FIN 571 Final Exam

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FIN 571 Week 1 Quiz

01.Which of the following business organizational
subjects the owner(s) to unlimited liability?

forms

sole proprietorship
partnership
corporation
a and b

02.Which of the following business organizational forms is

easiest to raise capital?

sole proprietorship
partnership
corporation
a and b

03.Which organizational form best enables the owners of the

firm to monitor the actions of other owners of the same firm?

private corporation
sole proprietorship
partnership
public corporation

04.Which of the following factors or activities can be controlled

by the management of the firm?

Stock market conditions.

Capital budgeting.
The level of economic activity.
The level of interest rates.

05.The legal system and market forces impose substantial

costs on individuals and institutions that engage in unethical
behavior. Which of the following would not be an example of
the above?

Agency conflicts.
Jail time.
Financial losses.
Legal fines.

06.The most common reason that corporate firms use the

futures and options markets is

to make deposits.
none of these.
to hedge risk.
to take risk.

07.Galan Associates prepared its financial statement for 2008

based on the information given here. The company had cash
worth $1,234, inventory worth $13,480, and accounts
receivables of $7,789. The company's net fixed assets are
$42,331, and other assets are $1,822. It had accounts
payables of $9,558, notes payables of $2,756, common stock

of $22,000, and retained earnings of $14,008. How much longterm debt does the firm have?

$76,342
$18,334
$54,342
$12,314

08.Tre-Bien Bakeries generated net income of $233,412 this

year. At year end, the company had accounts receivables of
$47,199, inventory of $63,781, and cash of $21,461. It also had
accounts payables of $51,369, short-term notes payables of
$11,417, and accrued taxes of $6,145. The net working capital
of the firm is

none of these
$68,931
$63,510
$69,655

09.Which of the following best represents cash flows to

investors?
Net income, minus dividends paid to preferred stockholders.
Earnings before interest and taxes times 1 minus the firms
tax rate.
Cash flow from operating activity, plus cash flow generated
from net working capital.
Cash flow from operating activity, minus cash flow invested
in net working capital, minus cash flow invested in long-term
assets.
10.Present value: Tommie Harris is considering an investment
that pays 6.5 percent annually. How much must he invest today
such that he will have $25,000 in seven years? (Round to the
nearest dollar.)
$38,850
$23,474

 $16,088
$26,625
11.PV of multiple cash flows: Jack Stuart has loaned money to
his brother at an interest rate of 5.75 percent. He expects to
receive $625, $650, $700, and $800 at the end of the next four
years as complete repayment of the loan with interest. How
much did he loan out to his brother? (Round to the nearest
dollar.)

$2,250
$2,545
$2,713
$2,404

12.PV of multiple cash flows: Hassan Ali has made an

investment that will pay him $11,455, $16,376, and $19,812 at
the end of the next three years. His investment was to fetch
him a return of 14 percent. What is the present value of these
cash flows? (Round to the nearest dollar.)

$33,124
$36,022
$41,675
$39,208

13.PV of multiple cash flows: Pam Gregg is expecting cash flows

of $50,000, $75,000, $125,000, and $250,000 from an
inheritance over the next four years. If she can earn 11 percent
on any investment that she makes, what is the present value of
her inheritance? (Round to the nearest dollar.)

$361,998
$309,432
$434,599
$412,372

14.Present value of an annuity: Transit Insurance Company has

made an investment in another company that will guarantee it
a cash flow of $37,250 each year for the next five years. If the
company uses a discount rate of 15 percent on its investments,
what is the present value of this investment? (Round to the
nearest dollar.)

$186,250
$101,766
$124,868
$251,154

15.Future value of an annuity: Carlos Menendez is planning to

invest $3,500 every year for the next six years in an
investment paying 12 percent annually. What will be the
amount he will have at the end of the six years? (Round to the
nearest dollar.)

$28,403
$24,670
$26,124
$21,000

16.Bond price: Briar Corp is issuing a 10-year bond with a

coupon rate of 7 percent. The interest rate for similar bonds is
currently 9 percent. Assuming annual payments, what is the
present value of the bond? (Round to the nearest dollar.)

$990
$872
$1,066
$945

17.PV of dividends: Cortez, Inc., is expecting

dividend of $2.50 next year. After that it expects
grow at 7 percent for the next four years. What
value of dividends over the next five-year period
rate of return is 10 percent?

to pay out a
its dividend to
is the present
if the required

$10.76
$11.50
$9.80
$11.88

18.PV of dividends: Givens, Inc., is a fast growing technology

company that paid a $1.25 dividend last week. The company's
expected growth rates over the next four years are as follows:
25 percent, 30 percent, 35 percent, and 30 percent. The
company then expects to settle down to a constant-growth rate
of 8 percent annually. If the required rate of return is 12
percent, what is the present value of the dividends over the
fast growth phase?

$6.46
$7.24
$8.37
$1.25

19.Which one of the following statements about trend analysis

is NOT correct?
It allows management to examine each ratio over time and
determine whether the trend is good or bad for the firm.
This benchmark is based on a firm's historical performance.
The Standard Industrial Classification (SIC) System is used to
identify benchmark firms.
All of these are true statements.
20.Coverage ratios: Sectors, Inc., has an EBIT of $7,221,643
and interest expense of $611,800. Its depreciation for the year
is $1,434,500. What is its cash coverage ratio?

None of these
14.15 times
15.42 times
18.34 times

21.Multiples analysis: Turner Corp. has debt of

$230 million and generated a net income of $121 million in the
last fiscal year. In attempting to determine the total value of
the firm, an investor identified a similar firm in Jacobs, Inc., an
all-equity firm. This firm had 150 million shares outstanding, a
share price of $14.25, and net income of $182 million. What is
the total value of Turner Corp.? Round to the nearest million
dollars.

$1,715
$1,651
$1,421
$1,191

million
million
million
million

22.Coverage ratios, like times interest earned and cash

coverage ratio, allow
a firm's creditors to assess how well the firm will meet its
interest obligations.
a firm's creditors to assess how well the firm will meet its
short-term liabilities other than interest expense.
a firm's management to assess how well they meet shortterm liabilities.
a firm's shareholders to assess how well the firm will meet its
short-term liabilities.

23.Peer group analysis can be performed by

management choosing a set of firms that are similar in size
or sales, or who compete in the same market.
using the average ratios of this peer group, which would then
be used as the benchmark.
identifying firms in the same industry that are grouped by
size, sales, and product lines, in order to establish
benchmark ratios.
Only a and b relate to peer group analysis.

24.Efficiency ratio: If Viera, Inc., has an accounts receivable

turnover of 3.9 times and net sales of $3,436,812, what is its
level of receivables?

$13,403,567
$881,234
$1,340,357
$81,234

25.The operating cycle

ends not with the finished goods being sold to customers and
the cash collected on the sales; but when you take into
account the time taken by the firm to pay for its purchases.
To measure operating cycle we need another measure called
the days' payables outstanding.
begins when the firm receives the raw materials it purchased
that would be used to produce the goods that the firm
manufactures.
begins when the firm uses its cash to purchase raw materials
and ends when the firm collects cash payments on its credit
sales.
26.You are provided the following working capital information
for the Ridge Company:
Ridge Company
Account
$
Inventory
$12,890
Accounts receivable
12,800
Accounts payable 12,670
Net sales
$124,589
Cost of goods sold
99,630
Operating cycle: What is the operating cycle for Ridge
Company?

51
47
85
36

days
days
days
days

27. Ticktock Clocks sells 10,000 alarm clocks each year. If the
total cost of placing an order is $65 and it costs $85 per year to
carry the alarm clock in inventory, use the EOQ formula to
calculate the optimal order size.

26,154 clocks
124 clocks
15,294 clocks
161 clocks

28. The asset substitution problem occurs when

managers substitute less risky assets for riskier
detriment of equity holders.
managers substitute riskier assets for less risky
detriment of bondholders.
managers substitute less risky assets for riskier
detriment of bondholders.
managers substitute riskier assets for less risky
detriment of equity holders.

ones to the
ones to the
ones to the
ones to the

29. M&M Proposition 1: Dynamo Corp. produces annual cash

flows of $150 and is expected to exist forever. The company is
currently financed with 75 percent equity and 25 percent debt.
Your analysis tells you that the appropriate discount rates are
10 percent for the cash flows, and 7 percent for the debt. You
currently own 10 percent of the stock.
How much are your cash flows today?

$4.50
$12.38
$150
$15

30.M&M Proposition 2: Melba's Toast has a capital structure

with 30% debt and 70% equity. Its pretax cost of debt is 6%,
and its cost of equity is 10%. The firm's marginal corporate

income tax rate is 35%. What is the appropriate

WACC?

6.35%
7.44%
8.80%
8.17%

31.According to the text, the financial plan covers a period of

ten years.
none of these.
one year.
three to five years.

32.The financing plan of a firm will indicate

the firm's dividend policy, the desired capital structure for
the firm, and the firm's working capital policy.
the dollar amount of funds that has to be raised externally
and the sources of funds available to the firm, the desired
capital structure for the firm, and the firm's dividend policy.
the dollar amount of funds that has to be raised externally
and the sources of funds available to the firm, the desired
capital structure for the firm, and the firm's working capital
policy.
the dollar amount of funds that has to be raised externally
and the sources of funds available to the firm, the firm's
dividend policy, and the firm's working capital policy.

33.Payout and retention ratio: Tradewinds Corp. has revenues

of $9,651,220, costs of $6,080,412, interest payment of
$511,233, and a tax rate of 34 percent. It paiddividends of
$1,384,125 to shareholders. Find the firm's dividend payout
ratio and retention ratio.
25%, 75%
66%, 34%

 34%, 66%
69%, 31%

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