BUSN379 - Finance - Devry - Midterm Exam - A + Graded

1.

(TCO 1) Which one of the following actions best matches the primary goal of financial management?

[removed] increasing the net working capital while lowering the long-term asset requirements

[removed] improving the operating efficiency, thereby increasing the market value of the stock

[removed] increasing the firm’s market share

[removed] reducing fixed costs and increasing variable costs

[removed] increasing the liquidity of the firm by transferring short-term debt into long-term debt

Question 2.

(TCO 1) When analyzing alternative capital structures for a firm, a financial manager must consider which of the following?

[removed] type of loan

[removed] amount of funds needed

[removed] cost of funds

[removed] mix of debt and equity

[removed] all of the above

Question 3.

(TCO 1) Market value reflects which of the following:

[removed] The amount someone is willing to pay today for an asset.

[removed] The value of the asset based on generally-accepted accounting principles.

[removed] The asset’s historical cost.

[removed] A and B only

[removed] None of the above

Question 4.

(TCO 1) The income statement reflects:

[removed] Income and expenses at the time when those items affect the cash flows of a firm.

[removed] Income and expenses in accordance with GAAP.

[removed] The cash flows in accordance with GAAP.

[removed] The flow of cash into and out of a firm during a stated period of time.

[removed] The flow of cash into and out of a firm as of a particular date.

Question 5.

(TCO1) Telemarket Inc. 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 Telemarket’s taxes figure? 
 
                  

[removed] $100,100

[removed] $85,050

[removed] $112,700

[removed] $72,900

Income Statements

• Sales $625,000
• Costs  260,000
• Depreciation     79,000
• EBIT   $286,000
• Interest      43,000
• Taxable Income $243,000
• Taxes      85,050
• Net Income  $157,950

Question 6.

(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 marginal tax rate?

[removed] 35%

[removed] 39%

[removed] 34%

[removed] 32%

Question 7.

(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?

[removed] $2.0

[removed] $2.21

[removed] $0.50

[removed] $0.47

Question 8.

(TCO 1) The income statement reflects:

[removed] income and expenses at the time when those items affect the cash flows of a firm.

[removed] income and expenses in accordance with GAAP.

[removed] the cash flows in accordance with GAAP.

[removed] the flow of cash into and out of a firm during a stated period of time.

[removed] the flow of cash into and out of a firm as of a particular date.

Question 9.

(TCO 1) Green Leaf Nursery has EBIT of $250,000, interest of $30,000, taxes of $50,000, and depreciation of $80,000. What is the company’s operating cash flow?

[removed] $297,200

[removed] $280,000

[removed] $340,000

[removed] $270,000

[removed] $250,000  

Question 10.

(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?

[removed] Linda will receive equal interest payments every six months over the life of the investment.

[removed] Linda would have earned more interest if she had invested in an account paying 6.50 percent simple interest.

[removed] Linda will earn more interest in year 5 than she will in year 4.

[removed] Linda would have earned more interest if she had invested in an account paying annual interest.

[removed] Linda will earn less and less interest each year over the life of the investment.

Question 11.

(TCO 3) Mr. Smith will receive $6,500 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?

[removed] $93,000

[removed] $53,500

[removed] $84,300

[removed] $52,000

Question 12.

(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?

[removed] 3.0 years

[removed] 4.0 years

[removed] 4.25 years

[removed] 4.5 years

[removed] 5.0 years

Question 13.

(TCO 3) Fine Oak Woodworks is considering a project that has cash flows of $5,000, $3,000, and $8,000 for the next three years. If the appropriate discount rate of this project is 10 percent, which of the following statements is true?

[removed] The current value of the project’s inflows is $16,000

[removed] The approximate current value of the project’s inflows is $13,000

[removed] The current value of the project’s inflows is somewhere in between $14,000 and $16,000

[removed] The project should be rejected because its present value is negative

Question 14.

(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: 

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

[removed] $15,600

[removed] $12,500

[removed] $12,750

[removed] $15,000

Question 15.

(TCO 3) North Bank offers you an APR of 9.76 percent compounded semiannually, and South Bank offers you an effective rate of 9 percent on a business loan. Which bank should you choose and why?

[removed] South Bank because its effective rate is higher.

[removed] North Bank because the APR is lower.

[removed] South Bank because its effective rate is lower.

[removed] North Bank because its effective rate is lower.

1.

(TCO 3) Which one of the following will increase the future value of a lump sum invested today?

[removed] decreasing the amount of the lump sum

[removed] increasing the rate of interest

[removed] paying simple interest rather than compound interest

[removed] paying interest only at the end of the investment period

[removed] shortening the investment time period

Question 2.

(TCO 3) Which one of the following best exemplifies a perpetuity?

[removed] a mortgage of $860 a month for 30 years

[removed] $2,000 annual payments from a trust fund indefinitely

[removed] social security payments of $2,500 a month for life

[removed] student loan payments of $600 a month for three years

[removed] $250 a month over the life of a lease

Question 3.

(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.

[removed] $1080

[removed] $1085

[removed] $925

[removed] $1000

Question 4.

(TCO 6 and 8) Which one of the following statements is correct?

[removed] Bond issuers maintain a listing of bondholders when bonds are issued in bearer form.

[removed] An indenture, is a contract between a corporation and its shareholders.

[removed] Collateralized bonds are called debentures.

[removed] The description of any property used to secure a bond issue is included in the bond indenture.

Chapter 5 Pages 174-175

Question 5.

(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?

[removed] 10.50%

[removed] 11.50%

[removed] 11.75%

[removed] 12%

Question 6.

(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.

[removed] $100

[removed] $400

[removed] $7.40

[removed] $86.40

[removed] None of the above

Question 7.

(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?

[removed] $23

[removed] $32

[removed] $27

[removed] $29

Question 8.

(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?

[removed] $2, $2.10 and $2.205

[removed] $2, $2.205 and $2.315

[removed] $2.10, $2.205, and $2.315

[removed] $2.10, $2.205 and $2.456

Question 9.

(TCO 6) The market where one shareholder sells shares to another shareholder is called the _____ market.

[removed] primary

[removed] main

[removed] secondary

[removed] principal

[removed] dealer

Question 10.

(TCO 6) The smallest firms listed on NASDAQ are in the NASDAQ _____ Market.

[removed] National

[removed] Capital

[removed] Regional

[removed] Global Select

[removed] Global

Question 11.

(TCO 6) The maturity date of a bond is defined as:

[removed] the first date on which a bond can be called.

[removed] the date on which the principal amount is paid.

[removed] 20 years after the issue date.

[removed] the date on which the next interest payment will be made.

[removed] the original issue date.

Question 12.

(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.

[removed] deferred call

[removed] market

[removed] liquidity

[removed] debenture

[removed] sinking fund

Question 13.

(TCO 8) Which of the following is true regarding bonds?

[removed] Bonds do not carry default risk.

[removed] Bonds are sensitive to changes in the interest rates.

[removed] Moody’s and Standard and Poor’s provide information regarding a bond’s interest rate risk.

[removed] Municipal bonds are free of default risk.

[removed] None of the above is true

Question 14.

(TCO 6) Which of the following is not a floating-rate bond?

[removed] A bond that adjusts the coupon payments based on an interest rate index, such as the T-bill.

[removed] An EE Savings Bond issued by the U.S. government.

[removed] A bond that does not have any coupons until maturity.

[removed] A bond that adjusts the coupon and face value payment based on inflation.

[removed] TIPS

Question 15.

(TCO 6) Which of the following is true regarding put bonds? Select all that apply:

[removed] Have coupons that depend on the company’s income

[removed] Can be exchanged for a fixed number of shares before maturity only

[removed] Can be exchanged for a fixed number of shares before maturity

[removed] Allow the holder to require the issuer to buy the bond back

1.

(TCO 1) Kate is the owner of Kate's Sun Wear, which is a sole proprietorship. Kate unexpectedly suffered a fatal heart attack. Which one of the following statements is correct given this situation?

[removed] The proprietorship ended when Kate passed away.

[removed] Kate's Sun Wear will continue on with Kate's beneficiary automatically replacing Kate as the sole proprietor.

[removed] The proprietorship ends when Kate passed on, and all income to that date will be tax-free.

[removed] The proprietorship ends when Kate passed on, and all income to that date will be taxed as a separate legal entity.

[removed] The proprietorship ends when Kate passed on, and all income earned to that date will be taxed as Kate's personal income.

Question 2.

(TCO 1) Trademarks are classified as:

[removed] short-term assets.

[removed] current liabilities.

[removed] long-term debt.

[removed] tangible fixed assets.

[removed] intangible fixed assets.

Question 3.

(TCO 1) Can you provide some examples of situations in which business ethics play a role in the financial management process?

Question 4.

(TCO 3) What are some real-life scenarios where you can apply the time value of money?  Present two or three scenarios. Briefly explain your rationale.

Question 5.

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

Question 6.

(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?