MBA FNCE 625 FINAL EXAM

STUDENT NAME:____________________________________________

1. You invest $2000 in a rare coin. You expect that it will be worth $2,500 two years from now. Alternatively, you can invest $2,000 at 10%. Using both PV and FV analyses determine if the coin is a better investment.

a) Yes the coin investment is better

b) NO

2) You invest $2,000 in your RRSP at 4%. How much you will have in 40 years from now?

a) 9,600.09

b) 9604.25

c) 9602.04

d) 9601.48

3) Suppose that your firm needs $100,000 in working capital and your bank manager has responded with the following alternatives:

1) a lump sum repayment at the end of three years equal to $133,100

2) an interest only loan where your firm must pay $10,500 for each of the next 2 years plus $110,500 at the end of the 3 years

3) annual end period payment of $40,921.31 for each of the next 3 years

Which alternative should your firm choose?

a) 1

b) 2

c) 3

d) None

4) A bond pays 8% interest semi annually and has a face value of $1,000 and 10 years left to maturity. If today the market rate of interest is 6% what is the PV of this bond?

a) 1,102.52

b) 1,120.87

c) 1,148.78

d) 1,153.45

5) A__________is secured by a mortgage on specific property, whereas a ______is unsecured.

a) indenture; debenture

b) mortgage security; debenture

c) debenture; coupon

d) stock; callable bond

6) A share of preferred stock with $12 annual dividend is selling for $75. What is the rate of return?

a) 16%

b) 15%

c) 14%

d) 17%

7) The current price of a share (P0) is $20 and last year price (P-1) was $18.87. This year dividend (D0) is $2. Assume constant growth rate (g) in dividend and share price. What is the rate of return (r) for the coming year?

a) 15.5%

b) 16.6%

c) 14.65%

d) -11.52%

8) Net working capital is defined as:

A) Total liabilities minus shareholders’ equity.

B) Current liabilities minus shareholders’ equity.

C) Fixed assets minus shareholders’ equity.

D) Current assets minus current liabilities.

E) Total assets minus total liabilities.

9) Noncash items refer to:

A) Expenses charged against revenues that do not directly affect cash flow.

B) The accounts payable of a firm.

C) Expenses incurred for the purchase of intangible fixed assets.

D) The credit sales of a firm.

E) All accounts on the balance sheet other than cash on hand.

10) Ratios that measure how efficiently a firm’s management uses its assets in operations to generate bottom line net income are known as:

A) Asset management ratios.

B) Long-term solvency ratios.

C) Short-term solvency ratios.

D) Market value ratios.

E) Profitability ratios.

11) The cash ratio is measured as:

A) Cash on hand divided by current liabilities.

B) Current assets minus cash on hand, divided by current liabilities.

C) Current liabilities plus current assets, divided by cash on hand.

D) Cash on hand plus inventory, divided by current liabilities.

E) Current assets divided by current liabilities.

12) You are considering a project that costs $300 and has expected cash flows of $110, $121 and $133.10 over the next three years. If the appropriate discount rate for the project’s cash flows is 10%, what is the net present value of this project?

A) The NPV is negative

B) $0.71

C) $0.00

D) $19.79

E) $64.10

13) What is the IRR of an investment that costs $77,500 and pays $27,500 a year for 4 years?

A) 24%

B) 18%

C) 22%

D) 20%

E) 16%

14) A project costs $40,000, will be depreciated straight-line to zero over its 3 year life, and will require a net working capital investment of $5,000 up-front. The firm has a tax rate of 34% and a required return of 10%. The project generates OCF of $17,000. What is the project’s NPV?

A) -$2,724

B) $2,942

C) $1,393

D) $2,394

E) $1,033

15) Given the following historical returns, what is the standard deviation?

Year 1 = 20%; Year 2 = -12%; Year 3 = 16%; Year 4 = 3%; Year 5 = -15%.

A) 11.89%

B) 12.48%

C) 14.18%

D) 15.85%

E) 16.87%

16)Given the following returns, what is the variance?

Year 1 = 15%; Year 2 = 3%; Year 3 = -29%; Year 4 = -1%.

A) 0.0137

B) 0.0182

C) 0.0347

D) 0.0398

E) 0.0468

17) What is the expected portfolio return given the following information: Asset Portfolio weight Return

A .25 15%

B .25 20%

C .30 10%

D .20 35%

A) 7.71%

B) 9.23%

C) 18.75%

D) 19.25%

E) 21.15%

18) Suppose that Topstone Industries has a cost of equity of 14% and a cost of debt of 9%. If the target debt/equity ratio is 75%, and the tax rate is 34%, what is Topstone’s weighted average cost of capital (WACC)?

A) 10.6%

B) 7.9%

C) 8.4%

D) 6.6%

E) 10.9%

19) Kojack Film needs silver to make photographic film. To ensure that they will have an ample supply of silver at a reasonable price, the company purchases a silver mine. This is an example of a(n) .

A) horizontal acquisition

B) vertical acquisition

C) acquisition of liquid assets

D) conglomerate acquisition

E) hostile takeover

5 Short Essays

1) Explain the NPV rule. What other method you can use? Any limitations? Explain.

2) Explain the relationship between risk and return.

3) Is there a proportion of debt that maximizes a firm’s value? Are there limitations to the amount of debt? Explain

4) Select one topic that you enjoyed the most in this course and explain why you liked it. Also, explain where and how you could use this new knowledge.

5) Why choose a merger – pros and cons?