Fin 443

EX 1
Name (print): _______________________________________________
I pledge that I will work on the examination without collaborating with any other individuals.
Signature: __________________
Examine the financial statements below. Use this information to answer questions 1-7. Note: All
figures are in millions of dollars.
The XXX Corporation: Balance Sheet, 2015
Cash & marketable securities
Accounts receivable
Inventories
Total current assets

$200
150
250
$600

Accounts payable
Notes payable
Total current liabilities
Long-term debt
Total liabilities

Fixed assets

900

Total assets

Common stock
Retained earnings
Total equity
$1,500 Total liabilities and equity

100
100
$200
400
$600
50
850
$900
$1,500

The XXX Corporation: Income Statement, 2015

Sales revenue
Cost of goods sold
Selling expenses
Depreciation
Earnings before interest and taxes
Interest paid
Taxable income
Taxes (40%)
Net income

$1,200
700
200
150
$150
50
$100
40
$60

1. The quick ratio is:

1. 0.57

B. 1.75

C. 3.0 D. 1.25

E. 0.80

2. The equity multiplier is:

1. 1.67 B. 0.60

C. 0.40

D. 1.50

E. 0.67

3. The net profit margin is:

A. 0.05

B. 0.15

C. 0.60

D. 0.50

E. 0.12

4. The operating cash flow for 2015 was ____ million.

A. +$60

B. -$60

C. +$260

D. +$160

E. +$100

5. The current market price of XXX is $30 per share. The price earnings ratio is 25. The
number of shares outstanding is _______ million.
A. 10

B. 20

C. 30

B. 1.25

C. 2.0

D. 40

E. 50

6. The total asset turnover ratio is:

A. 0.8

D. 4.0

E. 6.0

7. If XXX were to acquire $50 million in inventory with a $50 million increase in accounts
payable (other things equal), the current ratio would _____, and the quick ratio would _____.
A. increase, increase
B. not change, decrease
C. not change, not change
D. decrease, increase
E. decrease, decrease
8.

A financial manager of a corporation is considering different operating strategies for the

coming year. From a financial management standpoint, which of the following would be her
optimal strategy?
A Undertake the plan that would reduce the overall risk of the firm.
B Undertake the plan that would maximize the current stock price.
C Undertake the plan that would result in the largest profits for the year.
D Undertake the plan that would maximize her personal wealth.
E Undertake the plan that would lead to the most stable stock price for the year.
9. After eating a McDonalds hamburger you wonder what the internal growth rate (IGR) of
McDonalds is. {IGR = (ROAb)/[1-(ROAb)], b is the retention ratio}. You find the following
recent data: ROA = 0.04, ROE = 0.08, dividend payout ratio = 0.33. The IGR is closest to
_______.
A. 3%

B. 6%

C. 15%

D. 25%

E. 20%

10. A bond with a face value of $1,000 has annual coupon payments of $100 and was issued 7
years ago. The bond currently sells for $1,000 and has 8 years remaining to maturity.
This bonds
must be 10%.

I.
II.
III.
a.
b.
c.
d.
e.

yield to maturity
market premium
coupon rate
I only
I and II only
III only
I and III only
I, II and III

11. Suppose that you will invest $10,000 today. If you earn a constant annual interest rate of 8%,
how many years will it take to grow to $21,589?
A. 5

B. 10

C. 15

D. 20

E. 25

12. If you deposit $2,000 into a bank account at the end of each of the next 10 years and it has
grown to $27,633, what constant annual interest rate were you earning?
A. 3%

B. 7%

C. 12%

D. 15%

E. 18%

13. Which cash flow below has the largest present value if the interest rate is 8% per year?
(Assume that the cash flows are received at the end of each year.)
A. A
Year
1
2
3
4
5

A
$400
$400
$400
$0
$0

B. B
B
$400
$0
$0
$0
$900

C. C
C
$1,000
$50
$50
$0
$0

14. What is the present value of a $2,000 perpetuity if the interest rate is 5 percent per year?
A. $1,000

B. $10,000

C. $16,667

D. $100,000

E. $40,000

15. You take out a $800,000 amortized loan for your new beach house. You will make equal
annual payments at the end of each of the next 10 years. The interest rate is 8%. How much of
the first annual payment will be principal reduction?
A. $64,000 B. $119,224 C. $183,224 D. $26,000 E. $55,224
16. Liddy Products, Inc. just issued 10-year, 8% coupon bonds at par. Outstanding Limbaugh
Corp. bonds, which have a maturity of 10 years, sell at a premium to par and are
viewed by investors as having the same risk as the Liddy bonds. Therefore, it must be
true that:
a. The coupon rate on the Limbaugh bonds is equal to that on the Liddy bonds.
b. The coupon rate on the Limbaugh bonds is higher than that on the Liddy bonds.
c. The coupon payment on the Limbaugh bonds is lower than that on the Liddy bonds.
d. The yield on Limbaugh bonds is higher than the yield on Liddy bonds.
e. The Limbaugh bonds pay coupons more often than twice a year.

17. The bonds issued many years ago by the XYZ Corporation just paid another annual coupon
and have four annual coupons remaining. These bonds have a $1,000 par value, and a 14%
coupon rate. Bonds of similar risk currently have a yield to maturity of 8%. The market price of
these bonds would be closest to _______.
A. $1,400

B. $1,000

C. $1,464

D. $1,295

E. $1,199

18. Suppose that a security analyst uses the constant dividend growth model to determine the
theoretical share price of a corporation. The annual dividend just paid was $3.00 per share. The
analyst assumes a required rate of return of investors of 15%, and a dividend growth rate of 5%.
The share price should be _______.
A. $20

B. $27

C. $40.50

D. $31.50

E. $21

19. Which of these has the highest effective annual rate (EAR)?
(In case you forgot, e = 2.71828)
A. 10.2% quoted rate, annual compounding
B. 10.0% quoted rate, monthly compounding
C. 9.8% quoted rate, daily compounding
D. 10.1% quoted rate, quarterly compounding
20. Over the past four years, a company has paid dividends of $1.00, $0.90, $0.80, and $0.70,
respectively. This pattern is expected to continue into the future. This is an example of
a company paying a:
a.
b.
c.
d.
e.

Dividend that declines by 10% each year.

Dividend that declines at a constant rate.
Dividend that declines by a decreasing amount.
Dividend that declines at a decreasing rate.
Dividend that declines at an increasing rate.

Use the following to answer the following three questions:

You and your spouse have found your dream home in Rapid City, South Dakota. The selling price
is $120,000; you will put $20,000 down and obtain a 30-year fixed-rate mortgage at 8.25% for
the rest.
21.Assume that monthly payments are made at the end of the month. What will each
payment be?
A)
$725.01
B)
$751.27
C)
$757.76
D)
$825.45
E)
$901.52
22. How much interest will you pay (in dollars) over the life of the loan? (Assume you
make each of the required 360 payments on time.)
A)
$135,101
B)
$145,583

C)
D)
E)

$170,457
$190,457
$270,457

23.Although you will get a 30-year mortgage, you plan to prepay the loan by making an
additional payment each month along with your regular payment. How much extra
must you pay each month if you wish to pay off the loan in 20 years?
A)
$ 24.56
B)
$ 54.88
C)
$100.80
D)
$103.28
E)
$106.86
24. J&J Manufacturing just issued a bond with a $1,000 face value and a coupon rate of 8%. If
the bond has a life of 20 years, pays annual coupons, and the yield to maturity is 7.5%,
what will the bond sell for?
a. $ 975
b. $1,020
c. $1,051
d. $1,087
e. $1,162
25. McIver's Meals, Inc. currently pays a $2 annual dividend. Investors believe that dividends
will grow at 20% next year, 12% annually for the two years after that, and 6% annually
thereafter. Assume the required return is 10%. What is the current market price of the
stock?
A) $54.90
B) $60.80
C) $66.60
D) $69.30
E) $75.20
26 Commtel Partners hires Smith Brothers investment bank to negotiate the purchase of the
fiber optic assets of Lightware.com. Identify the parties to this transaction.
a. Smith is the principal and Commtel is the agent.
b. Commtel is the principal and Smith is the agent.
c. Lightware is the principal and Commtel is the agent.
d. Smith is the agent while Lightware and Commtel together are principals.
e. Commtel is the principal and Lightware is the agent.
27

A financial manager is responsible for deciding whether an investment in new

manufacturing equipment should be financed with debt, preferred stock, or common
stock. Which of the following financial management areas would be involved in the
decision process?
I. Capital budgeting
II. Capital structure management
III. Working capital management
a. I only
b. II only
c. II and III only
d. I and III only
e. I, II and III

28. You are interested in purchasing 100 shares of stock in a small technology firm that trades in
NASDAQ of the United States. You would most likely purchase the shares in
a. a secondary market operated as an auction market (This firm is most likely to be listed
on NASDAQ.)
b. a primary market operated as an auction market
c. a secondary market operated as a dealer market
d. a primary market operated as a dealer market
e. a secondary market operated as a money market
29. An agreement giving the bond issuer the option to redeem the bond at a specified price prior
to maturity is the
provision.
a. sinking fund
b. call
c. seniority
d. collateral
e. trustee
30. Common stock valuation requires, among other things, information regarding the:
I. Expected dividend growth rate.
II. Current dividend payment.
III. Par value of the common stock.
a. I only
b. I and II only
c. I and III only
d. II and III only
e. I, II, and III
31. A bond with an annual coupon of $100 originally sold at par for $1,000. The current market
interest rate on this bond is 9%. Assuming no change in risk, this bond will sell at a
today and present the seller with a capital
.
a. premium;
gain
b. discount;
gain
c. premium;
loss
d. discount;
loss
e. discount;
neither loss or gain
32. Which of the following is false regarding the differences between debt and common stock?
a. Equity is ownership in a firm but debt is not.
b. Stockholders have voting power while creditors do not.
c. Periodic payments made to either class of security are tax deductible for the issuer.
d. Interest payments are legally binding while dividend payments generally are not.
33. What would you pay today for a stock that is expected to make a $2 dividend in one year if
the expected dividend growth rate is 5% and you require a 12% return on your
investment?
A) $28.57
B) $29.33
C) $31.43
D) $43.14
E) $54.30

34. The current price of XYZ stock is $80.00. Dividends are expected to grow at 5% indefinitely
and the most recent dividend was $2.75. What is the required rate of return on XYZ
stock?
A) 7.3%
B) 8.7%
C) 9.5%
D) 10.6%
E) 11.2%
35. Which of the following typically applies to common stock but NOT to preferred stock?
A) Par value
B) Dividend yield
C) Legally considered as equity in the firm
D) Voting rights
E) The dividends are a tax-deductible expense
36. Which of the following statements about dividends is true?
A) Preferred stock dividends received are always fully-taxable to corporate investors.
B) Dividends are the only source of return that investors earn on common stock
investments.
C) The payment of dividends is at the discretion of the board of directors.
D) The payment of dividends by the corporation is a tax-deductible business expense.
E) A corporation can be sued for not paying undeclared common stock dividends.
37.The future value interest factor is calculated as:
A) (1 + r)t
B) (1 + rt)
C) (1 + r)(t)
D) 1 + r t
E) None of the above are correct
38. The present value interest factor is calculated as:
A) 1/(1 + r t)
B) 1/(1 + rt)
C) 1/(1 + r)(t)
D) 1/(1 + r)t
E) 1 + r + t
39. Given r and t greater than zero and assuming a lump sum payment:
I. Present value interest factors are less than one.
II. Future value interest factors are greater than one.
III. Present value interest factors are greater than future value interest factors.
IV. Present value interest factors grow as t grows, provided r is held constant.
A) I only
B) I and II only
C) I and IV only
D) II and III only
E) II and IV only