Exam 1
Sample Questions
INSTRUCTIONS: Read each question carefully. After you choose an answer, you can check to see if it is correct by clicking “CHECK ANSWER” below the question.
1. Which of the following statements about the corporate form of business organization is incorrect?
a. The corporation is the easiest form of business organization to establish.
b. In the
c. Corporations generally are larger than either partnerships or proprietorships.
d. One of the most important features of the corporate form of business organization is that stockholders have limited liability.
e. None of the above.
2. Why is the present value of an amount to be received in the future less than the future amount?
a. Deflation causes investors to lose purchasing power when their dollars are invested for greater than one year.
b. Investors have the opportunity to earn positive rates of return, so any amount invested today should grow to a larger amount in the future.
c. Investments generally are not as good as those who sell them suggest, so investors usually are not willing to pay full face value for such investments, thus the price is discounted.
d. Because investors are taxed on the income received from investments they never will buy an investment for the amount expected to be received in the future.
e. None of the above is a correct answer.
3. According to the text, which of the following is a financial intermediary?
a.
b. the over-the-counter (OTC) market
c. investment banker
d. mutual fund (investment) company
e. More than one of the above.
a. daily
b. weekly
c. monthly
d. quarterly
e. annually
a. $89,096.45
b. $160,587.07
c. $384,856.26
d. $161,622.60
e. None of the above is correct.
6. Which of the following statements concerning “agency problems” is most correct?
a. Regardless of economic conditions, if a firm's stock price falls during the year, this indicates that the firm's managers must not be acting in the best interests of the shareholders.
b. One method of controlling agency problems is to engage in the taking of “poison pills.”
c. One of the best means to control agency problems is to require the managers and other important decision makers of the firm to also be owners of the firm.
d. Agency problems probably would not exist if the important decisions of a firm were made by persons who have no vested interests, such as ownership, in the firm.
e. None of the above is a correct statement.
7. Which of the
following statements concerning a firm’s quest to maximize wealth is correct?
a. In
extremely competitive industries, we would expect firms would voluntarily
engage in many socially beneficial projects to try to maximize their stocks’
values.
b. Actions
that maximize a firm's stock price are inconsistent with maximizing social
welfare.
c. The
concepts of social responsibility and ethical responsibility on the part of
corporations are completely different and neither is relevant in maximizing
stock price.
d. In
a competitive market, if a group of firms does not spend resources making
social welfare improvements, but another group does, in general, this will not
affect the second group's ability to attract funds.
e. If
the government did not mandate socially responsible corporate actions, such as
those relating to product safety and fair hiring practices, most firms in
competitive markets probably would not pursue such policies voluntarily.
8. Following is information about a company that Sue Brittany is analyzing for her boss:
Total liabilities = $500,000
What were the company’s sales?
a. $1,250,000
b. $1,500,000
c. $ 200,000
d. $3,750,000
e. None of the above.
a. greater than $5,000.
b. equal to $5,000.
c. less than $5,000.
d. There is not enough information to answer this question.
e. None of the above is the correct answer.
10. When constructing a Statement of Cash Flows, which of the following actions would be considered a use of cash?
a. decrease in dividends
b. increase in accounts receivable
c. decrease in plant and equipment
d. increase in common equity
e. All of the above are uses of cash.
11. If investors expect inflation to always be a part of the economy, then the nominal risk-free rate of return (rRF) associated with an investment will always be _____ the real risk-free rate of return (r*).
a. greater than
b. less than
c. equal to
d. The rates will not be equal, but more information is needed to determine the exact relationship.
e. There is not enough information to answer this question.
a. Pay off some existing debt with cash.
b. Issue new debt and use the proceeds to pay off some of the old (existing) debt.
c. Issue additional debt.
d. Purchase new equipment using cash.
e. More
than one of the above actions will reduce a firm’s debt ratio.
13. According to the Wall Street Journal, the yield to maturity on 1-year Treasury bonds is 2.2 percent, the yield to maturity on 2-year Treasury bonds is 3.0 percent, and the yield on 3-year Treasury bonds is 3.6 percent. These bonds are considered risk free, so the rates given here are risk-free rates (rRF). The 1-year bond matures one year from today, the 2-year bond matures two years from today, and so forth. If the real risk-free rate (r*) for all three years is 2 percent, what is the expected inflation rate for the next 12 months (year)? (Assume that the expectations theory is the appropriate explanation for the shape of the yield curve.)
a. 1.8%
b. 0.2%
c. 1.0%
d. 0.8%
e. None of the above is a correct answer.
a. 10.00%
b. 11.04%
c. 10.38%
d. This question cannot be answered without knowing the dollar amount of the investment.
e. None of the above is correct.
15. Assume
you just won the
a. The $6 million lump-sum payment is better, because it is always better to receive money today than to wait until some future period regardless of the amounts involved.
b. The $6 million lump-sum payment is better, because it is greater than the present value of the $400,000 annuity, which equals $5,813,498.
c. The $400,000 annuity should be selected because its present value, which equals $6,133,240, is greater than the $6 million lump-sum amount that would be received today.
d. The $6 million lump-sum payment should be selected because it can be invested at 5.5 percent, and thus will grow to an amount in the future that is greater than the present value of the $400,000 annuity.
e. The two choices are identical, so you should flip a coin to make the decision.
a. approximately 9%
b. approximately 19%
c. 32%
d. This question cannot be answered without knowing the dollar amount that was invested by Steve.
e. None of the above is a correct answer.
a. accumulated over the years because it chose to retain some interest that was owed to creditors to reinvest these funds in the firm to achieve growth.
b. available to invest in capital budgeting projects in the current year.
c. accumulated over the years because it chose to retain income, which could have otherwise been paid out as dividends to common stockholders, to fund growth.
d. in its cash account, which can be paid as dividends in the current period.
e. None of the above is correct.
18. Assume the expectations theory of the term structure of interest rates is correct and the other term structure theories are invalid. If we observe an upward sloping yield curve, which of the following is a correct statement?
a. Investors expect short-term (annual) rates to be constant over time.
b. Investors expect short-term (annual) rates to decrease over time.
c. Investors expect short-term (annual) rates to increase over time.
d. It is impossible to say how interest rates are expected to move unless we know whether investors require a positive or negative maturity risk premium.
e. The maturity risk premium must be positive, because there is less liquidity associated with bonds that have longer terms to maturity.
19. According to the results of a recent survey, investors expect the annual interest rates in each of the next three years to be:
1-Year
Year Rate
2006 5.0%
2007 9.0
2008 4.0
Given these expectations, what should be the yield to maturity for a 3-year bond? To answer this question, assume today is January 1, 2006 and the 3-year bond matures on December 31, 2008. (Assume that the expectations hypothesis is the only explanation for the shape of the yield curve.)
a. 4.0%
b. 6.0%
c. 6.5%
d. 7.0%
e. There is note enough information to answer this question.