FNAN 522 FINAL EXAM QUESTIONS AND ANSWERS
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 provided? - Answers -The company picks a project with profitability
index of 1.25 over a project with a PI of -.25 A firm is trying to choose the most
profitable project to invest in.
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? - Answers -The company's
reinvestment rate or weighted average cost of capital.
(USE CALCULATOR) 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 - Answers -3.44 years
In which of the following situations would it be appropriate to use the IRR method to
make an investment decision? - Answers -to compare two projects that have an equal
initial investment and lifespan.
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 _____. - Answers -the marginal
tax rate
When evaluating the cash flows from a project, a financial manager needs to analyze
the: - Answers -costs, benefits, and opportunity costs of the project.
Which of the following describes an advantage the internal rate of return has over net
present value for capital budgeting purposes? - Answers -Internal rate of return is an
indicator of the efficiency, quality or yield of an investment.
Which of the following is a correct definition of a capital budgeting method? - Answers -
The internal rate of return is the discount rate that gives a net present value of zero.
Which of the following is a way cash flow factors can be used to improve a business? -
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
Which of the following is an element needed to calculate an asset's depreciation? -
Answers -a. The cost of the asset minus the asset's salvage value.
b. The estimated useful life of the asset.
, c. A method of apportioning the cost of the asset.
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? - Answers -250,000 units
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? - Answers -2.14
(4,000,000-2,500,000)/(4,000,000-2,500,000-800,000)
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? - Answers -Managers may under invest in projects if it
appears that all proceeds will be absorbed by bondholders, hurting both shareholders
and bondholders.
Which of the following is a possible market reaction to an stock repurchase
announcement? - Answers -a. The stock price may increase because the repurchase
signals that the company views the shares as currently undervalued.
c. 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.
d. 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.
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 - Answers -$1 mil
Which of the following is a benefit shareholders can obtain by repurchasing its shares? -
Answers -b. Shareholders have a higher percent ownership in the company at a higher
per share price.
Which of the following is a method of payment a corporation can use to pay a dividend?
- Answers -a. Securities of other companies.
b. Cash.
c. Stock.
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 provided? - Answers -The company picks a project with profitability
index of 1.25 over a project with a PI of -.25 A firm is trying to choose the most
profitable project to invest in.
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? - Answers -The company's
reinvestment rate or weighted average cost of capital.
(USE CALCULATOR) 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 - Answers -3.44 years
In which of the following situations would it be appropriate to use the IRR method to
make an investment decision? - Answers -to compare two projects that have an equal
initial investment and lifespan.
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 _____. - Answers -the marginal
tax rate
When evaluating the cash flows from a project, a financial manager needs to analyze
the: - Answers -costs, benefits, and opportunity costs of the project.
Which of the following describes an advantage the internal rate of return has over net
present value for capital budgeting purposes? - Answers -Internal rate of return is an
indicator of the efficiency, quality or yield of an investment.
Which of the following is a correct definition of a capital budgeting method? - Answers -
The internal rate of return is the discount rate that gives a net present value of zero.
Which of the following is a way cash flow factors can be used to improve a business? -
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
Which of the following is an element needed to calculate an asset's depreciation? -
Answers -a. The cost of the asset minus the asset's salvage value.
b. The estimated useful life of the asset.
, c. A method of apportioning the cost of the asset.
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? - Answers -250,000 units
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? - Answers -2.14
(4,000,000-2,500,000)/(4,000,000-2,500,000-800,000)
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? - Answers -Managers may under invest in projects if it
appears that all proceeds will be absorbed by bondholders, hurting both shareholders
and bondholders.
Which of the following is a possible market reaction to an stock repurchase
announcement? - Answers -a. The stock price may increase because the repurchase
signals that the company views the shares as currently undervalued.
c. 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.
d. 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.
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 - Answers -$1 mil
Which of the following is a benefit shareholders can obtain by repurchasing its shares? -
Answers -b. Shareholders have a higher percent ownership in the company at a higher
per share price.
Which of the following is a method of payment a corporation can use to pay a dividend?
- Answers -a. Securities of other companies.
b. Cash.
c. Stock.
