Final Exam Part 1

1. Which of the following statements is CORRECT?
2. Which of the following statements is CORRECT?
3. Other things held constant, the value of an option depends on the stock's price, the risk-free rate, and the
4. Which of the following statements is CORRECT?
5. An option that gives the holder the right to sell a stock at a specified price at some future time is
6. Braddock Construction Co.'s stock is trading at $20 a share. Call options that expire in three months with a strike price of $20 sell for $1.50. Which of the following will occur if the stock price increases 10%, to $22 a share?
7. 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?
8. Which of the following statements is CORRECT?
9. 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?
10. Which of the following statements is CORRECT?
11. For a typical firm, which of the following sequences is CORRECT? All rates are after taxes, and assume that the firm operates at its target capital structure.
12. Which of the following statements is CORRECT?
13. Which of the following statements is CORRECT?
14. Which of the following statements is CORRECT?
15. 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.
16. Which of the following statements is CORRECT?
17. Which of the following statements is CORRECT?
18. Which of the following statements is CORRECT?
19. Which of the following procedures best accounts for the relative risk of a proposed project?
20. Which of the following factors should be included in the cash flows used to estimate a project's NPV?
21. To increase productive capacity, a company is considering a proposed new plant. Which of the following statements is CORRECT?
22. Which of the following rules is CORRECT for capital budgeting analysis?
23. When evaluating a new project, firms should include in the projected cash flows all of the following EXCEPT:
24. Which of the following statements is CORRECT?
25. Which of the following assumptions is embodied in the AFN equation?
26. The capital intensity ratio is generally defined as follows:
27. Last year National Aeronautics had a FA/Sales ratio of 40%, comprised of $250 million of sales and $100 million of fixed assets. However, its fixed assets were used at only 75% of capacity. Now the company is developing its financial forecast for the coming year. As part of that process, the company wants to set its target Fixed Assets/Sales ratio at the level it would have had had it been operating at full capacity. What target FA/Sales ratio should the company set?
28. Which of the following statements is CORRECT?
29. 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?
30. Which of the following is NOT one of the steps taken in the financial planning process?

Final Exam Part 2

1. Which of the following is NOT normally regarded as being a good reason to establish an ESOP?
2. Which of the following is NOT normally regarded as being a barrier to hostile takeovers?
3. Which of the following statements is correct?
4. Grandin Inc. is evaluating its dividend policy. It has a capital budget of $625,000, and it wants to maintain a target capital structure of 60% debt and 40% equity. The company forecasts a net income of $475,000. If it follows the residual dividend policy, what is its forecasted dividend payout ratio?
5. Which of the following statements is correct?
6. If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that
7. Which of the following statements is correct?
8. Which of the following statements is NOT correct?
9. If a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio), then the firm should pay
10. Which of the following statements is CORRECT?
11. Which of the following statements is CORRECT?
12. Companies HD and LD have identical tax rates, total assets, and basic earning power ratios, and their basic earning power exceeds their before-tax cost of debt, rd. However, Company HD has a higher debt ratio and thus more interest expense than Company LD. Which of the following statements is CORRECT?
13. Which of the following events is likely to encourage a company to raise its target debt ratio, other things held constant?
14. Which of these items will not generally be affected by an increase in the debt ratio?
15. Two operationally similar companies, HD and LD, have the same total assets, operating income (EBIT), tax rate, and business risk. Company HD, however, has a much higher debt ratio than LD. Also HD's basic earning power (BEP) exceeds its cost of debt (rd). Which of the following statements is CORRECT?
16. Which of the following statements is CORRECT?
17. Which of the following actions should Reece Windows take if it wants to reduce its cash conversion cycle?
18. Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?
19. A lockbox plan is
20. Which of the following will cause an increase in net working capital, other things held constant?
21. Firms generally choose to finance temporary current operating assets with short-term debt because
22. Which of the following statements is most consistent with efficient inventory management? The firm has a
23. Suppose a carton of hockey pucks sell in Canada for 105 Canadian dollars, and 1 Canadian dollar equals 0.71 U.S. dollars. If purchasing power parity (PPP) holds, what is the price of hockey pucks in the United States?
24. Suppose one U.S. dollar can purchase 144 yen today in the foreign exchange market. If the yen depreciates by 8.0% tomorrow, how many yen could one U.S. dollar buy tomorrow?
25. Which of the following is NOT a reason why companies move into international operations?
26. In Japan, 90-day securities have a 4% annualized return and 180-day securities have a 5% annualized return. In the United States, 90-day securities have a 4% annualized return and 180-day securities have an annualized return of 4.5%. All securities are of equal risk, and Japanese securities are denominated in terms of the Japanese yen. Assuming that interest rate parity holds in all markets, which of the following statements is most CORRECT?
27. Suppose Yates Inc., a U.S. exporter, sold a consignment of antique American muscle-cars to a Japanese customer at a price of 143.5 million yen, when the exchange rate was 140 yen per dollar. In order to close the sale, Yates agreed to make the bill payable in yen, thus agreeing to take some exchange rate risk for the transaction. The terms were net 6 months. If the yen fell against the dollar such that one dollar would buy 154.4 yen when the invoice was paid, what dollar amount would Yates actually receive after it exchanged yen for U.S. dollars?
28. If the inflation rate in the United States is greater than the inflation rate in Britain, other things held constant, the British pound will
29. Suppose 1 U.S. dollar equals 1.60 Canadian dollars in the spot market. 6-month Canadian securities have an annualized return of 6% (and thus a 6-month periodic return of 3%). 6-month U.S. securities have an annualized return of 6.5% and a periodic return of 3.25%. If interest rate parity holds, what is the U.S. dollar-Canadian dollar exchange rate in the 180-day forward market?
30. A U.S.-based importer, Zarb Inc., makes a purchase of crystal glassware from a firm in Switzerland for 39,960 Swiss francs, or $24,000, at the spot rate of 1.665 francs per dollar. The terms of the purchase are net 90 days, and the U.S. firm wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk. Suppose the firm completes a forward hedge at the 90-day forward rate of 1.682 francs. If the spot rate in 90 days is actually 1.638 francs, how much will the U.S. firm have saved or lost in U.S. dollars by hedging its exchange rate exposure?