BFIN3321 MIDTERM EXAM SP2014 MULTIPLE CHOICE.docx

BFIN3321 MIDTERM EXAM SP2014
MULTIPLE CHOICE (2 points each)
1. The overall goal of the financial manager is to
_________________.
A. Minimize total costs
B. Maximize net income
C. Maximize earnings per share
D. Maximize shareholder wealth
2. Which of the following is/are true:
A. Unethical behavior and illegal behavior are the same
B. Unethical behavior is always illegal behavior
C. Illegal behavior is always unethical behavior
D. Unethical behavior and illegal behavior are never the same
3. Which of the following statements is correct?
A. Accountants are focused on what happened in the past.
B. Financial managers are focused on what happened in the
past.
C. Financial managers double-check the accountant's
statements.
D. Accountants and financial managers use total quality
management systems to standardize data.
4. Maximizing owners' equity value means carefully considering
all of the following except _______.

A. Which projects to invest in
B. How best to increase the firm's risk
C. How to best bring additional funds into the firm
D. How best to return the profits from those projects to the
owners over time
5. The most common type of business in the United States is the
__________.
A. Corporation
B. Partnership
C. Sole Proprietorship
D. Hybrid organization such as a limited liability company
6. The biggest disadvantage of the sole proprietorship is
_________________.
A. Total control
B. Double taxation
C. Unlimited liability
D. Limited access to capital
7. All of the following are advantages to organizing as a
corporation except ____.
A. Limited liability
B. Double taxation
C. Easy access to capital
D. Easy to transfer ownership
8. From the perspective of access to capital, the best form of
business organization is the _______.
A. Corporation
B. Partnership
C. S Corporation

D. Sole proprietorship
9. From the perspective of ownership risk, the best form of
business organization is the ______.
A. Partnership
B. Corporation
C. S Corporation
10. From the perspective of control, the best form of business
organization is the __________.
A. Partnership
B. Corporation
C. S Corporation
11. Attempting to maximizing shareholder value can lead to
A. less pollution worldwide.
B. minimizing bondholders’ wealth.
C. disasters, like the BP oil spill in the Gulf.
D. a long-term outlook by a firm’s managers.
A. Shareholder wealth maximization is achieved by minimizing
costs.
B. Shareholder wealth maximization may actually be beneficial
for society in the long-run.
C. Shareholder wealth maximization is achieved by maximizing
market share.
D. Shareholder wealth maximization is achieved by maximizing
sales.

13. All are examples of perks a CEO might enjoy except _____.
A. Company car
B. Corporate jet
C. Golf club membership
D. All of the above are examples of perks a CEO might enjoy
14. An employee stock option plan is ________________.
A. A plan that only partnerships can use to defer compensation
to partners
B. A perk usually only given to the board of directors as
compensation
C. A way to align the interests of employees with those of the
owners
D. None of these answers are correct
15. While cash flow is more often used in financial analysis,
which of the following is not a reason to
require firms to still report accounting profit?
A. We need to keep accountants employed
B. accounting profit proxies economic profit
C. accounting profit will generally have less erratic swings from
year to year
D. accounting profits reflect the prospect of the business as a
‘going concern’
16. The agency relationship in corporate finance refers to
_______________________.
A. when the corporate hires an advertising agency to market
their new product/service
B. when the shareholders hire a manager to run their company
C. when the board of directors are elected to staggered terms
D. when the board of directors oversee the CEO

17. The role of a credit analyst is to ______________.
A. help firms access capital markets
B. examine a firm's financial strength for its debt holders
C. monitor the business activities and report to the Securities
Exchange Commission
D. follow a firm and conduct their own evaluations of the
company's business activities
18. A legal duty between two parties where one party must act
in the interest of the other party is
known as a ______________.
A. Fiduciary
B. Venture capitalist
C. Restricted investor
D. Restricted capitalist
19. Restricted stock is:
A. a special type of stock that is not transferable from the
current holder to others until specific
conditions are satisfied.
B. a special type of stock that can be converted into corporate
bonds after a specific amount of time
has elapsed.
C. a special type of stock that is a result of offering an
employee stock ownership plan.
D. None of these answers is correct.

20. Which of the following is not true about ratio analysis?
A. Ratio analysis can show us how our organization changes
over time.
B. Ratio analysis can show us how our organization compares to
other organizations.
C. Ratio analysis tells us how to fix our organization.
D. Ratio analysis uses accounting data, not cash flow, so it is
not useful.
21. The board of directors _____________.
A. are hired by the CEO
B. are elected by shareholders
C. have unlimited liability since they oversee the day-to-day
operations of the firm
D. are employed by the Securities Exchange Commission to
ensure its rules and regulations have
been met
22. Which of the following would be a result of changing to the
MACRS method of depreciation?
A. Lower taxable income in the early years of a project's life
B. Lower taxes in the early years of a project's life
C. Higher depreciation expense
D. All of the above.
23. Is it possible for a firm to have positive net income and yet
it has cash flow problems?
A. Yes, this can occur when a firm is growing very rapidly.
B. No, this is impossible since net income increases the firm's
cash.
C. No, this is impossible since net income and cash are highly
correlated.

D. Yes, this is possible if the firm window-dressed its financial
statements.
24. All of the following are cash flows from investing activities
except a(n)___________.
A. Increases in fixed assets
B. Decreases in fixed assets
C. Increases in marketable securities
D. All of these items are cash flows from investing.
25. All of the following are cash flows from financing activities
except a(n) _________.
A. Increase in accounts payable
B. Stock Repurchases
C. Paying dividends
D. Issuing stock
26. Cash flows available to pay the firm's stockholders and debt
holders after the firm has made the
necessary working capital investments, fixed asset investments,
and developed the necessary new
products to sustain the firm's ongoing operations is referred to
as _________________.
A. Net operating working capital
B. Operating cash flow
C. Free cash flow
D. None of the above
27. All of the following are reasons that one should be cautious

in interpreting financial statements
except ____________.
A. Firms can take steps to over- or understate earnings at
various times.
B. It is difficult to compare two firms that use different
depreciation methods.
C. Financial managers have some latitude in accounting rules to
manage their reported earnings.
D. All of the above are reasons to be cautious in interpreting
financial statements.
28. Choose the phrase that makes this statement true: Ratio
analysis
A. can provide useful information on a firm's past but not
current position.
B. can provide useful information on a firm's current position
and hint at future performance.
C. can provide useful information on a firm's current position
but should never be used to forecast
future performance.
D. can provide useful information on a firm's past and current
position, but should never be used to
forecast future performance.
29. Which of the following statements is incorrect?
A. A negative free cash flow means that the firm's operations
are not producing any cash flows for
investors and always indicates that the firm is mismanaged.
B. A positive free cash flow means that the firm's operations are
producing cash flows for investors—
both bondholders and shareholders.
C. Free cash flows are the cash flows available to investors
after the firm has made the necessary
investments in the firm's operations.
D. All of these statements are correct.

A. The use of debt in the capital structure results in tax benefits
to the firm.
B. Debt is referred to as "financial leverage" because it
magnifies returns to shareholders.
C. Debt management ratios evaluate whether a firm is financing
its assets with a reasonable amount
of debt versus equity financing.
D. All of these statements are correct.
A. Performing cross-sectional analysis is easy as industries are
clustered with firms that are identical.
B. Time-series analysis is useless in assessing improvement or
deterioration of ratios since the data is
historical.
C. Performing cross-sectional ratio analysis refers to assessing
how a firm performed over a certain
section of time.
D. To interpret financial ratios, users should analyze the
performance of the firm over time and the
performance of the firm against one or more companies in the
same industry.
32. A strong liquidity position means that ______________.
A. the firm pays out a large portion of its net income in the
form of dividends
B. the firm is able to meet its short-term obligations
C. the firm uses little debt in its capital structure

D. the firm pays its creditors on-time
33. A firm has an average collection period of 13 days. The
industry average ACP is 27 days. Which
of the following statements is true given this information?
A. The firm could probably increase its sales by relaxing its
strict accounts receivable policy.
B. The firm is maximizing its net income by minimizing its
losses in accounts receivable.
C. The firm has an excellent accounts receivable policy.
D. Both statements b and c are correct.
34. Which of the following activities will increase a firm's
current ratio?
A. Purchase inventory using cash.
B. Accrued wages and taxes increase.
C. Accounts receivable are paid in cash.
D. Buy equipment with a short-term bank loan.
E. None of these statements will increase a firm's current ratio.
35. A firm may not want to strive to match industry average
ratios when:
A. Firms in the industry are shifting into different directions.
B. Most of the other firms in the industry are foreign firms.
C. They are the leader in the industry.
36. Which of the following will increase a firm's quick ratio
assuming no other accounts change?
A. An increase in inventory.
B. A reduction in accounts payable.
C. An increase in accounts receivable.
D. All of these statements will increase a firm's quick ratio.

A. In general, a firm should strive for a high average payment
period because it wants to pay for its
purchases as quickly as possible.
B. If a firm has a very high fixed asset turnover, it means that
the firm may be nearing its maximum
production capacity.
C. An extremely low average collection period will maximize
net income.
D. A debt ratio of zero, so no interest is paid, is the most
profitable strategy.
38. Common-size financial statements:
A. Are obtained by dividing all income statement accounts by
net sales and all balance sheet
accounts by total assets.
B. Allow for easy comparison of balance sheets and income
statements across firms in the industry.
C. Provide quantitative clues about the direction that the firm is
moving.
39. The main two sources of the time value of money are:
A. Interest Rates and Risk,
B. Inflation and Interest Rates,
C. Risk and timing of Consumption,
D. Inflation and timing of Consumption.

40. Which of the following will decrease a present value?
A. Increasing the future value.
B. Decreasing the interest rate.
C. Decreasing the number of periods.
D. None of the above will decrease a present value.
41. Which of the following will not increase a present value?
A. Increase the interest rate.
B. Increase the future value.
C. Decrease the number of periods.
D. None of these answers is correct.
42. Compounding is _______.
A. the adding of interest earned every period on both the
original investment and the reinvested
earnings
B. the adding of interest earned every period on both the
original investment and additional deposits
C. the process of using time-value equations to compute the
number of years
D. the process of finding a present value
43. Which of the following will increase the present value of an
annuity?
A. The discount rate increases.
B. The discount rate decreases.
C. The number of periods the annuity is received increases.
D. Statements B and C are correct.
44. Which of the following will increase the present value of an
annuity?
A. The interest rate decreases.

B. The number of periods decreases.
C. The amortization schedule decreases.
D. The effective rate is calculated over fewer years.
45. In theory, a perpetuity’s value will be infinite
A. always,
B. if the interest rate is zero,
C. if the interest rate is 100%,
D. when payments go on forever.
46. You just bought a new home and have a 30-year mortgage
with monthly payments. Which
statement regarding your mortgage is correct?
A. The dollar amount of interest expense you pay each year will
remain the same each year.
B. The dollar amount of principal paid increases each month.
C. Your monthly payments will decrease over time.
D. If you want to pay off the mortgage at 15 years, you will owe
½ of the amount borrowed.
47. Which of the following bonds will have the largest
percentage increase in value if interest rates
decrease by 1%?
A. 30-year, 10% coupon bond
B. 2-year, 5% coupon bond
C. 10-year, zero coupon
D. 30-year, zero coupon

48. If a bond is selling at a discount, which of the following
statements is correct?
A. The coupon rate must be greater than the yield to maturity.
B. The current yield must be greater than the coupon rate.
C. The bond must have a low bond rating.
D. All of the statements are correct.
49. Which statement is true?
A. Extremely high levels of liquidity guard against liquidity
crises, but at the cost of lower returns on
assets
B. The less liquid assets a firm holds, the less likely it is that
the firm will experience financial
distress.
C. The lower the liquidity ratios, the less liquidity risk a firm
has.
D. Liquid assets generate profits for the firm.
50. Under what conditions is a bond likely to be called?
A. The firm is in financial duress.
B. The firm wants to increase its debt ratio.
C. Interest rates have significantly declined.
D. The firm is planning a massive expansion and needs to raise
a lot of capital.
A. Long-term bonds have more reinvestment rate risk than
short-term bonds.
B. Long-term bonds have more interest rate risk than short-term
bonds.
C. Short-term bonds with high coupons have high interest rate
risk.
D. A zero coupon bonds do not have interest rate risk.

52. Under which conditions will an investor demand a larger
return (yield) on a bond?
A. The bond issue is upgraded from A to AA.
B. The bond issue is downgraded from A to BBB.
C. Interest rates decrease due to decline in inflation.
D. None of these conditions will cause an increase in the bond's
yield.
53. Which of the following is an electronic stock market
without a physical trading floor?
A. Mercantile Exchange
B. Nasdaq Stock Market
C. American Stock Exchange
D. New York Stock Exchange
54. To list a stock on the NYSE, a company must meet
minimum requirements that include all of the
following except ____________________.
A. Firm size
B. P/E Ratio
C. Level of trading volume

D. Total number of stockholders
55. Which of the following indices best reflects the ten sectors
of the economy?
A. Dow Jones Industrial Average
B. Standard & Poor's 500
C. Nasdaq Composite
D. None of the above
56. Which of the following is incorrect with respect to preferred
stock?
A. Preferred stock is largely owned by other companies rather
than individual investors.
B. Preferred stock takes preference over common stock in
bankruptcy proceedings.
C. Preferred stock dividends do not grow.
D. None of these statements is incorrect.
A. Trading at the New York Stock Exchange and the American
Stock Exchange are done by open
outcry.
B. The Dow Jones Industrial Average includes 35 of the largest
companies in the U.S.

C. Dealers create market liquidity in the Nasdaq's electronic
market.
D. The Nasdaq contains many very large technology firms.
A. Preferred stockholders have higher precedence for payment
in the event of firm liquidation from
bankruptcy.
B. Preferred stock prices fluctuate with market interest rates
and behave like corporate bond prices.
C. Common stock price changes with the value of the company's
underlying business.
D. Preferred stock is preferred because it always pays a higher
return than common stock.
59. Sally has researched GLE and wants to pay no more than
$50 for the stock. Currently, GLE is
trading in the market for $54. Sally would be best served to:
A. use the bid-ask spread to her advantage.
B. buy using a market order.
C. buy using a limit order.
D. None of the above.

PROBLEMS
1. (6 points) Hoffa Masonry, Inc.’s balance sheet lists net fixed
asset as $24 million. The fixed
assets could currently be sold for $21 million. Brick's current
balance sheet shows current liabilities
of $9 million and current assets of $18 million. If all the
current accounts were liquidated today, the
company would receive $2 million cash after paying the $9
million in liabilities. What is the book
value of Brick’s assets today? What is the market value of
these assets?
2. (3 points) Last year a firm had an ROA of 4% and a dividend
payout ratio of 30%. What is the
internal growth rate?
3. (3 points) Last year a firm had an ROE of 8% and a dividend
payout ratio of 40%. What is the
sustainable growth rate?
4. (3 points) What is the future value in 2 years of $1,000
deposited today, earning a 3% interest

rate annually?
5. (3 points) Approximately, how many years does it take to
double a $1,000 investment when
interest rates are 6% per year?
6. (3 points) A stock investor deposited $800 seven years ago
in a non-dividend paying stock.
Today the account is valued at $600. What annual rate of return
has this investor earned?
7. (7 points) A friend wants to retire in 40 years when he is 65.
At age 25, he can invest

$100/month that earns 6% each year. But he is thinking of
waiting twenty years, and then
investing $250/month to catch up, earning the same 6% per
year. He feels that by investing two
and a half times as much for 20 years instead of 40 years he will
have more. What is the future
value of each of these options at age 65, and under which
scenario would he accumulate more
money?
8. (3 points) Compute the present value of a onetime payment
of $2,000 paid in four years using
the following discount rates: 2% in year 1, 3% in year 2, 3.5%
in year 3, and 2.5% in year 4.

9. (4 points) Tree Trunk Furniture is advertising a deal, in
which you buy a living room set for
$3,526 (including tax) with two years before you need to pay
(no interest is incurred if you pay by
the end of the two years). How much would you need to deposit
each month in a savings account
earning 2.0% APR, compounded monthly, to be able to pay the
$3,526 bill in two years?
10. (6 points) You purchase a house for $250,000 by getting a
mortgage for $200,000 and paying a
$50,000 down payment (20%). If you get a 30-year mortgage
with a 4.0% interest rate, what
would the loan balance be in 10 years?

11. (3 points) If the present value of an ordinary, 10 year
annuity is $5,000 and interest rates are
6%, what is the present value of the same annuity due?
12. (3 points) A credit card is offered with monthly payments
and a 21.99% APR. What is the
loan's effective annual rate (EAR)?
13. (4 points) Calculate the price of a 6%, $1,000 coupon bond
with 12 years left to maturity and a
market interest rate of 4%. (Assume interest payments are
semiannual.) Is this a discount or
premium bond?

14. (3 points) On February 3, 2014, the Dow Jones Industrial
Average closed at $15,372.80, which
was down $326.05 from the day before. What was the return (in
percent) of the stock market that
day?
15. (4 points) Financial analysts forecast MNO Inc.’s growth for
the future to be 4%. MNO's recent
annual dividend was $2.00. What is the value of ABC stock
when the required return is 9%?

16. (4 points) URN Inc. recently paid a $3.00 annual dividend.
The dividend is expected to grow at a
2% rate. At a current stock price of $25, what is the return
shareholders are expecting?
Sheet1MGT 325 Module 5 Spreadsheet Exam - this is one long
problem or caseTo do this exam you need to study the cases at
the end of Chapter 11. Remember that the cost of debtwhen
calculated is before tax and has to be converted to an after tax
return. The returns on preferred andcommon stock are already
after tax so are not adjusted which is in Chapter 10.PROBLEM
FOR CHAPTERS TEN AND ELEVENSaint Leo Manufacturing
is going to introduce a new product line and to accomplish thisit
has four projects analyzed in which it wants to invest a total of
$100 million. Your job is tofind what it will cost to raise this
amount of capital and based on the cost of capital determine
which of theprojects should be accepted by the firm to invest
in.PROJECTSABCDINVESTMENT$ 30,000,000$
20,000,000$ 25,000,000$ 25,000,000EXPECTED
RETURN10.00%14.00%11.50%16.00%The firms capital
structure consists
of:FMVCAPITALPERCENTAGEAMOUNTDEBT40%$
20,000,000PREFERRED STOCK15%$ 7,500,000COMMON
STOCK45%$ 22,500,000$ 50,000,000Other information
about the firm:CORPORATE TAX RATE35%DEBTCURRENT
PRICE$ 1,075.00ANNUAL INTEREST6.00%CURRENT
INTEREST PAID SEMIANNUALLYORIGINAL
MATURITY25YEARS, BUT NOW 20 YEARS
LEFTMATURITY VALUE$ 1,000.00FLOTATION
COSTINSIGNIFICANTMARKET YIELD PROJECTED:UP TO
$20 MILLION9%ABOVE $20 MILLION12%3 % additional

premiumPREFERREDCURRENT PRICE$ 35.00LAST
DIVIDEND (D0)$ 2.63FIXED AT 7.5% OF PARFLOTATION
COST$ 1.00NEXT DIVIDEND (D1)$
2.63COMMONCURRENT PRICE$ 25.00LAST DIVIDEND
(D0)$ 1.00RETAINED EARNINGS$ 10,000,000GROWTH
RATE (g)9%FLOTATION COST$ 1.50NEXT DIVIDEND
(D1)$ 1.090NOTE - Once retained earnings is maxed out new
common stock will need to be issued.Any preferred stock would
be new preferred stock. You may want to review case in
chapter 11.REQUIRED:In all of the required parts one part
builds on the previous part. If you can't do a part use theset of
other numbers to solve the next part.a. What is the current Kd,
Kp and Ke assuming no new debt or stock?b. Since any new
capital investment will require issuing new perferred stock,
what would thethe new returns be preferred stock (knp) and the
new cost of capital?c. What amount of increase (marginal cost
of capital) in capital structure will the firm runout of retained
earnings and be forced to issue new common stock?d. If new
common stock has to be issued what will the new return
required be (Kne) and thenew cost of capital?Note: All
Answers Should Be Taken Out to 2 Decimal Places, Especially
the Interest Rate Answers.Part aCurrent price$Maturity
value$Interest payment$Payment periodsYield rate%Annual
yield%Kd%Kp%Ke%Current Cost of capital%Part bUse your
solutions in Part a to do this part, but if you couldn't complete
Part a, assume Kd=4%, Kp=8%, and Ke=13%; =%Knp preferred
stock%New cost of capital%Part cIf the capital structure
increases more than$new common stock will have to be issued
to finance new projects since internally generated RE runs
out,and the required return on common stock will increase as
demanded by shareholders.Part dKne common stock%If you
could not come up with the Kne common stock returns, do the
cost of capital assuming Kd=5%, Knp=9%, and Ke=14%=%New
cost of capital%
Sheet2
Sheet3

BFIN3321 MIDTERM EXAM SP2014 MULTIPLE CHOICE.docx

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