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FINA 3313 Mid-Term 1 Practice questions
1
...

A
...
False

2
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6 billion in 2006 on research and development of new drugs is an investment
decision (capital budgeting decision) but not a financing decision
...
True
B
...
The liability of sole proprietors is limited to the amount of their investment in the company
...
True
B
...
The separation of ownership and management is one distinctive feature of corporations
...
True
B
...
Shareholders welcome higher short-term profits even when they damage long-term profits
...
True
B
...
Ethical decision making in business can be viewed as a long-term investment in reputation
...
True
B
...
Financial analysts are involved in monitoring and controlling the risk associated with investment
projects and financing decisions
...
True
B
...
The primary goal of any company should be to maximize current period profits
...
True
B
...
Corporations that do not issue financial securities such as stock or debt obligations:
A
...

B
...

C
...

D
...


10
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minimize the cost of the investment
...
maximize the number of capital budgeting projects
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maximize the difference between cash inflows and cost
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finance all capital budgeting projects with debt
...
Which of the following is not a financing decision?
A
...
Should the firm shut down an unprofitable factory?
C
...
Should the firm issue preferred stock or common stock?

12
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capital structure decisions
...
investment decisions
...
financing decisions
...
both investment and financing decisions
...
Which of the following would not be considered a financial asset?
A
...
A personal IOU
C
...
A share of stock

14
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both real assets and financial assets
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the goods and services produced by a firm
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securities, such as shares of IBM
...
the raw materials used in manufacturing
...
The stockholders in a sole proprietorship are represented by:
A
...

B
...

C
...

D
...


16
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the partnership itself
...
the partners individually
...
both the partnership and the partners
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neither the partnership nor the partners
...
Which of the following is not an advantage to incorporating a business?
A
...
Limited liability
C
...
Profits taxed at the corporate level and the shareholder level

18
...
top management
...
stakeholders
...
shareholders
...
customers
...
"Double taxation" refers to:
A
...

B
...

C
...

D
...


20
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primary markets
...
secondary markets
...
capital markets
...
money markets
...
Agency problems can best be characterized as:
A
...

B
...

C
...

D
...


22
...
Lavish spending on expense accounts
B
...
Excessive investment in "safe" projects
D
...
Which of the following forms of compensation is most likely to align the interests of managers and
shareholders?
A
...
A salary that is linked to company profits
C
...
A salary that is linked to the company's total market value

24
...
A reduction of cash dividends is always in the best interests of current shareholders
...
The firm will have available cash to increase current investment and future profits
...
Reduced dividends increase managerial compensation, thus increasing their motivation
...
A reduction of cash dividends cannot be in the best interests of current shareholders
...
Corporate financing comes ultimately from:
A
...

B
...

C
...

D
...


26
...
They are financial institutions
...
They raise money by selling shares to investors
...
They pool the savings of many investors
...
They offer professional management
...
A primary market would be utilized when:
A
...

B
...

C
...

D
...


28
...
A reduction of cash dividends is always in the best interests of current shareholders
...
The firm will have available cash to increase current investment and future profits
...
Reduced dividends increase managerial compensation, thus increasing their motivation
...
A reduction of cash dividends cannot be in the best interests of current shareholders
...
Which of the following is not typically considered a function of financial intermediaries?
A
...
Investing in real assets
C
...
Spreading, or pooling risk among individuals

30
...
The U
...
Federal Reserve, for its policy of easy money
B
...
S
...
Bankers, who aggressively promoted and resold subprime mortgages
D
...
If the balance sheet of a firm indicates that total assets exceed current liabilities plus shareholders'
equity, then the firm has:
A
...

B
...

C
...

D
...

32
...
can shift loan risk to their deposit customers
...
are motivated by the potential for profit
...
do not have any income tax liability
...
have information to evaluate creditworthiness
...
During the Financial Crisis of 2007-2009, the U
...
government bailed out the following firms except:
A
...

B
...

C
...


D
...

34
...
Marketable securities
B
...
Accounts receivable
D
...
In which of the following asset accounts are you least likely to find a difference between market value
and book value?
A
...
Inventory
C
...
Shareholders' equity

36
...
Depreciation is subtracted from cost of goods sold to calculate net income
...
When depreciation expense is incurred, cash balances are reduced
...
Depreciation expense does not affect net income
...
Depreciation reduces the book value of assets
...
Long-term financing decisions commonly occur in the:
A
...

B
...

C
...

D
...


38
...
the sale of additional shares of stock to investors
...
income not paid to shareholders
...
an excess of assets over liabilities
...
market values that exceed book values
...
Which of the following changes in working capital will result in an increase in cash flows?
A
...
Increase in inventories
C
...
Decrease in other current liabilities

40
...
equity has been depreciated too rapidly
...
the firm uses accrual-based accounting
...
profit potential is expected to be attractive
...
the firm is holding too much cash
...
Investment banks like Merrill Lynch or Goldman Sachs:
A
...

B
...

C
...

D
...


42
...
High depreciation expense
B
...
Acquisition of equipment
D
...
Marginal tax rates are based on:
A
...

B
...

C
...

D
...

44
...
Income taxes
B
...
Dividends
D
...
The concept of compound interest refers to:
A
...

B
...

C
...

D
...


46
...
an annuity
...
an annuity due
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an installment plan
...
a perpetuity
...
Which of the following will increase the present value of an annuity, other things equal?
A
...
Decreasing the interest rate
C
...
Decreasing the amount of the payment

48
...
simple interest rate
...
annual percentage rate
...
discounted interest rate
...
effective annual interest rate
...
If interest is paid m times per year, then the per-period interest rate equals the:
A
...

B
...

C
...

D
...


50
...
individuals
...
companies
...
other organizations
...
all of these
...
What is the future value of $30,000 on deposit for nine years at 9% simple interest?
A
...
80
B
...
83
C
...
80
D
...
00

52
...
$150
B
...
$300
D
...
How much must be deposited today in an account earning 9% annually to accumulate a 20% down
payment to use in purchasing a car one year from now, assuming that the car's current price is $35,000,
and inflation will be 4%?
A
...
$6,548
C
...
$6,679

54
...
$9,944
...
$9,855
...
$9,864
...
$9,605
...
A perpetuity of $4,000 per year beginning today is said to offer a 12% interest rate
...
$42,857
...
$37,333
...
$36,904
...
$33,333
...
$59,000 is borrowed, to be repaid in three equal, annual payments with 13% interest
...
$3,248
...
$24,987
...
$17,317
...
$7,670
...
Approximately how much should be accumulated by the beginning of retirement to provide a $4,100
monthly check that will last for 20 years, during which time the fund will earn 10% interest with monthly
compounding?
A
...
00
B
...
84
C
...
00
D
...
94

58
...
50% during the investment period?
A
...
50%

B
...
00%
C
...
10%
D
...
80%

59
...
71% and weekly compounding of
interest? (Assume 52 weeks in a year)
...
13
...
13
...
12
...
14
...
A car dealer offers payments of $1,522
...
What is the loan's APR?
A
...
04%
B
...
04%
C
...
04%
D
...
04%

61
...
$7,472
...
$10,303
...
$13,000
...
$13,382
...
How much must be deposited today in an account earning 6% annually to accumulate a 20% down
payment to use in purchasing a car one year from now, assuming that the car's current price is $20,000,

and inflation will be 4%?
A
...
$3,782
C
...
$4,080

63
...
94 today? The deposit pays interest semi-annually
...
3
...
6
...
7
...
7
...
Approximately how long must one wait (to the nearest year) for an initial investment of
$1,000 to
triple in value if the investment earns 8% compounded annually?
A
...
14
C
...
25
65
...
7008
...
5
...
7
...
8
...
9
...
The salesperson offers, "Buy this new car for $25,000 cash or, with appropriate down payment, pay
$500 per month for 48 months at 8% interest
...

A
...
00
B
...
64
C
...
24
D
...
00

67
...
91; $500 today, $2,000 in one
year, and $5,000 in two years
...
3%
B
...
5%
D
...
What is the present value of the following set of cash flows at an interest rate of 7%; $1,000 today,
$2,000 at end of year one, $4,000 at end of year three, and $6,000 at end of year five?
A
...
$10,412
C
...
$11,524

69
...
Assuming you're indifferent to cash versus credit, that you can
invest at 10%, and that you want to receive $9,000 for the car, should you accept?
A
...

B
...

C
...


D
...


70
...
No
interest will be paid on the bonds during the twenty years, and the bonds are discounted at a 7% interest
rate
...
$70
...
$258
...
$629
...
$857
...
Your car loan requires payments of $200 per month for the first year and payments of $400 per month
during the second year
...
What is the
present value of this two-year loan?
A
...
34
B
...
78
C
...
57
D
...
05

72
...
34 beginning in one year
...
$1,326
...
$1,206
...
$1,096
...
$587
...
How many monthly payments remain to be paid on an 8% mortgage with a 30 year amortization and
monthly payments of $733
...
Approximately 268 payments
B
...
Approximately 92 payments
D
...
What is the present value of a four-period annuity of $100 per year that begins two years from today if
the discount rate is 9%?
A
...
21
B
...
86
C
...
85
D
...
97

75
...
What is the approximate size of the mortgage with these
terms?
A
...
$147,940
C
...
$393,120

76
...
$261,500
...
$323,800
...
$578,700
...
$690,000
...
The present value of an annuity stream of $100 per year is $614 when valued at a 10% rate
...
An increase of $10
...
An increase of $61
...
An increase of $100
...
Unknown without knowing number of payments
...
Your retirement account has a current balance of $50,000
...
5
...
7
...
9
...
10
...
With $1
...
$112,150
B
...
$123,371
D
...
How much can be accumulated for retirement if $2,000 is deposited annually, beginning one year
from today, and the account earns 9% interest compounded annually for 40 years?
A
...
00
B
...
89
C
...
73
D
...
27



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