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devry busn 379 full midterm [week 4 ]

(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

Question 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

Question 3. Question : (TCO 1) Market value is important to the financial manager because:

It reflects the value of the asset, based on generally-accepted accounting principles.

Is a crucial component of the balance sheet, and can impact the financial statements.

Market value reflects the amount someone is willing to pay today for an asset.

The market value of an asset reflects its historical cost.

None of the above

Question 4. Question : (TCO 1) Which of the following is true regarding income statements?

It shows the revenue and expenses, based upon selected accounting methods.

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

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

It records revenue only when cash is received for the product or service provided.

It records expenses based on the recognition principle.

Question 5. Question : (TCO1) Telemarket Inc. 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 Telemarket’s taxes figure?

$100,100

$85,050

$112,700

$72,900

Question 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?

$122,850

$106,100

$94,500

None of the above

Question 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?

$2.0

$2.21

$0.50

$0.47

Question 8. Question : (TCO 1) The financial statement that summarizes a firm’s operations over a period of time is called a(n):

income statement.

cash flow statement.

production report.

balance sheet.

periodic operating statement.

Question 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?

$297,200

$280,000

$340,000

$270,000

$250,000

Question 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.

Question 11. Question : (TCO 3) Mr. Smith will receive $6,500 a year for the next 14 years from his trust. If the interest rate on this investment is eight percent, what is the approximate current value of these future payments?

$93,000

$53,500

$84,300

$52,000

Question 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

Question 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 true?

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

The approximate current value of the project’s inflows is $11,000

The current value of the project’s inflows cannot be determined

The project should be rejected because its present value is negative

)

Question 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 Software Company investment?

Question 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.

(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

Question 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

Question 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 16 percent? Assume annual payments.

$1315

$1300

$756

$1000

Question 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

Question 5. Question : (TCO 3) Bonds issued by Blue Sky Airlines have a face value of $1,000 and currently sell for $1,180. The annual coupon payments are $125. If the bonds have 20 years until maturity, what is the approximate YTM of the bonds?

10.50%

11.50%

11.75%

12%

Question 6. Question : (TCO 3) Bean Coffee issued preferred stock many years ago. It carries a dividend of $8 per share, fixed. As time has passed, yields have decreased from the original eight percent (at the time of issuance) to six percent. What was the original issue price? Hint: Yield is the same as required rate of return.

$100

$400

$7.40

$86.40

None of the above

Question 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 seven percent. What is the current price of the stock?

$23

$32

$27

$29

Question 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

Question 9. Question : (TCO 6) Which of the following is true regarding the primary market?

it is the market where the largest number of shares are traded on a daily basis.

it is the market in which the largest number of issues are listed.

it is the market with the largest number of participants.

it is the market where new securities are offered.

it is the market where shareholders trade most frequently with each other.

Question 10. Question : (TCO 6) A member of the NYSE who trades on the floor of the exchange for his or her personal account is called a(n):

specialist.

independent broker.

floor trader.

stand-alone agent.

dealer.

Question 11. Question : (TCO 6) The maturity date of a bond is defined as:

the first date on which a bond can be called.

the date on which the principal amount is paid.

20 years after the issue date.

the date on which the next interest payment will be made.

the original issue date.

Question 12. Question : (TCO 6) Star Industries has one outstanding bond issue. An indenture provision prohibits the firm from redeeming the bonds during the first two years. This provision is referred to as a _____ provision.

deferred call

market

liquidity

debenture

sinking fund

Question 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

:

Question 14. Question : (TCO 6) Which of the following best describes a zero-coupon bond?

A bond that adjusts the coupon payments based on an interest rate index, such as the T-bill.

A bond that is issued by the U.S. government.

A bond that adjusts the coupon payment date.

A bond that has no coupons and pays a face value at maturity.

An EE Savings Bond

Question 15. Question : (TCO 6) Which of the following are not true regarding convertible bonds? Select all that apply:

Are extremely rare

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

(TCO 1) Kate is the owner of Kate’s Sun Wear, which is a sole proprietorship. Kate unexpectedly suffered a fatal heart attack. Which one of the following statements is correct given this situation?

The proprietorship ended when Kate passed away.

Kate’s Sun Wear will continue on with Kate’s beneficiary automatically replacing Kate as the sole proprietor.

The proprietorship ends when Kate passed on, and all income to that date will be tax-free.

The proprietorship ends when Kate passed on, and all income to that date will be taxed as a separate legal entity.

The proprietorship ends when Kate passed on, and all income earned to that date will be taxed as Kate’s personal income.

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

short-term assets.

current liabilities.

long-term debt.

tangible fixed assets.

intangible fixed assets.

Question 3. Question : (TCO 1) Explain agency theory. Provide an example of a potential agency problem for a corporation, and identify means by which the firm can help reduce or eliminate that problem.

Question 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.

Question 5. Question : (TCO 8) Explain some of the key risks associated with bonds.

Question 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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