Review Questions

Here are a few sample questions to consider in your preparation for the first exam. Some of the questions are linked to solutions.

1. The goal of profit maximization is equivalent to the goal of maximization of share value.

T
F

A link to a notebook with the review question answers will appear here after the questions have been covered in class.

 

2.  The financial manager should examine available risk-return trade-offs and make a decision based upon the greatest expected return.

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F

A link to a notebook with the review question answers will appear here after the questions have been covered in class.

 

3. A disadvantage of partnerships is the double taxation faced by the partners.

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F

A link to a notebook with the review question answers will appear here after the questions have been covered in class.

 

4.  Financial markets exist in order to allocate savings in the economy to the demanders of those savings.

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F

A link to a notebook with the review question answers will appear here after the questions have been covered in class.

 

5.  Financing through common stock is the most popular method for corporations.

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F

A link to a notebook with the review question answers will appear here after the questions have been covered in class.

 

6.  The U.S. tax system inherently favors debt as a means of raising capital.

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F

A link to a notebook with the review question answers will appear here after the questions have been covered in class.

 

7.  If the real rate of interest is 4.5 percent and the inflation rate is expected to be 3 percent, what is the expected nominal rate of interest?

a.  21%
b.  13.5%
c.  7.6%
d.  7.5%

A link to a notebook with the review question answers will appear here after the questions have been covered in class.

 

8.  Which sector of the U.S. economy is the largest supplier of funds?

a.  US Government
b.  Corporations
c.  State and Local Governments
d.  Households
e.  None of the above

A link to a notebook with the review question answers will appear here after the questions have been covered in class.

 

9.  A balance sheet is a statement of the financial position of the firm on a given date, including its asset holdings, liabilities, and equity.

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F

A link to a notebook with the review question answers will appear here after the questions have been covered in class.

 

 

 

Table 2
Smith Company
Balance Sheet

Assets:
Cash and marketable securities $ 300,000
Accounts receivable 2,215,000
Inventories 1,837,500
Prepaid expenses 24,000
Total current assets $3,286,500
Fixed assets 2,700,000
Less: accumulated depreciation 1,087,500
Net fixed assets $1,612,500
Total assets $4,899,000
Liabilities:
Accounts payable $ 240,000
Notes payable 825,000
Accrued taxes 42,500
Total current liabilities $1,107,000
Long-term debt 975,000
Owner's equity 2,817,000
Total liabilities and owner's equity $4,899,000
Net sales (all credit) $6,375,000
Less: Cost of goods sold 4,312,500
Selling and administrative expense 1,387,500
Depreciation expense 135,000
Interest expense 127,000
Earnings before taxes $ 412,500
Income taxes 225,000
Net income $ 187,500
Common stock dividends $ 97,500
Change in retained earnings $ 90,000

10.  Based on the information in Table 2, the net profit margin is:

a. 4.61%
b. 2.94%
c. 1.97%
d. 5.33%

A link to a notebook with the review question answers will appear here after the questions have been covered in class.

 

11. Which of the statements below are true?

a. The sole proprietorship and the general partnership both feature unlimited liability.
b. It is legally more complicated to establish a corporation.
c. No legal criterion exists for a general partnership.
d. All of the above are true.

A link to a notebook with the review question answers will appear here after the questions have been covered in class.

 

12.  Goodwin Enterprises had a gross profit of $2,500,000 for the year. Operating expenses and interest expense incurred in that same year were $595,000 and $362,000, respectively. Goodwin had 200,000 shares of common stock and 180,000 shares of preferred stock outstanding. Management declared a $2.50 dividend per share on the common and a $1.50 dividend per share on the preferred. Securities purchased at a cost of $37,500 in a previous year were resold at a price of $50,500. Compute the taxable income and the resulting tax liability for Goodwin Enterprises for the year.

Use the following tax rates:

Income Tax rate
0-$50,000 15%
50,001-$75,000 25%
75,001-$100,000 34%
$100,001-$335,000 39%
over $335,001 34%

A link to a notebook with the review question answers will appear here after the questions have been covered in class.

 

13. The present value of the future sum of money is inversely related to both the number of years until the payment is received and the opportunity rate.

T
F

A link to a notebook with the review question answers will appear here after the questions have been covered in class.


14.  You are considering two investments. Call them A and B. Both investments provide a cash flow of $1 per year for n years. However, investment A receives the cash flow at the beginning of each year, while investment B receives the cash at the end of each year. If the present value of cash flows from investment A is pva, and the discount rate is r, what is the present value pvb of the cash flows from investment B?

a. pvb = pva/(1+r)
b. pvb = pva (1+r)
c. pvb = pva/(1+r)n
d. pvb = pva (1+r)n

15.  Bobby's grandmother deposited $100 in a savings account for him when he was born. The money has been earning an annual rate of 12% interest, compounded quarterly for the last twenty five years. He is getting married and would like to take his new bride on a fabulous honeymoon. How much does he have in this account to use?

a. $4,165
b. $1,700
c. $5,051
d. $1,922

16.  You have just received an endowment of $32,976. You plan to put the entire amount in an account earning 8 percent compounded annually and to withdraw $4000 at the end of each year. How many years can you continue to make the withdrawals?

 

17.  You are going to pay $1,200 into an account at the beginning of each year for 20 years. The account will then be left to compound for an additional 20 years. At the end of the 41st year you will begin receiving a perpetuity from the account. If the account pays 14% then how much will you receive from the perpetuity each year?

 

18. So long as a bond sells for an amount above its par value, the coupon interest rate and yield to maturity remain equal. 


F

 

19. BCD's $1,000 par value bonds currently sell for $798.50. The coupon rate is 10 percent, paid semi-annually. If the bonds have five years before maturity, what is the yield to maturity or expected rate of return?

20. Bond H matures in one hundred years, pays $100 per year interest, and has a face value of $1,000. Calculate the value and the duration of the bond using an interest rate of 10%. If the interest rate drops to 9% then what is the bond value, bond duration, and the percentage change in price?

 

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