Finance Wk4 Midterm
1. Question : (TCO 1) The goal of financial management is to increase the:
Student Answer: future value of the firm’s total equity.
book value of equity
dividends paid per share
current market value per share
number of shares outstanding, thereby increasing the market value of equity
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 reflects which of the following:
Student Answer: The amount someone is willing to pay today for an asset.
The value of the asset based on generally-accepted accounting principles.
The asset’s historical cost.
A and B only
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.
Question 5. Question : (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?
Student Answer: $100,100
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 are the company’s income taxes?
Student Answer: $122,850
None of the above
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 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.
Question 9. Question : (TCO 1) Best Electronics has EBIT of $450,000, interest of $30,000, taxes of $50,000, and depreciation of $80,000. What is the company’s operating cash flow?
Student Answer: $497,200
Question 10. Question : (TCO 3) Mark deposited $1,000 today, in an account that pays eight percent interest, compounded semi-annually. Which one of the following statements is correct concerning this investment?
Student Answer: Mark will earn more interest in year 4 than he will in year 3.
Mark will receive equal interest payments every six months over the life of the investment.
Mark would have earned more interest if he had invested in an account paying 8 percent simple interest.
Mark would have earned more interest if he had invested in an account paying annual interest.
Mark 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) KED Engineering acquired an additional business unit for $310,000. The seller agreed to accept annual payments of $67,000 at an interest rate of 6.5 percent. How many years will it take KED Engineering to pay for this purchase?
Student Answer: 4.70 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 true?
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 current value of the project’s inflows cannot be determined
The project should be rejected because its present value is negative
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:
Year Software Company Engineering Company
1 $5,000 $15,000
2 $3,000 $8,000
3 $4,000 $9,000
4 $3,600 $11,000
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 best exemplifies a perpetuity?
Student Answer: a mortgage of $860 a month for 30 years
$2,000 annual payments from a trust fund indefinitely
social security payments of $2,500 a month for life
student loan payments of $600 a month for three years
$250 a month over the life of a lease
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 16 percent? Assume annual payments.
Student Answer: $1315
Question 4. Question : (TCO 6 and 8) A bond’s indenture agreement will include which of the following?
Student Answer: description of any loan collateral
total amount of the bond issue
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 $1,180. 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) 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
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 seven 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) NASDAQ is a(n):
Student Answer: electronic dealer market.
electronic broker market.
market based on specialists.
dealer market with a single market maker.
Question 11. Question : (TCO 6) The maturity date of a bond is defined as:
Student Answer: the first date on which a bond can be called.
the date on which the principal amount is paid.
20 years after the issue date.
the date on which the next interest payment will be made.
the original issue date.
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 not 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 not 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) 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?
Student Answer: The proprietorship ended when Kate passed away.
Kate’s Sun Wear will continue on with Kate’s beneficiary automatically replacing Kate as the sole proprietor.
The proprietorship ends when Kate passed on, and all income to that date will be tax-free.
The proprietorship ends when Kate passed on, and all income to that date will be taxed as a separate legal entity.
The proprietorship ends when Kate passed on, and all income earned to that date will be taxed as Kate’s personal income.
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) Can you provide some examples of recent, well-known unethical behavior cases? Explain the situation in one or two sentences.
Student Answer: The company’s collapse resulted from the disclosure that it had reported false profits, used accounting methods that failed to following generally accepted procedures. Both internal and external controls failed to detect the financial losses disguised as profits fro a number of years. Enron’s managers and executives retired or sold their company stock before its price went down. Enron employees lost their jobs and most of their retirement savings invested in Enron stock.
Question 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.
Student Answer: We can apply the concept of time value of money in evaluating a mortgage calculating the number of periods of the mortgage. Another way we can use the concept of time value of money in evaluating a mortgage is to obtaining the rate we are paying.
Question 5. Question : (TCO 8) Explain some of the key risks associated with bonds.
Student Answer: Some of the key risks factors associated with bond valuations are listed as follows: Interest rate risk Reinvestment rate risk Yield curve risk Call and prepayment risk Credit risk Liquidity risk Exchange rate risk Risk associated with inflation and erosion of purchasing power Risk due to political & regulatory events and government actions
Question 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?
Student Answer: Zero-coupon bonds are attractive to tax-exempt investors with long-term dollar denominated liabilities. Some features include the tax deductions and the relative certainly of future dollar value.
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