DeVry BUSN379 Midterm Exam Study Guide

1. DeVry BUSN379 - Midterm Exam Study Guide
1. Question :
(TCO 1) The goal of financial management is to increase the:
future value of the firm's total equity.
book value of equity
dividends paid per share
current market value per share
number of shares outstanding, thereby increasing the
market value of equity
Chapter 1, Page 10
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
Chapter 1, Page 5, Week 1 Lecture
3. Question :
(TCO 1) Market value reflects which of the following:
The amount someone is willing to pay today for an asset.
The value of the asset based on generally-accepted
accounting principles.

2. The asset’s historical cost.
A and B only
None of the above
Chapter 2, Page 26
4. Question :
(TCO 1) The income statement reflects:
Income and expenses at the time when those items affect
the cash flows of a firm.
Income and expenses in accordance with GAAP.
The cash flows in accordance with GAAP.
The flow of cash into and out of a firm during a stated
period of time.
The flow of cash into and out of a firm as of a particular
date.
Chapter 2, Page 27-29
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
Chapter 2, Pages 27-28

3. Income Statements
Sales $625,000
Costs 260,000
Depreciation 79,000
EBIT $286,000
Interest 43,000
Taxable Income $243,000
Taxes 85,050
Net Income $157,950
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
Chapter 2, Pages 31-32
Taxes = 0.15($50,000) + 0.25($25,000) + 0.34($25,000) +
0.39($315,000 – 100,000)
Taxes = $106,100
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

4. $0.47
Chapter 2 Pages 27-28
EPS = Earnings after taxes/shares outstanding = $600,000/300,000
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.
Chapter 2, Pages 27-28
9. Question :
(TCO 1) Best Electronics has EBIT of $450,000, interest of
$30,000, taxes of $50,000, and depreciation of $80,000. What
is the company’s operating cash flow?
$497,200
$480,000
$530,000
$470,000
$450,000
Chapter 2 Pages 34-35
Operating cash flow = EBIT + Depreciation – Current Taxes
Operating cash flow = $450,000 + $80,000 - $50,000 = $480,0000
10. Question :
(TCO 3) You opened a new certificate of feposit with $13,000.

5. Your broker indicated that this investment pays five percent
interest, compounded quarterly. Which one of the following
statements is correct concerning this investment?
You will receive equal interest payments every three
months over the life of the investment.
You could earn more interest by investing in an account
paying five percent simple interest.
You would have earned more interest if you had invested
in an account paying annual interest.
You will earn less and less interest each year over the life
of the investment.
You will earn more interest in year 3, than you will in year
2.
Chapter 4 Pages 96-97
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
Chapter 5 Pages 130-131, Formula 5.1
Present Value of an annuity - $6500 x 8.244 (8%, 14 periods) =
$53,586
12. Question :
(TCO 3) Your neighbor just received a credit offer in an e-
mail. The company is offering him $6,000 at 12.8 percent
interest. The monthly payment is only $110. If he accepts this

6. offer, how long will it take him to pay off the loan?
81.00 months
81.50 months
83 months
82.17 months
90.70 months
Chapter 5 Pages 132-133
13. Question :
(TCO 3) Fine Oak Woodworks is considering a project that has
cash flows of $5,000, $3,000, and $8,000 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 $16,000
The approximate current value of the project’s inflows is
$13,000

7. The current value of the project’s inflows is somewhere in
between $14,000 and $16,000
The project should be rejected because its present value is
negative
Chapter 5 Pages 124-127
PV = (5,000/1.10) + (3,000/1.10^2) + (8,000/1.10^3)
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?
$15,600
$12,500
$12,750
$15,000
Chapter 5 Pages 124-127
PV = (5,000/1.10) + (3,000/1.10^2) + (4,000/1.10^3) + (3,600/1.10^4) =
$12,488
15. Question :
(TCO 3) 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

8. 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.
Chapter 5 Pages 140-141
Here you need to select the lowest EAR.
EAR North Bank= [1 + (0.1317 / 12)]12
– 1 = 0.1399 x 100 =
13.99%
1. Question : (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
Chapter 4, Pages 96-97
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

9. student loan payments of $600 a month for three years
$250 a month over the life of a lease
Chapter 5 Pages 137-138
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
Chapter 6 Pages 163-166, Week 3 Lecture
Determine coupon/interest payments = $1,000 x 12% = $120
PV of interest payments (as an annuity) = $120 x 6.097= $731.64
PV of principal (single amount) = $1000 x 0.024 = $24
Total = $731.64 + $24 = $755.64
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

10. Chapter 5 Pages 174-175
5. Question :
(TCO 3) 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?
10.50%
11.50%
11.75%
12%
Chapter 6 Pages 168-169, Week 3 Lecture
You may use the trial and error approach explained in the textbook, or the
approximation formula in the lecture for Week 3.
Using the formula = See formula (lecture 3)
Approximate YTM = [$80+($1000-850/10)]/[(0.6*850)+(0.4x1000)] = 95/910 = 10.44%
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 current price of the stock? Hint: Yield is the same as
required rate of return.
$100
$133
$102
$86.40
None of the above
Chapter 5 Page 139, Week 3 Lecture

11. Pp=Dp/r=$8/0.06=$133
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 nine percent. What is the current
price of the stock?
$35
$40
$27
$29
Chapter 7 Pages 205-206, Week 3 Lecture
P = D / (r-g) = $1.60 / 0.13-0.09= $40
8. Question :
(TCO 3) Royal Electric paid a $2 dividend last year. The
dividend is expected to grow at a constant rate of five
percent over the next three years. Common stockholders
require a 12 percent return. What is the total amount of
dividends stockholders will receive during the next three
years?
$6.62
$6.03
$6.52
$6.85
Chapter 7 Pages 205-206, Week 3 Lecture
D1=$2.0 x 1.05 = 2.10
D2=$2.10 x 1.05 = 2.205
D3=$2.205 x 1.05 = 2.315
Add D1+D2+D3 = 6.62

12. 9. Question :
(TCO 6) The market where one shareholder sells shares to
another shareholder is called the _____ market.
primary
main
secondary
principal
dealer
Chapter 7 Page 216
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.
Chapter 7 Page 217
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.

13. the original issue date.
Chapter 6 Page 163
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
Chapter 6 Page 176
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
Week 3 Lecture
14. Question :
(TCO 6) Which of the following best describes a floating-rate
bond?

14. 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, but adjusts the face value
payment based on inflation.
Chapter 6 Page 181-182
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
Chapter 6 Page 182
1. Question :
(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.

15. 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.
Chapter 1, Page 7
2. Question :
(TCO 1) Which one of the following is classified as a current
asset?
land
accounts payable
equipment
inventory
note payable
Chapter 2, Pages 23-24
3. Question :
(TCO 1) Can you provide some examples of recent, well-
known unethical behavior cases? Explain the situation in one
or two sentences.
- Parmalat’s fraudulent accounting practices
- Martha Stewart’s insider trading on ImClone
- Microsoft antitrust case
- Worldcom, Enron, Tyco
4. Question :
(TCO 3) Why does money have time value? Explain your
rationale.
- inflation & postponement of consumption

16. - earning interest over time
5. Question :
(TCO 8) Are U.S. Treasury securities risk-free? Why or why
not? Explain your rationale?
Chapter 6 Page 187-189
No. As interest rates fluctuate, the value of a treasury security will
fluctuate. Long-term treasury securities have substantial interest rate
risk.
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?
Chapter 6 Page 181
Zero-coupon bonds are attractive to tax-exempt investors with long-
term dollar denominated liabilities. Some features include the tax
deductions and the relative certainly of future dollar value.