BUSN 379 Final Exam

sunk costs should be included
erosion effects should be considered
financing costs need to be included
opportunity costs are irrelevant

net present value method
payback method
internal rate of return method
all of these are time-adjusted methods

have a PI equal to zero.
produce negative rates of return.
have positive AARs.
have positive IRRs.
have positive NPVs.

$1,085.25
$1,193.77
$3,498.28
$4,102.86
$4,513.15

5.81 years
6.05 years
6.96 years
7.90 years
This project never pays back

is a valuable option.
is referred to as the option to extend.
could not cause a negative net present value project to become a positive net present value project.
will generally cause the internal rate of return for a project to decline.

contingency planning.
hard rationing.
soft rationing.
capital constraint.
scenario analysis.

The net present value of the project is approximately $1,011
This project should be accepted because it has a negative net present value
This project’s payback period is 10 years or more
All of the above are true

$12,000
$8,574
$19,800
None of the above

$82,000
$110,000
$42,000
none of these

is diversifiable
is the total risk associated with surprise events
it is measured by beta
it is measured by standard deviation

the expected return is usually the same as the actual return
a key to assess risk is determining how much risk an investment adds to a portfolio
risks can always be decreased or mitigated by the financial manager
the higher the risk, the lower the return investors require for the investment

7.33 percent
9.82 percent
11.26 percent
11.33 percent
11.50 percent

17.68 percent
17.91 percent
18.42 percent
19.07 percent
19.46 percent

.46
.55
.61
.70
.90

only the most talented analysts can determine the true value of a security.
only company insiders have a marketplace advantage.
technical analysis provides the best tool to gain a marketplace advantage.
no one person has an advantage in the marketplace.
every security offers the same rate of return.

between 4.5% and 8%
more than 13%
between 12 and 13%
between 13 and 14%
none of the above

$103.68
$36.92
$96.00
none of these

It is the return that the firm’s creditors demand on new borrowing.
It is the interest rate that the firm pays on current/existing borrowing.
An appropriate method to compute the cost of debt is using the YTM of current bonds outstanding.
It needs to be converted into an after-tax cost.

it is relevant to the WACC
does not require new funds to be raised
has associated flotation costs
has a cost, which is the opportunity cost associated with stockholder funds

less than 5%
between 5 and 15%
between 15 and 18%
more than 21%

the WACC can be used as the required return for all new projects.
the WACC of a leveraged firm will decrease when the tax rate decreases.
an increase in the market risk premium will tend to decrease a firm’s WACC.
the WACC is a starting point for the subjective approach to setting discount rates.
a reduction in the risk level of a firm will tend to increase the firm’s WACC.

5.98%
7.06%
8.05%
9.68%
10.10%

a petition is filed in federal court
administrative fees are incurred
a list of creditors is compiled
pre-bankruptcy shareholders tend to lose part, if not all, of their investment in the firm
a trustee-in-bankruptcy is elected by the creditors

The cost of capital should consider the flotation costs.
All other being equal, it is preferable to use market value weights than book value weights.
The WACC is the most appropriate discount rate for all projects.
Should include the cost of retained earnings.

Goods are sold cash
An interest payment on a notes payable is made
A payment due is received from a client
Dividends are paid to shareholders
Inventory is purchased and paid for with credit

There is an opportunity cost associated with not offering credit.
The costs of the credit application process and the costs expended in the collection process are not carrying costs of granting credit.
Character, refers to the ability of a firm to meet its credit obligations out its operating cash flows.
The optimal credit policy, is the policy that produces the largest amount of sales for a firm.

electric utility company
airplane manufacturer
fast-food restaurant
furniture store
clothing manufacturer

$567
$600
$821
$1,134
$1,200

Because by maximizing the current stock value, you also maximize the company’s profit for the year.
Because this criterion is non-ambiguous.
Because financial managers always act in the best interest of shareholders.
Because it creates short-term gains in the financial statements.

I and II
I, II and III
II, III and IV
I, III and IV
All of the above

Book values reflect the value of the asset based on generally-accepted accounting principles.
Book values are used in the company’s balance sheet.
Book values do not reflect the amount someone is willing to pay today for an asset.
All of the above
None of the above

33%
34%
36%
37%
38%

Regional Bank, APR
Local Bank, EAR
Regional Bank, EAR
Local Bank, APR

a decrease in the interest rate
increasing the initial amount of your deposit
increasing the frequency of the interest payments
decreasing the length of the investment period

$12,468.07
$12,502.14
$14,597.62
$17,044.32
$17,129.01

$91.05
$284.13
$556.50
$682.87
$731.60

interest-only
pure discount
compounded
amortized
complex

$1080
$1085
$925
$1000

primary
main
secondary
principal
dealer

Financial leverage increases profits and decreases losses.
Financial leverage has no effect on a firm’s return on equity.
Financial leverage, refers to the use of common stock.
Financial leverage magnifies both profits and losses.
Increasing financial leverage will always increase the earnings per share.

10.5%
10.6%
11.5%
12.1%

Most bonds do not carry default risk.
Municipal bonds are free of default risk.
Bonds are not sensitive to changes in the interest rates.
Moody’s and Standard and Poor’s provide information regarding a bond’s interest rate risk.
None of the above is true

zero-coupon, five year
seven percent annual coupon, five year
zero-coupon, 10 year
five percent semi-annual coupon, 10 year
five percent annual coupon, 10 year

paying interest payments on a semi-annual basis.
redeeming bonds early.
repaying the face value at maturity.
paying the expenses required to reissue outstanding bonds.
paying the “balloon payment” at maturity.