Fin 534 Midterm Exam
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- Capital market instruments include both long-term debt and common stocks. An example of a primary market transaction would be your uncle transferring shares of WalMart stock to you as a birthday gift. The NYSE does not exist as a physical location;...
- One drawback of switching from a partnership to the corporate form of organization is the following: a. It subjects the firm to additional regulations. It makes it more difficult for the firm to raise additional capital. The main method of...
- A slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster growing company. The limited partners in a limited partnership have voting control, while the general partner has operating control over the business. A major disadvantage of all partnerships compared to all corporations is the fact that federal income taxes must be paid by the partners rather than by the firm itself. Corporations are at a disadvantage relative to partnerships because they have to file more reports to state and federal agencies, including the Securities and Exchange Administration, even if they are not publicly owned. A fast-growth company would be more likely to set up as a partnership for its business organization than would a slow-growth company. Partnerships have difficulty attracting capital in part because of their unlimited liability, the lack of impermanence of the organization, and difficulty in transferring ownership.
- A major disadvantage of a partnership relative to a corporation as a form of business organization is the high cost and practical difficulty of its formation. Most businesses by number and total dollar sales are organized as partnerships or proprietorships because it is easier to set up and operate in one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, mainly because corporations have important tax advantages over proprietorships and partnerships. Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U. Large corporations are taxed more favorably than sole proprietorships. Corporate stockholders are exposed to unlimited liability. Jane Doe, who has substantial personal wealth and income, is considering the possibility of starting a new business in the chemical waste management field.
- She will be the sole owner, and she has enough funds to finance the operation. The business will have a relatively high degree of risk, and it is expected that the firm will incur losses for the first few years. However, the prospects for growth and positive future income look good, and Jane plans to have the firm pay out all of its income as dividends to her once it is well established. Which of the legal forms of business organization would probably best suit her needs?
- Proprietorship, because of ease of entry. S corporation, to gain some tax advantages and also to obtain limited liability. Partnership, but only if she needs additional capital. Regular corporation, because of the limited liability. In this situation, the various forms of organization seem equally desirable. The corporate bylaws are a standard set of rules established by the state of incorporation. Procedures for electing corporate directors are contained in bylaws, while the declaration of the activities that the firm will pursue and the number of directors are included in the corporate charter. Companies must establish a home office, or domicile, in a particular state, and that state must be the one in which most of their business sales, manufacturing, and so forth is conducted. Attorney fees are generally involved when a company develops its charter and bylaws, but since these documents are voluntary, a new corporation can avoid these costs by deciding not to have either a charter or bylaws.
FIN 534 Financial Management Final Exam Part 1 Answers (2021)
The corporate charter is concerned with things like what business the company will engage in, whereas the bylaws are concerned with things like procedures for electing the board of directors. With which of the following statements would most people in business agree? Government agencies and firms almost always agree with one another regarding the restrictions that should be placed on hiring and firing employees. Developing a formal set of rules defining ethical and unethical behavior is not useful for a large corporation. The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to a. Minimize the chances of losses. Maximize the stock price on a specific target date. The financial manager should seek that combination of assets, liabilities, and capital that will generate the largest expected projected after-tax income over the relevant time horizon, generally the coming year.- However, EPS is not affected by the manner in which those assets are financed. Potential agency problems can arise between managers and stockholders, because managers hired as agents to act on behalf of the owners may instead make decisions favorable to themselves rather than the stockholders. Ownership is generally widely dispersed; hence managers have great freedom in how they run the firm. Suppose the U. Assuming the announcement was not expected, what effect, other things held constant, would that have on bond prices and interest rates?
- Prices and interest rates would both rise. Prices would rise and interest rates would decline. Prices and interest rates would both decline. There would be no changes in either prices or interest rates. Prices would decline and interest rates would rise. Which of the following would be most likely to lead to higher interest rates on all debt securities in the economy? Households start saving a larger percentage of their income. The economy moves from a boom to a recession. The level of inflation begins to decline. Corporations step up their expansion plans and thus increase their demand for capital.
- The Federal Reserve uses monetary policy in an attempt to stimulate the economy. Tags: fin complete, fin exams, fin final, fin final exam part 1, fin final exam part 2, fin financial management, fin homework set 1, fin homework set 2, fin homework set 3, fin homework set 4, fin homework set 5, fin midterm exam, fin midterm exam part 1, fin midterm exam part 2, fin strayer, fin strayer test bank, fin test bank, FIN Week 5 Midterm Exam Part 1 - Strayer Latest, fin All pages:.
- FIN Midterm Exam 3 1. Your bank offers a year certificate of deposit CD that pays 6. Of the following investments, which would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero. How much would she have after 8 years if she leaves it invested at 8. You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would increase the calculated value of the investment?
- Assume that interest rates on year noncallable Treasury and corporate bonds with different ratings are as follows: The coupon rate will remain fixed until the bond matures. Both bonds have the same yield to maturity. Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds? Answering this question is not essay as it seems. It will require you to research or burn your brain power, write your findings down, edit, proofread severally, and submit unsure of the grade you will get. Order your assignment now, relax, submit, and enjoy excellent grades.
- The interest is compounded quarterly. Answer If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity. The cash flows for an ordinary or deferred annuity all occur at the beginning of the periods. If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity. The cash flows for an annuity due must all occur at the ends of the periods. The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month. Question 5 A U. The present value would be greater if the lump sum were discounted back for more periods. Question 6 At the end of 10 years, which of the following investments would have the highest future value? Assume that the effective annual rate for all investments is the same and is greater than zero.
- Question 7 Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds? Answer Market interest rates rise sharply. Market interest rates decline sharply. The company's financial situation deteriorates significantly. Inflation increases significantly. The company's bonds are downgraded. Answer All else equal, long-term bonds have less interest rate price risk than short-term bonds. All else equal, low-coupon bonds have less interest rate price risk than high-coupon bonds. All else equal, short-term bonds have less reinvestment rate risk than long-term bonds. All else equal, long-term bonds have less reinvestment rate risk than short-term bonds. All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds.
- If the bond's yield to maturity remains constant, the bond will continue to sell at par. The bond's current yield exceeds its capital gains yield. The bond's expected capital gains yield is positive. Answer The total yield on a bond is derived from dividends plus changes in the price of the bond. Bonds are riskier than common stocks and therefore have higher required returns. Bonds issued by larger companies always have lower yields to maturity less risk than bonds issued by smaller companies. The market value of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant.
- If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices. Capital market transactions involve only the purchase and sale of equity securities, i. If an investor sells shares of stock through a broker, then this would be a primary market transaction. Consumer automobile loans are evidenced by legal documents called "promissory notes," and these individual notes are traded in the money market. While the distinctions are blurring as investment banks are today buying commercial banks, and vice versa, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties. Answer Capital market instruments include both long-term debt and common stocks.
- An example of a primary market transaction would be your uncle transferring shares of Wal-Mart stock to you as a birthday gift. The NYSE does not exist as a physical location; rather, it represents a loose collection of dealers who trade stocks electronically. If your uncle in New York sold shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction. While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors. Question 3 You recently sold shares of your new company, XYZ Corporation, to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the following statements best describes this transaction? Answer This is an example of an exchange of physical assets. This is an example of a primary market transaction.
- This is an example of a direct transfer of capital. This is an example of a money market transaction. Answer While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties. A security whose value is derived from the price of some other "underlying" asset is called a liquid security. Money market mutual funds usually invest most of their money in a well-diversified portfolio of liquid common stocks.
- When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation. Because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of debt than on the cost of common stock as measured by the CAPM. When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation. Since the money is readily available, the after-tax cost of reinvested earnings not newly issued stock is usually much lower than the after-tax cost of debt. When calculating the cost of preferred stock, a company needs to adjust for taxes, because preferred stock dividends are deductible by the paying corporation.
FIN MIDTERM EXAM PART I & PART II (50 Questions Solved) - CourseMerit
With its current financial policies, Flagstaff Inc. Since new stock has a higher cost than reinvested earnings, Flagstaff would like to avoid issuing new stock. Increase the percentage of debt in the target capital structure. Increase the proposed capital budget. Reduce the amount of short-term bank debt in order to increase the current ratio. Reduce the percentage of debt in the target capital structure. Increase the dividend payout ratio for the upcoming year. The WACC is calculated on a before-tax basis. The WACC exceeds the cost of equity. The cost of equity is always equal to or greater than the cost of debt. The cost of reinvested earnings typically exceeds the cost of new common stock. WACC calculations should be based on the before-tax costs of all the individual capital components.- Flotation costs associated with issuing new common stock normally reduce the WACC. An increase in the risk-free rate will normally lower the marginal costs of both debt and equity financing. The higher the WACC, the shorter the discounted payback period. The MIRR method assumes that cash flows are reinvested at the crossover rate. If two projects have the same cost, and if their NPV profiles cross in the upper right quadrant, then the project with the higher IRR probably has more of its cash flows coming in the later years.
- If two projects have the same cost, and if their NPV profiles cross in the upper right quadrant, then the project with the lower IRR probably has more of its cash flows coming in the later years. Assume a project has normal cash flows. The payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects. The discounted payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects. The net present value method NPV is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
Fin Week 5 Midterm Exam Part 1-questions And Answers - FIN (FIN) - Stuvia
The modified internal rate of return method MIRR is generally regarded by academics as being the best single method for evaluating capital budgeting projects. The internal rate of return method IRR is generally regarded by academics as being the best single method for evaluating capital budgeting projects. For mutually exclusive projects with normal cash flows, the NPV and MIRR methods can never conflict, but their results could conflict with the discounted payback and the regular IRR methods. If a firm uses the discounted payback method with a required payback of 4 years, then it will accept more projects than if it used a regular payback of 4 years.- Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product? These costs have been expensed for tax purposes, and they cannot be recovered regardless of whether the new project is accepted or rejected. A firm has a parcel of land that can be used for a new plant site or be sold, rented, or used for agricultural purposes. Which of the following procedures does the text say is used most frequently by businesses when they do capital budgeting analyses? It is better to not risk adjust at all. Sensitivity and scenario analyses, on the other hand, require much more information regarding the input variables, including probability distributions and correlations among those variables. This makes it easier to implement a simulation analysis than a scenario or a sensitivity analysis, hence simulation is the most frequently used procedure. DCF techniques were originally developed to value passive investments stocks and bonds.
- Opportunities for such actions are called real options. Real options are valuable, but this value is not captured by conventional NPV analysis. Then, depending on how risky different projects are judged to be, the calculated NPVs are scaled up or down to adjust for differential risk. The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not. This is another reason to favor the NPV. Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not specifically identified.
FIN Midterm Exam Solution Week 5 Flashcards - Medicoguia.com
However, the payback method does not. Identifying an externality can never lead to an increase in the calculated NPV. If the project would have a favorable effect on other operations, then this is not an externality. Collins Inc. In evaluating whether to go ahead with the project, which of the following items should NOT be explicitly considered when cash flows are estimated? The project will utilize some equipment the company currently owns but is not now using.- A used equipment dealer has offered to buy the equipment. These funds cannot be recovered, but the research may benefit other projects that might be proposed in the future. The company will produce the new product in a vacant building that was used to produce another product until last year. All sunk costs that have been incurred relating to the project. All interest expenses on debt used to help finance the project. Sunk costs that have been incurred relating to the project, but only if those costs were incurred prior to the current year. What is the maximum sales growth rate North could achieve before it had to increase its fixed assets?
Fin Week 5 Midterm Exam Part 2-questions And Answers - FIN (FIN) - Stuvia
Skip Next Companies Heidee and Leaudy have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power. Both companies have positive net incomes. Company Heidee has a higher debt ratio and, therefore, a higher interest expense. Company Heidee has more net income. Company Heidee pays less in taxes. Company Heidee has a lower equity multiplier. Company Heidee has a higher ROA. Company Heidee has a higher times interest earned TIE ratio. ANS: Companies Heidee and Leaudy have the same tax rate, sales, total assets, and basic earning power.- Company Heidee has a lower times interest earned TIE ratio. Company Heidee pays more in taxes. Company Heidee has a lower ROE. Lincoln Industries' current ratio is 0. Considered alone, which of the following actions would increase the company's current ratio? Use cash to reduce long-term bonds outstanding. Borrow using short-term notes payable and use the cash to increase inventories. Use cash to reduce accruals. Use cash to reduce accounts payable. Use cash to reduce short-term notes payable. Which of the statements below best describes the results of these transactions? The transaction would improve both firms' financial strength as measured by their current ratios. The transactions would raise Lofland's financial strength as measured by its current ratio but lower Smaland's current ratio. The transactions would lower Lofland's financial strength as measured by its current ratio but raise Smaland's current ratio.
- The transaction would have no effect on the firm' financial strength as measured by their current ratios. The transaction would lower both firm' financial strength as measured by their current ratios. Companies Heidee and Leaudy have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt. However, company Heidee has a higher debt ratio. Given this information, Leaudy must have the higher ROE.
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