BFIN3321MIDTERM EXAMFALL II 2015MULTIPLE CHOICE (2 points each) Use the Excel spreadsheet to submit your answers!1. Which of the following is/are true:A. Unethical behavior and illegal behavior are the sameB. Unethical behavior is always illegal behaviorC. Illegal behavior is always unethical behaviorD. Unethical behavior and illegal behavior are never the same2. The overall goal of the financial manager is to _________________.A. Minimize total costsB. Maximize net incomeC. Maximize earnings per shareD. Maximize shareholder wealth3. 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 inB. How best to increase the firm’s riskC. How to best bring additional funds into the firmD. How best to return the profits from those projects to the owners over time5. All of the following are advantages to organizing as a corporation except ____.A. Easy to transfer ownershipB. Easy access to capitalC. Double taxationD. Limited liability6. From the perspective of access to capital, the best form of business organization is the _______.A. Sole proprietorshipB. S CorporationC. CorporationD. Partnership7. The most common type of business in the United States is the __________.A. Hybrid organization such as a limited liability companyB. Sole ProprietorshipC. PartnershipD. Corporation8. From the perspective of ownership risk, the best form of business organization is the ______.A. Sole proprietorshipB. S CorporationC. CorporationD. Partnership9. The biggest disadvantage of the sole proprietorship is _________________.A. Limited access to capitalB. Unlimited liabilityC. Double taxationD. Total control10. From the perspective of control, the best form of business organization is the __________.A. Sole proprietorshipB. S CorporationC. CorporationD. Partnership11. Unethical firm behavior include all of the following exceptA. maximizing shareholder value,B. Mistreating Employees,C. Mistreating Customers,D. Financial Misconduct.12. An employee stock option plan is ________________.A. A plan that only partnerships can use to defer compensation to partnersB. A perk usually only given to the board of directors as compensationC. A way to align the interests of employees with those of the ownersD. None of these answers are correct13. Which of the following statements is correct?A. Shareholder wealth maximization may actually be beneficial for society in the long-run.B. Shareholder wealth maximization is achieved by maximizing market share.C. Shareholder wealth maximization is achieved by maximizing sales.D. Shareholder wealth maximization is achieved by minimizing costs.14. All are examples of perks a CEO might enjoy except _____.A. Company carB. Corporate jetC. Golf club membershipD. All of the above are examples of perks a CEO might enjoy15. While cash flow is more often used in financial analysis, which of the following is not a reason torequire firms to still report accounting profit?A. We need to keep accountants employedB. accounting profit proxies economic profitC. accounting profit will generally have less erratic swings from year to yearD. accounting profits reflect the prospect of the business as a ‘going concern’16. The agency relationship in corporate finance refers to _______________________.A. when the board of directors oversee the CEOB. when the board of directors are elected to staggered termsC. when the shareholders hire a manager to run their companyD. when the corporate hires an advertising agency to market their new product/service17. Restricted stock is:A. a special type of stock that is not transferable from the current holder to others until specificconditions are satisfied.B. a special type of stock that can be converted into corporate bonds after a specific amount of timehas 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.18. The role of a credit analyst is to ______________.A. help firms access capital marketsB. examine a firm’s financial strength for its debt holdersC. monitor the business activities and report to the Securities Exchange CommissionD. follow a firm and conduct their own evaluations of the company’s business activities19. A legal duty between two parties where one party must act in the interest of the other party isknown as a(n) ______________.A. FiduciaryB. Venture capitalistC. Restricted investorD. Restricted capitalist20. Which of the following is not true about ratio analysis?A. Ratio analysis tells us how to fix our organization.B. Ratio analysis can show us how our organization changes over time.C. Ratio analysis uses accounting data, not cash flow, so it is not useful.D. Ratio analysis can show us how our organization compares to other organizations.21. Is it possible for a firm to have positive net income and yet have cash flow problems?A. No, this is impossible since net income and cash are highly correlated.B. No, this is impossible since net income increases the firm’s cash.C. Yes, this can occur when a firm is growing very rapidly.D. Yes, this is possible if the firm is selling off assets.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 lifeB. Lower taxes in the early years of a project’s lifeC. Higher depreciation expenseD. All of the above.23. All of the following are cash flows from investing activities except a(n)___________.A. All of these items are cash flows from investing.B. Increases in marketable securitiesC. Decreases in fixed assetsD. Increases in fixed assets24. The board of directors _____________.A. are hired by the CEOB. are elected by shareholdersC. have unlimited liability since they oversee the day-to-day operations of the firmD. are employed by the Securities Exchange Commission to ensure its rules and regulations havebeen met25. Cash flows available to pay the firm’s stockholders and debt holders after the firm has made thenecessary working capital investments, fixed asset investments, and developed the necessary newproducts to sustain the firm’s ongoing operations is referred to as _________________.A. Net operating working capitalB. Operating cash flowC. Free cash flowD. None of the above26. All of the following are reasons that one should be cautious in interpreting financial statementsexcept ____________.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.27. All of the following are cash flows from financing activities except a(n) _________.A. Increase in accounts payableB. Stock RepurchasesC. Paying dividendsD. Issuing stock28. Choose the phrase that makes this statement true: Ratio analysis can provide useful informationon a firm’sA. past but not current position.B. current position and hint at future performance.C. current position but should never be used to forecast future performance.D. 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 forinvestors 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 necessaryinvestments in the firm’s operations.D. All of these statements are correct.30. Which of the following statements is 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 amountof debt versus equity financing.D. All of these statements are correct.31. A strong liquidity position means that ______________.A. the firm pays out a large portion of its net income in the form of dividendsB. the firm is able to meet its short-term obligationsC. the firm uses little debt in its capital structureD. the firm pays its creditors on-time32. Which of the following statements is 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 ishistorical.C. Performing cross-sectional ratio analysis refers to assessing how a firm performed over a certainsection of time.D. To interpret financial ratios, users should analyze the performance of the firm over time and theperformance of the firm against one or more companies in the same industry.33. A firm has an average collection period of 13 days. The industry average ACP is 27 days. Whichof 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. Which of the following statements is correct?A. In general, a firm should strive for a high average payment period because it wants to pay for itspurchases as quickly as possible.B. If a firm has a very high fixed asset turnover, it means that the firm may be nearing its maximumproduction 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.36. 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.D. All of the above.37. 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.38. Common-size financial statements:A. Are obtained by dividing all income statement accounts by net sales and all balance sheetaccounts 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.D. All of the above.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. Compounding is _______.A. the adding of interest earned every period on both the original investment and the interestpreviously earned and retained with the investmentB. the adding of interest earned every period on both the original investment and additional depositsC. the process of using time-value equations to compute the number of yearsD. the process of finding a present value42. 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.43. In theory, a perpetuity’s value will be infiniteA. always,B. if the interest rate is zero,C. if the interest rate is 100%,D. when payments go on forever,E. when the payments are constant.44. 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.45. Which statement is true?A. Extremely high levels of liquidity guard against liquidity crises, but at the cost of lower returns onassetsB. The less liquid assets a firm holds, the less likely it is that the firm will experience financialdistress.C. The lower the liquidity ratios, the less liquidity risk a firm has.D. Liquid assets generate profits for the firm.46. 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.47. Which of the following statements is correct?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.48. 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 a decline in inflation.D. None of these conditions will cause an increase in the bond’s yield.49. Which of the following is an electronic stock market without a physical trading floor?A. Mercantile ExchangeB. Nasdaq Stock MarketC. American Stock ExchangeD. New York Stock Exchange50. To list a stock on the NYSE, a company must meet minimum requirements that include all of thefollowing except ____________________.A. Firm sizeB. P/E RatioC. Level of trading volumeD. Total number of stockholders51. Which of the following indices best reflects the ten sectors of the economy?A. Dow Jones Industrial AverageB. Standard & Poor’s 500C. Nasdaq CompositeD. None of the above52. Which of the following statements is incorrect?A. Trading at the New York Stock Exchange and the American Stock Exchange are done by openoutcry.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.53. Which of the following statements is incorrect?A. Preferred stockholders have higher precedence for payment than common stockholders in firmliquidation if bankruptcy occurs.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.PROBLEMS – Show your work! For time value of money problems, show your inputs,and tell me what you use for the calculations! No work and its wrong = 0 points!1. (7 points) In the Wall Bricks, Inc.’s balance sheet lists net fixed asset as $12 million. The fixedassets could currently be sold for $10 million. Wall Bricks’ current balance sheet shows currentliabilities of $4 million and current assets of $6 million. If all the current accounts were liquidatedtoday, the company would receive $1 million cash after paying the $4 million in liabilities. What isthe book value of Wall Bricks’ assets today? What is the market value of these assets?Book Value of Assets: $; Market Value: $2. (4 points) Last year a firm had an ROA of 4% and a dividend payout ratio of 25%. What is theinternal growth rate?Rate:3. (4 points) Last year a firm had an ROE of 10% and a dividend payout ratio of 60%. What is thesustainable growth rate?Rate:4. (3 points) What is the future value in 5 years of $1,000 deposited today, earning a 6% interestrate annually?Future Value:5. (3 points) Approximately, how many years does it take to double a $2000 investment wheninterest rates are 9% per year?Years:6. (3 points) A stock investor deposited $1000 three years ago in a non-dividend paying stock.Today the stock is valued at $804. What annual rate of return has this investor earned?Rate:%7. (8 points) A friend wants to retire in 30 years when he is 65. At age 35, he can invest$300/month that earns 6% each year. But he is thinking of waiting 15 years when he is age 50,and then investing $900/month to catch up, earning the same 6% per year. He feels that byinvesting three times as much for half as many years (15 instead of 30 years) he will have more.What is the future value of each of these options at age 65, and under which scenario would heaccumulate more money?Scenario A:$,Scenario B: $, Best:8. (4 points) Compute the present value of a one-time payment of $1,000 paid in four years usingthe following discount rates: 2.0% in year 1, 2.25% in year 2, 4% in year 3, and 4.5% in year 4.Present Value:$9. (5 points) TV’s R Yours is advertising a deal, in which you buy a flat screen TV for $1,192.25(including tax) with one year before you need to pay (no interest is incurred if you pay by the end ofthe one year). How much would you need to deposit at the end of each month in a savings accountearning 1.2% APR, compounded monthly, to be able to pay the $1,192.25 bill in one year?Monthly Deposit:10. (8 points) You purchase a house for $300,000 by getting a mortgage for $240,000 and paying a$60,000 down payment (20%). You can get a 15-year mortgage with a 3.6% interest rate.A. What would be your monthly payment?B. What would be the loan balance be in 10 years?11. (3 points) If the present value of an ordinary, 15 year annuity is $30,000 and interest rates are5%, what is the present value of an annuity due with the same length of life, present values andinterest rate?Present Value:12. (4 points) A credit card is offered with monthly payments and a 21.99% APR. What is theloan’s effective annual rate (EAR)?EAR:13. (5 points) Calculate the price of a $1,000 bond, offering a 10% coupon payment with 20 yearsleft to maturity and a market interest rate of 12%. (Assume interest payments are semiannual.) Isthis a discount or premium bond?Price:Type:14. (4 points) On July 25, 2014, the Dow Jones Industrial Average opened $17,083.80 and closed at$16,960.57. What was the effective annual rate return (in percent) of the stock market that day?Daily Return:%EAR:%15. (4 points) Financial analysts forecast GDY Inc.’s growth for the future to be 3%. GDY’s recentannual dividend was $4.00. What is the value of GDY stock when the required return is 11%?Stock Value: $16. (5 points) URN Inc. recently paid a $5.00 annual dividend. The dividend is expected to grow at a4% rate. At a current stock price of $52, what is the return shareholders are expecting?Expected Return%



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