Sample Quiz #2 Answers
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Sample Quiz #2 Answers

Course Number: FIN 351, Fall 2011

College/University: S.F. State

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Finance 351: Financial Management Instructor: Shuming Liu Sample Quiz 2 1. The following are all important items to look out for when you perform capital budgeting for a company except A) Be aware of allocated overhead costs. B) Include all indirect effects. C) Include sunk costs. D) Include opportunity costs. E) Recognize the investment in working capital. Answer: C 2. The purpose of sensitivity analysis is to...

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351: Finance Financial Management Instructor: Shuming Liu Sample Quiz 2 1. The following are all important items to look out for when you perform capital budgeting for a company except A) Be aware of allocated overhead costs. B) Include all indirect effects. C) Include sunk costs. D) Include opportunity costs. E) Recognize the investment in working capital. Register to View Answer 2. The purpose of sensitivity analysis is to show: A) the optimal level of the capital budget. B) how price changes affect break-even volume. C) seasonal variation in product demand. D) how variables in a project affect profitability. Register to View Answer 3. Assume your firm has an unused machine that originally cost $75,000, has a book value of $20,000, and is currently worth $25,000. Ignoring taxes, the correct opportunity cost for this machine in capital budgeting decisions is: A) $75,000 B) $25,000 C) $20,000 D) $5,000 Register to View Answer 4. When projects are mutually exclusive, selection should be made according to the project with the: A) longer life. B) larger initial size. C) highest IRR. D) highest NPV. Register to View Answer 5. Which of the following statements regarding investment in working capital is incorrect? 1 A) Investment in working capital, unlike investment in plant and equipment, represents a positive cash flow. B) The cash flow is measured by the change in working capital, not the level of working capital. C) The working capital may change during the life of the project. D) Working capital is recovered at the end of the project. E) None of the above. Register to View Answer 6. Firms that make investment decisions based upon the payback rule may be biased toward rejecting projects: A) with short lives. B) with long lives. C) with early cash inflows. D) that have negative NPVs. Register to View Answer 7. What is the NPV break-even for a project costing $4,000,000 today and generating cash flows according to .30 sales - $450,000 every year from year 1? Assume the project to last 10 years and requires a discount rate of 12%. A) $2,093,654 B) $2,359,047 C) $3,859,789 D) $13,783,333 Register to View AnswerNPV = PV (10-year cash flows) Investment = 0 Therefore: PV (10-year cash flows) = Investment = 4,000,000 Cash flows each year from year 1 to 10 is computed as follows: I = 12, N = 10, FV = 0, PV = (-)4,000,000 PMT = 707,936.66 Cash flows every year = 707,936.66 = (.3 sales - 450,000) So sales = 3,859,789 every year 8. The opportunity cost of capital is equal to: A) the discount rate that makes project NPV equal zero. B) the return offered by other projects of equal risk. C) a project's internal rate of return. D) the average rate of return for a firm's projects. Register to View Answer 2 9. Which of the following statements is true for a project with $20,000 initial cost, cash inflows of $5,800 per year for six years, and a discount rate of 15%? A) Its payback period is roughly 3 1/2 years. B) Its NPV is $2,194. C) Its IRR is 1.85%. D) Its profitability index is 0.109. Register to View Answer 10. What is the amount of the operating cash flow for a firm with $500,000 profit before tax, $100,000 depreciation expense, and a 35% marginal tax rate? A) $260,000 B) $325,000 C) $360,000 D) $425,000 Register to View Answerprofit before tax taxes @ 35% net profit + depreciation cash flow from operations 11. $500,000 -175,000 $325,000 100,000 $425,000 Which of the descriptions following is representative of scenario analysis? A) One variable at a time is allowed to change. B) It isolates the unknowns that belong in the model. C) Different combinations of variables are analyzed. D) It represents the "top-down" approach. Register to View Answer 12. The difference between an NPV break-even level of sales and an accounting break-even level of sales is: A) the consideration of opportunity cost. B) the consideration of depreciation expense. C) allowing the sales level to vary in response to changes in demand. D) the inclusion of income taxes. Register to View Answer 13. As long as the NPV of a project declines smoothly with increases in the discount rate, the project is acceptable if its: A) internal rate of return is positive. B) net present value does not equal zero. 3 C) internal rate of return exceeds the cost of capital. D) cash inflows exceed the initial cost. Register to View Answer 14. Calculate the accounting break-even level of sales, assuming: $1.4 million fixed costs, $400,000 depreciation expense, variable costs-to-sales ratio of 65%. A) $2,769,231 B) $2,857,143 C) $4,000,000 D) $5,142,857 Register to View Answer 15. When managers cannot determine whether to invest now or wait until costs decrease later, the rule should be to: A) postpone until costs reach their lowest. B) invest now to maximize the NPV. C) postpone until the opportunity cost reaches its lowest. D) invest at the date that gives the highest NPV today. Register to View Answer 16. Which of the following statements is most likely to be correct for a project in which the NPV is negative when based on flows from net income? A) NPV may turn positive after adjusting for depreciation expense. B) NPV should be calculated with pre-tax cash flows. C) NPV has probably been over-estimated. D) The project should be rejected or abandoned. Register to View Answer 17. What is the equivalent annual cost for a project that requires a $40,000 investment at time-period zero, and a $10,000 annual expense during each of the next 4 years, if the opportunity cost of capital is 10%? A) $20,000.00 B) $21,356.95 C) $22,618.83 D) $25,237.66 4 Register to View AnswerFinancial calculator: PMT=10,000, n=4, i=10, FV=0 PV=(-)31,698.65 NPV = 40,000 + 31,698.65 = 71,698.65. And the four-year annuity to provide a present value of $71,698.65 at 10% is computed as follows: PV=(-)71,698.65, n=4, i=10, FV=0 PMT=22,618.83 18. If the adoption of a new product will reduce the sales of an existing product, then the: A) new product should not be undertaken. B) old product should be abandoned. C) incremental benefits of the new product may be over-estimated. D) incremental benefits of the new product may be under-estimated. Register to View Answer 19. The NPV of a project that breaks even in accounting terms will be A) positive. B) zero. C) negative. D) all of the above. Register to View Answer 20. What is the undiscounted cash flow in the final year of an investment, assuming: $10,000 after-tax cash flows from operations, the fully depreciated machine is sold for $1,000, the project had required $2,000 in additional working capital, and a 35% tax rate? A) $8,450 B) $12,600 C) $12,650 D) $14,000 Register to View Answercash flows = after-tax cash flow from operations + recovery of additional working capital + after-tax salvage value = $10,000 + $2,000 + ($1,000 .65) = $12,650 5

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S.F. State - FIN - 351
Finance 351: Financial ManagementInstructor: Shuming LiuSample Quiz 21.The following are all important items to look out for when you perform capital budgetingfor a company exceptA) Be aware of allocated overhead costs.B) Include all indirect effec
S.F. State - FIN - 351
Finance 351: Financial ManagementInstructor: Shuming LiuSample Quiz 31.Capital structure decisions refer to the:A) dividend yield of the firm's stock.B) blend of equity and debt used by the firm.C) capital gains available on the firm's stock.D) ma
S.F. State - FIN - 351
Finance 351: Financial ManagementInstructor: Shuming LiuSample Quiz 31.Capital structure decisions refer to the:A) dividend yield of the firm's stock.B) blend of equity and debt used by the firm.C) capital gains available on the firm's stock.D) ma
S.F. State - FIN - 351
SAN FRANCISCO STATE UNIVERSITYCOLLEGE OF BUSINESSFIN 351-3: Financial ManagementFall 2011INSTRUCTOR: Shuming LiuOFFICE: SCI 330PHONE: 338-6289EMAIL: shuming@sfsu.eduOFFICE HOURS: TTH 9am 9:25am, 3:25pm 5:00pmClassroom: BUS 110 Meeting Time: TTH 9
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PRINCIPLES OF CONDUCTSan Francisco State University welcomes diversity as an opportunity for teaching, developing,and promoting multi-cultural competencies and understandings.Racial, ethnic, gender, sexual identity, disability, religious, and other ind
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EQUIVALENT CHAPTERS 3rd and 6th EDITIONS OF SAUNDERS AND CORNETTSFINANCIAL INSTITUTIONS TEXTBOOKNote: Remember that the chapters in the syllabus are given for 3rd edition.3rd Edition Chapters: 1, 5-10, 14-18 6th Edition Chapters: 1, 2-63rd Edition Cha
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Fin 353 Midterm QuestionsFall 20091. In US, the discount rate has been set to be higher than the federal funds rate since 2003,emphasizing the lender of last resort function of the Federal Reserve.a) Trueb) False2. Both the assets and liabilities of
S.F. State - FIN - 353
Midterm Answers-Fall 20091. A2. A3. A4. B5. A6. B7. B8. D9. C10. B11. A12. A13. A14. B15. B16. A17. A18. A19. E20. A21. C22. D23. B24. B25. C26. D27. C28. A29. A30. B
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Fin 353, First MidtermFall 2010Instructor: Deniz K. TudorYou have one hour for this exam. Each question is worth 1 point.1. Provisions of the Glass-Steagall Act of 1933 that prohibit a bank holding company from owning other financialcompanies were re
S.F. State - FIN - 353
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S.F. State - FIN - 353
LECTURE 1 NOTESOVERVIEW OF THE LECTURE-WHY ARE FINANCIAL INTERMEDIARIES (FI) SPECIAL?-OVERVIEW OF THE FINANCIAL MARKETS:-DIFFERENCES BETWEEN PRIMARY AND SECONDARY MARKETS-DIFFERENCES BETWEEN MONEY AND CAPITAL MARKETS-FOREIGN EXCHANGE MARKETS-DERIVA
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Lecture 1 Questions1. a) Primary market financial instruments include issues of equity by firms initially goingpublic. True or False?b) Primary market securities include the issue of additional equity or debt instruments ofan already publicly traded f
S.F. State - FIN - 353
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S.F. State - FIN - 353
Lecture 2 Questions1. Whats coupon stripping? How can it create arbitrage opportunities?Answer: Coupon stripping entails taking a conventional bond and selling each of thecash payments as a separate security.To have an arbitrage opportunity with coupo
S.F. State - FIN - 353
LECTURE 3 OUTLINEYIELD CURVE DEFINITONFORWARD RATE DEFINITIONCONSTRUCTION OF A YIELD CURVELOANABLE FUNDS THEORYARBITRAGE PRICING THEORYUTILITY BASED THEORIES:THEORIES OF THE TERM STRUCTURE OF INTEREST RATES(Unbiased Expectations Theory, Liquidity
S.F. State - FIN - 353
Lecture 3 Questions1. What do the different shapes of the yield curve mean? Please draw graphs.Answer:Rising Yield Curve (upward sloping): Expect future short rates to be higher than currentlevels.Falling Yield Curve (inverted or downward sloping): E
S.F. State - FIN - 353
LECTURE 4 NOTESOVERVIEW OF THE LECTURE:-GENERAL RESPONSIBILITIES OF CENTRAL BANKS-FINANCIAL STABILITY-BALANCE SHEET OF A CENTRAL BANK-CHARACTERISTICS OF A SUCCESSFUL CENTRAL BANK- STRUCTURE OF THE FEDERAL RESERVE SYSTEM-SPECIFIC MONETARY POLICY TOO
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S.F. State - FIN - 353
LECTURE 6 NOTES:- WHY DO FINANCIAL INSTITUTIONS NEED TO MANAGE RISK?-TYPES OF RISKS INCURRED BY FINANCIAL INSTITUTIONS:Liquidity Risk, Interest Rate Risk, Market Risk, Off-Balance Sheet Risk, ForeignExchange Risk, Country or Sovereign Risk, Technology
S.F. State - FIN - 353
LECTURE 7 NOTESCREDIT RISK DEFINITION-Credit risk is the risk that promised cash flows from loans and securities held by FIsmay not be paid in full.-If the principal on all financial claims held by FIs were paid in full on maturity andinterest paymen
S.F. State - FIN - 353
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S.F. State - FIN - 353
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S.F. State - FIN - 353
Fin 353 Midterm QuestionsSpring 2010Instructor: Deniz K. Tudor1. In US, the discount rate has been set to be higher than the federal funds rate since 2003,emphasizing the lender of last resort function of the Federal Reserve.a) Trueb) False2. Both
S.F. State - FIN - 353
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S.F. State - FIN - 353
Fin 353 Midterm QuestionsSpring 2011Instructor: Deniz K. TUDOR1. In US, the discount rate has been set to be lower than the federal funds rate since 2003,emphasizing the lender of last resort function of the Federal Reserve.a) Trueb) False2. The yi
S.F. State - FIN - 353
Spring 2011 Midterm Answers1. b2. b3. a4. d5. c6. b7. b8. a9. a10. b11. a12. a13. e14. a15. c16. d17. b18. a19. c20. b21. a22. a23. b24. b25. c26. a27. b28. a29. b30. d
S.F. State - FIN - 353
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S.F. State - FIN - 355
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S.F. State - FIN - 355
The Primary market is the market where investors purchase newly issued securities Initial public offering (IPO): An initial publicoffer occurs when a company offers stock for sale to the public for the first time Seasoned equity offering (SEO): If a comp
S.F. State - FIN - 355
Expected return is the weighted average return on a risky asset, from today to some future date To calculate anexpected return, you must first: Decide on the number of possible economic scenarios (states) that might occur.Estimate how well the security
S.F. State - FIN - 355
SummaryOur goal in this chapter is to see what financial market history cantell us about risk and return. Dollar Returns and Percent Returns The Historical Record Average Returns Return Variability Arithmetic Averages versus Geometric Averages Ris
S.F. State - FIN - 355
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S.F. State - FIN - 355
Learning ObjectivesPrice quotes for all types of investments are easy to find,but what do they mean? Learn the answers for:1. Various types of interest-bearing assets.2. Equity securities.3. Futures contracts.4. Option contracts.3-1Security Types
S.F. State - FIN - 355
Learning ObjectivesYou are probably going to be a mutual fund investor verysoon, so you should definitely know the following:1. The different types of mutual funds.2. How mutual funds operate.3. How to find information about how mutual funds have per
S.F. State - FIN - 355
Learning ObjectivesTake stock in yourself. Make sure youhave a good understanding of:1. The difference between primary and secondarystock markets.2. The workings of the New York Stock Exchange.3. How NASDAQ operates.4. How to calculate index return
S.F. State - FIN - 355
Common Stock Valuation (DDM)The DDM with T Periods P0 =D3D1D2DT+++L(1 + k ) (1 + k )2 (1 + k )3(1 + k )TThe Constant Perpetual Growth DDMThe Two-stage Growth DDMif k gP0 = T D 0The Constant Growth DDM with T PeriodsTD 0 (1 + g) 1 + g P0
S.F. State - FIN - 355
Learning ObjectivesSeparate yourself from the commoners by having a goodUnderstanding of these security valuation methods:1. The basic dividend discount model.2. The two-stage dividend growth model.3. The residual income model.4. Price ratio analysi
S.F. State - FIN - 355
Discount Yield and Bond Equivalent Yield (BEY)FormulasPricesYields Days to Maturityx Discount Yield Price = Face Value x 1 360Price =Face value1 + BEY Days to maturity / 365Price 360Discount Yield = 1 Face Value Days to MaturityBEY = (365
S.F. State - FIN - 355
Learning ObjectivesIt will be worth your time to increase yourrate of interest in these topics:1. Money market prices and rates.2. Rates and yields on fixed-income securities.3. Treasury STRIPS and the term structure ofinterest rates.4. Nominal ver
S.F. State - FIN - 355
Learning ObjectivesIn this chapter, you will learn:1.2.3.4.How to calculate bond prices and yields.The importance of yield to maturity.Interest rate risk.How to measure the impact of interest ratechanges on bond prices.10-1Bond Prices and Yiel
S.F. State - FIN - 355
Learning ObjectivesTo get the most out of this chapter,spread your study time across:1. How to calculate expected returns and variancesfor a security.2. How to calculate expected returns and variancesfor a portfolio.3. The importance of portfolio d
S.F. State - FIN - 355
FIN 355HomeworkChapter 11 (P401-403):Questions and Problems 13, 8, 9, 1113Chapter 12 (P436-438):Questions and Problems 19, 12, 20Chapter 13 (P464-465):Concept Questions: 14, 6, 7 Questions and Problems 3, 1012Chapter 11Diversification and Risk Al
S.F. State - FIN - 355
Learning ObjectivesStudying some topics will yield an expectedreward. For example, make sure you know:1. The difference between expected and unexpectedreturns.2. The difference between systematic risk andunsystematic risk.3. The security market lin
S.F. State - FIN - 355
DataInputs:ER(S):STD(S):ER(B):STD(B):CORR(S,B):R_f:0.120.150.060.100.100.04ChangerCell:X_S: 0.250ER(P):STD(P):0.0750.087SharpeRatio:0.402Target Cell
S.F. State - FIN - 355
Learning ObjectivesTo get a high evaluation of your investmentsperformance, make sure you know:1. How to calculate the three best-known portfolio evaluationmeasures.2. The strengths and weaknesses of these three portfolioevaluation measures.3. How
S.F. State - FIN - 355
Learning ObjectivesYou will derive many future benefits if youhave a good understanding of:1. The basics of futures markets and how to obtain price quotes forfutures contracts.2. The risks involved in futures market speculation.3. How cash prices an
S.F. State - FIN - 355
FIN 355HomeworkChapter 14 (P495-497):Questions and Problems 3, 612, 14, 15, 17, 22Chapter 15 (P537-539):Questions and Problems 1, 2, 8, 9, 10, 15, 16, 20, 21Chapter 16 (P575-576):Concept Questions: 7; Questions and Problems 9, 10Chapter 14Futures
S.F. State - FIN - 355
Learning ObjectivesGive yourself some in-the-money academicand professional options by understanding:1. The basics of option contracts and how to obtainprice quotes.2. The difference between option payoffs and optionprofits.3. The workings of some
S.F. State - FIN - 355
Option Valuation Our goal in this chapter is to discuss stock option pricesand its determining factors. We will discuss "implied volatility," which is the marketsforward-looking uncertainty gauge.1616-1The Black-Scholes-MertonOption Pricing Model
S.F. State - FIN - 355
Finance 355: InvestmentsInstructor: Shuming LiuIn-Class Exercise 3Chapter 5 Question 10On November 20, 2009, the DJIA opened at 10,327.91. The divisor at that time was0.132319125. Suppose on this day the prices for 29 of the stocks remained unchanged
S.F. State - FIN - 355
Finance 355: InvestmentsInstructor: Shuming LiuIn-Class Exercise 4The current book value per share of Trenton Motors is $11.90 and the required return on the stock is 15percent. The firm expects earnings per share of $1.40 next year with annual earnin
S.F. State - FIN - 355
Finance 355: InvestmentsInstructor: Shuming LiuIn-Class Exercise 5Chapter 9 Question 11A Treasury bill with 82 days to maturity is quoted at 98.921. What is the bank discount yield,the bond equivalent yield, and the effective annual return?ANSWER:P
S.F. State - FIN - 355
Finance 355: InvestmentsInstructor: Shuming LiuIn-Class Exercise 6Chapter 10 Question 19LKD Co. has 10 percent coupon bonds with a YTM of 8.6 percent. The current yield on thesebonds is 9.2 percent. How many years do these bonds have left until they
S.F. State - FIN - 355
Finance 355: InvestmentsInstructor: Shuming LiuIn-Class Exercise 7The following portfolio has 50% in stock A and 25% in each of stock B and C. What is theportfolio expected return and portfolio variance and standard deviation?State ofEconomyProbabi
S.F. State - FIN - 355
Finance 355: InvestmentsInstructor: Shuming LiuIn-Class Exercise 8The risk-free rate is 5.4 percent and the expected return on the market is 11.2 percent. Stock Ahas a beta of 1.3. For a given year, stock A returned 14.8 percent while the market retur
S.F. State - FIN - 355
Finance 355: InvestmentsFall 2011Instructor: Shuming LiuQUIZ 11a6QUIZ PAPER A11b2d7b3c84c5cb16d12e17ca13d18c9b14e19c10b15d20db16a1d6QUIZ PAPER B11b2c7e12b17d3c8d13a18c4c9e14b19c
S.F. State - FIN - 355
Finance 355: InvestmentsFall 2011Instructor: Shuming LiuQUIZ 2QUIZ PAPER A1c6c11a16b2d7e12b17b3d8e13c18b4d9e14b19b5d10b15c20dQUIZ PAPER B1a6c11b16c2b7d12b17e3c8d13b18e4b9d14b19e
S.F. State - FIN - 355
Finance 355: InvestmentsFall 2011Shuming LiuQUIZ 3QUIZ PAPER A1b6d11c16c2d7a12d17a3c8c13b18e4b9e14a19c5a10d15e20dQUIZ PAPER B1d6b11c16c2a7d12a17d3c8c13e18b4e9b14c19a5d10a15
S.F. State - FIN - 355
Finance 355: InvestmentsSample Quiz 11.A stock sold for $38.20 at the beginning of the year. The end of year stock price was $40.11.What was the amount of the annual dividend if the total return for the year was 9.712percent?a. $1.50b. $1.54c. $1.