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BUSN 379 Midterm Exam Set 1 and 2 Answer

BUSN 379 Midterm Exam Set 1 and 2 Answer

BUSN 379 Midterm Exam Set 1 and 2 Answer

BUSN 379 Midterm Exam Set 1 and 2 Answer

BUSN 379 Midterm Exam Set 1 and 2 Answer

DeVry BUSN 379 Midterm Exam Set 1 and 2 Answer

Set 1

Page 1

1. (TCO 1) What is the goal of financial management for a sole proprietorship? (Points : 3)

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

Question 2.2. (TCO 1) Working capital management includes which of the following? (Points : 3)

establishing the inventory level
deciding when to pay suppliers
determining the amount of cash needed on a daily basis
establishing credit terms for customers
all of the above

Question 3.3. (TCO 1) Market value reflects which of the following: (Points : 3)

The amount someone is willing to pay today for an asset.
The value of the asset based on generally-accepted accounting principles.
The asset’s historical cost.
A and B only
None of the above

Question 4.4. (TCO 1) Which of the following is true regarding income statements? (Points : 3)

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.

Question 5.5. (TCO 1) Tato’s 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 Tato’s Pizza net income? (Points : 3)

$157,950
$322,000
$243,000
$200,000

Question 6.6. (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 marginal tax rate?(Points : 3)

35%
39%
34%
32%

Question 7.7. (TCO 1) Pizza A had earnings after taxes of $390,000 in the year 2008 and 300,000 shares outstanding. In year 2009, earnings after taxes increased by 20 percent to $468,000 and 25,000 new shares were issued for a total of 325,000 shares. What is the EPS figure for 2008? (Points : 3)

$1.30
$1.44
$0.77
$0.69

Question 8.8. (TCO 1) The income statement reflects: (Points : 3)

income and expenses at the time when those items affect the cash flows of a firm.
income and expenses in accordance with GAAP.
the cash flows in accordance with GAAP.
the flow of cash into and out of a firm during a stated period of time.
the flow of cash into and out of a firm as of a particular date.

Question 9.9. (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 company’s operating cash flow? (Points : 3)

$120,000
$180,000
$170,000
$150,000
$120,000

Question 10.10. (TCO 3) Mark deposited $1,000 today, in an account that pays eight percent interest, compounded semi-annually. Which one of the following statements is correct concerning this investment? (Points : 3)

Mark will earn more interest in year 4 than he will in year 3.
Mark will receive equal interest payments every six months over the life of the investment.
Mark would have earned more interest if he had invested in an account paying 8 percent simple interest.
Mark would have earned more interest if he had invested in an account paying annual interest.
Mark will earn less and less interest each year over the life of the investment.

Question 11.11. (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? (Points : 3)

$61,800
$53,500
$113,400
$97,200

Question 12.12. (TCO 3) Your neighbor just received a credit offer in an e-mail. The company is offering him $6,000 at 12.8 percent interest. The monthly payment is only $110. If he accepts this offer, how long will it take him to pay off the loan? (Points : 3)

81.00 months
81.50 months
83 months
82.17 months
90.70 months

13. (TCO 3) Fine Oak Woodworks is considering a project that has cash flows of $5,000, $3,000, and $8,000 for the next three years. If the appropriate discount rate of this project is 10 percent, which of the following statements is true? (Points : 3)

The current value of the project’s inflows is $16,000
The approximate current value of the project’s inflows is $13,000
The current value of the project’s inflows is somewhere in between $14,000 and $16,000
The project should be rejected because its present value is negative

Question 14.14. (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 Company Engineering 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 Engineering Company investment? (Points : 3)

$33,200
$34,500
$42,000
$43,500

Question 15.15. (TCO 3) North Bank offers you an APR of 9.76 percent compounded semiannually, and South Bank offers you an effective rate of 9 percent on a business loan. Which bank should you choose and why? (Points : 3)

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.

Page 2

1. (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? (Points : 3)

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

Question 2.2. (TCO 3) Which one of the following is an example of an annuity, but not a perpetuity? (Points : 3)

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

Question 3.3. (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 16 percent? Assume annual payments. (Points : 3)

$1315
$1300
$756
$1000

Question 4.4. (TCO 6 and 8) Which one of the following statements is correct? (Points : 3)

Bond issuers maintain a listing of bondholders when bonds are issued in bearer form.
An indenture, is a contract between a corporation and its shareholders.
Collateralized bonds are called debentures.
The description of any property used to secure a bond issue is included in the bond indenture.

Question 5.5. (TCO 3) Bonds issued by Blue Sky Airlines have a face value of $1,000 and currently sell for $1,180. The annual coupon payments are $125. If the bonds have 20 years until maturity, what is the approximate YTM of the bonds? (Points : 3)

10.50%
11.50%
11.75%
12%

Question 6.6. (TCO 3) Bean Coffee issued preferred stock many years ago. It carries a dividend of $8 per share, fixed. As time has passed, yields have decreased from the original eight percent (at the time of issuance) to six percent. What was the current price of the stock? Hint: Yield is the same as required rate of return. (Points : 3)

$100
$133
$102
$86.40
None of the above

Question 7.7. (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 seven percent. What is the current price of the stock? (Points : 3)

$23
$32
$27
$29

Question 8.8. (TCO 3) Royal Electric paid a $4 dividend last year. The dividend is expected to grow at a constant rate of six percent over the next four years. Common stockholders require a 13 percent return. What are the values of the dividends for years 1, 2 and 3, respectively? (Points : 3)

$4, $4.5 and $4.8
$4.24, $4.76 and $5.05
$4.24, $4.49, $4.76
$4, $4.50, $5.05

Question 9.9. (TCO 6) Which of the following is true regarding the primary market? (Points : 3)

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.

Question 10.10. (TCO 6) A member of the NYSE who trades on the floor of the exchange for his or her personal account is called a(n): (Points : 3)

specialist.
independent broker.
floor trader.
stand-alone agent.
dealer.

Question 11.11. (TCO 6) The annual interest on a bond divided by the bond’s market price is called the: (Points : 3)

yield to maturity.
yield to call.
total yield.
required yield.
current yield.

Question 12.12. (TCO 6) Star Industries has one outstanding bond issue. An indenture provision prohibits the firm from redeeming the bonds during the first two years. This provision is referred to as a _____ provision. (Points : 3)

deferred call
market
liquidity
debenture
sinking fund

Question 13.13. (TCO 8) Which of the following is true regarding bonds? (Points : 3)

Most bonds do not carry default risk.
Municipal bonds are free of default risk.
Bonds are not sensitive to changes in the interest rates.
Moody’s and Standard and Poor’s provide information regarding a bond’s interest rate risk.
None of the above is true

Question 14.14. (TCO 6) Which of the following is not a floating-rate bond? (Points : 3)

A bond that adjusts the coupon payments based on an interest rate index, such as the T-bill.
An EE Savings Bond issued by the U.S. government.
A bond that does not have any coupons until maturity.
A bond that adjusts the coupon and face value payment based on inflation.
TIPS

Question 15.15. (TCO 6) Which of the following is true regarding put bonds? Select all that apply: (Points : 3)

Have coupons that depend on the company’s income
Can be exchanged for a fixed number of shares before 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

Page 3

1. (TCO 1) In a general partnership, each partner is personally liable for: (Points : 3)

the partnership debts that he or she personally obtained for the firm.
his or her proportionate share of all partnership debts, regardless of which partner incurred that debt.
the total debts of the partnership, even if he or she was unaware of those debts.
the debts of the partnership, up to the amount he or she invested in the firm.
all personal and partnership debts incurred by any partner, even if he or she was unaware of those debts.

Question 2.2. (TCO 1) Trademarks are classified as: (Points : 3)
short-term assets.
current liabilities.
long-term debt.
tangible fixed assets.
intangible fixed assets.

4 Short Answer essays:

1. (TCO 1) Can you provide some examples of recent, well-known unethical behavior cases? Explain the situation in one or two sentences.

2. What are some real-life scenarios where you can apply the time value of money? Present two or three scenarios. Briefly explain your rationale.

3. Explain some of the key risks associated with bonds.

4. What are some of the features of zero-coupon bonds that make them attractive to certain investors? Which type of investors will be most interested in these bonds?

Set 2

DeVry BUSN379 – Midterm Exam

1. Question : (TCO 1) The goal of financial management is to increase the:

future value of the firm’s total equity.

book value of equity

dividends paid per share

current market value per share

number of shares outstanding, thereby increasing the market value of equity

2. Question : (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

3. Question : (TCO 1) Market value reflects which of the following:

The amount someone is willing to pay today for an asset.

The value of the asset based on generally-accepted accounting principles.
The asset’s historical cost.

A and B only

None of the above

4. Question : (TCO 1) The income statement reflects:

Income and expenses at the time when those items affect the cash flows of a firm.
Income and expenses in accordance with GAAP.

The cash flows in accordance with GAAP.

The flow of cash into and out of a firm during a stated period of time.
The flow of cash into and out of a firm as of a particular date.

5. Question : (TCO1) Telemarket Inc. 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 Telemarket’s taxes figure?

$100,100

$85,050

$112,700

$72,900

6. Question : (TCO 1) Home Best Hardware had $315,000 in taxable income last year. Using the tax rates provided in Table 2.3, what are the company’s income taxes?

$122,850

$106,100

$94,500

None of the above

7. Question : (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

8. Question : (TCO 1) The financial statement that summarizes a firm’s operations over a period of time is called a(n):

income statement.

cash flow statement.

production report.

balance sheet.

periodic operating statement.

9. Question : (TCO 1) Best Electronics has EBIT of $450,000, interest of $30,000, taxes of $50,000, and depreciation of $80,000. What is the company’s operating cash flow?

$497,200

$480,000

$530,000

$470,000

$450,000

10. Question : (TCO 3) You opened a new certificate of feposit with $13,000. Your broker indicated that this investment pays five percent interest, compounded quarterly. Which one of the following statements is correct concerning this investment?

You will receive equal interest payments every three months over the life of the investment.
You could earn more interest by investing in an account paying five percent simple interest.
You would have earned more interest if you had invested in an account paying annual interest.
You will earn less and less interest each year over the life of the investment.
You will earn more interest in year 3, than you will in year 2.

11. Question : (TCO 3) Mr. Smith will receive $6,500 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?

$93,000

$53,500

$84,300

$52,000

12. Question : (TCO 3) Your neighbor just received a credit offer in an e-mail. The company is offering him $6,000 at 12.8 percent interest. The monthly payment is only $110. If he accepts this offer, how long will it take him to pay off the loan?

81.00 months

81.50 months

83 months

82.17 months

90.70 months

13. Question : (TCO 3) Fine Oak Woodworks is considering a project that has cash flows of $5,000, $3,000, and $8,000 for the next three years. If the appropriate discount rate of this project is 10 percent, which of the following statements is true?

The current value of the project’s inflows is $16,000

The approximate current value of the project’s inflows is $13,000
The current value of the project’s inflows is somewhere in between $14,000 and $16,000
The project should be rejected because its present value is negative

14. Question : (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 Company Engineering 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

15. Question : (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.

1. Question : (TCO 3) Which one of the following will increase the future value of a lump sum invested today?

decreasing the amount of the lump sum

increasing the rate of interest

paying simple interest rather than compound interest

paying interest only at the end of the investment period

shortening the investment time period

2. Question : (TCO 3) Which one of the following best exemplifies a perpetuity?

a mortgage of $860 a month for 30 years

$2,000 annual payments from a trust fund indefinitely

social security payments of $2,500 a month for life

student loan payments of $600 a month for three years

$250 a month over the life of a lease

3. Question : (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 16 percent? Assume annual payments.

$1315

$1300

$756

$1000

4. Question : (TCO 6 and 8) A bond’s 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

5. Question : (TCO 3) Bonds issued by Blue Sky Airlines have a face value of $1,000 and currently sell for $850. The annual coupon payments are $80. If the bonds have 10 years until maturity, what is the approximate YTM of the bonds?

10.50%

11.50%

11.75%

12%

6. Question : (TCO 3) Bean Coffee issued preferred stock many years ago. It carries a dividend of $8 per share, fixed. As time has passed, yields have decreased from the original eight percent (at the time of issuance) to six percent. What was the current price of the stock? Hint: Yield is the same as required rate of return.

$100

$133

$102

$86.40

None of the above

7. Question : (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 nine percent. What is the current price of the stock?

$35

$40

$27

$29

8. Question : (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

9. Question : (TCO 6) The market where one shareholder sells shares to another shareholder is called the _____ market.

primary

main

secondary

principal

dealer

10. Question : (TCO 6) A member of the NYSE who trades on the floor of the exchange for his or her personal account is called a(n):

specialist.

independent broker.

floor trader.

stand-alone agent.

dealer.

11. Question : (TCO 6) The maturity date of a bond is defined as:

the first date on which a bond can be called.

the date on which the principal amount is paid.

20 years after the issue date.

the date on which the next interest payment will be made.
the original issue date.

12. Question : (TCO 6) Star Industries has one outstanding bond issue. An indenture provision prohibits the firm from redeeming the bonds during the first two years. This provision is referred to as a _____ provision.

deferred call

market

liquidity

debenture

sinking fund

13. Question : (TCO 8) Which of the following is true regarding bonds?

Bonds do not carry default risk.

Bonds are sensitive to changes in the interest rates.

Moody’s and Standard and Poor’s provide information regarding a bond’s interest rate risk.
Municipal bonds are free of default risk.

None of the above is true

14. Question : (TCO 6) Which of the following best describes a floating-rate bond?

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, but adjusts the face value payment based on inflation.

15. Question : (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

1. Question : (TCO 1) Kate is the owner of Kate’s Sun Wear, which is a sole proprietorship. Kate unexpectedly suffered a fatal heart attack. Which one of the following statements is correct given this situation?
2. Question : (TCO 1) Which one of the following is classified as a current asset?
3. Question : (TCO 1) Can you provide some examples of recent, well-known unethical behavior cases? Explain the situation in one or two sentences.
4. Question : (TCO 3) Why does money have time value? Explain your rationale.
5. Question : (TCO 8) Are U.S. Treasury securities risk-free? Why or why not? Explain your rationale?
6. Question : (TCO 6) What are some of the features of zero-coupon bonds that make them attractive to certain investors? Which type of investors will be most interested in these bonds?

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BUSN 379