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Davenport FINC620 final exam 2016Davenport FINC620 final exam 2016

by | Jun 18, 2022 | Questions & Answers

QuestionSave All Answers Save and SubmitQuestion 1The interest tax shield is a key reason why:A. the required rate of return on assets rises when debt is added to the capital structure.B. the value of an unlevered firm is equal to the value of a levered firm.C. the net cost of debt to a firm is generally less than the cost of equity.D. the cost of debt is equal to the cost of equity for a levered firm.E. firms prefer equity financing over debt financing.4 points Save AnswerQuestion 2Rosita’s has a cost of equity of 13.8% and a pre-tax cost of debt of 8.5%. The debt-equity ratio is .60 and the tax rate is .34. What is Rosita’s unlevered cost of capital?A. 8.83%B. 12.30%C. 13.97%D. 14.08%E. 14.60%4 points Save Answer138 = RU + (RU – .085) × .60 × (1 − .34); .17166 = 1.396RU; RU = .12297 = 12.30 %Question 3Juanita’s Steak House has $12,000 of debt outstanding that is selling at par and has a coupon rate of 8%. The tax rate is 34%. What is the present value of the tax shield?A. $2,823B. $2,887C. $4,080D. $4,500E. $4,6334 points Save AnswerPresent value of the tax shield = .34×$12,000 = $4,080Question 4The Backwoods Lumber Co. has a debt-equity ratio of .80. The firm’s required return on assets is 12% and its cost of equity is 15.68%. What is the pre-tax cost of debt based on MM Proposition II with no taxes?A. 6.76%B. 7.00%C. 7.25%D. 7.40%E. 7.50%4 points Save Answer.1568 = .12 + (.12 – Rd)´.80; Rd= .074 = 7.40%Question 5The combination of the efficient set of portfolios with a riskless lending and borrowing rate results in:A. the capital market line which shows that all investors will only invest in the riskless asset.B. the capital market line which shows that all investors will invest in a combination of the riskless asset and the tangency portfolio.C. the security market line which shows that all investors will invest in the riskless asset only.D. the security market line which shows that all investors will invest in a combination of the riskless asset and the tangency portfolio.E. None of these.4 points Save AnswerQuestion 6A stock with an actual return that lies above the security market line:A. has more systematic risk than the overall market.B. has more risk than warranted based on the realized rate of return.C. has yielded a higher return than expected for the level of risk assumed.D. has less systematic risk than the overall market.E. has yielded a return equivalent to the level of risk assumed.4 points Save AnswerQuestion 7The primary purpose of portfolio diversification is to:A. increase returns and risks.B. eliminate all risks.C. eliminate asset-specific risk.D. eliminate systematic risk.E. lower both returns and risks.4 points Save AnswerQuestion 8A portfolio contains two assets. The first asset comprises 40% of the portfolio and has a beta of 1.2. The other asset has a beta of 1.5. The portfolio beta is:A. 1.35B. 1.38C. 1.42D. 1.50E. 1.554 points Save Answerβp = .4(1.2) + .6(1.5) = 1.38Question 9Payback is frequently used to analyze independent projects because:A. it considers the time value of money.B. all relevant cash flows are included in the analysis.C. it is easy and quick to calculate.D. it is the most desirable of all the available analytical methods from a financial perspective.E. it produces better decisions than those made using either NPV or IRR.4 points Save AnswerQuestion 10A project has an initial cost of $2,100. The cash inflows are $0, $500, $900, and $700 over the next four years, respectively. What is the payback period?A. 1 yearsB. 2 yearsC. 3 yearsD. 4 yearsE. never4 points Save AnswerQuestion 11The payback period rule accepts all investment projects in which the payback period for the cash flows is:A. greater than one.B. greater than the cutoff point.C. less than the cutoff point.D. positive.E. None of these.4 points Save AnswerQuestion 12The internal rate of return for a project will increase if:A. the initial cost of the project can be reduced.B. the total amount of the cash inflows is reduced.C. each cash inflow is moved such that it occurs one year later than originally projected.D. the required rate of return is reduced.E. the salvage value of the project is omitted from the analysis.4 points Save AnswerQuestion 13An investment with an initial cost of $14,000 produces cash flows of $4,000 annually for 5 years. If the cash flow is evenly spread out over the year and the firm can borrow at 10%, the discounted payback period is _____ years.A. 2.5B. 2.68C. 4.53D. 4.87E. Never4 points Save AnswerQuestion 14Estimates using the arithmetic average will probably tend to _____ values over the long-term while estimates using the geometric average will probably tend to _____ values over the short-term.A. overestimate; overestimateB. overestimate; underestimateC. underestimate; overestimateD. underestimate; underestimateE. accurately; accurately4 points Save AnswerQuestion 15A stock has an expected rate of return of 8.3% and a standard deviation of 6.4%. Which one of the following best describes the probability that this stock will lose 11% or more in any one given year?A. less than 0.5%B. less than 1.0%C. less than 1.5%D. less than 2.5%E. less than 5%4 points Save AnswerLower bound of 99% probability range = .083 – (3´.064) = -.109 = -10.9%;Probability of losing 11% or more is less than 0.5%.Question 16You purchased 300 shares of Deltona, Inc. stock for $44.90 a share. You have received a total of $630 in dividends and $14,040 in proceeds from selling the shares. What is your capital gains yield on this stock?A. 4.06%B. 4.23%C. 4.68%D. 8.55%E. 8.91%4 points Save AnswerCost = 300×$44.90 = $13,470;Capital gains yield = ($14,040 – $13,470) ÷ $13,470 = 4.23%Question 17One year ago, you purchased a stock at a price of $32 a share. Today, you sold the stock and realized a total return of 25%. Your capital gain was $6 a share. What was your dividend yield on this stock?A. 1.25%B. 3.75%C. 6.25%D. 18.75%E. 21.25%4 points Save AnswerCapital  gain yield = $6/$32=18.75%;Divided yield = 25%/18.75%=6.25%Question 18Excelsior shares are currently selling for $25 each. You bought 200 shares one year ago at $24 and received dividend payments of $1.50 per share. What was your percentage capital gain this year?A. 4.17%B. 6.25%C. 10.42%D. 104.17%E. 110.42%4 points Save AnswerTotal Return = ($25 – $24)/$25 = .04167 = 4.17%Question 19Murphy’s, Inc. has 10,000 shares of stock outstanding with a par value of $1.00 per share. The market value is $8 per share. The balance sheet shows $32,500 in the capital in excess of par account, $10,000 in the common stock account and $42,700 in the retained earnings account. The firm just announced a 10% (small) stock dividend. What will the market price per share be after the dividend?A. $7.20B. $7.27C. $7.33D. $8.00E. $8.804 points Save AnswerMarket price per share = (10,000 shares×$8)÷(10,000 shares×1.10) = $7.27; Note that the total market value of the firm does not changeQuestion 20Samuel’s has 7,000 shares of stock outstanding with a par value of $1.00 per share and a market value of $12 per share. The balance sheet shows $7,000 in the common stock account, $58,000 in the capital in excess of par account and $32,500 in the retained earnings account. The firm just announced a 50% (large) stock dividend. What is the value of the common stock account after the dividend?A. $7,000B. $8,500C. $9,000D. $10,500E. $14,0004 points Save AnswerCommon stock = [(7,000 shares × .50) × $1] + $7,000 = $10,500Question 21Samuel’s has 7,000 shares of stock outstanding with a par value of $1.00 per share and a market value of $12 per share. The balance sheet shows $7,000 in the common stock account, $58,000 in the capital in excess of par account, and $32,500 in the retained earnings account. The firm just announced a 50% (large) stock dividend. What is the market value per share after the dividend?A. $6.00B. $8.00C. $9.00D. $10.50E. $12.004 points Save AnswerMarket value per share = (7,000 share x $12) (7,000 x 1.5) =$8.00Note that the total market value of the firm does not changeQuestion 22A reverse split is when:A. the stock price gets too high for investors to purchase in round lots.B. the stock becomes too liquid and highly marketable.C. the stock price moves into the popular trading range.D. several old shares, such as 4, are replaced by 1 new share.E. None of these.4 points Save AnswerQuestion 23Which one of the following statements concerning a sole proprietorship is correct?A. The life of the firm is limited to the life span of the owner.B. The owner can generally raise large sums of capital quite easily.C. The ownership of the firm is easy to transfer to another individual.D. The company must pay separate taxes from those paid by the owner.E. The legal costs to form a sole proprietorship are quite substantial.4 points Save AnswerQuestion 24Which one of the following statements concerning a sole proprietorship is correct?A. A sole proprietorship is the least common form of business ownership.B. The profits of a sole proprietorship are taxed twice.C. The owners of a sole proprietorship share profits as established by the partnership agreement.D. The owner of a sole proprietorship may be forced to sell his/her personal assets to pay company debts.E. A sole proprietorship is often structured as a limited liability company.4 points Save AnswerQuestion 25A stakeholder is:A. any person or entity that owns shares of stock of a corporation.B. any person or entity that has voting rights based on stock ownership of a corporation.C. a person who initially started a firm and currently has management control over the cash flows of the firm due to his/her current ownership of company stock.D. a creditor to whom the firm currently owes money and who consequently has a claim on the cash flows of the firm.E. any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of the firm.4 points Save AnswerQuestion 26Which one of the following is a capital budgeting decision?A. Determining how much debt should be borrowed from a particular lenderB. Deciding whether or not to open a new storeC. Deciding when to repay a long-term debtD. Determining how much inventory to keep on handE. Determining how much money should be kept in the checking account4 points Save AnswerQuestion 27Toni’s Tools is comparing machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs, differing machine lives, and will be replaced when worn out. These machines should be compared using:A. net present value only.B. both net present value and the internal rate of return.C. their equivalent annual costs.D. the depreciation tax shield approach.E. the replacement parts approach.4 points Save AnswerQuestion 28The equivalent annual cost method is useful in determining:A. the annual operating cost of a machine if the annual maintenance is performed versus when the maintenance is not performed as recommended.B. the tax shield benefits of depreciation given the purchase of new assets for a project.C. operating cash flows for cost-cutting projects of equal duration.D. which one of two machines to acquire given equal machine lives but unequal machine costs.E. which one of two machines to purchase when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out.4 points Save AnswerQuestion 29A company which uses the MACRS system of depreciation:A. will have equal depreciation costs each year of an asset’s life.B. will expense the cost of nonresidential real estate over a period of 7 years.C. can depreciate the cost of land, if it so desires.D. will write off the entire cost of an asset over the asset’s class life.E. cannot expense any of the cost of a new asset during the first year of the asset’s life.4 points Save AnswerQuestion 30Your firm purchased a warehouse for $335,000 six years ago. Four years ago, repairs were made to the building which cost $60,000. The annual taxes on the property are $20,000. The warehouse has a current book value of $268,000 and a market value of $295,000. The warehouse is totally paid for and solely owned by your firm. If the company decides to assign this warehouse to a new project, what value, if any, should be included in the initial cash flow of the project for this building?A. $0B. $268,000C. $295,000D. $395,000E. $515,000Opportunity cost = $295,0004 points Save AnswerQuestion 31The difference between bank cash and book cash is called:A. float.B. disbursement float.C. net float.D. collection float.E. None of these.4 points Save AnswerQuestion 32Collection float increases:A. disbursement float.B. bank cash.C. book cash.D. gross float times net float.E. None of these.4 points Save AnswerQuestion 33The Smythe firm expects a total cash need of $9,000 over the next 4 months. They have a beginning cash balance of $1,000, and cash is replenished when it hits zero. The fixed cost of selling securities to replenish cash balances is $4.00. The interest rate on marketable securities is 8% per annum. There is a constant rate of cash disbursement and no cash receipts during the month. Based on the firm’s current practice, what is the average daily cash balance (a month has 30 days)?A. $20.00B. $45.25C. $54.17D. $69.48E. None of these.4 points Save AnswerQuestion 34Checks written by the firm are said to generate:A. collection float.B. ledger float.C. disbursement float.D. book float.E. None of these.4 points Save AnswerQuestion 35The Holly Corporation has a new rights offering that allows you to buy one share of stock with 4 rights and $25 per share. The stock is now selling ex-rights for $30. The price rights-on is:A. $21.00.B. $25.00.C. $30.00.D. $31.25.E. impossible to determine without the cum-rights price.4 points Save AnswerRX=(PX-S)/N=($30-$25)/4=$1.25; Price = $30+$1.25=$31.25Question 36Which of the following is not one of the four main functions that underwriters provide?A. Risk bearingB. MarketingC. Auditing the financial statementsD. CertificationE. Monitoring4 points Save AnswerQuestion 37Venture capitalists areA. intermediaries that raise funds from outside investors.B. play an active role in overseeing, advising, and monitoring the companies in which they invest.C. generally do not want to own the investment forever.D. intermediaries that raise funds from outside investors and play an active role in overseeing, advising, and monitoring the companies in which they invest.E. intermediaries that raise funds from outside investors, play an active role in overseeing, advising, and monitoring the companies in which they invest, and generally do not want to own the investment forever.4 points Save AnswerQuestion 38Empirical evidence suggests that new equity issues are generally:A. priced efficiently by the market.B. overpriced by investor excitement concerning a new issue.C. overpriced resulting from SEC regulation.D. underpriced, in part, to counteract the winner’s curse.E. underpriced resulting from SEC regulation.4 points Save AnswerQuestion 39An investor discovers that for a certain group of stocks, large positive price changes are always followed by large negative price changes. This finding is a violation of the:A. moderate form of the efficient market hypothesis.B. semistrong form of the efficient market hypothesis.C. strong form of the efficient market hypothesis.D. weak form of the efficient market hypothesis.E. None of these.4 points Save AnswerQuestion 40Under the concept of an efficient market, a random walk in stock prices means that:A. there is no driving force behind price changes.B. technical analysts can predict future price movements to earn excess returns.C. the unexplained portion of price change in one period is unrelated to the unexplained portion of price change in any other period.D. the unexplained portion of price change in one period that cannot be explained by expected return can only be explained by the unexplained portion of price change in a prior period.E. None of these.4 points Save AnswerQuestion 41In order to create value from capital budgeting decisions, the firm is likely to:A. locate an unsatisfied demand for a particular product or service.B. create a barrier to make it more difficult for other firms to compete.C. produce products or services at a lower cost than the competition.D. locate an unsatisfied demand for a particular product or service and produce products or services at a lower cost than the competition.E. locate an unsatisfied demand for a particular product or service; create a barrier to make it more difficult for other firms to compete; and produce products or services at a lower cost than the competition.4 points Save AnswerQuestion 42If the market is weak form efficient:A. semistrong form efficiency holds.B. strong form efficiency must hold.C. semistrong form efficiency may hold.D. markets are not weak form efficient.E. None of these.4 points Save AnswerQuestion 43Your _____ tax rate is the amount of tax payable on the next taxable dollar you earn.A. deductibleB. residualC. totalD. averageE. Marginal4 points Save AnswerQuestion 44_____ is calculated by adding back noncash expenses to net income and adjusting for changes in current assets and liabilities.A. Operating cash flowB. Capital spendingC. Net working capitalD. Cash flow from operationsE. Cash flow to creditors4 points Save AnswerQuestion 45Which of the following is not included in the computation of operating cash flow?A. Earnings before interest and taxesB. Interest paidC. DepreciationD. Current taxesE. All of these are included4 points Save AnswerQuestion 46Earnings per share is equal to:A. net income divided by the total number of shares outstanding.B. net income divided by the par value of the common stock.C. gross income multiplied by the par value of the common stock.D. operating income divided by the par value of the common stock.E. net income divided by total shareholders’ equity.4 points Save AnswerQuestion 47If you have a choice to earn simple interest on $10,000 for three years at 8% or annually compounded interest at 7.5% for three years which one will pay more and by how much?A. Simple interest by $50.00B. Compound interest by $22.97C. Compound interest by $150.75D. Compound interest by $150.00E. None of these.4 points Save AnswerQuestion 48What is the future value of $1,000 a year for five years at a 6% rate of interest?A. $4,212.36B. $5,075.69C. $5,637.09D. $6,001.38E. $6,801.914 points Save AnswerQuestion 49Your parents are giving you $100 a month for four years while you are in college. At a 6% discount rate, what are these payments worth to you when you first start college?A. $3,797.40B. $4,167.09C. $4,198.79D. $4,258.03E. $4,279.324 points Save AnswerQuestion 50You estimate that you will have $24,500 in student loans by the time you graduate. The interest rate is 6.5%. If you want to have this debt paid in full within five years, how much must you pay each month?A. $471.30B. $473.65C. $476.79D. $479.37E. $480.404 points Save Answer   

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