A sole proprietorship is defined as a business:

A. owned by a single individual.

B. that employs a single employee.

C. engaged in a single operation.

D. that is unincorporated.

E. that produces only one product.

Which one of the following is an annuity, but not a perpetuity

A. equal payments every six months for 48 months

B. payments of equal amount each quarter forever

C. unequal payments each year forever

D. unequal payments each month for 18 months

E. unending equal payments every other month

Which one of the following is the primary determinant of the cost of capital for a proposed project

A. length of the project’s life

B. the risk level of the project

C. use, or lack thereof, of preferred stock to finance the project

D. combined sources of funds used to finance the project

E. amount of debt used to finance the project

A project has an operating cash flow of $33,000. Initially, this 4-year project required $5,600 in net working capital, which is recoverable when the project ends. The firm also spent $16,400 on equipment to start the project. This equipment will have a book value of $2,800 at the end of year 4. What is the cash flow for year 4 of the project if the equipment can be sold for $4,500 and the tax rate is 35 percent

A. $42,505

B. $37,500

C. $43,100

D. $38,600

E. $36,905

Free cash flow is equal to:

A. cash flow to shareholders.

B. the addition to retained earnings.

C. cash flow from assets.

D. net income plus depreciation.

E. earnings before interest and taxes plus depreciation minus taxes.

A portfolio is a(n):

A. type of risk-free asset.

B. group of assets held by an investor.

C. security that has a beta equal to the market beta.

D. new issue of securities that are being offered to the public.

E. asset that has a beta greater than 1.0.

An expense that lowers net income but does not affect a firm’s cash flow is referred to as a(n):

A. period cost.

B. variable cost.

C. indirect cost.

D. noncash item.

E. direct cost.

Which one of the following is a breakdown of the ROE into its three component parts

A. equity analysis

B. sustainable growth

C. Du Pont identity

D. efficiency breakout

E. profitability ratios

Direct bankruptcy costs are defined to include which of the following costs

A. the total costs to a firm related to a bankruptcy proceeding

B. the loss of customer goodwill resulting from a bankruptcy filing

C. the legal and accounting fees associated with the bankruptcy proceedings

D. costs to avoid a bankruptcy filing

E. management time spent on a bankruptcy proceeding

Hybrid Motors has paid increasing dividends of $.42, $.50, $.55, $.65, and $.80 a share over the past five years, respectively. The firm estimates that future increases in its dividends will be comparable to the arithmetic average growth rate over these past five years. The stock is currently selling for $41.50 a share. The risk-free rate is 3.5 percent and the market risk premium is 8.6 percent. What is the cost of equity for Hybrid Motors if the firm’s beta is 1.42

A. 12.49 percent

B. 17.78 percent

C. 15.45 percent

D. 18.67 percent

E. 19.24 percent

Boone Brothers purchased a parcel of land 8 years ago for $392,500. At that time, the firm invested $127,000 modifying the site so that it could be leased to an adjacent car dealer for displaying used car inventory. The lease payment was $39,000 a year. Boone Brothers is now considering building a hotel on the site as the auto dealer is relocating to make room for a nearby shopping mall to expand. The current value of the land is $1.14 million. Boone Brothers has no loans or mortgages secured by the property. What value should be included in the initial cost of the hotel project for the use of this land

A. $0

B. $828,000

C. $1,267,000

D. $1,140,000

E. $519,500

Standard deviation measures the _____ of a security’s returns over time.

A. mean

B. volatility

C. frequency

D. arithmetic average

E. average value

You earned 16.7 percent on your investments for a time period when the risk-free rate was 6.1 percent and the inflation rate was 5.4 percent. What was your real rate of return for the period

A. 11.83 percent

B. 9.78 percent

C. 10.72 percent

D. 10.60 percent

E. 9.89 percent

Which one of the following is a perpetuity

A. $1,000 annual payments from a trust fund forever

B. car payments of $260 a month for 60 months

C. $680 a month over the life of a lease

D. student loan payments of $360 a month for five years

E. social security payments of $1,100 a month for life

You are making a $50,000 investment and feel that a 13 percent rate of return is reasonable given the nature of the risks involved. You feel you will receive at least $8,000 in the first year, $21,000 in the second year, $43,000 in the third year, and potentially could see a cash outflow of $7,000 in the fourth year. What is the net present value of this investment given your expectations

A. $2,284.60

B. $7,620.11

C. $966.35

D. $3,673.12

E. $620.11

The primary market is defined as the market:

A. where the largest number of shares are traded on a daily basis.

B. with the largest number of participants.

C. where shareholders trade most frequently with each other.

D. where new securities are offered.

E. in which the largest number of issues are listed.

The return that lenders require on a firm’s borrowed funds is called the firm’s:

A. bond rating.

B. aftertax yield.

C. yield to maturity.

D. beta.

E. cost of debt.

Last week, Lester’s Electronics paid an annual dividend of $2.10 on its common stock. The company has a longstanding policy of increasing its dividend by 3 percent annually. This policy is expected to continue. What is the firm’s cost of equity if the stock is currently selling for $44.60 a share

A. 7.85 percent

B. 7.66 percent

C. 7.71 percent

D. 7.90 percent

E. 7.79 percent

————————————————————————-

Exam2 FIN370 Winter 2009 Key

Version B

A common-size income statement:

I. expresses all values as a percent of total assets.

II. should reflect a relatively constant cost of goods sold unless a firm changed the percent that it uses to mark up the wholesale price to get the retail price.

III. expresses net income as 100 percent.

IV. can be used to compare the performance of a firm both over time and against its industry.

a. II, III, and IV only

b. I and III only

c. III and IV only

D. II and IV only

e. I, II, and III only

The condominium at the beach that you want to buy costs $249,500. You plan to make a cash down payment of 20 percent and finance the balance over 10 years at 6.75 percent. What will be the amount of your monthly mortgage payment

A. $2,291.89

b. $3,412.67

c. $3,287.46

d. $4,145.68

e. $2,809.10

Anthony’s Appliances pays a constant quarterly dividend of $.35 per share. How much are you willing to pay for one share if you require a 9 percent rate of return

A. $15.56

b. $7.78

c. $11.67

d. $19.44

e. $3.89

The present value of an annuity will decrease when either the:

a. interest rate increases or the number of periods increases.

b. interest rate declines or the amount of the annuity payment increases.

C. amount of the annuity payment decreases or the interest rate increases.

d. interest rate increases or the amount of the annuity payment increases.

e. number of periods increases or the interest rate decreases.

Given an interest rate of zero percent, the future value of a lump sum invested today will always:

a. be equal to $0.

b. decrease if the investment time period is shortened.

c. be greater than the initial investment amount.

D. remain constant, regardless of the investment time period.

e. decrease if the investment time period is lengthened.

Preferred stock:

I. generally has a fixed dividend.

II. generally has a dividend that increases annually.

III. receives preference in bankruptcy over bonds.

IV. receives preference in bankruptcy over common stock.

a. II and IV only

b. I only

c. II and III only

d. I and III only

E. I and IV only

The interest rate used to compute the present value of a future cash flow is called the:

a. compound rate.

b. present value rate.

C. discount rate.

d. simple rate.

e. prime rate.

Working capital management includes which of the following

I. establishing the inventory level

II. deciding when to pay suppliers

III. determining the amount of cash needed on a daily basis

IV. establishing credit terms for customers

a. I, II, and III only

b. I, II, and IV only

c. I and II only

D. I, II, III, and IV

e. III and IV only

The interest rate per period multiplied by the number of periods in a year is called the:

a. perpetual rate.

b. effective annual rate.

C. annual percentage rate.

d. compounded rate.

e. simple rate.

The annual interest on a bond divided by the bond’s market price is called the:

a. total yield.

B. current yield.

c. yield to maturity.

d. yield to call.

e. required yield.

Locksmith’s is expected to pay an annual dividend of $.75 this month. The stock is selling for $10.90 a share and has a required return of 11 percent. What is the growth rate of the dividend

a. 4.27 percent

b. 3.85 percent

C. 4.12 percent

d. 3.94 percent

e. 3.62 percent

The yield to maturity on a bond is:

a. equal to the coupon rate divided by the current market price.

b. another name for the coupon rate.

C. the current required market rate.

d. equal to the annual interest divided by the face value.

e. another name for the current yield.

Which of the following affect the current price of a stock

I. dividend growth rate

II. required return

III. dividend paid this year

IV. expected dividend next year

a. I, II, III, and IV

b. II and IV only

c. II, III, and IV only

D. I, II, and IV only

e. I and III only

Dustin is considering an investment that will pay $3,000 a year for 10 years, starting

1 year from today. How much should Dustin pay for this investment if he wishes to earn a 9 percent rate of return

A. $19,252.97

b. $20,415.57

c. $18,349.81

d. $21,213.24

e. $17,985.74

The primary benefit of cumulative voting is:

a. the ability to vote by proxy.

b. that each shareholder receives an equal number of total votes.

c. the ability of the shareholders to replace the entire board of directors in one election.

D. an increased probability that minority shareholders can elect at least one director of their choice.

e. an increased probability that the largest shareholder will be able to control the entire board of directors.

Denton, Inc. has total equity of $83,000 and total assets of $255,000. What is the total debt ratio

a. .33

b. 1.12

c. .25

d. 1.48

E. .67

Karen has $16,000 that she wants to invest for 1 year. She can invest this amount at The North Bank and earn 5.50 percent simple interest. Or, she can open an account at The South Bank and earn 5.39 percent interest, compounded monthly. If Karen decides to invest at The North Bank, she will:

a. earn $17.60 more than if she had invested with The South Bank.

b. have a total balance of $16,862.40 in her account after 1 year.

c. have a total balance of $16,800 in her account after 1 year.

D. earn $4.03 less than if she had invested with The South Bank.

e. earn the same amount as if she had invested with The South Bank.

The financial statements of Classic Collectables reflect cash of $15,800, accounts receivable of $31,600, accounts payable of $40,100, inventory of $54,700, long-term debt of $60,000, and net fixed assets of $99,500. The firm estimates that if it wanted to cease operations today it could sell the inventory for $39,000 and the fixed assets for $77,000. What is the market value of the assets

a. $201,600

b. $181,700

c. $101,500

D. $163,400

e. $63,300

Crabtree, Inc. has an operating cash flow of $164,900, depreciation expense of $93,100, and taxes paid of $80,400. A partial listing of its balance sheet accounts is as follows:

What is the amount of Crabtree’s cash flow from assets

a. $49,100

b. $107,200

c. $200,300

d. $69,800

E. $120,400

The tax rate applicable to the next dollar of taxable income is called the _____ tax rate.

a. absolute

b. next

c. total

D. marginal

e. average

Sander’s Supplies has paid a constant dividend of $2.15 a share for the past 20 years. Yesterday, the firm announced that the dividend will increase next year by 5 percent and will stay at the level for three years, after which time the dividends will increase by 4 percent annually. The required return on this stock is 9 percent. What is the current value per share

A. $41.97

b. $48.82

c. $54.07

d. $56.42

e. $43.49

A 6 percent $1,000 bond matures in 4 years, pays interest semiannually, and has a yield to maturity of 6.85 percent. What is the current market price of the bond

a. $768.76

B. $970.69

c. $910.27

d. $801.38

e. $869.15

Which one of the following statements is correct

a. NASDAQ is an auction market.

b. The majority of the publicly traded firms in the U.S. are listed on the NYSE.

c. The NYSE is a dealer market.

D. The NYSE has the most stringent listing requirements.

e. The trading floor for NASDAQ is located in Chicago.

Which one of the following is a breakdown of the ROE into its three component parts

a. equity analysis

b. sustainable growth

C. Du Pont identity

d. profitability ratios

e. efficiency breakout

Dividends become a liability of a firm on the:

a. last day of each fiscal year.

B. declaration date.

c. payment date.

d. first day of each fiscal year.

e. date of record.

If shareholders are granted a preemptive right they will be:

a. able to determine who the candidates should be for any open seats on the board.

B. given the first right to purchase any new shares of stock that are issued.

c. granted shares that receive additional voting privileges.

d. paid dividends prior to the preferred shareholders during the preemptive period.

e. given the choice of receiving dividends in cash or in additional shares of stock.

The voting system whereby a shareholder can cast all of his or her votes for a single candidate for the board of directors is called _____ voting.

a. aggregate

b. condensed

c. proxy

d. straight

E. cumulative

Which one of the following statements is correct

a. The present value of an annuity is unaffected by the number of the annuity payments.

b. The present value of an annuity increases when the interest rate increases.

c. The future value of an annuity is unaffected by the amount of each annuity payment.

d. The future value of an annuity increases when the interest rate decreases.

E. The present value of an annuity increases when the interest rate decreases.

The 8.5 percent annual coupon bonds of Eberly, Inc. are selling for $930.12. The bonds have a face value of $1,000 and mature in 9 years. What is the yield to maturity

a. 4.84 percent

b. 5.24 percent

c. 8.12 percent

d. 9.31 percent

E. 9.70 percent

Which of the following correctly describe a dealer market

I. Dealers match buyers with sellers.

II. Dealers buy and sell for themselves at their own risk.

III. Dealer trading occurs over-the-counter.

IV. Dealer transactions occur on a trading floor.

a. I, II, and III only

b. I and IV only

c. I and III only

d. II and IV only

E. II and III only

Global Enterprises has just signed a $3 million contract. The contract calls for a payment of $.5 million today, $.9 million one year from today, and $1.6 million two years from today. What is this contract really worth if Global Enterprises can earn 12 percent on its money

a. $2.21 million

B. $2.58 million

c. $2.49 million

d. $2.30 million

e. $2.39 million

Around Town Movers recently purchased a new truck costing $97,000. The firm financed this purchase at 8.25 percent interest with monthly payments of $2,379.45. How many years will it take the firm to pay off this debt

a. 4.5 years

b. 5.0 years

c. 3.5 years

D. 4.0 years

e. 3.0 years

The coupon is the:

a. amount of discount received when a bond is purchased.

b. annual interest divided by the current bond price.

c. amount paid to a bond dealer when a bond is purchased.

D. stated interest payment on a bond.

e. difference between the bid and ask price.

Which of the following will increase the total amount of interest earned on an investment? Assume all interest is reinvested.

I. increasing the frequency of the interest payments

II. decreasing the frequency of the interest payments

III. increasing the interest rate

IV. decreasing the interest rate

A. I and III only

b. I and IV only

c. II and III only

d. III only

e. II and IV only

The coupon rate for a bond is best defined as the:

a. annual interest divided by the current market price.

B. annual interest divided by the face value.

c. annual interest divided by the clean market price.

d. annual coupon divided by the dirty market price.

e. semi-annual interest divided by the par value.

A debenture is:

a. unsecured debt that generally matures in less than ten years.

b. long-term debt secured by real estate.

c. any type of debt that is short-term in nature.

D. unsecured debt that generally matures in ten years or more.

e. long-term debt secured by fixed assets of the borrower.

The common stock of Bethel Baked Goods is valued at $8.76 a share. The company increases its dividend by 1.5 percent annually and expects its next dividend to be $.65 per share. What is the required rate of return on this stock

a. 9.03 percent

b. 10.17 percent

C. 8.92 percent

d. 6.64 percent

e. 7.53 percent

The goal of financial management is to increase the:

A. current market value per share.

b. future value of the firm’s total equity.

c. book value of equity.

d. dividends paid per share.

e. number of shares outstanding, thereby increasing the market value of equity.

The 7 percent coupon bonds of the Media Printing Co. are selling for 102 percent of par value. The bonds mature in 6 years and pay interest semiannually. These bonds have current yield of _____ percent, a yield to maturity of _____ percent, and an effective annual yield of _____ percent.

A. 6.86; 6.59; 6.70

b. 6.86; 6.23; 6.53

c. 6.59; 6.65; 6.70

d. 6.37; 6.59; 6.86

e. 6.37; 6.23; 6.53

A $1,000 face value bond quoted as 102.16 sells for _____ and a bond quoted as 99:08 sells for _____.

A. $1,021.60; $992.50

b. $1020.16; $992.50

c. $1,021.60; $990.80

d. $1025.00; $992.50

e. $1020.16; $990.80

The dividend yield is defined as:

a. next year’s expected dividend divided by the current book value per share.

b. the current dividend divided by the current book value per share.

c. next year’s expected dividend divided by next year’s expected market value per share.

D. next year’s expected dividend divided by the current market value per share.

e. the current dividend divided by the current market value per share.

Blake’s offers a perpetuity that pays annual payments of $8,000. This contract sells for $75,000 today. What is the interest rate

a. 16.50 percent

b. 5.00 percent

c. 8.75 percent

d. 21.33 percent

E. 10.67 percent

Eli and Sons wants to evaluate its assets to determine if its mix of assets has changed over time. To do this, the firm should compile which one of the following financial statements for each of the past few years

a. income statement

b. balance sheet

C. common-size balance sheet

d. common-size income statement

e. statement of cash flows

Boots Roofing just paid its annual dividend of $.90 a share. The firm recently announced that all future dividends will be increased by 3.5 percent annually. What is one share of this stock worth to you if you require a 12 percent rate of return

A. $10.96

b. $10.30

c. $10.59

d. $10.35

e. $10.78

A series of equal cash flows that occur at the beginning of each time period for a limited number of time periods is called a(n):

a. beginning annuity.

b. perpetuity due.

C. annuity due.

d. perpetuity.

e. ordinary annuity.

Payments of $100 a month for 24 months are defined as a(n):

A. annuity.

b. ordinary cash flow.

c. discounted cash flow.

d. consol.

e. perpetuity.

A bond has a $1,000 face value, a market price of $1,115, and pays interest payments of $90 every year. What is the coupon rate

a. 6.75 percent

B. 9.00 percent

c. 8.25 percent

d. 7.39 percent

e. 4.50 percent

Trevor’s Tires is offering a set of 4 premium tires on sale for $550. The credit terms are 24 months at $20 per month. What is the interest rate on this offer

a. 9.48 percent

b. 11.59 percent

c. 10.62 percent

d. 13.18 percent

E. 12.74 percent

Which one of the following is a form of bond issue wherein interest payments are made directly to the owners of record

A. registered

b. coupon

c. bearer

d. street name

e. secured

Over the past year, a firm increased its current assets and decreased its current liabilities. As a result, the firm’s net working capital:

a. had to decrease.

b. was unaffected as the changes occurred in the firm’s current accounts.

C. had to increase.

d. could have either increased, decreased, or remained constant.

e. could have remained constant.

h. Summarize the gain, loss, and cost conditions of the hedge on the bond portfolio in terms of changes in interest rates.

27.

1.

Smart Sammy tripled his money in just 3 years in the recent stock market boom. His average annualized return was:

Answer

a. 67%

b. 44%

c. 25%

d. 100%

Question 2

1.

One of your best friends, who is in 20% marginal tax bracket, is planning to buy a Condo selling for $ 140,000. Your friend’s plan is to make a down pmt of 20% and finance the balance from a Bank in Worcester MA at a fixed rate of 4.99% over 30 years with monthly payments. He needs your help in figuring out his first year tax savings if he decides to buy this home.

Answer

a. $1,441

b. $5,551

c. $1,110

d. $1,118

Question 3

1.

Currently the IVY League Colleges cost about $ 50,000 per year for the 4 year college education, while the WSU Costs only about $ 15,000. . These costs are going up each year by about 4.5%. In 18 years time, the difference between the Ivy League and WSU would be approximately:

Answer

a. $ 35,000

b. $63,350

c. $940,000

d. $ 77,300

Question 4

1.

Net Future value (NFV) of the following Cash Flows (CF) is:

YR 0 1 2 3 4

CF 100 50 30 60 20

Discount Rate = 10%

2. Answer

a. $300

b. $ 335.00

c. $260

d. $235

Question 5

1.

Your best friend’s parents want to buy a home in the Worcester County, but they don’t know the exact amount of money that they can afford to borrow. They can afford monthly payments of $ 1,800. A friendly bank in Worcester has indicated that they can borrow money at 6% fixed rate for 30 years with monthly payments. They can afford to borrow:

Answer

a. $ 24,777

b. $142,305

c. $300,225

d. $ 648,000

Question 6

1.

Car Leasing Problem

Car Price = $22,500

Dn Payment = $2,500

Lease Duration = 3 years

Leasing Rate = 2.99%

Residual Value of Car at the end of 3 years = $12,5000

Approximate Monthly Payments for this Lease are:

Answer

a. 320.00

b. 715.00

c. $ 280

d. $250.00

Question 7

1.

Lucky Ed, 70, just won a Power Ball Lotto worth $120 million. He has two options collect his winnings:

Option #1: Annuity Option: One Pmt per year. In all 20 pmts

Option # 2: Cash Option: Lotto Commission would use a Discount Rate of 10% to calculate this value.

Assume Ed to be 40% Marginal Tax bracket. On Your advice, Ed has decided to take the Cash Option.

Based on your calculation Joe would, under Cash Option, receive a Lump Sum of:

Note: The answers are rounded to Zero Decimal points.

Answer

$34m

$30m

$72m

$31m

Question 8

1.

All of the followings are the rights and privileges of a Common Stockholders EXCEPTING:

Answer

a. Right to Interest Payments

b. Voting Proxy Rights

c. Pre-emptive Right

d. Residual Right

e. Right to Dividends

Question 9

1.

Fine prints on a Credit Card state that the all unpaid balances will be charged at an annual percentage rate (APR) of 24%. The effective annual rate (EAR) with monthly compounding is:

Answer

a. 26.8%

b. 21.7%

c. 27.1%

d. 24.0%

Question 10

1.

The financial instrument that promises to pay the same amount of money at the beginning of each month for a given no of months is:

Answer

a. Annuity Due

b. Perpetuity

c. Ordinary Annuity

d. Preferred Stock

Question 11

1.

You are offered an investment that will make you three payments of $ 5,000 each. These payments would occur from now at the end of 4th, 5th, and 6th year respectively. If you can 11%, what is the most this investment is worth now?

Answer

a. $ 15,000

b. $12,219

c. $ 8,934.00

d. $10,968.00

Question 12

1.

Working Capital Management refers to a Firm’s Short Term Assets. All of the following assests are Short Term, RXCEPT:

Answer

a. Cash

b. Account Receivable

c. Inventory

d. Notes Payables

e. Prepaid Expenses

Question 13

1.

Financial Management Goal of a Corporation is to:

Answer

a. Maximize Stockholders’ Wealth

b. Maximize Net Sales

c. Maximize Market Share

d. Maximize Profit

1.

This is a type of financial market where Securities are sold for the first time:

Answer

a. Dealer Market

b. Primary Market

c. Auction Market

d. Secondary Market

Question 15

1.

Supposing you are responsible for setting the policy on Effective Annual Rates (EAR) on all loans for a bank in Worcester MA, You have decided that all loans given to people with Credit Score between 500 and 600 should be charged an EAR of 18%. A customer with Credit Score of 540 wants to borrow $200,000 to buy a Condo. The Truth in Lending Act of 1968 AKA Regulation Z requires that cost of borrowing must be quoted in Annual Percentage Rate (APR). According to your calculations, this APR rate is:

Answer

a. 16.72%

b. 15.95%

c. 16.56%

d. 18.00%

Question 16

1.

At a Discount Rate of 9.5%, a plot of land that promises to generate a cash flow of $ 12,000 per year forever Is worth:

Answer

a. $ 179,325

b. $ 126,316

c. $120,850

d. Its value cannot be calculated.

Question 17

1.

You would like to retire in 50 years as a millionaire. If you have $10,000 today. What rate of return do you need to achieve your gaol?

Answer

9.65% per yr

198% per yr

1.98%

10% per yr

Question 18

1.

Supposing ,you just graduated from WSU and got a nice high paying job with a Finance Company. You are planning to buy a Lexus car that sells for $55,000. Your plan is to accumulate 20% down payment for the Lexus Car by making monthly deposits of $ 600 in an account that promises to earn at an annual rate of 12%. No of months it would take to meet this objectives is:

Answer

a. 17

b. 20

c. 18

d. 10

Question 19

1.

This is a type of Business which is run by a few active owners that have unlimited liabilities, but there are many more passive owners who have limited liabilities. This type of business is called:

Answer