ARE
171A
FALL
2011
MIDTERM
~B
n
~()St-
NAME:
______________
_
This exam has two sections.
Section A consists of 15 multiple choice questions worth 10 points each for a
total of 150 possible points (about 43% of exam).
Section 8
is
made up of 5 short problems, worth 40 points each., for a total of 200
possible points
(-57%
of
exam).
Show your work
in
section 8; partial credit can be earned for correct approach even if final answer is wrong.
Total points possible
=
350.
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Section A.
(10 pts. each)
1.
Jackie is considering purchasing either Farm A
or
Farm 8. Each farm has sales
of
$500,000
per year,
and production costs of $350,000. Farm A is mostly open farmland, with no improvements except for an
irrigation well.
Farm B has extensive improvements, including barns, fencing, and a well. Given this limited
information, and assuming both properties are selling for the same price, which statement below is likely true?
a.
Farm A will likely have lower accounting profits, but higher cash flows.
@)
Farm B will likely have lower accounting profits, but higher cash flows.
c.
Farm A will have higher accounting profrts and cash flows.
d.
Farm 8 will have higher accounting profits and cash flows.
2.
Suppose a 5-year Treasury security yields
5%,
while a 10-year AAA corporate bond pays 4.9%.
What could explain this situation?
a.
The Treasury security has a higher default premium.
b.
The maturity premium is negative.
~
Inflation is expected to decline.
d.
Any
of
the above reasons could explain the interest rates we observe.
e.
None
of
the above reasons could explain the interest rates we observe.
3.
What is an advantage of purchasing zero-coupon Treasury bonds?
.
(l)rhe
investor can receive a lump sum of cash
on
a specific future date that meets his/her needs.
b.
The investor can postpone paying income tax
on
the bond interest, until the year in which the
bond matures.
c.
Both a and
b.
d.
None of the above.
4.
A startup firm plans to drill for natural gas wells in California.
Which form of organization below would the
firm
be
likely to consider?
(i')
Limited partnership
b.
Limited liability partnership
c.
Either a or b would be a feasible choice.
d.
None of these would be a feasible choice.
5.
Victory Corp. has current assets
of
$5 million, and long-term assets of $11 million.
It has current liabilities
of
$4
million, long term debt of
$6
million, and shareholders' equity
of
$6
million.
What is its net working
capital?
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- Fall '08
- WHITNEY
- Treasury security yields
-
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