BUSN 379 Midterm Exam

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BUSN 379 Midterm Exam

 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


 2.Question :(TCO 1) Working capital management includes which of the following?
Student Answer: establishing the inventory level
 deciding when to pay suppliers
 determining the amount of cash needed on a daily basis
 establishing credit terms for customers
 all of the above


 3.Question :(TCO 1) Book values are different from market values because:
Student Answer: Book values reflect the value of the asset based on generally-accepted accounting principles.
 Book values are used in the company’s balance sheet.
 Book values do not reflect the amount someone is willing to pay today for an asset.
 All of the above
 None of the above


 4.Question :(TCO 1) The income statement reflects:
Student Answer: Income and expenses at the time when those items affect the cash flows of a firm.
 Income and expenses in accordance with GAAP.
 The cash flows in accordance with GAAP.
 The flow of cash into and out of a firm during a stated period of time.
 The flow of cash into and out of a firm as of a particular date.


 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

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 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 are the company’s income taxes?
Student Answer: $122,850
 None of the above


 7.Question :(TCO 1) Pizza A had earnings after taxes of $390,000 in the year 2008, and 300,000 shares outstanding. In year 2009, earnings after taxes increased by 20 percent to $468,000 and 25,000 new shares were issued for a total of 325,000 shares. What is the EPS figure for 2009?
Student Answer: $1.30


 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.


 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


 10.Question :(TCO 3) You opened a new certificate of feposit with $13,000. Your broker indicated that this investment pays five percent interest, compounded quarterly. Which one of the following statements is correct concerning this investment?
Student Answer: You will receive equal interest payments every three months over the life of the investment.
 You could earn more interest by investing in an account paying five percent simple interest.
 You would have earned more interest if you had invested in an account paying annual interest.
 You will earn less and less interest each year over the life of the investment.
 You will earn more interest in year 3, than you will in year 2.


 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


 12.Question :(TCO 3) Your neighbor just received a credit offer in an e-mail. The company is offering him $6,000 at 12.8 percent interest. The monthly payment is only $110. If he accepts this offer, how long will it take him to pay off the loan?
Student Answer: 81.00 months
 81.50 months
 83 months
 82.17 months
 90.70 months


 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


 14.Question :(TCO 4) You are considering an investment that will have the following cash flows: $54,000, $66,000, $(60,000), $57,000, and $120,000. The appropriate discount rate is 11 percent. What is the value of this investment? Note that the cash flow in brackets is negative.
Student Answer: $160,000
 Cannot be determined because one of the cash flows is negative


 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) Which one of the following will increase the future value of a lump sum invested today?
Student Answer: decreasing the amount of the lump sum
 increasing the rate of interest
 paying simple interest rather than compound interest
 paying interest only at the end of the investment period
 shortening the investment time period


 2.Question :(TCO 3) The difference between an ordinary annuity and an annuity due is the:
Student Answer: number of payments to be made
 amount to be paid each time
 the timing of the payments
 frequency of the payments
 interest rate applied to the first payment


 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


 4.Question :(TCO 6 and 8) Which one of the following statements is correct?
Student Answer: Bond issuers maintain a listing of bondholders when bonds are issued in bearer form.
 An indenture, is a contract between a corporation and its shareholders.
 Collateralized bonds are called debentures.
 The description of any property used to secure a bond issue is included in the bond indenture.


 5.Question :(TCO 3) Bonds issued by Blue Sky Airlines have a face value of $1,000 and currently sell for $850. The annual coupon payments are $80. If the bonds have 10 years until maturity, what is the approximate YTM of the bonds?
Student Answer: 10.50%


 6.Question :(TCO 3) Bean Coffee issued preferred stock many years ago. It carries a dividend of $8 per share, fixed. As time has passed, yields have decreased from the original eight percent (at the time of issuance) to six percent. What was the original issue price? Hint: Yield is the same as required rate of return.
Student Answer: $100
 None of the above


 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 seven percent. What is the current price of the stock?
Student Answer: $23


 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 are the values of the dividends for years 1, 2 and 3, respectively?
Student Answer: $2, $2.10 and $2.205
 $2, $2.205 and $2.315
 $2.10, $2.205, and $2.315
 $2.10, $2.205 and $2.456


 9.Question :(TCO 6) The market where one shareholder sells shares to another shareholder is called the _____ market.
Student Answer: primary


 10.Question :(TCO 6) NASDAQ is a(n):
Student Answer: electronic dealer market.
 electronic broker market.
 market based on specialists.
 dealer market with a single market maker.
 electronic ECN.


 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.


 12.Question :(TCO 6) Star Industries has one outstanding bond issue. An indenture provision prohibits the firm from redeeming the bonds during the first two years. This provision is referred to as a _____ provision.
Student Answer: deferred call
 sinking fund


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


 14.Question :(TCO 6) Which of the following is not a floating-rate bond?
Student Answer: A bond that adjusts the coupon payments based on an interest rate index, such as the T-bill.
 An EE Savings Bond issued by the U.S. government.
 A bond that does not have any coupons until maturity.
 A bond that adjusts the coupon and face value payment based on inflation.


 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.


 2.Question :(TCO 1) Trademarks are classified as:
Student Answer: short-term assets.
 current liabilities.
 long-term debt.
 tangible fixed assets.
 intangible fixed assets.


 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.


 4.Question :(TCO 3) How can we apply the concept of time value of money in evaluating a mortgage? Present at least two scenarios. Briefly explain your rationale.


 5.Question :(TCO 8) Are U.S. Treasury securities risk-free? Why or why not? Explain your rationale?


 6.Question :(TCO 6) What are some of the features of zero-coupon bonds that make them attractive to certain investors? Which type of investors will be most interested in these bonds?



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