FINA 3313 FINAL EXAM STUDY
GUIDE QUESTIONS WITH 100%
CORRECT ANSWERS
A stock split will cause a change in the total dollar amounts shown in which of the
following balance sheet accounts?
A. Cash.
B. Common stock.
C. Paid-in capital.
D. Retained earnings.
E. None of the above. - Answer-E. None of the above.
A line of credit and a revolving credit agreement are similar except that a line of credit
creates a legal obligation for the bank.
A. True
B. False - Answer-B. False
Which of the following statements concerning commercial paper is incorrect?
A. Commercial paper is generally written for terms less than 270 days.
B. Commercial paper generally carries an interest rate below the prime rate.
C. Commercial paper is sold to money market mutual funds, as well as to other financial
institutions and nonfinancial corporations.
D. Commercial paper can be issued by virtually any firm so long as it is willing to pay
the going interest rate.
E. Commercial paper is a type of unsecured promissory note issued by large, strong
firms. - Answer-D. Commercial paper can be issued by virtually any firm so long as it is
willing to pay the going interest rate.
Commercial paper- source of short term financing
A company just paid 10 USD million for a feasibility study. If the company goes ahead
with the project, it must immediately spend another 100 USD million now, and then
spend 20 USD million in one year. In two years it will receive 80 USD million, and in
three years it will receive 90 USD million. If the cost of capital for the project is 11
percent, what are the project's NPV and IRR?
A. NPV = $2.72 million; IRR = Two positive IRRs.
,B. NPV = $2.72 million; IRR = 16%.
C. NPV = $12.72 million; IRR = Two positive IRRs.
D. NPV = $12.72 million; IRR = 16%.
E. None of the above. - Answer-C. NPV = $12.72 million; IRR = Two positive IRRs.
The "gold standard" of investment criteria refers to:
a. NPV
B. irr
C. payback
D. EVA
E. profitability index
F. mirr - Answer-a. NPV
Calculate the economic break-even level of sales for a project requiring an investment
of 3,000,000 USD and providing as cash flows .15 × sales less 250,000 USD. Assume
the project will generate these cash flows for 10 years and that the discount rate is 10%.
A. $3,254,890
B. $4,921,549
C. $19,686,667
D. $3,504,890 - Answer-B. $4,921,549
Economic break-even = set npv to 0
(pv of 10 n, i/y10%, $1 pmt)
PVAF (6.1446)(.15X - 250,000) - 3,000,000= 0
.9217
PF of future cash flows
Twin Hills Inc. is considering a proposed project. Given available information, it is
currently estimated that the proposed project is risky but has a positive net present
value. Which of the following factors would make the company less likely to adopt the
current project?
A. It is revealed that if the company proceeds with the proposed project, the company
will lose two other accounts, both of which have positive NPVs.
B. It is revealed that the company has an option to back out of the project 2 years from
now, if it is discovered to be unprofitable.
C. It is revealed that if the company proceeds with the project, it will have an option to
repeat the project 4 years from now.
D. Answers a and b are correct.
E. Answers b and c are correct. - Answer-A. It is revealed that if the company proceeds
with the proposed project, the company will lose two other accounts, both of which have
positive NPVs.
, You currently own 100 shares of stock in Beverly Brothers Inc. The stock currently
trades at $120 a share. The company is contemplating a 2-for-1 stock split. Which of the
following best describes your position after the proposed stock split takes place?
A. You will have 200 shares of stock, and the stock will trade at or near $120 a share.
B. You will have 200 shares of stock, and the stock will trade at or near $60 a share.
C. You will have 100 shares of stock, and the stock will trade at or near $60 a share.
D. You will have 50 shares of stock, and the stock will trade at or near $120 a share.
E. You will have 50 shares of stock, and the stock will trade at or near $60 a share. -
Answer-B. You will have 200 shares of stock, and the stock will trade at or near $60 a
share.
Commodore Corporation is deciding whether it makes sense to invest in a project today,
or to postpone this decision for one year. Which of the following statements best
describes the issues that Commodore faces when considering this investment timing
option?
A. The investment timing option does not affect the expected cash flows and should
therefore have no impact on the project's risk.
B. The more uncertainty about the project's future cash flows the more likely it is that
Commodore will go ahead with the project today.
C. If the project has a positive expected NPV today, this means that its expected NPV
will be even higher if it chooses to wait a year.
D. All of the above statements are correct.
E. None of the above statements is correct. - Answer-E. None of the above statements
is correct.
The option for a firm to expand future production has value because:
A. the future holds uncertainty.
B. the option requires no investment today.
C. future production will be profitable.
D. today's production costs are lower than in the future. - Answer-A. the future holds
uncertainty.
Which of the following changes, if of a sufficient magnitude, could turn a negative NPV
project into a positive NPV project?
A. A decrease in the estimated annual sales
B. An increase in the discount rate
C. An increase in the initial investment
D. A decrease in the fixed costs - Answer-D. A decrease in the fixed costs
NPV = PV (CF) - Initial
GUIDE QUESTIONS WITH 100%
CORRECT ANSWERS
A stock split will cause a change in the total dollar amounts shown in which of the
following balance sheet accounts?
A. Cash.
B. Common stock.
C. Paid-in capital.
D. Retained earnings.
E. None of the above. - Answer-E. None of the above.
A line of credit and a revolving credit agreement are similar except that a line of credit
creates a legal obligation for the bank.
A. True
B. False - Answer-B. False
Which of the following statements concerning commercial paper is incorrect?
A. Commercial paper is generally written for terms less than 270 days.
B. Commercial paper generally carries an interest rate below the prime rate.
C. Commercial paper is sold to money market mutual funds, as well as to other financial
institutions and nonfinancial corporations.
D. Commercial paper can be issued by virtually any firm so long as it is willing to pay
the going interest rate.
E. Commercial paper is a type of unsecured promissory note issued by large, strong
firms. - Answer-D. Commercial paper can be issued by virtually any firm so long as it is
willing to pay the going interest rate.
Commercial paper- source of short term financing
A company just paid 10 USD million for a feasibility study. If the company goes ahead
with the project, it must immediately spend another 100 USD million now, and then
spend 20 USD million in one year. In two years it will receive 80 USD million, and in
three years it will receive 90 USD million. If the cost of capital for the project is 11
percent, what are the project's NPV and IRR?
A. NPV = $2.72 million; IRR = Two positive IRRs.
,B. NPV = $2.72 million; IRR = 16%.
C. NPV = $12.72 million; IRR = Two positive IRRs.
D. NPV = $12.72 million; IRR = 16%.
E. None of the above. - Answer-C. NPV = $12.72 million; IRR = Two positive IRRs.
The "gold standard" of investment criteria refers to:
a. NPV
B. irr
C. payback
D. EVA
E. profitability index
F. mirr - Answer-a. NPV
Calculate the economic break-even level of sales for a project requiring an investment
of 3,000,000 USD and providing as cash flows .15 × sales less 250,000 USD. Assume
the project will generate these cash flows for 10 years and that the discount rate is 10%.
A. $3,254,890
B. $4,921,549
C. $19,686,667
D. $3,504,890 - Answer-B. $4,921,549
Economic break-even = set npv to 0
(pv of 10 n, i/y10%, $1 pmt)
PVAF (6.1446)(.15X - 250,000) - 3,000,000= 0
.9217
PF of future cash flows
Twin Hills Inc. is considering a proposed project. Given available information, it is
currently estimated that the proposed project is risky but has a positive net present
value. Which of the following factors would make the company less likely to adopt the
current project?
A. It is revealed that if the company proceeds with the proposed project, the company
will lose two other accounts, both of which have positive NPVs.
B. It is revealed that the company has an option to back out of the project 2 years from
now, if it is discovered to be unprofitable.
C. It is revealed that if the company proceeds with the project, it will have an option to
repeat the project 4 years from now.
D. Answers a and b are correct.
E. Answers b and c are correct. - Answer-A. It is revealed that if the company proceeds
with the proposed project, the company will lose two other accounts, both of which have
positive NPVs.
, You currently own 100 shares of stock in Beverly Brothers Inc. The stock currently
trades at $120 a share. The company is contemplating a 2-for-1 stock split. Which of the
following best describes your position after the proposed stock split takes place?
A. You will have 200 shares of stock, and the stock will trade at or near $120 a share.
B. You will have 200 shares of stock, and the stock will trade at or near $60 a share.
C. You will have 100 shares of stock, and the stock will trade at or near $60 a share.
D. You will have 50 shares of stock, and the stock will trade at or near $120 a share.
E. You will have 50 shares of stock, and the stock will trade at or near $60 a share. -
Answer-B. You will have 200 shares of stock, and the stock will trade at or near $60 a
share.
Commodore Corporation is deciding whether it makes sense to invest in a project today,
or to postpone this decision for one year. Which of the following statements best
describes the issues that Commodore faces when considering this investment timing
option?
A. The investment timing option does not affect the expected cash flows and should
therefore have no impact on the project's risk.
B. The more uncertainty about the project's future cash flows the more likely it is that
Commodore will go ahead with the project today.
C. If the project has a positive expected NPV today, this means that its expected NPV
will be even higher if it chooses to wait a year.
D. All of the above statements are correct.
E. None of the above statements is correct. - Answer-E. None of the above statements
is correct.
The option for a firm to expand future production has value because:
A. the future holds uncertainty.
B. the option requires no investment today.
C. future production will be profitable.
D. today's production costs are lower than in the future. - Answer-A. the future holds
uncertainty.
Which of the following changes, if of a sufficient magnitude, could turn a negative NPV
project into a positive NPV project?
A. A decrease in the estimated annual sales
B. An increase in the discount rate
C. An increase in the initial investment
D. A decrease in the fixed costs - Answer-D. A decrease in the fixed costs
NPV = PV (CF) - Initial
