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EXAM 1 REVIEW Name: __________________________ Date: _____________ 1. Agency problems can best be characterized as: A) friction between the primary and secondary markets. B) dislike of firm's bondholders by its equity holders. C) differing incentives between managers and owners. D) spending corporate resources. 2. Which of the following financial markets is not located in one, centralized location? A) CBOT B) NASDAQ C) NYSE D) LSE 3. A financial intermediary provides financing for: A) companies. B) other organizations. C) individuals. D) all of the above. 4. Calculate the EBIT for a firm with $5 million total revenues, $4 million cost of goods sold, $500,000 depreciation expense, and $120,000 interest expense. A) ($120,000) B) $500,000 C) $380,000 D) $0 5. How much more is a perpetuity of $1,000 worth than an annuity of the same amount for 20 years? Assume an 10% interest rate and cash flows at end of period. A) $2,000.00 B) $1,635.08 C) $297.29 D) $1,486.44 1 6. Which of the following would be considered an advantage of the sole proprietorship form of organization? A) Profits taxed at only one level B) A pool of expertise C) Wide access to capital markets D) Unlimited liability 7. Financial markets are used for trading: A) the raw materials used in manufacturing. B) both real assets and financial assets. C) the goods and services produced by a firm. D) securities, such as shares of IBM. 8. Which of the following forms of compensation is most likely to align the interests of managers and shareholders? A) A salary that is paid partly in the form of the company's shares. B) A fixed salary. C) A salary that is linked to the company's total market value. D) A salary that is linked to company profits. 9. Which of the following assets is likely to be considered the most liquid? A) Net fixed assets B) Inventories C) Marketable securities D) Accounts payable 10. What is the present value of a five period annuity of $3,000 if the interest rate is 12% and the first payment is made today? A) $10,814.33 B) $12,112.05 C) $13,200.00 D) $9,655.65 11. What is the effective annual rate of interest on an account with an APR of 10% and monthly compounding? A) 11.05% B) 10.52% C) 10.00% D) 10.47% 2 12. Which of the following financial markets is located in one, centralized location? A) the European Monetary Union. B) the over-the-counter market. C) NYSE. D) NASDAQ. 13. The overall goal of capital budgeting projects should be to: A) increase the wealth of the firm's shareholders. B) increase the firm's outstanding shares of stock. C) decrease the firm's reliance upon debt. D) increase the firm's sales. 14. Financing for public corporations flow through: A) financial intermediaries. B) the financial markets, financial intermediaries, or both. C) the financial markets. D) either the financial markets or financial intermediaries. 15. What is the future value of $10,000 on deposit for five years at 6% simple interest? A) $13,000.00 B) $7,472.58 C) $13,382.26 D) $10,303.62 16. A credit card account that charges interest at the rate of 1.25% per month would have an effective annual rate of _______ and an APR of _______. A) 15.00%; 14.55% B) 16.08%; 15.00% C) 14.55%; 16.08% D) 12.68%; 15.00% 17. What will be the monthly payment on a home mortgage of $75,000 at 12% interest, to be amortized over 30 years? A) $1,034.53 B) $771.46 C) $775.90 D) $1,028.61 3 18. “Give me $5,000 today and I'll return $20,000 to you in five years,” offers the investment broker. To the nearest percent, what annual interest rate is being offered? A) 29% B) 60% C) 25% D) 32% 19. When subtracting an asset's accumulated depreciation from its historic cost, the resulting value is termed the: A) market value of the asset. B) current asset value. C) book value of the asset. D) depreciation expense. 20. Which of the following expense categories is subtracted from total revenues to arrive at a firm's EBIT? A) Interest expense B) Tax liability C) Depreciation expense D) Cash dividends 21. One common reason for partnerships to convert to a corporate form of organization is that the partnership: A) wishes to avoid double taxation of profits. B) agreement expires after ten years of use. C) faces rapidly growing financing requirements. D) has issued all of its allotted shares. 22. The primary distinction between securities sold in the primary and secondary markets is the: A) profitability of the issuing corporation. B) previous issuance of the securities. C) riskiness of the securities. D) price of the securities. 4 23. How long must one wait (to the nearest year) for an initial investment of $1,000 to triple in value if the investment earns 8% compounded annually? A) 25 B) 22 C) 9 D) 14 24. What is the present value of the following payment stream, discounted at 8% annually: $1,000 at the end of year 1, $2,000 at the end of year 2, and $3,000 at the end of year 3? A) $5,520.00 B) $5,423.87 C) $5,022.11 D) $5,144.03 25. What is the effective annual interest rate on a 9% APR automobile loan that has monthly payments? A) 10.94% B) 9.00% C) 9.38% D) 9.81% 26. Which of the following statements generally cannot be correct for an investor who faces unlimited liability on an investment? A) The investor is subject to double taxation. B) The investor is responsible for managing the firm. C) The investor has no partners. D) The investor owns stock in the firm. 27. Retained earnings result from: A) market values that exceed book values. B) an excess of assets over liabilities. C) the sale of additional shares of stock to investors. D) income not paid to shareholders in the form of cash dividends. 28. How much must be invested today in order to generate a five-year annuity of $1,000 per year, with the first payment one year from today, at an interest rate of 12%? A) $3,746.25 B) $4,604.78 C) $3,604,78 D) $4,037.35 5 29. If a borrower promises to pay you $1,900 nine years from now in return for a loan of $1,000 today, what effective annual interest rate is being offered? A) 9.00% B) 10.00% C) 7.39% D) 5.26% 30. A perpetuity of $5,000 per year beginning today is said to offer a 15% interest rate. What is its present value? A) $38,333.33 B) $33,333.33 C) $65,217.39 D) $37,681.16 31. Your real estate agent mentions that homes in your price range require a payment of approximately $1,200 per month over 30 years at 9% interest. What is the approximate size of the mortgage with these terms? A) $393,120 B) $128,035 C) $147,940 D) $149,140 32. Profit maximization is not a well-defined corporate objective because: A) profits can be changed by using different accounting rules. B) it leaves open the question of which year's profits. C) higher profits does not necessarily mean a better rate of return. D) all of the above. 33. According to GAAP, assets and liabilities are typically recorded on the balance sheet at: A) market value. B) salvage value. C) historical cost less depreciation. D) historical cost. 6 34. What is the present value of the following set of cash flows at an interest rate of 7%; $1,000 today, $2,000 at end of year one, $4,000 at end of year three, and $6,000 at end of year five? A) $11,524 B) $ 9,731 C) $10,412 D) $10,524 35. Long-term financing arrangements occur in the: A) capital markets. B) secondary markets. C) primary markets. D) money markets. 36. When the management of a business is conducted by individuals other than the owners, the business is more likely to be a: A) partnership. B) general partner. C) sole proprietorship. D) corporation. 37. U.S. corporate equities are mostly held by: A) foreign investors. B) state and local governments. C) households. D) insurance companies. 38. Which of the following would not be considered a real asset? A) A patent B) A corporate bond C) A factory D) A machine 39. A financial institution: A) raises financing by selling shares or policies. B) is a kind of financial intermediary. C) invests primarily in securities. D) simply pools and invests savings. 7 40. Financial markets and intermediaries: A) provide liquidity. B) channel savings to real investment. C) enable investors and businesses to reduce risk. D) All of the above. 41. Corporate managers are expected to make corporate decisions that are in the best interest of: A) the corporation's board of directors. B) all corporate employees. C) top corporate management. D) the corporation's shareholders. 42. Short-term financing decisions commonly occur in the: A) capital markets. B) primary markets. C) money markets. D) secondary markets. 43. When a corporation fails, the maximum that can lost by an investor protected by limited liability is: A) the amount of the profit on the investment. B) the amount necessary to pay the corporation's debts. C) the amount of the investor's personal wealth. D) the amount of the initial investment. 44. Which of the following values would most likely interest a shareholder? A) Historical cost of equity. B) Book value of equity. C) Retained earnings component of equity. D) Market value of equity. 45. Which of the following statements is NOT characteristic of mutual funds? A) They offer professional management. B) They pool the savings of many investors. C) They are financial institutions. D) They raise money by selling shares to investors. 8 46. The legal “life” of a corporation is: A) permanent, regardless of current ownership. B) permanent, as long as shareholders don't change. C) coincident with that of its CEO. D) equal to the life of the Board of Directors. 47. Within the realm of ethical decision making, managers should attempt to maximize: A) their firm's market share. B) the profits of the firm. C) their compensation plans. D) the market value of the shareholders' wealth. Use the following to answer questions 48-50: Tax Rate 25% COGS 7500 Taxes Paid 2500 Administrative Expenses 3200 Interest Expense 1200 Depreciation 1000 2. What is the firm’s net income? A) $12,500 B) $10,000 C) $2,000 D) $7,500 3. What is the level of the firm revenues? A) $23,000 B) $19,000 C) $22,900 D) $17,900 4. What is the EBIT? A) $11,200 B) $9,650 C) $10,000 D) $8000 9
"EXAM 1 REVIEW"