Fin 3312 Sample Exam 1 Questions Here are some representative type questions. This review is intended to give you an idea of the types of questions that may appear on the exam, and how the questions might be worded. Study your notes and pay particular to the areas of the textbook related to the notes we discussed in class. 1. Which of the following is not one of the things that causes a corporation to have a significant advantage over a partnership or a proprietorship? a. Limited liability. b. Ease of transfer of ownership interest. c. Unlimited life. d. Elimination of double taxation. e. Ability to retain earnings and thus convert income from personal income to capital gains. Answer: B 2. The New York Stock Exchange is primarily: a. a secondary market. b. an organized auction market. c. an over-the-counter market. d. answers a and b above are both correct. e. answers b and c above are both correct. Answer: D 3. The primary goal of a publicly-owned firm is: a. minimize the debt used by a firm. b. maximize expected EPS. c. maximize the shareholder wealth. d. maximize expected net income. e. Ensure the satisfaction of its employees. Answer: C 4. Taking poison pills and offering greenmail are: a. ways stockholders protect their interests from management's conflicting interests. b. tactics creditors can use to help resolve agency problems. c. actions managers might take to ward off hostile takeovers. d. commonly practiced methods used by firms' managers to increase stockholders' wealth. e. None of the above. Answer: C 5. ABX has a return on assets equal to 7.5%. Their profit margin is 2%. If the firm has $350 in total equity, and $500 in total assets, what must be their return on equity? Hint: use the Dupont identity after solving for the Equity Multiplier (EM). a. 3.75% b. 28.13% c. 5.25% d. 15.00% e. 10.73% Answer: E 6. The corporate officer generally responsible for tasks related to cash and credit management, financial planning, and capital expenditures is the: a. Corporate Treasurer. b. Director. c. Corporate Controller. d. Chairman of the Board. e. Vice President of Operations. Answer: A 7. The mixture of debt and equity used by the firm to finance its operations is called: a. working capital management. b. financial depreciation. c. agency cost analysis. d. capital budgeting. e. capital structure. Answer: E 8. The document that legally establishes domicile for a corporation is called the: a. Indenture contract. b. Partnership agreement. c. Amended homestead filing. d. Bylaws. e. Articles of incorporation. Answer: E 9. The purchase and sale of securities after the original issuance occurs in the: a. Primary market. b. Secondary market. c. Dealer market. d. Auction market. e. Liquidation market. Answer: B 10. The fundamental goal of financial management should be to: a. Maximize sales. b. Maximize the current value per share of the existing stock. c. Avoid financial distress. d. Maintain steady earnings growth. e. Maximize profits. Answer: B 11. Which of the following help ensure managers act in the best interest of owners? I. A compensation package for managers that is a flat cash salary, with no bonuses or options. II. Managers are promoted only when they have worked for the firm for at least 5 years. III. The threat that if the firm does poorly, shareholders will use a proxy fight to replace the existing management. IV. There is a high degree of likelihood the firm will become a takeover candidate if the firm performs poorly. a. I and II only b. II and III only c. III and IV only d. I and III only e. I, II, III, and IV Answer: C 12. Net working capital is defined as: a. Total liabilities minus shareholders' equity. b. Current liabilities minus shareholders' equity. c. Fixed assets minus shareholders' equity. d. Total assets minus total liabilities. e. Current assets minus current liabilities. Answer: E 13. Your ______________ tax rate is the amount of tax payable on the next dollar you earn. a. deductable b. residual c. total d. average e. marginal Answer: E 14. Earnings per share is equal to: a. Net income divided by the total number of shares outstanding. b. Net income divided by the par value of common stock. c. Gross income multiplied by the par value of common stock. d. Operating income divided by the par value of common stock. e. Net income divided by total stockholders' equity. Answer: A 15. Which of the following is a use of cash? a. An increase in short-term loans. b. An increase in accounts payable. c. The sale of fixed assets. d. Dividends paid e. The sale of new bonds. Answer: D 16. A firm has net fixed assets of $8 million on December 31, 2001 and $14.5 million on December 31, 2002. If the depreciation expense for 2002 was $630,000, what was the firm's 2002 capital spending? a. $ 8.63 million b. $22.50 million c. $ 6.50 million d. $ 7.13 million e. $23.13 million Answer: D Response: Investment in new fixed assets = $14.5M - 8M + 630,000 = $7.13M 17. If total assets = $900, fixed assets = $550, current liabilities = $250, equity = $175, long-term debt = $475, and current assets is the only remaining item on the balance sheet, what is the value of net working capital? a. –$250 b. $100 c. $250 d. $350 e. $500 Answer: B Response: Current assets = $900 - 550 = $350; NWC = $350 - 250 = $100 18. If cash flow from operations is $7,300, net capital spending is –$3,500, and net working capital declines by $1,600, what is cash flow from assets? a. $ 2,200 b. $ 5,400 c. $ 9,200 d. $10,800 e. $12,400 Answer: E Response: CFA = $7,300 - (-3,500) - (-1,600) = $12,400 19. Activities of the firm in which cash is spent are known as: a. Sources of cash. b. Uses of cash. c. Cash payments. d. Cash receipts. e. Cash on hand. Answer: B 20. The __________ breaks down return on equity into three component parts: operating efficiency of the firm, its asset use efficiency, and financial leverage. a. Du Pont identity b. return on assets c. statement of cash flows d. asset turnover ratio e. equity multiplier Answer: A 21. A decrease in a(n) __________ account would be considered a/an __________ of funds. I. asset; source II. liability; source III. expense; use a. I only b. II only c. I and II only d. I and III only e. II and III only Answer: A 22. Based on the notion of the time value of money, which of the following equally risky alternatives would you prefer? No calculations are required to answer. 1. $5,000 today 2. $5,000 in one year 3. $4,000 in four years 4. $3,000 in ten years a. Alternative 4 Answer is D No Calculation Require b. Alternative 3 c. Alternative 2 d. Alternative 1 e. none of the above 23. You have determined the profitability of a planned project by finding the present value of all the cash flows from that project. Which of the following would cause the project to look more appealing in terms of the present value of those cash flows (e.g., which would lead to an increase in the present value)? ANSWER IS C a. The discount rate increases. b. The cash flows are extended over a longer period of time, but the total amount of the cash flows remains the same. c. The discount rate decreases. d. Answers b and c above. e. Answers a and b above. Also study the suggested homework problems at the end of each chapter.