BUSN 379 Midterm Exam 2

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BUSN 379 Midterm Exam 2

1.Question :(TCO 1) What is the goal of financial management for a sole proprietorship?
Student Answer:decrease long-term debt to reduce the risk to the owner
maximize net income given the resources of the firm
maximize the market value of the equity
minimize the tax impact on the proprietor
minimize costs and increase production


Question 2.Question :(TCO 1) When analyzing alternative capital structures for a firm, a financial manager must consider which of the following?
Student Answer:type of loan
amount of funds needed
cost of funds
mix of debt and equity
all of the above


Question 3.Question :(TCO 1) Market value is important to the financial manager because:
Student Answer:It reflects the value of the asset, based on generally-accepted accounting principles.
Is a crucial component of the balance sheet, and can impact the financial statements.
Market value reflects the amount someone is willing to pay today for an asset.
The market value of an asset reflects its historical cost.
None of the above


Question 4.Question :(TCO 1) Which of the following is true regarding income statements?
Student Answer:It shows the revenue and expenses, based upon selected accounting methods.
It reveals the net cash flows of a firm over a stated period of time.
It reflects the financial position of a firm as of a particular date.
It records revenue only when cash is received for the product or service provided.
It records expenses based on the recognition principle.

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Question 5.Question :(TCO 1) Tato’s Pizza has sales of $625,000. They paid $43,000 in interest during the year and depreciation was $79,000. Administrative costs were $100,000 and other costs were $160,000. Assuming a tax rate of 35 percent, what is Tato’s Pizza net income?
Student Answer:$157,950


Question 6.Question :(TCO 1) Home Best Hardware had $315,000 in taxable income last year. Using the tax rates provided in Table 2.3, what is the approximate average tax rate?
Student Answer:35%


Question 7.Question :(TCO 1) Pizza A had earnings after taxes of $600,000 in the year 2008, and 300,000 shares outstanding. In year 2009, earnings after taxes increased to $750,000, and 25,000 new shares were issued for a total of 325,000 shares. What is the EPS figure for 2008?
Student Answer:$2.0


Question 8.Question :(TCO 1) The financial statement that summarizes a firm’s operations over a period of time is called a(n):
Student Answer:income statement.
cash flow statement.
production report.
balance sheet.
periodic operating statement.


Question 9.Question :(TCO 1) Print Imaging has EBIT of $150,000, interest of $30,000, taxes of $50,000, and depreciation of $50,000. What is the company’s operating cash flow?
Student Answer:$120,000


Question 10.Question :(TCO 3) Linda invested $15,000 today, in an investment that pays 6.50 percent interest, compounded semi-annually. Which one of the following statements is correct concerning this investment?
Student Answer:Linda will receive equal interest payments every six months over the life of the investment.
Linda would have earned more interest if she had invested in an account paying 6.50 percent simple interest.
Linda will earn more interest in year 5 than she will in year 4.
Linda would have earned more interest if she had invested in an account paying annual interest.
Linda will earn less and less interest each year over the life of the investment.


Question 11.Question :(TCO 3) Mr. Smith will receive $7,500 a year for the next 14 years from his trust. If the interest rate on this investment is eight percent, what is the approximate current value of these future payments?
Student Answer:$61,800


Question 12.Question :(TCO 3) Paper Pro recently purchased a printing machine costing $97,000. The company financed this purchase at 8.25 percent interest, with monthly payments of $2,379.45. How many years will it take the firm to pay off this debt?
Student Answer:3.0 years
4.0 years
4.25 years
4.5 years
5.0 years


Question 13.Question :(TCO 3) Fine Oak Woodworks is considering a project that has cash flows of $6,000, $4,000, and $3,000 for the next three years. If the appropriate discount rate of this project is 10 percent, which of the following statements is false?
Student Answer:The current value of the project’s inflows is $13,000
The approximate current value of the project’s inflows is $11,000
The project’s inflows are higher than zero
The project should be accepted because its present value is positive


Question 14.Question :(TCO 4) You are considering two investments. Investment I, is in a software company and Investment II, is an engineering company. The investments offer the following cash flows:

YearSoftware CompanyEngineering Company

If the appropriate discount rate is 10 percent, what is the approximate present value of the Software Company investment?

Student Answer:$15,600


Question 15.Question :(TCO 3) North Bank offers you an APR of 13.17 percent compounded monthly, and South Bank offers you an effective rate of 13.75 percent on a business loan. Which bank should you choose and why?
Student Answer:South Bank because its effective rate is higher.
North Bank because the APR is lower.
South Bank because its effective rate is lower.
North Bank because its effective rate is lower.
1.Question :(TCO 3) Tim needs to borrow $5,000 for two years. The loan will be repaid in one lump sum at the end of the loan term. Which one of the following interest rates is best for Tim?
Student Answer:7.5 percent simple interest
7.5 percent interest, compounded monthly
8.0 percent simple interest
8.0 percent interest, compounded annually
8.0 percent interest, compounded monthly


Question 2.Question :(TCO 3) Which one of the following is an example of an annuity, but not a perpetuity?
Student Answer:unequal payments each month, for 18 months
payments of equal amount each quarter forever
unequal payments each year forever
equal payments every six months for 48 months
unending equal payments every other month


Question 3.Question :(TCO 3) Fanta Cola has $1,000 par value bonds outstanding at 12 percent interest. The bonds mature in 25 years. What is the current price of the bond if the YTM is 11 percent? Assume annual payments.
Student Answer:$1080


Question 4.Question :(TCO 6 and 8) A bond’s debenture will include which of the following?
Student Answer:description of any loan collateral
call provisions
total amount of the bond issue
protective covenants
all of the above
none of the above


Question 5.Question :(TCO 3) Bonds issued by Blue Sky Airlines have a face value of $1,000 and currently sell for $1,080. The annual coupon payments are $125. If the bonds have 20 years until maturity, what is the approximate YTM of the bonds?
Student Answer:10.50%


Question 6.Question :(TCO 3) The preferred stock of Bean Coffee pays an annual dividend of $5.60. It has a required rate of return of eight percent. What is the price of the preferred stock?
Student Answer:$700
None of the above


Question 7.Question :(TCO 3) Intelligence Research, Inc. will pay a common stock dividend of $1.60 at the end of the year. The required rate of return by common stockholders is 13 percent. The firm has a constant growth rate of 7.5 percent. What is the current price of the stock?
Student Answer:$23


Question 8.Question :(TCO 3) Royal Electric paid a $2 dividend last year. The dividend is expected to grow at a constant rate of five percent over the next three years. Common stockholders require a 12 percent return. What is the total amount of dividends stockholders will receive during the next three years?
Student Answer:$6.62


Question 9.Question :(TCO 6) Which of the following is true regarding the primary market?
Student Answer:it is the market where the largest number of shares are traded on a daily basis.
it is the market in which the largest number of issues are listed.
it is the market with the largest number of participants.
it is the market where new securities are offered.
it is the market where shareholders trade most frequently with each other.


Question 10.Question :(TCO 6) The smallest firms listed on NASDAQ are in the NASDAQ _____ Market.
Student Answer:National
Global Select


Question 11.Question :(TCO 6) The annual interest on a bond divided by the bond’s market price is called the:
Student Answer:yield to maturity.
yield to call.
total yield.
required yield.
current yield.


Question 12.Question :(TCO 6) A sinking fund is an account managed by a bond trustee for the sole purpose of:
Student Answer:paying interest payments on a semi-annual basis.
redeeming bonds early.
repaying the face value at maturity.
paying the expenses required to reissue outstanding bonds.
paying the “balloon payment” at maturity.


Question 13.Question :(TCO 8) Which of the following is true regarding bonds?
Student Answer:Bonds do not carry default risk.
Bonds are sensitive to changes in the interest rates.
Moody’s and Standard and Poor’s provide information regarding a bond’s interest rate risk.
Municipal bonds are free of default risk.
None of the above is true


Question 14.Question :(TCO 6) Which of the following best describes a zero-coupon bond?
Student Answer:A bond that adjusts the coupon payments based on an interest rate index, such as the T-bill.
A bond that is issued by the U.S. government.
A bond that adjusts the coupon payment date.
A bond that has no coupons and pays a face value at maturity.
An EE Savings Bond


Question 15.Question :(TCO 6) Which of the following are not true regarding convertible bonds? Select all that apply:
Student Answer:Are extremely rare
Can be exchanged for a fixed number of shares at maturity only
Can be exchanged for a fixed number of shares before maturity
Allow the holder to require the issuer to buy the bond back
1.Question :(TCO 1) Paul is the owner of Paul’s Cabinets, which is a sole proprietorship. The firm cannot pay its bills because a large customer defaulted on payment. Which one of the following statements is correct given this situation?
Student Answer:The creditors of Paul’s Cabinets can only collect payment if Paul’s Cabinets receives payment from its customer.
The only course of action the creditors of Paul’s Cabinets has is to sell the assets of Paul’s Cabinets.
The creditors of Paul’s Cabinets can assume the assets of Paul’s Cabinets, but only in an amount that exceeds Paul’s investment in the firm.
Paul is personally liable for the entire debt of Paul’s Cabinets.
Paul is personally liable for the firm’s debts, but only to the extent of his investment in Paul’s Cabinets.


Question 2.Question :(TCO 1) Which of the following is classified as tangible, fixed assets?
Student Answer:inventory
cash on hand


Question 3.Question :(TCO 1) Explain agency theory. Provide an example of a potential agency problem for a corporation, and identify means by which the firm can help reduce or eliminate that problem.


Question 4.Question :(TCO 3) Why does money have time value? Explain your rationale.


Question 5.Question :(TCO 8) Why do firms use protective covenants? Provide two or three examples of protective covenants, and explain how these covenants increase or decrease risk.


Question 6.Question :(TCO 6) What are some of the features of PETS (bonds) that make them attractive to certain investors?



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