Financial Administration FIN6340'01

1
Financial Administration(FIN6340.01)

• Exam 1 Review
• October 10, 2006

2
Why is depreciation a non-cash expense?

• It is treated as an expense on the income
  statement, but it does not require the
  disbursement of cash. (No actual cash is paid to
  cover depreciation).

3
The annual coupon payment of a bond divided by
its market price is called the

• Current yield

4
What is the difference between a Eurobond and a
Foreign Bond?

• A Eurobond is issued in a foreign currency while
  a foreign bond is issued by a foreign corporation
  in the domestic currency.

5
What are derivatives?

• Off balance sheet transactions that result in
  contingent assets or liabilities.

6
Preferred stock is much like debt in that
________.

• both frequently carry credit ratings.
• both can be repaid using a sinking fund.
• both receive a stated payment from the
  corporation during the year.
• the holders of both get a stated payment in the
  event of a liquidation.

7
What are the three primary determinants of a
firms cash flow?

• sales revenues.
• operating expenses, such as raw materials costs
  and labor costs.
• the necessary investments in operating capital,
  such as buildings, equipment, and inventory.

8
What is the difference between sunk costs and
opportunity costs?

• A sunk cost is an outlay that has already
  occurred. An opportunity cost is a cash flow that
  could be generated from an owned asset if it is
  not used in the project.

9
The ____________tax rate is the rate that applies
if one more dollar of income is earned and the
___________ tax rate is the total tax bill
divided by taxable income.

• marginal average

10
You are considering buying a bond that has a par
value of 1,000, a coupon rate of 7.5 and
matures in 20 years. How much would you pay if
you want to make a return of 8 on your
investment?
11
The preferred stock of Cars-A-Lot currently sells
for 48.55 per share. The annual dividend of
2.00 is fixed. Assuming a constant dividend
forever, what is the rate of return on this
stock?

• R 2.00 / 48.55 4.12

12
Suppose you purchase a zero coupon bond with face
value 1,000, maturing in fifteen years, for
255.14. What is the implicit interest, in
dollars, in the first year of the bond's life?

• 9.53 return 24.31

13
Treasury bills currently have a return of 3.5
and the market rate is 8.5. If a firm has a beta
of 1.6, what is its cost of equity?

• 11.5 3.5 1.6 (8.5-3.5)

14
The rate of return required by investors in the
market for owning a bond is called the

• yield to maturity

15
In reference to bonds, what are protective
covenants?

• Parts of the indenture limiting certain actions
  that might be taken during the term of the loan
  (usually to protect the interests of the lender).

16
According to the Dupont Analysis what are the
three components of a firms ROE?

• Operating Efficiency (measured by profit margin)
• Asset Use Efficiency (Measured by total asset
  turnover)
• Financial Leverage (measured by equity
  multiplier)

17
You are considering a project that will provide a
net cash inflow of 55,000 in the first year, and
the cash flows are projected to grow at a rate of
7 per year forever. The project requires an
initial investment of 400,000. If you require a
15 return on such undertakings, should the
project be started?
18
You purchase a machine for 10,000, depreciated
straight-line to a salvage value of 2,000 over
its 4 year life. If the machine is sold at the
end of the third year for 6,000, what are the
after-tax proceeds from the sale, assuming your
tax rate is 34.
19
You are considering purchasing a bond that will
start paying a coupon of 75 per year five years
from now and the coupon payments will continue
forever. If the discount rate is 6, what is the
maximum price you will pay?

• 990.12

20
The net present value (NPV) rule can be best
stated as

• An investment should be accepted if the NPV is
  positive and rejected if it is negative.