UNIVERSITY OF ECONOMICS AND LAW FINAL EXAM

FACULTY OF FINANCE AND BANKING Academic year 2018 – 2019

(Closed book exam. Dictionaries are permitted)

ANSWER SHEET
Course: Financial Management - Time: 90 minutes
Code: 1701CA

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Student’s full name: ...................................................... Student’s code:..................................

This paper comprises 32 multiple choice questions. Please choose the most appropriate answer in each
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 UNIVERSITY OF ECONOMICS AND LAW FINAL EXAM
FACULTY OF FINANCE AND BANKING Academic year 2018 – 2019
(Closed book exam. Dictionaries are permitted)
Course: Financial Management (Corporate Finance)
Time: 90 minutes
Code: 1701CA

0. Câu demo:
Quyết định quan trọng nhất trong các quyết định tài chính doanh nghiệp là
a. Quyết định nguồn vốn
b. Quyết định chia cổ tức
c. Quyết định đầu tư
d. Cả a và b đều đúng
e. Cả a, b và c đều đúng

1. Which of the following statements is CORRECT?

a. One of the advantages of the corporate form of organization is that it avoids double taxation.

b. It is easier to transfer one's ownership interest in a partnership than in a corporation.

c. One of the disadvantages of a proprietorship is that the proprietor is exposed to unlimited

liability.

d. One of the advantages of a corporation from a social standpoint is that every stockholder has
equal voting rights, i.e., "one person, one vote."

e. Corporations of all types are subject to the corporate income tax.

2. Which of the following mechanisms would be most likely to help motivate managers to act in the best
interests of shareholders?
a. Decrease the use of restrictive covenants in bond agreements.

b. Take actions that reduce the possibility of a hostile takeover.

c. Elect a board of directors that allows managers greater freedom of action.

d. Increase the proportion of executive compensation that comes from stock options and reduce
the proportion that is paid as cash salaries.

e. Eliminate a requirement that members of the board of directors have a substantial investment
in the firm's stock.

3. Which of the following actions would be most likely to reduce potential conflicts between stockholders
and bondholders?
a. Including restrictive covenants in the company's bond indenture (which is the contract between
the company and its bondholders).

b. Compensating managers with more stock options and less cash income.

c. The passage of laws that make it harder for hostile takeovers to succeed.

d. A government regulation that banned the use of convertible bonds.

e. The firm begins to use only long-term debt, e.g., debt that matures in 30 years or more, rather
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 than debt that matures in less than one year.

4. Analysts who follow Hana Industries recently noted that, relative to the previous year, the company's net
cash provided from operations increased, yet cash as reported on the balance sheet decreased. Which of the
following factors could explain this situation?
a. The company cut its dividend.

b. The company made large investments in fixed assets.

c. The company sold a division and received cash in

return.

d. The company issued new common stock.

e. The company issued new long-term debt.

5. The CFO of Rock Industries plans to have the company issue $300 million of new common stock and use
the proceeds to pay off some of the company's outstanding bonds that carry a 7% interest rate. Assume that
the company, which does not pay any dividends, takes this action, and that total assets, operating income
(EBIT), and tax rate all remain constant. Which of the following would occur?
a. The company’s taxable income would fall.

b. The company’s interest expense would remain constant.

c. The company would have less common equity than

before.

d. The company’s net income would increase.

e. The company would have to pay less taxes.

6. Last year Almazan Software reported $10.500 million of sales, $6.250 million of operating costs other
than depreciation, and $1.300 million of depreciation. The company had $5.000 million of bonds that carry a
6.5% interest rate, and its federal-plus-state income tax rate was 35%. This year's data are expected to
remain unchanged except for one item, depreciation, which is expected to increase by $0.310 million. By
how much will net income change as a result of the change in depreciation? The company uses the same
depreciation calculations for tax and stockholder reporting purposes. (Round your final answer to 3 decimal
places.)
a. -$0.232

b. -$0.155

c. -$0.212

d. -$0.202

e. -$0.193

7. Prezas Company's balance sheet showed total current assets of $2,500, all of which were required in
operations. Its current liabilities consisted of $975 of accounts payable, $600 of 6% short-term notes payable
to the bank, and $250 of accrued wages and taxes. What was its net operating working capital?
a. $1,173

b. $1,199

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 c. $1,301

d. $1,326

e. $1,275

8. Brown Office Supplies recently reported $18,000 of sales, $8,250 of operating costs other than
depreciation, and $1,750 of depreciation. It had $9,000 of bonds outstanding that carry a 7.0% interest rate,
and its federal-plus-state income tax rate was 40%. How much was the firm's earnings before taxes (EBT)?
a. $5,749

b. $8,918

c. $7,370

d. $8,033

e. $7,223

9. Companies HD and LD have the same sales, tax rate, interest rate on their debt, total assets, and basic
earning power. Both firms finance using only debt and common equity, and total assets equal total invested
capital. Both companies have positive net incomes. Company HD has a higher total debt to total capital ratio
and therefore a higher interest expense. Which of the following statements is CORRECT?
a. Company HD pays less in taxes.

b. Company HD has a lower equity multiplier.

c. Company HD has a higher ROA.

d. Company HD has a higher times-interest-earned (TIE) ratio.

e. Company HD has more net income.

10. Which of the following statements is CORRECT?

a. If a firm has high current and quick ratios, then it must be managing its liquidity position well.

b. If a firm sold some inventory for cash and left the funds in its bank account, then its current ratio
would probably not change much, but its quick ratio would decline.

c. If a firm sold some inventory on credit, then its current ratio would probably not change much,
but its quick ratio would decline.

d. If a firm sold some inventory on credit as opposed to cash, then there is no reason to think that
either its current or quick ratio would change.

e. The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to
assess how effectively a firm is managing its current assets.

11. Bread Corp's stock price at the end of last year was $28.75 and its earnings per share for the year were
$1.30. What was its P/E ratio?
a. 23.0
0

b. 18.8

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 0

c. 27.6
4

d. 22.1
2

e. 17.6
9

12. Beranek Corp has $855,000 of assets (which equal total invested capital), and it uses no debt—it is
financed only with common equity. The new CFO wants to employ enough debt to raise the total debt to
total capital ratio to 40%, using the proceeds from borrowing to buy back common stock at its book value.
How much must the firm borrow to achieve the target debt ratio?
a. $287,28
0

b. $342,00
0

c. $318,06
0

d. $403,56
0

e. $277,02
0

13. Nem Corp's total assets at the end of last year were $395,000 and its EBIT was $52,500. What was its
basic earning power (BEP) ratio?
a. 11.30%

b. 15.55%

c. 11.70%

d. 16.35%

e. 13.29%

14. 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 lower the calculated value of the investment?
a. The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that
the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather
than for $10,000.

b. The discount rate increases.

c. The riskiness of the investment's cash flows decreases.

d. The total amount of cash flows remains the same, but more of the cash flows are received in the

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 earlier years and less are received in the later years.

e. The discount rate decreases.

15. Which of the following bank accounts has the highest effective annual return?
a. An account that pays 8% nominal interest with monthly compounding.

b. An account that pays 8% nominal interest with annual compounding.

c. An account that pays 7% nominal interest with daily (365-day)

compounding.

d. An account that pays 7% nominal interest with monthly compounding.

e. An account that pays 8% nominal interest with daily (365-day)

compounding.

16. Suppose you have $2,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 11.1%
interest, compounded annually. How much will you have when the CD matures?
a. $7,105.4
6

b. $5,730.2
1

c. $6,818.9
5

d. $6,303.2
3

e. $4,526.8
7

17. You just deposited $2,000 in a bank account that pays a 4.0% nominal interest rate, compounded
quarterly. If you also add another $5,000 to the account one year (4 quarters) from now and another $7,500
to the account two years (8 quarters) from now, how much will be in the account three years (12 quarters)
from now?
a. $15,472.4
6

b. $19,340.5
8

c. $11,604.3
5

d. $18,566.9
6

e. $14,234.6
7

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18. Ali Bank offers to lend you $50,000 at a nominal rate of 6.5%, compounded monthly. The loan
(principal plus interest) must be repaid at the end of the year. Ponzi Bank also offers to lend you the
$50,000, but it will charge an annual rate of 7.8%, with no interest due until the end of the year. How much
higher or lower is the effective annual rate charged by Ponzi versus the rate charged by Ali?
a. 1.02%

b. 1.35%

c. 1.10%

d. 1.05%

e. 1.24%

19. Which of the following is most likely to occur as you add randomly selected stocks to your portfolio,
which currently consists of 3 average stocks?
a. The diversifiable risk of your portfolio will likely decline, but the expected market risk should not
change.

b. The expected return of your portfolio is likely to decline.

c. The diversifiable risk will remain the same, but the market risk will likely decline.

d. Both the diversifiable risk and the market risk of your portfolio are likely to decline.

e. The total risk of your portfolio should decline, and as a result, the expected rate of return on the
portfolio should also decline.

20. Stock X has a beta of 0.6, while Stock Y has a beta of 1.4. Which of the following statements is
CORRECT?
a. A portfolio consisting of $50,000 invested in Stock X and $50,000 invested in Stock Y will have a
required return that exceeds that of the overall market.

b. Stock Y must have a higher expected return and a higher standard deviation than Stock X.

c. If expected inflation increases but the market risk premium is unchanged, then the required
return on both stocks will fall by the same amount.

d. If the market risk premium declines but expected inflation is unchanged, the required return on
both stocks will decrease, but the decrease will be greater for Stock Y.

e. If expected inflation declines but the market risk premium is unchanged, then the required
return on both stocks will decrease but the decrease will be greater for Stock Y.

21. Bill Dukes has $100,000 invested in a 2-stock portfolio. $62,500 is invested in Stock X and the
remainder is invested in Stock Y. X's beta is 1.50 and Y's beta is 0.70. What is the portfolio's beta? Do not
round your intermediate calculations. Round the final answer to 2 decimal places.
a. 1.1
4

b. 0.9
0

c. 1.4

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 4

d. 1.2
0

e. 1.5
6

22. Tom holds the following portfolio:

Stock Investment Beta
A $150,000 1.40
B $50,000 0.80
C $100,000 1.00
D $75,000 1.20
Total $375,000
Tom plans to sell Stock A and replace it with Stock E, which has a beta of 0.80. By how much will the
portfolio beta change? Do not round your intermediate calculations.
a. –
0.240

b. –
0.194

c. –
0.290

d. –
0.271

e. –
0.230

23. Cherry Inc.'s manager believes that economic conditions during the next year will be strong, normal, or
weak, and she thinks that the firm's returns will have the probability distribution shown below. What's the
standard deviation of the estimated returns? (Hint: Use the formula for the standard deviation of a
population, not a sample.) Do not round your intermediate calculations.
Economic Conditions Prob. Return
Strong 30% 40.0%
Normal 40% 10.0%
Weak 30% -16.0%

a. 21.71%

b. 25.18%

c. 22.58%

d. 17.59%

e. 24.75%

24. Projects C and D are mutually exclusive and have normal cash flows. Project C has a higher NPV if the
WACC is less than 12%, whereas Project D has a higher NPV if the WACC exceeds 12%. Which of the
following statements is CORRECT?
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 a. Project D probably has a higher IRR.

b. Project D is probably larger in scale than Project C.

c. Project C probably has a faster payback.

d. Project C probably has a higher IRR.

e. The crossover rate between the two projects is below

12%.

25. Which of the following statements is CORRECT?

a. The IRR method appeals to some managers because it gives an estimate of the rate of return on
projects rather than a dollar amount, which the NPV method provides.

b. The discounted payback method eliminates all of the problems associated with the payback
method.

c. When evaluating independent projects, the NPV and IRR methods often yield conflicting results
regarding a project's acceptability.

d. To find the MIRR, we discount the TV at the IRR.

e. A project’s NPV profile must intersect the X-axis at the project’s WACC.

26. Coco Inc. is considering a project that has the following cash flow data. What is the project's payback?
Year 0 1 2 3
Cash flows -$1,075 $500 $500 $500

a. 2.15
years

b. 1.70
years

c. 2.11
years

d. 1.81
years

e. 2.45
years

27. Chill Inc. is considering a project that has the following cash flow and WACC data. What is the project's
MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative).
WACC: 10.00%
Year 0 1 2 3 4
Cash flows -$975 $300 $320 $340 $360

a. 14.45%

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 b. 12.92%

c. 12.57%

d. 11.28%

e. 11.75%

28. A firm is considering Projects S and L, whose cash flows are shown below. These projects are mutually
exclusive, equally risky, and not repeatable. The CEO wants to use the IRR criterion, while the CFO favors
the NPV method. You were hired to advise the firm on the best procedure. If the wrong decision criterion is
used, how much potential value would the firm lose?
WACC: 6.75%
0 1 2 3 4
CFS -$1,025 $380 $380 $380 $380
CFL -$2,150 $765 $765 $765 $765

a. $214.4
4

b. $186.4
7

c. $218.1
7

d. $182.7
4

e. $220.0
3

29. 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?
a. Using some of the firm's high-quality factory floor space that is currently unused to produce the
proposed new product. This space could be used for other products if it is not used for the
project under consideration.

b. Revenues from an existing product would be lost as a result of customers switching to the new
product.

c. Shipping and installation costs associated with a machine that would be used to produce the
new product.

d. The cost of a study relating to the market for the new product that was completed last year. The
cost of the research was incurred and expensed for tax purposes last year.

e. It is learned that land the company owns and would use for the new project, if it is accepted,
could be sold to another firm.

30. Your company, RMU Inc., is considering a new project whose data are shown below. What is the
project's Year 1 cash flow?
Sales revenues $23,250
Depreciation $8,000
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Other operating costs $12,000
Tax rate 35.0%

a. $8,798

b. $11,933

c. $10,416

d. $10,113

e. $11,225

31. Your company, Beauty Inc., is considering a new project whose data are shown below. The required
equipment has a 3-year tax life, and the accelerated rates for such property are 33%, 45%, 15%, and 7% for
Years 1 through 4. Revenues and other operating costs are expected to be constant over the project's 10-year
expected operating life. What is the project's Year 4 cash flow?
Equipment cost (depreciable basis) $70,000
Sales revenues, each year $34,000
Operating costs (excl. depr.) $25,000
Tax rate 35.0%

a. $8,70
0

b. $6,88
4

c. $7,56
5

d. $7,71
6

e. $8,47
3

32. Temple Corp. is considering a new project whose data are shown below. The equipment that would be
used has a 3-year tax life, would be depreciated by the straight-line method over its 3-year life, and would
have a zero salvage value. No change in net operating working capital would be required. Revenues and
other operating costs are expected to be constant over the project's 3-year life. What is the project's
NPV? Do not round the intermediate calculations and round the final answer to the nearest whole number.
Risk-adjusted WACC 10.0%
Net investment cost (depreciable basis) $65,000
Straight-line depr. rate 33.3333%
Sales revenues, each year $71,500
Annual operating costs (excl. depr.) $25,000
Tax rate 35.0%

a. $25,83
1

b. $33,37

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 7

c. $34,82
8

d. $29,02
3

e. $22,92
8

The end
FINANCE DEPARTMENT LECTURER
Ho Thi Hong Minh

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