BAM 513 Financial Management Final Exam

BAM 513Financial ManagementMultiple Choice Questions (Enter your answers on the enclosed answer sheet)1)Which of the following legal forms of organization is characterized by limitedliability?c.Professional partnershipd.Sole proprietorsh i pe.Corporationf.Partnership2) The financial manager may be responsible for any of the following EXCEPTa.keepi ng track of quarterly tax payments.b.analyzing quarterly budget and performance reports.c.analyzing the effects of more debt on the firm’s capital structure.d.determining whether to accept or reject a capital asset acquisition.3) The financial manager’s financing decisions determinea.both the mix and the type of assets found on the firm’s balance sheet.b.both the mix and the type of assets and liabilities found on the firm’s balancesheet.c.the most appropriate mix of short-term and long-term financing.d.the proportion of the firm’s earnings to be paid as dividend.4) Wealth maximization as the goal of the firm implies enhancing the wealth ofa.the firm’s stockholders.b.the Board of Directors.c.the firm’s employees.d.the federal government.5)The amount earned during the accounting period on each outstanding share of common stock is calleda.common stock dividend.b.net profits after taxes.c.earn i ngs per share.d.net income.6)Cash flow and risk are the key determinants in share price. Increased cash flow results in , other things remaining the same.a.an unchanged share priceb.a lower share pricec.an undetermined share priced.a higher share price1g.27)A more recent issue that is causing major problems in the business commu-nity isa.short-term versus long-term financial goals of management.b.the privatization of ownership.c.ethical problems.d.environmental concerns.8) The implementation of a pro-active ethics program is expected to result ina.a positive corporate image and increased respect, but is not expected to af-fect cash flows.b.a positive corporate image and increased respect, but is not expected to af-fect share price.c.an increased share price resulting from a decrease in risk, but is not expectedto affect cash flows.d.a positive corporate image and increased respect, a reduction in risk, and en-hanced cash flow resulting in an increase in share price.9) The Sarbanes-Oxley Act of 2002 was passed in response toa.the decline in tech nology stocks.b.insider trading activities.c.false disclosures in financial reporting.d.all of the above10)The key participants in financial transactions are individuals, businesses,and governments. Individuals are net of funds, and businesses arenet of funds.a.demanders; suppliersb.purchasers; sellersc.suppliers; demandersd.users; providers11) The over-the-counter (OTe) market isa.an intangible market for unlisted securities.b.a place where securities are bought and sold.c.the New York Stock Exchange.d.an organized stock exchange.12) The two key financial markets area.primary market and secondary market.b.capital market and secondary market.c.primary market and money market.d.money market and capital market.13)Securities exchanges create efficient markets that do all of the followingEXCEPTa.ensure a market in which the price reflects the true value of the security.b.control the supply and demand for securities through price.c.allocate funds to the most productive uses.d.allow the price to be determined by supply and demand of securities.14)The tax deductibility of various expenses such as general and administrativeexpenses their after-tax cost.a.reducesb.has no effect onc.has an undetermined effect ond.increases15)The dividend exclusion for corporations receiving dividends from another corporation has resulted ina.stock investments being relatively less attractive, relative to bond investments made by one corporation in another corporation.b.stock investments being relatively more attractive relative to bond investments made by one corporation in another corporation.c.a lower cost of equity for the corporation paying the dividend.d.a higher relative cost of bond-financing for the corporation paying the dividend.16)The rule-setting body, which authorizes generally accepted accounting principles isa.FASB.b.Federal Reserve System.c.SEC.d.GAAP.3h.Financial Ma ment17)Candy Corporation had pretax profits of $1.2 million, an average tax rateof 34 percent, and it paid preferred stock dividends of $50,000. There were100,000 shares outstanding and no interest expense. What were Candy Cor-poration’s earnings per share?a.$4.52b.$7.59c.$7.42d.$3.9118) The analyst should be careful when evaluating a ratio analysis thata.the dates of the financial statements being compared are the same time.b.pre-audited statements are used.c.neither A nor B.d.both A and B.19) The is useful in evaluating credit and collection policies.a.current asset turnoverb.current ratioc.average collection periodd.average payment period20) The ratio may indicate poor collections procedures or a lax creditpolicy.a.average collection periodb.average payment periodc.inventory turnoverd.quick21) are especially interested in the average payment period, since itprovides them with a sense of the bill-paying patterns of the firm.a.Lenders and suppliersb.Borrowers and buyersc.Stockholdersd.Customers4Financial Man ent22) If the inventory turnover is divided into 365, it becomes a measure ofa.sales turnover.b.the average collection period.c.sales efficiency.d.the average age of the inventory.23)The ratio may indicate that the firm will not be able to meet interest obligations due on outstanding debt.a.times interest earnedb.return on total assetsc.net profit rnargi nd.debt24)The measures the percentage of profit earned on each sales dollar before interest and taxes.a.net profit marginb.operati ng profit margi nc.earnings available to common shareholdersd.gross profit margin25) In the DuPont system, the return on total assets (asset) is equal toa.(net profit margin) x (fixed asset turnover).b.(return on equity) x (total asset turnover).c.(return on equity) x (financial leverage multiplier).d.(net profit margin) x (total asset turnover).26) The financial leverage multiplier is an indicator of how much a corporation is utilizing.a.long-term debtb.total debtc.operating leveraged.total assets27)Allocation of the historic costs of fixed assets against the annual revenue theygenerate is calleda.amortization.b.net profits.c.depreciation.d.gross profits.5i.Financial Ma ment628)The cash flows from operating activities section of the statement of cash flows considersa.interest expense.b.stock repurchases.c.dividends paid.d.cost of raw materials.29) The key aspects of the financial planning process area.cash planning and investment planning.b.cash planning and profit planning.c.investment planning and profit planning.d.cash planning and financing.30)A firm has projected sales in May, June, and July of $100, $200, and $300,respectively. The firm makes 20 percent of sales for cash and collects thebalance one month following the sale. The firm’s total cash receipts in Julya.are $200.b.are $220.c.are $180.d.cannot be determined with the information provided.31) A projected excess cash balance for the month may bea.financed with long-term securities.b.invested in marketable securities.c.financed with short-term securities.d.invested in long-term securities.32)In the month of August, a firm had total cash receipts of $10,000, total cashdisbursements of $8,000, depreciation expense of $1,000, a minimum cashbalance of $3,000, and a beginning cash balance of $500. The excess cashbalance (required financing) for August isa.required total financing of $500.b.required total financing of $2,500.c.excess cash balance of $500.d.excess cash balance of $5,500.j.k.33)The key inputs for preparing pro forma income statements using the simplified approaches are thea.sales forecast for the preceding year and financial statements for the comingyear.b.sales forecast for the coming year and the cash budget for the preceding year.c.cash budget for the coming year and sales forecast for the preceding year.d.sales forecast for the coming year and financial statements for the preceding year.34)The method of developing a pro forma balance sheet estimates values of certain balance sheet accounts while others are calculated. In this method, the firm’s external financing is used as a balancing, or plug, figure.a.cashb.accrualc.judgmentald.percent-of-sales35)The strict application of the percent-of-sales method to prepare a pro forma income statement assumes the firm has no fixed costs. Therefore, the use of the past cost and expense ratios generally tends to profits when sales are increasing.a.have no effect onb.accurately predictc.overstated.understate36)A firm plans to retire outstanding bonds in the next planning period. The statements that will be affected are thea.pro forma balance sheet and cash budget.b.pro forma income statement and pro forma balance sheet.c.cash budget and statement of retained earnings.d.pro forma income statement, pro forma balance sheet, cash budget, andstatement of retained earnings.37)Utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend toa.overstate profits when sales are increasing.b.neither understate nor overstate profits.c.understate profits when sales are increasing.d.understate profits when sales are decreasing.7l.Financial Ma ment838)In a period of rising sales utilizing past cost and expense ratios (percent-of-sales method), when preparing pro forma financial statements and planning financing, will tend toa.overstate retained earnings and understate the financing needed.b.overstate retained earnings and overstate the additional financing needed.c.understate retained earnings and overstate the financing needed.d.understate retained earnings and understate the additional financing needed.39) For positive interest rates, the future value interest factor isa.sometimes negative.b.always greater than 1.0.c.never greater than 25.d.always less than O.40)The amount of money that would have to be invested today at a given interestrate over a specified period in order to equal a future amount is calleda.present value.b.future value.c.future value interest factor.d.present value interest factor.41)The present value of $200 to be received 10 years from today, assuming anopportunity cost of 10 percent, isa.$200.b.$50.c.$518.d.$77.42) The future value of a dollar as the interest rate increases and___ the farther in the future an initial deposit is to be received.a.increases; increasesb.decreases; increasesc.decreases; decreasesd.increases; decreases43) The present value of a $25,000 perpetuity at a 14 percent discount rate isa.$350,000.b.$285,000.c.$178,571.d.$219,298.m.n.44)The future value of $100 received today and deposited in an account for fouryears paying semiannual interest of 6 percent isa.$450.b.$889.c.$134.d.$126.45)The future value of an annuity of $1,000 each quarter for 10 years, deposited at 12 percent compounded quarterly isa.$75,40l.b.$17,549.c.$93,049.d.$11,200.46)Adam borrows $4,500 at 12 percent annually compounded interest to berepaid in four equal annual installments. The actual end-of-year payment isa.$2,64l.b.$1,125.c.$942.d.$1,482.47)Ashley owns stock in a company which has consistently paid a growing divi-dend over the last five years. The first year Ashley owned the stock, she re-ceived $1.71 per share and in the fifth year, she received $2.89 per share.What is the growth rate of the dividends over the last five years?a.7 percentb.5 percentc.14 percentd.12 percent48)Julian was given a gold coin originally purchased for $1 by his great-grand-father 50 years ago. Today the coin is worth $450. The rate of return realizedon the sale of this coin is approximately equal toa.13.b.50.c.7.5.d.cannot be determined with given information.9o.Financial M ment49)Aunt Bertha borrows $19,500 from the bank at 8 percent annually com-pounded interest to be repaid in 10 equal annual installments. The interestpaid in the third year is _a.$1,947.10b.$1,336.00c.$2,906.11d.$1,560.1450)What annual rate of return would Grandma Zoe need to earn if she deposits$1,000 per month into an account beginning one month from today in orderto have a total of $1,000,000 in 30 years?a.5.98b.5.28c.6.23d.4.5551) is the chance of loss or the variability of returns associated with agiven asset.a.Valueb.Probabilityc.Riskd.Return52) The goal of an efficient portfolio is toa.minimize profit in order to minimize risk.b.maximize risk for a given level of return.c.maximize risk in order to maximize profit.d.minimize risk for a given level of return.53)Combining negatively correlated assets having the same expected returnresults in a portfolio with level of expected return and _level of risk.a.the same; a lowerb.a lower; a higherc.a higher; a lowerd.the same; a higherlOp.q.54) The purpose of adding an asset with a negative or low positive beta is toa.reduce risk.b.increase profit.c.red uce profit.d.increase risk.55)The portion of an asset’s risk that is attributable to firm-specific, randomcauses is calleda.unsystematic risk.b.systematic risk.c.nondiversifiable risk.d.none of the above56) risk represents the portion of an asset’s risk that can be eliminatedby combining assets with less than perfect positive correlation.a.Systematicb.Totalc.Nondiversifiabled.Diversifiable57)Nico owns 100 shares of stock X which has a price of $12 per share and 200shares of stock Y which has a price of $3 per share. What is the proportion ofN ico’s portfol io invested in stock X?a.50b.77c.67d.3358) As risk aversion increasesa.investors’ required rate of return will decrease.b.a firm’s beta will decrease.c.a firm’s beta wi II increase.d.investors’ required rate of return will increase.59) The rate of interest creates equilibrium between the supply of savings and the demand for investment funds.a.inflationaryb.risk-freec.reald.nominal11r.Financial Management1260)The rate of interest is typically the required rate of return on athree-month U.S. Treasury bill.a.premiumb.realc.nominald.risk-free61)An upward-sloping yield curve that indicates generally cheaper short-termborrowing costs than long-term borrowing costs is calleda.flat yield curve.b.normal yield curve.c.inverted yield curve.d.none of the above.62) The cost of long-term debt generally that of short-term debt.a.has no relation tob.is less thanc.is equal tod.is greater than63) is a paid individual, corporation, or commercial bank trust department that acts as a third party to a bond indenture to ensure that the issuerdoes not default on its contractual responsibilities to the bondholders.a.A trusteeb.A bond rating agencyc.A bond issuerd.An investment banker64) An example of a standard debt provision is thea.constraints on subsequent borrowing.b.requirement to pay taxes and other liabilities when due.c.limiting of the corporation’s annual cash dividend payments.d.restricting the corporation from disposing of fixed assets.65) Another name for a deeply discounted bond that pays no coupon interest is aa.floati ng rate bond.b.junk bond.c.subordinated debenture.d.zero coupon bond.66) A debenture isa.a secured bond that is secured by unspecified assets.b.a lengthy legal document stating the conditions under which a bond has been issued.c.an unsecured bond that only creditworthy firms can issue.d.a bond secured by specific asset.67) In utilizing a the issuer can annually deduct the current year’s interest accrual without having to actually pay the interest until the bond matures.a.junk bondb.extendible notesc.zero coupon bondd.floating rate bond68) The less certain a cash flow, the the risk, and the the present value of the cash flow.a.higher; higherb.lower; lowerc.higher; lowerd.lower; higher69)Jia Hua Enterprises wants to issue sixty 20-year, $1,000 par value, zero-coupon bonds. If each bond is priced to yield 7 percent, how much will Jia H ua receive (ignori ng issuance costs) when the bonds are first sold?a. $12,393b. $15,505c. $18,880d. $11,212e. $20,00070)If bankruptcy were to occur, stockholders would have prior claim on assets overa.preferred stockholders.b.unsecured creditors.c.secured creditors.d.no one.13s.1471)The advantages of issuing preferred stock from the common stockholder’s perspective i ncl ude all of the followi ng EXCEPTa.increased leverage.b.flexibility.c.use in mergers.d.seniority of preferred stockholder’s claim over common stockholders.72) All of the following features may be characteristic of preferred stock EXCEPTa.convertible.b.no maturity date.c.callable.d.tax-deductible dividends.73) Preferred stockholdersa.do have preference over bondholders in the case of liquidation.b.do not have preference over bondholders in the case of liquidation.c.do not have preference over common stockholders in the case of liquidation.d.two of the above are true statements74)The opportunity for management to purchase a certain number of shares of their firm’s common stock at a specified price over a certain period of time is aa.stock option.b.stock right.c.pre-emptive right.d.warrant.75) Stock rights provide the stockholder witha.cumulative voting privileges.b.the opportunity to receive extraordinary earnings.c.the right to elect the board of directors.d.certain purchase privileges of additional stock shares in direct proportion based on their number of owned shares.76)Tangshan China Company’s stock is currently selling for $80.00 per share.The expected dividend one year from now is $4.00 and the required return is 13 percent. What is Tangshan’s dividend growth rate assuming that dividends are expected to grow at a constant rate forever?a.9b.10c.8d.1177)Which of the following valuation methods is superior to the others in the list since it considers expected earnings?a.PIE multipleb.liquidation valuec.book valued.present val ue of the interest78)Nico Corporation expects to generate free-cash flows of $200,000 per yearfor the next five years. Beyond that time, free cash flows are expected to grow at a constant rate of 5 percent per year forever. If the firm’s average cost of capital is 15 percent, the market value of the firm’s debt is $500,000, and Nico has a half million shares of stock outstanding, what is the value of Nico’s stock?a.$0.00b.$1.43c.$3.43d.$2.4379) A capital expenditure is all of the following EXCEPTa.an outlay for current asset expansion.b.an outlay made for the earning assets of the firm.c.commonly used to expand the level of operations.d.expected to produce benefits over a period of time greater than one year.80) projects have the same function; the acceptance of one _the others from consideration.a.Mutually exclusive; eliminatesb.Replacement; does not eliminatec.Capital; eliminatesd.Independent; does not eliminate15t.Financial Ma ment81)In international capital budgeting decisions, political risks can be minimized using all of the following strategies EXCEPTa.structuring the financing of such investments as equity rather than as debt.b.structuring the financing of such investments as debt rather than as equity.c.structuring the investment as a joint venture and selecting well-connected local partner.d.none of the above82)When evaluating a capital budgeting project, the change in net working capital must be considered as part ofa.the initial investment.b.the incremental operating cash inflows.c.the operati ng cash inflows.d.the operati ng cash outflows.83)The tax treatment regarding the sale of existing assets that are sold for their book value results ina.recaptured depreciation taxed as ordinary income.b.no tax benefit or liability.c.an ordinary tax benefit.d.a capital gain tax liability and recaptured depreciation taxed as ordinary income.84)A corporation is selling an existing asset for $1,000. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five- year recovery period, and has been depreciated for four full years. If the as sumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction isa.$3,600 tax liability.b.$280 tax benefit.c.$0 tax liability.d.$1,100 tax liability.85) Unsophisticated capital budgeting techniques do nota.examine the size of the initial outlay.b.take into account an unconventional cash flow pattern.c.explicitly consider the time value of money.d.use net profits as a measure of return.16Financial Ma ment86) Should Tangshan Mining company accept a new project if its maximum pay-back is 3.5 years and its initial after tax cost is $5,000,000 and it is ex-pected to provide after-tax operating cash inflows of $1,800,000 in year 1,$1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4?a.Yesb.Noc.It dependsd.None of the above87)The minimum return that must be earned on a project in order to leave the firm’s value unchanged isa.the compound rate.b.the cost of capital.c.the interest rate.d.the internal rate of return.88) A firm would accept a project with a net present value of zero becausea.the project would enhance the wealth of the firm’s owners.b.the return on the project would be positive.c.the project would maintain the wealth of the firm’s owners.d.the return on the project would be zero.89)What is the NPV for the following project if its cost of capital is 15 percentand its initial after tax cost is $5,000,000 and it is expected to provideafter-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year2, $1,700,000 in year 3 and $1,300,000 in year 4?a.($137,053)b.$371,764c.$1,700,000d.None of the above90)What is the NPV for the following project if its cost of capital is 0 percent and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2,$1,700,000 in year 3 and $1,300,000 in year 4?a.$1,700,000b.$137,053c.$371,764d.None of the above17u.1891)The is the compound annual rate of return that the firm will earn it invests in the project and receives the given cash inflows.a.internal rate of returnb.cost of capitalc.discount rated.opportunity cost92) When evaluating projects using internal rate of return,a.the discount rate and magnitude of cash flows do not affect internal rate of return.b.projects having higher early-year cash flows tend to be preferred at lower discount rates.c.projects having higher early-year cash flows tend to be preferred at higher discount rates.d.projects havi ng lower early-year cash flows tend to be preferred at higher discou nt rates.93)Diagrams that permit the mapping of the various investment decision alternatives and payoffs as well as their probabilities of occurrence are calleda.multiple regression analysis.b.simulations.c.decision trees.d.sensitivity analysis.94) The advantage of using simulation in the capital budgeting process isa.the availability of a continuum of risk-return trade-offs which may be used as the basis for decision-making.b.that it generates a continuum of risk-return trade-offs rather than a single point estimate.c.dependability of predetermined probability distributions.d.ease of calculation.95) Breakeven cash inflow refers toa.the minimum level of cash inflow necessary for a project to be acceptable, that is, IRR < cost of capital.b.the minimum level of cash inflow necessary for a project to be acceptable, that is, N PV > $0.c.the minimum level of cash inflow necessary for a project to be acceptable, that is, NPV < $0.d.none of the above is correct96)A behavioral approach that evaluates the impact on the firm's return of simultaneous changes in a number of project variables is calleda.simulation analysis.b.scenario analysis.c.sensitivity analysis.d.none of the above97) The reflects the return that must be earned on the given project to compensate the firm's owners adequately according to the project's variability of cash flows.a.internal rate of returnb.cost of capitalc.average rate of returnd.risk-adjusted discount rate98)An approach to capital rationing that involves graphing project returns indescending order against the total dollar investment to determine the group of acceptable projects is called thea.net present value approach.b.the internal rate of return approach.c.the profitability index approach.d.the payback approach.99) The cost to a corporation of each type of capital is dependent upona.the risk-free rate of each type of capital plus the business risk and the financial risk of the firm.b.the risk-free rate of each type of capital pi us the busi ness risk of the firm.c.the risk-free rate of each type of capital plus the financial risk of the firm.d.the risk-free rate of bonds plus the business risk of the firm.100) The before-tax cost of debt for a firm which has a 40 percent marginal tax-rate is 12 percent. The after-tax cost of debt isa.12 percent.b.7.2 percent.c.4.8 percent.d.6.0 percent.