Final Exam Comprehensive Questions

Which one of the following questions involves a working capital management decision

Should the firm require immediate payments from customers or offer credit terms?

Which one of the following outcomes best illustrates that the management of a firm is adhering to the goal of financial management

an increase in the market value per share

corporate dividends represent

aftertax income from the corporation which becomes taxable income for the recipient

Which one of the following statement concerning stock exchanges is correct?

Some large companies are listed on Nasdaq

The Sarbanes-Oxley Act of 2002 holds a public company’s _____ responsible for the accuracy of the company’s financial statements

managers

determining the number of shares of stock to issue is an example of a ____ decision

capital structure

Deciding which long-term investment a firm should make is a ____decision

capital budgeting

Why must financial managers strive to maximize the current value per share of the existing stock? To:

best represent the interests of the current owners of the firm

Which one of the following statements best reflects the primary goal of financial management

maximize the current value per share

Which one of the following outcomes best illustrates that the management of a firm is adhering to the goal of financial management

an increase in the market value per share

Which one of the following statements is generally correct

Auction markets match buy orders with sell orders

ultimately, the ___ controls the corporation

shareholders

Which one of the following actions would be most likely to reduce a firm’s agency’s costs

Reward high performing employees with shares of stock

Which one of the following financial reports shows the accounting value of a firm’s equity as of a particular date

balance sheet

Which one of the following financial reports summarizes a firm’s revenue and expenses during a period of time

income statement

Which one of the following statements concerning corporate income taxes is correct

the federal income tax is applied at a flat rate across all levels of taxable income

Which of the following actions could cause a company’s change in net working capital to be negative for a given year

borrow money from the bank using a note payable in nine months

Which one of the following events is a source of cash

Acquisition of debt

On a common-base year financial statement, inventory for the current year will be expressed relative to which one of the following

base-year inventory

The relationship between the return on assets and the return on equity is illustrated by the

DuPont Identity

Which one of the following accurately lists the three components of the DuPont identiy

Equity multiplier, net profit margin, and total asset turnover

Which one of the following possibilities does NOT represent a problem encountered when comparing the financial statement of two separate firms? When the two firms:

have the same fiscal year

Which one of the following factors is the LEAST important to consider when comparing the financial situations of utility companies that generate electric power and have the same SIC code

Number of part-time employees

Investor X and Investor Y are the same age. At age 22, Investor X invests $7,500 at 6 %, compounded annually. At age 28, Investor Y invests $7,500at 6 %, compounded annually. All else being constant, when the investors both reach age 72:

Investor X will have more money than Investor Y

Your relative promised to give you $25,000 on the day you graduate from college. You expect to graduate three years from now. If you speed up your plans to enable you to graduate two years from now, the present value of the promised gift will:

increase

According to Rule of 72, you can do which one of the following?

Approximately double your money in 11 years at 6.55% interest

Investor X invested $2,500 ten years ago and expected to have $7,500 today. They have neither added nor withdrawn any money since their initial investment . All interest was reinvested and compounded annually. As it turns out, they have only $6,800 in their account today. Which one of the following statements must be true?

they earned a lower interest rate than expected

An amortized loan:

may have equal or increasing amounts applied to the principal from each loan payment

You are trying to compare the present values of two separate streams of cash flows that have equivalent risks. One stream is expressed in nominal values and the other stream is expressed in real values. You decided to discount the nominal cash flows using a nominal annual rate of 7.5%. What rate should you use to discount the real cash flows?

comparable real rate

Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond’s interest or principal payments as expected? the ____ premium

default risk

Which one the following statements is true when applying the dividend growth model?

even if the dividend amount and growth rate remain constant, the value of a stock can vary

An analyst is applying the dividend growth model. If she expects the market rate of return to increase on all equity securities in the market, then she should also expect:

a decrease in all stock values

A forward PE ratio is based on

estimated future earnings

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation? The right to:

determine the amount of the dividend per share to be paid

Which one of the following transactions would occur in the primary market?

Purchase of newly issued stock from the issuer

In actual practice, managers most frequently use which two types of investment criteria?

Internal rate of return and net present value

There are two distinct rates at which a particular project will have a zero net present value. In this situation, the project is said to:

have multiple rates of return

If a firm accepts Project X it cannot also accept Project Y because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be

mutually exclusive

You are comparing two mutally exclusive project, Project X and Project Y. The crossover point is 13.2%. You have determined that you should accept project X if the required return is 14.1%. This implies you should:

always accept Project X if the required return exceeds the crossover rate

When evaluating two mutually exclusive projects, the final decision on which project to accept ultimately depends upon which one of the following

net present value

Which one the following outcomes would make a mutually exclusive project unacceptable

an equivalent annual cost that exceeds that of an alternative project

The equivalent annual cost considers all of the following factors except the:

costs of research conducted to identify equipment choices

Which one of the following statements best describes the principle of diversification

Spreading an investment across many diverse assets will eliminate some of the total risk

Of the options listed below, which are examples of diversifiable risk?
1. Wildfires damage an entire town.
2.the fed gov imposes a $12,000 fee on all business entities.
3. Payroll taxes increased nationally.
4. All software providers are required to improve their privacy standards

1. and 4. only

_____ measures the amount of systematic risk present in a particularly risky asset relative to the systematic risk present in an average risky asset

Beta

Which one of the following statements is accurate

Eliminating unsystematic risk is the responsibility of the individual investor.

The market risk premium equals the:

market rate of return minus the risk-free rate of return

A firm’s aftertax cost of debt will increase if there is an

decrease in the company’s tax rate

Assume a firm has debt-equity ratio of .46. The firm’s weighted average cost of capital is the

rate of return a company must earn on its existing assets to maintain the current value of it’s stock

The floatation cost for a company is computed as:

the weighted average of the floatation costs associated with each form of financing

Assume a firm’s floatation costs are 8.2% of the funding needed. Accordingly, when analyzing capital projects, the frim’s managers should:

increase the initial project cost by dividing that cost by (1-.082)

A firm has two vastly different lines of business: X and Y. The X line is the riskiest of the two, and accounts for 67% of the firm’s sales. When deciding which project proposals should be accepted the managers should

assign appropriate but differing, discount rates to each business line and then select the projects with the highest net present values

Assume a manager determines the cost of capital for a specific project based on the cost of capital at another firm with a line of business that is similar to the project. Accordingly, the manager is using the ____ approach

pure play