Final EXAM FIN 370

1. Which of these provide a forum in which demanders of funds raise funds by issuing new financial
instruments, such as stocks and bonds?
2. Which of these does NOT perform vital functions to securities markets of all sorts by channeling funds
from those with surplus funds to those with shortages of funds?
3. Which of these statements is true regarding divisional WACC?
4. Which financial statement reports the amounts of cash that the firm generated and distributed during a
particular time period?
5. You are trying to pick the least-expensive machine for your company. You have two choices: machine
A, which will cost $50,000 to purchase and which will have OCF of -$3,500 annually throughout the
machine's expected life of three years; and machine B, which will cost $75,000 to purchase and which
will have OCF of -$4,900 annually throughout that machine's four-year life. Both machines will be
worthless at the end of their life. If you intend to replace whichever type of machine you choose with the
same thing when its life runs out, again and again out into the foreseeable future, and if your business
has a cost of capital of 14 percent, which one should you choose?
6. Financial plans include which of the following?
7. Which of the following terms means that during periods when interest rates change substantially,
bondholders experience distinct gains and losses in their bond investments
8. Which of these is used as a measure of the total amount of available cash flow from a project?
9. The overall goal of the financial manager is to__________.
10. A firm is expected to pay a dividend of $2.00 next year and $2.14 the following year. Financial analysts
believe the stock will be at their target price of $75.00 in two years. Compute the value of this stock with
a required return of 10 percent.
11. When firms use multiple sources of capital, they need to calculate the appropriate discount rate for
valuing their firms cash flows as _____.
12. What are the tools available for the manager in financial planning?
13. As new capital budgeting projects arise, we must estimate__________.
14. What are reasons for the firm to go abroad?
15. The Rule of 72 is a simple mathematical approximation for__________.
16. Which of these is the term for portfolios with the highest return possible for each risk level?
17. Which of the following can create ethical dilemmas between corporate managers and stockholders?

18. Which financial statement shows the total revenues that a firm earns and the total expenses the firm
incurs to generate those revenues over a specific period of time generally one year?
19. Five years ago, Jane invested $5,000 and locked in an 8 percent annual interest rate for 25 years (ending
20 years from now). James can make a 20-year investment today and lock in a 10 percent interest rate.
How much money should he invest now in order to have the same amount of money in 20 years as Jane?
20. Which financial statement reports a firm's assets, liabilities, and equity at a particular point in time?
21. Suppose that Model Nails, Inc.'s capital structure features 60 percent equity, 40 percent debt, and that its
before-tax cost of debt is 6 percent, while its cost of equity is 10 percent. If the appropriate weighted
average tax rate is 28 percent, what will be Model Nails' WACC?
22. What's the current yield of a 6 percent coupon corporate bond quoted at a price of 101.70?
23. The top part of Mars, Inc.'s 2013 balance sheet is listed as follows (in millions of dollars). What are
Mars, Inc.'s current ratio, quick ratio, and cash ratio for 2013?
24. Which of these is the process of estimating expected future cash flows of a project using only the
relevant parts of the balance sheet and income statements?
25. Which of the following is a true statement?
26. Will's Wheels, Inc. reported a debt-to-equity ratio of 0.65 times at the end of 2013. If the firm's total
debt at year-end was $5 million, how much equity does Will's Wheels have?
27. We commonly measure the risk-return relationship using which of the following?
28. Which of these ratios show the combined effects of liquidity, asset management, and debt management
on the overall operation results of the firm?
29. We can estimate a stock's value by__________.
30. We call the process of earning interest on both the original deposit and on the earlier interest payments:

Final EXAM FIN 370

Answers
1. Which of these provide a forum in which demanders of funds raise funds by issuing new financial
instruments, such as stocks and bonds?
a. Primary markets
b. Secondary markets
c. Investment banks
d. Money markets
2. When firms use multiple sources of capital, they need to calculate the appropriate discount rate for valuing
their firms cash flows as _____.
a. They apply to each asset as they are purchased with their respective forms of debt or equity.
b. A sum of the capital components costs
c. A weighted average of the capital component costs
d. A simple average of the capital components costs
3. You are trying to pick the least-expensive machine for your company. You have two choices: machine A,
which will cost $50,000 to purchase and which will have OCF of -$3,500 annually throughout the machine's
expected life of three years; and machine B, which will cost $75,000 to purchase and which will have OCF
of -$4,900 annually throughout that machine's four-year life. Both machines will be worthless at the end of
their life. If you intend to replace whichever type of machine you choose with the same thing when its life
runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 14
percent, which one should you choose?
a. Neither machine A nor B
b. Machine A
c. Machine B
d. Both machines A and B
4. Which of these does NOT perform vital functions to securities markets of all sorts by channeling funds from
those with surplus funds to those with shortages of funds?
a. Secondary Markets
b. Mutual funds
c. Insurance companies
d. Commercial banks

5. Which of these statements is true regarding divisional WACC?

a. Using a divisional WACC versus a WACC for the firms current operations will result in quite a
few incorrect decisions
b. Using a firmwide WACC to evaluate new projects would have no impact on projects that present
less risk than the firms average beta
c. Using a simple firmwide WACC to evaluate new projects would give an unfair advantage to
projects that present less risk than the firms average beta
d. Using a simple firm wide WACC to evaluate new projects would give an unfair advantage
to projects that present more risk than the firm's average beta.
6. Suppose that Model Nails, Inc.'s capital structure features 60 percent equity, 40 percent debt, and that its
before-tax cost of debt is 6 percent, while its cost of equity is 10 percent. If the appropriate weighted
average tax rate is 28 percent, what will be Model Nails' WACC?
a. 8.00 percent
b. 7.73 percent
c. 8.40 percent
d. 16.00 percent
7. Which financial statement reports the amounts of cash that the firm generated and distributed during a
particular time period?
a. Statement of cash flows
b. Statement of retained earnings
c. Income statement
d. Balance sheet
8. Which financial statement reports a firm's assets, liabilities, and equity at a particular point in time?
a. Income statement
b. Statement of retained earnings
c. Balance sheet
d. Statement of cash flows
9. Financial plans include which of the following?
a. Short Term and Long Term Plan
b. Schedule of Sales, Expenses, and Capital Expenditures
c. Pro forma Income Statement, Balance Sheet
d. All of the above
10. Which of the following terms means that during periods when interest rates change substantially,
bondholders experience distinct gains and losses in their bond investments
a. Credit quality risk

b. Interest rate risk

c. Reinvestment risk
d. Liquidity rate risk
11. As new capital budgeting projects arise, we must estimate__________.
a. The cost of the loan for the specific project
b. The float costs for financing the project
c. When such projects will require cash flows
d. The costs of the stock being sold for the specific project
12. Which of these is used as a measure of the total amount of available cash flow from a project?
a. Operating cash flow
b. Free cash flow
c. Sunk cash flow
d. Investment in operating capital
13. The overall goal of the financial manager is to__________.
a. Maximize shareholder wealth
b. Maximize total costs
c. Maximize net income
d. Maximize earnings per share
14. What are reasons for the firm to go abroad?
a. Diversification
b. Access to raw materials
c. Lower production costs
d. All of the above
15. A firm is expected to pay a dividend of $2.00 next year and $2.14 the following year. Financial analysts
believe the stock will be at their target price of $75.00 in two years. Compute the value of this stock with a
required return of 10 percent.
a. $65.57
b. $79.14
c. $65.40
d. $66.67
16. What are the tools available for the manager in financial planning?
a. Delaying disbursement of cash and cash management
b. Delaying disbursement of cash, reducing collection period, cash management, and Increasing
inventory turnover
c. Reducing collection period and delaying disbursement of cash

d. Increasing inventory turnover and reducing collection period

17. The Rule of 72 is a simple mathematical approximation for__________.
a. The present value required to double an investment
b. The payments required to double an investment
c. The future value required to double an investment
d. The number of years required to double an investment
18. Which of these is the term for portfolios with the highest return possible for each risk level?
a. Efficient portfolios
b. Optimal portfolios
c. Modern portfolios
d. Total portfolios
19. We call the process of earning interest on both the original deposit and on the earlier interest payments:
a. Computing
b. Multiplying
c. Compounding
d. Discounting
20. We can estimate a stock's value by__________.
a. using the book value of the total stockholder equity section
b. using the book value of the total assets divided by the number of shares outstanding
c. discounting the future dividends and future stock price appreciation
d. compounding the past dividends and past stock price appreciation
21. Which of the following can create ethical dilemmas between corporate managers and stockholders?
a. Agency relationship
b. Board of directors
c. Auditors
d. Venture capitalist
22. Which of these ratios show the combined effects of liquidity, asset management, and debt management on
the overall operation results of the firm?
a. Profitability
b. Financial
c. Coverage
d. Liquidity
23. We commonly measure the risk-return relationship using which of the following?
a. Standard deviation
b. Coefficient of variation

c. Expected returns
d. Correlation coefficient
24. Which financial statement shows the total revenues that a firm earns and the total expenses the firm incurs
to generate those revenues over a specific period of time generally one year?
a. Statement of retained earnings
b. Statement of cash flows
c. Balance sheet
d. Income statement
25. Five years ago, Jane invested $5,000 and locked in an 8 percent annual interest rate for 25 years (ending 20
years from now). James can make a 20-year investment today and lock in a 10 percent interest rate. How
much money should he invest now in order to have the same amount of money in 20 years as Jane?
a. $7,346.64
b. $5089.91
c. $3,160.43
d. $3,464.11
26. What's the current yield of a 6 percent coupon corporate bond quoted at a price of 101.70?
a. 5.9 percent
b. 6.0 percent
c. 6.1 percent
d. 10.2 percent
27. Will's Wheels, Inc. reported a debt-to-equity ratio of 0.65 times at the end of 2013. If the firm's total debt at
year-end was $5 million, how much equity does Will's Wheels have?
a. 5 Million
b. 0.65 Million
c. 3.25 Million
d. 7.69 Million
28. The top part of Mars, Inc.'s 2013 balance sheet is listed as follows (in millions of dollars). What are Mars,
Inc.'s current ratio, quick ratio, and cash ratio for 2013?
a. 2.333, 0.5556, 0.1111
b. 4.2, 1.0, 0.2
c. 10.5, 6.0, 1.0
d. 0.1111, 0.5556, 0.2
29. Which of these is the process of estimating expected future cash flows of a project using only the relevant
parts of the balance sheet and income statements?
a. Incremental cash flows

b. Pro forma analysis

c. Cash flow analysis
d. Substitutionary analysis
30. Which of the following is a true statement?
a. If interest rates fall, no bonds will enjoy rising values
b. If interest rates fall, all bonds will enjoy rising values
c. If interest rates fall, corporate bonds will have decreasing value
d. If interest rates fall, U.S. Treasury bonds will have decreasing value