FIN 486 Final Exam Answers
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
1 Stockholders expect to earn higher rates of return on investments of lower risk and lower rates of return on
investments of higher risk.
2 When considering each financial decision alternative or possible action in terms of its impact on the share price of
the firm’s stock, financial managers should accept only those actions that are expected to maximize shareholder
3 Due to the no fixed costs assumption underlying the strict percent-of-sales method, the use of cost and expense
ratios generally tends to understate profits when sales are increasing and overstate profits when sales are
4 A firm’s investment opportunities schedule (IOS) is a graphical presentation of the firm’s collection of project IRRs
in descending order against the total dollar investment.
5 From a bond issuer’s perspective, the IRR on a bond’s cash flows is its yield to maturity (YTM); from the investor’s
perspective, the IRR on a bond’s cash flows is the cost to maturity.
6 The effect of a decrease in the ratio of current assets to total assets and the effect of an increase in the ratio of
current liabilities to total assets are increases in the firm’s profits and, correspondingly, its risk.
7 Factoring accounts receivable is a relatively inexpensive source of unsecured short-term funds.
8 Fixed assets are the most desirable short-term loan collateral since they normally have a longer life, or duration,
than the term of the loan.
9 In doing business in foreign countries, financing operations in the local market not only improves the company’s
business ties to the host community but also minimizes exchange rate risk.
10 Historical weights are either book value or market value weights based on the actual historical capital structure
11 To achieve the goal of profit maximization for each alternative being considered, the financial manager would select
the one that is expected to result in the highest monetary return.
12 A market risk-return function is a graphical presentation of the discount rates associated with each level of project
13 In spite of the theoretical superiority of IRR, financial managers prefer to use NPV.
14 In general, projects with similar-sized investments and lower early-year cash inflows (lower cash inflows in the early
years) tend to be preferred at higher discount rates.
15 If a firm is subject to capital rationing, it is able to accept all independent projects that provide an acceptable return.
16 It would be correct to define Operating Cash Flow (OCF) as net operating profit after taxes minus depreciation.
17 The higher the debt ratio, the more financial leverage a firm has and, thus, the greater will be its risk and return.
18 Gross profit margin measures the percentage of each sales dollar left after the firm has paid for its goods and
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
19 Managerial finance:
A) recognizes funds on an accrual basis.
B) involves tasks such as budgeting, financial forecasting, cash management, and funds procurement.
C) involves the design and delivery of advice and financial products.
D) devotes the majority of its attention to the collection and presentation of financial data.
20 The treasurer is commonly responsible for
A) making capital expenditures.
C) cost accounting.
D) data processing.
21 The controller is commonly responsible for
A) financial planning.
B) managing credit activities.
C) managing cash.
D) financial accounting.
22 Total assets less net fixed assets equals
A) gross assets.
C) liabilities and equity.
D) current assets.
23 Projects that compete with one another, so that the acceptance of one eliminates the others from further
consideration are called
A) mutually exclusive projects.
B) independent projects.
C) replacement projects.
D) none of the above.
24 Payback is considered an unsophisticated capital budgeting because it
A) gives explicit consideration to the timing of cash flows and therefore the time value of money.
B) gives explicit consideration to the timing of cash flows and therefore the time value of money.
C) gives explicit consideration to risk exposure due to the use of the cost of capital as a discount rate.
D) none of the above.
25 The first step in the collection of overdue accounts is
A) legal actions.
B) a personal visit.
C) a letter.
D) contacting a collection agency.
26 The ________ financing strategy requires the firm to pay interest on excess funds borrowed but not needed
throughout the entire year.
27 A firm has determined its optimal structure which is composed of the following sources and target market
Debt: The firm can sell a 15-year, $1,000 par value, 8 percent bond for $1,050. A flotation cost of 2 percent of the face
value would be required in addition to the premium of $50.
Common Stock: A firm’s common stock is currently selling for $75 per share. The dividend expected to be paid at the
end of the coming year is $5. Its dividend payments have been growing at a constant rate for the last five years. Five
years ago, the dividend was $3.10. It is expected that to sell, a new common stock issue must be underpriced $2 per
share and the firm must pay $1 per share in flotation costs. Additionally, the firm has a marginal tax rate of 40 percent.
The weighted average cost of capital up to the point when retained earnings are exhausted is ________.
(See Table 11.2.)
A) 11.29 percent.
B) 6.8 percent.
C) 9.44 percent.
D) 7.7 percent.
28 Important types of risk in an international capital budgeting context include all of the following EXCEPT
A) political risk.
B) exchange rate risk.
C) appropriation risk.
D) all of the above are correct.
29 An investment banker has recommended a $100,000 portfolio containing assets B, D, and F. $20,000 will be
invested in asset B, with a beta of 1.5; $50,000 will be invested in asset D, with a beta of 2.0; and $30,000 will
be invested in asset F, with a beta of 0.5. The beta of the portfolio is
D) unable to be determined from the information provided.
30 The DuPont system merges the income statement and balance sheet into two summary measures of
A) net profit margin and return on total assets.
B) return on total assets and return on equity.
C) net profit margin and price/earning ratio.
D) net profit margin and return on equity.