# FIN 534-FINAL_EXAM_LATEST _2016 (PART 1)

FIN 534-FINAL_EXAM_LATEST _2016 (PART 1)
· Question 1 2 out of 2 points Which of the following statements is CORRECT? · Question 2 2 out of 2 points Which of the following statements is CORRECT? · Question 3 2 out of 2 points An option that gives the holder the right to sell a stock at a specified price at some future time is · Question 4 2 out of 2 points Cazden Motors' stock is trading at \$30 a share. Call options on the company's stock are also available, some with a strike price of \$25 and some with a strike price of \$35. Both options expire in three months. Which of the following best describes the value of these options? · Question 5 2 out of 2 points The current price of a stock is \$50, the annual risk-free rate is 6%, and a 1-year call option with a strike price of \$55 sells for \$7.20. What is the value of a put option, assuming the same strike price and expiration date as for the call option? · Question 6 2 out of 2 points Suppose you believe that Florio Company's stock price is going to decline from its current level of \$82.50 sometime during the next 5 months. For \$5.10 you could buy a 5-month put option giving you the right to sell 1 share at a price of \$85 per share. If you bought this option for \$5.10 and Florio's stock price actually dropped to \$60, what would your pre-tax net profit be? · Question 7 2 out of 2 points To help them estimate the company's cost of capital, Smithco has hired you as a consultant. You have been provided with the following data: D1 = \$1.45; P0 = \$22.50; and g = 6.50% (constant). Based on the DCF approach, what is the cost of common from reinvested earnings? · Question 8 2 out of 2 points With its current financial policies, Flagstaff Inc. will have to issue new common stock to fund its capital budget. Since new stock has a higher cost than reinvested earnings, Flagstaff would like to avoid issuing new stock. Which of the following actions would REDUCE its need to issue new common stock?

Question 9

2 out of 2 points You have been hired as a consultant by Feludi Inc.'s CFO, who wants you to help her estimate the cost of capital. You have been provided with the following data: rRF = 4.10%; RPM = 5.25%; and b = 1.30. Based on the CAPM approach, what is the cost of common from reinvested earnings?

Question 10

2 out of 2 points Which of the following statements is CORRECT?

Question 11

2 out of 2 points Which of the following statements is CORRECT? · Question 12 2 out of 2 points Which of the following statements is CORRECT?

Question 13

2 out of 2 points Projects S and L are both normal projects with an initial cost of \$10,000, followed by a series of positive cash inflows. Project S's undiscounted net cash flows total \$20,000, while L's total undiscounted flows are \$30,000. At a WACC of 10%, the two projects have identical NPVs. Which project's NPV is more sensitive to changes in the WACC? · Question 14 2out of 2 points Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. · Question 15 2 out of 2 points Which of the following statements is CORRECT? 2 out of 2 points · Question 16 2 out of 2 points Which of the following statements is CORRECT? · Question 17 2 out of 2 points Suppose a firm relies exclusively on the payback method when making capital budgeting decisions, and it sets a 4-year payback regardless of economic conditions. Other things held constant, which of the following statements is most likely to be true? · Question 18 2 out of 2 points Which of the following statements is NOT a disadvantage of the regular payback method? · Question 19 2 out of 2 points Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product? · Question 20 2 out of 2 points Which of the following statements is CORRECT? · Question 21 2 out of 2 points Collins Inc. is investigating whether to develop a new product. In evaluating whether to go ahead with the project, which of the following items should NOT be explicitly considered when cash flows are estimated? · Question 22 2 out of 2 points Puckett Inc. risk-adjusts its WACC to account for project risk. It uses a WACC of 8% for below-average risk projects, 10% for average-risk projects, and 12% for above-average risk projects. Which of the following independent projects should Puckett accept, assuming that the company uses the NPV method when choosing projects? · Question 23 2 out of 2 points WWhich of the following rules is CORRECT for capital budgeting analysis? · Question 24 2 out of 2 points While developing a new product line, Cook Company spent \$3 million two years ago to build a plant for a new product. It then decided not to go forward with the project, so the building is available for sale or for a new product. Cook owns the building free and clear¾there is no mortgage on it. Which of the following statements is CORRECT? · Question 25 2 out of 2 points Which of the following statements is CORRECT? · Question 26 2 out of 2 points Last year Baron Enterprises had \$350 million of sales, and it had \$270 million of fixed assets that were used at 65% of capacity last year. In millions, by how much could Baron's sales increase before it is required to increase its fixed assets? · Question 27 2 out of 2 points Which of the following is NOT one of the steps taken in the financial planning process? · Question 28 2 out of 2 points A company expects sales to increase during the coming year, and it is using the AFN equation to forecast the additional capital that it must raise. Which of the following conditions would cause the AFN to increase? · Question 29 2 out of 2 points The term "additional funds needed (AFN)" is generally defined as follows: · Question 30 2 out of 2 points Which of the following assumptions is embodied in the AFN equation?

Question 1

2 out of 2 points The current price of a stock is \$22, and at the end of one year its price will be either \$27 or \$17. The annual risk-free rate is 6.0%, based on daily compounding. A 1-year call option on the stock, with an exercise price of \$22, is available. Based on the binomial model, what is the option's value? (Hint: Use daily compounding.)

Question 2

2 out of 2 points Which of the following statements is CORRECT?

Question 3

2 out of 2 points Which of the following statements is CORRECT?

Question 4

2 out of 2 points Which of the following statements is CORRECT?

Question 5

2 out of 2 points BLW Corporation is considering the terms to be set on the options it plans to issue to its executives. Which of the following actions would decrease the value of the options, other things held constant?

Question 6

2 out of 2 points An option that gives the holder the right to sell a stock at a specified price at some future time is

Question 7

2 out of 2 points Which of the following statements is CORRECT?

Question 8

2 out of 2 points Which of the following statements is CORRECT?

Question 9

2 out of 2 points Adams Inc. has the following data: rRF = 5.00%; RPM = 6.00%; and b = 1.05. What is the firm's cost of common from reinvested earnings based on the CAPM?

Question 10

2 out of 2 points Which of the following statements is CORRECT?

Question 11

2 out of 2 points Which of the following statements is CORRECT? Assume a company's target capital structure is 50% debt and 50% common equity.

Question 12

2 out of 2 points To help them estimate the company's cost of capital, Smithco has hired you as a consultant. You have been provided with the following data: D1 = \$1.45; P0 = \$22.50; and g = 6.50% (constant). Based on the DCF approach, what is the cost of common from reinvested earnings?

Question 13

2 out of 2 points Which of the following statements is CORRECT?

Question 14

2 out of 2 points Which of the following statements is CORRECT?

Question 15

2 out of 2 points Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

Question 16

2 out of 2 points Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

Question 17

2 out of 2 points Suppose a firm relies exclusively on the payback method when making capital budgeting decisions, and it sets a 4-year payback regardless of economic conditions. Other things held constant, which of the following statements is most likely to be true?

Question 18

2 out of 2 points Which of the following statements is CORRECT?

Question 19

2 out of 2 points Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product?

Question 20

2 out of 2 points Which of the following procedures best accounts for the relative risk of a proposed project?

Question 21

2 out of 2 points While developing a new product line, Cook Company spent \$3 million two years ago to build a plant for a new product. It then decided not to go forward with the project, so the building is available for sale or for a there is no mortgage¾new product. Cook owns the building free and clear on it. Which of the following statements is CORRECT?

Question 22

2 out of 2 points To increase productive capacity, a company is considering a proposed new plant. Which of the following statements is CORRECT?

Question 23

2 out of 2 points When evaluating a new project, firms should include in the projected cash flows all of the following EXCEPT:

Question 24

2 out of 2 points Collins Inc. is investigating whether to develop a new product. In evaluating whether to go ahead with the project, which of the following items should NOT be explicitly considered when cash flows are estimated?

Question 25

2 out of 2 points The Besnier Company had \$250 million of sales last year, and it had \$75 million of fixed assets that were being operated at 80% of capacity. In millions, how large could sales have been if the company had operated at full capacity?

Question 26

2 out of 2 points The capital intensity ratio is generally defined as follows:

Question 27

2 out of 2 points Which of the following is NOT one of the steps taken in the financial planning process?

Question 28

2 out of 2 points Which of the following statements is CORRECT?

Question 29

2 out of 2 points North Construction had \$850 million of sales last year, and it had \$425 million of fixed assets that were used at only 60% of capacity. What is the maximum sales growth rate North could achieve before it had to increase its fixed assets?

Question 30

2 out of 2 points The term "additional funds needed (AFN)" is generally defined as follows: