BMGT 3354 – BFIN3321 MIDTERM EXAM FALL I 2016

BFIN3321 MIDTERM EXAM FALL I 2016MULTIPLE CHOICE (2 points each)1. The overall goal of the financial manager is to _________________. A.Minimize total costsB. Maximize net incomeC. Maximize earnings per shareD. Maximize shareholder wealth2. 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 managementsystems to standardize data.3. Maximizing owners’ equity value means carefully considering all ofthe 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 ownersover time4. All of the following are advantages to organizing as a corporationexcept ____. A. Easy to transfer ownershipB. Easy access to capitalC. Double taxationD. Limited liability5. From the perspective of access to capital, the best form of businessorganization is the _______. A. Sole proprietorshipB. S CorporationC. CorporationD. Partnership6. The most common type of business in the United States is the__________. A. Hybrid organization such as a limited liability companyB. Sole ProprietorshipC. Partnership D. Corporation7. From the perspective of ownership risk, the best form of businessorganization is the ______. A. Sole proprietorshipB. S CorporationC. CorporationD. Partnership8. The biggest disadvantage of the sole proprietorship is_________________. A. Limited access to capitalB. Unlimited liabilityC. Double taxationD. Total control9. From the perspective of control, the best form of businessorganization is the __________. A. Sole proprietorshipB. S CorporationC. CorporationD. Partnership10. Which of the following is/are true:A. Unethical behavior is always illegal behaviorB. Illegal behavior is always unethical behaviorC. Unethical behavior and illegal behavior are the sameD. Unethical behavior and illegal behavior are never the same11. Unethical firm behavior include all of the following except A.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 topartners B. A perk usually only given to the board of directors ascompensationC. 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 forsociety 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….pany 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 ofthe following is not a reason to require firms to still report accountingprofit?A. We need to keep accountants employedB. accounting profit proxies economic profitC. accounting profit will generally have less erratic swings from year toyear 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 board of directors oversee theCEOB. 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 newproduct/service17. Restricted stock is:A. a special type of stock that is not transferable from the currentholder to others until specific conditions are satisfied.B. a special type of stock that can be converted into corporate bondsafter a specific amount of time has elapsed.C. a special type of stock that is a result of offering an employee stockownership plan.D. None of these answers is correct.18. A legal duty between two parties where one party must act in theinterest of the other party is known as a(n) ______________.A. FiduciaryB. Venture capitalistC. Restricted investor D. Restricted capitalist 19. 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 SecuritiesExchange Commission D. follow a firm and conduct their ownevaluations of the company’s business activities20. 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 notuseful.D. Ratio analysis can show us how our organization compares to otherorganizations.21. Is it possible for a firm to have positive net income and yet havecash flow problems? A. No, this is impossible since net income andcash 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 MACRSmethod of depreciation? A. Lower taxable income in the early years ofa 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 excepta(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 operationsof the firmD. are employed by the Securities Exchange Commission to ensure itsrules and regulations have been met 25. Cash flows available to pay the firm’s stockholders and debtholders after the firm has made the necessary working capitalinvestments, fixed asset investments, and developed the necessarynew products to sustain the firm’s ongoing operations is referred to as_________________.A. Net operating working capitalB. Operating cash flow C. Free cash flowD. None of the above26. All of the following are reasons that one should be cautious ininterpreting financial statements except ____________.A. Firms can take steps to over- or understate earnings at varioustimes.B. It is difficult to compare two firms that use different depreciationmethods.C. Financial managers have some latitude in accounting rules tomanage their reported earnings. D. All of the above are reasons to becautious in interpreting financial statements.27. All of the following are cash flows from financing activities excepta(n) _________. A. Increase in accounts payableB. Stock RepurchasesC. Paying dividendsD. Issuing stock28. Choose the phrase that makes this statement true: on a firm’sA. past but not current position.B. current position and hint at future performance.Ratio analysis can provide useful informationC. current position but should never be used to forecast futureperformance.D. past and current position, but should never be used to forecastfuture performance.29. Which of the following statements is incorrect?A. A negative free cash flow means that the firm’s operations are notproducing any cash flows for investors and always indicates that thefirm is mismanaged.B. A positive free cash flow means that the firm’s operations areproducing cash flows for investors— both bondholders andshareholders. C. Free cash flows are the cash flows available to investors after thefirm has made the necessary investments 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 thefirm.B. Debt is referred to as “financial leverage” because it magnifiesreturns to shareholders.C. Debt management ratios evaluate whether a firm is financing itsassets with a reasonable amount of 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 ofdividends B. 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 areclustered with firms that are identical. B. Time-series analysis isuseless in assessing improvement or deterioration of ratios since thedata is historical.C. Performing cross-sectional ratio analysis refers to assessing how afirm performed over a certain section of time.D. To interpret financial ratios, users should analyze the performance ofthe firm over time and the performance of the firm against one or morecompanies in the same industry.33. A firm has an average collection period of 13 days. The industryaverage ACP is 27 days. Which of the following statements is truegiven this information?A. The firm could probably increase its sales by relaxing its strictaccounts receivable policy.B. The firm is maximizing its net income by minimizing its losses inaccounts receivable.C. The firm has an excellent accounts receivable policy. D. Bothstatements 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 periodbecause 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 firmmay be nearing its maximum production capacity.C. An extremely low average collection period will maximize netincome.D. A debt ratio of zero, so no interest is paid, is the most profitablestrategy.36. A firm may not want to strive to match industry average ratioswhen: 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 noother 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 salesand all balance sheet accounts by total assets.B. Allow for easy comparison of balance sheets and income statementsacross firms in the industry. C. Provide quantitative clues about thedirection that the firm is moving.D. All of the above.39. The main two sources of the time value of money are:1. Interest Rates and Risk,2. Inflation and Interest Rates,3. Risk and timing of Consumption,4. Inflation and timing of Consumption. 40. Which of the following will decrease a present value? A. Increasingthe 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 originalinvestment and the interest previously earned and retained with theinvestmentB. the adding of interest earned every period on both the originalinvestment and additional deposits C. the process of using time-valueequations to compute the number of yearsD. the process of finding a present value42. Which of the following will increase the present value of anannuity? 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 infinite A. 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 statementsis correct? A. The coupon rate must be greater than the yield tomaturity.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, butat the cost of lower returns on assetsB. The less liquid assets a firm holds, the less likely it is that the firmwill experience financial distress.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 infinancial 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 ofcapital.47. Which of the following statements is correct?A. Long-term bonds have more reinvestment rate risk than short-termbonds. B. Long-term bonds have more interest rate risk than shortterm 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 aphysical 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 minimumrequirements that include all of the following 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 theeconomy? A. Dow Jones Industrial AverageB. Standard & Poor’s 500C. Nasdaq CompositeD. None of the above 52. Which of the following statements is incorrect?A. Trading at the New York Stock Exchange and the American StockExchange are done by open outcry.B. The Dow Jones Industrial Average includes 35 of the largestcompanies 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 thancommon stockholders in firm liquidation if bankruptcy occurs.B. Preferred stock prices fluctuate with market interest rates andbehave like corporate bond prices. C. Common stock price changeswith the value of the company’s underlying business.D. Preferred stock is preferred because it always pays a higher returnthan common stock.PROBLEMS1. (6 points) In the Wall Bricks, Inc.’s balance sheet lists net fixed assetas $6 million. The fixed assets could currently be sold for $5 million.Wall Bricks’ current balance sheet shows current liabilities of $1 millionand current assets of $4 million. If all the current accounts wereliquidated today, the company would receive $2 million cash afterpaying the $1 million in liabilities. What is the book value of WallBricks’ assets today? What is the market value of these assets?Book Value: $ ; Market Value: $2. (4 points) Last year a firm had an ROA of 4% and a dividend payoutratio of 25%. What is the internal growth rate?Rate:3. (4 points) What is the present value of $1,000 received in 5 years,earning a 2% interest rate annually?Present Value:4. (4 points) Approximately, how many years will it take to double a$1000 investment when interest rates are 2% per year?Years: 5. (4 points) A stock investor deposited $1000 three years ago in anon-dividend paying stock. Today the stock is valued at $804. Whatannual rate of return has this investor earned?Rate: %6. (8 points) A friend wants to retire in 30 years when he is 65. At age35, he can invest $200/month that earns 6% each year. But he isthinking of waiting 15 years when he is age 50, and then investing$500/month to catch up, earning the same 6% per year. He feels thatby investing over twice as much for half as many years (15 instead of30 years) he will have more. What is the future value of each of theseoptions at age 65, and under which scenario would he accumulatemore money?Scenario A: $ , Scenario B: $ , Best:7. (4 points) TV’s R Yours is advertising a deal, in which you buy a flatscreen TV for $2,355 (including tax) with one year before you need topay (no interest is incurred if you pay by the end of the one year). Howmuch would you need to deposit at the end of each month in a savingsaccount earning 1.2% APR, compounded monthly, to be able to pay the$2,355 bill in one year?Monthly Deposit:8. (8 points) You purchase a house for $300,000 by getting a mortgagefor $240,000 and paying a $60,000 down payment (20%). You can geta 30 year mortgage with a 3.6% interest rate.A. What would be your monthly payment?B. What would be the loan balance half way through in 15 years?9. (4 points) If the present value of an ordinary, 20 year annuity is$50,000 and interest rates are 6%, what is the present value of anannuity due with the same length of life, present values andinterest rate?10. (4 points) A credit card is offered with monthly payments and a24.99% APR. What is the loan’s effective annual rate (EAR)?EAR:Present Value: 11. (5 points) Calculate the price of a $1,000 bond, offering a 10%coupon payment with 20 years left to maturity and a market interestrate of 12%. (Assume interest payments are semiannual.) Is this adiscount or premium bond?Price: Type:12. (6 points) On June 24, 2016, the Dow Jones Industrial Averageopened at $18,011.07 and closed at $17,400.75. What was the dailyreturn that day, and what was the effective annual rate return (inpercent) of the stock market that day?Daily Return: % EAR: %13. (4 points) Financial analysts forecast GDY Inc.’s growth for thefuture to be 4%. GDY’s recent annual dividend was $3.00. What is thevalue of GDY stock when the required return is 12%?Stock Value: $14. (4 points) URN Inc. recently paid a $4.00 annual dividend. Thedividend is expected to grow at a 5% rate. At a current stock price of$42, what is the return shareholders are expecting?Expected Return %