Busn 379 Week 4 Midterm 100 All Answers Instructor S Explanations

BUSN 379 Week 4 Midterm

100% All correct answers + Instructor’s explanations

Page: 1

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

increasing the net working capital while lowering the long-term asset requirements
improving the operating efficiency, thereby increasing the market value of the stock
increasing the firm’s market share

reducing fixed costs and increasing variable costs

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

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

3. Question : (TCO 1) Book values are different from market values because:

Book values reflect the value of the asset based on generally-accepted accounting principles.
Book values are used in the company’s balance sheet.

Book values do not reflect the amount someone is willing to pay today for an asset.
All of the above

None of the above

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.

5. Question : (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?





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?




None of the above

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?





8. Question : (TCO 1) An income statement:

reveals the net cash flows of a firm over a stated period of time.

reflects the financial position of a firm as of a particular date.

shows the revenue and expenses based upon selected accounting methods.
records revenue only when cash is received for the product or service provided.
records expenses based on the recognition principle.

9. Question : (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?






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?

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. Question : (TCO 3) Mr. Smith will receive $8,500 a year for the next 14 years from a contract. If the interest rate on this investment is eight percent, what is the approximate current value of these future payments?





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?

4.70 years

5.68 years

6.21 years

7.84 years

8.12 years

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 false?

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

The approximate current value of the project’s inflows is $11,000
The project’s inflows are higher than zero

The project should be accepted because its present value is positive

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 Engineering Company investment?





15. Question : (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?

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) 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 11 percent? Assume annual payments.





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?





6. Question : (TCO 3) The preferred stock of Bean Coffee pays an annual dividend of $5.60. It has a required rate of return of eight percent. What is the price of the preferred stock?





None of the above

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?





8. Question : (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?

$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. Question : (TCO 6) The market where new securities are offered is called the _____ market.






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




Global Select


11. Question : (TCO 6) The yield to maturity on a bond is:

equal to the coupon rate divided by the current market price.
another name for the current yield.

equal to the annual interest divided by the face value.

the current required market rate.

another name for the coupon rate.

12. Question : (TCO 6) A call provision in a bond agreement grants the issuer the right to:

repurchase the bonds prior to maturity at a pre-specified price.
replace the bonds with equity securities.

repurchase the bonds, after maturity at a pre-specified price.
change the coupon rate, provided the bondholders are notified in advance.
buy back the bonds on the open market prior to maturity.

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

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

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.

15. Question : (TCO 6) Which of the following is true regarding convertible bonds? Select all that apply:

Are relatively common

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

Page: 3

1. Question : (TCO 1) In a general partnership, each partner is personally liable for:

2. Question : (TCO 1) Trademarks are classified as:

short-term assets.

current liabilities.

long-term debt.

tangible fixed assets.

intangible fixed assets.

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) How can we apply the concept of time value of money in evaluating a mortgage? Present at least two scenarios. Briefly explain your rationale.

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

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?

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