FIN540 FINAL EXAM

User jacob conteh

Course Adv. Corporate Finance

Test Final Exam

Started 3/20/15 2:16 AM

Submitted 3/20/15 4:49 AM

Status Completed

Attempt Score 232 out of 280 points

Time Elapsed 2 hours, 33 minutes out of 3 hours.

Instructions

Question 1 .0 out of 8 points

Incorrect Which of the following statements concerning the MM extension with growth is NOT

CORRECT?

Answer

Selected Answer: The tax shields should be discounted at the unlevered cost of equity.

Correct Answer: The total value of the firm is independent of the amount of debt it uses.

. Question 2 .8 out of 8 points

Correct Which of the following is NOT a real option?

Answer

Selected Answer: The option to buy shares of stock if its price goes up.

Correct Answer: The option to buy shares of stock if its price goes up.

. Question 3 .8 out of 8 points

Correct Which of the following statements is CORRECT?

Answer

Selected Answer: The slope of the CML is (M – rRF)/M..

Correct Answer: The slope of the CML is (M – rRF)/M..

. Question 4 .8 out of 8 points

Correct Which of the following statements about pension plans if any, is incorrect?

Answer

Selected Answer: If assets exceed the present value of benefits, the pension plan is fully funded.

Correct Answer: If assets exceed the present value of benefits, the pension plan is fully funded.

. Question 5 .0 out of 8 points

Incorrect Which of the following statements about project risk analysis in not-for-profit firms is incorrect?

Answer

Selected Answer: A project’s corporate beta is defined as (σP/σF)rPF, where σP

is the standard deviation of the project’s returns, σF

is the standard deviation of the firm’s returns, and rPF is the correlation among the two sets of returns.

Correct Answer: A project’s corporate beta is found (at least conceptually) by regressing returns on the project against returns on the market portfolio.

. Question 6 .8 out of 8 points

Correct Which of the following is true of the EOQ model? Note that the optimal order quantity, Q, will be called EOQ.

Answer

Selected Answer: If the average inventory increases by 20%, then the total carrying costs will increase by 20%.

Correct Answer: If the average inventory increases by 20%, then the total carrying costs will increase by 20%.

. Question 7 .8 out of 8 points

Correct Which of the following statements is CORRECT?

Answer

Selected Answer: The typical R2 for a stock is about 0.3 and the typical R2 for a large portfolio is about 0.94.

Correct Answer: The typical R2 for a stock is about 0.3 and the typical R2 for a large portfolio is about 0.94.

. Question 8 .8 out of 8 points

Correct Which one of the following is an example of a “flexibility” option?

Answer

Selected Answer: A company agrees to pay more to build a plant in order to be able to change the plant’s inputs and/or outputs at a later date if conditions change.

Correct Answer: A company agrees to pay more to build a plant in order to be able to change the plant’s inputs and/or outputs at a later date if conditions change.

. Question 9 .8 out of 8 points

Correct Which of the following are NOT ways risk management can be used to increase the value of a firm?

Answer

Selected Answer: Risk management can allow managers to defer receipt of their bonuses and thus postpone tax payments.

Correct Answer: Risk management can allow managers to defer receipt of their bonuses and thus postpone tax payments.

. Question 10 .8 out of 8 points

Correct Which of the following statements concerning capital structure theory is NOT

CORRECT?

Answer

Selected Answer: Under MM with corporate taxes, rs increases with leverage, and this increase exactly offsets the tax benefits of debt financing.

Correct Answer: Under MM with corporate taxes, rs increases with leverage, and this increase exactly offsets the tax benefits of debt financing.

. Question 11 .8 out of 8 points

Correct For markets to be in equilibrium (that is, for there to be no strong pressure for prices to depart from their current levels),

Answer

Selected Answer: The expected rate of return must be equal to the required rate of return; that is, .

Correct Answer: The expected rate of return must be equal to the required rate of return; that is, .

. Question 12 .8 out of 8 points

Correct Which of the following is NOT a potential problem with beta and its estimation?

Answer

Selected Answer: The beta of “the market,” can change over time, sometimes drastically.

Correct Answer: The beta of “the market,” can change over time, sometimes drastically.

. Question 13 .8 out of 8 points

Correct Which of the following statements is most CORRECT?

Answer

Selected Answer: Futures contracts generally trade on an organized exchange and are marked to market daily.

Correct Answer: Futures contracts generally trade on an organized exchange and are marked to market daily.

. Question 14 .8 out of 8 points

Correct Which of the following would cause average inventory holdings to decrease, other things held constant?

Answer

Selected Answer: The sales forecast is revised downward by 10 percent.

Correct Answer: The sales forecast is revised downward by 10 percent.

. Question 15 .8 out of 8 points

Correct In a portfolio of three different stocks, which of the following could NOT

be true?

Answer

Selected Answer: The beta of the portfolio is less than the betas of each of the individual stocks.

Correct Answer: The beta of the portfolio is less than the betas of each of the individual stocks.

. Question 16 .8 out of 8 points

Correct Which of the following are the factors for the Fama-French model?

Answer

Selected Answer: The excess market return, a size factor, and a book-to-market factor.

Correct Answer: The excess market return, a size factor, and a book-to-market factor.

. Question 17 .8 out of 8 points

Correct Which is the best measure of risk for an asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?

Answer

Selected Answer: Coefficient of variation; beta.

Correct Answer: Coefficient of variation; beta.

. Question 18 .8 out of 8 points

Correct The major contribution of the Miller model is that it demonstrates that

Answer

Selected Answer: personal taxes decrease the value of using corporate debt.

Correct Answer: personal taxes decrease the value of using corporate debt.

. Question 19 .8 out of 8 points

Correct Which of the following statements is CORRECT?

Answer

Selected Answer: Tests have shown that the betas of individual stocks are unstable over time, but that the betas of large portfolios are reasonably stable over time.

Correct Answer: Tests have shown that the betas of individual stocks are unstable over time, but that the betas of large portfolios are reasonably stable over time.

. Question 20 .0 out of 8 points

Incorrect Which of the following statements concerning the MM extension with growth is NOT

CORRECT?

Answer

Selected Answer: For a given D/S, the WACC is greater than the WACC under MM’s original (with tax) assumptions.

Correct Answer: The tax shields should be discounted at the cost of debt.

. Question 21 .8 out of 8 points

Correct Stock A’s beta is 1.5 and Stock B’s beta is 0.5. Which of the following statements must be true about these securities? (Assume market equilibrium.)

Answer

Selected Answer: The expected return on Stock A should be greater than that on Stock B.

Correct Answer: The expected return on Stock A should be greater than that on Stock B.

. Question 22 .8 out of 8 points

Correct Which of the following statements about defined contribution plans is incorrect?

Answer

Selected Answer: In a defined contribution plan, the employer must make larger-than-average contributions to the pension plan when investment returns have been below expectations.

Correct Answer: In a defined contribution plan, the employer must make larger-than-average contributions to the pension plan when investment returns have been below expectations.

. Question 23 .8 out of 8 points

Correct Which of the following statements about pension plan portfolio performance is incorrect?

Answer

Selected Answer: In managing the retiree portfolio, fund managers often use immunization techniques such as alpha analysis to eliminate, or at least significantly reduce, the risk associated with changing interest rates.

Correct Answer: In managing the retiree portfolio, fund managers often use immunization techniques such as alpha analysis to eliminate, or at least significantly reduce, the risk associated with changing interest rates.

. Question 24 .8 out of 8 points

Correct A firm’s credit policy consists of which of the following items?

Answer

Selected Answer: Credit period, cash discounts, credit standards, collection policy.

Correct Answer: Credit period, cash discounts, credit standards, collection policy.

. Question 25 .8 out of 8 points

Correct Which of the following is not correct?

Answer

Selected Answer: A more aggressive collection policy will reduce bad debt expenses, but may also decrease sales.

Correct Answer: A more aggressive collection policy will reduce bad debt expenses, but may also decrease sales.

. Question 26 .0 out of 8 points

Incorrect Which of the following statements concerning the MM extension with growth is NOT

CORRECT?

Answer

Selected Answer: The tax shields should be discounted at the unlevered cost of equity.

Correct Answer: For a given D/S, the WACC is less than the WACC under MM’s original (with tax) assumptions.

. Question 27 .0 out of 8 points

Incorrect Which of the following will NOT increase the value of a real option?

Answer

Selected Answer: A decrease in the probability that a competitor will enter the market of the project in question.

Correct Answer: An increase in the cost of obtaining the real option.

. Question 28 .8 out of 8 points

Correct You have the following data on three stocks:

Stock Standard Deviation Beta

A 0.15 0.79

B 0.25 0.61

C 0.20 1.29

As a risk minimizer, you would choose Stock if it is to be held in isolation and Stock if it is to be held as part of a well-diversified portfolio.

Answer

Selected Answer: A; B.

Correct Answer: A; B.

. Question 29 .8 out of 8 points

Correct Which one of the following aspects of banks is considered most relevant to businesses when choosing a bank?

Answer

Selected Answer: Loyalty and willingness to assume lending risks.

Correct Answer: Loyalty and willingness to assume lending risks.

. Question 30 .8 out of 8 points

Correct A swap is a method used to reduce financial risk. Which of the following statements about swaps, if any, is NOT CORRECT?

Answer

Selected Answer: A problem with swaps is that no standardized contracts exist, which has prevented the development of a secondary market.

Correct Answer: A problem with swaps is that no standardized contracts exist, which has prevented the development of a secondary market.

. Question 31 .8 out of 8 points

Correct Calculate the required rate of return for Mercury, Inc., assuming that (1) investors expect a 4.0% rate of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 5.0%, (4) Mercury has a beta of 1.00, and (5) its realized rate of return has averaged 15.0% over the last 5 years.

Answer

Selected Answer: 12.00%

Correct Answer: 12.00%

. Question 32 .0 out of 8 points

Incorrect Coverall Carpets Inc. is planning to borrow $12,000 from the bank. The bank offers the choice of a 12 percent discount interest loan or a 10.19 percent add-on, one-year installment loan, payable in 4 equal quarterly payments. What is the effective rate of interest on the 12 percent discounted loan?

Answer

Selected Answer: 12.5%

Correct Answer: 14.1%

. Question 33 .8 out of 8 points

Correct Viking Farms harvests crops in roughly 90-day cycles based on a 360-day year. The firm receives payment from its harvests sometime after shipment. Due in part to the firm’s rapid growth, it has been borrowing to finance its harvests using 90-day bank notes on which the firm pays 12 percent discount interest. If the firm requires $60,000 in proceeds from each note, what must be the face value of each note?

Answer

Selected Answer: $61,856

Correct Answer: $61,856

. Question 34 .8 out of 8 points

Correct You hold a diversified portfolio consisting of a $5,000 investment in each of 20 different common stocks. The portfolio beta is equal to 1.12. You have decided to sell a lead mining stock (b = 1.00) at $5,000 net and use the proceeds to buy a like amount of a steel company stock (b = 2.00). What is the new beta of the portfolio?

Answer

Selected Answer: 1.1700

Correct Answer: 1.1700

. Question 35 .8 out of 8 points

Correct XYZ Company needs to borrow $200,000 from its bank. The bank has offered the company a 12-month installment loan (monthly payments) with 9 percent add-on interest. What is the effective annual rate (EAR) of this loan?

Answer

Selected Answer: 17.48%

Correct Answer: 17.48%

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