FIN 515 – Managerial Finance                                                                         DeVry – Spring 2016                                                                                                         Multiple Choice and Explanatory Questions and Answers

1. TCO A) In the United States, which of the following types of organization has the greatest revenue in total? (Points : 5)

    Sole proprietorship

    C corporation

     S corporation

     Limited partnership 

2. TCO A) A sole proprietorship is owned by (Points : 5)

          one person.

          one or two people, but if there are two owners, they must be married to each other.

          up to 100 owners.

          up to 64 owners. 

3. TCO B) Which of the following would cause the present value of an annuity to increase? (Points : 5)

          Reducing the number of payments.

          Increasing the interest rate.

          Decreasing the interest rate.

          Decreasing the liquidity of the payments.  

4. TCO B) Which of the following is an annuity due? (Points : 5)

A typical car loan.

       A typical mortgage.

       A typical apartment rental agreement.

       A credit card balance. 

5. TCO G) If you were a manager of a company, which of the three right side components of the DuPont Identity would you want to increase and which would you want to decrease, other things being equal? Give a specific example for how to do that for each of the three. (Points : 20)

6. TCO D) A stock has just paid a dividend and will pay a dividend of $3.00 in a year. The dividend will stay constant for the rest of time. The return on equity for similar stocks is 14%. What is P₀? (Points : 20)

7. TCO D) A stock has just paid a dividend and has declared an annual dividend of $2.00 to be paid one year from today. The dividend is expected to grow at a 5% annual rate. The return on equity for similar stocks is 12%. What is P₀? (Points : 20)

8. (TCO D) A particular bond has 8 years to maturity. It has a face value of $1,000. It has a YTM of 7% and the coupons are paid semiannually at a 10% annual rate. What does the bond currently sell for? (Points : 10)

9. (TCO D) A bond currently sells for $1,000 and has a par of $1,000. It was issued two years ago and had a maturity of 10 years. The coupon rate is 7% and the interest payments are made semiannually. What is its YTM? (Points : 10)  

10. (TCO D) What is β and why is it important to investors and issuers of stock? Describe the behavior of stocks with βs of greater than one, less than one, and less than zero. (Points : 30)

11. TCO E) A company has 100 million shares outstanding trading for $8 per share. It also has $900 million in outstanding debt. If its equity cost of capital is 15%, and its debt cost of capital is 12%, and its effective corporate tax rate is 40%, what is its weighted average cost of capital? (Points : 30)   

12. TCO A) What is the difference between capital structure and capital budgeting? Explain and give an example of a capital structure decision and an example of a capital budgeting decision. (Points : 25)

13. TCO H) What is the difference between the cash cycle and the operating cycle? Under what condition would they be the same? (Points : 30)

14. (TCO F) A company has the opportunity to do any of the projects for which the

net cash flows per year are shown below. The company has a cost of capital of 12%.

Which should the company do and why? You must use at least two capital budgeting

methods. Show your work

Year    A         B         C

0          -300     -100     -300

1          100      -50       100

2          100      100      100

3          100      100      100

4          100      100      100

5          100      100      100

6          100      100      100

7          -100     -200     0 (Points : 40)