DeVry BUSN379 Midterm Exam Study Guide

DeVry BUSN379 - Midterm Exam Study Guide

1. Question : (TCO 1) The goal of financial management is to increase the:

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

Chapter 1, Page 10

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

type of loan

amount of funds needed

cost of funds

mix of debt and equity

all of the above

Chapter 1, Page 5, Week 1 Lecture

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

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

The value of the asset based on generally-accepted

1995802829 MultipleChoice 2 True

0 1995802829 MultipleChoice 2



accounting principles.

The asset’s historical cost.

A and B only

None of the above

Chapter 2, Page 26

4. Question : (TCO 1) The income statement reflects:

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.

Chapter 2, Page 27-29

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?

$100,100

$85,050

$112,700

$72,900



1995802832 MultipleChoice 11 False


Chapter 2, Pages 27-28

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

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?

$122,850

$106,100

$94,500

None of the above


Taxes = 0.15($50,000) + 0.25($25,000) + 0.34($25,000) + 0.39($315,000 – 100,000) Taxes = $106,100

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?

$2.0

$2.21





$0.50

$0.47

Chapter 2 Pages 27-28

EPS = Earnings after taxes/shares outstanding = $600,000/300,000

8. Question : (TCO 1) The financial statement that summarizes a firm's operations over a period of time is called a(n):

income statement.

cash flow statement.

production report.

balance sheet.

periodic operating statement.


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?

$497,200

$480,000

$530,000

$470,000

$450,000


Operating cash flow = EBIT + Depreciation – Current Taxes Operating cash flow = $450,000 + $80,000 - $50,000 = $480,0000





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?

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 $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?

$93,000

$53,500

$84,300

$52,000

Chapter 5 Pages 130-131, Formula 5.1

Present Value of an annuity - $6500 x 8.244 (8%, 14 periods) = $53,586






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?

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 $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?




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


PV = (5,000/1.10) + (3,000/1.10^2) + (8,000/1.10^3)

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?

$15,600

$12,500

$12,750

$15,000


PV = (5,000/1.10) + (3,000/1.10^2) + (4,000/1.10^3) + (3,600/1.10^4) = $12,488




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?

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.


Here you need to select the lowest EAR. EAR North Bank= [1 + (0.1317 / 12)]12 – 1 = 0.1399 x 100 = 13.99%

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

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) Which one of the following best exemplifies a perpetuity?

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


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.

$1315

$1300

$756

$1000

Chapter 6 Pages 163-166, Week 3 Lecture

Determine coupon/interest payments = $1,000 x 12% = $120PV of interest payments (as an annuity) = $120 x 6.097= $731.64 PV of principal (single amount) = $1000 x 0.024 = $24Total = $731.64 + $24 = $755.64

4. Question : (TCO 6 and 8) A bond's debenture will include which of the following?

description of any loan collateral

call provisions

total amount of the bond issue





protective covenants

all of the above

none of the above


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?

10.50%

11.50%

11.75%

12%


You may use the trial and error approach explained in the textbook, or the approximation formula in the lecture for Week 3.Using the formula = See formula (lecture 3)

Approximate YTM = [$80+($1000-850/10)]/[(0.6*850)+(0.4x1000)] = 95/910 = 10.44%

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 current price of the stock? Hint: Yield is the same as required rate of return.

$100

$133

$102





$86.40

None of the above

Chapter 5 Page 139, Week 3 Lecture Pp=Dp/r=$8/0.06=$133

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 nine percent. What is the current price of the stock?

$35

$40

$27

$29

Chapter 7 Pages 205-206, Week 3 Lecture P = D / (r-g) = $1.60 / 0.13-0.09= $40

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?

$6.62

$6.03

$6.52

$6.85


D1=$2.0 x 1.05 = 2.10





D2=$2.10 x 1.05 = 2.205D3=$2.205 x 1.05 = 2.315 Add D1+D2+D3 = 6.62

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

primary

main

secondary

principal

dealer

Chapter 7 Page 216

10. Question : (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):

specialist.

independent broker.

floor trader.

stand-alone agent.

dealer.

Chapter 7 Page 217

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







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.

Chapter 6 Page 163

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.

deferred call

market

liquidity

debenture

sinking fund

Chapter 6 Page 176

13. Question : (TCO 8) Which of the following is true regarding bonds?

Bonds do not carry default risk.

Bonds are 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 free of default risk.





None of the above is true

Week 3 Lecture

14. Question : (TCO 6) Which of the following best describes a floating-rate bond?

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, but adjusts the face value payment based on inflation.

Chapter 6 Page 181-182

15. Question : (TCO 6) Which of the following are not true regarding convertible bonds? Select all that apply:

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

Chapter 6 Page 182

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.





1995802858 ManyMultipleChoi 2 False

0 1995802858 ManyMultipleChoi 2

Which one of the following statements is correct given this situation?

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.

Chapter 1, Page 7

2. Question : (TCO 1) Which one of the following is classified as a current asset?

land

accounts payable

equipment

inventory

note payable


3. Question : (TCO 1) Can you provide some examples of recent, well-known unethical behavior cases? Explain the situation in one or two sentences.





- Parmalat’s fraudulent accounting practices- Martha Stewart’s insider trading on ImClone- Microsoft antitrust case - Worldcom, Enron, Tyco

4. Question : (TCO 3) Why does money have time value? Explain your rationale.

- inflation & postponement of consumption - earning interest over time

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

Chapter 6 Page 187-189 No. As interest rates fluctuate, the value of a treasury security will fluctuate. Long-term treasury securities have substantial interest rate risk.

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?

Chapter 6 Page 181Zero-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.

1995802861 Short 2 False

0 1995802861 Short 2


0 1995802862 Short 4


0 1995802863 Short 9


0 1995802864 Short 10

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DeVry BUSN379 Midterm Exam Study Guide