Midterm Exam – Semester 2 2023/2024 – Set 2

School of Business/UEH

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EXAM INSTRUCTIONS
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You may begin writing when instructed by the Exam Supervisor at the start of the exam.
Clearly indicate which question you are answering on any Examination Answer Booklets used.

Unit Name: Corporate Finance

Unit Number: FIN201

Number of Questions: 50 Questions Part A: T&F and Part B: MCQ

Total Number of Pages: 10 pages (excluding exam cover sheet)

Value of Questions: 0.20 points

Answering Questions: All questions

Lecturer: Mr. Manoj Menon

Mr. Hong Ngoc Nguyen

Time Allowed: 90 minutes

NO RESOURCES ALLOWED

It is a closed-book exam!

DO NOT TAKE THIS PAPER FROM THE EXAM ROOM

0
Part A: True & False Questions

1. Sustainability is usually in conflict with the idea of Corporate Social Responsibility (CSR). F
 Sustainability is a core aspect of CSR, , they are complementary rather than conflicting
concepts.

2. For a firm wealth maximization goal is preferable to profit maximization goal. T

3. If a firm has a debt-to-equity ratio of 1.0, then its total debt ratio must be 0.50. T
4. According to the DuPont Analysis, an increase in net profit margin will decrease return on
assets. F
 In DuPont model, return on assets (ROA) is the product of net profit margin and asset turnover. an
increase in net profit margin will increase, not decrease, ROA, assuming asset turnover remains
constant. => directly related

5. An effective annual rate must be greater than an annual percentage rate. T

6. If other things remain the same, the more frequently your money is compounded the lower is
the effective rate. F
 The more frequently interest is compounded, the higher the effective rate becomes.

7. The real rate must be less than the nominal rate given a positive rate of inflation. T
8. Expectations of lower inflation rates in the future tend to lower the slope of the term structure
of interest rates. T
9. With the constant growth model, the dividend yield cannot be greater than the stock’s
required return. T
10. The pre-emptive right gives shareholders the right to maintain their percentage ownership in
the firm. T

Part B: Multiple Choice Questions

1) Financial managers primarily create firm value by:

A) maximizing current dividends.
B) investing in assets that generate cash in excess of their cost.
C) lowering the earnings per share.
D) increasing the firm’s market share.

2) If a firm is profitable, it follows that:

A) its cash inflows exceed its cash outflows.
B) its sales exceed its costs.
C) its cash flows are known with certainty.
D) it has sufficient cash to pay its bills in a timely manner.

3) The right-hand side of the balance sheet is where ________ is reported.

A) property, plant, and equipment
B) accumulated retained earnings
C) accumulated depreciation
D) cash and equivalents

4) Of the following choices, the most liquid asset is typically:

A) inventory.
B) land.
C) accounts receivable.
D) equipment.

5) Which of the following statements is accurate? Book value is:

A) equivalent to market value for firms with fixed assets.
B) based on historical cost.
 C) always more than market value.
D) more of a financial than an accounting valuation.

6) Hudson Enterprises spent $6,400 to purchase equipment three years ago. This
equipment
is currently valued at $4,600 on today’s balance sheet but could actually be sold for
$5,100.
Net working capital is $800 and long-term debt is $3,700. Assuming the equipment is the
firm’s only fixed asset, what is the book value of shareholders’ equity?
A) $1,700
B) $3,500
C) $2,200
D) $100

7) All account values on the ________ are expressed as a percentage of total assets.
A) pro forma balance sheet
B) common-size income statement
C) statement of cash flows
D) common-size balance sheet

8) The quick ratio equals:

A) current assets divided by current liabilities.
B) cash on hand plus current liabilities, divided by current assets.
C) current liabilities divided by current assets, plus inventory.
D) current assets minus inventory, divided by current liabilities.

9) ________ ratios measure how efficiently a firm uses its assets to generate sales.
A) Asset management
B) Long-term solvency
C) Short-term solvency
D) Profitability

10) Burds Feed Store has sales of $22,400, net income of $3,600, net fixed assets of $18,700,
inventory of $2,800, and total current assets of $6,300. What is the common-size
statement
value of inventory?
A) 10.07%
B) 13.67%
C) 11.20%
D) 12.50%

11) You would be making a wise decision if you chose to:

A) base decisions regarding investments on effective rates and base decisions
regarding loans on annual percentage rates.
B) assume all loans and investments are based on simple interest.
C) accept the loan with the lower effective annual rate rather than the loan with the
lower annual percentage rate.
D) invest in an account paying 6 percent, compounded quarterly, rather than an
account paying 6 percent, compounded monthly.
 12) A preferred stock pays an annual dividend of $6.50 per share and has an annual rate of
return of 7.35 percent. What is the stock price?
A) $74.50
B) $71.78
C) $92.09
D) $88.44

13) A bond’s principal amount, which is repaid at the end of the loan term, is called the:
A) coupon.
B) face value.
C) maturity.
D) yield to maturity.

14) A_____ bond has a face value of $1,000 and a market price of $1,000.
A) par value
B) discount
C) premium
D) zero coupon

15) A corporate bond has a coupon of 7.5 percent and pays interest annually. The face value
is $1,000 and the current market price is $1,108.15. The bond matures in 14 years. What
is the yield to maturity?
A) 6.31%
B) 7.82%
C) 8.00%
D) 8.04%

16) Michael's, Incorporated, just paid $1.90 to its shareholders as the annual dividend.
Simultaneously, the company announced that future dividends will be increasing by 4.2
percent. If you require a rate of return of 8.5 percent, how much are you willing to pay
today to purchase one share of the company's stock?
A) $15.59
B) $46.04
C) $23.02
D) $47.94

17) A stock currently sells for $62. The dividend yield is 3.5 percent and the dividend growth
rate is 4.8 percent. What is the amount of the dividend that was just paid?
A) $1.95
B) $1.97
C) $2.17
D) $2.07

` 18) Voltanis Corporation has preferred stock outstanding that will pay an annual dividend of
$3.33 every year in perpetuity. If the stock currently sells for $95.59 per share, what is the
required return?
A) 3.98%
B) 3.48%
C) 3.26%
D) 3.14%
 19) Knightmare, Incorporated, will pay a dividend of $4.85, $8.95, and$12.15 per share for
each of the next three years, respectively. The company will then close its doors.
Investors require a return of 9.5 percent on the company's stock. What is the current
stock price?
A) $21.15
B) $24.41
C) $31.52
D) $26.29

20) The tax rates are as shown Tax Rate

below:

Taxable Income
$0 − 50,000 15%
50,001 − 75,000 25%
75,001 − 100,000 34%
100,001 − 335,000 39%

Your firm currently has taxable income of $81,500. How much additional tax will you owe
if you increase your taxable income by $22,700?

A) $7,718
B) $7,928
C) $7,538
D) $7,548

21) Your firm has net income of $245 on total sales of $1,080. Costs are $610 and
depreciation is $120. The tax rate is 30 percent. The firm does not have interest
expenses. What is the operating cash flow?

A) $595
B) $365
C) $245
D) $470

22) A firm wants a sustainable growth rate of 3.08 percent while maintaining a dividend payout
ratio of 26 percent and a profit margin of 5 percent. The firm has an equity multiplier ratio of
1.62. What is the debt–equity ratio that is required to achieve the firm's desired rate of growth?

A) .81times
B) .62 times
C) .38times
D) .19times

23) The primary goal of the financial management is ____________.

A) to maximize the return
B) to minimize the risk.
C) to maximize the wealth of owners.
D) all of the above

24) Present value takes ____________.

A). compounding rate.
B) discounting rate.
C) inflation rate.
D) deflation rate.
 25) ___________ are financial assets.
A) bonds
B) machines
C) stocks
D) A and C

26) Which one of the following terms is defined as the mixture of a firm's debt and equity financing?
A) Working capital management.
B) Cash management
C) Cost analysis
D) Capital structure

27) Which one of the following correctly defines the upward chain of command in a typical corporate
organizational structure?
A) The Chief Financial Officer reports to the Chairman of the board
B) The Chief Executive Officer reports to Vice Chairman of the board
C) The Controller reports to the Chief Executive Officer.
D) The Treasurer reports to the Chief Financial Officer

28) Which one of the following statements concerning a sole proprietorship is correct?
A) The life of a sole proprietorship is potentially unlimited.
B) A sole proprietor can generally raise large sums of capital quite easily.
C) Transferring ownership of a sole proprietorship is easier than transferring ownership of a
corporation.
D) A sole proprietorship is easier to create than a corporation.

29) You find the following financial information about a company: net working capital = $936; fixed
assets = $6,977; total assets = $11,526; and long-term debt = $4,251. What is the company's total
equity?

A) $8,179
B) $3,662
C) $6,662
D) $8,792

30) At the beginning of the year, Vendors, Incorporated, had owners' equity of $50,045. During the
year, net income was $6,325 and the company paid dividends of $4,345. The company also
repurchased $8,495 in equity. What was the cash flow to stockholders for the year?

A) $4,150
B) $12,840
C) −$4,150
D) $10,475
E) −$12,840

31) Red Barchetta Company paid $27,860 in dividends and $28,815 in interest over the past year.
During the year, net working capital increased from $13,698 to $18,419. The company purchased
$42,880 in fixed assets and had a depreciation expense of $17,165. During the year, the company
issued $25,200 in new equity and paid off $21,280 in long-term debt. What was the company's cash
flow from assets?

A) $52,755
 B) $46,279
C) $54,103
D) $53,152

32) Which of the following accounts are included in working capital management?

I) accounts payable
II) Accounts receivable
III) Fixed Assets
IV) Inventory"
A. I and II only
B. I and III only
C. II and IV only
D. I, II and IV only

33) You need to have $31,250 in 7 years. You can earn an annual interest rate of 4 percent for the
first 4 years, and 4.6 percent for the next 3 years. How much do you have to deposit today?

A) $23,341.12
B) $22,349.91
C) $23,207.23
D) $23,747.43

34) When your father was born 50 years ago, his grandparents deposited $250 in an account for
him. Today, that account is worth $11,000. What was the annual rate of return on this account?

A) 7.55 percent
B) 7.86 percent
C) 7.34 percent
D) 5.87 percent

35) Maxxie purchased a tract of land for $24,500. Today, the same land is worth $43,800. How many
years have passed if the price of the land has increased at an annual rate of 6.4 percent?

A) 9.36 years
B) 7.02 years
C) 8.32 years
D) 8.43 years

36) Your sister just deposited $11,500 into an investment account. She believes that she will earn
an annual return of 10 percent for the next 7 years. You believe that you will only be able to earn an
annual return of 9.2 percent over the same period. How much more must you deposit today in order to
have the same amount as your sister in 7 years?

A) $602.86
B) $1,716.33
C) $416.79
D) $562.67

37) An interest rate that is compounded monthly, but is expressed as if the rate were compounded
annually, is called the ________ rate.
 A) stated interest
B) compound interest
C) effective annual
D) periodic interest

38) An annuity is a stream of:

A) equal cash flows occurring at equal time periods during a fixed length of time.
B) equal cash flows occurring at equal time periods forever.
C) either equal or varying cash flows occurring at intervals of time for a fixed length of time.
D) increasing cash flows occurring at set intervals of time that go on forever.

39) Which one of the following is an agency cost?

A) accepting an investment opportunity that will add value to the firm

B) increasing the quarterly dividend
C) investing in a new project that creates firm value
D) hiring outside accountants to audit the company's financial statements

40) ________ annuities have payments that occur at the end of each period, whereas ________
annuities have payments that occur at the beginning of each period.

A) Ordinary annuities; annuities due

B) Delayed annuities; straight annuities
C) Straight annuities; delayed annuities
D) Annuities due; ordinary annuities