FIN 534 Final Part 1 (SUMMER 2016)
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<strong>FIN</strong> <strong>534</strong> <strong>Final</strong> <strong>Part</strong> 1 (<strong>SUMMER</strong> <strong>2016</strong>)<br />
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<strong>FIN</strong> <strong>534</strong> <strong>Final</strong> <strong>Part</strong> 1 (<strong>SUMMER</strong> <strong>2016</strong>)<br />
1. Suppose you believe that Basso Inc.'s stock price is going to increase from its current level of $22.50<br />
sometime during the next 5 months. For $3.10 you can buy a 5-month call option giving you the right to<br />
buy 1 share at a price of $25 per share. If you buy this option for $3.10 and Basso's stock price actually<br />
rises to $45, what would your pre-tax net profit be?<br />
2. An investor who writes standard call options against stock held in his or her portfolio is said to be<br />
selling what type of options?<br />
3. Which of the following statements is most correct, holding other things constant, for XYZ Corporation's<br />
traded call options?<br />
4. BLW Corporation is considering the terms to be set on the options it plans to issue to its executives.<br />
Which of the following actions would decrease the value of the options, other things held constant?<br />
5. Which of the following statements is CORRECT?<br />
6. Which of the following statements is CORRECT?<br />
7. Adams Inc. has the following data: rRF = 5.00%; RPM = 6.00%; and b = 1.05. What is the firm's cost<br />
of common from reinvested earnings based on the CAPM?<br />
8. Which of the following statements is CORRECT?<br />
9. Which of the following statements is CORRECT?<br />
10. Which of the following statements is CORRECT?<br />
11. Suppose Acme Industries correctly estimates its WACC at a given point in time and then uses<br />
that same cost of capital to evaluate all projects for the next 10 years, then the firm will most likely<br />
12. With its current financial policies, Flagstaff Inc. will have to issue new common stock to fund<br />
its capital budget. Since new stock has a higher cost than reinvested earnings, Flagstaff would like to<br />
avoid issuing new stock. Which of the following actions would REDUCE its need to issue new common<br />
stock?<br />
13. Suppose a firm relies exclusively on the payback method when making capital budgeting<br />
decisions, and it sets a 4-year payback regardless of economic conditions. Other things held constant,<br />
which of the following statements is most likely to be true?<br />
14. Which of the following statements is CORRECT?<br />
15. Which of the following statements is CORRECT?<br />
16. Which of the following statements is CORRECT?<br />
17. Which of the following statements is CORRECT?<br />
18. Which of the following statements is CORRECT?<br />
19. Which of the following rules is CORRECT for capital budgeting analysis?<br />
20. Which of the following procedures best accounts for the relative risk of a proposed project?<br />
21. Which one of the following would NOT result in incremental cash flows and thus should NOT<br />
be included in the capital budgeting analysis for a new product?<br />
22. To increase productive capacity, a company is considering a proposed new plant. Which of<br />
the following statements is CORRECT?<br />
23. Which of the following statements is CORRECT?<br />
24. Puckett Inc. risk-adjusts its WACC to account for project risk. It uses a WACC of 8% for<br />
below-average risk projects, 10% for average-risk projects, and 12% for above-average risk projects.<br />
Which of the following independent projects should Puckett accept, assuming that the company uses the<br />
NPV method when choosing projects?<br />
25. The term "additional funds needed (AFN)" is generally defined as follows:
26. Last year Baron Enterprises had $350 million of sales, and it had $270 million of fixed assets<br />
that were used at 65% of capacity last year. In millions, by how much could Baron's sales increase before<br />
it is required to increase its fixed assets?<br />
27. Which of the following statements is CORRECT?<br />
28. A company expects sales to increase during the coming year, and it is using the AFN equation<br />
to forecast the additional capital that it must raise. Which of the following conditions would cause the AFN<br />
to increase?<br />
29. The capital intensity ratio is generally defined as follows:<br />
30. The Besnier Company had $250 million of sales last year, and it had $75 million of fixed<br />
assets that were being operated at 80% of capacity. In millions, how large could sales have been if the<br />
company had operated at full capacity?
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