PracticeMidtermCh1-6 - University of Houston Bauer College...

University of Houston
Bauer College of Business
Finance 3332
Principles of Financial Management
Spring, 2006
Practice Midterm Exam
Chapters 1 - 6
1. Agency problems occur between __________________ and between ________________.
2. The primary goal of the financial manager is to __________________.
3. Javier wants to purchase a 40-year $60,000 per year annuity which will begin payments in
ten years from now. How much will Javier be willing to pay for this annuity today if the
appropriate discount rate is 6 percent?
4. Capital market efficiency means ________________________.
5. Three forms of market efficiency are:
1.
2.
3.
6. Cash flow concepts are ___________ but generally accepted accounting principles are
___________ in the determination of a firm’s net income.
7. The three primary areas of Finance are:
1.
2.
3.
8. Advantages of the corporate form of business over both sole proprietorships and partnerships
include:
1.
2.
3.
4.
9. The current spot rate for the Swiss franc is $.7931 and the 6 month forward rate is $.7965.
What is the annualized premium or discount?
10. The Fisher effect states that _________________.
11. Primary markets are where _______________ trade.
12. Secondary markets are where _______________ trade.
13. Capital markets are where _______________ trade.
14. Money markets are where _______________ trade.

15. Lucia bought 500 shares of stock eleven months ago for $12 per share and just sold it for $8
per share. Last month, she received a dividend check for $500. What is Lucia’s holding period
return?
16. Assumptions of the mean-variance criteria of portfolio selection require that investors:
1.
2.
3.
4.
Corporate Tax Rates
Taxable Income($) Marginal Tax Rate Tax Calculation
Up to 50,000 15% $0 + (15% Amount over $0)
50,001-75,000 25% $7500 + (25% Amount over $50,000)
75,001-100,000 34% $13,750 + (34% Amount over $75,000)
100,001-335,000 39%
$22,250 + (39% Amount over $100,000)
335,001-10,000,000 34%
$113,900 + (34% Amount over $335,000)
10,000,001-15,000,000 35%
$3,400,000 + (35% Amount over $10,000,000)
15,000,001-18,333,333 38%
$5,150,000 + (38% Amount over $15,000,000)
Over 18,333,333 35% 35% x Taxable Income
17. XYZ Corporation had operating income of $200,000, received $8,000 in interest income,
paid $12,000 in interest, received $20,000 in preferred dividends, and paid $3000 in common
dividends. What was the firm’s tax liability ?
18. Ms. Foxille plans to retire in 28 years. She wants to be able to withdraw $250,000 at the end
of each year for 35 years during retirement. How much must she contribute each year to her
retirement savings over the next 28 years assuming her account earns 7 percent per year?
19. What is the effective rate of interest on an account that pays a nominal rate of 9 percent with
interest compounded continuously?
20. What is the value in eight years of a $60,000 college fund if the nominal rate of interest is 4
percent compounded monthly?
21. What is the value of the following cash flow stream if the appropriate discount rate is 8
percent?
Year Cash Flow
1 $2000
2 0
3 3000
4 8000
5 5000
2

22. Michael is considering buying a new ATV. The selling price is $30,000, and he has $5000 to
put toward a down payment. If he can finance at a nominal annual interest rate of 12 percent
over the next 4 years, what will be his monthly payments? Assume payments are made at the
beginning of each month.