Final study guide Adv Financial Mgmt And Policy (University of Louisiana at Lafayette)

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Question 1 A company is analyzing a variety of potential investments using different capital budgeting methods. Which of the following represents the most profitable choice based on the information p... rovided? Select one: ⦁ The company picks a project with profitability index of 1.25 over a project with a PI of -.25. ⦁ The company picks a project with a 5 year payback period over one with a 3 year payback period. ⦁ The company picks a project with an accounting rate of return 5% over one with an ARR of 3%. ⦁ The company picks a project with an NPV of $250,000 over one with an NPV of $300,000. The most profitable choice is choice (b) where the company picks a project with PI of 1.25 over PI of -0.25 because a project is worth selecting only if the profitability index i.e PV of future cash flows/ Initial investment is positive and greater than 1. Negative PI indicates NPV (net present value) of the project being negative i.e. the project can't cover initial investment. -Choice (a):- Payback period measures the time required for the annual cash flows of a project to recover initial investment. Lower the Payback period, better the project. Thus, choosing 5 year payback period over 3 is incorrect. -Choice (c):-NPV= Present value of future cash flows- Initial investment. Thus, higher the NPV, better the project. Thus, choosing $250,000 NPV over $300,000 is incorrect. -Choice (d):- Accounting rate of return (ARR)= Profit/ Investment. Higher the ARR, better the project. But ARR is not an appropriate measure of capital budgeting since it takes into account Profit rather than cash flows and also doesn't take into account time value of money. Thus even a project with ARR of 5% can't be said to be better because of the above drawbacks. Question 2 A firm is trying to choose the most profitable project to invest in. Which of the following should be used as the company's discount rate? Select one: ⦁ The projects' average internal rate of return. ⦁ The company's profitability index. ⦁ The company's weighted average cost of capital. ⦁ The company's reinvestment rate or weighted average cost of capital. Question 3 Calculate the discounted payback period for a project with a discount rate of 5% the following cash flows:Year 0: - $2000Year 1: $1000Year 2: -$1000Year 3: $1000Year 4: $3000Year 5: $2000 Select one: ⦁ 4.44 years. ⦁ 3.56 years. ⦁ 3.44 years. ⦁ 4 years. Question 4 In which of the following situations would it be appropriate to use the IRR method to make an investment decision? Select one: ⦁ To compare two projects that have an equal initial investment and lifespan. ⦁ All of these answers. ⦁ To assess a project which cash flows fluctuate between positive and negative. ⦁ To compare two investments that have different durations. Question 5 The tax rate that applies to the last dollar of the tax base and is often applied to the change in one's tax obligation as income rises is called . Select one: ⦁ the effective tax rate ⦁ the statutory tax rate ⦁ the marginal tax rate ⦁ the average tax rate Question 6 When evaluating the cash flows from a project, a financial manager needs to analyze the: Select one: ⦁ costs, benefits, and opportunity costs of the project. ⦁ The costs and benefits of the project only ⦁ The benefits of the project only ⦁ The costs of the project only Question 7 Which of the following describes an advantage the internal rate of return has over net present value for capital budgeting purposes? Select one: ⦁ The IRR method recognizes the firm's opportunity costs. ⦁ The IRR method adjusts for the riskiness (or uncertainty) of the projected cash flows ⦁ Internal rate of return is an indicator of the efficiency, quality or yield of an investment. ⦁ All of these answers. Question 8 Which of the following is a correct definition of a capital budgeting method? Select one: ⦁ Real option analysis is the ratio of payoff to investment of a proposed project. ⦁ Equivalent annuity method essentially value projects as if they were risky bonds. ⦁ The internal rate of return is the discount rate that gives a net present value of zero. ⦁ The profitability index is the time required for an investment to repay the original investment. Question 9 Which of the following is a way cash flow factors can be used to improve a business? Select one: ⦁ All of these answers. ⦁ It can be used to determine problems with a business's liquidity. ⦁ It can be used to evaluate the ""quality"" of income generated by accrual accounting. ⦁ It can be used to .determine a project's rate of return or value Question 10 Which of the following is an element needed to calculate an asset's depreciation? Select one: ⦁ All of these answers. ⦁ The estimated useful life of the asset. ⦁ A method of apportioning the cost of the asset. ⦁ The cost of the asset minus the asset's salvage value. Question 11 You have an opportunity to invest $48,900 now in return for $61,200 in one year. If your cost of capital is 8.6%, what is the NPV of thisinvestment? Select one: a. $6,231.53 b. $8,856.92 c. $7,453.59 d. $12,300 Question 12 You have an opportunity to invest $115,000 now in return for $81,200 in one year and $43,200 in two years. If your cost of capital is 9.6%, what is the NPV of this investment? Select one: a. -$9,400 b. -$4,948.85 c. $9,400 d. $4,948.85 Question 13 You run a construction firm. You have just won a contract to build a government office building. Building it will require an investment of $10.6 million today and $5.8 million in one year. The government will pay you $22.2 million in one year upon the building's completion. Suppose the interest rate is 11.3%. What is the NPV of this opportunity? Select one: ⦁ $5.8 million ⦁ $4.14 million ⦁ $12.4 million ⦁ $6.3 million Question 14 Marian Cebrian owns his own business and is considering an investment. If he undertakes the investment, it will pay $6,840 at the end of each of the next 3 years. The opportunity requires an initial investment of $1,710 plus an additional investment at the end of the second year of $8,550. What is the NPV of this opportunity if the interest rate is 2.6% per year? Should Marian take it? Select one: ⦁ The NPV is -$9,665. Yes, he should take it. ⦁ The NPV is -$9,665. No, he should not take it. ⦁ The NPV is $9,665. Yes, he should take it. ⦁ The NPV is $9,665. No, he should not take it. Question 15 You are a real estate agent thinking of placing a sign advertising your services at a local bus stop. The sign will cost $6,300 and will be posted for one year. You expect that it will generate additional revenue of $1,386 a month. What is the payback period? Select one: ⦁ 0.22 months ⦁ 6 months ⦁ 0.22 years 4.5 months Question 16 You have just been offered a contract worth $1.28 million per year for 6 years. However, to take the contract, you will need to purchase some new equipment. Your discount rate for this project is 12.6%. You are still negotiating the purchase price of the equipment. What is the most you can pay for the equipment and still have a positive NPV? Select one: ⦁ $7.68 million ⦁ $5.17 million ⦁ $3.49 million ⦁ $6.71 million Question 17 You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $11.0 million. Investment A will generate $2.40 million per year (starting at the end of the first year) in perpetuity. Investment B will generate $1.70 million at the end of the first year, and its revenues will grow at 3.2% per year for every year after that. Which investment has the higher IRR? Which investment has the higher NPV when the cost of capital is 8.1%? Which investment should you select? Select one: ⦁ Project B had the higher IRR, project A has the higher NPV. Select project A with the higher NPV. IRR can only be used to compare projects with equal initial investments. ⦁ Project A had the higher IRR, project B has the higher NPV. Select project B with the higher NPV. IRR can only be used to compare projects with equal initial investments. ⦁ Both projects are equally valuable. IRR and NPV are both reliable methods to compare projects' value. ⦁ Project A had the higher IRR, project B has the higher NPV. Select project A with the higher IRR. NPV can only be used to compare projects with equal initial investments. Question 18 Project Year 0 Year 1 Year 2 Year 3 Year 4 A -$103 28 34 44 53 B -$103 53 44 34 24 You are considering the following two projects and can take only one. Your cost of capital is 11.9%. The cash flows for the two projects are as follows ($ million): What is the IRR of each project? Which project should you choose? Select one: ⦁ IRR cannot be used to compare these projects. Choose project B because it has a higher NPV. ⦁ IRR of Project A = 17.7%, IRR of Project B = 21.7%. Choose project B. ⦁ IRR of Project A = 11.9%, IRR of Project B = 17.7%. Choose project B. ⦁ IRR of Project A = 17.7%, IRR of Project B = 21.7%. Choose project A. Question 19 You need a particular piece of equipment for your production process. An equipment-leasing company has offered to lease the equipment to you for $10,600 per year if you sign a guaranteed 5-year lease (the lease is paid at the end of each year). The company would also maintain the equipment for you as part of the lease. Alternatively, you could buy and maintain the equipment yourself. The cash flows from doing so are listed below (the equipment has an economic life of 5 years). If your discount rate is 7.9%, what should you do? Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 -$41,500 -$2,400 -$2,400 -$2,400 -$2,400 -$2,400 Select one: a. The NPV of the leasing alternative is -$53,000. The NPV of the purchase alternative is -$53,500. Choose the leasing alternative because it has the lowest NPV. b. The NPV of the leasing alternative is -$53,000. The NPV of the purchase alternative is -$53,500. Choose the buying alternative because it has the highest NPV. c.The NPV of the leasing alternative is -$42,435. The NPV of the purchase alternative is -$51,108. Choose the leasing alternative because it has the lowest NPV. d. e.The NPV of the leasing alternative is -$42,435. The NPV of the purchase alternative is -$51,108. Choose the buying alternative because it has the highest NPV. Question 20 Your storage firm has been offered $102,000 in one year to store some goods for one year. Assume your costs are $97,200, payable immediately, and the cost of capital is 9.1%. Should you take the contract? Select one: a. The NPV will be −$3,708. No, you should not take the contract, as the NPV of the contract is negative. ⦁ The NPV will be $4,800. Yes, you should take the contract, as the NPV of the contract is positive. ⦁ The NPV will be $3,708. Yes, you should take the contract, as the NPV of the contract is positive. ⦁ The NPV will be −$4,800. No, you should not take the contract, as the NPV of the contract is negative. MODULE 5 A company has $2 million in machinery expenses and $3 million in rent. It costs $30 per unit in labor costs to produce the good, which is sold for $50 per unit. What is the break-even point? Select one: ⦁ 50,000 units ⦁ 100,000 units ⦁ 166,667 units ⦁ 250,000 units Question 2 A company produces 100,000 units that sell for $40. The company's variable costs per unit is $25. The company's total fixed costs are $800,000. What is the company's degree of operating leverage? Select one: a. 1.47 b. 2.14 c. 1.25 d. 1.14 Question 3 Managers of publicly traded corporations are often compensated at least in part based on firm profitability, and bondholders prefer to receive principal and interest payments on time. Leverage can increase firm profitability and make more money available for interest and principal payments, so it appears that mangers' interests and bondholders' interests are well-aligned. Which of the following is true about conflicts between managers and bondholders? Select one: ⦁ Managers' and bondholders' incentives are well aligned only when firms are 100% equity financed (zero debt financing). ⦁ Managers' interests and bondholders' interests are well aligned only when firms are 100% debt financed, but bankruptcy costs prevent this level of debt financing in practice. ⦁ There is a clear target balance between the amount of debt and equity financing that aligns manager's interests with bondholders' interests. ⦁ Managers may under invest in projects if it appears that all proceeds will be absorbed by bondholders, hurting both shareholders and bondholders. Question 4 If a company with stable earnings wanted to ensure that its managers' interests are aligned with the company's shareholders, which of the following capital structures should it use? Select one: ⦁ An equity-heavy capital structure that maximizes returns to shareholders by magnifying ROE, maximizing the tax shield, up to the point that these benefits are higher than anticipated bankruptcy costs. ⦁ A preferred equity-heavy capital structure that maximizes returns to shareholders by magnifying ROE, maximizing the tax shield, up to the point that these benefits are higher than anticipated bankruptcy costs. ⦁ A debt-heavy capital structure that maximizes returns to shareholders by magnifying ROE, maximizing the tax shield, up to the point that these benefits are higher than anticipated bankruptcy costs. ⦁ The company's capital structure has no effect on a manager's interests. Question 5 In a perfect market as proposed by Modigliani and Miller, which of the following statements is true? Select one: ⦁ As a company increases its leverage, total risk is conserved and no extra value is created. ⦁ All of these answers. ⦁ Investment decisions are not affected by financing decisions. ⦁ The value of a company is independent of its capital structure. Question 6 Under the best capital structure of a company, the goal of it is to maximize: Select one: ⦁ the market value of the company. ⦁ the market value of the company's bonds. ⦁ profits. ⦁ stock dividends. Question 7 When a company files Chapter 11 bankruptcy, which of the following statements accurately describes an action the company's management can take? Select one: ⦁ Management can choose to continue to operate exactly as it did prior to the bankruptcy. ⦁ All of these answers. ⦁ Unilaterally reject and cancel contracts based solely on what would be best for the company. ⦁ Acquire financing and loans on favorable terms by giving the lenders first priority on earnings. Question 8 Which of the following factors explain why a company's capital structure is relevant to its value in practice? Select one: ⦁ Bankruptcy costs. ⦁ Information asymmetry between the company's management and its investors. ⦁ Agency costs. ⦁ All of these answers. Question 9 Suppose a firm expects to have $50,000,000 in free cash flow and $1,000,000 in interest expenses this year. If the firm's WACC is 12% and it's corporate tax rate is 35%, what is the expected value of the tax shield this year? Select one: a. $6,000,000 b. $44,642,587 c. $17,500,000 d. $350,000 Question 10 Managers of publicly traded corporations are often compensated at least in part based on firm profitability, and shareholders prefer higher stock prices to lower stock prices. Stock prices are determined at least in part based on firm profitability, so it appears that mangers' interests and stockholders' interests are well-aligned. Which of the following is true about conflicts between managers and shareholders? Select one: ⦁ There is a clear target balance between the amount of debt and equity financing that aligns manager's interests with stockholders' interests. ⦁ Managers' interests and stockholders' interests are well aligned only when firms are 100% debt financed, but bankruptcy costs prevent this level of debt financing in practice. ⦁ Instead of returning free cash flow to investors in the form of dividends or stock buybacks, managers may invest cash flows in projects that are not expected to yield adequate returns in order to create some growth. ⦁ Managers' and stockholders' incentives are well aligned only when firms are 100% equity financed (zero debt financing). MODULE 6 Question 1 A company made $10 million in revenue, recorded $2 million in net income, and paid $750,000 in dividends last year. What was the company's pay out ratio last year? Select one: a. 20.0% b. 2.7% c. 37.5% d. 7.5% Question 2 In which of the following situations would a shareholder prefer to receive stock dividends as opposed to cash dividends? Select one: ⦁ The investor is looking to own shares in the company for a long period of time. ⦁ Cash dividends and stock sales are both taxed using capital gain rates. ⦁ All of these answers ⦁ The investor wants to minimize the taxes due on investment income. Question 3 The Modigliani-Miller theory suggests that it doesn't matter to a shareholder whether a company issues dividends. Why might that theory not be applicable to the US stock market as it currently exists? Select one: Changes in dividend policy may indicate a change in the company's investment policy. ⦁ There are transaction costs associated with trading stock. ⦁ Dividends and share repurchases are taxed at different rates. ⦁ All of these answers. Question 4 Which of the following is a possible market reaction to an stock repurchase announcement? Select one: ⦁ The stock price may increase because the repurchase signals that the company views the shares as currently undervalued. ⦁ The stock price may fall because the repurchase signals that the company's future earnings may not be as high as the market currently expects. ⦁ The share price may increase because the repurchase signals that the company is shifting to a higher degree of leverage to maximize returns to shareholders. ⦁ All of these answers. Question 5 A company wants to implement a capital growth policy. In the current year it had $10 million in net income. How much income should it distribute in dividends in order to pursue this strategy? Select one: ⦁ $9 million ⦁ $10 million ⦁ $20 million ⦁ $1 million Question 6 Which of the following is a benefit shareholders can obtain by repurchasing its shares? Select one: ⦁ Share repurchases can boost EPS, which can in turn increase management compensation. ⦁ Share repurchases can deter hostile takeovers. ⦁ All of these answers. ⦁ Shareholders have a higher percent ownership in the company at a higher per share price. Question 7 Which of the following is a method of payment a corporation can use to pay a dividend? Select one: ⦁ Stock. ⦁ All of these answers. ⦁ Cash. ⦁ Securities of other companies. Question 8 Under the Modigliani-Miller theorem in finance, the value of a company depends on: Select one: ⦁ the capital structure of the company. ⦁ the competitive situation of the company and the projects that the company undertakes and plans. ⦁ how managers work together. ⦁ the relative mix of stock returns and dividends. Question 9 Which of the following is an element of a company's dividend policy? Select one: ⦁ Whether the company pays dividends at all. ⦁ Whether dividends are paid out in cash or stock. ⦁ All of these answers. ⦁ How often the company pays dividends. Question 10 Which of the following repurchasing method definitions is NOT correct? Select one: ⦁ Open Market: The firm buys its stock on the open market from shareholders. ⦁ Selective Buy-Backs: The firm makes repurchase offers privately to some shareholders. ⦁ Repurchase Put Rights: The firm announces that it will repurchase a number of shares at a set price. ⦁ Employee Share Scheme Buy-Back: The company repurchases shares held by employees. Question 11 Which of the following changes after a stock splits? Select one: ⦁ The company's total market value. ⦁ The stock's per share price. ⦁ The stockholder's ownership percentage in the company. ⦁ All of these answers. Question 12 Which of the following is a reason a company might have for initiating a reverse stock split? Select one: ⦁ To encourage institutional investors and mutual funds to purchase the stock. ⦁ To prevent the stock from being delisted from a stock exchange. ⦁ All of these answers. ⦁ To decrease the number of its shareholders. Question 13 Which of the following is an accurate description of one of the dates related to issuing dividends. Select one: ⦁ The declaration date is the day the board of directors announces it will pay a dividend. ⦁ The in-dividend date is the last day when the stock is cum dividend. ⦁ The ex-dividend date refers to when the shareholders must be registered on record. ⦁ All of these answers Question 14 Which of the following is a possible market reaction to a company's announcement that it will increase it's quarterly dividend? Select one: ⦁ All of these answers. ⦁ The share price may decrease because the increased dividend signals that future earnings will be higher than the market currently expects. ⦁ The share price may increase because the increased dividend signals that future earnings will be lower than the market currently expects. ⦁ The share price may increase because the increased dividend signals that future earnings will be higher than the market currently expects. Question 15 Which of the following statements regarding what dividends can mean to prospective investors is true? Select one: ⦁ Stocks with consistently high dividends tend to mitigate agency conflicts between investors and firm management ⦁ Consistent dividends signal that earnings generated by the stock will be volatile. ⦁ All of these answers. ⦁ Dividends do not help mitigate information asymmetry between investors and firm management MODULE 7 Question 1 A company has a holding cost per unit of $5. Each order has a fixed cost of $8 and the annual demand quantity is 150,000 units. What is the company's optimal order quantity? Select one: ⦁ 490 units ⦁ 1550 units ⦁ 245 units ⦁ 693 units Question 2 A company that manufactures 4th of July decorations is looking to improve its inventory management. Which of the following should it consider as it redesigns its inventory system? Select one: ⦁ It should review its past sales data to determine the pattern of demand for its goods. ⦁ It should analyze its cash flow so it has enough cash to purchase its stock. ⦁ All of these answers. ⦁ It should calculate the lag time in its supply chain. Question 3 A company values its inventory by assuming that the most recently produced items are sold first. This inventory valuation method is known as . Select one: ⦁ Weighted Average Cost Method ⦁ FIFO ⦁ Moving Average Cost Method ⦁ LIFO Question 4 A customer has 45 days from the date of invoice to pay a bill in full, but if he pays within 15 days of the invoice, he gets a 10% discount. Which of the following describes these terms of trade? Select one: a. 15/45, net 10. b. 10/15, net 45. c. 10/45, net 15. d. 15/10, net 45. Question 5 If a company has yet to receive payment for its goods, which of the following describes a situation when it can recognize revenue from the sale? Select one: ⦁ When the goods have been delivered and the title has been transferred to the buyer. ⦁ Once the company has performed a portion of the services to be provided. ⦁ Once the company has sustained a portion of the costs associated with providing the good or service. ⦁ All of these answers. Question 6 Which of the following is a reason a company would hold marketable securities? Select one: ⦁ All of these answers. ⦁ To serve as a substitute for cash balances. ⦁ To ensure that the company can meet known financial requirements, such as maturing bond issues. ⦁ To obtain a return instead of letting the funds remain idle. Question 7 Which of the following is an acceptable strategy for managing a company's disbursements? Select one: ⦁ A company should be overinsured to ensure that it has adequate coverage. ⦁ All of these answers. ⦁ A company should always purchase products it needs to avoid long-term rental expenses. ⦁ A company should distribute payroll after the point when banks will clear checks for that week. Question 8 Which of the following is not a component included in a cash budget? Select one: ⦁ Depreciation expense. ⦁ Interest expenses on loans. ⦁ Income taxes paid. ⦁ Purchases of assets. Question 9 Which of the following should a company ALWAYS do with regards to its collection policy? Select one: ⦁ Demand upfront payment when the good or service is delivered. ⦁ Require a deposit from all customers for large purchases. ⦁ Tailor its collection policy based on each customer's needs and importance. ⦁ Set up lock box banking for its customers' convenience. Question 10 A company has average inventory of $12 million and COGS of $16 million. Its average accounts receivable is $2 million and it had $6 million in credit sales. Its average accounts payable is $3 million and it had $16 million in purchases. What is its CCC? Select one: ⦁ 326.98 days ⦁ 158.88 days ⦁ 273.75 days ⦁ 479.57 days Question 11 A company uses ABC analysis to manage its inventory and it has just adopted a new product. While this new product is an important part of the company's sales, it is relatively cheap to manufacture and is not prone to expiring. It should be . Select one: ⦁ an A item. ⦁ a B item. accounted for separately outside of the current inventory system. ⦁ a C item. Question 12 A company values its inventory by dividing the total cost of goods available for sale by the sum of the beginning inventory balance and the total amount of purchases made during the period. This method is known as . Select one: ⦁ Moving-Average Cost. ⦁ Specific Identification. ⦁ LIFO. ⦁ Weighted Average Cost. Question 13 Which of the following is a reason to always have cash on hand? Select one: ⦁ It can be used immediately to perform economic actions, such as paying outstanding debts. ⦁ It allows the company to meet its obligations without incurring avoidable losses. ⦁ All of these answers. ⦁ It increases a company's liquidity. Question 14 Which of the following statements regarding the cash conversion cycle (CCC) is correct? Select one: ⦁ All of these answers. ⦁ Rising cash conversion cycle often indicates deterioration in cash flows, while declining cash conversion cycle generally signals improving cash flows. ⦁ The cash conversion cycle is written to analyze firms that conducts its business solely using cash. ⦁ The cash conversion cycle is directly observed from a business's cash flows. Question 15 How does inflation influence inventory levels? Select one: ⦁ As inflation increases, inventories tend to increase. ⦁ As inflation increases, companies lock in their inventories at pre-inflationary levels. ⦁ Inflation does not effect inventory levels. ⦁ As inflation increases, inventories tend to decrease. [Show More]

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