# FIN 534 FIN534 Financial Management Final Exam Part 1 Answers (2017)

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FIN 534 Financial Management Final Exam Part 1 Answers (2017)

1. BLW Corporation is considering the terms to be set on the options it plans to issue to its executives. Which of the following actions would decrease the value of the options, other things held constant?
2. The current price of a stock is \$22, and at the end of one year its price will be either \$27 or \$17. The annual risk-free rate is 6.0%, based on daily compounding. A 1-year call option on the stock, with an exercise price of \$22, is available. Based on the binomial model, what is the option's value? (Hint: Use daily compounding.)

3. Which of the following statements is CORRECT?

4. Which of the following statements is CORRECT?

5. Suppose you believe that Florio Company's stock price is going to decline from its current level of \$82.50 sometime during the next 5 months. For \$5.10 you could buy a 5-month put option giving you the right to sell 1 share at a price of \$85 per share. If you bought this option for \$5.10 and Florio's stock price actually dropped to \$60, what would your pre-tax net profit be?

6. As a consultant to Basso Inc., you have been provided with the following data: D1 = \$0.67; P0 = \$27.50; and g = 8.00% (constant). What is the cost of common from reinvested earnings based on the DCF approach?

7. The current price of a stock is \$50, the annual risk-free rate is 6%, and a 1-year call option with a strike price of \$55 sells for \$7.20. What is the value of a put option, assuming the same strike price and expiration date as for the call option?

8. Which of the following statements is CORRECT?

9. Which of the following statements is CORRECT?

10. Perpetual preferred stock from Franklin Inc. sells for \$97.50 per share, and it pays an \$8.50 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What is the company's cost of preferred stock for use in calculating the WACC?

11. With its current financial policies, Flagstaff Inc. will have to issue new common stock to fund its capital budget. Since new stock has a higher cost than reinvested earnings, Flagstaff would like to avoid issuing new stock. Which of the following actions would REDUCE its need to issue new common stock?

12. Adams Inc. has the following data: rRF = 5.00%; RPM = 6.00%; and b = 1.05. What is the firm's cost of common from reinvested earnings based on the CAPM?

13. Which of the following statements is CORRECT?

14. Which of the following statements is CORRECT?

15. Projects S and L are both normal projects with an initial cost of \$10,000, followed by a series of positive cash inflows. Project S's undiscounted net cash flows total \$20,000, while L's total undiscounted flows are \$30,000. At a WACC of 10%, the two projects have identical NPVs. Which project's NPV is more sensitive to changes in the WACC?

16. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

17. Which of the following statements is CORRECT?

18. The WACC for two mutually exclusive projects that are being considered is 12%. Project K has an IRR of 20% while Project R's IRR is 15%. The projects have the same NPV at the 12% current WACC. Interest rates are currently high. However, you believe that money costs and thus your WACC will soon decline. You also think that the projects will not be funded until the WACC has decreased, and their cash flows will not be affected by the change in economic conditions. Under these conditions, which of the following statements is CORRECT?

19. Which of the following factors should be included in the cash flows used to estimate a project's NPV?

20. Puckett Inc. risk-adjusts its WACC to account for project risk. It uses a WACC of 8% for below-average risk projects, 10% for average-risk projects, and 12% for above-average risk projects. Which of the following independent projects should Puckett accept, assuming that the company uses the NPV method when choosing projects?

21. When evaluating a new project, firms should include in the projected cash flows all of the following EXCEPT

22. To increase productive capacity, a company is considering a proposed new plant. Which of the following statements is CORRECT?

23. Which of the following procedures does the text say is used most frequently by businesses when they do capital budgeting analyses?

24. 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?

25. Which of the following is NOT one of the steps taken in the financial planning process?

26. Which of the following statements is CORRECT?

27. Last year National Aeronautics had a FA/Sales ratio of 40%, comprised of \$250 million of sales and \$100 million of fixed assets. However, its fixed assets were used at only 75% of capacity. Now the company is developing its financial forecast for the coming year. As part of that process, the company wants to set its target Fixed Assets/Sales ratio at the level it would have had had it been operating at full capacity. What target FA/Sales ratio should the company set?

28. The capital intensity ratio is generally defined as follows:

29. Which of the following statements is CORRECT?

30. The term "additional funds needed (AFN)" is generally defined as follows:

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