FIN Final Exam

Question 1

Consider a $100,000, 30-year, 6.9% mortgage with monthly payments. What portion of the payments during the first 31 months goes toward interest?

a) 80.72%
b) 82.91%
c) 86.15%
d) 90.37%
e) 93.71%

Answer 1

C. 86.15%

Question 2

Your uncle has a great finance job with a large manufacturing firm. Based on his excellent performance, he received the following year-end cash bonuses:
2019: $9,500
2020: $10,000
2021: $12,500
2022: $15,000
He wisely invested his bonuses in a stock mutual fund that earns 12% per year.
(A) How much he have in the account at the end of 2025?

a. $77,119
b. $35,174
c. $77,117
d. $62,313
e. $60,561

(B) How much did he have in the account in 2018 (PV)?

Answer 2

(A) C. $77,117
(B) $34,884

Question 3

Vassar Inc. issued a bond with a par value of $1,000, a coupon rate of 7.25%
(semiannual coupon), and the investor’s required return is 6.60%. The bond
has 7 years to maturity. What is the value of the bond?

a) $1,005
b) $1,036
c) $1,050
d) $1,082
e) $1,135

Answer 3

B. $1,036

Question 4

Vassar Inc. has a new bond issue that has a $1000 par value, a 4.55% coupon rate and semiannual interest payments. The bond will mature in 30 years. If the bond’s price is quoted at 92, what is the bond’s yield to maturity?
a) 5.07%
b) 5.33%
c) 4.42%
d) 4.55%
e) 4.93%

Answer 4

A. 5.07%

Question 5

The following are three possible states of the economy for next year’s
operations at Vassar Inc. Calculate the standard deviation.
State of Economy Probability Rate of Return
Recession 20% -10%
Normal growth 50% 8%
High growth 30% 14%

a) 6.20%
b) 8.89%
c) 6.92%
d) 8.51%

Answer 5

D. 8.51%

Question 6

Vassar Inc. recently paid its annual dividend ($16.00). Dividends have
consistently grown at a rate of 3.50%. Analysts estimate that the stock has a
beta of 1.41. The current risk-free rate is 2.60% and the market return is
11.1%. Assuming that CAPM holds, what is the intrinsic value of this stock?

a) $137
b) $149
c) $154
d) $158
e) $165

Answer 6

B. $149

Question 7

Your firm recently paid a dividend of $4 to common stockholders. Dividends are
expected to grow at 8% per year for the foreseeable future. The current stock
price is $54. New shares could be sold for the same price, but flotation costs
would amount to $6 per share. The firm’s tax rate is 21%.

What is the firm’s cost of capital of external equity?

a) 17.00%
b) 16.00%
c) 13.31%
d) 13.52%
e) 16.33%

Answer 7

A. 17.00%

Question 8

Suppose your firm just issued a 20-year, $1000 par value bond with
semiannual coupons. The coupon interest rate is 6%. The bonds sold for par value, but flotation costs amounted to 3% of the price. You have a 21%
corporate tax rate. What is your firm’s after-tax cost of debt?

a) 5.5%
b) 6.36%
c) 4.95%
d) 6.00%
e) 5.09%

Answer 8

C. 4.95%

Question 9

Vassar Corp. is considering buying a $220,000 production machine. It would
be depreciated (simplified straight line) for 10 years. This investment would
allow the firm to increase sales by $180,000 per year. Operating expenses
would increase by $50,000 per year also. The corporate tax rate is 21%. What is the annual cash flow for the project?

a) $75,720
b) $53,720
c) $108,000
d) $107,320
e) $170,520

Answer 9

D. $107,320

Question 10

Sales: $950,000
Interest Expense: $40,000
Variable Costs: $270,000
Fixed Costs: $400,000
Taxes: $50,400

If sales increase by 8%, what should be the increase in EBIT?

a) 19.43%
b) 22.67%
c) 8.0%
d) 9.34%
e) 2.43%

Answer 10

A. 19.43%

Question 11

Sales: $950,000
Interest Expense: $40,000
Variable Costs: $270,000
Fixed Costs: $400,000
Taxes: $50,400

If sales increase by 7%, what should be the increase in earnings per share?

a) 2.83%
b) 17.0%
c) 8.17%
d) 19.83%
e) 7.0%

Answer 11

D. 19.83%

Question 12

Your firm expects to earn $474,000 after taxes next year. Sales will be $3,500,000 and fixed costs will be $1,300,000. Interest expense will amount to $350,000. Your firm manufactures office machines, and expects to sell 8,750 units next year. Your firm has a 21% tax rate. What are your firm’s total variable costs expected to be next year?

a) $950,000
b) $600,000
c) $2,500,000
d) $1,250,000
e) $1,600,000

Answer 12

D. $1,250,000

Question 13

LOOK AT PROBLEM 4

If you are able to set fixed costs at $1,200,000 per year and change variable costs to $100 per unit, how many units would you have to sell to break even?

a) 3,000 units
b) 4,000 units
c) 6,000 units
d) 12,000 units
e) 10,000 units

Answer 13

B. 4,000 units

Question 14

Anderson Corporation predicts that this year’s sales will total $7,500,000. The selling price for their product is $62.50 per unit. Variable costs amount to $38 per unit. Net income (after taxes) is projected to be $165,750. The firm has a tax rate of 21% and no debt. What will be the firm’s total fixed costs?

a) 3,340,000
b) 2,730,190
c) 2,140,000
d) 4,560,000
e) 2,540,000

Answer 14

B. 2,730,190

Question 15

Stock Dividends:

a) May increase the value of the firm due to information content.
b) Increase the number of shares outstanding.
c) are preferred by investors who desire capital gains.
d) Decrease the common stock account by the amount of the split.
e) Decrease the number of shares outstanding.

Answer 15

e) Decrease the number of shares outstanding.

Question 16

Kiwi Airlines has fixed operating costs of $5.8 million, and its variable costs amount to 20 percent of sales revenue. The firm has $2 million in bonds outstanding with a coupon interest rate of 8 percent. Revenues for the firm are $8 million and the firm has a 21% corporate tax rate.

1. What is the firm’s degree of operating leverage (DOL)?
2. What is the firm’s degree of financial leverage (DFL)?
3. How will a 10 percent increase in operating income affect earnings per share?
4. How will a 10 percent increase in sales affect earnings per share?
5. What is the firm’s breakeven dollar sales volume?

Answer 16

1. 10.67%
2. 1.36
3. 13.6%
4. 145%
5. 7,250,000

Question 17

The board of directors of McKay Company has approved a 20% stock dividend. The firm currently has net income of $900,000. There are 300,000 common shares outstanding and the stock has a P/E ratio of 8. What will be the firm’s common stock price after the stock dividend?

a) $24
b) $37.50
c) $3
d) $20
e) $2.50

Answer 17

D. $20

Question 18

You own 20% of Hi-Tek Company stock. The stock sold for $96 per share before a planned 3-for-2 stock split. Before the split, there was 320,000 shares outstanding. How many shares of stock will you own after the stock split?

a) 64,000
b) 96,000
c) 42,667
d) 480,000
e) 76,800

Answer 18

B. 96,000

Question 19

The increased variability in earnings per share due to the firm’s use of debt financing is measured by:

a) beta
b) standard deviation
c) degree of operating leverage
d) degree of financial leverage
e) degree of combined leverage

Answer 19

D. Degree of financial leverage

Question 20

The objective of capital structure management is to find the capital mix that results in:

a) maximization of shareholder wealth
b) minimization of the cost of capital
c) maximization of net income
d) maximization of dividends paid
e) a and b only

Answer 20

E. a and b only

Question 21

According to the moderate view of capital structure, as the use of debt financing increases,

a) the cost of capital continuously decreases
b) the cost of capital remains constant
c) the cost of capital continuously increases
d) there will be an optimal capital structure at 100 percent debt financing
e) there will be an optimal capital structure, but not at 100 percent debt

Answer 21

E. There will be an optimal capital structure, but not at 100 percent debt

Question 22

There is an agency relationship between bondholders and stockholders. The agency costs that arise as a result of this relationship:

a) increase as the debt/equity ratio decreases
b) affect the present value of the debt tax shield
c) decrease as bankruptcy costs increase
d) reduce the market value of the levered firm
e) reduce the market value of the unlevered firm

Answer 22

D. Reduce the market value of the levered firm