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									                                              Towson University
                                            Department of Finance
                                                    Fin331
                                     Principles of Financial Management
                                                Prof. M. Rhee
                                                 Spring 2007

1. Do not Cheat!
2. Write down your name and id# on the answer sheet.
3. You have 65 minutes to complete the exam.
4. Circle the correct answers. There is only one correct answer for each question.
5. Closed book and closed notes! You may use a calculator.
6. If you find questions requiring additional information or no correct answers/multiple correct answers,
provide a note on the right margin next to the corresponding question. You do not need to ask the proctor
for clarification.

1. You want to receive a $100 on your next year birthday. How much are your parents need to save in a
savings account yielding 10% today so that you will get the money a year later.
A) $80.8 B) $90.9 C) $70.7 D) $75.5 E) None

2. You have a choice of receiving $100 today (#1) or $109 a year from today(#2). Which one do you prefer
if the market interest rate is 7%. If you need to make those payments instead of receiving the payments,
which one do you like?
A) #1, #1 B) #1, #2 C) #2, #1 D) #2,#2 E) They are all equivalent

3. If you save $100 today and $100 next year, how much can you have two years from now if the savings
rate is 10%?
A) $200 B) $221 C) $250 D) $267 E) None

4. There are two strings. The length of one of them is 2 feet long. What is the length of the other string in
feet if the total The total length of two strings adjoined together is 42 inches?
A) 1.0 B) 1.5 C) 2.0 D) 2.5 E) None

5. What is (are) the factor(s) common to the required returns of all securities?
A) real risk free rate B) expected inflation rate C) risk premium D) A & B E) B& C

6. How are term structures and yield curves different?
A) They are practically the same B) Negative relationship C) Different risks
D) Different premiums E) None

7. Which one is a long-term security?
A) Trade credit B) accruals C) commercial paper D) short-term loans E) None

8. What is (are) the unique feature(s) of equity?
A) Ownership B) Residual claims C) IOU D) A&B E) B&C

9. What is the Expected Return and Standard Deviation of the probability distribution given below?
Possible return Probablity
     10%           80%
    -10%           20%
A) 6%, 6% B) 6%, 8% C) 8%, 6% D) 8%, 8% E) None

10. You may have different types of risk measures depending on whether you are interested in the
performance of the entire portfolio (ups and downs of the portfolio performance may have a direct impact
on your wealth) or in each security comprising the portfolio. What kind of risk measure would be
appropriate for the entire portfolio?
A) Total risk measured by standard deviation B) Total risk measured by beta
C) Additional risk by standard deviation D) Additional risk by beta, E) None

11. Consider a very simple discount bond with a Face Value of $1000, to be paid at the end of the year, and
no coupon payments. What is the PV of the bond at 10% discount interest rate? If the bond sells for $875,
would you buy the bond or not?
A) $909.09, Buy B) $1010.10, Buy C) $909.09, Don’t
D) $1010.10, Don’t E) None

12. Given D1 = $1.08 and K=10%, what is the value of the stock at 8% growth rate? If the current price of
the stock is $50, would you buy it?
A) $55, Buy B) $60, Buy C) $55, Don’t D) $60, Don’t E) None

13. Determine the payback period for a project with an investment amount = $10k and C1=3k, C2=4k,
C3=5k, C4=6k. If the maximum number of periods allowed is 2 years, would you take the project?
A) 3.4, Take B) 4.3, Take C) 3.4, Don’t D) 4.3 Don’t E) None

14. What is the NPV of a project with an investment amount of $100 and C1=$121 at 10% discount interest
rate? Would you take the project?
A)$10, Take B)$110, Take C)$10, Don’t D)$110, Don’t E) None

15. What is the normative objective of a firm?
A) Profit maximization B) Agency conflict C) Efficient management
D) Shareholder wealth maximization E) None of the above

16. What is the main disadvantage of sole proprietorship against corporation?
A) Profit margin B) Double taxation C) Unlimited liability D) Dividend policy E) None

17. Current ratio=current assets/current liability, Quick ratio=(current assets-inventory)/current liability. If
Quick ratio=1.0, current liability=$10k, and inventory=$2k, what is the Current ratio?
A) 0.9 B) 1.0 C) 1.1 D) 1.2 E) None of the above

18. If Total Asset Turnover (TAT)=0.8 and the Profit Margin (PM) =5% what is the ROA?
A) 5% B)7.2% C) 0.2% D) 4.8% E) None

19. C(1 feet -> inches)=12, C(1 yard->feet)=3. What is the conversion factor from 1 inch into yards?
A) 1/15 B) 1/9 C) 1/36 D) 1/4 E) None

20. If the PV is300 and an investment amount is 200, what is the NPV? Should we take the project
according to the NPV rule? If IRR is 10% and the required rate of return is 12%, should we take the
project?
A) 100, Yes, Yes B) -100, Yes, NO C) 100, No, Yes, D) -100, No, Yes E) None

END
                                                Exam II
                                 Principles of Financial Management
                                                                                           Prof. M. Rhee
                                                                                             Spring 2007

1.    What is one common way of identifying potential peers in the peer group analysis (cross-sectional
      industry) analysis?
       A) Time-Trend B) SIC Industry codes C) Internal uses D) External uses E) None of the above

2.    BF Chicken Co. has a debt equity ratio of 1.25. Return on assets is 7.3%, and
      total equity is $245,000. What is its net income?
      A) $40,243.50 B) $33,325.40 C) $71,240.00 D) 80,050.40 E) None

3.    Given r and t greater than zero, which statements are correct?
      I. Present value interest factors are less than 1.0
      II. Future value interest factors are less than 1.0
      III. Present value interest factors are greater than future value interest factors
      IV. Present value interest factors grow as t grows, provided r is held constant
      A) I only B) I and III C) I and IV D) II and III E) II and IV

4.    You received a $1 savings account earning 5% on your 1st birthday. How much will you have in
      the account on your 40th birthday if you don't withdraw any money before then?
      A) $5.89 B) $6.34 C) $6.70 D) $7.00 E) None

5.    Your grandfather placed $2,000 in a trust fund for you. In 10 years the fund will be worth $5,000.
      What is the rate of return on the trust fund?
      A) 5.98%          B) 8.76%            C) 9.60%        D) 9.98%           E) None

6.    What is the value of the trailer house you can buy 4 years from today, if you save $25,000 today?
      A) $18,267 B) $18,375                C) $19,147        D) $21,370        E) None

7.    Compute the current liabilities for Peterson Brewing.
      CGS = $2,040,000, Quick ratio = 1.8, Inventory turnover =4, Current ratio = 3.3
      A) $340,000     B) $360,000          C) $399,999      D) $480,222     E) None

8     Your grandfather placed $2,000 in a trust fund for you. In 10 years the fund will be worth $5,000.
      What is the rate of return on the trust fund?
      A) 5.98%          B) 8.76%            C) 9.60%        D) 10.98%          E) 11.14%

9.    The relationship between the market value of a firm measured by its current share price and its
      earnings is known as
      A) return on equity B) market to book ratio C) return on assets D) total asset turnover E) None

10.   What is the approximate rate of return on the invesment to double your money every 10 years?
      A) 7.2 % B) 10% C) 5% D) 4.6% E) 9 %

11.   Which one is incorporated into calculation of ROE, but not in ROA according to Du Pont identity?
      A) ROA B) Equity multiplier C) Total asset turnover D) Profit margin E) Receivables turnover

12.   Capital structure refers to
      A) the types of projects a firm invests in. B) the mixture of short-term and long-term debt.
      C) the amount of debt and equity a firm has D) short-term assets and short-term liabilities.
      E) the size, timing, and risk of a firm's future cash flows.

13.   Which of the following is the BEST description of the objective of the financial manager in a
      corporation where shares are publicly traded?
       A) Maximize sales B) Maximize profits C) Avoid financial distress
       D) Maintain steady earnings growth E) Maximize the current stock price

14.    A firm has an ROA of 8%, sales of $100, and total assets of $75. What is its profit margin?
       A) 1.3%         B) 4.3% C) 6.0% D) 10.7%             E) 16.7%

15.    Calculate net income and the cash flow using the following information: Sales = $135.00; Cost of
       goods sold = $40.00; Selling, general and administrative expense = $35; Depreciation = $20.00;
       Interest expense = $20.00; Tax rate = 34%.
       A)$13.20, 33.20 B $19.80, 29.80 C)$20.00, $50.00 D)$23.10, 33.20 E)$42.90, 32.20

16.    According to Fisher effect, what is the expected inflation rate if the nominal rate is 15.5%, and the
       real interest rate is 10%?
       A) 3% B) 3.5% C) 4% D) 4.5% E) 5.5%

17.    How long will you need to pay off $1,000 charged on your credit card, if you plan to make the
       minimum payment of $20 per month and the credit card charges 18% per annum?
       A) 20 months    B) 35 months       C) 60 months     D) 74 months       E) 93 months

18.    What is the after tax yield (return) of a corporate bond with 8% before tax yield, when you are in a
       30% tax bracket? Which one do you like better between the corporate bond and a 7% muni?
       A) 4.8%, Corp B) 5.6%, Corp C) 4.8%, Muni D) 5.6%, Muni E) More information needed

19.    If the current one year CD rate is 5% and the two year CD rate is 7%, what is your best estimate of
       one year CD rate which will be available one year from today?
       A) 5% B) 6% C) 7% D) 8% E) 9%

20.    How much do you have to save today to have $100 3 years later at 10%, semi-annual
       compounding?
       A) $67.62      B) $74.62         C) $75.13        D) $82.13         E) $90.87

NOTES: CR=CA/CL, Q ratio = QA/CL, Debt Ratio= TL/TA, TIE=EBIT/Interest, IT=Sales/Inv or
CGS/Inv, TAT=Sales/TA, FAT=Sales/FA, ACP=(Accounts Receivable/Avg Credit Sales)*360, Receivable
turnover = Credit sales/Accounts Receivable, PM=NE/Sales, ROA=NE/TA, ROE=NE/E, Payout=Div/NE,
Gross PM=Gross Profit/Sales
                                                  Spring 2007
                                                   Exam #3
                                                 Prof. M. Rhee
                                                     NAME: _______________________ ID#____________
Instructions:
     1. Do not cheat!
     2. Closed book and closed notes. You may use a (financial) calculator.
     3. 60 minutes to complete the exam.
     4. If you think that the question is not clear or requires more information, please write down your
          interpretation of the question in the margin available and proceed. No need to ask the proctor
          about the exam questions.

1. Which statement is false?
a) debt.primary and secondary markets are two different markets and there is no linkage between them.
b) a primary market is where the brand new securities are issued
c) a secondary market is where existing securities are traded
d) there is an influx of capital if new securities are issued
e) an investment decision is practically the same as buying decision.

2. ABC company is increasing its equity by selling additional shares to the public and also by converting its
retained earnings. The total amount to be raised is $1,000. While the preferred choice is internal equity
financing (converting retained earning to equity), it is limited by the amount of retained earnings available.
Given that the size of retained earnings is $300, how much should be raised externally (by issuing new
shares)? Although ABC can sell its new shares for $1.00, the net receipt from the sale would be $0.95 due
to the flotation cost. How many shares does ABC need to issue?
a) $700, 520 b) $700, 737 c) $1,000, 520 d) $1,000, 737 e) none

3. What is NADAQ?
a) a computer network serving the OTC b) foreign markets c) shelf registration
d) organized markets e) specialists acting as market makers

4. What is the PV of a bond with the following information: FV=$1000, Annual coupon rate 8%, Semi-
annual coupon payments, 2 year maturity, discount rate = 10%, the price of the bond = $1000. Based on
the PV, do you want to invest in the bond or not?
a) $965,Yes b) $965,No c) 1,000,Yes d) 1,000,No e) $1,000,indifferent

5. How is IPO different from seasoned public offering?
a) brand new securities b) issued by privately held companies
c) offered to only select group of investors, mostly institutional
d) internal financing e) external financing

6. In order to force your pro forma B/S to balance, what do you need to do when estimated assets exceed
the sum of liabilities and equity?
a) excess cash b) cumulative retained earnings c) increased sales
d) increased spontaneous account e) external funding needed

7. One example of mismatching between the financing needs and funding is financing a long-term project
with short-term funding, which one is a good example of such a mismatch?
a) CP to build a production facility b) CP to hire temporaries
c) long-term bonds to build a factory d) long-term to hire temps e) none

8. Which ratio may be greatly affected by the choice of short-term and long-term debt for a given amount
of total debt?
a) debt ratio b) profit margin c) TIE d) quick ratio e) none
9. Which accounts are closely related to sales?
a) variable, spontaneous b) variable, discretionary c) fixed, spontaneous d) fixed, discretionary e) none

10. Other than the increased number of companies included, what else is taken into consideration for S&P
instead of DJIA?
a) stock prices b) firm sizes c) annual sales d) funding needs e) none

11. If an issue can retire the bond prior to its maturity, what kind of indenture provision does the bond
have? Does the return on this bond tend to be higher or lower than a bond with such a provision?
a) convertibility higher b) convertibility lower c) call higher
d) sinking fund lower e) sinking fund higher

12. A 10 year discount bond (bond with no coupon payments, only the FV) with a face value $1,000 is now
sold for $800. What is the PV of the bond at the discount rate of 5%? According to the efficient market
hypothesis, the price of a security should be equal to the (present) value of the security. If the price and the
(present) value are not equal, then the price of the bond will go up instantly (with a huge buy pressure) or
go down instantly (with a huge sell pressure) to be equal to the (present) value of the bond. Do you expect
the price to go up or down?
a) $565 up b) $565 down c) $614 up d) $614 down e) none

13. What is the debenture?
a) FRN b) Euro$ c) secured bonds d) junk bonds e) none

14. A muni is offering 8% interest. What should the return on a corporate bond be so that both the muni and
the corporate bond are equally competitive when you are in a 30% tax bracket?
a) 11.43% b) 12.34% c) 13.56% d) 14.12% e) none

15. Differentiate between SEC registration and the exchange listing requirements.
a) stock vs. bonds b) long-term vs short-term c) formality
d) minimal government requirements vs additional e) none

16. Given the information below for 2006, please estimate the 2007 sales amount and CGS using the
percentage-of-sales method when $600 of the CGS is variable and the rest ($300) is fixed.

Sales $1,000, GGS $900
Sales are expect to increase 10% next year.
a) $1,100, $990 b) $1,100, $960 c) $1,060, $990 d) $1,060, $960 e) none of the above

17. If ABC Co. expects sales next year to be $1,000 and will make an extra $100 investment to support the
increased sales, what is the size of the company’s net earnings if it finances its additional investment ($100)
equally from an external source and the next year’s addition to retained earnings. The company has a 20%
dividend payout ratio.
a) 50.75 b) $62.50 c) $80 d) $100 e) none

18. Which one is a disadvantage of commercial paper vis-à-vis bank borrowing?
a) a weaker relationship with the bank b) interest rates could be more steady
c) more competitive rates d) no collaterals needed e) none

19. Using 360 days for a year, compute the APR cost of not taking the discount in the case of 1/10, net 30.
If the cost of borrowing money is 20% APR, are you going to take the cash discount?
a) 18%, yes b) 18%, no c) 20.54%, yes d) 20.54% no e) none

20. Which one is not an advantage of a preferred stock from the issuer’s perspective?
a) no collaterals required b) better debt management
c) no ownership dilution d) smaller risk e) none
                                                Final
                                Principles of Financial Management
                                                                                           Prof. M. Rhee
                                                                                             Spring 2007

1.    If 1/X, net 30 days is equivalent to an 18% discount on an annual basis, what is X? If the cost of
      borrowing money is 15%, would you take the discount or not?
      A) 5 days, Yes B) 7 days, Yes C) 5 days, No D) 7 days, No E) 10 days, Yes

2.    BF Co. has a debt equity ratio of 1.00. ROA is 7.0%, and total equity is $200,000. What
       is its net income?
      A) $40,243.50 B) $33,325.40 C) $71,240.00 D) 80,050.40 E) 28,000

3.    Given r (discount rate) and t greater than zero, which statements are correct?
      I. Present value interest factors are greater than 1.0
      II. Future value interest factors are less than 1.0
      III. Present value interest factors are less than future value interest factors
      IV. Future value interest factors grow as t grows, provided r is held constant
      A) I only B) I and III C) I and IV D) II and III E) III and IV

4.    You received an $1 savings account earning 5% from you father today. How much will you have
      in the account 40 years from today if you don't withdraw any money before then?
      A) $5.89 B) $6.34 C) $6.70 D) $7.04 E) $8.97

5.    If you need $1000 in one year and $2000 more in two years and earning 9%, how much do you
      have to put up today to cover these amounts in the future?
      A) $2,601 B) $3402 C) $2670 D) $2700 E) $3444

6.    The term __________ implies that common stock has no special preference either in paying
      dividends or in bankruptcy.
      A) limited liability      B) debenture  C) residual claim
      D) cumulative voting      E) indenture

7.    Compute the current liabilities for Peterson Brewing.
      Sales=$350,000, CGS = $200,000, Quick ratio = 1.8, Inventory turnover =4, Current ratio = 3.2
      A) $34,000      B) $35,714           C) $39,999       D) $48,222    E) $51,409

8     What is (are) factor(s) unique to each security?
      A) real risk free rate B) expected inflation rate C) risk premium D) A & B E) B& C

9.    The relationship between the market value of a firm measured by its current share price and its
      earnings is known as
      A) return on equity B) market to book ratio C) return on assets D) total asset turnover E) P/E

10.   According to the rule of 72, how long does it take to quadruple your investment at 12%?
      A) 6 years B) 8 years C) 9 years D) 12 years E) 15 years

11.   Which one has nothing to do with either of Du Pont identities?
      A) ROA B) Equity multiplier C) Total asset turnover D) Profit margin E) Receivables turnover

12.   Capital structure refers to
      A) the types of projects a firm invests in. B) the mixture of short-term and long-term debt.
      C) the amount of debt and equity a firm has D) short-term assets and short-term liabilities.
      E) the size, timing, and risk of a firm's future cash flows.
13.   Which of the following is the BEST description of the objective of the financial manager in a
      corporation where shares are publicly traded?
      A) Maximize sales B) Maximize profits C) Avoid financial distress
      D) Maintain steady earnings growth E) Maximize the current stock price

14.   A firm has a profit margin of 6%, sales of $100, and total assets of $75. What is its ROA?
      A) 1.3%           B) 4.3% C) 6.0% D) 8%          E) 16.7%

15.   Which one is a long-term security?
      A) Trade credit B) accruals C) commercial paper D) short-term loans E) treasury notes

16.   According to Fisher effect, what is the real interest rate if the nominal rate is 5.5%, and the
      expected inflation rate is 2%?
      A) 3% B) 3.5% C) 4% D) 4.5% E) 7.5%

17.   How long will it take for you to pay off $1,000 charged on your credit card, if you plan to make
      the minimum payment of $20 per month and the credit card charges 18% per annum?
      A) 20 months      B) 35 months      C) 60 months      D) 74 months      E) 93 months

18.   A muni is yielding 7%. What is the before tax equivalent yield (return) of a corporate bond which
      has the after-tax return the same as the muni so that both are equally competitive when you are in
      a 30% tax bracket?
      A) 8.8% B) 9.6% C) 10.0% D) 10.6% E) 12.4%

21.   If the current one year CD rate is 5% and the best estimate of one year CD rate which will be
      available one year from today is 7%, what is the current two year CD rate according to the
      expectations hypothesis?
      A) 5% B) 6% C) 7% D) 8% E) 9%

22.   If the current one year CD rate is 5% and the best estimate of one year CD rate which will be
      available one year from today is 7%, what is the current two year CD rate given the liquidity
      premium is 2% on the overall long term rate?
      A) 5% B) 6% C) 7% D) 8% E) 9%

23.   You have only three investment opportunities as follows: Project A with 5% return, Project B with
      7% return, Project C with 9% return. What should be the required rate of return when you consider
      for Project B?
      A) 5% B) 7% C) 9% D) 12% E) 14%

22.   How is CML different from SML?
      A) total risk vs systematic risk B) portfolio vs individual security within a portfolio
      C) firms with different sizes    D) A & B           E) B & C

24.   Determine the expected rates of return for Security ABC, given the following probability
      distribution. If the required return for the security is 12.5%, are you going to buy it or not?
      Possible Return 10%          15%
      Probability                  40%       60%
      A) 11% Yes          B) 13% Yes         C) 11% No          D) 13% No         E) 15% Yes

23.   For a preferred stock with the dividend amount of $2.00 every quarter, what is the (P)V of it with
      an annual discount rate of 5%? If the price of the preferred stock is $200, what is the yield (ROI,
      APR) of this security? (Hint: PV=D/k)
      A) $160, 4%        B) $180, 4%       C) $160, 6%        D) $180, 6%       E) $200, 4%

24.   Given that a (nominal) risk free rate is 2% and the market average return is expected to be 5%,
      determine the required rate of return for a security with a beta of 1.5. Is it underpriced if the
       expected return on this security is 7%?
       A) 6.5% Yes       B) 9.5% Yes        C) 6.5% No        D) 9.5% No           E) 10.5% Yes

25.    For a common stock with the current dividend amount of = $.70 (Do = .70), what is the (P)V of it
       with an annual discount rate of 15% and the dividend is expected to grow at the rate of 10% per
       annum forever? If the price of the stock is $32, are you going to buy it or not? Hint: PV=D1/(k-g)
       A) $33.5 Yes      B) $35.0 Yes       C) $33.5 No       D) $35.0 No        E) $37.5 Yes

26.    Which one(s) is(are) an external financing and has the flotation cost?
       A) Retained earnings       B) Bonds          C) Preferred stock             D) A&B          E) B&C

27.    What is the YTM (=return on the bond) of a bond with the following information: FV=$1000,
       Annual coupon rate 10%, Semi-annual coupon payments, 1 year maturity, required rate of return
       = 8%, the price of the bond = $1000.
       A) 5%             B)8.5%           C) 10.0%        D) 10.5%          E) 13.0%

28.    How is IPO (initial public offering) different from seasoned public offering?
       A) New shares issued       B) Previously privately held company          C) Large corporations
       D) Block trading           E) Cost of capital

29.    The amount of retained earnings limit the size of internal equity financing. If the amount of
       retained earnings is $25m, where do you have a switch from the internal to external equity
       financing in terms of the size of the total funding and also in term of the amount of debt financing
       when the equity financing accounts for 25% of the total funding and the remaining is from debt?
       A) $150m, $75m B) $100m, $75m C) $150m, $25m D) $100m, $25m E) $150m, $50

30.    Which of the following is NOT correct?
       A)      NPV is one of the most important concepts in finance
       B)      NPV is the difference between the present value of a project and its cost
       C)      The financial manager acts in the shareholders' best interests by identifying and taking
               positive NPV projects
       D)      NPV and Payback period rules are very similar
       E)      NPV is better than IRR, when the projects are mutually exclusive

31.    Long-term debt of Topstone Industries is currently selling for $1,045 of its face value. The issue
       matures in 10 years and pays an annual coupon of 8% of face. What is the before- and after-tax
       cost of debt for Topstone if the company is in 30% tax bracket?
       A) 6.75%, 4.75% B) 7.35%, 4.75% C) 6.75%, 5.15% D) 7.35%, 5.15% E) 8.35%, 6.75%

32.    What is the decision rule for IRR?
       A) Accept a project when IRR > 0
       B) Accept a project if at the IRR the NPV is positive
       C) Reject any project if the IRR is below 10%
       D) Accept a project if the IRR exceeds the firm's bank borrowing rate
       E) Accept a project if the IRR exceeds the firm's required rate of return

33.    Compute the NPV of the following project using a discount rate of 12%:
       Yr 0 = -$500; Yr 1 = -$50; Yr 2 = $50; Yr 3 = $200; Yr 4 = $400; Yr 5 = $400
       A) $0.00         B) $61.22         C) $118.75       D) $208.04        E) $300.00

34..   A project costs $475 and has cash flows of $100 for the first four years and $50 in each of the
       project's last five years. What is the payback period of the project? Are you going to take this
       project if the cutoff is 5 years?
       A) The project never pays back B) 4.5 years Yes C) 5.5 years Yes D) 4.5 years No E) 5.5 years No

35.    The costs of financing from different sources are as follows:
IEF = 5%, EEF=6%, cost of debt before tax = 5%, tax rate=20%, the size of retained
earnings=$30m. The capital structure is: We=40% and Wd=60%. Determine the WAMCC before
and after the break point.
A) 4.4% 4.8% B) 4.4% 5.2%          C) 4.6% 4.8%    D) 4.6% 5.2% E) 4.6% 5.2%

								
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