1. What is the goal of financial management for a sole proprietorship?
[removed]decrease long-term debt to reduce the risk to the owner
[removed]maximize net income given the resources of the firm
[removed]maximize the market value of the equity
[removed]minimize the tax impact on the proprietor
[removed]minimize costs and increase production
2. Working capital management includes which of the following?
[removed]establishing the inventory level
[removed]deciding when to pay suppliers
[removed]determining the amount of cash needed on a daily basis
[removed]establishing credit terms for customers
[removed]all of the above
3. Market value reflects which of the following:
[removed]The amount someone is willing to pay today for an asset.
[removed]The value of the asset based on generally-accepted accounting principles.
[removed]The asset’s historical cost.
[removed]A and B only
[removed]None of the above
4. Which of the following is true regarding income statements?
[removed]It reveals the net cash flows of a firm over a stated period of time.
[removed]It reflects the financial position of a firm as of a particular date.
[removed]It records revenue only when cash is received for the product or service provided.
[removed]It records expenses based on the recognition principle.
[removed]None of the above is a true statement.
5. 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 taxable income?
6. Home Best Hardware had $315,000 in taxable income last year. Using the tax rates provided in Table 2.3, what is the approximate average tax rate?
7. Pizza A had earnings after taxes of $390,000 in the year 2008 and 300,000 shares outstanding. In year 2009, earnings after taxes increased by 20 percent to $468,000 and 25,000 new shares were issued for a total of 325,000 shares. What is the EPS figure for 2008?
8. The income statement reflects:
[removed]income and expenses at the time when those items affect the cash flows of a firm.
[removed]income and expenses in accordance with GAAP.
[removed]the cash flows in accordance with GAAP.
[removed]the flow of cash into and out of a firm during a stated period of time.
[removed]the flow of cash into and out of a firm as of a particular date.
9. 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?
10. 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?
[removed]Mark will earn more interest in year 4 than he will in year 3.
[removed]Mark will receive equal interest payments every six months over the life of the investment.
[removed]Mark would have earned more interest if he had invested in an account paying 8 percent simple interest.
[removed]Mark would have earned more interest if he had invested in an account paying annual interest.
[removed]Mark will earn less and less interest each year over the life of the investment.
11. Mr. Smith will receive $8,500 a year for the next 14 years from a contract. If the interest rate on this investment is eight percent, what is the approximate current value of these future payments?
12. 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?
13. 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 false?
[removed]The current value of the project’s inflows is $13,000
[removed]The approximate current value of the project’s inflows is $11,000
[removed]The project’s inflows are higher than zero
[removed]The project should be accepted because its present value is positive
14. 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?
15. North Bank offers you an APR of 13.17 percent compounded monthly, and South Bank offers you an effective rate of 13.75 percent on a business loan. Which bank should you choose and why?
[removed]South Bank because its effective rate is higher.
[removed]North Bank because the APR is lower.
[removed]South Bank because its effective rate is lower.
[removed]North Bank because its effective rate is lower.
16. Which one of the following will increase the future value of a lump sum invested today?
[removed]decreasing the amount of the lump sum
[removed]increasing the rate of interest
[removed]paying simple interest rather than compound interest
[removed]paying interest only at the end of the investment period
[removed]shortening the investment time period
17. Which one of the following is an example of an annuity, but not a perpetuity?
[removed]unequal payments each month, for 18 months
[removed]payments of equal amount each quarter forever
[removed]unequal payments each year forever
[removed]equal payments every six months for 48 months
[removed]unending equal payments every other month
18. 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 13 percent? Assume annual payments.
19. A bond’s debenture will include which of the following?
[removed]description of any loan collateral
[removed]total amount of the bond issue
[removed]all of the above
[removed]none of the above
20. Bonds issued by Blue Sky Airlines have a face value of $1,000 and currently sell for $850. The annual coupon payments are $80. If the bonds have 10 years until maturity, what is the approximate YTM of the bonds?
21. 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 current price of the stock? Hint: Yield is the same as required rate of return.
[removed]None of the above
22. 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 7.5 percent. What is the current price of the stock?
23. 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?
[removed]$4, $4.5 and $4.8
[removed]$4.24, $4.76 and $5.05
[removed]$4.24, $4.49, $4.76
[removed]$4, $4.50, $5.05
24. Which of the following is true regarding the primary market?
[removed]it is the market where the largest number of shares are traded on a daily basis.
[removed]it is the market in which the largest number of issues are listed.
[removed]it is the market with the largest number of participants.
[removed]it is the market where new securities are offered.
[removed]it is the market where shareholders trade most frequently with each other.
25. The smallest firms listed on NASDAQ are in the NASDAQ _____ Market.
26. The annual interest on a bond divided by the bond’s market price is called the:
[removed]yield to maturity.
[removed]yield to call.
27. 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.
28. Which of the following is true regarding bonds?
[removed]Bonds do not carry default risk.
[removed]Bonds are sensitive to changes in the interest rates.
[removed]Moody’s and Standard and Poor’s provide information regarding a bond’s interest rate risk.
[removed]Municipal bonds are free of default risk.
[removed]None of the above is true
29. Which of the following best describes a floating-rate bond?
[removed]A bond that adjusts the coupon payments based on an interest rate index, such as the T-bill.
[removed]A bond that is issued by the U.S. government.
[removed]A bond that adjusts the coupon payment date.
[removed]A bond that has no coupons, but adjusts the face value payment based on inflation.
30. Which of the following are not true regarding convertible bonds? Select all that apply:
[removed]Are extremely rare
[removed]Can be exchanged for a fixed number of shares at maturity only
[removed]Can be exchanged for a fixed number of shares before maturity
[removed]Allow the holder to require the issuer to buy the bond back
31. In a general partnership, each partner is personally liable for:
[removed]the partnership debts that he or she personally obtained for the firm.
[removed]his or her proportionate share of all partnership debts, regardless of which partner incurred that debt.
[removed]the total debts of the partnership, even if he or she was unaware of those debts.
[removed]the debts of the partnership, up to the amount he or she invested in the firm.
[removed]all personal and partnership debts incurred by any partner, even if he or she was unaware of those debts.
32. Trademarks are classified as:
[removed]tangible fixed assets.
[removed]intangible fixed assets.
33. 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.
34. How can we apply the concept of time value of money in evaluating a mortgage? Present at least two scenarios. Briefly explain your rationale
35. Why do firms use protective covenants? Provide two or three examples of protective covenants, and explain how these covenants increase or decrease risk
36. 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?