Go over the problems below, provide an answer, bring your questions to class.

(A list of answers is
provided on the last page, for you to check your work once you are finished.)

Exam #1
Multiple Choice
The following questions are worth 3 points each. Provide the single best response.
____ 1. Which of the following statements is most correct?
a. One of the advantages of the corporate form of organization is that there is no double
taxation.
b. The partnership form of organization has easy transferability of ownership.
c. One of the disadvantages of the sole proprietorship form of organization is that there is
unlimited liability.
d. Statements b and c are correct.
e. None of the statements above is correct.

____ 2. Which of the following statements is most correct?

a. One advantage of forming a corporation is that you have limited liability.
b. Corporations face fewer regulations than sole proprietorships.
c. One disadvantage of being a sole proprietor is that you have to pay corporate taxes, even
though you don't realize the benefits of being a corporation.

d. Statements b and c are correct.

e. None of the statements above is correct.
____ 3. Which of the following could explain why a business might choose to organize as a corporation rather than
as a sole proprietorship or a partnership?
a. Corporations generally face fewer regulations.
b. Corporations generally face lower taxes.
c. Corporations generally find it easier to raise capital.
d. Corporations enjoy unlimited liability.
e. Statements c and d are correct.

____ 4. The primary goal of a publicly-owned firm interested in serving its stockholders should be to
a. Maximize expected total corporate profit.
b. Maximize expected EPS.
c. Minimize the chances of losses.
d. Maximize the stock price per share.
e. Maximize expected net income.
____ 5. Which of the following statements is most correct?
a. A good goal for a corporate manager is maximization of expected EPS.
b. Most business in the U.S. is conducted by corporations; corporations' popularity results primarily
from their favorable tax treatment.

c. A good example of an agency relationship is the one between stockholders and managers.
d. Corporations and partnerships have an advantage over proprietorships because a sole proprietor is

subject to unlimited liability, but investors in the other types of businesses are not.
e. Firms in highly competitive industries find it easier to exercise "social responsibility" than do firms
in oligopolistic industries.

____ 6. Which of the following statements is most correct?

a. A hostile takeover is the main method of transferring ownership interest in a corporation.

b. The corporation is a legal entity created by the state and is a direct extension of the legal

status of its owners and managers, that is, the owners and managers are the corporation.
c. Unlimited liability and limited life are two key advantages of the corporate form over other
forms of business organization.
d. In part due to limited liability and ease of ownership transfer, corporations have less trouble
raising money in financial markets than other organizational forms.
e. Although stockholders of the corporation are insulated by limited legal liability, the legal
status of the corporation does not protect the firm's managers in the same way.

____ 7. Last year Aldrin Co. had negative net cash flow, yet its cash on the balance sheet increased. What could
explain these events?
a. Aldrin issued long-term debt.
b. Aldrin repurchased some of its common stock.
c. Aldrin sold some of its assets.
d. Statements a and b are correct.
e. Statements a and c are correct.

____ 8. Analysts who follow Sierra Nevada Inc. recently noted that, relative to the previous year, the company's net
cash flow was larger but cash on the firm's balance sheet had declined. What factors could explain these
changes?
a. The company sold a division and received cash in return.
b. The company cut its dividend.
c. The company made a large investment in new plant and equipment.
d. Statements a and b are correct.
e. Statements b and c are correct.

____ 9. Which of the following items is included as part of a company's current assets?
a. Accounts payable.
b. Inventory.
c. Accounts receivable.
d. Statements b and c are correct.
e. All of the statements above are correct.
____ 10. A start-up firm is making an initial investment in new plant and equipment. Currently, equipment is
depreciated on a straight-line basis over 10 years. Assume that Congress is considering legislation that will
allow the corporation to depreciate the equipment over 7 years. If the legislation becomes law, and the firm
implements the 7-year depreciation basis, which of the following will occur?
a. The firm's tax payments will increase.
b. The firm's net income will increase.
c. The firm's taxable income will increase.
d. The firm's net cash flow will increase.
e. The firm's operating income (EBIT) will increase.

____ 11. Byrd Lumber has 2 million shares of common stock outstanding and its stock price is $15 a share. On the
balance sheet, the company has $40 million of common equity. What is the company's Market Value Added
(MVA)?
a. -$80,000,000
b. -$20,000,000
c. -$10,000,000

d. $20,000,000
e. $80,000,000
____ 12. Whitehall Clothiers had $5,000,000 of retained earnings on its balance sheet at the end of 2001. One year
later, Whitehall had $6,000,000 of retained earnings on its balance sheet. Whitehall has one million shares
of common stock outstanding, and it paid a dividend of $0.80 per share in 2002. What was Whitehall's
earnings per share in 2002?
a. $0.80
b. $1.00
c. $1.80
d. $5.00
e. $6.00

____ 13. All else being equal, which of the following will increase a company's current ratio?
a. An increase in accounts receivable.
b. An increase in accounts payable.
c. An increase in net fixed assets.
d. Statements a and b are correct.
e. All of the statements above are correct.
____ 14. Which of the following alternatives could potentially result in a net increase in a company's cash flow for
the current year?
a. Reduce the days sales outstanding ratio.
b. Increase the number of years over which fixed assets are depreciated.
c. Decrease the accounts payable balance.
d. Statements a and b are correct.
e. All of the statements above are correct.

____ 15. Company J and Company K each recently reported the same earnings per share (EPS). Company J's stock,
however, trades at a higher price. Which of the following statements is most correct?
a. Company J must have a higher P/E ratio.
b. Company J must have a higher market to book ratio.
c. Company J must be riskier.
d. Company J must have fewer growth opportunities.
e. All of the statements above are correct.

____ 16. You are given the following information: Stockholders' equity = $1,250; price/earnings ratio = 5; shares
outstanding = 25; and market/book ratio = 1.5. Calculate the market price of a share of the company's
stock.
a. $ 33.33
b. $ 75.00
c. $ 10.00
d. $166.67
e. $133.32

____ 17. The Wilson Corporation has the following relationships:

Sales/Total assets

2.0

Return on assets (ROA)

Return on equity (ROE)

4.0%
6.0%

What is Wilson's profit margin and debt ratio?

a. 2%; 0.33
b. 4%; 0.33
c. 4%; 0.67
d. 2%; 0.67
e. 4%; 0.50

____ 18. Cleveland Corporation has 100,000 shares of common stock outstanding, its net income is $750,000, and
its P/E is 8. What is the company's stock price?
a. $20.00
b. $30.00
c. $40.00
d. $50.00
e. $60.00

____ 19. Which of the following statements is most correct?

a. The NYSE does not exist as a physical location; rather it represents a loose collection of
dealers who trade stock electronically.

b. An example of a primary market transaction is buying 100 shares of Wal-Mart stock from
your uncle.

c. Capital market instruments include long-term debt and common stock.

d. Statements b and c are correct.
e. Statements a, b, and c are correct.
____ 20. What is the future value of a 5-year ordinary annuity with annual payments of $200, evaluated at a 15
percent interest rate?
a. $ 670.44
b. $ 842.91
c. $1,169.56
d. $1,522.64
e. $1,348.48

____ 21. What is the present value of a 5-year ordinary annuity with annual payments of $200, evaluated at a 15
percent interest rate?
a. $ 670.43
b. $ 842.91
c. $1,169.56
d. $1,348.48
e. $1,522.64

____ 22. You have the opportunity to buy a perpetuity that pays $1,000 annually. Your required rate of return on this
investment is 15 percent. You should be essentially indifferent to buying or not buying the investment if it
were offered at a price of
a. $5,000.00
b. $6,000.00

c. $6,666.67
d. $7,500.00
e. $8,728.50
____ 23. In 1958 the average tuition for one year at an Ivy League school was $1,800. Thirty years later, in 1988,
the average cost was $13,700. What was the growth rate in tuition over the 30-year period?
a. 12%
b. 9%
c. 6%
d. 7%
e. 8%

____ 24. You have just taken out an installment loan for $100,000. Assume that the loan will be repaid in 12 equal
monthly installments of $9,456 and that the first payment will be due one month from today. How much of
your third monthly payment will go toward the repayment of principal?
a. $7,757.16
b. $6,359.12
c. $7,212.50
d. $7,925.88
e. $8,333.33
Mortgage
A 30-year, $115,000 mortgage has a nominal annual rate of 7 percent. All payments are made at the end of
each month.

____ 25. Refer to Mortgage. What is the monthly payment on the mortgage?
a. $760.66
b. $765.10
c. $772.29
d. $774.10
e. $776.89
____ 26. Refer to Mortgage. What is the remaining balance on the mortgage after 5 years?
a. $106,545.45
b. $106,919.83
c. $107,623.52
d. $107,988.84
e. $108,251.33

Exam #1
Answer Section
MULTIPLE CHOICE
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.

C
A
C
D
C
D
E
C
D
D
C
C
A
A
A
B
A
E
C

20.
21.
22.
23.
24.
25.
26.

E
A
C
D
A
B
E