Benesh
EXAM Gary I - FIN 3403
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MULTIPLE CHOICE AND TRUE/FALSE QUESTIONS - 4 points each
INSTRUCTIONS : Darken the letter corresponding to the most appropriate response. If you are asked to select the
statement(s) that is (are) true (or false) and more than one statement is correct, choose the response that indicates that
this is the case.
1. You take out a $200,000 mortgage with an annual percentage rate of 6.8%. The loan is to be amortized by making
monthly payments over the next 15 years. The interest will you pay during the first year of the loan is closest to:
a.
b.
c.
d.
e.
$13,600
$13,876
$13,010
$13,355
$12,945
2. Select the statement(s) that is (are) true:"
a.
b.
c.
d.
e.
Agency problems are likely to be more prevalent in sole proprietorships than in corporations.
Agency problems can be reduced by designing compensation plans so that managers' objectives coincide
more closely with shareholder's objectives.
The excessive consumption of 'perks' by management is an example of an agency problem.
Both b and c are true statements.
All of the above are true statements.
3. Select the statement(s) that is (are) true :
a.
b.
c.
d.
e.
In general, it is more difficult for corporations to raise capital than it is for sole proprietorships.
"Double taxation' is a major disadvantage of the corporation form of organization.
Limited liability is a major advantage associated with corporations as compared to sole proprietorships.
With a corporation, it is generally more difficult to transfer ownership from one party to another than it is
with a sole proprietorship.
Both b and c are true statements.
4. You take out a loan for $23,500 to finance an automobile. The annual percentage rate on the loan is 7.8 percent,
and it is to be amortized by making monthly payments over the next four years. Your monthly payment will be closest
to:
a.
b.
c.
d.
e.
$557
$572
$614
$591
$634
5. Last year, the Burniece Corporation had earnings before interest and taxes (EBIT) of $612,000, interest expense of
$103,000, common stock dividends of $40,000, a 30 percent tax rate, and 100,000 shares of common stock outstanding.
Burniece's earnings per share were:
a. $3.56
b. $3.16
c. $3.73
d. $3.88
e. $2.98
6. How much will you have in your account ten years from today if you make deposits of $30,000 at the end of each
of the next three years and your account pays interest at the rate of 6% compounded annually? Note, deposits are only
being made for the first three years, but you are being asked for the total value of the account after ten years.
a.
b.
c.
d.
e.
$112,874
$149,544
$138,885
$151,366
$143,609
7. You have just celebrated your 40th birthday. You want to retire on your 50 th birthday. Your objective is to make
equal annual deposits at the end of each of the next 10 years (1 st deposit on your 41st birthday) so that you will be able
to make annual withdrawals of $100,000 per year for 25 consecutive years, with the first withdrawal occurring on your
51st birthday. If your account earns interest at the rate of 7 percent compounded annually, how much must your annual
deposit be over the next 10 years?
a.
b.
c.
d.
e.
$87,765.32
$83,424.92
$84,345.72
$81,672.78
$85,113.44
8. You are offered an investment that requires you to put up $10,000 now in exchange for payments of $2,475 at the
end of each of the next five years. The annual rate of return on this investment is closest to:
a.
b.
c.
d.
e.
8.01%
7.69%
8.54%
7.55%
12.9%
9. The liabilities and equity side of the Keltgen Corporations balance sheet is provided below. Keltgens common
stock is presently selling for $20 per share. The book value per share of Keltgens common stock is closest to:
Current Liabilities
Long-term Debt
Common Stock (80,000 shares outstanding, $1 par)
Paid in surplus
Retained Earnings
Total Liabilities and Equity
a.
b.
c.
d.
e.
$ 300,000
$ 300,000
$ 80,000
$ 680,000
$ 620,000
$1,980,000
$24.63
$18.57
$16.25
$17.25
$8.50
10. You want to have $250,000 saved 10 years from now. At present you have $50,000. You are prepared to make
equal annual deposits at the end of each of the next 10 years to meet your objective. Assuming that you can invest
your money (both what you have at present and the annual deposits) at a rate of 7 Percent compounded annually, your
annual deposit each year will be closest to:
a.
b.
c.
d.
e.
$11,154
$10,456
$10,976
$12,324
$11,268
11. An investment promises to pay you $10,000 three years from today and $20,000 five years from today. Given a
discount rate of 9 percent compounded annually, the present value of this investment is closest to:
a.
b.
c.
d.
e.
$18,878
$20,720
$19,165
$19,938
$21,176
12. the Select statement(s) that is (are) true.
a.
b.
c.
d.
e.
When discounting a sum to be received in the future back to the present, the lower the discount rate used
the higher the present value will be.
A discount factor for n periods and the rate r per period is just the reciprocal of the corresponding
compound factor with the same values for n and r.
One of the primary functions of secondary markets is to provide investors liquidity.
Both a and c are true statements.
All of the above are true statements.
13. You win a lottery that provides you with three options. You may take Option (1) $1,045,000 today,
Option (2) payments of $170,000 per year at the end of each of the next ten years, or Option (3) $2,700,000 ten years
from today. Given you believe that 10% compounded annually is a correct discount rate to use, which option should
you select if your desire is to maximize the present value of your winnings. Assume no taxes in any case.
a.
b.
c.
d.
Option (1)
Option (2)
Option (3)
All choices result in the same present value.
14. The value of a perpetuity that pays $4,500 per year given a discount rate of 7 percent compounded annually is
closest to:
a.
b.
c.
d.
e.
$64,286
$65,250
$64,500
$65,525
over $67,000
15. Select the statement that is false :
a.
b.
c.
d.
Interest paid by a corporation is tax deductible for the paying corporation.
A firms dividend payout ratio is equal to the stock's dividend per share divided by its earnings per share.
The market value of a share of stock is generally equal to the stock's book value per share.
Net Working Capital is equal to Current Assets minus Current Liabilities
e.
Primary markets are where firms issue securities for the purposes of raising funds.
16. The annual rate of interest an account must pay in order for $50,000 to turn into $1,000,000 over a 30 year period
is closest to: (Dont worry about taxes, etc.)
a.
b.
c.
d.
e.
9.7%
11.3%
10.9%
11.1%
10.5%
17. You are planning on buying your first house, and you have decided the highest monthly payment you can afford is
$2,000. Assuming that you take out a 30-year mortgage (monthly payments) with an Annual Percentage Rate of 7
percent, the largest mortgage (loan) you can take out is closest to:
a.
b.
c.
d.
e.
$294,780
$300,615
$301,987
$302,009
$299,562
18. Which of the following has the highest effective annual rate?
a.
b.
c.
d.
e.
6.57% compounded annually
6.42% compounded semi-annually
6.32% compounded monthly
6.30% compounded continuously
All have the same effective annual rate.
19. How long will it take for a $1,000 investment to be worth $10,000 if it is invested at a rate of 5.8 percent
compounded monthly (nearest tenth of a year)?
a.
b.
c.
d.
e.
39.8 years
36.4 years
38.9 years
37.7 years
40.8 years
20. Year end account balances show a firm with $2,000,000 cash, Net Plant and Equipment of $56,000,000, Current
Liabilities of $14,000,000, $6,000,000 in inventory, $9,000,000 in long-term liabilities, and a total in the stockholders
equity accounts of $53,000,000. Accounts Receivables is the only account not listed. What must the balance be for
Accounts Receivables?
a.
b.
c.
d.
e.
$17 million
$12 million
$14 million
$24 million
$16 million
21. A firm has earnings before interest and taxes (EBIT) of $500,000. Interest expense for the year is $80,000, and the
firm's tax rate is 30 percent. Given the firm pays out 40 percent of its net income in dividends, and that there are
100,000 shares of stock outstanding, the firm's dividend per share is closest to:
a.
b.
c.
d.
e.
$1.76
$1.12
$1.40
$1.18
$2.94
22. In studying finance and evaluating how financial decisions should be made, we assume that the goal of the firm is
to:
a.
b.
c.
d.
e.
maximize earnings per share.
maximize profits.
maximize shareholders wealth or the stock price.
maximize market share.
minimize risk.
23. You invest $100,000 in an account that has an annual percentage rate of 6 percent compounded continuously. The
amount that you will have in your account after 10 years is closest to:
a.
b.
c.
d.
e.
$179,085
$180,564
$181,654
$182,212
$182,658
24. For the year just ended, the Smart Corporation had interest expense of $50,000, and a net income of $180,000.
Smart has 10,000 shares of common stock outstanding, a 30 percent tax rate, and the dividend paid per share for the
year was $3.00. The addition to retained earnings for the year was:
a.
b.
c.
d.
e.
$61,000
$100,000
$110,000
$120,000
$150,000
25. How much must you deposit in an account today in order to make withdrawals of $5,000 a year at the end of six
consecutive years, given that the first withdrawal occurs four years from today and that your account earns interest at
the rate of 8 percent compounded annually?
a.
b.
c.
d.
e.
$17,890.76
$18,348.95
$18,989.77
$17,549.95
$19,112.98