FINC 330 Quiz 3 Spring 2013

FINC
330
Quiz
3
Spring
2013

MULTIPLE
CHOICE and T/F.
Choose
the one alternative that best completes the statement or answers the question.

1)
________ is at the heart of corporate finance, because it is concerned with
making the best choices about project selection.

A)
Capital budgeting B) Short-term
budgeting
C)
Payback period D) Capital structure

2)
The ________ model is usually considered the best of the capital budgeting
decision-making models.
A)
Net Present Value (NPV) B)
Discounted Payback Period
C)
Profitability Index (PI) D) Internal
Rate of Return (IRR)

TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if
the statement is false.

3)
Capital budgeting decisions are typically long-term decisions.

MULTIPLE
CHOICE:

4)
The ________ model answers one basic question: How soon will I recover my
initial investment?
A)
IRR B) NPV
C)
Payback Period D) Profitability
Index

5)
The initial outlay or cost is $1,000,000 for a four-year project. The
respective future cash inflows for years 1, 2, 3 and 4 are: $500,000, $300,000,
$300,000 and $300,000. What is the payback period without discounting cash
flows?

A)
About 4.50 years B) About 2.50
years C) About 2.67 years D) About 3.67 years

6)
The capital budgeting decision model that utilizes all the discounted cash flow
of a project is the ________ model, which is one of the single most important
models in finance.

A)
profitability index (PI) B)
discounted payback period
C)
internal rate of return (IRR) D) net
present value (NPV)

7)
In regard to the NPV method, which of the statements below is TRUE?

A)
In the NPV Model, the net present value of an investment is the present value
of all benefits (cash inflow) minus the present value of all costs (cash
outflow) of the project.
B)
In the NPV Model, the present cash flows are discounted at the rate r, the cost
of capital.
C)
In the NPV Model, most future cash flows are stated in present value or current
dollars and the inflow is “netted” against the outflow to see if the
net amount is positive or negative.
D)
In the NPV Model, if two projects are being compared, the one with the highest
IRR is selected.

8)
Which of the statements below is FALSE?

A)
The net present value decision model is an economically sound model when
comparing different projects across a wide variety of products, services, and
activities under capital constraint.
B) The greater the NPV of a project, the greater
the “bag of money” for doing the project, and more money is better.
If a company is short of capital, it would choose those projects that provide
the largest “bag of money.”
C)
By discounting all future cash flows to the present, adding up all inflows, and
subtracting all outflows, we are determining the current value of the project.
D)
Despite all of the advantages of using the NPV Model, it is inconsistent with
the concept of the time-value-of-money.

9)
Geronimo, Inc. is considering a project that has an initial after-tax outlay or
after-tax cost of $220,000. The respective future cash inflows from its
four-year project for years 1 through 4 are: $50,000, $60,000, $70,000 and
$80,000. Geronimo uses the net present value method and has a discount rate of
11%. Will Geronimo accept the project?

A)
Geronimo rejects the project because the NPV is about -$2,375.60.
B)
Geronimo rejects the project because the NPV is about -$22,375.73.
C)
Geronimo accepts the project because the NPV is greater than $10,000.00.
D)
Geronimo rejects the project because the NPV is about -$12,375.60.

10)
Dice, Inc. is considering a five-year project that has an initial after-tax
outlay or after-tax cost of $70,000. The future after-tax cash inflows from its
project for years 1, 2, 3, 4 and 5 are all the same at $35,000. Dice uses the
net present value method and has a discount rate of 10%. Will Dice accept the
project?

A)
Dice rejects the project because the NPV is less than -$33,021.
B)
Dice accepts the project because the NPV is about $69,455.
C)
Dice rejects the project because the NPV is about -$13,382.
D)
Dice accepts the project because the NPV is about $62,678.

11)
Which method is designed to give the dollar amount of return for every $1.00
invested in the project in terms of current dollars?

A)
Internal Rate of Return Method B)
Profitability Index Method
C)
Net Present Value Method D)
Discounted Payback Period Method

12)
Mulligan, Inc. is currently considering an eight-year project that has an
initial outlay or cost of $140,000. The cash inflows from its project for years
1 through 8 are the same at $35,000. Mulligan has a discount rate of 12%.
Because there is a shortage of funds to finance all good projects, Mulligan
wants to compute the profitability index (PI) for each project. That way
Mulligan can get an idea as to which project might be a better choice. What is the
PI for Mulligan’s current project?

A)
About 1.24 B) About 1.19 C) About 1.09 D) About 1.21

13)
Berra, Inc. is currently considering an eight-year project that has an initial
outlay or cost of $120,000. The future cash inflows from its project for years
1 through 8 are the same at $30,000. Berra has a discount rate of 11%. Because
of capital rationing (shortage of funds for financing), Berra wants to compute
the profitability index (PI) for each project. What is the PI for Berra’s current
project?

A)
About 1.31 B) About 1.33 C) About 1.39 D) About 1.29

14)
The ________ is the cost of each financing component multiplied by that
component’s percent of the total funding amount. 14) ______

A)
cost of capital B) cost of debt C) IRR D) NPV

15)
The cost of capital is ________.
A)
the cost of each financing component multiplied by that component’s percent of
the total borrowed.
B)
the cost of debt in a firm that finances with both debt and equity.
C)
another name for the IRR.
D)
All of the above

16)
Which of the following are not considered a part of the firm’s capital
structure?
A)
Preferred stock B) Retained earnings
C)
Long-term debt D) Inventory

17)
Which of the following would be classified as equity financing for a firm?
A)
Preferred shareholders, common shareholders, and retained earnings
B)
Nonbank lenders, common shareholders, and commercial banks
C)
Preferred shareholders, banks, and nonbank lenders
D)
Suppliers, nonbank lenders, and commercial banks

18)
Jensen Motorsports has a new project that will require the company to borrow
$3,000,000. Jensen’s has made an agreement with three lenders for the needed
financing. Citizens’ Bank will give $1,500,000 and wants 10% interest on the
loan. Visitors’ Bank will give $1,000,000 and wants 12% interest on the loan.
Peoples’ Bank will give $500,000 and wants 13% interest on the loan. What is
the weighted average cost of capital for this $3,000,000?
A)
11.17% B) 12.16% C) 11.66% D) 10.55%

TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if
the statement is false.

19)
The choice of the borrowing proportion makes up the capital budgeting of the
firm.

20)
In capital budgeting, the ________ is the appropriate discount rate to use when
calculating the NPV of an average risk project.

A)
WACC B) IRR C) cost of Equity D) cost of debt

21)
Your firm has preferred stock outstanding that pays a current dividend of $3.00
per year and has a current price of $39.50. You anticipate that the economy
will grow steadily at a rate of 3.00% per year for the foreseeable future. What
is the market required rate of return on your firm’s preferred stock?

A)
10.82%
B)
7.59%
C)
10.59%
D)
There is not enough information to answer this question.

22)
Your firm has preferred stock outstanding that pays a current dividend of $2.00
per year and has a current price of $21.50. Currently, preferred stock makes up
approximately 15% of your firm’s long-term financing. What is the market
required rate of return on your firm’s preferred stock?

A)
9.30% B) 8.70% C) 9.00% D) 15.00%

23)
Use the security market line to determine the required rate of return for the
following firm’s stock. The firm has a beta of 1.25, the required return in the
market place is 10.50%, the standard deviation of returns for the market
portfolio is 25.00% and the standard deviation of returns for your firm is also
25.00%.

A)
31.25%
B)
13.13%
C)
10.50%
D)
There is not enough information to answer this question.

24)
Use the dividend growth model to determine the required rate of return for
equity. Your firm has just paid a dividend of $1.50 per share, has a recent
price of $31.82 per share, and anticipates a growth rate in dividends of 4.00%
per year for the foreseeable future.

A)
8.71%
B)
9.09%
C)
8.90%
D)
There is not enough information to answer this question.

25)
The following market information was gathered for the Blender Corporation. The
firm has 1,000 bonds outstanding, each selling for $1,100.00 with a required
rate of return of 8.00%. Blenders has 5,000 shares of preferred stock
outstanding, selling for $40.00 per share and 50,000 shares of common stock
outstanding, selling for $18.00 per share. If the preferred stock has a
required rate of return of 11.00% and the common stock requires a 14.00%
return, and the firm has a corporate tax rate of 30%, then calculate the firm’s
WACC adjusted for taxes.

A)
6.77%
B)
9.53%
C)
10.73%
D)
There is not enough information to answer this question because there is no
information provided about the amount of retained earnings held by the firm.

26)
Managing the relationship between current assets and current liabilities of the
firm in order to improve the flow of funds is called ________.

A)
the production cycle B) working
capital management
C)
the business operating cycle D) the
cash conversion cycle

27)
The ________ starts at the time production begins and ends with the collection
of cash from the sale of the product.

A)
business operating cycle B) cash
conversion cycle
C)
accounts receivable cycle D)
production cycle

28)
The production cycle ________.
A)
starts when production begins and ends with the collection of cash from the
sale of the product
B)
is the period from the start of cash outflow for producing a product or service
until the associated cash inflow materializes from the sale of that product or
service
C)
starts when the customer takes delivery of the product and ends when the firm
receives payment for the product
D)
begins at the time a firm first starts to make a product and lasts until the
time the customer buys the product

29)
The ________ is the period from the start of cash outflow for producing a
product or service until the associated cash inflow materializes from the sale
of that product or service.

A)
accounts receivable cycle B) current
ratio
C)
cash conversion cycle D) business
operating cycle

30)
Using the information provided, what is the inventory turnover for the firm?

Perfect Purchase Electronics
Selected Income Statement Items, 2009
Cash
Sales $1,500,000
Credit
Sales $7,500,000
Total
Sales $9,000,000
COGS $6,000,000

Perfect Purchase Electronics
Selected Balance Sheet Accounts
12/31/2009 12/31/2008 Change
Accounts
Receivable $270,000 $240,000 $30,000
Inventory $125,000 $100,000 $25,000
Accounts
Payable $110,000 $90,000 $20,000

A)
48.00 times B) 60.00 times C) 53.33 times D) 23.53 times