12/31/21, 2:17 AM AC59: Final Exam

AC59: Final Exam Total points 30/30

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s.hizo.floriemay@cmu.edu.ph

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Final Exam 30 of 30 points

You observe that a firm’s profit margin is below the industry average, 1/1
while its return on equity and debt ratio exceed the industry average.
What can you conclude? *

Return on assets must be above the industry average.

Total assets turnover must be above the industry average.

Total assets turnover must be below the industry average.

None of the statements above is correct.

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12/31/21, 2:17 AM AC59: Final Exam

Which of the following statements is most correct? * 1/1

a. Suppose a firm is losing money and thus, is not paying taxes, and that this
situation is expected to persist for a few years whether or not the firm uses debt
financing. Then the firm’s after-tax cost of debt will equal its before-tax cost of
debt.

b. The component cost of preferred stock is expressed as kp(1 - T), because

preferred stock dividends are treated as fixed charges, similar to the treatment of
debt interest.

c. The reason that a cost is assigned to retained earnings is because these funds are
already earning a return in the business; the reason does not involve the opportunity
cost principle.

d. The bond-yield-plus-risk-premium approach to estimating a firm’s cost of common

equity involves adding a subjectively determined risk premium to the market risk-free
bond rate.

A 30-year, $115,000 mortgage has a nominal annual rate of 7 percent. All 1/1
payments are made at the end of each month. What is the monthly
payment on the mortgage? *

a. $760.66

b. $765.10

c. $772.29

d. $774.10

e. $776.89

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12/31/21, 2:17 AM AC59: Final Exam

Van Buren Company has a current ratio = 1.9. Which of the following 1/1
actions will increase the company’s current ratio? *

Use cash to reduce short-term notes payable.

Use cash to reduce accounts payable.

Issue long-term bonds to repay short-term notes payable.

All of the statements above are correct.

The CFO of Mulroney Brothers has suggested that the company should 1/1
issue $300 million worth of common stock and use the proceeds to
reduce some of the company’s outstanding debt. Assume that the
company adopts this policy, and that total assets and operating income
(EBIT) remain the same. The company’s tax rate will also remain the
same. Which of the following will occur? *

The company’s net income will increase.

The company’s taxable income will fall.

The company will pay less in taxes.

Statements b and c are correct.

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12/31/21, 2:17 AM AC59: Final Exam

Which of the following statements is correct? * 1/1

a. A relatively risky future cash outflow should be evaluated using a relatively low
discount rate.

b. If a firm’s managers want to maximize the value of the stock, they should
concentrate exclusively on projects’ market, or beta, risk.

c. If a firm evaluates all projects using the same cost of capital, then the riskiness of
the firm as measured by its beta will probably decline over time.

d. If a firm has a beta that is less than 1.0, say 0.9, this would suggest that its
assets’ returns are negatively correlated with the returns of most other firms’ assets.

It is a legal arrangement between two or more people who decide to do 1/1

business together. *

Sole Proprietorship

Partnership

Corporation

Cooperative

All else equal, which of the following actions will increase the amount of 1/1
cash on a company’s balance sheet? *

The company issues new common stock.

The company repurchases common stock.

The company pays a dividend.

The company purchases a new piece of equipment.

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12/31/21, 2:17 AM AC59: Final Exam

A 30-year, $115,000 mortgage has a nominal annual rate of 7 percent. All 1/1
payments are made at the end of each month. What is the monthly
payment on the mortgage? *

a. $760.66

b. $765.10

c. $772.29

d. $774.10

e. $776.89

Pearson Plastics has two equal-sized divisions, Division A and Division B. 1/1
The company estimates that if the divisions operated as independent
companies Division A would have a cost of capital of 8 percent, while
Division B would have a cost of capital of 12 percent. Since the two
divisions are the same size, Pearson’s composite weighted average cost
of capital (WACC) is 10 percent. In the past, Pearson has assigned
separate hurdle rates to each division based on their relative risk. Now,
however, Pearson has chosen to use the corporate WACC, which is
currently 10 percent, for both divisions. Which of the following is likely to
occur as a result of this change? Assume that this change is likely to have
no effect on the average risk of each division and market conditions
remain unchanged. *

a. Over time, the overall risk of the company will increase.

b. Over time, Division B will become a larger part of the overall company.

c. Over time, the company’s corporate WACC will increase.

d. All of the statements above are correct.

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12/31/21, 2:17 AM AC59: Final Exam

What is Becker’s cost of newly issued stock? * 1/1

a. 16.0%

b. 16.5%

c. 17.0%

d. 17.5%

Company J and Company K each recently reported the same earnings 1/1
per share (EPS). Company J’s stock, however, trades at a higher price.
Which of the following statements is most correct? *

a. Company J must have a higher P/E ratio.

b. Company J must have a higher market to book ratio.

c. Company J must be riskier.

d. Company J must have fewer growth opportunities.

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12/31/21, 2:17 AM AC59: Final Exam

Which of the following statements is most correct? * 1/1

a. Under normal conditions, a firm’s expected ROE would probably be higher if it

financed with short-term rather than with long-term debt, but the use of short-
term debt would probably increase the firm’s risk.

b. Conservative firms generally use no short-term debt and thus have zero current
liabilities.

c. A short-term loan can usually be obtained more quickly than a long-term loan, but
the cost of short-term debt is likely to be higher than that of long-term debt.

d. If a firm that can borrow from its bank buys on terms of 2/10, net 30, and if it must
pay by Day 30 or else be cut off, then we would expect to see zero accounts payable
on its balance sheet.

You have determined the profitability of a planned project by finding the 1/1
present value of all the cash flows from that project. Which of the
following would cause the project to look more appealing in terms of the
present value of those cash flows? *

a. The discount rate decreases.

b. The cash flows are extended over a longer period of time, but the total amount of
the cash flows remains the same.

c. The discount rate increases.

d. Statements b and c are correct.

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12/31/21, 2:17 AM AC59: Final Exam

Phillips Glass Company buys on terms of 2/15, net 30 days. It does not 1/1
take discounts, and it typically pays 30 days after the invoice date. Net
purchases amount to $730,000 per year. On average, how much “free”
trade credit does Phillips receive during the year? (Assume a 365-day
year.) *

a. $30,000

b. $40,000

c. $50,000

d. $60,000

On its 2020 balance sheet, Gong Yoo Corp. had retained earnings equal 1/1
to $510 million. On its 2021 balance sheet, retained earnings were also
equal to $510 million. Which of the following statements is most correct?
*

The company must have had net income equal to zero in 2021.

The company did not pay dividends in 2021.

If the company’s net income in 2021 was $200 million, dividends paid must have
also equaled $200 million.

If the company lost money in 2021, they must have paid dividends.

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12/31/21, 2:17 AM AC59: Final Exam

You're trying to save to buy a new $160,000 Ferrari. You have $56,000 1/1
today that can be invested at your bank. The bank pays 6 percent annual
interest on its accounts. How many years will it be before you have
enough to buy the car? Assume the price of the car remains constant. *

A. 16.67 years

B. 17.04 years

C. 18.02 years

D. 17.87 years

This is an unincorporated business owned by one individual. * 1/1

Sole Proprietorship

Partnership

Corporation

Cooperative

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12/31/21, 2:17 AM AC59: Final Exam

Stennett Corp.’s CFO has proposed that the company issue new debt 1/1
and use the proceeds to buy back common stock. Which of the following
are likely to occur if this proposal is adopted? (Assume that the proposal
would have no effect on the company’s operating income.) *

Return on assets (ROA) will decline.

The times interest earned ratio (TIE) will increase.

Taxes paid will decline.

Statement a and c are correct

Which one of the following aspects of banks is considered most relevant 1/1
to businesses when choosing a bank? *

a. Convenience of location.

b. Loyalty and willingness to assume lending risks.

c. Size of the bank’s deposits.

d. Experience of personnel.

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12/31/21, 2:17 AM AC59: Final Exam

Your grandmother has promised to give you $5,000 when you graduate 1/1
from college. She is expecting you to graduate two years from now.
What happens to the present value of this gift if you delay your
graduation by one year and graduate three years from now? *

A. remains constant

B. increases

C. decreases

D. becomes negative

Your firm buys on credit terms of 2/10, net 45 days, and it always pays on 1/1
Day 45. If you calculate that this policy effectively costs your firm
$159,621 each year, what is the firm’s average accounts payable balance?
(Hint: Use the nominal cost of trade credit and carry its cost out to 6
decimal places.) *

a. $ 750,000

b. $ 75,000

c. $ 157,500

d. $ 625,000

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12/31/21, 2:17 AM AC59: Final Exam

What is the firm’s cost of retained earnings? * 1/1

a. 15.0%

b. 15.5%

c. 16.0%

d. 17.0%

Which of the following statements concerning commercial paper is 1/1

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.

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12/31/21, 2:17 AM AC59: Final Exam

Lancaster Motors has total assets of $20 million. Its basic earning power 1/1
is 25 percent, its return on assets (ROA) is 10 percent, and the company’s
tax rate is 40 percent. What is Lancaster’s TIE ratio? *

a. 2.5

b. 3.0

c. 1.5

d. 1.2

Which of the following items can be found on a firm’s balance sheet 1/1
listed as a current asset? *

Accounts receivable.

Depreciation.

Accrued wages.

Common Stock

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12/31/21, 2:17 AM AC59: Final Exam

A $10,000 loan is to be amortized over 5 years, with annual end-of-year 1/1

payments. Given the following facts, which of these statements is most
correct? *

a. The annual payments would be larger if the interest rate were lower.

b. If the loan were amortized over 10 years rather than 5 years, and if the interest
rate were the same in either case, the first payment would include more dollars of
interest under the 5-year amortization plan.

c. The proportion of each payment that represents interest as opposed to

repayment of principal would be higher if the interest rate were higher.

d. The proportion of interest versus principal repayment would be the same for each
of the 5 payments.

MET Gala Clothiers had $5,000,000 of retained earnings on its balance 1/1
sheet at the end of 2020. One year later, MET Gala had $6,000,000 of
retained earnings on its balance sheet. Whitehall has one million shares
of common stock outstanding, and it paid a dividend of $0.80 per share
in 2021. What was MET Gala’s earnings per share in 2021? *

$0.80

$1.00

$1.80

$5.00

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12/31/21, 2:17 AM AC59: Final Exam

Find the present value of an income stream that has a negative flow 1/1
of$100 per year for 3 years, a positive flow of $200 in the 4th year, and a
positive flow of $300 per year in Years 5 through 8. The appropriate
discount rate is 4 percent for each of the first 3 years and 5 percent for
each of the later years. Thus, a cash flow accruing in Year 8should be
discounted at 5 percent for some years and 4 percent in other years. All
payments occur at year-end. *

a. $ 528.21

b. $1,329.00

c. $ 792.49

d. $1,046.41

e. $ 875.18

Company A and Company B have the same total assets, tax rate, and net 1/1
income. Company A, however, has a lower profit margin than Company
B. Company A also has a higher debt ratio and, therefore, higher interest
expense than Company B. Which of the following statements is most
correct? *

a. Company A has a higher total assets turnover.

b. Company A has a higher basic earning power ratio.

c. Statements a and b are correct.

d. All of the statements above are correct.

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12/31/21, 2:17 AM AC59: Final Exam

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