Time Value of Money and Financial Management, Exams of Finance

Download Time Value of Money and Financial Management and more Exams Finance in PDF only on Docsity! Page | 1 FINAL-7003 Business Finance 2 Week - Chapters 1 and 2 Please note that the following selected MC Q&as are for your review purpose. They might not appear in your mid-term and final exams. 1. Financial managers use the time value of money to A) Make business decisions. B) Compare cash flows of different projects. C) Determine the price of common stock. D) Both A and B. E) all of the above. 2. The time value of money is created by A) The existence of profitable investment alternatives and interest rates. B) The fact that the passing of time increases the value of money. C) The elimination of the opportunity cost as a consideration. D) The fact that the value of saving money for tomorrow could be more or less than spending it today. Page | 2 3. Which of the following statements is FALSE? A) A dollar received one year from now will be worth more than a dollar received today. B) On monthly compounding loans, the annual percentage yield will be less than the nominal or quoted rate of interest. C) Compounding essentially means earning interest on interest on an initial balance. D) Perpetuities pay an equal payment forever. 4. An investor will invest $1,000 now and expect to receive $10 for each of the next 10 years plus $1,000 at the end of the 10th year. Her cash flow at time period 0 is: A) $1,000 B) - $1,000 C) $-990 D) $1,010 Page | 5 A) $100,000 now B) $10,000 perpetuity C) $50,000 now and $100,000 in 10 years D) $50,000 now and $150,000 in 10 years Page | 6 9. Your parents are planning to retire in Phoenix, AZ in 20 years. Currently, the typical house that pleases your parents costs $200,000, but they expect inflation to increase the price of the house at a rate of 4% over the next 20 years. To buy a house upon retirement, what must they save each year in equal annual end-of-year deposits if they can earn 10% annually? A) $21,910.00 B) $7,650.94 C) $10,000.00 D) $14,715.52 10. You intend to purchase a new car upon graduation in two years. It will have a cost of $29,371, including all extra features and sales tax. You just received a $3,000 pre- graduation gift from your rich uncle that you intend to deposit in a money market account that pays 6% interest, compounded monthly. If you use the amount in the money market account for a down payment, and take out an auto loan for the remainder, how much will you need to borrow? (Round to the nearest dollar.) A) $29,371 Page | 7 B) $25,880 C) $26,371 D) $26,000 11. Which of the following is not a reason for incorporating a business? A) Limited liability B) Ownership is relatively easy to transfer C) It is easier to form than a proprietorship D) Corporate tax laws may allow tax deferral or avoidance 12. Which of the following is not a form of business organization? A) Corporation B) Sole partnership C) General partnership D) Sole proprietorship 13. If you are in a business that is faced with enormous risks of failure, what type of ownership would you avoid? Page | 10 17. The primary objective of the financial manager is to: A) maximize earnings B) maximize dividend payments C) maximize shareholder wealth D) Minimize expenses 18. If you are working for a company and your job description includes accounting, budgeting, internal audit, systems management/MIS, and tax management, you are most likely a(n): A) treasurer B) tax accountant C) auditor D) controller 19. Ratios should not be used to compare two companies in different industries since wide variation across industries can occur. But even within an industry, sometimes comparisons can be problematic. Which of the following is/are a reason(s) for concern? Page | 11 A) Methods of calculating ROE may differ between analysts B) Company choice between weighted average and FIFO inventory valuations C) Companies are based in different countries D) All of these are reasons for concern. Page | 12 20. The International Financial Reporting Standards apply to Canadian public companies. How does that affect comparability of financial statements across countries? A) It achieves greater comparability in the short term. B) It achieves greater comparability in the long term. C) IFRS is not intended to improve comparability. D) IFRS coordinates only a few changes in financial reporting standards. 21. Which of the following people would be likely to calculate financial ratios for a company? A) Bondholders B) Equity holders C) Suppliers D) All of these would calculate ratios on a company 22. Which of the following people would be least likely to calculate financial ratios for a company? A) Bondholders B) Equity holders C) Supplier s D) Page | 15 25. EXLO Company has current sales of $100,000 and has projected annual sales growth of 5%, asset growth of 120%, profit margins of 3%, and its dividend policy is to have a dividend payout of 15% per year. The sustainable growth rate for EXLO is closest to: A) 0.13% B) 0.38% C) 2.17% D) 4.25% B*PM/ (a-b*PM) = (1-.15)*.03/(1.20-(1-.15)*.03)) = .0255/1.1745 = 2.17% 26. What does operational efficiency refer to? A) Prices that quickly reflect important information. B) Low transaction costs. C) Sufficient securities to efficiently allocate risk D) Both A and B are correct. 27. What does informational efficiency refer to? A) Cheap information costs. B) Prices that quickly reflect important information. C) Low number of transactions. D) Both A and B are correct. Page | 16 28. The Kumquat Exchange is characterized by high transaction costs and very infrequent trading. This exchange is likely to have: A) Information efficiency and operational efficiency B) Information inefficiency and operational efficiency C) Information efficiency and operational inefficiency D) Information inefficiency and operational inefficiency 29. In many emerging markets, stock exchanges do not have big capitalizations. This refers to which type of inefficiency? A) Operational efficiency B) AL locational efficiency C) Information efficiency D) Liquidity efficiency 30. Which one of the following is NOT an example of market efficiency? A) Stock price changes after earning announcements. B) Stock price decreases every third day by a decrease of 0.5% from the opening price. C) Stock price has a beta of 1. D) Stock price decreases when the market goes up. Page | 17 31. Empirical support for market efficiency is strongest for: A) Weak form B) Semi-strong form C) Strong form D) No form of market efficiency is supported by the data 32. Michel has developed a trading strategy for the Abitibi-Témiscamingue Market. He has observed that his strategy earns returns that are statistically significantly greater than the market. Should Michel start applying his trading strategy? A) Yes, the tests show that its returns are statistically significantly greater than the market. B) Not necessarily; the tests show that its returns are statistically significantly greater than the market. C) Yes, the tests show that its returns are economically significantly greater than the market. D) Not necessarily; the tests do not show whether the returns are economically significantly greater than the market. 33. If markets were strong form efficient, which of the following situations would yield abnormal returns? Page | 20 A) February 2, 2012 B) March 12, 2012 C) March 16, 2012 D) April 2, 2012 38. Which of the following would result in a decrease in the number of shares outstanding and an increase in the earnings per share? A) Cash dividend B) Stock dividend C) Reverse stock split D) None of the above result in a decrease in the number of shares outstanding 39. With respect to a company paying a stock dividend, which of the following is false? A) The capital account remains unchanged. B) The overall value of the firm remains unchanged. C) The corporation distributes additional stock certificates. D) There is no proportionate change in ownership. Page | 21 40. An investor will prefer a high dividend if: I). the firm cannot reinvest the funds in projects where the yields exceed those that a shareholder could get elsewhere. II). the investor needs a high level of current income. III). the investor faces high personal taxes. A) I only B) II only C) I and II D) I and III 41. An investor will prefer a low dividend if: I). the firm cannot reinvest the funds in projects where the yields exceed those that a shareholder could get elsewhere. II). the investor needs a high level of current income. III). the investor faces high personal taxes. A) I only B) III only C) I and II D) II and III 42. Which of the following would impact management's decision regarding the Page | 22 proportion of earnings to be paid out in dividends and the proportion to be retained for reinvestment? A) Investors' reinvestment opportunities. B) Tax considerations. C) The firm's reinvestment opportunities. D) All of the above 43. Use the following two statements to answer this question: I). Managers only repurchase stocks to take advantage of their underpricing II). Stock repurchases are exactly the same as cash dividends in the real world. A) I and II are correct B) I and II are incorrect C) I is incorrect and II is correct D) I is correct and II is incorrect Page | 25 48. The book value of current assets of the bidder is $25,000, the book value of current assets of the bidder is $3,500, and the fair market value of current assets is $2,900. What is the book value of current assets post acquisition? A) $25,000 B) $28,500 C) $27,900 D) $2,900 Current assets after acquisition=$25,000+$2,900=$27,900 49. Which of the following indicators best reflect(s) the wealth of common shareholders? (I). the retained earnings of the firm. (II) Dividend payments to common shareholders. (III). Market value of the common shares of a firm. A) I only B) II only C) III only D) II and III only Page | 26 E) I, II, and III 50. ABC Corp. is considering investing in a project whose risk is greater than the current risk of the firm. What should ABC's decision maker do? A) Increase the internal rate of return (IRR) of the project to reflect the risk increase. B) Reject the project, as its acceptance would increase the risk of the firm. C) Ignore the risk differential if the project to be accepted would comprise only a small fraction of the total assets of the firm. D) Increase the cost of capital used to evaluate the project to reflect the higher risk of the project. Please note that these MC Q&as might not appear in your mid-term and final exams. Page | 27 Discussion Problems: Q1. Suppose you could choose security A, which is a coin toss with heads winning $1,000 and tails winning nothing. Or, you could choose security B, which is a coin toss with heads winning $100,000 and tails losing $99,000. Which would you prefer? Q2. Click the following link to read the article: I'm 28 with £50,000 savings. How long before I can afford to quit work and travel the world? From the article, what are some underlying assumptions and theories in finance course you have learnt in this type of discussion? Q3. It is common for companies to have multiple objectives and not to focus solely on shareholder value. What pressures are companies under that might cause them to have a range of objectives? Comments Q1. Both securities have the same expected payoff of $500, but security B has a much larger standard deviation than security A. If you prefer security A, you do not like risk. You are a risk-averse investor. If you prefer security B, you are a risk-taker. If you have no preference between the two securities, you are risk-neutral.