DeVry BUSN 379 Final Exam 2

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(TCO 1) What is the goal of financial management for a sole

proprietorship?
decrease long-term debt to reduce the risk to the owner
maximize net income given the resources of the firm
maximize the market value of the equity
minimize the tax impact on the proprietor
minimize costs and increase production

(TCO 1) When analyzing alternative capital structures for a firm, a

financial manager must consider which of the following?
type of loan
amount of funds needed
cost of funds
mix of debt and equity
all of the above

(TCO 1) Market value is important to the financial manager because:

It reflects the value of the asset, based on generally-accepted
accounting principles.
Is a crucial component of the balance sheet, and can impact the
financial statements.
Market value reflects the amount someone is willing to pay today for an
asset.
The market value of an asset reflects its historical cost.
None of the above

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(TCO 1) Which of the following is true regarding income statements?

It shows the revenue and expenses, based upon selected accounting
methods.
It reveals the net cash flows of a firm over a stated period of time.
It reflects the financial position of a firm as of a particular date.
It records revenue only when cash is received for the product or service
provided.
It records expenses based on the recognition principle.

(TCO 1) Tatos Pizza has sales of $625,000. They paid $43,000 in interest
during the year and depreciation was $79,000. Administrative costs
were $100,000 and other costs were $160,000. Assuming a tax rate of
35 percent, what is Tatos Pizza net income?
$157,950
$322,000
$243,000
$200,000

(TCO 1) Home Best Hardware had $315,000 in taxable income last year.
Using the tax rates provided in Table 2.3, what is the approximate
average tax rate?
35%
39%
34%
32%

(TCO 1) Pizza A had earnings after taxes of $600,000 in the year 2008,
and 300,000 shares outstanding. In year 2009, earnings after taxes
increased to $750,000, and 25,000 new shares were issued for a total of
325,000 shares. What is the EPS figure for 2008?
$2.0
$2.21
$0.50
$0.47

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(TCO 1) The financial statement that summarizes a firms operations

over a period of time is called a(n):
income statement.
cash flow statement.
production report.
balance sheet.
periodic operating statement.

(TCO 1) Print Imaging has EBIT of $150,000, interest of $30,000, taxes of

$50,000, and depreciation of $50,000. What is the companys operating
cash flow?
$120,000
$180,000
$170,000
$150,000
$120,000

(TCO 3) Linda invested $15,000 today, in an investment that pays

6.50 percent interest, compounded semi-annually. Which one of the
following statements is correct concerning this investment?
Linda will receive equal interest payments every six months over the life
of the investment.
Linda would have earned more interest if she had invested in an account
paying 6.50 percent simple interest.
Linda will earn more interest in year 5 than she will in year 4.
Linda would have earned more interest if she had invested in an account
paying annual interest.
Linda will earn less and less interest each year over the life of the
investment.

(TCO 3) Mr. Smith will receive $7,500 a year for the next 14 years from
his trust. If the interest rate on this investment is eight percent, what is
the approximate current value of these future payments?
$61,800

$53,500
$113,400
$97,200

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(TCO 3) Paper Pro recently purchased a printing machine costing

$97,000. The company financed this purchase at 8.25 percent interest,
with monthly payments of $2,379.45. How many years will it take the
firm to pay off this debt?
3.0 years
4.0 years
4.25 years
4.5 years
5.0 years

(TCO 3) Fine Oak Woodworks is considering a project that has cash flows
of $6,000, $4,000, and $3,000 for the next three years. If the
appropriate discount rate of this project is 10 percent, which of the
following statements is false?
The current value of the projects inflows is $13,000
The approximate current value of the projects inflows is $11,000
The projects inflows are higher than zero
The project should be accepted because its present value is positive

(TCO 4) You are considering two investments. Investment I, is in a

software company and Investment II, is an engineering company. The
investments offer the following cash flows:
Year Software
Engineering
Company
Company
1 $5,000
$15,000
2 $3,000
$8,000
3 $4,000
$9,000
4 $3,600
$11,000
If the appropriate discount rate is 10 percent, what is the approximate
present value of the Software Company investment?
$15,600
$12,500

$12,750
$15,000

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(TCO 3) North Bank offers you an APR of 13.17 percent compounded

monthly, and South Bank offers you an effective rate of 13.75
percent on a business loan. Which bank should you choose and why?
South Bank because its effective rate is higher.
North Bank because the APR is lower.
South Bank because its effective rate is lower.
North Bank because its effective rate is lower.

(TCO 3) Tim needs to borrow $5,000 for two years. The loan will be
repaid in one lump sum at the end of the loan term. Which one of the
following interest rates is best for Tim?
7.5 percent simple interest
7.5 percent interest, compounded monthly
8.0 percent simple interest
8.0 percent interest, compounded annually
8.0 percent interest, compounded monthly

(TCO 3) Which one of the following is an example of an annuity, but not

a perpetuity?
unequal payments each month, for 18 months
payments of equal amount each quarter forever
unequal payments each year forever
equal payments every six months for 48 months
unending equal payments every other month

(TCO 3) Fanta Cola has $1,000 par value bonds outstanding at 12

percent interest. The bonds mature in 25 years. What is the current
price of the bond if the YTM is 11 percent? Assume annual payments.
$1080
$1085
$925
$1000

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(TCO 6 and 8) A bonds debenture will include which of the following?

description of any loan collateral
call provisions
total amount of the bond issue
protective covenants
all of the above
none of the above

(TCO 3) Bonds issued by Blue Sky Airlines have a face value of $1,000
and currently sell for $1,080. The annual coupon payments are $125. If
the bonds have 20 years until maturity, what is the approximate YTM of
the bonds?
10.50%
11.50%
11.75%
12%

(TCO 3) The preferred stock of Bean Coffee pays an annual dividend of

$5.60. It has a required rate of return of eight percent. What is the price
of the preferred stock?
$700
$70
$5.20
$6.05
None of the above

(TCO 3) Intelligence Research, Inc. will pay a common stock dividend of

$1.60 at the end of the year. The required rate of return by common
stockholders is 13 percent. The firm has a constant growth rate of 7.5
percent. What is the current price of the stock?
$23
$32
$27

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(TCO 3) Royal Electric paid a $2 dividend last year. The dividend is

expected to grow at a constant rate of five percent over the next three
years. Common stockholders require a 12 percent return. What is the
total amount of dividends stockholders will receive during the next
three years?
$6.62
$6.03
$6.52
$6.85

(TCO 6) Which of the following is true regarding the primary market?

it is the market where the largest number of shares are traded on a daily
basis.
it is the market in which the largest number of issues are listed.
it is the market with the largest number of participants.
it is the market where new securities are offered.
it is the market where shareholders trade most frequently with each
other.

(TCO 6) The smallest firms listed on NASDAQ are in the NASDAQ _____
Market.
National
Capital
Regional
Global Select
Global

(TCO 6) The annual interest on a bond divided by the bonds market

price is called the:
yield to maturity.
yield to call.
total yield.
required yield.

current yield.

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(TCO 6) A sinking fund is an account managed by a bond trustee for the

sole purpose of:
paying interest payments on a semi-annual basis.
redeeming bonds early.
repaying the face value at maturity.
paying the expenses required to reissue outstanding bonds.
paying the balloon payment at maturity.

(TCO 8) Which of the following is true regarding bonds?

Student Answer:

Bonds do not carry default risk.

Bonds are sensitive to changes in the interest rates.
Moodys and Standard and Poors provide information regarding a
bonds interest rate risk.
Municipal bonds are free of default risk.
None of the above is true

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(TCO 6) Which of the following best describes a zero-coupon bond?

Student Answer:

A bond that adjusts the coupon payments based on an interest rate

index, such as the T-bill.
A bond that is issued by the U.S. government.
A bond that adjusts the coupon payment date.
A bond that has no coupons and pays a face value at maturity.
An EE Savings Bond

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(TCO 6) Which of the following are not true regarding convertible

bonds? Select all that apply:
Are extremely rare
Can be exchanged for a fixed number of shares at maturity only
Can be exchanged for a fixed number of shares before maturity
Allow the holder to require the issuer to buy the bond back

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(TCO 1) Paul is the owner of Pauls Cabinets, which is a sole

proprietorship. The firm cannot pay its bills because a large customer
defaulted on payment. Which one of the following statements is correct
given this situation?
The creditors of Pauls Cabinets can only collect payment if Pauls
Cabinets receives payment from its customer.
The only course of action the creditors of Pauls Cabinets has is to sell
the assets of Pauls Cabinets.
The creditors of Pauls Cabinets can assume the assets of Pauls
Cabinets, but only in an amount that exceeds Pauls investment in the
firm.
Paul is personally liable for the entire debt of Pauls Cabinets.
Paul is personally liable for the firms debts, but only to the extent of his
investment in Pauls Cabinets.

(TCO 1) Which of the following is classified as tangible, fixed assets?

inventory
machinery
patents
cash on hand

Question 3. Question :

(TCO 1) Explain agency theory. Provide an example of a potential agency

problem for a corporation, and identify means by which the firm can
help reduce or eliminate that problem.

Question 4. Question :

(TCO 3) Why does money have time value? Explain your rationale.

Comments:
Question 5. Question :

(TCO 8) Why do firms use protective covenants? Provide two or three

examples of protective covenants, and explain how these covenants
increase or decrease risk.

Question 6. Question :

(TCO 6) What are some of the features of PETS (bonds) that make them
attractive to certain investors?

DeVry BUSN 379 Final Exam 2

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