SDSU BA 323 FINANCE FINAL EXAM NEWEST 2025
ACTUAL EXAM COMPLETE QUESTIONS AND
CORRECT DETAILED ANSWERS (VERIFIED ANSWERS)
|A+ GRADED
Highest possible FICO score? What corresponds to Excellent
credit?* - <<answer>>850; low-to-mid 700's to 850.
Two most important ways to maintain a high FICO score?* -
<<answer>>Make payments on time and take advantage of
revolving credit utilization.
Revolving Credit Utilization - <<answer>>Best area to
significantly improve your FICO score.
Measures what percentage of credit you are using at a given point
in the month.
WACC and why we care? - <<answer>>Weighted average cost of
capital.
Knowing the WACC is necessary for making investment
decisions.vTwo sides of an investment decision: How much
money will this project make and how much does it cost for the
firm to get the funds for this investment?
,WACC calculates the cost and this is why we care: it's necessary
for investment decisions
Three main sources of capital for the firm? - <<answer>>Debt,
preferred stock and common equity.
Two components of common equity? - <<answer>>Retained
earnings and new common stock.
Two components of debt? - <<answer>>Short term notes payable
and long-term debt.
Do we care about after-tax or pre-tax analysis? Why? -
<<answer>>After-tax capital cost; interest is tax deductible
Three ways/methods of determining a company's target weights?
- <<answer>>Accounting numbers (book value), Market value
and Optimal capital structure determination.
Different methods will yield different WACC.
Three ways to determine the cost of common equity -
<<answer>>CAPM (Capital asset pricing model): DCF
(discounted cash flow); Bond-yield plus risk premium.
Why is there a cost for retained earnings? - <<answer>>Earnings
can be reinvested or paid out as dividends. Investors could buy
other securities, earn a return. If earnings are retained, there is an
,opportunity cost (the return that stockholders could earn on
alternative investments of equal risk).
• Investors could buy similar stocks and earn.
• Firm could repurchase its own stock and earn.
Factors that influence a company's composite (average for the
company) WACC: - <<answer>>Market conditions: interest rates,
state of the economy.
Firm's capital structure, dividend policy, and investment policy.
Risk: riskier projects will increase a firm's WACC
Should the company use the composite WACC as the hurdle rate
for each of its projects? - <<answer>>Not necessarily. The
composite WACC reflects the risk of an average project
undertaken by the firm. Therefore, the WACC only represents the
"hurdle rate" for a typical project with average risk.
Different projects have different risks. The project's WACC should
be adjusted to reflect the project's risk.
Why is the cost of retained earnings cheaper than the cost of
issuing new common stock? (Flotation costs) - <<answer>>When
a company issues new common stock they also have to pay
flotation costs to the underwriter.
Plus issuing new common stock may send a negative signal to the
capital markets, which may depress the stock price.
Flotation costs = transaction costs associated with issuing new
securities.
, What is capital budgeting? - <<answer>>Analysis of potential
additions to fixed assets and rates of return.
Long-term decisions; involve large expenditures.
Very important to firm's future.
What is a company's strategic business plan? - <<answer>>A
long plan that outlines in broad terms the firm's basic strategy for
the next 5 - 10 years.
Five criteria used to accept or reject a project? - <<answer>>Net
present value, internal rate of return, modified internal rate of
return, regular payback, discounted payback.
What is the difference between independent and mutually
exclusive projects? - <<answer>>Independent projects: If the
cash flows of one are unaffected by the acceptance of the other.
Mutually exclusive projects: If the cash flows of one can be
adversely impacted by the acceptance of the other. Harder to
calculate.
What is the difference between normal and nonnormal cash flow
streams? Which cash flow stream is most common? -
<<answer>>Normal cash flow stream: Cost (negative CF)
followed by a series of positive cash inflows. One change of signs.
Nonnormal cash flow stream: Two or more changes of signs.
ACTUAL EXAM COMPLETE QUESTIONS AND
CORRECT DETAILED ANSWERS (VERIFIED ANSWERS)
|A+ GRADED
Highest possible FICO score? What corresponds to Excellent
credit?* - <<answer>>850; low-to-mid 700's to 850.
Two most important ways to maintain a high FICO score?* -
<<answer>>Make payments on time and take advantage of
revolving credit utilization.
Revolving Credit Utilization - <<answer>>Best area to
significantly improve your FICO score.
Measures what percentage of credit you are using at a given point
in the month.
WACC and why we care? - <<answer>>Weighted average cost of
capital.
Knowing the WACC is necessary for making investment
decisions.vTwo sides of an investment decision: How much
money will this project make and how much does it cost for the
firm to get the funds for this investment?
,WACC calculates the cost and this is why we care: it's necessary
for investment decisions
Three main sources of capital for the firm? - <<answer>>Debt,
preferred stock and common equity.
Two components of common equity? - <<answer>>Retained
earnings and new common stock.
Two components of debt? - <<answer>>Short term notes payable
and long-term debt.
Do we care about after-tax or pre-tax analysis? Why? -
<<answer>>After-tax capital cost; interest is tax deductible
Three ways/methods of determining a company's target weights?
- <<answer>>Accounting numbers (book value), Market value
and Optimal capital structure determination.
Different methods will yield different WACC.
Three ways to determine the cost of common equity -
<<answer>>CAPM (Capital asset pricing model): DCF
(discounted cash flow); Bond-yield plus risk premium.
Why is there a cost for retained earnings? - <<answer>>Earnings
can be reinvested or paid out as dividends. Investors could buy
other securities, earn a return. If earnings are retained, there is an
,opportunity cost (the return that stockholders could earn on
alternative investments of equal risk).
• Investors could buy similar stocks and earn.
• Firm could repurchase its own stock and earn.
Factors that influence a company's composite (average for the
company) WACC: - <<answer>>Market conditions: interest rates,
state of the economy.
Firm's capital structure, dividend policy, and investment policy.
Risk: riskier projects will increase a firm's WACC
Should the company use the composite WACC as the hurdle rate
for each of its projects? - <<answer>>Not necessarily. The
composite WACC reflects the risk of an average project
undertaken by the firm. Therefore, the WACC only represents the
"hurdle rate" for a typical project with average risk.
Different projects have different risks. The project's WACC should
be adjusted to reflect the project's risk.
Why is the cost of retained earnings cheaper than the cost of
issuing new common stock? (Flotation costs) - <<answer>>When
a company issues new common stock they also have to pay
flotation costs to the underwriter.
Plus issuing new common stock may send a negative signal to the
capital markets, which may depress the stock price.
Flotation costs = transaction costs associated with issuing new
securities.
, What is capital budgeting? - <<answer>>Analysis of potential
additions to fixed assets and rates of return.
Long-term decisions; involve large expenditures.
Very important to firm's future.
What is a company's strategic business plan? - <<answer>>A
long plan that outlines in broad terms the firm's basic strategy for
the next 5 - 10 years.
Five criteria used to accept or reject a project? - <<answer>>Net
present value, internal rate of return, modified internal rate of
return, regular payback, discounted payback.
What is the difference between independent and mutually
exclusive projects? - <<answer>>Independent projects: If the
cash flows of one are unaffected by the acceptance of the other.
Mutually exclusive projects: If the cash flows of one can be
adversely impacted by the acceptance of the other. Harder to
calculate.
What is the difference between normal and nonnormal cash flow
streams? Which cash flow stream is most common? -
<<answer>>Normal cash flow stream: Cost (negative CF)
followed by a series of positive cash inflows. One change of signs.
Nonnormal cash flow stream: Two or more changes of signs.
