Midterm Exam 2020 Spring (Version 1a-3)
1. The primary goal of financial management is best described as:
A. Increasing the market value of thefirm B. Increasing the dollar amount of eachsale C. Increasing traffic flow within the firm'sstores D. Transforming fixed costs into variablecosts E. Increasing the firm'sliquidity
2. Which of the following would decrease the present value of anannuity?
A The annuity paymentdecreases B. The payment amountincreases C. The future valueincreases D. The time periodincreases E. The discount ratedecreases
3. The value of a firm’s assets according to its financial statements is referredtoas , while apublicly-tradedcompanies is calculated by multiplying a company’s shares outstanding by its current stockprice.
A. asset quanta; stockmultiplier B. book value; marketvalue C. current net book; totalassets D. current assets; currentliabilities E. blackhole; coronal massejection
4. Standardized financial statements that present all income statement items as a percentageof are common-size financialstatements.
A. last year's accountvalue. B. total equity. C. totalassets. D. totalsales. E. the forecastedbudget.
5. Repaying a short-term bank loan would have which of the following effects on a firm’s current ratio (assume that net working capital is greater thanone)?
A. Decrease the currentratio B. No change to the currentratio C. Increase the currentratio D. Both increase and decrease the current ratiovirally E. All of theabove
6. A wealthy relative plan to give three siblings sizable inheritance one year from now. The three siblings, Bonnie, Ronnie, and Connie, want to borrow $10,000 each so that they can purchase a vacation home in Trinidad now. All three agree to repay their loans in full in one year using the inheritance they plan to receive from the wealthy relative. Ronnie borrows his money at six percent, compounded monthly. Connie borrows her money at six percent, compounded annually. Bonnie agrees to a loan with six percent simple interest. Which of the following statement istrue?
A. Ronnie, Connie, and Bonnie will each owe the same amount one year fromnow. B. Connie will have to repay the same amount as Ronnie, but less thanBonnie. C. Bonnie will owe less money than either Connie orRonnie. D. Ronnie will have to repay less money than either Connie orBonnie. E. Connie will owe the same amount as Bonnie, but less thanRonnie.
7. The future value of a lump sum investment would be increased by which of the following factors?
I. the amount of the lump sum investment decreases II. the interest rateincreases III. the time perioddecreases IV. the interest ratedecreases
A. Ionly B. I and IIonly C. IIonly D. IIIonly E. II, III and IVonly
8. Assuming no other changes to the calculation of an annuity, what causes the present valueto decrease?
I. The payment amount declines II. The annuity paymentsincrease III. Interest ratedeclines IV. Interest ratesincrease
A. II and IIIonly B. IIonly C. IIIonly D. I, II, and IVonly E. I and IV only 9. Two CEO’s sign employment agreements. One CEO receives $80 million in 10 equal installments. The second CEO receives the same $80 million in 10 installments, but the installments decrease by 5 percent per year. Who got the betterdeal?
A. The firstCEO B. The secondCEO C. Neither athletes got a betterdeal D. Du-PontRatio E. All of theabove
10. Jason would like to deposit into a savings account the amount of $500 today, earning 5 percent interest compounded annually, so that he can withdraw $10,000 later to buy anengagement ring. In calculating how long it will take Jason to meet his objective, what do we call the$10,000?
A. discountedvalue B. futurevalue C. presentvalue D. truevalue E. salvagevalue
11. On March 9, 2019, the professor offered to sell the class a piece of paper thatrepresented:
A. three preferred shares with a 3% dividendrate. B. a 10-year bond with a face value of $1,000 and a coupon rate of10%. C. gift cards redeemable at several local retailestablishments. D. a free pass from doing the midtermexam. E. all of theabove.
12. N95 Distributors Inc. has cash of $75,000, inventory of $100,000, receivables of $50,000 and net fixed of $125,000. These are the company’sonlyassets. On average, it takes N95 Distributors 27.67 days to collect its receivables. The company’s profit margin is 3.4 percent.For every dollar in assets, how much does the company generate insales?
A. $1.88 B. $4.25 C. $2.87 D. $13.54 E. $3.06
13. Additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected can best be described as which of thefollowing?
A. Interest rate riskpremium B. Inflationpremium C. Liquiditypremium D. Taxabilitypremium E. Default riskpremium
14. Holding all else constant, which of the following will increase the profit margin of afirm?
A. Increase in interestpaid B. Increase in fixed costs C. Increase in depreciationexpense D. Decrease in the taxrate E. Decrease insales
15. What goal should always motivate the actions of the firm’s financialmanager?
A. to minimize the risk of potential lawsuits (class action ornot) B. to maximize the current market value (share price) of the equity of the firm(whether it’s publicly traded ornot) C. to maximize person remuneration (upper managers and executives) withannual increases not less than5% D. to minimize the firm’s collection of accounts receivables (increase days salesin receivables) E. to minimize the DuPont Identity (through use of multipleidentities)
16. Click on the following link to access the SEC 10-K Filing for Tesla Motors, Inc. for theyear ended December 31, 2014:Link to Filing atSEC.com
The debt-equity ratio for Tesla Motors, Inc. at December 31, 2013 is:
A. 0.83 times B. 5.35 times C. 0.78 times D. 0.92 times E. None of theabove
17. The DuPont identity is best described as which of thefollowing?
A. Equity multiplier and return onassets B. Return on equity, total asset turnover, and equity multiplier C. Profit margin and return onequity D. Total asset turnover, profit margin, and debt-equityratio E. Equity multiplier, return on assets, and profitmargin 18. Spyglass Optics issued $5,500 in new equity in 2019 and repaid $7,800 in outstanding long- term debt early. The 2019 income statement shows: sales = $345,812; costs = $199,867; other expenses = $26,135; depreciation expense = $27,564; interest expense = $18,745; taxes = $22,222; dividends = $15,600. If net fixed assets increased by $12,250 during the year, what was the addition to net workingcapital?
A. $14,600 B. $21,129 C. $17,900 D. $17,400 E. $21,000
19. Renee is considering a certificate of deposit with a stated annual rate of 15%. If compounding occurs monthly and she has $2,000 on deposit, how much would Renee’s $2,000 grow to by the end of the year? What is the effective annual interestrate?
A. $2,200.00; 17.20% B. $2,321.51; 16.08% C. $2,222.68; 15.03% D. $2,325.50; 16.52% E. $2,020; 18.32%
20. Which financial management decision ensures that a company has sufficient cash flowin order to meet its short-term debt obligations and operatingexpenses?
A. Working CapitalManagement B. Debtfinancing C. CapitalBudgeting D. CapitalStructure E. Corporate Social Responsibility
21. Use the following financial information to answer thisquestion.
What are the values of the three components of the DuPont identity? Use ending balance sheet values.
A. 0.15; 1.02; 0.35 B. 0.15; 2.02; 0.35 C. 0.15; 0.98; 2.86 D. 0.16; 0.98; 0.35 E. 0.16; 1.02; 2.86
22. What name is given to a bond that doesn’t pay interest but is traded at a deepdiscount, generating profit at maturity when the bond is redeemed for its full facevalue?
A. Zerocoupon B. Income C. Convertible D. Tax-free E. Callable
23. A company’s cash flow to shareholders would decrease due to which of thefollowing?
I. Payingdividends II. Issuing newstock III. Repurchasingshares IV. Capitalinvestments
A. Ionly B. I and II C. IIonly D. IIIonly E. I, II, andIII
24. Making a payment on a long-termdebtwill the net working capital of afirm?
A. increase B. stabilize C. noteffect D. decrease E. none of theabove
25. Trevor is considering purchasing one of two annuities. The first annuity, an ordinary annuity, will pay $7,000 at the end of each quarter for 20 years. The second annuity, an annuitydue, will pay $7,000 at the beginning of each quarter for 20 years. Which of the following statements is correct regarding theseannuities?
A. The present value of an ordinary annuity is equal to the present value of anannuity due. B. An ordinary annuity has a higher future value but a lower present value than an annuitydue. C. The future value of an ordinary annuity is greater than the future value of an annuity due. D. An annuity due has both a higher present value and a higher future value than an ordinaryannuity. E. An annuity due will pay one more payment than an ordinary annuitywill.
26. Which of the following would prevent a company from paying dividends in a periodwhen net income is twice the amount of the previous annualperiod?
A. The Rule of Micro-Four-Thirds isinverted B. Net income exceeds the DuPont ratio C. Forecasted net income in the next year is expected to be half the currentyear D. Retained earnings would be negative after thedividend E. The company had negative net income in three of the four previousyears
27. Company X has a quick ratio of 0.5 and current ratio of 1.2, which of the following mustbe true?
A. has positive net workingcapital. B. pays cash for itsinventory. C. has more fixed assets than equity. D. has more cash thaninventory. E. has more current liabilities than it does currentassets.
28. An income statement prepared in accordance with GAAP:
A. reflects the net cash flows of a firm over a stated period oftime. B. reflects the financial position of a firm as of a particulardate. C. distinguishes variable costs from fixedcosts. D. records expenses based on the matching principle. E. records revenue when payment for a sale isreceived.
29. Shareholder’s interest and the priorities of management are best alignedby:
A. Allowing employees to retire early with full retirementbenefits B. Increasing the number of paid holidays that long-term employees are entitledto receive C. Compensating managers with shares of stock that must be held for three yearsbefore the shares can besold D. Increasing employee retirement benefits E. Allowing a manager to decorate his or her own office once he or she has been inthat office for a period of three years ormore
30. The corporate form of organization includes which of thesedisadvantages?
I. Limited liability for all owners II. Ease of ownershiptransfer III. Double taxation toshareholders IV. Ability to raise large sums of equitycapital
A. Ionly B. I and IV C. II, III, andIV D. IIIonly E. I, II, andIV
31. Which of the following best describesdividends?
A. Payable at the discretion of a firm'spresident B. Treated as a tax-deductible expense to the payingfirm C. Paid out of after-taxprofits D. Paid to holders of record as of the declarationdate E. Only partially taxable to high-income individual shareholders
32. Which of the following is true regarding the present value of a single future cashpayment?
A. The interest rate is inversely related to the presentvalue. B. The future value is inversely related to the presentvalue. C. The present value is directly related to the timeperiod. D. The present value is directly related to the interestrate. E. The present value decreases as the time perioddecreases.
33. In a general partnership, each partner is personally liable for which of thefollowing? A. the total debts of the partnership, even if he or she was unaware of thosedebts. B. his or her proportionate share of all partnership debts regardless of whichpartner incurred thatdebt. C. all personal and partnership debts incurred by any partner, even if he or shewas unaware of thosedebts. D. the partnership debts that he or shecreated. E. the debts of the partnership up to the amount he or she invested in thefirm.
34. Protective covenants are primarily usedto:
A. reduce interest raterisk. B. the issuer in case ofdefault. C. protect bondholders from issueractions. D. bondholders whose bonds arecalled. E. convert bearer bonds into registeredform.
35. Sally decides to purchase bonds in her favorite medical supply company because she believes bonds provide stable cash flows and she will profit when the company shows higher profits. Your best response to this shouldbe:
A. Bonds are risky because the company has no obligation to repay any fixed amount; they only do so because things are goingwell. B. Bonds are risky because the company can’t deduct interest payments from theirtax obligation. C. Bonds represent a contractual obligation to repay the stated amount, and the company will share additional cash flows if they come in better thanexpected. D. Bonds represent a contractual obligation to repay the stated amount, butdon’t represent an ownership claim on the company’s higher cashflows. E. Bonds pay dividends and stocks payinterest.
36. A call provision grants the bond issuerthe:
A. right to contact each bondholder to determine if he or she would like to extend the term of his or herbonds. B. right to automatically extend the bond's maturitydate. C. right to repurchase the bonds on the open market prior tomaturity. D. option of repurchasing the bonds prior to maturity at a prespecifiedprice. E. option to exchange the bonds for equitysecurities.
37. Hand Sanitizers Ltd owes $1,217,987.34 in tax on taxable income of $5,750,348. The company concluded that it will owe $2,888,772.95 in tax if its taxable income rose to $13,402,673. What is the marginal tax rate at this level of income?
A. 18.83percent B. 21.53percent C. 21.18percent D. 21.83percent E. 23.81percent
38. In a time value of money calculation, the discount rate would need tobeadjusted in order to decrease the presentvalue.
A. higher B. lower C. sideways D. outward E. none of theabove
39. One of the primary disadvantages of the sole proprietorshipis:
A. involves significant legal costs during the formationprocess. B. has an unlimitedlife. C. the owner has limited liability for businessdebts D. provides unlimited liability for itsowner. E. can generally raise significant capital from non-ownersources.
40. Bug-be-gone Disinfectant Corp had sales of $124,600 last year and added $10,300 to retained earnings. The company had cost of sales of $64,580, other expenses of $2,300, dividends of $2,500, and interest expense of $2,750. The tax rate was 34 percent. What was the amount ofthe depreciation & amortization expense?
A. $13,512 B. $17,651 C. $21,187 D. $27,346 E. $35,576
41. The difficulty involved in comparing companies of different sizes in order to investigatethe relationships between different pieces of financial information can be addressed by which of the following?
A. analyticalstandards B. industrialstatistics C. equitystandards D. financialratios E. rhythmic cashcow
42. Scott likes to use his Chase Manhattan bank Visa card when he goes shopping forcleaning supplies. His bank charges 15% annual interest. Which of the following is true?
A. If Chase Manhattan charges interest annually, the effective annual rate wouldbe equal to15%. B. If Chase Manhattan charges interest daily, the effective annual rate would beless than15%. C. If Chase Manhattan charges interest monthly, the effective annual rate would beless than15%. D. If Chase Manhattan charges interest monthly, the effective annual rate can either be greater than or equal to 15% given the degree that the purchases areexotic. E. none of theabove.
43. Which one of the following types of securities has no priority in a bankruptcyproceeding?
A. Convertiblebond B. Seniordebt C. Commonstock D. Preferredstock E. Straightbond
44. Adrien is considering a loan in the amount of $8,000 for 5 years. The loan will be repaidin one lump sum at the end of the loan term. Adriend should choose the loan with which of the following feature to pay the leastinterest?
A. 5 percent interest, compoundedannually B. 5.5 percent simpleinterest C. 5.5 percent interest, compoundedannually D. 5 percent simpleinterest E. 7 ¾ percent interest, compounded annually
45. Andy’s Upstate, Inc. currently pays annual dividends of $1.10 per share. If the firm expects to increase this dividend by 4 percent per year the following 2 years and then decrease the dividend growth to 3 percent annually thereafter, which one of the following is the correct computation of the dividend for year7?
A. ($1.04) (1.05 × 3) (1.02 ×4) B. ($1.10) (1.03)5 (1.04)2 C. ($1.10) (1.08)3(1.02)4 D. ($1.06) (1.04)2(1.03)4 E. ($1.06) (1.04)2(1.04)3
46. Which of the following must be true if James has a home equity loan with an APR of 11 percent and an EAR of 11.46percent? A. The loan must be compoundingmonthly. B. The loan has a zero percent interestrate. C. The loan charges interestannually. D. The loan must be compoundingquarterly E. The loan must be an interest-onlyloan.
47. A company wants to compare the firm's revenues and expenses over the past seven years to determine any common trends and necessary improvements. They plan on expressing each itemon the income statement as a percentage of total sales. Which of the following will they beusing?
A. Well-balancedsheet B. Uncommon cashflows
C. Common-size incomestatement D. Commonwealthconstitution E. Curiously stronganalysis
48. Click on the following link to access the SEC 10-Q Filing for Chipotle Mexican Grill,Inc. for the quarter ended September 30, 2015:Link To SECFiling
The current ratio for Chipotle Mexican Grill, Inc. at December 31, 2014 is:
A. 4.39 times B. 1.18 times C. 1.47 times D. 3.58 times E. None of theabove
49. Ian plans to deposit the following amounts into a bank account at the end of each of the following years earning interest at rate of 8% compoundedannually:
Year 1$18,500 Year 2$12,600 Year 3 $5,300
Ian is adamant that he will never pay interest to a bank. Instead, he plans to save in advance so that he has enough money to buy a car in three years. At the end of the third year, which of the following cars could Ian afford?
2016 Jeep$65,000 1975 El Camino$5,600 2016 G-Class Mercedes-Benz $200,000 2012 Toyota Camry$17,999 2015 BMW 328$47,000 2014 Cadillac CTS$41,500 2013 Lexus $42,000
A. BMW, Cadillac, Camry,Lexus B. Lexus, Cadillac, Camry, ElCamino C. Jeep, Cadillac, Camry,Lexus D. Cadillac, Camry, BMW, El Camino E. Camry, ElCamino
50. The stated interest paid on a bond is callthe?
A. Facevalue B. Footvalue C. Handvalue D. Coupon E. GreyPoupon
51. Which of the following is true regarding the fictitious company we created in class on Feruary 3,2020?
A. Our fictitious company had a net income of $12,000 after the firstmonth. B. Our third customer’s dog brought flees to the facility resulting in three fumigation bills totaling $10,000 in the secondmonth. C. The bonds that our fictitious company issued in the first month of operationswere given a rating of Ba “High Grade” byMoody’s. D. Our fictitious company was funded by a loan from Aunt Kathy in the amountof $500,000 to be repaid in 5 years with 10% simple interest. E. All of theabove.
52. Cameron’s Famous Chicken Parms has net fixed assets of $62,750, long-term debtof $42,000, total assets of $308,000, and total debt of $104,500. If marketable securities is $25,000, what is the current ratio? A. 2.35 B. 3.92 C. 4.32 D. 3.52 E. 2.95
53. Mike would like to save enough money to be able to move out of his grandmother’shouse. Which statement below would increase the future value ofsavings?
A. Receiving simple interest rather than compoundinterest. B. Receiving interest only at the end of the investment period rather than throughout the investmentperiod. C. Increasing the interestrate. D. Receiving interest only on the principalamount. E. Shortening the investment timeperiod.
54. Saul earned $375 in interest on his savings account last year. Saul has decided to leavethe $375 in his account so that he can earn interest on the $375 this year. This process of earning interest on prior interest earnings is called:
A. discounting. B. compounding. C. duplicating. D. multiplying. E. indexing.
55. Which statement best describes a soleproprietorship?
A. The ownership can easily be transferred to anotherindividual. B. Debt financing is easy to arrange in the firm'sname. C. Pay taxes on profits once, at your individual rate as personalincome. D. The business entity has an unlimitedlife. E. The owner enjoys limited liability for the firm'sdebts
56. A 7 percent bond has a yield to maturity of 6.5 percent. The bond matures in seven years, has a face value of $1,000, and pays annual interest payments. What is the amount of eachcoupon payment?
A. $30.00 B. $35.00 C. $60.00 D. $65.00 E. $70.00
57. Apple Inc. reported to the public on Form 10-Q, filed with the Security and Exchange Commission (www.sec.gov) on July 31, 2019, that ithad:
A. earned net income in the amount of $41,570,000 for the nine months ended June 29, 2019. B. net working capital of $45,269,000,000 at June 29,2019. C. engaged in a proxy battle with Steve Jobsheirs. D. cash and cash equivalents in the amount of $25,913,000,000 at June 29,2019. E. net income of $10,044 million and $11,519 million for the three month periods June 29, 2019 and June 30, 2018, respectively—an increase of14.7%. 58. Christine was walking behind Cameron when she noticed that Cameron dropped a 5 percent coupon bond certificate. Christine picked it up and didn’t say anything to Cameron. The bond matures in two days and has a current market value of $5,327. After two days, Christine presents the bond to the bank and receives the value of the bond. Which of the following statements must be true?
A. Christine must have received an interest payment of$246.87 B. The face value of the bond must be$7,500 C. Wang Fang dropped a bearer form bond D. The bond must have been issued by the DuPontCorporation E. Christine violated the six-feet social distancingrule
59. A $10,000 face value bond is currently quoted at $12,345. The bond pays annual payments of $1,000 and matures in six years. What is the coupon rate?
A. 5.63percent B. 2.85percent C. 10.00percent D. 5.33percent E. 12.34percent
60. Which of the following will cause the liquidity of a firm toincrease?
A. Cash purchase of new productionequipment B. Payment of an accountpayable C. Cash purchase ofinventory D. Credit sale of inventory atcost E. Cash payment of employeewages
61. Free Point – Which of the following istrue?
A. True B. False C. False D. False E. False
62. (FIVE POINTS) Łukasz is brought to tearsreading an article in Forbesby Edward Siedle entitled “The Greatest Retirement Crisis in American History.” It noted that averageAmericans nearing retirement had less than $25,000 in their retirement accounts and that, in the decades to come, millions of elderly Americans will be slipping intopoverty. Łukasz is determined not to be one of the millions “too frail to work, too poor to retire.” Armed with his recently acquired knowledge of the time value of money, he sets his Kleenex box aside and reaches for the Chapter 4 & 5 Template that he received from his Financial Management course at NYU. He intends to have a plan and is determined to start the first day of next year.
Any plan or forecast requires certain assumptions, he figures, and his first assumption is that he will retire early at the age of 60. Łukasz is 30 years old. In retirement, he wants to be able to withdraw $5,000 from his savings account each last day of the month for the 25 years of his retirement (beginning January 1, 2050 through and including December 31, 2074).
His plan is to use a 401(k) account and hopes the laws will not change over the next 30 years. He logs into his 401(k) account today, only to realize that he will have a mere $3,838.03 in his account by the beginning of next year.
He plans to start his first contribution to his savings account on January 31, 2020. He intends to keep contributing a certain amount on the last day of every month for 30 years.
Figuring in the early years he can be more aggressive and will have the time to ride out natural cycles in the markets, he intends to invest in funds with a heavier weight in stocks than in bonds for the first 25 years (the first 300 months from January 1, 2020 through and including December 31, 2044). His assumption is that he will earn an annual rate of return of 12%, compounded monthly.
For the five years before his retirement (from January 1, 2045 through and including December 31, 2049), Łukasz realizes he will want to be more conservative with his investments because he will be in less of a position to weather any serious drops in the markets. He intends to rebalance his portfolio to favor bonds and less risky stocks that will earn an annual rate of return of 8%, compounded monthly.
In retirement (from January 1, 2050 through and including December 31, 2074), Łukasz plans to shift his investments to certificate of deposits and the most conservative investment choices which he expects will yield an annual rate of return of 6%, compounded monthly.
He is also assuming that his employers will match his contribution during the 30-year savings period at the rate of 50%. In other words, for every $1 that Łukasz contributes to his account, his employers will contribute $0.50, so that $1.50 is deposited into his account.
He also assumes that, in the last 5 years before his retirement, he will be making a higher salary and will be in a better position to contribute more to the account. He plans to double the amount of the contributions to his account compared to the first 25 years.
At the conclusion of his retirement, Łukasz would like to donate $1.15 to NYU to fund overworked and underpaid adjunct faculty.
How much should Łukasz begin contributing on January 31, 2020?
A. $150.00 B. $200.00 C. $212.06 D. $249.86 E. $270.97 F. $314.79 G. $415.47 H. $1,098.49 |
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