FIN350 Sample Final

Version B

There will be 40 questions in the final exam. There will be NO question on the
measurement of free cash flows or standard deviation of investment returns.
The list of equations below will be reprinted on the final exam.
To toggle between END and BEGIN model, press 2nd, BGN, 2nd, ENTER
P

cpn
cpn
(cpn par )

....
(1 y )1 (1 y )2
(1 y )t

Current ratio = Current assets / Current liabilities

FA turnover
= Sales / Net fixed assets
TA turnover
= Sales / Total assets
Inv. turnover = Sales / Inventories
Days Sales Outstanding = Receivables / Average sales per day
Debt ratio (D/A)= Total debt / Total assets
Profit margin = Net income / Sales
BEP = EBIT / Total assets
ROA = Net income / Total assets
ROE = Net income / Total common equity
P/E
= Price / Earnings per share
M/B = Mkt price per share / Book value per share
ROE = (NI/Sales) x (Sales/TA) x (TA/Equity)

PV = FV / ( 1 + i )
n
iPER = iNOM / m

EFF%= ( 1 + iNOM / m )

-1

WACC = wdrd(1-T) + wprp + wcrs

rp = D / P
rs = D1 / P0 + g
CAPM: rs = rRF + (rM rRF)
Rd (before tax): YTM
Firm value=FCF1/(WACC-g) if free cash flows grow at a constant rate
For bond: YTM = Current yield + Capital gains yield

The following questions are authentic questions from the final exam of Fall 2006.
1. You hope to buy a car 5 years from now, and you plan to save $2,000 per year, beginning
immediately. You will make 5 deposits in an account that pays 8% interest. Under these
assumptions, how much will you have 5 years from today?
a.
b.
c.
d.
e.

$11,976.27
$17,925.96
$15,423.29
$12,671.86
$13,349.15

Work under the BEGIN model because we are having an annuity due.
5 N, 2000 PMT, 0 PV, 8 I/Y, CPT FV
Do not forget to return to END model

2. An account was opened with an investment of $2,000 10 years ago. The ending balance in
the account is $3,500. If interest was compounded annually, what rate was earned on the
account?
A) 3.95%
B) 2.66%
C) 3.22%
D) 5.76%
E) 4.81%
-2000 PV, 10 N, 0 PMT, 3500 FV, CPT I/Y
3. Whats the present value of $4,000 discounted back 3 years if the appropriate interest rate is 8%,
compounded monthly?
a.
b.
c.
d.
e.

$2,982.90
$3,149.02
$2,649.78
$2,023.74
$3,708.26

monthly interest rate=8%/12=0.666%, there are 36 months in 3 years

4000 FV, 36 N, 0.666 I/Y, 0 PMT, CPT PV
4. Which of the following is/are true of a zero coupon bond?
a. The bond makes no coupon payments.
b. The bond sells at a discount prior to maturity.
c. The bond has a zero value.
d. All of the above are true.
e. a and b above are true

5. The interest rate charged per period multiplied by the number of periods per year is
called the:
A) Effective annual rate (EAR).
B) Annual percentage rate (APR).
C) Periodic interest rate.
D) Compound interest rate.
E) Daily interest rate.
Periodic interest rate=nominal interest rate/ the number of periods per year=APR/ the number of
periods per year
6. If the Treasury yield curve is downward sloping, what is the yield to maturity on a 10-year
Treasury bond, relative to that on a 1-year Treasury bond?
a. The yields on the two bonds are equal.
b. The yield on a 10-year Treasury bond will always be higher than the yield on a 1-year
Treasury bond.
c. It is impossible to tell without knowing the coupon rates of the bonds.
d. The yield on the 10-year Treasury bond is less than the yield on a 1-year Treasury
bond.
e. It is impossible to tell without knowing the relative default risks of the two Treasury
bonds.
7. Find the current yield and the capital gains yield for a 10-year, 10% annual coupon bond that sells
for $900, and has a face value of $1,000.
A)
B)
C)
D)
E)

10%, 0.67%
11.11%, 0.64%
11.11%, 11.75%
9%, 0.76%
9%, 0.67%

current yield=coupon/price=100/900=11.11%
yield to maturity=from calculator=11.75%
capital gain yield= yield to maturity-current yield=0.64%
8.

Which of the following bonds would be considered to be of speculative-grade (junk bond)?

a. A treasury bond.
b. A BBB-rated bond.
c. A B-rated bond.
d.
none of above

BBB is the lower rate for investment grade

9. You determine that XYZ common stock will return 14 percent. XYZ has a beta of 1. Risk free
rate is 5%. The market expected return is 10 percent. Which of the following is most likely to happen:
A) You and other investors will sell XYZ stock and its return will fall.
B) You and other investors will buy up XYZ stock and its price will rise.
C) You and other investors will buy up XYZ stock and its return will rise.
D) You and other investors will sell XYZ stock and its price will fall.
Expected return=14%, required return=5%+1*(10%-5%)=10%<expected return, undervalued stock.
10. Which of the following is/are true of the Capital Asset Pricing Model?
A) Its graph is referred to as the Security Characteristic Line
B) It usually uses the inflation rate as the risk-free rate
C) It uses beta as a measure of diversifiable risk
D) None of the above
E) Only A and C above are correct
11. The beta of a Treasury bill is _____ and the beta of the overall market index is____:
a. risk free rate; 1.
b. 1; 0.
c. 0; 1.
d. 1; 1.
e. infinite; 1.
12.

Fiction Company's stock has a beta of 1.20, the risk-free rate is 5.00%, and the market risk
premium is 4.50%. Expected market return is 9.50%. What is Fiction's required return?
a.
b.
c.
d.
e.

10.25%
10.40%
10.75%
10.50%
11.25%

5%+1.2*4.5%=10.40%
13.

Which of the following statements best describes what would be expected to happen as you
randomly select stocks and add them to your portfolio?
a.
b.
c.
d.
e.

Adding more such stocks will reduce the portfolios unsystematic, or diversifiable, risk.
Adding more such stocks will reduce the portfolios beta.
Adding more such stocks will increase the portfolios expected return.
Adding more such stocks will reduce the portfolios market risk.
Adding more such stocks will have no effect on the portfolios risk.

Diversification will reduce unsystematic, or diversifiable, risk.

14. The dividend on Simple Motors common stock will be $3 in 1 year, $4.25 in 2 years,
and $6.00 in 3 years. You can sell the stock for $100 in 3 years. If you require a 12%
return on your investment, how much would you be willing to pay for a share of this
stock today?
A) $75.45
B) $77.24
C) $85.66
D) $81.52
E) $91.30
P=3/1.2+4.25/(1.12^2)+6/(1.12^3) +100/(1.12^4)
15.

Womack Toy Companys stock is currently trading at $25 per share. The stocks dividend
is projected to increase at a constant rate of 7 percent per year. The required rate of return
on the stock, rs, is 10 percent. What is the expected price of the stock 4 years from today?
a.
b.
c.
d.
e.

$36.60
$34.15
$28.39
$32.77
$30.63

The price will grow at the growth rate of 7%. 25*1.07^4=$32.77

16.

An analyst is trying to estimate the intrinsic value of the stock of Harkleroad Technologies.
The analyst estimates that Harkleroads free cash flow during the next year will be $25
million. The analyst also estimates that the companys free cash flow will increase at a
constant rate of 7 percent a year and that the companys WACC is 10 percent. Harkleroad
has $200 million of debt , and 30 million outstanding shares of common stock. What is
the estimated per-share price of Harkleroad Technologies common stock?
a.
b.
c.
d.
e.

$21.11
$18.37

$ 1.67
$27.78
$ 5.24

Firm value=25/(0.10-0.07)=833.3, equity=833.3-debt 200=633.3, per share equity

value=633.3/30=21.11

17. A stock now sells for $100. The stock has an expected return of 20% and is expected to pay $5

dividends next year. What is the expected stock price one year from now?
A) $182.00
B) $186.00
C) $115.00
D) $110.00
E) None of the above
Expected return=dividend yield + capital gain yield
20%=5/100+capital gain yield, so capital gain yield is 15%. The price will appreciate by
15% next year.100*(1+15%)=115
18.

Graham Industries has two separate divisions: the Farm Equipment Division and the
Household Product Division. Each division accounts for about 50 percent of the
companys revenues and assets. Managers now want to enter the toy industry. In
assessing the attractiveness of investment projects in the toy industry, Graham should
use a required rate of return based on:
a.
b.
c.
d.
e.

the required rate of return on the treasury bonds.

the required rate of return on the market portfolio.
Grahams current weighted-average cost of capital.
a weighted-average required return computed for the farm equipment,
household products, and toy industries.
a required return computed for the toy industry.

Use a required rate of return (also called discount rate) of the toy industry because the new
project will be in toy industry. The new project may be different from the firms other
operations in terms of risk.
19.

Which of the following should NOT be considered when calculating a firm's WACC?
a. YTM on a firm's bonds.
b. Cost of preferred stock.
c. cost of accounts payable.
d. Cost of common stock.
e. Corporate tax rate.

Cost of payable is not included in the formula of WACC.

20.

A company estimates that a below-average risk project has a discount rate of 9 percent, an
average-risk project has a discount rate of 10 percent, and an above-average risk project has
a discount rate of 11 percent. Which of the following independent projects should the
company accept?
a.
b.
c.
d.
e.

Project A has average risk and a return of 9.5 percent.

Project C has above-average risk and a return of 11.5 percent.
Project B has below-average risk and a return of 8.5 percent.
All of the projects above should be accepted.
None of the projects above should be accepted.
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For a project with normal cash flows, if the projects return is higher than its discount rate, then
we can take the project. For project C, its return is 11.5. Based on its average risk, the
appropriate discount rate is 10%. 11.5%>10%.

21. A project has the following cash flows. What is the payback period?
Year
Cash flow
a.
b.
c.
d.
e.

0
-$5,000

1
$2,700

2
$3,300

3
$1,400

1.88 years
1.70 years
1.76 years
1.84 years
1.39 years

1+(5000-2700)/3300=1+2300/3300=1.697=1.70
22. A project has the following cash flows. What is the internal rate of return?
Year
Cash flow
a.
b.
c.
d.
e.

0
-$390,000

1
$168,000

2
$190,000

3
$218,600

20.32 percent
22.85 percent
21.32 percent
22.02 percent
21.54 percent

at this level of discount rate, NPV is close to zero.

23. You have a choice between 2 mutually exclusive investments. If you require a 15% return,
which investment should you choose? Assume you have plenty of cash to make the
investment.
Year
0
1
2
3

A)
B)
C)
D)
E)

A
Cash Flow
$100,000
20,000
40,000
80,000

B
Cash Flow
$125,000
75,000
45,000
40,000

Neither A nor B.
Project B, because it has a higher NPV.
Project A, because it has a smaller initial investment.
Project A, because it has the higher internal rate of return.
Project B, because it pays back faster.

Compute NPV for both projects, Project Bs NPV is higher.

24. Which of the following would be considered a capital budgeting decision?

A) Planning to issue common stock rather than issuing preferred stock
B) A decision to expand into a new line of products, at a cost of $5 million
C) Repurchasing shares of common stock
D) Issuing debt in the form of long-term bonds
E) None of the above

A decision to spend money and invest in something real assets.

25.

Which of the following should a company consider in an analysis when evaluating a

proposed project?
a. The new project is expected to reduce sales of the companys existing products by 15
percent a year.
b. Vacant facilities not currently leased out could instead be leased out for $10 million a
year.
c. If the new project is taken, the company has to spend $30 million next year to improve
the facilities in which the new project will be housed.
d. Statements a and b are correct.
e. All of the statements above are correct.

a. incidental effect. b. opportunity cost. c. relevant cash flows.

The following are either practice questions or authentic final-exam questions from other
semesters.
26. Which of the following factors should the manager include when estimating the relevant cash
flows?
a.
b.
c.
d.
e.
27.
A)
B)
C)
D)
E)

Any sunk costs associated with the project.

Any interest expenses associated with the project.
Any opportunity costs associated with the project.
Statements b and c are correct.
All of the statements above are correct.

A bond that is issued by US federal government is called a _______ bond.

corporate
municipal
James
junk
treasury

28. One common reason for partnerships to convert to a corporate form of organization is
that the partnership:
A) wishes to avoid double taxation of profits.
B) has rapidly growing financing requirements.
C) has issued all of its allotted shares.
D) agreement expires after ten years of use
E) none of the above
It is easier for corporation to raise capital (meaning getting money from outside of the
company)
29. Financial managers are expected to make corporate decisions to maximize
A) the wealth of both shareholders and bondholders
B) the wealth of shareholders
C) the wealth of bondholders.
D) the wealth of corporate employees
E) the value of the firm with bond and stock holders
30. You have two plans to pay your friend: plan A: you pay $1000 to your friend three yeas
from now , with a discount rate of 5%; plan B: you pay $5000 to your friend 10 years
from now, with a discount rate of 5%, which plan do you prefer from your point of
view? (assume that you are rational)
A) A
B) B
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C) Either A or B
D) none of the above
PV(A)= 1000/1.053= $863.84; PV(B)= 5000/1.0510. Since PV(A) is less than PV(B), plan A is
cheaper and better for you.
31..The IRR is defined as:
A) The discount rate at which level the NPV of a project is equal to zero
B) The difference between the cost of capital and the present value of the cash flows
C) The discount rate used in the NPV method
D) The discount rate used in the discounted payback period method
E) None of the above
32. A stock paying $5 in annual dividends next year sells now for $50 and has an expected
return of 14%. What the expected growth rate of dividends?
A) 5%
B) 4%
C) 6%
D) 7%
E) none of the above
Since 50=5/(0.14-g), g=0.04.
33.
.

You have discovered from looking at charts of past stock prices that if you buy
just after a stock price has increased for five consecutive days, you make money
every time! This is clearly a violation of _________ market efficiency. For
another example, suppose that firms with high earnings earn abnormally high
returns for several months after the earnings announcement. This is clearly a
violation of _________ market efficiency.

A)

strong form; semi-strong form

B)

semi-weak form; weak form

C)

semi-strong form; strong form

D)

strong form; weak form

E)

weak form; semi-strong form

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34.When the stock market is strong-form efficient, then the stock price incorporates (reflects)
A) information reflected in the historical prices
B) private information
C) public information
D) all relevant information, including public and private information
E) None of the above

35. In order for a manager to correctly decide to take an investment, the NPV of the
investment should be:
A) positive.
B) larger than the cost of capital.
C) less than the cost of capital
D) same as the cost of capital
E) none of the above
36. If a stock's beta is 1 during a period when the market portfolio was down by 10%, then,
in advance, we could expect the return on this individual stock to:
A) go down by 10% .
B) go up by 10%.
C) have no change.
D) go in any direction
Since the Beta of the stock is the same as the Beta of the market portfolio, the stock tends to
move as fast as the market, which is represented by the market portfolio.

37. What is the beta of a three-stock portfolio including 25% of Stock A with a beta of .90,
40% Stock B with a beta of 1.05, and 35% Stock C with a beta of 1.73?
A) 1.05
B) 1.17
C) 1.22
D) 1.25
E) None of the above
The beta of a portfolio is the weighted average of the betas of the securities in the portfolio.
That is, the beta of the portfolio =0.25*0.9+0.4*1.05+0.35*1.73=1.25

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38. Net Operating Working Capital (simply referred to as NOWC) is the:

A) Difference between current assets and non-interest-bearing current liabilities
B) Difference between long-term assets and long term liabilities
C) Difference between long-term assets and short term liabilities
D) None of the above
A (by definition)
39. The market value of equity is $500 million and the total market value of the firm is $925
million. The market value of debt is $425million (=925-400). The cost of equity is
15%, the cost of debt is 10%, and the tax rate is 35%. What is the firms WACC?
A)11.09%
B)12.18%
C)13.78%
D)14.17%
E)15.64%
500/925*0.15 +425/925*0.10*(1-0.35)=11.09%
40. Required stock returns required by investors can be explained by the stock's
A) systematic risk
B) unique risk.
C) firm-specific risk
D) total risk.
E) none of the above.
According to CAPM, the answer is A

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