BUSN 379 Midterm Exam

BUSN 379 Midterm Exam

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1. (TCO 1) What is the goal of financial management for a sole proprietorship?
(Points : 3)

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. (TCO 1) Working capital management includes which of the following? (Points : 3)

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. (TCO 1) Market value reflects which of the following: (Points : 3)

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
4. (TCO 1) Which of the following is true regarding income statements? (Points : 3)

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
5. (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?
(Points : 3)

$157,950
$322,000
$243,000
$200,000
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?(Points : 3)

35%
39%
34%
32%
7. (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 2008? (Points : 3)

$1.30
$1.44
$0.77
$0.69
8. (TCO 1) The income statement reflects: (Points : 3)

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
9. (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?
(Points : 3)

$120,000
$180,000
$170,000
$150,000
$120,000
10. (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? (Points : 3)

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
11. (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? (Points : 3)

$61,800
$53,500
$113,400
$97,200
12. (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? (Points : 3)

81.00 months
81.50 months
83 months
82.17 months
90.70 months
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? (Points : 3)

The current value of the project’s inflows is $16,000
The approximate current value of the project’s inflows is $13,000

The current value of the project’s inflows is somewhere in between $14,000 and
$16,000
The project should be rejected because its present value is negative
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:
Year Software Company Engineering Company

If the appropriate discount rate is 10 percent, what is the approximate present value
of the Engineering Company investment? (Points : 3)

$33,200
$34,500
$42,000
$43,500
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? (Points : 3)
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. (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? (Points : 3)

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
2. (TCO 3) Which one of the following is an example of an annuity, but not a
perpetuity? (Points : 3)

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
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 16 percent? Assume annual payments. (Points : 3)

$1315
$1300
$756
$1000
4. (TCO 6 and 8) Which one of the following statements is correct? (Points : 3)

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. (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? (Points : 3)

10.50%
11.50%
11.75%
12%
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 current price of
the stock? Hint: Yield is the same as required rate of return. (Points : 3)

$100
$133
$102
$86.40
None of the above
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? (Points : 3)

$23
$32
$27
$29
8. (TCO 3) Royal Electric paid a $4 dividend last year. The dividend is expected to
grow at a constant rate of six percent over the next four years. Common
stockholders require a 13 percent return. What are the values of the dividends for
years 1, 2 and 3, respectively? (Points : 3)

$4, $4.5 and $4.8

$4.24, $4.76 and $5.05
$4.24, $4.49, $4.76
$4, $4.50, $5.05
9. (TCO 6) Which of the following is true regarding the primary market? (Points : 3)

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
10. (TCO 6) A member of the NYSE who trades on the floor of the exchange for his
or her personal account is called a(n): (Points : 3)

specialist.
independent broker.
floor trader.
stand-alone agent.
dealer
11. (TCO 6) The annual interest on a bond divided by the bond’s market price is
called the: (Points : 3)

yield to maturity.
yield to call.
total yield.
required yield.
current yield

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. (Points : 3)

deferred call
market
liquidity
debenture
sinking fund
13. (TCO 8) Which of the following is true regarding bonds? (Points : 3)

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. (TCO 6) Which of the following is not a floating-rate bond? (Points : 3)

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.
TIPS
15. (TCO 6) Which of the following is true regarding put bonds? Select all that apply:
(Points : 3)

Have coupons that depend on the company’s income
Can be exchanged for a fixed number of shares before 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. (TCO 1) In a general partnership, each partner is personally liable for: (Points : 3)

the partnership debts that he or she personally obtained for the firm.
his or her proportionate share of all partnership debts, regardless of which partner
incurred that debt.
the total debts of the partnership, even if he or she was unaware of those debts.
the debts of the partnership, up to the amount he or she invested in the firm.
all personal and partnership debts incurred by any partner, even if he or she was
unaware of those debts
2. (TCO 1) Trademarks are classified as: (Points : 3)
short-term assets.
current liabilities.
long-term debt.
tangible fixed assets.
intangible fixed assets
1. (TCO 1) Can you provide some examples of recent, well-known unethical behavior
cases? Explain the situation in one or two sentences.
2. What are some real-life scenarios where you can apply the time value of money?
Present two or three scenarios. Briefly explain your rationale.
3. Explain some of the key risks associated with bonds.
4. 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?