FIN 534 Final Exam Part 1 A++ all correct

FIN 534 Final Exam Part 1 A++ all correct

FIN 534 Final Exam Part I 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 2
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 3
2 out of 2 points

Which of the following statements is CORRECT?
An option- value is determined by its exercise value, which is the market price of the stock less its striking price. Thus, an option canÃ¢â‚¬â„¢t sell for more than its exercise value.
As the stock- price rises, the time value portion of an option on a stock increases because the difference between the price of the stock and the fixed strike price increases.
Issuing options provides companies with a low cost method of raising capital.
The market value of an option depends in part on the option- time to maturity and also on the variability of the underlying stock- price.

• Question 4
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 5
Which of the following statements is CORRECT?

If the underlying stock does not pay a dividend, it does not make good economic sense to exercise a call option prior to its expiration date, even if this would yield an immediate profit.
Call options generally sell at a price greater than their exercise value, and the greater the exercise value, the higher the premium on the option is likely to be.
Call options generally sell at a price below their exercise value, and the greater the exercise value, the lower the premium on the option is likely to be.
Call options generally sell at a price below their exercise value, and the lower the exercise value, the lower the premium on the option is likely to be.
Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock.

• Question 6
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 7
2 out of 2 points

Which of the following statements is CORRECT?
The WACC is calculated using before-tax
costs for all components.
The after-tax cost of debt usually exceeds
the after-tax cost of equity.
For a given firm, the after-tax cost of debt is always more expensive than the after-tax cost of non-convertible preferred stock.
Retained earnings that were generated in the past and are reported on the firm- balance sheet are available to finance the firm- capital budget during the coming year.
The WACC that should be used in capital budgeting is the firm- marginal, after-tax cost of capital.

• 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

Which of the following statements is CORRECT?
We should use historical measures of the component costs from prior financings that are still outstanding when estimating a company's WACC for capital budgeting purposes.

The cost of new equity (re) could possibly be lower than the cost of reinvested earnings (rs) if the market risk premium, risk-free rate, and the company's beta all decline by a sufficiently large amount.

A firm's cost of reinvesting earnings is the rate of return stockholders require on a firm's common stock.

The component cost of preferred stock is expressed as rp(1 Ã¢Ë†â€™ T), because preferred stock dividends are treated as fixed charges, similar to the treatment of interest on debt.

In the WACC calculation, we must adjust the cost of preferred stock (the market yield) to reflect the fact that 70% of the dividends received by corporate investors are excluded from their taxable income.

• Question 10
2 out of 2 points

As a consultant to Basso Inc., you have been provided with the following data: D1 = $0.67; P0 = $27.50; and g = 8.00% (constant). What is the cost of common from reinvested earnings based on the DCF approach?

• Question 11
2 out of 2 points

Perpetual preferred stock from Franklin Inc. sells for $97.50 per share, and it pays an $8.50 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What is the company's cost of preferred stock for use in calculating the WACC?

• Question 12
2 out of 2 points

A company's perpetual preferred stock currently sells for $92.50 per share, and it pays an $8.00 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 5.00% of the issue price. What is the firm's cost of preferred stock?

• Question 13
2 out of 2 points

The WACC for two mutually exclusive projects that are being considered is 8%. Project K has an IRR of 20% while Project R's IRR is 15%. The projects have the same NPV at the 8% current WACC. However, you believe that money costs and thus your WACC will also increase. You also think that the projects will not be funded until the WACC has increased, and their cash flows will not be affected by the change in economic conditions. Under these conditions, which of the following statements is CORRECT?

• Question 14
2 out of 2 points

Which of the following statements is CORRECT?
One defect of the IRR method is that it does not take account of the time value of money.

One defect of the IRR method is that it does not take account of the cost of capital.

One defect of the IRR method is that it values a dollar received today the same as a dollar that will not be received until sometime in the future.

One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid.

One defect of the IRR method is that it does not take account of cash flows over a project's full life.

• Question 15
2 out of 2 points

Projects C and D both have normal cash flows and are mutually exclusive. Project C has a higher NPV if the WACC is less than 12%, whereas Project D has a higher NPV if the WACC exceeds 12%. Which of the following statements is CORRECT?

• Question 16
2 out of 2 points

Which of the following statements is CORRECT?
A) If a project has "normal" cash flows, then its IRR must be positive.
B) If a project has "normal" cash flows, then its MIRR must be positive.
C) If a project has "normal" cash flows, then it will have exactly two real IRRs.
D) The definition of "normal" cash flows is that the cash flow stream has one or more negative cash flows followed by a stream of posititive cash flowsand then one negative cash flow at the end of the project's life.
E) If a project has "normal" cash flows, then it can have only one real IRR, whereas a project with "nonnormal" cash flows might have more than one real IRR.

• Question 17
2 out of 2 points

Which of the following statements is CORRECT?
a. If a project with normal cash flows has an IRR greater than the WACC, the project must also have a positive NPV.
b. If Project A- IRR exceeds Project B-, then A must have the higher NPV.
c. A project- MIRR can never exceed its IRR.
d. If a project with normal cash flows has an IRR less than the WACC, the project must have a positive NPV.
e. If the NPV is negative, the IRR must also be negative.

• Question 18
2 out of 2 points

Which of the following statements is CORRECT?
The regular payback method recognizes all cash flows over a project- life.
The discounted payback method recognizes all cash flows over a project- life, and it also adjusts these cash flows to account for the time value of money.
The regular payback method was, years ago, widely used, but virtually no companies even calculate the payback today.
The regular payback is useful as an indicator of a project- liquidity because it gives managers an idea of how long it will take to recover the funds invested in a project.
The regular payback does not consider cash flows beyond the payback year, but the discounted payback overcomes this defect.

• Question 19
2 out of 2 points

Which of the following is NOT a relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project?
.

• Question 20
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?
Answer

• Question 21
2 out of 2 points

Which of the following statements is CORRECT?
Answer

• Question 22
2 out of 2 points

The CFO of Cicero Industries plans to calculate a new project's NPV by estimating the relevant cash flows for each year of the project's life (i.e., the initial investment cost, the annual operating cash flows, and the terminal cash flow), then discounting those cash flows at the company's overall WACC. Which one of the following factors should the CFO be sure to INCLUDE in the cash flows when estimating the relevant cash flows?

• Question 23
2 out of 2 points

Which of the following statements is CORRECT?
Sensitivity analysis is a good way to measure market risk because it explicitly takes into account diversification effects.
One advantage of sensitivity analysis relative to scenario analysis is that it explicitly takes into account the probability of specific effects occurring, whereas scenario analysis cannot account for probabilities.
Well-diversified stockholders do not need to consider market risk when determining required rates of return.
Market risk is important, but it does not have a direct effect on stock prices because it only affects beta.
Simulation analysis is a computerized version of scenario analysis where input variables are selected randomly on the basis of their probability distributions.

• 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?
Answer

• Question 25
2 out of 2 points

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?

• Question 26
2 out of 2 points

Which of the following is NOT one of the steps taken in the financial planning process?
Answer
Selected Answer:
Consult with key competitors about the optimal set of prices to charge, i.e., the prices that will maximize profits for our firm and its competitors.
Correct Answer:
Consult with key competitors about the optimal set of prices to charge, i.e., the prices that will maximize profits for our firm and its competitors.

• Question 27
2 out of 2 points

Which of the following assumptions is embodied in the AFN equation?

• Question 28
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 29
2 out of 2 points

Which of the following statements is CORRECT?
Since accounts payable and accrued liabilities must eventually be paid off, as these accounts increase, AFN as calculated by the AFN equation must also increase.
Suppose a firm is operating its fixed assets at below 100% of capacity, but it has no excess current assets. Based on the AFN equation, its AFN will be larger than if it had been operating with excess capacity in both fixed and current assets.
If a firm retains all of its earnings, then it cannot require any additional funds to support sales growth.
Additional funds needed (AFN) are typically raised using a combination of notes payable, long-term debt, and common stock. Such funds are non-spontaneous in the sense that they require explicit financing decisions to obtain them.
If a firm has a positive free cash flow, then it must have either a zero or a negative AFN.

Answer
Selected Answer:
Additional funds needed (AFN) are typically raised using a combination of notes payable, long-term debt, and common stock. Such funds are non-spontaneous in the sense that they require explicit financing decisions to obtain them.
Correct Answer:
Additional funds needed (AFN) are typically raised using a combination of notes payable, long-term debt, and common stock. Such funds are non-spontaneous in the sense that they require explicit financing decisions to obtain them.

• Question 30
2 out of 2 points

Which of the following statements is CORRECT?
The sustainable growth rate is the maximum achievable growth rate without the firm having to raise external funds. In other words, it is the growth rate at which the firm- AFN equals zero.
If a firm- assets are growing at a positive rate, but its retained earnings are not increasing, then it would be impossible for the firm- AFN to be negative.
If a firm increases its dividend payout ratio in anticipation of higher earnings, but sales and earnings actually decrease, then the firm- actual AFN must, mathematically, exceed the previously calculated AFN.
Higher sales usually require higher asset levels, and this leads to what we call AFN. However, the AFN will be zero if the firm chooses to retain all of its profits, i.e., to have a zero dividend payout ratio.
Dividend policy does not affect the requirement for external funds based on the AFN equation.

Answered

Other / Other

19 Dec 2015

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