University Center for Academic Excellence, UCAE - UNC ...



FINN 3120-001 Name________________________ INSTRUCTIONS: 1. This is a closed-book and closed-note exam. You can bring one letter sized cheat sheet with two-sided. 2. No laptops, iPhones, Android phones, or any other smartphones or tablets are allowed. 3. Please minimize the changes on the answer sheet to avoid machine reading errors. It is your responsibility to make sure that your answer sheet is machine-readable. 4. Write your name on the exam paper, Scantron answer sheet, and cheat sheet. 5. Please mark your last name and first name on the answer sheet. 6. Please turn in your exam paper, Scantron answer sheet, and cheat sheet after finishing the exam. ? GOOD LUCK!!! ?MULTIPLE CHOICE. Choose the one alternative that best answers the question (25 credits) 1. Which one of the following statements is correct? A. The net present value is a measure of profits expressed in today's dollars. B. The net present value is positive when the required return exceeds the internal rate of return. C. If the initial cost of a project is increased, the net present value of that project will also increase. D. If the internal rate of return equals the required return, the net present value will equal zero. 2. A portfolio is: A. an investment in a risk-free security. B. any security that is equally as risky as the overall market. C. any new issue of stock. D. a group of assets held by an investor. 3. Unsystematic risk can be defined by all of the following except: A. unrewarded risk. B. diversifiable risk. C. market risk. D. asset-specific risk. 4. Crabby Shores stock is expected to return 16 percent in a booming economy, 11.5 percent in a normal economy, and 1.8 percent in a recession. The probabilities of an economic boom, normal state, or recession are 6 percent, 85 percent, and 9 percent, respectively. What is the expected rate of return on this stock? A. 8.96 percent B. 9.63 percent C. 9.50 percent D. 10.90 percent 5.Which one of the following indicates that a project is expected to create value for its owners? A. Profitability index less than 1.0 B. Payback period greater than the requirement C. Positive net present value D. Internal rate of return that is less than the requirement 6. Which one of the following statements is correct? A. A longer payback period is preferred over a shorter payback period. B. The payback rule states that you should accept a project if the payback period is less than one year. C. The payback period ignores the time value of money. D. The payback rule is biased in favor of long-term projects.1 7. Electronic Products has 22,500 bonds outstanding that are currently quoted at 101.6. The bonds mature in 8 years and pay an annual coupon payment of $90. What is the firm's aftertax cost of debt if the applicable tax rate is 34 percent? A. 5.47 percent B. 4.79 percent C. 5.75 percent D. 6.98 percent 8. Services United is considering a new project that requires an initial cash investment of $26,000. The project will generate cash inflows of $2,500, $11,700, $13,500, and $10,000 over each of the next four years, respectively. How long will it take to recover the initial investment? A. 2.74 years B. 2.87 years C. 2.99 years D. 3.27 years 9. Net present value involves discounting an investment's: A. future cash flows. B. future profits. C. liabilities. D. costs. 10. The modified internal rate of return is specifically designed to address the problems associated with: A. mutually exclusive projects. B. unconventional cash flows. C. long-term projects. D. negative net present values. 11. What is the net present value of a project that has an initial cost of $40,000 and produces cash inflows of $ 8,500 a year for 10 years if the discount rate is 13 percent? A. $ 6,123.07 B. $ 9,500.00 C. $ 7,189.34 D. $ 6,712.03 12. The security market line is a linear function that is graphed by plotting data points based on the relationship between the: A. risk-free rate and beta. B. market rate of return and standard deviation. C. expected return and beta. D. risk-free rate and the market rate of return.2 13. John is considering a project with cash inflows of $1,100, $1,000, $1,050, and $1,200 over the next four years, respectively. The relevant discount rate is 12.5 percent. What is the net present value of this project if it the start-up cost is $3,200? A. $54.50 B. $48.04 C. -$35.45 D. $89.33 14.You are considering an investment for which you require a rate of return of 8.5 percent. The investment costs $ 53,500 and will produce cash inflows of $20,000 for three years. Should you accept this project based on its internal rate of return? Why or why not? A. Yes; because the IRR is 5.96 percent B. Yes; because the IRR is 9.56 percent C. No; because the IRR is 5.96 percent D. No; because the IRR is 9.56 percent 15.Which one of the following will decrease the aftertax cost of debt for a firm? A. Decrease in the firm's beta B. Increase in tax rates C. Increase in the risk-free rate of return D. Increase in a bond's yield to maturity 16. S&W has 21,000 shares of common stock outstanding at a price of $29 a share. It also has 2,000 shares of preferred stock outstanding at a price of $71 a share. The firm has 7 percent, 12-year bonds outstanding with a total market value of $386,000. The bonds are currently quoted at 100.6 percent of face and pay interest semiannually. What is the capital structure weight of the firm's preferred stock if the tax rate is 34 percent? A. 12.49 percent B. 9.00 percent C. 8.24 percent D. 11.84 percent 17. KellyAnne Public Relations just paid an annual dividend of $1.27 on its common stock and increases its dividend by 3.4 percent annually. What is the rate of return on this stock if the current stock price is $38.56 a share? A. 6.81 percent B. 7.87 percent C. 7.04 percent D. 7.69 percent3 18. The common stock of Serenity Homescapes has a beta of 1.21 and a standard deviation of 17.8 percent. The market rate of return is 13.5 percent and the risk-free rate is 3.2 percent. What is the cost of equity for this firm? A. 15.66 percent B. 13.61 percent C. 13.93 percent D. 16.25 percent 19. Spartans has 6.5 percent bonds outstanding that mature in 18 years. The bonds pay interest semiannually and have a face value of $1,000. Currently, the bonds are selling for $985 each. What is the firm's pretax cost of debt? A. 6.77 percent B. 6.64 percent C. 6.94 percent D. 7.11 percent 20. Healthy Snacks has a target capital structure of 60 percent common stock, 3 percent preferred stock, and 37 percent debt. Its cost of equity is 16.8 percent, the cost of preferred stock is 11.4 percent, and the pretax cost of debt is 8.3 percent. What is the company's WACC if the applicable tax rate is 34 percent? A. 13.29 percent B. 12.61 percent C. 12.34 percent D. 12.45 percent 21. Which one of these represents systematic risk? A. Product recall by one manufacturer B. Increase in consumption created by a reduction in personal tax rates C. Surprise firing of a firm's chief financial officer D. Closure of a major retail chain of stores 22.You own a stock portfolio invested 28 percent in Stock Q, 16 percent in Stock R, 42 percent in Stock S, and 14 percent in Stock T. The betas for these four stocks are .97, 1.03, 1.43, and 1.88, respectively. What is the portfolio beta? A. 1.8 B. 1.3 C. 1.6 D. 2.8 23.The preferred stock of Dolphin Pools pays an annual dividend of $5.25 a share and sells for $48 a share. The tax rate is 35 percent. What is the firm's cost of preferred stock? A. 9.67 percent B. 10.94 percent4 C. 15.07 percent D. 15.59 percent 24. Jefferson International is trying to choose between the following two mutually exclusive design projects: The required return is 13 percent. If the company applies the profitability index (PI) decision rule, which project should the firm accept? If the company applies the NPV decision rule, which project should it take? Given your first two answers, which project should the firm actually accept? A. Project A; Project B; Project A B. Project A; Project B; Project B C. Project B; Project A; Project A D. Project B; Project A; Project B 25. Precision Cuts has a target debt-equity ratio of .48. Its cost of equity is 16.4 percent, and its pretax cost of debt is 8.2 percent. If the tax rate is 34 percent, what is the company's WACC? A. 13.20 percent B. 11.72 percent C. 12.84 percent D. 11.28 percent Bonus questions 26. Which one of the following statements is correct? Assume cash flows are conventional. A. If two projects are mutually exclusive, you should select the project with the shortest payback period. B. The profitability index will be greater than 1.0 when the net present value is negative. C. When the internal rate of return is greater than the required return, the net present value is positive. D. Projects with conventional cash flows have multiple internal rates of return. 27. If a security plots to the right and below the security market line, then the security has ____ systematic risk than the market and is ____. A. more; overpriced B. more; underpriced C. less; overpriced D. less; underpriced5 Appendix: using the TI BAII+ financial calculator to compute NPV and IRR6 ................
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