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Midterm

Practice midterm


Department
Finance
Course Code
FIN 401
Professor
Alan Kaplan
Study Guide
Midterm

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FINANCE 401
RYERSON UNIVERSITY
Mid-Term Exam - Alan Kaplan
Thursday, October 22, 3:00 P.M. – Version A
Time allowed: 2 hours
Aids allowed: Closed book except for an 8’1/2” by 11’ note sheet
Answer all multiple choice questions on the scan sheet.
All multiple choice questions are worth 1 mark each. There are 40 multiple choice questions
1. Which version of the exam do you have? This is a free mark. Take it.
a) A
b) B
2. In the article dated September 09, 2009, titled Barrick dumps hedges, Barrick states that they
will place an equity issue. Which of the following statements is true?
a) The money from the issue will be used to buy back bonds that are about to come due
b) The issue will be for $3 billion
c) The money from the issue will be used to finance Barrick’s new project in the Yukon
d) The issue will be for $500,000
e) None of the above
3. In the newspaper article titled “Spurned as Low”, dated September 08, 2009, Kraft is trying to
do one of the following activities. Which one is it trying to do?
a) Kraft is trying to buy Cadbury
b) Kraft management is saying that an offer from Hershey for the shares of Kraft is too low
c) Kraft is trying to convince investors that is own shares are worth more than the current
market price
d) Kraft is trying to borrow funds in order to finance its new food operations in the U.S.
e) None of the above
Please use the following information to answer the next TWO questions.
Management of Doubleit Corp. promises investors a return of $10 per year, paid at the end of the
year for each of the next eight years, and then $20 at the end of each year from then on…forever.
4. Based on this information, and assuming that the money is guaranteed (no risk), what is the
maximum price that you as an investor would pay for 100 shares of this stock? Assume no taxes
or transactions costs, and a discount rate of 12%.
a) $3,152.59
b) $491.32
c) $34,897.44
d) 55,493.22
e) None of the above
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5. The discount rate in the question was 12%. If the discount rate in the question was actually
14% instead of 12%, and the rest of the information stayed the same, which of the following
statements would be most true?
a) The price of the stock would go up
b) The price of the stock would go down
c) The price of the stock would remain the same
d) None of the above
6. Fast Food Inc. has bonds outstanding with 12 years to maturity, a $1000 face value, a current
price of $945 and an annual coupon of 6.4% paid quarterly. What is the YTM on the bonds?
a) 1.77%
b) 3.54%
c) 5.31%
d) 7.08%
e) None of the above
7. Please fill in the blank. Planning and managing the firm’s current assets and liabilities is
called _____________?
a) Working Capital Management
b) Capital Budgeting
c) Risk Management
d) Corporate Governance
e) Financial Engineering
8. Please fill in the blank. Retained Earnings divided by net income is the______________.
a) Return on equity
b) WACC
c) Retention ratio
d) Cost of equity
9. Harvin Corp’s common stock has a beta of .89. The risk-free rate is 4% and the expected
return on the market is 12%. What is Harvin Corp’s cost of equity?
a) .0952
b) .1112
c) .1352
d) .1551
e) None of the above
10. Please fill in the blank. According to the text, a company that focuses only on a single line of
business is called a ____________?
a) A straight shot
b) A unitary play
c) A single firm
d) An undiversified consolidation
e) None of the above
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11. Please fill in the blank. According to the text, using the WACC is most appropriate when the
proposed investment is ____________________________ ?
a) Similar to the firm’s existing activities
b) Less risky than the firm’s existing activities
c) Different from the firm’s existing activities
d) Less risky than the firm’s past activities
e) None of the above
12. Why is the cost of debt (rd) adjusted for taxes in the WACC calculation but the cost of equity
(re) is not?
a) Because interest payments are not tax deductible but dividend payments are
b) Because interest payments are tax deductible but dividend payments are not
c) Because principal payments are tax deductible but interest payments are not
d) Because capital gains are tax deductible but principal payments are not
e) None of the above
13. Why are Short-term bank borrowings usually excluded from the cost of capital calculation?
a) Because they rise automatically as sales decrease
b) Because they are already reflected in the cash flow estimates and if we also include them
in the cost of capital calculation, we would be double counting
c) Because they are generally not included in the permanent capital structure of the firm
d) Because they tend to be very small in amount in comparison to the other sources of
funding for the firm.
14. In the article “Canadian Consumers take Steak to Hamburger Shift, dated 23.09.09, a
spokesperson for Mazda Canada said a decline in the availability of credit was contributing to
the move towards cheaper vehicles. What “credit” was the spokesperson talking about?
a) The availability of government subsidies and grants
b) The availability of cheap equity
c) The availability of bank loans
d) The availability of consumer leasing
Please use the following information to answer the next EIGHT questions.
Dellishous Corp. currently has $20,000,000 in assets, half of which is funded by debt. The firm
currently has 1,000,000 shares outstanding and pays 10% interest on its outstanding debt. There
are no taxes or other market imperfections. The firm is thinking of issuing enough shares at the
current price to buy back all of the outstanding debt. Mrs. Jones currently owns 10,000 shares of
Dellishous Corp.
15. If the firm’s EBIT is expected to be $1,600,000 next year, which of the following statements
is most true?
a) The firm’s EPS will be $.20 per share higher under the proposed capital
structure than under the current capital structure.
b) The firm’s EPS will be $.20 per share lower under the proposed capital
structure than under the current capital structure
c) The firm’s EPS will be $.40 per share higher under the proposed capital
structure than under the current capital structure
d) The firm’s EPS will be $.40 per share lower under the proposed capital
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