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FINA2203

Final Exam
Practice Questions

1. Which of the following alternatives could potentially result in a net increase in a

company’s cash flow for the current year?

A. Increase the account receivable

B. Reduce the number of years over which fixed assets are depreciated
C. Decrease the account payable
D. Two of the statements above are correct
E. Statements A, B, and C are all correct.

2. Vernon-Nelson Chemicals is planning to release a new brand of insecticide, Bee-Safe,

that will kill many insect pests but not harm useful pollinators. Buying new equipment to
manufacture the product will cost $15 million. The equipment is expected to have a
lifetime of nine years and will be depreciated by the straight-line method over its lifetime.
The firm expects that they should be able to sell 1,500,000 gallons per year at a price of
$53 per gallon. It will take $36 per gallon to manufacture and support the product. If
Vernon-Nelsonʹs marginal tax rate is 40%, what are the incremental earnings after tax in
year 3 of this project?

A. $25.5 million
B. $23.8 million
C. $14.3 million
D. $9.5 million

3. Food For Less (FFL), a grocery store, is considering offering one-hour photo
developing in their store. The firm expects that sales from the new one-hour machine will
be $175,000 per year. FFL currently offers overnight film processing with annual sales of
$90,000 . While many of the one-hour photo sales will be to new customers, FFL estimates
that 40% of their current overnight photo customers will switch and use the one-hour
service. The level of incremental sales associated with introducing the new one hour photo
service is closest to .

A. $36,000
B. $70,000
C. $139,000
D. $175,000

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4. A company buys a computer system. It will cost $1.6 million. This purchase will be
depreciated over five years. It is expected that the system will reduce inventory by $10.7
million at the end of the first year after it is installed, though there will be an annual cost of
$120,000 per year to run the system. If the companyʹs marginal tax rate is 40%, how will
the purchase of this item change the companyʹs free cash flows at the end of the first year?

A. $9.680 million
B. $10.380 million
C. $10.756 million
D. $11.832 million

5. Wine and Roses, Inc. offers a 7% coupon bond with semiannual payments and a yield to
maturity of 8%. The bonds mature in 9 years. What is the market price of a $1,000 face
value bond?

A. $936.7
B. $953.2
C. $963.8
D. $1,065.9
E. $1,401.5

6. How many of the following statement(s) is/are correct?

I. If a bond’s yield to maturity exceeds its annual coupon, then the bond will be trading
at a premium.
II. If interest rates decrease, the relative price change in percentage term of a 10-year
coupon bond will be greater than the relative price change of a 10-year zero coupon
bond.
III. If a bond is selling at below par, the price of the bond is expected to rise assuming
that YTM of the bond remains constant.

A. I only
B. II only
C. III only
D. I and II
E. II and III

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 7. Suppose you are holding an 8 percent coupon bond (paid annually) maturing in 15 years
with a yield to maturity of 10 percent. If the interest rate on one-year bonds rises from 10
percent to 20 percent over the course of the year, what is the yearly return on the bond you
are holding? (Face value = 1000, YTM at time 0 = 10%, YTM at time 1 = 20%)

A. -37.88%
B. +37.88%
C. -47.31%
D. +47.31%

8. Fred Flintlock wants to earn a total of 10% on his investments. He recently purchased
shares of ABC stock at a price of $20 a share. The stock pays a $1 a year dividend (D1 =
$1). The price of ABC stock needs to if Fred is to achieve his 10% rate of return.

A. increase by 15%
B. increase by 10%
C. decrease by 5%
D. increase by 5%

9. Stock A has a required return of 10 percent. Its dividend is expected to grow at a constant
rate of 7 percent per year. Stock B has a required return of 12 percent. Its dividend is
expected to grow at a constant rate of 9 percent per year. Stock A has a price of $25 per
share, while Stock B has a price of $40 per share. How many of the following statement(s)
is/are correct?

I. The two stocks have the same dividend yield.

II. If the stock market were efficient, these two stocks should have the same price.
III. If the stock market were efficient, these two stocks should have the same
expected return.

A. One
B. Two
C. Three
D. Four

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10. Valence Electronics has 213 million shares outstanding. It expects earnings at the end
of the year of $800 million. Valence pays out 40% of its earnings in total, 15% paid out
as dividends and 25% used to repurchase shares. If Valence ʹs earnings are expected to
grow by 7% per year, these payout rates do not change, and Valence ʹs equity cost of
capital is 9%, what is Valenceʹs share price?

A. $11.27
B. $22.54
C. $60.10
D. $75.12

11. Portfolios with higher volatility have historically rewarded investors with higher average
returns.
A. True
B. False

12. You are analyzing a stock that has a beta of 1.1. The risk-free rate is 2% and the market
return is expected to be 12%. You expect the stock to have a return of 14%. Should you
buy the stock?

A. Yes because the stock is fairly priced.

B. Yes, because the stock is underpriced.
C. No, because the stock is overpriced.
D. No, because the return is higher than expected.
E.
13. The XYZ Company is planning a $50 million expansion. The expansion is to be
financed by selling $22 million in new debt and remaining in new common stock. The
before-tax required rate of return on debt is 9%, and the required rate of return on equity
is 14%. If the company is in the 40% tax bracket, what is the cost of capital?

A. 8.32
B. 10.22%
C. 10.73
D. 12.28

14. Tankergy Inc. is an integrated oil company with three operating divisions: i) oil
exploration and production, ii) pipelines, and iii) refining. Its WACC is 14%. In order to
maximize shareholder value, the firm should take on projects with the highest possible
rate of return which are above 14%.
A. True
B. False
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