Question Details

FIN 534 Final Exam Which of the following is NOT normally regarded as being a good reason to establish an ESOP?

•	Question 2
2 out of 2 points
	
 	Which of the following is NOT normally regarded as being a barrier to hostile takeovers?

			
•	Question 3
2 out of 2 points
	
 	Poff Industries' stock currently sells for $120 a share. You own 100 shares of the stock. The company is contemplating a 2-for-1 stock split. Which of the following best describes what your position will be after such a split takes place?

			
•	Question 4
2 out of 2 points
	
 	Consider two very different firms, M and N. Firm M is a mature firm in a mature industry. Its annual net income and net cash flows are both consistently high and stable. However, M's growth prospects are quite limited, so its capital budget is small relative to its net income. Firm N is a relatively new firm in a new and growing industry. Its markets and products have not stabilized, so its annual operating income fluctuates considerably. However, N has substantial growth opportunities, and its capital budget is expected to be large relative to its net income for the foreseeable future. Which of the following statements is correct?

•	Question 5
2 out of 2 points
	
 	Which of the following statements is CORRECT?
When firms are deciding on the size of stock splits—say whether to declare a 2-for-1 split or a 3-for-1 split, it is best to declare the smaller one, in this case the 2-for-1 split, because then the after-split price will be higher than if the 3-for-1 split had been used.
Back before the SEC was created in the 1930s, companies would declare reverse splits in order to boost their stock prices. However, this was determined to be a deceptive practice, and it is illegal today.
Stock splits create more administrative problems for investors than stock dividends, especially determining the tax basis of their shares when they decide to sell them, so today stock dividends are used far more often than stock splits.
When a company declares a stock split, the price of the stock typically declines—by about 50% after a 2-for-1 split—and this necessarily reduces the total market value of the equity.
If a firm- stock price is quite high relative to most stocks—say $500 per share—then it can declare a stock split of say 10-for-1 so as to bring the price down to something close to $50. Moreover, if the price is relatively low—say $2 per share—then it can declare a “reverse split” of say 1-for-25 so as to bring the price up to somewhere around $50 per share.
2 points

A
			
•	Question 6
2 out of 2 points
	
 	Which of the following actions will best enable a company to raise additional equity capital?

			
•	Question 7
2 out of 2 points
	
 	In the real world, dividends
			
•	Question 8
2 out of 2 points
	
 	The capital budget of Creative Ventures Inc. is $1,000,000. The company wants to maintain a target capital structure that is 30% debt and 70% equity. The company forecasts that its net income this year will be $800,000. If the company follows a residual dividend policy, what will be its total dividend payment?

•	Question 9

	
 	Which of the following statements is correct?
The tax code encourages companies to pay dividends rather than retain earnings.
If a company uses the residual dividend model to determine its dividend payments, dividends payout will tend to increase whenever its profitable investment opportunities increase.
The stronger management thinks the clientele effect is, the more likely the firm is to adopt a strict version of the residual dividend model.
Large stock repurchases financed by debt tend to increase earnings per share, but they also increase the firm- financial risk.
A dollar paid out to repurchase stock is taxed at the same rate as a dollar paid out in dividends. Thus, both companies and investors are indifferent between distributing cash through dividends and stock repurchase programs.


			
•	Question 10
2 out of 2 points
	
 	Barette Consulting currently has no debt in its capital structure, has $500 million of total assets, and its basic earning power is 15%. The CFO is contemplating a recapitalization where it will issue debt at a cost of 10% and use the proceeds to buy back shares of the company's common stock, paying book value. If the company proceeds with the recapitalization, its operating income, total assets, and tax rate will remain unchanged. Which of the following is most likely to occur as a result of the recapitalization?

			
•	Question 11
2 out of 2 points
	
 	Which of the following statements is CORRECT?
Increasing financial leverage is one way to increase a firm- basic earning power (BEP).
If a firm lowered its fixed costs while increasing its variable costs, holding total costs at the present level of sales constant, this would decrease its operating leverage.
The debt ratio that maximizes EPS generally exceeds the debt ratio that maximizes share price.
If a company were to issue debt and use the money to repurchase common stock, this action would have no impact on its basic earning power ratio. (Assume that the repurchase has no impact on the company- operating income.)
If changes in the bankruptcy code made bankruptcy less costly to corporations, this would likely reduce the average corporation- debt ratio.

Answer			
	
			
•	Question 12
2 out of 2 points
	
 	Which of the following statements is CORRECT?
Answer
Since debt financing raises the firm- financial risk, increasing a company- debt ratio will always increase its WACC.
Since debt financing is cheaper than equity financing, raising a company- debt ratio will always reduce its WACC.
Increasing a company- debt ratio will typically reduce the marginal cost of both debt and equity financing. However, this action still may raise the company- WACC.
Increasing a company- debt ratio will typically increase the marginal cost of both debt and equity financing. However, this action still may lower the company- WACC.
Since a firm- beta coefficient it not affected by its use of financial leverage, leverage does not affect the cost of equity
			
	company's WACC.
			
•	Question 13
2 out of 2 points
	
 	Which of the following would increase the likelihood that a company would increase its debt ratio, other things held constant?

•	Question 14
2 out of 2 points
	
 	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?

•	Question 15
2 out of 2 points
	
 	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?
Answer			
	
			
•	Question 16
2 out of 2 points
	
 	Which of these items will not generally be affected by an increase in the debt ratio?

•	Question 17
2 out of 2 points
	
 	Other things held constant, which of the following would tend to reduce the cash conversion cycle?

•	Question 18
2 out of 2 points
	
 	Which of the following statements is most consistent with efficient inventory management? The firm has a
Answer			
	
			
•	Question 19
2 out of 2 points
	
 	Which of the following actions should Reece Windows take if it wants to reduce its cash conversion cycle?

			
•	Question 20
2 out of 2 points
	
 	Which of the following items should a company report directly in its monthly cash budget?

			
•	Question 21
0 out of 2 points
	
 	Which of the following actions would be likely to shorten the cash conversion cycle?

			
•	Question 22
2 out of 2 points
	
 	A lockbox plan is most beneficial to firms that
y.
			
•	Question 23
2 out of 2 points
	
 	In 1985, a given Japanese imported automobile sold for 1,476,000 yen, or $8,200. If the car still sold for the same amount of yen today but the current exchange rate is 144 yen per dollar, what would the car be selling for today in U.S. dollars?

			
•	Question 24
2 out of 2 points
	
 	Which of the following statements is NOT CORRECT?
A) Foreign bonds are bonds sold by a foreign borrower but denominated in the currency of the country in which the issue is sold.
B) A Eurodollar is a U.S. dollar deposited in a bank outside the U.S.
C) The term Eurobond applies only to foreign bonds denominated in U.S. currency.
D) Foreign bonds and Eurobonds are two important types of international bonds.
E) Any bond sold outside the country of the borrower is called an international bond.

			
•	Question 25
2 out of 2 points
	
 	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?

•	Question 26
2 out of 2 points
	
 	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?

			
•	Question 27
2 out of 2 points
	
 	Which of the following is NOT a reason why companies move into international operations?

•	Question 28
2 out of 2 points
	
 	Suppose the exchange rate between U.S. dollars and Swiss francs is SF 1.41 = $1.00, and the exchange rate between the U.S. dollar and the euro is $1.00 = 1.64 euros. What is the cross-rate of Swiss francs to euros?

•	Question 29
2 out of 2 points
	
 	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?

			
•	Question 30
2 out of 2 points
	
 	Suppose that 1 British pound currently equals 1.62 U.S. dollars and 1 U.S. dollar equals 1.62 Swiss francs. What is the cross exchange rate between the pound and the franc?