Lawrence Gitman - Principles of Managerial Finance (9th)
Finance 301 (Chapters 1 through 6)
First Examination Sample
(Excluding the Final Examination, my exams normally have 30
questions, extra questions are given here for your benefit)
A. Choose the one best answer.
B. All computations based on 360 days.
C. If the correct answer is not listed and "none of the above"
is not a choice, select the closest answer.
1. Asset Z has a beta ($z) of .7. The risk-free rate of return
(RF) is .05 or 5 percent, while the return on the market
portfolio of assets (km) is .12 or 12 percent. Asset Z's
required rate of return (kZ) is: kz = RF + (km - RF)
2. In the capital asset pricing model (CAPM), the equation
given in problem # 1, the beta coefficient is a measure of
_______ risk and index of the degree of movement of an
asset's return in response to a change in ________.
A. diversifiable; the prime rate.
B. market risk; the Treasury Bill rate.
C. diversifiable; the bond index rate.
(D.) market risk; the market risk premium (RPm).
3. The Cleveland Indians Corporation has a year end 1998
retained earnings balance of $ 220,000. The firm reported
net profits after taxes of $ 50,000 in 1999 and paid
dividends in 1999 of $ 30,000. The firm's retained earnings
balance at year end 1999 is _______.
(A.) $ 240,000
B. $ 250,000
C. $ 270,000
D. $ 300,000
E. $ 324,000
4. The less certain a cash flow, the _______ the risk, and the
_______ the present value of the cash of the cash flow.
A. Lower; higher
B. Lower; lower
(C.) Higher; lower
D. Higher; higher
E. Nothing can be said here
5. For this course the goal of the corporation or the firm is
assumed to be:
A. Maximize earnings per share.
B. Maximize the cash balance of the firm in the current
C. Maximize the amount of net working capital that the firm
(D.) Maximize shareholder's wealth (common stock price).
E. Minimize risk.
6. Which of the following set of balance sheet account changes
contain changes that all USE FUNDS?
A. Increased assets, increased liabilities, increased
(B.) Increased assets, decreased liabilities, decreased
C. Decreased assets, decreased liabilities, decreased
D. Increased assets, increased liabilities, decreased
E. Decreased assets, increased liabilities, increased
7. The David Justis Corporation is considering a project that
will yield cash flows for only one year:
POSSIBLE NET CASH INFLOWS PROBABILITY OF OCCURRENCE
$ 300 .10
$ 375 .15
$ 420 .35
$ 455 .10
$ 510 .30
Calculate the expected net cash inflow for that one year.
A. $ 30.00
B. $ 56.25
C. $ 64.50
D. $ 237.75
(E.) $ 431.75
8. You are given the following investments:
INVESTMENTS EXPECTED RETURN(MEAN) STANDARD DEVIATION(RISK)
Security A $ 1,200 $ 240
Security B $ 2,400 $ 400
Calculate the COEFFICIENT OF VARIATION (not the coefficient
of correlation) for both investments to determine which
security has the greatest relative risk.
(A.) Security A is riskier than Security B.
B. Security B is riskier than Security A.
C. With the information that is given you cannot make a
relative comparison of risk between the two securities.
D. Security A has the same relative risk as Security B.
E. None of the above.
9. Under the current corporate tax law what is the relationship
between the marginal federal income tax rate (mtr) and the
average federal income tax rate (atr) for a corporation?
A. These tax rates move inversely with each other (ie. as
the mtr increases, the atr decreases or as the atr
increases, the mtr decreases).
B. These tax rates are equal to each other, as long as the
corporation is earning more than $ 50,000 and less than
(C.) The marginal income tax rate is higher than the average
income tax rate when taxable income exceeds $ 50,000 and
is less than $ 335,000. The marginal income tax rate is
also higher than the average income tax rate when income
is over $10,000,000 and less than $18,333,333.
D. The marginal income tax rate is always greater than the
average tax rate over ALL INCOME LEVELS.
E. None of the above are true.
10. The Kenny Lofton Corporation purchased a machine two years
ago for $ 100,000. The machine's current book value is
$ 63,000. The Kenny Lofton Corporation is selling this
machine for $ 85,000. If the Kenny Lofton Corporation's
marginal ordinary tax rate is 34 percent, determine the tax
on the sale of this machine.
A. $ 6,160
(B.) $ 7,480
C. $ 10,120
D. $ 22,000
E. $ 35,140
11. The Dwight Goodin Corporation had operating income of
$ 800,000 (EBIT). This Corporation has a $ 60,000 operating
carry back-carry forward loss that can be used to offset
profits, the Dwight Goodin Corporation received an
additional $ 22,000 of interest income that is not included
in the $ 800,000 figure given above. The Corporation needs
to pay $ 240,000 of interest on its bond liabilities and the
Corporation also needs to pay $ 100,000 in dividends on its
common stock. What is this Corporation's taxable income?
(NOTE YOU ARE NOT BEING ASKED TO DETERMINE THE TAXES PAID,
ONLY THE TAXABLE INCOME).
A. $ 412,000
B. $ 582,000
C. $ 503,000
D. $ 762,000
(E.) $ 522,000
Use the following for Problem #12:
Income up to $ 50,000 .15
Income from $ 50,000 to $ 75,000 .25
Income from $ 75,000 to $ 100,000 .34
Income from $ 100,000 to $ 335,000 .39
Income at and above $ 335,000 to $10,000,000 Flat .34
Income from $10,000,000 to $15,000,000 .35
Income from $15,000,000 to $18,333,333 .38
Income at and above $18,333,333 Flat .35
12. Determine the tax for the Sandy Alomar Corporation that
earns $ 13,500,000.
A. $ 1,225,000
B. $ 3,400,000
C. $ 4,590,000
(D.) $ 4,625,000
E. $ 4,725,000
13. Money market are market for
(A.) Short-term debt securities.
B. Long-term bonds.
C. Corporate stocks.
D. Consumer automobile loans.
E. Foreign currency exchange.
14. Assume the following data for the Jim Thome Corporation
which was organized in 19X2.
19X2 19X3 19X4 19X5 19X6
TAXABLE INC. $50,000 $100,000 ($300,000) $100,000 $100,000
Assume a straight or flat 40 percent tax rate (ie. for this
problem ignore the tax schedule that was previously given),
what is the tax liability for the Jim Thome Corporation in
D. $ 0
E. None of the above.
15. The Jose Mesa Corporation owns 15,000 shares of the Albert
Bell Corporation's shares outstanding. Assume that the
Jose Mesa Corporation owns between 20% and 80% of the shares
outstanding of the Albert Bell Corporation. The stock is
held by the Jose Mesa Corporation as an investment and the
Jose Mesa Corporation receives $ 12,000 in dividends from the
Albert Bell Corporation. How much of this dividend payment
will the Jose Mesa Corporation report as taxable income?
A. $ 12,000
B. $ 10,200
C. $ 9,600
(D.) $ 2,400
E. $ 1,800
16. A corporation raises $ 500,000 in long-term debt (first cash
flow) to acquire additional plant capacity (second cash
flow). This question is designed to see if you know what
operating, financing and investment cash flows are.
A. Both are considered investment cash flows.
B. Both are considered financing cash flows.
(C.) The first cash flow is considered a financing cash flow
and the second cash flow is considered an investment
D. The first cash flow is considered an investment cash
flow and the second cash flow is considered a financing
E. The first cash flow is considered a financing cash flow
and the second cash flow is considered an operating cash
17. Which of the following statements is most correct?
A. An agency relationship exists when one or more persons
hire another person to perform some service but withhold
decision-making authority from that person
(B.) The agency conflicts between bondholders and
stockholders can be reduced with the use of bond
C. Managers may operate in the stockholders' best
interests, or managers may operate in their own personal
best interests. As long as managers stay within the
law, there are no effective controls that stockholders
can implement to control managerial decision making.
D. Agency conflicts between stockholders and managers are
not really a problem when outsiders (ie., non-managers)
own shares in a corporation.
E. All of the statements above are false.
18. The Bob Ojeda Corporation has 2,000,000 shares of stock
outstanding. On the balance sheet the company has
$45,000,000 worth of common equity. The company's stock
price is currently $25 a share. What is the Bob Ojeda
Corporation's Market Value Added (MVA)?
B. ($ 5,000,000)
(C.) $ 5,000,000
19. You know that a given firm's Total Asset Turnover (S/TA) is
12.0X and you also know its net profit margin (NPAT/S) is
.005. What is this firm=s rate of return on assets (ROA)?
20. Paid-in-capital in excess of par represents the amount
A. From the original sale of stock.
B. At the current market value of common stock.
C. At the current book value of common stock.
D. That are in retained earnings.
(E.) In excess of the par value from the original sale of
21. A yield curve that reflects relatively similar borrowing
costs for both short-term and long-term loans is called:
(A.) A Flat Yield Curve
B. A Humped Yield Curve
C. An Inverted Yield Curve
D. A Normal Yield Curve
E. Upward sloping Yield Curve
22. The Mike Hargrove Corporation has an average collection
period of 62 days. What is the accounts receivable
turnover ratio for the Mike Hargrove Corporation? Assume
a 360 day year.
Use the following data for questions: #23, #24 and #25
(assume 360 day year)
Cash $ 44,000
Marketable Securities(short-term) 10,000
Accounts Receivable 110,000
Prepaid Expenses 16,000
TOTAL CURRENT ASSETS $ 280,000
Gross Fixed Assets $260,000
Less: Accumulated Depreciation 60,000 $ 200,000
Construction in Progress 35,000
TOTAL ASSETS $ 515,000
Notes Payable $ 35,000
Accounts Payable 90,000
Accrued Expenses 50,000
Income Taxes Payable 25,000
TOTAL CURRENT LIABILITIES $ 200,000
TOTAL LONG TERM DEBT 120,000
Preferred Stock(8%)* 50,000
Common Stock(40,000 shares)** 120,000
Retained Earnings 25,000
TOTAL LIABILITIES AND EQUITY $ 515,000
*Preferred Dividends Equal $ 4,000
**Total Common Stock Shares Outstanding
***Jackson Corporation is paying $.75 a share on
common shares outstanding.
Sales $ 330,000
Cost (CGS and Selling & Admin Expenses) 231,000
EBIT (Operating Profit) $ 99,000
Net Profit Before Taxes $ 80,000
Net Profit After Taxes $ 48,000
Preferred Dividends $ 4,000
Earnings Available for Common Stockholders$ 44,000
23. In 1999 the rate of return on common equity is:
24. In 1999 the times interest earned (TIE) ratio is:
25. If the Jackson Corporation=s common stock is currently
selling for $7.15 per share, what is the price earnings
ratio or the P/E ratio?
26. The legal contract setting forth the terms and provisions of
a corporate bond is
A. A denture
B. A debenture
(C.) An indenture
D. A loan document
E. A promissory note
27. How much money will you have in a savings account at the end
of ten years if you deposit $ 2,000 at the end of each year
and your money earns 6 percent interest compounded annually?
(Compound Value of an ordinary or straight annuity)
A. $ 3,582
B. $ 14,720
C. $ 25,156
(D.) $ 26,362
E. None of the above is within $ 25 of the correct answer.
28. The Jacobs Field Corp. has found a fantastic investment that
will pay an annual rate of interest of 8 percent. Interest
on this investment will be compounded quarterly. The Corp.
has $ 2,100 to invest, what total dollar amount of money
will the Jacobs Field Corporation have at the end of three
29. Accounting practices and procedures used to prepare
financial statements are called:
D. Federal Reserve Board
30. Shares of stock currently owned by the firm's shareholders
D. Treasury Shares
31. Cleveland has $ 1,500 to invest now. He can invest this
money at a stated rate of 3.5%. He plans to invest this
money for a period of six years. Interest will be
compounded continuously. What total dollar amount of money
will Cleveland have at the end of the sixth year? For
those that do not have an ex but do have a yx, e is equal to
32. A firm has the following accounts and financial data for
ACCOUNT DOLLARS ACCOUNT DOLLARS,%,SH.
Sales $3,060 CGS $1,800
Accts. Rec. $ 500 Pref Div $ 18
Int Expense $ 126 Tax Rate .40
Total Oper Exp $ 600 No of Com. Sh. 1,000 Shares
Accts. Pay. $ 240
The firm's earnings per share, rounded to the nearest cent,
for 1999 is __________.
A. $ .67
B. $ .53
C. $ .51
D. $ .32
(E.) $ .30
33. The Larry Doby Corporation has the opportunity to borrow
$5,000 for 4 years at a stated annual rate of 12%. Interest
is compounded on a semi-annual basis. What is the EFFECTIVE
RATE OF INTEREST(EAR or EFF) for the Larry Doby Corporation?
34. What is the present value of the following uneven stream of
End of Year One End of Year Two End of Year Three
$ 6,000 $ 2,550 $ 4,450
You feel that these cashflows should be discounted with a 4
percent discount rate.
A. $11,871.29 D. $12,301.24
B. $11,970.44 E. $13,000.00
35. Using the "Rule of 72", how many years will it take for a
sum of money to double if this sum is growing at the annual
rate of twelve percent?
(A.) 6 years.
B. 7.2 years.
C. 8 years.
D. 9 years.
E. 12 years.
36. Under MACRS, an asset which originally cost $100,000,
incurred installation costs of $10,000, and has an estimated
salvage value of $25,000, is being depreciated using a
5-year normal recovery period. What is the depreciation
expense in year 1?
A. $ 8,350
37. Gateway has found an investment that will pay $ 5.50 from
now until infinity. Gateway feels that these cashflows
should be discounted at 10 percent. What is the present
value of this investment (perpetuity)?
A $ .55
B. $ 5.50
(C.) $ 55.00
D. $ 550.00
E. $ 1,000.00
38. Jim Brown has just obtained a $ 110,000 mortgage loan from
Key Corporation. The interest rate on the mortgage is 6%
and the maturity is ten years. The year-end mortgage
payment for each year is $14,945.48. At the end of year
two, the second mortgage payment of $14,945.48 will be made.
Of the amount paid in this 2nd year, what dollar amount will
be paid interest?
A. $ 5,568.50
(B.) $ 6,099.27
C. $ 6,600.00
D. $ 8,345.48
E. $ 8,846.21
39. A ten year investment has a present value of $ 8,000. This
investment will pay a year-end cashflow of $ 1,232.88 for
ten years. What is the rate of return, the discount rate,
on this investment?
A. Between 7% and 8%.
(B.) Between 8% and 9%.
C. Between 9% and 10%.
D. Between 10% and 11%.
E. None of the above intervals are correct.
40. In period of rising costs, the LIFO(last in,first out)
inventory method would result in:
A. Lower cost inventory items in cost of goods sold, lower
taxable income, and lower taxes.
(B.) Higher cost inventory items in cost of goods sold, lower
taxable income, and lower taxes.
C. Higher cost inventory items in cost of goods sold,
higher taxable income, and higher taxes.
D. Lower cost inventory itmes in cost of goods sold, higher
taxable income, and lower taxes.
E. None of the above.
41. Bob Feller Corporation is going to invest $ 500 each year
for five years. These cashflows will be invested at the
beginning of each period and will earn interest at the
annual rate of 5%. Interest compounds yearly. What dollar
sum will be accumulated at the end of five years? (Sum of an
42. Tom is evaluating the growth rate in dividends of a company
over the past 6 years. What is the annual compound growth
rate of dividends from 1994 to 1999?
1994 $ 1.25
1995 $ 1.52
1996 $ 1.85
1997 $ 1.80
1998 $ 1.95
1999 $ 2.65
43. Which of the following statements is most correct?
A. Ratio analysis facilitates comparisons by standardizing
B. Financial ratios should be interpreted with caution
because it may be difficult to say with certainty what
is a "good" value. For example in the case of the
current ratio, a "good" value is neither high nor low.
C. Financial ratios should be interpreted with caution
because there exist seasonal and accounting differences
that can reduce their comparability.
D. Many large firms operate different divisions in
different industries, and this makes it hard to develop
a meaningful set of industry benchmarks for these types
(E.) All of the statements above are correct.
44. Last year Mike bought 100 shares of the Browns Corporation
common stock for $53 per share. During the year he received
dividends of $1.45 per share. The stock is currently
selling for $60 per share. What rate of return did Mike
earn over the year?
45. An efficient portfolio is one that
A. Maximizes risk for a given level of return.
(B.) Maximizes return for a given level of risk.
C. Minimizes return for a given level of risk.
D. Maximizes return at all risk levels.
E. None of the above.
46. Perfectly _________ correlated series move exactly together
and have a correlation coefficient of _______, while
perfectly __________ correlated series move exactly in
opposite directs and have a correlation coefficent.
A. Negatively; -1; Postively; +1
B. Negatively; +1; Postively; -1
C. Positively; -1; Negatively; +1
(D.) Positively; +1; Negatively; -1
E. None of the above.
47. Choose the most correct answer for the following: (1) Which
is the best measure of risk for choosing an asset which is
to be held in isolation? (2) Which is the best measure for
choosing an asset to be held as part of a diversified
A. Beta (); Beta ()
B. Standard deviation (); correlation coefficient ()
C. Beta (); variance (2)
(D.) Coefficient of variation (CV); Beta ()
E. Variance (2); correlation coefficient ()
48. What affect would the following have on the Security Market
Line (SML), all else constant: (1) if the expected inflation
rate increases, and (2) investors become less risk averse?
A. The line would shift down and have a steeper slope.
(B.) The line would shift up and have a lessor slope.
C. The line would shift down and keep the same slope.
D. The line would shift up and keep the same slope.
E. The line would shift down and have a lessor slope.
49. In general, the lower (less positive and more negative) the
correlation between asset returns,
A. The less the potential diversification of risk.
(B.) The greater the potential diversification of risk.
C. The lower the potential profit.
D. The greater is the amount of time that you have to spend
monitoring the returns of these assets.
E. None of the above.
50. Most businesss raise money by selling their securities in
A. A Direct Placement
B. A Private Placement
(C.) A Public Offering
D. The Over the Counter Market
E. A Stock Exchange