BUSN 379 Midterm Exam Solution

BUSN 379 Midterm Exam Solution

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BUSN 379 Midterm Exam Solution

1. What is the goal of financial management for a sole proprietorship?

2. Working capital management includes which of the following?

3. Market value reflects which of the following…

4. Which of the following is true regarding income statements?

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:

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?

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?

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?

16. Which one of the following will increase the future value of a lump sum invested today?

17. Which one of the following is an example of an annuity, but not a perpetuity?

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?

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.

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?

24. Which of the following is true regarding the primary market?

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:

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?

29. Which of the following best describes a floating-rate bond?

30. Which of the following are not true regarding convertible bonds? Select all that apply:

31. In a general partnership, each partner is personally liable for..

32. Trademarks are classified as /:

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?