Final Exam

Please submit your final exam answers through your Assignments Folder. Create a word document that contains your numbered answers to the exam. There is no need to retype the questions. Number your answers to correspond with the exam. You will then submit the file through the Assignment Folder in the WebTycho classroom. Alternatively, you may type your answers directly in the Text area of the Create Assignment window (within the Assignment Folder). With either method please clearly mark your exam answers with your name.

1) Which of the following forms of business organization has the greatest ability to attract new capital?

A) sole proprietorship

B) general partnership

C) corporation

D) none of the above

2) Which of the following forms of business organizations provide limited liability to all its owners?

A) limited partnership

B) general partnership

C) corporation

D) both B and C

3) Which of the following best describes the goal of the firm?

A) the maximization of the total market value of the firm’s common stock

B) risk minimization

C) profit maximization

D) All of the above are equally important.

4) Which of the following categories of owners have limited liability?

A) sole proprietors

B) shareholders of a corporation

C) general partners

D) both A and B

5) Which of the following applies to minimize the disruptions to the continuation of business in a general partnership?

A) the partnership can be extended only through the courts of law.

B) there is no way to accomplish this; that is, the partnership dies when the partner dies or retires, or withdraws.

C) No continuation is possible upon the death of a partner, but only forcases of withdrawal of a partner, and hence is rarely practiced.

D) the partnership can be extended through procedures specified in the partnership agreement.

6) If an investor is said to be “risk averse” then that investor

A) is not behaving in a typical manner.

B) will only take on the least risk possible.

C) will only take on additional risk if they expect to be compensated in the form of additional return.

D) will not be induced to take on any risk.

7) Maximization of shareholder wealth as a goal is superior to profit maximization because

A) it considers the time value of the money.

B) following the goal of shareholder wealth maximization will ensure high stock prices.

C) it considers uncertainty.

D) A and C

8) Which of the following is an advantage of the sole proprietorship?

A) easily transferred ownership

B) limited liability for its owners

C) no significant legal requirements for starting the business

D) double taxation for its owners

9) Which of the following is considered an advantage of the corporate form of business organization?

A) limited liability of owners

B) ability to raise large amounts of capital

C) ease of transferring ownership

D) all of the above

E) none of the above

10) Capital market transactions include which of the following?

A) common stock of a public corporation

B) all securities that are purchased in the open market

C) any security that is purchased from a brokerage firm that is well capitalized

D) U.S. Treasury bills

E) all of the above

11) The costs associated with issuing securities to the public can be high. Some types of securities have greater expenses associated with them than others. Which of the following is the most costly security to issue?

A) corporate bonds

B) preferred stock

C) common stock

D) All of the above are about equal in cost to issue.

12) When an investment-banking firm “underwrites” an issue of securities, the firm is performing which of the following?

A) offering to purchase the securities from the firm, thereby assuming the risk of resale to investors

B) giving legal advice to the firm that is issuing the securities

C) agreeing to provide insurance that the firm’s securities will sell for a price that is established by the firm

D) agreeing to market the securities to investors for a fee

13) Which of the following refers to all institutions and procedures that provide for transactions in short-term debt instruments generally issued by borrowers with very high credit ratings?

A) commercial banks

B) capital market

C) stock market

D) money market

14) Which of the following is an advantage of a private placement?

A) Every issue is standardized, thus it is more efficient.

B) It is slower, thus it is a less risky process.

C) Greater fees for the investment bankers.

D) None of the above are true.

15) The majority of public offerings of securities must be registered with the Securities and Exchange Commission, a costly and time consuming process. Which of the following methods allows corporations with the ability to “speed up” the registration process?

A) File a secondary offering.

B) Offer a privileged subscription.

C) File a shelf registration.

D) Offer an underwriting.

16) Which of the following does require registration with the SEC?

A) issues sold entirely intrastate

B) public utility and railroad issues

C) public issues with proceeds of more than $1.5 million annually

D) issues with a maturity of 270 days or less

E) All of the above must be registered with the SEC.

17) Which of the following is not a benefit provided by the existence of organized security exchanges?

A) establishing and publicizing fair security prices

B) helping businesses raise new capital

C) standardization of all debt agreements

D) providing a continuous market

18) Which of the below does not belong on the asset side of a balance sheet?

A) accounts receivable

B) accruals

C) cash

D) accumulated depreciation

19) Which of the below belongs in the liability section of a balance sheet?

A) accumulated depreciation

B) interest expense

C) accounts payable

D) preferred stock

20) Which of the below belongs on the asset side of a balance sheet?

A) common stock

B) accruals

C) accounts receivable

D) depreciation expense

21) Which of the following best describes free cash flow from an asset perspective?

A) cash flows generated from accruals and accounts payable

B) earnings before interest and taxes

C) cash available to common stockholders that have no cost to the firm

D) the after-tax cash flows generated from operations less the firm’s investments in operating working capital, fixed and other assets

22) What information does a firm’s statement of cash flows provide to the viewing public?

A) a report of revenues and expenses for a defined period of time

B) a complete listing of all of a firm’s cash receipts and cash expenditures for a defined period of time

C) an itemization of all of a firm’s assets, liabilities, and equity for a defined period of, time

D) a report of investments made and their cost for a specific period of time

23) Corporations are allowed to deduct specific expenses for income tax purposes. Several of these expenditures are deductible but they are not cash expenses. Which of the following is not a cash expenditure but is still deductible for income tax purposes?

A) depreciation expense

B) marketing expenses

C) wages and salaries

D) payroll tax payments

24) A Cash Flow Statement can be used to answer a variety of questions. Which of the following would this statement not be likely to answer?

A) Why was money borrowed?

B) Where did profits go?

C) How was the retirement of debt accomplished?

D) What is the current level of inventory?

25) Which of the following ratios would be the best way to determine how customers are paying for their purchases?

A) total asset turnover

B) average collection period

C) current ratio

D) inventory turnover

26) You are an investor and you want to achieve the highest possible return on your money. Which would be best for you to do, everything else equal?

A) Set aside funds on a semi-annual basis to make investments.

B) Set aside funds on a monthly basis to make investments.

C) Set aside funds on a quarterly basis to make investments.

D) Set aside funds on an annual basis to make investments.

E) All of the above will result in the same return.

27) The time value of money is created by

A) the fact that the value of saving money for tomorrow could be more or less than spending it today.

B) the existence of profitable investment alternatives and positive interest rates.

C) the elimination of the opportunity cost as a consideration.

D) the fact that the passing of time increases the value of money.

28) Which of the following has a beta of one?

A) a risk-free asset

B) All assets have a beta greater than one.

C) the market

D) All assets have a beta less than one.

29) Which of the following has a beta of zero?

A) a risk-free asset

B) All assets have a beta greater than zero.

C) the market

D) none of the above

30) The appropriate measure for risk according to the capital asset pricing model is

A) the coefficient of variation of a firm’s cash flows.

B) the standard deviation of a firm’s cash flows.

C) alpha.

D) none of the above

31) What is diversifying among different kinds of assets known as?

A) capital asset classification

B) portfolio funding

C) multi-diversification

D) asset allocation

32) Which of the following statements is true?

A) All bonds have equal interest rate risk.

B) Short-term bonds have greater interest rate risk than do long-tenn bonds.

C) Long-term bonds have greater interest rate risk than do short-tenn bonds.

D) none of the above

33) As interest rates, and consequently investors’ required rates of return, change over time, the _______________ of outstanding bonds will change as a result.

A) coupon interest payment

B) maturity date

C) price

D) par value

34) If market interest rates decline

A) short-term bonds will decline in value more than long-term bonds.

B) long-term bonds will rise in value more than short-term bonds.

C) short-term bonds will rise in value more than long-term bonds.

D) long-term bonds will decline in value more than short-term bonds.

35) A bond will sell at a discount (below par value) if

A) current market interest rates are moving in the same direction as bond values.

B) the market value of the bond is less than the present value of the discount rate of the bond.

C) investors’ required rate of return is above the coupon rate of the bond.

D) the economy is booming.

36) If a corporation were to choose between issuing a debenture, a mortgage bond, or a subordinated debenture, which would have the highest yield to maturity, everything else equal?

A) the mortgage bond

B) the subordinated debenture

C) the debenture

D) All of the above types of bonds would have the same coupon rate.

37) All of the following affect the value of a share of common stock except

A) the par value of stock.

B) the future dividends.

C) the future growth in dividends.

D) investors’ required rate of return.

38) Many preferred stocks have a provision that entitles a company to repurchase its preferred stock from their holders at stated prices over a given time period. What is the name of this provision?

A) Callable

B) Cumulative

C) Portable

D) Convertible

39) What provision entitles the common shareholder to maintain a proportionate share of ownership in a firm?

A) the cumulative feature

B) the preemptive right

C) the proxy

D) the convertible feature

40) How is preferred stock affected by a decrease in the required rate of return?

A) the dividend increases

B) the value of a share of preferred stock decreases

C) the dividend decreases

D) none of the above

41) Preferred stock is similar to a bond in the following way

A) preferred stock always contains a maturity date.

B) both provide interest payments.

C) both contain a growth factor similar to common stock.

D) both investments provide a stated income stream.

42) A significant advantage of the payback period is that it

A) tends to reduce firm risk because it favors projects that generate early, less uncertain returns.

B) gives proper weighting to all cash flows.

C) places emphasis on time value of money.

D) allows for the proper ranking of projects.

43) Incremental cash flows refer to

A) the cash flows of a project, minus financing costs.

B) the new cash flows that will be generated if a project is undertaken.

C) the cash flows that are foregone if a firm does not undertake a project.

D) the difference between after-tax cash flows and before-tax accounting profits.

44) What method is used for calculation of the accounting beta?

A) sensitivity analysis

B) regression analysis

C) simulation

D) both A and C

45) Market Value Added is

A) the additional value received for a firm’s common stock once the firm is listed on the NYSE.

B) stockholder’s required rate of return that is based upon the market value of a firm’s common stock relative to the book value of a firm’s common stock.

C) the difference in the current market value of a firm and the sum of all the funds that have been invested in the firm over its entire operating life.

D) market value of a firm’s common stock, plus the book value of its common stock.

46) Which of the following would be considered a variable cost in a manufacturing setting?

A) direct labor

B) administrative salaries

C) insurance

D) rent

E) all of the above

47) A high degree of variability in a firm’s earnings before interest and taxes refers to

A) financial risk.

B) financial leverage.

C) operating leverage.

D) business risk.

48) The true owners of the corporation are the

A) board of directors of the firm.

B) preferred stockholders.

C) common stockholders.

D) holders of debt issues of the firm.

49) A firm’s “sustainable rate of growth” is positively affected by

A) a decrease in a firm’s operating profit margin.

B) an increase in a firm’s spontaneous sources of funds.

C) a decrease in a firm’s ROE.

D) an increase in a firm’s dividend payout ratio.

50) All of the following are typical benefits of stock repurchases except

A) an approach for modifying the firm’s capital structure.

B) reduction in the firm’s costs associated with servicing small stockholders.

C) a means for providing an internal investment opportunity.

D) preservation of cash to be used for dividends.