FIN 571 final exam - 57 Questions | Free Answers | Corporate Finance | Phoenix

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1.Multiple Choice Question 51 

You are provided the following working capital information for the Ridge 

Company: 

Cash conversion cycle: What is the cash conversion cycle for Ridge 

Company? 

•38.3 days 

•46.4 days 

•83.5 days 

•129.9 days 


Multiple Choice Question 58 

•The cash conversion cycle 

•begins when the firm uses its cash to purchase raw materials and ends 

when the firm collects cash payments on its credit sales. 

•estimates how long it takes on average for the firm to collect its 

outstanding accounts receivable balance. 

•shows how long the firm keeps its inventory before selling it. 

•begins when the firm invests cash to purchase the raw materials that 

would be used to produce the goods that the firm manufactures. 


•Payout and retention ratio: Drekker, Inc., has revenues of $312,766, costs 

of $220,222, interest payment of $31,477, and a tax rate of 34 percent. It paid 

dividends of $34,125 to shareholders. Find the firm's dividend payout ratio 

and retention ratio. 

•85%, 15% 

•55%, 45% 

•15%, 85% 

•45%, 55% 



•Firms that achieve higher growth rates without seeking external financing 

•are highly leveraged. 

•none of these. 

•have less equity and/or are able to generate high net income leading to a 

high ROE. 

•have a low plowback ratio. 


•The strategic plan does NOT identify 

•working capital strategies. 

•the lines of business a firm will compete in. 

•major areas of investment in real assets. 

•future mergers, alliances, and divestitures. 



Which of the following does maximizing shareholder wealth not usually account for? 

•The timing of cash flows. 

•Amount of Cash flows. 

•Risk. 

•Government regulation. 


Which of the following cannot be engaged in managing the business? 

•a sole proprietor 

•a general partner 

•none of these 

•a limited partner 


External financing needed: Jockey Company has total assets worth $4,417,665. At year-end it will 

have net income of $2,771,342 and pay out 60 percent as dividends. If the firm wants no external 

financing, what is the growth rate it can support? 

•30.3% 

•25.1% 

•27.3% 

•32.9% 



Multiple Analysis: Turnbull Corp. had an EBIT of $247 million in the last fiscal year. Its depreciation 

and amortization expenses amounted to $84 million. The firm has 135 million shares outstanding 

and a share price of $12.80. A competing firm that is very similar to Turnbull has an enterprise 

value/EBITDA multiple of 5.40. 

What is the enterprise value of Turnbull Corp.? Round to the nearest million dollars. 

•$1,787 million 


•$453.6 million 



M&M Proposition 1: Dynamo Corp. produces annual cash flows of $150 and is expected to exist 

forever. The company is currently financed with 75 percent equity and 25 percent debt. Your 

analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 

percent for the debt. You currently own 10 percent of the stock. 

If Dynamo wishes to change its capital structure from 75 percent to 60 percent equity and use the 

debt proceeds to pay a special dividend to shareholders, how much debt should they issue? 

•$375 

•$600 

•$225 

•$321 


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A firm's capital structure is the mix of financial securities used to finance 

its activities and can include all of the following except 

•stock. 

•bonds. 

•equity options. 

•preferred stock. 


If a company's weighted average cost of capital is less than the required 

return on equity, then the firm: 

•Is perceived to be safe 

•Has debt in its capital structure 

•Must have preferred stock in its capital structure 

•Is financed with more than 50% debt 



The cost of equity: Gangland Water Guns, Inc., is expected to pay a dividend of $2.10 

one year from today. If the firm's growth in dividends is expected to remain at a flat 3 

percent forever, then what is the cost of equity capital for Gangland if the price of its 

common shares is currently $17.50? 

•15.36% 

•12.00% 

•14.65% 

•15.00% 


How firms estimate their cost of capital: The WACC for a firm is 13.00 percent. You 

know that the firm's cost of debt capital is 10 percent and the cost of equity capital is 

20%. What proportion of the firm is financed with debt? 

•30% 

•50% 

•70% 

•33% 



What decision criteria should managers use in selecting projects when there is 

not enough capital to invest in all available positive NPV projects? 

•The profitability index. 

•The modified internal rate of return. 

•The internal rate of return. 

•The discounted payback. 


Capital rationing. TuleTime Comics is considering a new show that will 

generate annual cash flows of $100,000 into the infinite future. If the initial 

outlay for such a production is $1,500,000 and the appropriate discount rate is 

6 percent for the cash flows, then what is the profitability index for the project? 

•0.11 

•1.90 

•1.11 

•0.90 



PV of dividends: Next year Jenkins Traders will pay a dividend of $3.00. It expects to 

increase its dividend by $0.25 in each of the following three years. If their required 

rate of return is 14 percent, what is the present value of their dividends over the next 

four years? 

•$13.50 

•$11.63 

•$9.72 

•$12.50 

Multiple Choice Question 57 

Bond price: Regatta, Inc., has six-year bonds outstanding that pay a 8.25 percent 

coupon rate. Investors buying the bond today can expect to earn a yield to maturity 

of 6.875 percent. What should the company's bonds be priced at today? Assume 

annual coupon payments. (Round to the nearest dollar.) 

•$1,014 

•$1,066 

•$923 

•$972 



Serox stock was selling for $20 two years ago. The stock sold for $25 one year ago, 

and it is currently selling for $28. Serox pays a $1.10 dividend per year. What was the 

rate of return for owning Serox in the most recent year? (Round to the nearest 

percent.) 

•16% 

•32% 

•12% 

•40% 


Future value of an annuity: Jayadev Athreya has started on his first job. He plans to 

start saving for retirement early. He will invest $5,000 at the end of each year for the 

next 45 years in a fund that will earn a return of 10 percent. How much will Jayadev 

have at the end of 45 years? (Round to the nearest dollar.) 

•$1,745,600 

•$3,594,524 

•$5,233,442 

•$2,667,904 



PV of multiple cash flows: Ajax Corp. is expecting the following cash flows—$79,000, 

$112,000, $164,000, $84,000, and $242,000—over the next five years. If the company's 

opportunity cost is 15 percent, what is the present value of these cash flows? (Round 

to the nearest dollar.) 

•$480,906 

•$414,322 

•$477,235 

•$429,560 


PV of multiple cash flows: Ferris, Inc., has borrowed from their bank at a rate of 8 

percent and will repay the loan with interest over the next five years. Their scheduled 

payments, starting at the end of the year are as follows—$450,000, $560,000, 

$750,000, $875,000, and $1,000,000. What is the present value of these payments? 

(Round to the nearest dollar.) 

•$2,431,224 

•$2,815,885 

•$2,735,200 

•$2,615,432 



Present value: Jack Robbins is saving for a new car. He needs to have $ 

21,000 for the car in three years. How much will he have to invest today in 

an account paying 8 percent annually to achieve his target? (Round to 

nearest dollar.) 

•$22,680 

•$26,454 

•$19,444 

•$16,670 


Which of the following is not a method of “benchmarking”? 

•Conduct an industry group analysis. 

•Evaluating a single firm’s performance over time.(112) 

•Utilize the DuPont system to analyze a firm’s performance. 

•Identify a group of firms that compete with the company being analyzed. 


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Leverage ratio: Your firm has an equity multiplier of 2.47. What is its debtto-equity 

ratio? 

•1.74 

•0.60 

•1.47(95) 

•0 


Efficiency ratio: Gateway Corp. has an inventory turnover ratio of 5.6. 

What is the firm's days's sales in inventory? 

•65.2 days 

•64.3 days 

•61.7 days 

•57.9 days 



Which of the following presents a summary of the changes in a firm’s balance sheet 

from the beginning of an accounting period to the end of that accounting period? 

•The statement of retained earnings. 

•The statement of working capital. 

•The statement of cash flows.(66) 

•The statement of net worth. 


Teakap, Inc., has current assets of $ 1,456,312 and total assets of $4,812,369 for the 

year ending September 30, 2006. It also has current liabilities of $1,041,012, common 

equity of $1,500,000, and retained earnings of $1,468,347. How much long-term debt 

does the firm have? 

•$2,123,612 

•$803,010 

•$1,844,022 

•$2,303,010 



Which of the following is a principal within the agency 

relationship? 

•the CEO of the firm 

•a shareholder 

•the board of directors 

•a company engineer 


Which of the following is considered a hybrid organizational 

form? 

•limited liability partnership 

•partnership 

•corporation 

•sole proprietorship 



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