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BFIN 300 SP 19 Final Spring 2019 Version 1

Student Name:

1. Beta measures:

A) how the returns of an asset covary with the returns of the market.
B) how the volatility of the market predicts the volatility of an asset.
C) how the returns of the market covary with the returns of the risk free rate.

2. Swiftwater Rafting had cash flow from assets in 2018 of $3651 (all values in thousands). The
company paid interest expense of $980 and the cash flow to shareholders was $2341. Swiftwater:

A) redeemed debt for $330. 3651 = 2341 + 980 + x, x = -330


B) issued debt for $330.
C) redeemed debt for $1,330.

3. Holding bonds is considered less risky than holding stocks. This is because:

A) in the event of bankruptcy creditors have a higher standing.


B) bond payments are always guaranteed.
C) bonds represent money owed to others.

4. If a firm has a 15% return on assets and a 30% return on equity then the firm :

A) has a debt-equity ratio of 2.


B) has a debt-assets ratio of 2.
C) has an equity multiplier of 2.

5. All else constant a bond will sell at a _______ when the yield to maturity is _____ than the coupon
rate.

A) discount; lower
B) premium; higher
C) premium; lower

6. One disadvantage of the corporate form is:

A) infinite life.
B) double taxation.
C) limited liability.

7. Perseus Inc.'s price is $37.65 a share their dividend for next year is expected to be $2.30 and they
have a long term sustainable growth rate of 3.10%. The expected return on the stock is closest to:

A) 6.11%.
B) 9.21%. 37.5/(r-.031), r = .0921, 9.21%
C) 9.40%.
8. Returning money to shareholders includes paying dividends and:

A) buying back debt.


B) issuing stock.
C) repurchasing stock.

9. A decrease in total assets:

A) indicates that net working capital is also decreasing.


B) indicates the firm has sold fixed assets.
C) must be offset by an equal decrease in liabilities and shareholders' equity.

10. The average return is

A) the market return minus a premium for expected inflation.


B) the market return minus the risk free rate.
C) the sum of the risk free rate and the market risk premium.

11. Choose the phrase that makes the following statement true. The arithmetic mean will:

A) almost always be greater than the geometric mean.


B) almost always be less than the geometric mean.
C) be a good predictor of long-term results.

12. The efficient market hypothesis posits that the average investor:

A) cannot consistently outperform the market.


B) can use historical market data to consistently outperform the market.
C) can use fundamental analysis to consistently outperform the market.

13. The Quagmire Company is considering three possible independent projects. Using the following
information: rank the projects from highest to lowest: Project A costs 11.5 with an NPV of 1.35 and a
discount rate of 7.45%. Project B costs 17.4 with an NPV of 3.8 and a discount rate of 7.6%. Project C
costs 26.3 with an NPV of 5.2 and a discount rate of 8.0%.

A) B, C, A 21.5/17.4 > 31.5/26.3 > 12.85/11.5


B) C, B, A
C) B, A, C

14. PearlWhite has commissioned a market analysis to determine if there is enough demand for a new
product they are undecided about developing. The cost of the analysis should be:

A) excluded from the capital budget.


B) discounted in the first year of the budget.
C) included in the capital budget.
15. Consider changing bond prices as interest rates change. Which of the following is true?

A) Bond prices change by the same amount whether rates are rising or falling.
B) Bond prices fall faster in rising rates than they rise in falling rates.
C) Bond prices rise faster in falling rates than they fall in rising rates.

16. Common size ratios include:

A) last year's sales divided by this year's sales.


B) COGS divided by Sales
C) profit margin times asset turnover.

17. The owner of a single risky asset assumes:

A) diversifiable risk only.


B) total risk.
C) market risk only.

18. You are considering purchasing an asset with an expected return of 8.5%. You'd like to know that
97.5% of the time the return you earn will not be less than -15.5%. For this to be true the standard
deviation could not be more than:

A) 11.50%.
B) 10.80%.
C) 12.00%.

8.5 – (-15.5) = 24, so 2 standard deviations is 24%, therefore 1 SD is 12%

19. All companies with securities that are publically traded must abide by the rules and regulations of
the:

A) Office of the Comptroller of the Currency.


B) New York Stock Exchange.
C) Securities and Exchange Commission.

20. You've been offered a choice between a payment of $10,000 in seven years or a payment of
$6,705.50 today. You know of a risk free investment that compounds quarterly at a rate of 5.75% for
seven years. Which payment is the best choice?

A) $10,000.
B) $6,705.50.
C) Either as they are equal in value.
21. SofSkills Inc has just paid an annual dividend of $2.10. You expect dividends to grow at 15% for the
next two years then grow at 3.80% into the foreseeable future. The expected return of the stock is 9.60%.
The per share value of the company is closest to:

A) $54.22.
B) $45.89.
C) $42.47.
Period 1 2 3+
2
Div 2.10(1.15) 2.10(1.15) 2.10(1.15)2(1.038)
PV @ 9.75% 2.2035 2.3120 TV = 49.7032*
PV of TV 41.3774
Total 45.89
*TV = [2.10(1.15)2(1.038)]/(.096-.038) = 2.8828/(.096-.038) = 49.7032

22. Calamos Co. has 110.0 million shares outstanding a PE of 23.5 and a forward PE of 16.8. At a
market price of $132.65 next year's approximate estimated net income in millions is closest to:

A) $868.5. 132.65/16.8*110.0mil
B) $621.0.
C) $1,848.0.

23. You have determined that a new product line result in more sales of another product you currently
sell. As you create your capital budget projections you should:

A) include this in your calculations.


B) expense this as part of the projections.
C) ignore this in your calculations.

24. Black Elk Designs stock has a beta of .87 the risk free rate is 2.15% and the expected return on the
market is 8.40%. The expected return on the stock is closest to:

A) 7.59%. 2.15 + .87(8.4-2.15)


B) 7.31%.
C) 9.46%.

25. When projecting values for a capital budget it is important to include:

A) incremental cash flows only.


B) ignore lost sales due to product switching.
C) sunk costs.
26. Solana Projects is considering a project with an initial investment of $21,000, a non-taxable salvage
value of $3,000, and operating cash flows of $6,300; $8,200; and $9,500. The required return is 9.68%.
The net present value is closest to:

A) -$1,240.
B) $1,034.
C) $1,761.

27. Springcreek Holdings has an expected return of 9.92%. The risk free rates is 2.65% and the return on
the market is 7.55%. Springcreek's beta is closest to:

A) 2.02.
B) 1.48. (9.92 – 2.65)/(7.55-2.65) from 9.92 = 2.65 + B(7.55-2.65)
C) 0.96.

28. Portia LTD has net income of $925 on total sales of $3,765. Costs are $1,865 and depreciation is
$220. The tax rate is 21%. The firm does not have interest expense. Portia's operating cash flow is
closest to:

A) $1,900.
B) $1,327.
C) $1,547. ( 3765-1865-220)*.79 = 1327.2+220 = 1547 *.79 = (1-.21)

29. Under US GAAP companies attempt to match expenses with revenues by:

A) expensing capital purchases when purchased.


B) adding leverage to the balance sheet.
C) using accrual accounting.

30. Several years ago you purchased Badabet Tech bonds. A recent price quote on the bonds is 108.50.
The bonds have 2 years left to maturity and a coupon rate of 12%. The yield to maturity at this price is
closest to:

A) 3.68%.
B) 7.28%.
C) 7.35%.
PV 108.50
FV 100
PMT 100*.12/2
RATE or i/y 7.35%
NPER or n 2*2

31. Gigante Corp provides you the following information as they consider converting existing
warehouse space into a production facility. Sales: $115,000; COGS: $58,000; depreciation: $9,500;
lease income on property currently in use as warehouse space: 12000; tax rate 21%. Gigante also sold
equipment previously stored in the warehouse for $2,500 with no tax effect. The after tax cash flow in
year 1 is closest to:

A) $28,045.
B) $37,545. 115000-58000-9500-12000 = 35500*.79 = 28045+9500 = 37545
C) $39,520.

32. You've been promised $12,000 on your birthday three years from now towards the purchase of a car
if you can save $4,000 by your birthday. You know you can earn 1.75% compounding monthly. If you
begin saving today your monthly investments to reach your goal would be closest to:

A) $109.19.
B) $108.14.
C) $108.30.
PV 0
FV 4,000
PMT 108.30
RATE or i/y 1.75/12
NPER or n 3*12

33. Given the following information the expected return for a portfolio that is 68% of Asset A and 32%
of Asset B would be closest to:

Scenario Probability Stock A Stock B


Boom 58% 12.10% 8.60%
Bust 42% 3.75% -2.50%

A) 6.27%.
B) 6.37%.
C) 7.10% (.58((.68*.121)+(.32*.086)))+(.42((.68*.0375)+(.32*-.025)))

34. Ratios that measure how profitably a firm's management uses its assets and equity to generate
bottom line net income are known as ________ ratios.

A) profitability
B) market value
C) asset management

35. At the start of a project a firm invested $1,000 in net working capital and this amount increased by
2% per year for three years. The project's useful life ended in year 4. The change in net working capital
for the final year of the budget is closest to:
A) $1,061.21. (1000*(1.02)^3) *You could use the TVM functions to solve this, PV=1000, I =
2%, N=3, PMT = 0, solve for FV
B) $1,082.43.
C) $5,204.04.

36. You purchased Vincet Corp a year ago at $147.60. The company paid a dividend of $3.80 and based
on today's selling price your return on the investment was 11.12%. The price you received for selling the
stock is closest to:

A) $160.21. 147.60(1.1112) = 164.01-3.80


B) $164.01.
C) $151.40.

37. Consider a portfolio of stocks from many sectors. If you replace 10% of the stocks with Treasury
Bills the standard deviation of the portfolio will likely:

A) decrease.
B) stay the same.
C) increase.

38. All else constant the net present value of a typical investment project decreases when the:

A) cash flows increase.


B) discount rate decreases.
C) discount rate increases.

39. Over the life of a project investments in net working capital will most likely:

A) steadily increase.
B) increase for a time then decrease.
C) sum to zero.

40. For 2017 Monsoon Ind. had operating cash flows of $2,390,000, an increase in net working capital
of $78,000 and cash flow from assets was $1,875,000. In 2017 Monsoon:

A) sold assets for $437,000.


B) purchased assets for $437,000. 2390000-1875000-78000 = 437000
C) sold assets for $593,000. 1875000 – 2390000 – 78000 = -593000

41. If the expected return on the market is 10.30% inflation is expected to be 1.80% and the risk free rate
is 2.80% the expected market risk premium is closest to:

A) 8.50%.
B) 7.50% 10.3-2.8.
C) 5.70%.
42. The financial ratio measured as total assets divided by total equity is known as the firm's:

A) equity to asset ratio.


B) equity multiplier.
C) asset to equity ratio.

43. A measure that compares the risk free rate the real rate and the expected rate of inflation is called
the:

A) Gordon Growth Model.


B) Sharpe ratio.
C) Fisher equation.

44. TerraVerde projects the following cash flows for a potential investment: -78.0; 23.0; 25.0; 27.0;
23.0. The hurdle rate for the project is estimated at 9.60%. Given this the firm should:

A) be indifferent to accepting or rejecting the project.


B) reject the project.
C) accept the project.

45. Changes in net working capital:

A) may increase or decrease cash flows.


B) do not affect cash flows after the first year.
C) are not included in cash flow calculations.

46. Working capital is:

A) current assets and current liabilities.


B) assets that create value for shareholders.
C) investments in capital improvements.

47. Lucre Inc wants to raise at least $25million in a 25 year zero coupon bond offering. They anticipate
the bond will sell for a yield to maturity of 4.65%. Rounding to the nearest thousand the par value of the
bonds to be issued is closest to:

A) $78,891,000.
B) $7,922,000.
C) $77,879,000.
PV 25,000,000
FV 78,891,938
PMT 0
RATE or i/y 4.65/2
NPER or n 25*2
48. The depreciation tax shield can be defined as:

A) the tax benefit of deducting depreciation.


B) the tax paid on capital investments.
C) the expenses that are shielded from taxes.

49. Franconia Ind. has a net income of $1.75 million and equity of $12.4 million. The debt-equity ratio is
1.15 and the reinvestment rate is 48%. The return on assets is closest to:

A) 3.15%.
B) 3.41%.
C) 6.56%. (1.75/12.4)/(1+1.15)

50. A firm has a debt to assets ratio of 0.47. What is the debt to equity ratio?

A) 1.47.
B) 0.89. .47/.53 = .8868 = .89
C) 1.12.