FIN300 Sample Midterm

• This midterm test has 30 questions. Each question has 1 point.

Question 1 (1 point)
Capital budgeting is defined as the:
determination of the total amount of money which a firm should borrow.
management of a firm's net working capital.
management of a firm's long-term investments.
mix of debt and equity used by a firm to finance its operations.
process of determining the optimal types and amounts of inventory to keep on hand.

Question 2 (1 point)
You own 100 shares in a company that earns $4.00 per share before taxes, has a corporate tax
rate of 30%, and pays out 60% of its after-tax earnings as dividends. The tax rate on dividend
income is 15%. What is the total after-tax income you receive from your dividends?
$40.80
$95.20
$25.20
$61.20
$142.80

Question 3 (1 point)
We Sell Ice Cream is creating its financial statements. Which of the following items are
assets on the statement of financial positions?
A) Outstanding short-term loan
B) Money owed for goods sold on credit
C) Ice cream trucks
D) Net income
B and D
A and D
B and C
A and B
C and D
Question 4 (1 point)
Ivanhoe Energy Inc has 36 million shares outstanding, with a current share price of $21.45
per share. If the firm's book value of equity is $80 million, what is its market-to-book ratio?
7.49
9.65
2.22
5.37
0.45

Question 5 (1 point)
Ryerson Corporation has a book value of total debt of $500,000 and a book value total debt-
to-total equity ratio of 0.55. What is the value of the total assets?
$1,111,111
$909,091
$409,091
$750,000
$1,409,091

Question 6 (1 point)
Manufacturer A has a profit margin of 2.0%, an asset turnover of 1.7, and an equity
multiplier of 4.9. Manufacturer B has a profit margin of 2.3% and an equity multiplier of 4.7.
If both manufacturers have the same ROE, what is the asset turnover for Manufacturer B?
4.77
1.54
2.58
3.00
3.69

Question 7 (1 point)
A firm has ROE of 15% and a net profit margin of 4.5%. If the firm has 6.5 dollars in assets
per dollar of equity, what is the firm's asset turnover ratio?
2.08
1.23
1.75
0.51
2.50
Question 8 (1 point)
All else being equal, which one of the following will increase the internal growth rate?
An increase in fixed assets.
An increase in total assets.
An increase in the dividend payout ratio.
An increase in the retention ratio
A decrease in net income.

Question 9 (1 point)
Toronto Cheesecakes had sales of $100 million in 2018. Its cost of sales were $70 million. If
sales are expected to grow at 20% in 2019, compute the forecasted cost of sales using the
percent of sales method.
$84 million
$102 million
$80 million
$88 million
$96 million

Question 10 (1 point)
What is the following firm's projected net income for next year under the percentage of sales
method if the firm expects 10% sales growth?

$8,526
$8,250
$5,592
$8,388
$6,921
Question 11 (1 point)
For the next fiscal year, you forecast net income of $50,000 and ending assets of $500,000.
Your firm's payout ratio is 20%. Your beginning stockholder's equity is $300,000 and your
beginning total liabilities are $120,000. Your non-debt liabilities, such as accounts payable,
are forecasted to increase by $10,000. What is your net new financing needed for next year?
$60,000
$25,000
$30,000
$70,000
$80,000

Question 12 (1 point)
LP Inc. has done the following projections for its balance sheet: total assets of $15 million,
current liabilities of $3 million, long-term liabilities of $8 million, and stockholders' equity of
$2 million. How much net new financing is needed in the following year?
$0 million
$2 million
$6 million
$4 million
$1 million

Question 13 (1 point)
Harvest Inc. has $20 million in equity and $25 million of debt at the beginning of the year. It
pays dividends of 20% of net income, and projects a net income of $5 million. What is the
firm's sustainable growth rate?

20%
9%
22%
21%
16%
Question 14 (1 point)
A firm has $40 million in total equity and $20 million of total liabilities at the beginning of
the year. Its net income is projected to be $10 million. It pays dividends of 20% of net
income. What will be the firm's internal growth rate?
3.33%
20.00%
13.33%
15.70%
14.10%

Question 15 (1 point)
Which of the following statements is (are) true concerning the present value of a single sum?
I. The higher the discount rate, the higher the present value.
II. The longer the time period, the higher the present value.
III. The larger the future value, the larger the present value.
IV. The larger the present value factor, the larger the present value.
I, III, and IV only
I and IV only
III and IV only
IV only
I, II, III, and IV

Question 16 (1 point)
What is the present value of $8,000 received in 5 years, when interest rates are 3% per year?
$9,274.19
$6,910.70
$7.0578.28
$9,261.00
$6,900.87

Question 17 (1 point)
Which of the following promised payments has the highest present value if the interest rate is
4.6%?
$24,000 in 10 years
$21,000 in 7 years
$22,000 in 8 years
$23,000 in 9 years
$20,000 in 6 years
Question 18 (1 point)
A business is deciding whether to give an end-of-year bonus of $5000 each year for the next
four years to an employee, in order to increase the number of sales that employee makes.
What is the minimum extra profit the employee must generate this year for the bonus to be
worthwhile over the next four years, if the discount rate is 7%?
$18,600
$14,480
$16,936
$12,263
$20,000

Question 19 (1 point)
You are interested in purchasing a new automobile that costs $35,000. The dealership offers
you a special financing rate of 0.5% per month for 48 months. Assuming that you do not make
a down payment on the auto and you take the dealer's financing deal, then your monthly car
payments at the end of each month would be closest to:
$647
$842
$789
$729
$822

Question 20 (1 point)
You owe $20,000 in student loans that charge 6.3% annual interest. If you plan to pay back
$2,500 at the end of each year, how long will it take to pay off these loans?
13.4 years
11.5 years
9.3 years
10.5 years
12.4 years
Question 21 (1 point)
You are considering an investment that will pay you $3,000 a year for 33 years, starting
today. What is the present value of this investment if the appropriate discount rate is 8%?
$91,250
$37,305
$31,250
$34,542
$26,950

Question 22 (1 point)
You are considering two investment options. One will pay you $4,000 each year over eight
years, starting at the end of the year. The other will pay you $3,800 each year over eight
years, beginning today. The appropriate discount rate for both is 11%. What is the difference
in value between the two options?
$937.25
$1,121.85
$1,085.75
$975.47
$400.25

Question 23 (1 point)
You are considering an investment $30,000 per year forever, beginning one year from now. If
the present value of this investment is $428,571, what is the discount rate used to value this
perpetuity?
8.0%
6.0%
5.0%
7.0%
4.0%
Question 24 (1 point)
Consider a growing annuity that starts with a payment of $67,000 at the end of year 1 with a
constant growth rate of 3%. The growing annuity lasts for a total of 45 years and has an
appropriate discount rate of 8%. What is the present value of this growing annuity?
$1,183,251
$1,179,251
$1,181,251
$1,180,251
$1,182,251

Question 25 (1 point)
Which of the following reasons for considering long-term loans inherently riskier than short-
term loans is most accurate?
There is a greater chance that an investor will need cash before the loan term is complete.
There is a greater chance that a borrower will default in a longer time-frame.
The penalties for closing out a long-term loan early make them unattractive to many investors.
The loan values are very sensitive to changes in market interest rates.
Long-term loans typically have ongoing costs that accumulate over the life of the loan.

Question 26 (1 point)
What is the effective annual rate (EAR)?
the interest rate that would earn the same interest with annual compounding
the discount rate for an n-year time interval, where n may be more than one year or less than or equal to
one year (a fraction)
the amount of simple interest earned in one year without considering the effects of compounding
the ratio of the number of the annual percentage rate to the number of compounding periods per year
the cash flows from an investment over a one-year period divided by the number of times that interest is
compounded during the year

Question 27 (1 point)
Your bank account pays quarterly interest with an EAR of 7%. What amount of interest will
you earn each quarter?
1.58%
1.79%
1.84%
1.71%
2.03%
Question 28 (1 point)
A $60,000 loan is taken out on a boat with the terms 7% APR (compounded monthly) for 36
months. Payments are made at the end of each month. How much are the monthly payments
on this loan?
$1,901.24
$1,666.67
$1,783.33
$1,796.54
$1,852.63

Question 29 (1 point)
A home buyer buys a house for $225,000. She pays 20% cash, and takes a fixed-rate
mortgage for the remaining over ten years at a quoted APR of 6.26% with semi-annual
compounding. If she makes biweekly payments at the end of each period, which of the
following is closest to each of her payments? Assume 26 biweekly periods per year.
$1,165.07
$1,160.76
$937.50
$928.56
$915.08

Question 30 (1 point)
Two years ago you purchased a new SUV. You financed your SUV for 60 months (with
payments made at the end of the month) with a loan at an APR of 4.5%, monthly
compounded. You monthly payments are $617.16 and you have just made your 24th monthly
payment on your SUV. Assuming that you have made all of the first 24 payments on time,
what is the outstanding balance on your SUV loan?
$28,132.04
$23,761.49
$20,747.02
$26,915.34
$21,784.15