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FIN350 Sample Final Version B

There will be 40 questions in the final exam. There will be NO question on the measurement of free cash flows or standard deviation of investment returns.

The list of equations below will be reprinted on the final exam.

To toggle between END and BEGIN model, press 2nd, BGN, 2nd, ENTER

Current ratio = Current assets / Current liabilities

FA turnover = Sales / Net fixed assets

TA turnover = Sales / Total assets

Inv. turnover = Sales / Inventories

Days Sales Outstanding = Receivables / Average sales per day

Debt ratio (D/A)= Total debt / Total assets

Profit margin = Net income / Sales

BEP = EBIT / Total assets

ROA = Net income / Total assets

ROE = Net income / Total common equity

P/E = Price / Earnings per share

M/B = Mkt price per share / Book value per share

ROE = (NI/Sales) x (Sales/TA) x (TA/Equity)

PV = FVn / ( 1 + i )n

iPER = iNOM / m

EFF%= ( 1 + iNOM / m )m - 1

WACC = wdrd(1-T) + wprp + wcrs

rp = D / P

rs = D1 / P0 + g

CAPM: rs = rRF + (rM – rRF) β

Rd (before tax): YTM

Firm value=FCF1/(WACC-g) if free cash flows grow at a constant rate

For bond: YTM = Current yield + Capital gains yield

The following questions are authentic questions from the final exam of Fall 2006.

1. You hope to buy a car 5 years from now, and you plan to save $2,000 per year, beginning immediately. You will make 5 deposits in an account that pays 8% interest. Under these assumptions, how much will you have 5 years from today?

a. $11,976.27

b. $17,925.96

c. $15,423.29

d. $12,671.86

e. $13,349.15

Work under the BEGIN model because we are having an annuity due.

5 N, 2000 PMT, 0 PV, 8 I/Y, CPT FV

Do not forget to return to END model

2. An account was opened with an investment of $2,000 10 years ago. The ending balance in the account is $3,500. If interest was compounded annually, what rate was earned on the account?

A) 3.95%

B) 2.66%

C) 3.22%

D) 5.76%

E) 4.81%

-2000 PV, 10 N, 0 PMT, 3500 FV, CPT I/Y

3. What’s the present value of $4,000 discounted back 3 years if the appropriate interest rate is 8%, compounded monthly?

a. $2,982.90

b. $3,149.02

c. $2,649.78

d. $2,023.74

e. $3,708.26

monthly interest rate=8%/12=0.666%, there are 36 months in 3 years

4000 FV, 36 N, 0.666 I/Y, 0 PMT, CPT PV

4. Which of the following is/are true of a zero coupon bond?

a. The bond makes no coupon payments.

b. The bond sells at a discount prior to maturity.

c. The bond has a zero value.

d. All of the above are true.

e. a and b above are true

5. The interest rate charged per period multiplied by the number of periods per year is called the:

Effective annual rate (EAR).

Annual percentage rate (APR).

Periodic interest rate.

Compound interest rate.

Daily interest rate.

Periodic interest rate=nominal interest rate/ the number of periods per year=APR/ the number of periods per year

6. If the Treasury yield curve is downward sloping, what is the yield to maturity on a 10-year Treasury bond, relative to that on a 1-year Treasury bond?

a. The yields on the two bonds are equal.

b. The yield on a 10-year Treasury bond will always be higher than the yield on a 1-year Treasury bond.

c. It is impossible to tell without knowing the coupon rates of the bonds.

d. The yield on the 10-year Treasury bond is less than the yield on a 1-year Treasury bond.

e. It is impossible to tell without knowing the relative default risks of the two Treasury bonds.

7. Find the current yield and the capital gains yield for a 10-year, 10% annual coupon bond that sells for $900, and has a face value of $1,000.

A) 10%, 0.67%

B) 11.11%, 0.64%

C) 11.11%, 11.75%

D) 9%, 0.76%

E) 9%, 0.67%

current yield=coupon/price=100/900=11.11%

yield to maturity=from calculator=11.75%

capital gain yield= yield to maturity-current yield=0.64%

8. Which of the following bonds would be considered to be of speculative-grade (junk bond)?

a. A treasury bond.

b. A BBB-rated bond.

c. A B-rated bond.

d. none of above

BBB is the lower rate for investment grade

9. You determine that XYZ common stock will return 14 percent. XYZ has a beta of 1. Risk free rate is 5%. The market expected return is 10 percent. Which of the following is most likely to happen:

You and other investors will sell XYZ stock and its return will fall.

You and other investors will buy up XYZ stock and its price will rise.

You and other investors will buy up XYZ stock and its return will rise.

You and other investors will sell XYZ stock and its price will fall.

Expected return=14%, required return=5%+1*(10%-5%)=10%10%.

21. A project has the following cash flows. What is the payback period?

Year 0 1 2 3

Cash flow -$5,000 $2,700 $3,300 $1,400

a. 1.88 years

b. 1.70 years

c. 1.76 years

d. 1.84 years

e. 1.39 years

1+(5000-2700)/3300=1+2300/3300=1.697=1.70

22. A project has the following cash flows. What is the internal rate of return?

Year 0 1 2 3

Cash flow -$390,000 $168,000 $190,000 $218,600

a. 20.32 percent

b. 22.85 percent

c. 21.32 percent

d. 22.02 percent

e. 21.54 percent

at this level of discount rate, NPV is close to zero.

23. You have a choice between 2 mutually exclusive investments. If you require a 15% return, which investment should you choose? Assume you have plenty of cash to make the investment.

|Year |A |B |

| |Cash Flow |Cash Flow |

|0 |–$100,000 |–$125,000 |

|1 |20,000 |75,000 |

|2 |40,000 |45,000 |

|3 |80,000 |40,000 |

| | | |

Neither A nor B.

Project B, because it has a higher NPV.

Project A, because it has a smaller initial investment.

Project A, because it has the higher internal rate of return.

Project B, because it pays back faster.

Compute NPV for both projects, Project B’s NPV is higher.

24. Which of the following would be considered a capital budgeting decision?

A) Planning to issue common stock rather than issuing preferred stock

B) A decision to expand into a new line of products, at a cost of $5 million

C) Repurchasing shares of common stock

D) Issuing debt in the form of long-term bonds

E) None of the above

A decision to spend money and invest in something real assets.

25. Which of the following should a company consider in an analysis when evaluating a proposed project?

a. The new project is expected to reduce sales of the company’s existing products by 15 percent a year.

b. Vacant facilities not currently leased out could instead be leased out for $10 million a year.

c. If the new project is taken, the company has to spend $30 million next year to improve the facilities in which the new project will be housed.

d. Statements a and b are correct.

e. All of the statements above are correct.

a. incidental effect. b. opportunity cost. c. relevant cash flows.

The following are either practice questions or authentic final-exam questions from other semesters.

26. Which of the following factors should the manager include when estimating the relevant cash flows?

a. Any sunk costs associated with the project.

b. Any interest expenses associated with the project.

c. Any opportunity costs associated with the project.

d. Statements b and c are correct.

e. All of the statements above are correct.

|27. |A bond that is issued by US federal government is called a _______ bond. |

|A) |corporate |

|B) |municipal |

|C) |James |

|D) |junk |

|E) |treasury |

| | |

28. One common reason for partnerships to convert to a corporate form of organization is that the partnership:

A) wishes to avoid double taxation of profits.

B) has rapidly growing financing requirements.

C) has issued all of its allotted shares.

D) agreement expires after ten years of use

E) none of the above

It is easier for corporation to raise capital (meaning getting money from outside of the company)

29. Financial managers are expected to make corporate decisions to maximize

A) the wealth of both shareholders and bondholders

B) the wealth of shareholders

C) the wealth of bondholders.

D) the wealth of corporate employees

E) the value of the firm with bond and stock holders

30. You have two plans to pay your friend: plan A: you pay $1000 to your friend three yeas from now , with a discount rate of 5%; plan B: you pay $5000 to your friend 10 years from now, with a discount rate of 5%, which plan do you prefer from your point of view? (assume that you are rational)

A) A

B) B

C) Either A or B

D) none of the above

PV(A)= 1000/1.053= $863.84; PV(B)= 5000/1.0510. Since PV(A) is less than PV(B), plan A is cheaper and better for you.

31..The IRR is defined as:

A) The discount rate at which level the NPV of a project is equal to zero

B) The difference between the cost of capital and the present value of the cash flows

C) The discount rate used in the NPV method

D) The discount rate used in the discounted payback period method

E) None of the above

32. A stock paying $5 in annual dividends next year sells now for $50 and has an expected return of 14%. What the expected growth rate of dividends?

A) 5%

B) 4%

C) 6%

D) 7%

E) none of the above

Since 50=5/(0.14-g), g=0.04.

33.

|. |You have discovered from looking at charts of past stock prices that if you buy just after a stock price has |

| |increased for five consecutive days, you make money every time! This is clearly a violation of _________ market |

| |efficiency. For another example, suppose that firms with high earnings earn abnormally high returns for several |

| |months after the earnings announcement. This is clearly a violation of _________ market efficiency. |

|A) |strong form; semi-strong form |

|B) |semi-weak form; weak form |

|C) |semi-strong form; strong form |

|D) |strong form; weak form |

|E) |weak form; semi-strong form |

34.When the stock market is strong-form efficient, then the stock price incorporates (reflects)

A) information reflected in the historical prices

B) private information

C) public information

D) all relevant information, including public and private information

E) None of the above

35. In order for a manager to correctly decide to take an investment, the NPV of the investment should be:

A) positive.

B) larger than the cost of capital.

C) less than the cost of capital

D) same as the cost of capital

E) none of the above

36. If a stock's beta is 1 during a period when the market portfolio was down by 10%, then, in advance, we could expect the return on this individual stock to:

A) go down by 10% .

B) go up by 10%.

C) have no change.

D) go in any direction

Since the Beta of the stock is the same as the Beta of the market portfolio, the stock tends to move as fast as the market, which is represented by the market portfolio.

37. What is the beta of a three-stock portfolio including 25% of Stock A with a beta of .90, 40% Stock B with a beta of 1.05, and 35% Stock C with a beta of 1.73?

A) 1.05

B) 1.17

C) 1.22

D) 1.25

E) None of the above

The beta of a portfolio is the weighted average of the betas of the securities in the portfolio. That is, the beta of the portfolio =0.25*0.9+0.4*1.05+0.35*1.73=1.25

38. Net Operating Working Capital (simply referred to as NOWC) is the:

A) Difference between current assets and non-interest-bearing current liabilities

B) Difference between long-term assets and long term liabilities

C) Difference between long-term assets and short term liabilities

D) None of the above

A (by definition)

39. The market value of equity is $500 million and the total market value of the firm is $925 million. The market value of debt is $425million (=925-400). The cost of equity is 15%, the cost of debt is 10%, and the tax rate is 35%. What is the firm’s WACC?

A)11.09%

B)12.18%

C)13.78%

D)14.17%

E)15.64%

500/925*0.15 +425/925*0.10*(1-0.35)=11.09%

40. Required stock returns required by investors can be explained by the stock's

A) systematic risk

B) unique risk.

C) firm-specific risk

D) total risk.

E) none of the above.

According to CAPM, the answer is A

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