment will be lower than it should be.
The times interest earned ratio will be lower than it should be.
The current ratio will be lower than it should be.
The quick ratio will be lower than it should be.
10. Metals Corp. has $2,575,000 of debt, $550,000 of preferred stock, and $18,125,000 of common equity. Metals Corp.'s after-tax cost of debt is 5.25%, preferred stock has a cost of 6.35%, and newly issued common stock has a cost of 14.05%. What is Metals Corp.'s weighted average cost of capital?
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11. Which of the following financial ratios is the best measure of the operating effectiveness of a firm's management?
Return on investment
Gross profit margin
12. We compute the profitability index of a capital-budgeting proposal by Initial outlay = $1,748.80
dividing the present value of the...
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