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a. Finance 3090 Final Exam Name: ______________________ 1. The idea that corporations should serve a variety of different stakeholders such as employees, customers, and the general public is known as _____________. a) b) c) d) Corporate Social Responsibility Earnings Per Share Maximization Principal Agency Shareholder Wealth Maximization 2. If the stock market is strong form efficient then it is possible to consistently earn positive abnormal returns through ________. a) b) c) d) Charting Fundamental Analysis Insider Trading None of the above 3. Corporations go public by issuing shares through a(n) __________________. a) b) c) d) AOL IPO NYSE SEC 4. Suppose one firm uses accelerated depreciation (like MACRS) while another firm uses straight line depreciation. In the early years, the firm using MACRS will show a _________. a) b) c) d) Lower Profit Margin Lower Operating Cash Flows Lower Debt Ratio All of the Above 5. Which is not one of the problems associated with using financial statements? a) b) c) d) Different firms might follow different rules under GAAP Firms might window dress in order to make their statements look better Some firms might use Off Balance Sheet forms of financing None of the above (All of the above are problems) Use the following information for questions 6-8: 12/31/2016 XX XX 5000 Current Assets Fixed Assets Total Assets Current Liabilities Long Term Debt CommonEquity Total 2016 7500 5500 500 1500 Sales COGS Dep EBIT Interest EBT Taxes Net Income 500 XX 2000 5000 XX XX XX XX Dividends were 500, Capital Expenditures were 700, Ending Stock Price was $20 per share and there were 400 shares outstanding. Taxes are 40% of EBT. 2016 4 .60 6 2.5 XX Current Ratio Debt Ratio Times Int. Ern FATO TATO Profit Margin ROA BEP P/E M/B 2016 10% XX XX XX XX 6. What is the firm's Earnings Before Taxes? a) 750 b) 1000 c) 1250 d) 1500 7. What is the firm's Market to Book Ratio? a) 3 b) 4 c) 5 d) 6 8. How much did the firm have in Common Equity at the end of the previous year (or the start of this year)? a) 1,750 b) 2,000 c) 2,800 d) 3,700 9. If a bond is selling at a premium, then it's current yield will be _______ than it's yield to maturity and ________ than it's coupon rate. a) b) c) d) Higher; Higher Higher; Lower Lower; Higher Lower; Lower 10. _________ bonds are backed by specific assets of the company. a) b) c) d) Convertible Debenture Floating Mortgage 11. Six years ago you bought a bond for $1,036. The bond had 15 years until maturity, a coupon rate of 11% with semiannual payments, and a face value of $1000. Today the bond is worth $982. If you sold the bond today, what rate of return would you have earned on your investment? a) -3% b) 2% c) 6% d) 10% 12. Which is NOT a problem with using the Capital Asset Pricing Model? a) b) c) d) There is no true Market Portfolio that includes every asset The CAPM assumes that there is no taxes Investors can't really borrow at the risk-free rate All of the above are problems 13. In order to reduce the risk of a portfolio, you would want to combine stocks with ______________. a) b) c) d) Low Correlation Coefficients Low Standard Deviations High expected returns The market portfolio 14. Net Present Value is considered a better method than Internal Rate of Return because __________. a) b) c) d) NPV does a better job of ranking mutually exclusive projects of different size Nonnormal projects may have multiple IRRs The IRR method assumes that cash flows are reinvested at the projects expected return All of these are reasons why NPV is considered better Use the following information for questions 15-21. A corporation has 12,000,000 shares of stock outstanding at a price of $40 per share. They just paid a dividend of $3 and the dividend is expected to grow by 4% per year forever. The stock has a beta of .9, the current risk free rate is 3%, and the market risk premium is 7%. The corporation also has 400,000 bonds outstanding with a price of $950 per bond. The bond has a coupon rate of 6% with semiannual interest payments, a face value of $1,000, and 13 years to go until maturity. The company plans on issuing new debt until they reach their target debt ratio of 70%. They expect their cost of debt to be 9% and their cost of equity to be 13% under this new capital structure. The tax rate is 40% 15. What is the CAPM required return on the corporation's stock? a) 8.4% b) 9.3% c) 10.1% d) 11.2% 16. What is the expected return on the corporation's stock? a) 10.4% b) 11.3% c) 11.8% d) 12.6% 17. What is the relevant yield on the company's debt? a) 6.6% b) 7.1% c) 7.8% d) 8.2% 18. What percent of their current market value capital structure is made up of debt? a) 25% b) 38% c) 44% d) 56% 19. What is their WACC using their target capital structure and expected costs of debt and equity? a) 7.7% b) 8.2% c) 8.9% d) 9.4% 20. Given the new cost of debt, what should be the new price of the bond? a) $775 b) $850 c) $911 d) $1,025 21. Given the new cost of equity, what should be the new price of the stock? a) $23.75 b) $28.50 c) $34.67 d) $44.25 22. If you are evaluating a normal, independent project, then you should accept it as long as ____________. a) b) c) d) The IRR is positive The Profitability Index exists The Modified IRR is greater than the IRR The NPV is positive 23. A project has the following cash flows: CF0 = -5000, C01 = 1000, C02 = 2000, C03 = 3000. If the WACC is 8%, then what is the NPV? a) -$250 b) $0 c) $250 d) $500 A firm wants to buy a widget making machine for $100,000. The machine will be depreciated using 3-year MACRS (33%, 45%, 15%, 7%). After three years, the machine can be sold for $15,000. The machine can make 20,000 widgets per year. Each widget can be sold for $5 and costs $3 to make. The Tax Rate is 40% and the WACC is 10%. Balance Sheet Effects |----------Depreciation Expenses-------------| Year 1 Year 2 Year 3 Today End 1. Buy New Assets Income Statement Effects Net Sales - Net COGS - Net Depreciation = Net OEBT - Net Taxes = Net OEAT + Net Depreciation = Net Operating CF Year 1 Year 2 Year 3 24. What is the Operating Cash Flow in year one for this project? a) $4,200 b) $14,700 c) $37,200 d) $49,600 25. What is the after tax salvage value of selling the new machinery in three years? a) $6,000 b) $8,800 c) $10,000 d) $11,800 Answer Sheet, Fin 3090 Final Name: ________________________ 1 A B C D 2. A B C D 3. A B C D 4. A B C D 5. A B C D 6. A B C D 7. A B C D 8. A B C D 9. A B C D 10. A B C D 11. A B C D 12. A B C D 13. A B C D 14. A B C D 15. A B C D 16. A B C D 17. A B C D 18. A B C D 19. A B C D 20. 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