BUSN 379 Finance DeVry

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BUSN 379 All Discussion Questions Week 1 7

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BUSN 379 Week 4 Midterm + Week 8 Final Exam (Package)
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BUSN 379 Week 4 Midterm Solutions

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Page 1
1. (TCO 1) What is the goal of financial management for a sole proprietorship?
2. (TCO 1) When analyzing alternative capital structures for a firm, a financial manager must
consider which of the following?
3. (TCO 1) Market value is important to the financial manager because:
4. (TCO 1) Which of the following is true regarding income statements?
5. (TCO 1) Tatos Pizza has sales of $625,000. They paid $43,000 in interest during the year and
depreciation was $79,000. Administrative costs were $100,000 and other costs were $160,000.
Assuming a tax rate of 35 percent, what is Tatos Pizza net income?
6. (TCO 1) Home Best Hardware had $315,000 in taxable income last year. Using the tax rates
provided in Table 2.3, what is the approximate average tax rate?
7. (TCO 1) Pizza A had earnings after taxes of $600,000 in the year 2008, and 300,000 shares
outstanding. In year 2009, earnings after taxes increased to $750,000, and 25,000 new shares
were issued for a total of 325,000 shares. What is the EPS figure for 2008?
8. (TCO 1) The financial statement that summarizes a firm's operations over a period of time is
called a(n):
9. (TCO 1) Print Imaging has EBIT of $150,000, interest of $30,000, taxes of $50,000, and
depreciation of $50,000. What is the companys operating cash flow?
10. (TCO 3) Linda invested $15,000 today, in an investment that pays 6.50 percent interest,
compounded semi-annually. Which one of the following statements is correct concerning this
investment?
11. (TCO 3) Mr. Smith will receive $7,500 a year for the next 14 years from his trust. If the
interest rate on this investment is eight percent, what is the approximate current value of these
future payments?
12. (TCO 3) Paper Pro recently purchased a printing machine costing $97,000. The company
financed this purchase at 8.25 percent interest, with monthly payments of $2,379.45. How many
years will it take the firm to pay off this debt?
13. (TCO 3) Fine Oak Woodworks is considering a project that has cash flows of $6,000,
$4,000, and $3,000 for the next three years. If the appropriate discount rate of this project is 10
percent, which of the following statements is false?
14. (TCO 4) You are considering two investments. Investment I, is in a software company and
Investment II, is an engineering company. The investments offer the following cash flows:
15. (TCO 3) North Bank offers you an APR of 13.17 percent compounded monthly, and South
Bank offers you an effective rate of 13.75 percent on a business loan. Which bank should you
choose and why?
Page 2
1. (TCO 3) Tim needs to borrow $5,000 for two years. The loan will be repaid in one lump sum
at the end of the loan term. Which one of the following interest rates is best for Tim?

2. (TCO 3) Which one of the following is an example of an annuity, but not a perpetuity?
3. (TCO 3) Fanta Cola has $1,000 par value bonds outstanding at 12 percent interest. The bonds
mature in 25 years. What is the current price of the bond if the YTM is 11 percent? Assume
annual payments.
4. (TCO 6 and 8) A bond's debenture will include which of the following?
5. (TCO 3) Bonds issued by Blue Sky Airlines have a face value of $1,000 and currently sell for
$1,080. The annual coupon payments are $125. If the bonds have 20 years until maturity, what is
the approximate YTM of the bonds?
6. (TCO 3) The preferred stock of Bean Coffee pays an annual dividend of $5.60. It has a
required rate of return of eight percent. What is the price of the preferred stock?
7. (TCO 3) Intelligence Research, Inc. will pay a common stock dividend of $1.60 at the end of
the year.
8. (TCO 3) Royal Electric paid a $2 dividend last year. The dividend is expected to grow at a
constant rate of five percent over the next three years.
9. (TCO 6) Which of the following is true regarding the primary market?
10. (TCO 6) The smallest firms listed on NASDAQ are in the NASDAQ _____ Market.
11. (TCO 6) The annual interest on a bond divided by the bond's market price is called the:
12. (TCO 6) A sinking fund is an account managed by a bond trustee for the sole purpose of:
13. (TCO 8) Which of the following is true regarding bonds?
14. (TCO 6) Which of the following best describes a zero-coupon bond?
15. (TCO 6) Which of the following are not true regarding convertible bonds? Select all that
apply:
Page 3
1. (TCO 1) Paul is the owner of Paul's Cabinets, which is a sole proprietorship. The firm cannot
pay its bills because a large customer defaulted on payment.
2. (TCO 1) Which of the following is classified as tangible, fixed assets?
3. (TCO 1) Explain agency theory. Provide an example of a potential agency problem for a
corporation, and identify means by which the firm can help reduce or eliminate that problem.
4. (TCO 3) Why does money have time value? Explain your rationale.
5. (TCO 8) Why do firms use protective covenants? Provide two or three examples of protective
covenants, and explain how these covenants increase or decrease risk.
6. (TCO 6) What are some of the features of PETS (bonds) that make them attractive to certain
investors?
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BUSN 379 Week 8 Final Exam Solutions

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Page 1
Question 1. (TCO 4) Which of the following is true regarding the evaluation of projects? (Points
: 4)
Question 2. (TCO 4) Which of the following investment ranking methods does not consider the
time value of money? (Points : 4)
Question 3. (TCO 3 and 4) You can ensure that an investment is expected to create value for
(Points : 4)
Question 4. (TCO 3 and 4) What is the net present value of a project with the following cash
flows, if the discount rate is 10 percent?
Question 5. (TCO 4) Howard Company is considering a new project that will require an initial
cash investment of $575,000. The project will produce no cash flows for the first three years. The
projected cash flows for years 4 through 8 are $73,000, $112,000, $124,000, $136,000, and
$145,000, respectively. How long will it take the firm to recover its initial investment in this
project? (Points : 4)
Question 6. (TCO 4) The postponement of a project until conditions are more favorable:

(Points : 4)
Question 7. (TCO 4) ___________, occurs when a firm cannot raise financing for a project
under any circumstances. (Points : 4)
Question 8. (TCO 4) ABC Cameras is considering an investment that will have a cost of
$10,000 and the following cash flows: $6,000 in year 1, $4,000 in year 2 and $3,000 in year 3.
Assume the cost of capital is 10%. Which of the following is true regarding this investment?
(Points : 4)
Question 9. (TCO 4) Assume Company X plans to invest $60,000 in industrial equipment.
Using Tables 9.6 and 9.7 of your textbook (Page 277), which is the first year depreciation
amount under MACRS? (Points : 4)
Question 10. (TCO 1 and 4) Assume a corporation has earnings before depreciation, and taxes
of $100,000, depreciation of $40,000, and that it has a 30 percent tax bracket. What are the aftertax cash flows for the company? (Points : 4)
Question 11. (TCO 8) Which of the following statements is true regarding systematic risk?
(Points : 4)
Question 12. (TCO 8) Which statement is true regarding risk? (Points : 4)
Question 13. (TCO 8) The stock of Chocolate Galore is expected to produce the following
returns, given the various states of the economy. What is the expected return on this stock?
Question 14. (TCO 8) You own a portfolio that consists of $8,000 in stock A, $4,600 in stock B,
$13,000 in stock C, and $5,500 in stock D. What is the portfolio weight of stock D? (Points : 4)
Question 15. (TCO 8) You currently own a portfolio valued at $24,000 that has a beta of 1.1.
You have another $8,000 to invest, and would like to invest it in a manner such that the risk of
the new portfolio matches that of the overall market. What does the beta of the new security have
to be? (Points : 4)
Page 2
Question 1. (TCO 8) If the financial markets are strong form efficient, then: (Points : 4)
Question 2. (TCO 5) Royal Petroleum Co. can buy a piece of equipment that can be financed
with debt at a cost of 9 percent (after-tax) and common equity at a cost of 16%. Assume debt and
common equity each represent 50 percent of the firm's capital structure.What is the weighted
average cost of capital? (Points : 4)
Question 3. (TCO 5, 6 and 7) An issue of common stock is expected to pay a dividend of $4.80
at the end of the year. Its growth rate is equal to eight percent. If the required rate of return is 13
percent, what is its current price? (Points : 4)
Question 4. (TCO 5, 6 and 7) Which of the following is not true regarding the cost of debt?
(Points : 4)
Question 5. (TCO 5) Which of the following is not true regarding the cost of retained earnings?
(Points : 4)
Question 6. (TCO 4) A project has the following cash flows. What is the internal rate of return?
Question 7. (TCO 5, 6 and 7) Which one of the following is a correct statement regarding a
firm's weighted average cost of capital (WACC)? (Points : 4)
Question 8. (TCO 5, 6 and 7) The six percent preferred stock of FKH Manufacturing is selling
for $62 a share. What is the firm's cost of preferred stock, if the tax rate is 34 percent and the par
value per share is $100? (Points : 4)
Question 9. (TCO 2) Which one of the following occurs if a firm files for Chapter 7 bankruptcy,
but does not generally occur if the firm files for Chapter 11 bankruptcy?(Points : 4)
Question 10. (TCO 5) Which of the following statements is false regarding the cost of capital?
(Points : 4)
Question 11. (TCO 2) Select any actions that do not affect the cash account. (Points : 4)
Question 12. (TCO 2) Which of the following statements is true? (Points : 4)
Question 13. (TCO 2) Which one of the following industries is most apt to have the shortest
cash cycle? (Points : 4)
Question 14. (TCO 2) Delphinia's has the following estimated quarterly sales for next year. The

accounts receivable period is 30 days. What is the expected accounts receivable balance at the
end of the second quarter? Assume each month has 30 days.
Question 15. (TCO 1) Why is maximization of the current value per share a more appropriate
financial management goal than profit maximization? (Points : 4)
Page 3
Question 1. (TCO 1) Which of the following are capital structure concerns?
Question 2. (TCO 1) Book values are different from market values because: (Points : 4)
Question 3. (TCO 1) Use the following tax table to answer this question:
Question 4. (TCO 3) Regional Bank offers you an APR of 19 percent compounded
semiannually, and Local Bank offers you an EAR of 19.50 percent for a new automobile loan.
You should choose ______________ because its _______ is lower. (Points : 4)
Question 5. (TCO 3) You deposited $11,000 in your bank account today. Which of the following
will decrease the future value of your deposit, assuming that all interest is reinvested? Assume
the interest rate is a positive value. Select all that apply: (Points : 4)
Question 6. (TCO 3) Amy needs to save $20,000 in cash to buy a new car five years from today.
She expects to earn 6.5 percent, compounded annually, on her savings. How much does she need
to deposit today, if this is the only money she saves for this purpose? (Points : 4)
Question 7. (TCO 3) Paper Pro needed a new store. The company spent $65,000 to refurbish an
old shop and create the current facility. The firm borrowed 75 percent of the refurbishment cost
at eight percent interest for 11 years. What is the amount of each monthly payment? (Points : 4)
Question 8. (TCO 3) John borrowed $5,500 four years ago at an annual interest rate of 10
percent. The loan term is seven years. Since he borrowed the money, Sonny has been making
annual payments of $550 to the bank. Which type of loan does John have? (Points : 4)
Question 9. (TCO 3) Fanta Cola has $1,000 par value bonds outstanding at 12 percent interest.
The bonds mature in 25 years. What is the current price of the bond, if the YTM is 11 percent?
Assume annual payments. (Points : 4)
Question 10. (TCO 6) The market where one shareholder sells shares to another shareholder is
called the _____ market. (Points : 4)
Question 11. (TCO 7) Which one of the following statements concerning financial leverage is
correct? (Points : 4)
Question 12. (TCO 3) What is the approximate yield to maturity for a seven-year bond that pays
11 percent interest on a $1000 face value annually if the bond sells for $952?(Points : 4)
Question 13. (TCO 8) Which of the following is true regarding bonds? (Points : 4)
Question 14. (TCO 8) Which one of the following bonds is the most sensitive to interest rate
movements? (Points : 4)
Question 15. (TCO 6) A sinking fund is an account managed by a bond trustee for the sole
purpose of: (Points : 4)
Page 4 (Explanatory)
Question 6. (TCO 1) Provide three examples of recent well-known unethical behavior cases.
Explain the situation in one or two paragraphs. How do you believe that this behavior affected
the firms value? (Points : 10)
Question 7. (TCO 4) What are sunk costs? Provide at least two real-life examples of sunk costs
for a project. Should sunk costs be included as incremental cash flows? Why or why not?
Explain your rationale. (Points : 10)
Question 8. (TCO 8) What is the difference between business risk and financial risk? If
Company A has a higher business risk than Company B, should its cost of capital be higher?
Why or why not? Explain your rationale. (Points : 10)
Question 9. (TCO 2) What are some important factors to consider when conducting a credit
evaluation and scoring? (Points : 10)
Question 10. (TCO 6 and 7) Do you believe that it is appropriate for some industries to be more
leveraged than others? Explain your rationale. (Points : 10)

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