FIN/571 Corporate Finance Final Exam Answers


1) Occurs when inaccurate information can falsely exist. A. free-rider problem B. adverse selection C. moral hazard D. The Principle of Valuable Ideas
2) Which principle states that extraordinary returns are achievable with new ideas? A. The Principle of Valuable Ideas B. The Principle of Risk-Return Trade-Off C. The Principle of Incremental Ideas D. The Notional Principle
3) Which of the following statements is true? A. The difference between the value of one action and the value of the best alternative is called an opportunity cost. B. An agent-manager can never make bad decisions. C. A security is a claim issued by a firm that pays owners interest but not dividends. D. A call option analyzes conflicts of interest and behavior in a principal-agent relationship.
4) Generally accepted accounting principles (GAAP) refers to A. the extent to which something can be sold for cash quickly and easily without loss of value. B. the length of an asset’s life when it is issued. C. a technical accounting term that encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. D. a report issued annually by a firm that includes, at a minimum, an income statement, a balance sheet, a statement of cash flows, and accompanying notes.
5) Remaining maturity refers to: A. the amount of time remaining until its maturity. B. the length of an asset’s life when it is issued. C. a technical accounting term that encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. D. a report issued annually by a firm that includes, at a minimum, an income statement, a balance sheet, a statement of cash flows, and accompanying notes.
6) The annual report refers to A. the extent to which something can be sold for cash quickly and easily without loss of value. B. a report issued annually by managers to primarily convey information about select working capital ratios. C. the length of time remaining until an asset’s maturity. D. a report issued annually by a firm that includes, at a minimum, an income statement, a balance sheet, a statement of cash flows, and accompanying notes.
7) The firm’s assets in the balance sheet refer to: A. the extent to which something can be sold for cash quickly and easily without loss of value. B. the productive resources in the firm’s operations. C. the statement of a firm's financial position at one point in time, including its assets and the claims on those assets by creditors (liabilities) and owners (stockholders' equity).
8) Book value (or Net book value) refers to: A. the net amount shown in the accounting statements. B. the length of an asset’s life when it is issued. C. the statement of a firm's financial position at one point in time, including its assets and the claims on those assets by creditors (liabilities) and owners (stockholders' equity). D. the price for which something could be bought or sold in a reasonable length of time, where “reasonable length of time” is defined in terms of the item’s liquidity.
9) Original maturity refers to: A. the net amount (net book value) for something shown in quarterly accounting statements. B. the length of an asset’s life when it is issued. C. a technical accounting term that encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. D. the price for which something could be bought or sold in a reasonable length of time, where “reasonable length of time” is defined in terms of the item’s liquidity. FIN/571 Corporate Finance Final Exam Progress: (0/57)
10) Preferred stock payment obligations are typically __________. A. viewed like debt obligations. B. issued with a maturity date. C. valued as an annuity. D. none of these
11) Assume that the par value of a bond is $1,000. Consider a bond where the coupon rate is 9% and the current yield is 10%. Which of the following statements is true? A. The current yield was a lot greater than 9% when the bond was first issued B. The current yield was a lot less than 9% when the bond was first issued C. The market value of the bond is less than $1,000 D. The market value of the bond is more than $1,000
12) If the yield to maturity for a bond is less than the bond's coupon rate, then the market value of the bond is __________. A. less than the par value. B. greater than the par value. C. cannot tell D. equal to the par value.
13) According to the CAPM, the expected return for a portfolio is determined by the portfolio's. A. variance. B. beta. C. standard deviation. D. none of these
14) Certain countries have restrictions. In practice, U.S. investors have NOT invested very much internationally. Possible factors include __________. A. lower transaction costs. B. expropriation risk. C. firm-specific risk. D. all of these
15) Certain countries have restrictions. In practice, U.S. investors have NOT invested very much internationally. Possible factors include __________. A. non-listing of foreign securities on U.S. stock exchanges. B. foreign tax considerations. C. efficiency in converting currencies. D. all of these
16) Dimensions of risk include ___________. A. the certainty of a negative outcome B. uncertainty about the future outcome C. uncertainty about yesterday’s outcome D. the impossibility of the same return
17) One problem with using negative values for w1 (the proportion invested in the riskless asset) to represent a borrowed amount is that the implied borrowing rate of interest is the same as __________. A. the current rate of interest B. the prime rate of interest C. the nominal rate of interest D. the lending rate of interest
18) The Principle of __________ implies that the expected return for an asset equals its required return. A. Risk-Return Trade-Off B. Capital Market Efficiency C. Signaling D. Comparative Advantage FIN/571 Corporate Finance Final Exam Progress: (0/57)
19) __________ says to calculate the incremental after-tax cash flows connected with working capital decisions. A. The Principle of Incremental Benefits B. The Signaling Principle C. The Options Principle D. The Principle of Time Value of Money
20) Stony Products has an inventory conversion period (ICP) of about 60.83 days. The receivables collection period (RCP) is 36.50 days. The payables deferral period (PDP) is about 30.42 days. What is Stony's cash conversion cycle (CCC)? A. about 69 days B. about 66 days C. about 67 days D. about 68 days
21) Stony Products has a payables turnover of six times. What is Stony's payables deferral period (PDP)? A. about 30.42 days B. about 56.50 days C. about 60.83 days D. none of these
22) Firms make short-term financial decisions just about every day solving such questions as __________. A. Where should we borrow? B. Where should we invest our cash? C. How much liquidity should we have? D. all of these
23) __________ says to calculate the incremental after-tax cash flows connected with working capital decisions. A. The Options Principle B. The Signaling Principle C. The Principle of Incremental Benefits D. The Principle of Time Value of Money
24) Main sources of short-term funds include __________. A. trade credit and commercial paper B. futures and bank loans C. bonds and trade credit D. none of these
25) Which of the following statements is (are) true? A. The "dating 120" or the "60 extra" mean that the clock does not start until 120 or 60 days after the invoice date. B. Prox or proximate refers to the next month. C. Invoices with "10th prox" must be paid by the 10th of the next month. D. all of these
26) Which (if any) of the following statements is false? A. The invoice is a written statement about goods that were ordered, along with their prices and the payment dates. In other words, the invoice is simply the bill for purchases. B. For the 4/10, net 40 credit terms, you are offering a total credit period of 30 days from the date of the invoice, a discount period of 10 days, and a 4% discount if paid on or before the discount period expires. C. When a firm is using invoice billing, the invoice that accompanies shipment is a separate bill to be paid. D. none of these
27) Most credit sales are made on an open account basis, which means __________. A. that suppliers cannot dictate the terms of the purchase. B. that customers simply purchase what they want. C. that suppliers dictate the terms of the purchase. D. that customers cannot simply purchase what they want. FIN/571 Corporate Finance Final Exam Progress: (0/57)
28) An all-equity-financed firm would __________. A. pay corporate income taxes if its taxable income is positive. B. not pay any income taxes because interest would exactly offset its taxable income. C. pay corporate income taxes because it would have interest expense. D. not pay corporate income taxes because it would have no interest expense.
29) A profitable firm would __________. A. pay corporate income taxes because it would have interest expense. B. pay corporate income taxes because it would not have interest expense. C. pay corporate income taxes if it had a positive taxable income. D. none of these
30) An investor's risky portfolio is made up of individual stocks. Which of the following statements about this portfolio is true? A. Each stock in the portfolio will have a beta greater than one. B. Each stock in the portfolio has its own beta. C. Selling any stock in this portfolio will lower the beta of the portfolio. D. An investor cannot change the risk of this portfolio by her choice about personal leverage (lending or borrowing).
31) Boeing Corporation is a world leader in commercial aircraft. In the face of competition, Boeing often faces a critical __________ decision: whether to develop a new generation of passenger aircraft. A. dividend B. present value C. payback D. capital budgeting
32) The capital budgeting process can be broken down into five steps. These steps include which of the following? A. Generate ideas for capital budgeting projects B. Prepare proposals C. Review existing projects and facilities D. all of these
33) There are two important tax considerations for a capital budgeting project. These include which (if any) of the following? A. It is indeed cash flow that’s irrelevant. B. The standard cash flow estimation does not explicitly identify the financing costs. C. The Principle of Incremental Benefits reminds us that it is the incremental cash flow that’s relevant. D. none of these
34) The __________ method breaks down when evaluating projects in which the sign of the cash flow changes. A. Payback B. NPV C. PI D. IRR
35) Whenever projects are both independent and conventional, then the IRR and NPV methods agree. Which of the following statements is true? A. A mutually exclusive project is one that can be chosen independently of other projects. B. When undertaking one project prevents investing in another project, and vice versa, the projects are said to have a positive payback. C. A conventional project is a project with an initial cash outflow that is followed by one or more expected future cash inflows. D. all of these
36) In practice, the __________ rule is preferred. A. PI B. NPV C. IRR D. Payback FIN/571 Corporate Finance Final Exam Progress: (0/57)
37) Studies show systematic differences in capital structures across industries. These are due mostly to differences in __________. A. accounting practices. B. the firm’s inventory turnover ratio. C. the ability of assets to support borrowing. D. management’s attitude toward what other industries are doing.
38) Studies show systematic differences in capital structures across industries. These are due mostly to differences in the availability of tax shelter provided by things other than debt, such as __________. A. accelerated depreciation. B. operating tax loss carryforwards. C. investment tax credit. D. all of these
39) Studies show systematic differences in capital structures across industries. These are due mostly to differences in __________. A. hiring and firing practices. B. the availability of tax shelter provided by things other than debt, such as accelerated depreciation, investment tax credit, and operating tax loss carryforwards. C. what the arbitrage pricing theory tells us. D. none of these
40) There can be a variety of motives for stock repurchases including __________. A. a buyback of overvalued stock. B. an increase in leverage. C. a decrease in anticipated earnings. D. all of these
41) Some countries have __________ in which shareholders' returns are not fully taxed twice. A. an imputation tax system B. a split tax system C. a two-tier tax system D. none of these
42) There can be a variety of motives for stock repurchases including __________. A. a decrease in leverage. B. a buyback of undervalued stock. C. a decrease in anticipated earnings. D. all of these
43) Mortgage bonds are __________. A. secured by a lien on general assets of the issuer B. secured by a lien on specific assets of the issuer C. usually secured by assets such as common shares of one of the issuer's subsidiaries D. none of these
44) Conditional sales contracts __________. A. are seldom issued to finance the purchase of aircraft B. are similar to equipment trust certificates C. enable the borrower to obtain title to the assets only before it fully repays the debt D. all of these
45) The Time Value of Money Principle says __________. A. to look for the most advantageous ways to finance the firm, such as the lowest-cost debt alternative B. to use discounted cash flow analysis to compare the costs and benefits of financing decisions, such as alternative securities to sell, lease versus borrow and buy, and bond refunding C. to set a price and other terms that investors will find acceptable when issuing securities D. that announcing the firm's decision to issue securities conveys information about the firm
46) __________ says to look for opportunities to develop asset-based financing arrangements that offer new positive-NPV financing mechanisms. A. The Principle of Valuable Ideas B. The Time Value of Money Principle C. The Principle of Self-Interested Behavior D. The Principle of Comparative Advantage
47) The Principle of Self-Interested Behavior says __________. A. to calculate the net advantage of leasing based on the incremental after-tax benefits that leasing will provide. B. to look for profitable opportunities to lease (or rent) an asset, rather than borrow and buy it. C. to use discounted cash flow analysis to compare the costs and benefits of leasing, relative to the alternative of borrowing and buying. D. that leasing transfers the tax benefits of ownership from the lessee to the lessor.
48) __________ says to transfer the tax benefits of ownership to other parties if they are willing to pay for benefits your firm cannot use. A. The Principle of Two-Sided Transactions B. The Principle of Incremental Benefits C. The Principle of Comparative Advantage D. The Capital Market Efficiency Principle FIN/571 Corporate Finance Final Exam Progress: (0/57)
49) The wholesale price for Captain John’s is $1.00 per loaf, and the variable cost of production is $0.50 per loaf. Captain John’s is expecting that expansion will allow them to sell an additional 5.0 million loaves in the next year. What additional revenues minus expenses will be generated from expansion? A. $25,000 B. $250,000 C. $550,000 D. none of these
50) The wholesale price for Captain John’s is $0.612 per loaf, and the variable cost of production is $0.387 per loaf. Captain John’s is expecting that expansion will allow them to sell an additional 4.5 million loaves in the next five years. What additional revenues minus expenses will be generated from expansion? A. $1,102,000 B. $912,500 C. $1,012,500 D. $1,000,500
51) The wholesale price for Captain John’s is $3.00 per loaf. One million loaves will be sold in the next year. What is the contribution margin? A. cannot tell B. $3.00 C. $3,000,000 D. $3,000,000 minus fixed costs
52) Which of the following statements is true? A. Soft capital rationing refers to the rationing imposed externally by limited funds for borrowing from outside sources. B. Hard capital rationing refers to the rationing imposed internally by the firm. C. A post audit is a set of procedures for evaluating a capital budgeting decision after the fact. D. all of these
53) Pursuing valuable ideas is the best way __________. A. to avoid risk. B. to achieve extraordinary returns. C. to restrain your spending. D. to get yourself in trouble.
54) In efficient markets, as in the United States, you should think long and hard before you conclude that a market price is __________. A. wrong. B. fair. C. followed by many analysts. D. all of these
55) __________ says to forecast the firm’s cash flows, and analyze the incremental cash flows of alternative decisions. A. The Principle of Risk-Return Trade-Off B. The Signaling Principle C. The Principle of Incremental Benefits D. The Time Value of Money Principle
56) ___________ says to use both bottom-up and top-down processes to increase the chance of uncovering valuable ideas. A. The Principle of Valuable Ideas B. The Behavioral Principle C. The Principle of Two-Sided Transactions D. The Principle of Comparative Advantage
57) __________ says to use common industry practices as a good starting place for the planning process. A. The Behavioral Principle B. The Principle of Incremental Benefits C. The Principle of Self-Interested Behavior D. The Principle of Valuable Ideas
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