Midterm Exam Answer

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Midterm Exam

 

1. Uptown Markets is financed with 45 percent debt and 55 percent equity. This mixture of debt and equity is referred to as the firm’s:

 

capital budget.

capital structure.

working capital.

asset allocation.

risk structure.

 

2.    The goal of financial management is to increase the:

 

book value of equity.

current market value per share.

future value of the firm’s total equity.

number of shares outstanding.

dividends paid per share.

 

 

3.   A sole proprietorship:

involves significant legal costs during the formation process.

can generally raise significant capital from non-owner sources.

provides limited financial liability for its owner.

has its profits taxed as personal income.

has an unlimited life.

 

 

4.  Which one of the following statements is correct?

All secondary markets are dealer markets.

All stock transactions are secondary market transactions.

All stock trades between existing shareholders are primary market transactions.

All over-the-counter sales occur in dealer markets.

All secondary markets are broker markets.

 

 

5.  Which one of the following statements correctly applies to a sole proprietorship?

The ownership can easily be transferred to another individual.

The owner enjoys limited liability for the firm’s debts.

Obtaining additional equity is dependent on the owner’s personal finances.

Debt financing is easy to arrange in the firm’s name.

The business entity has an unlimited life.

 

 

6.  Dixie’s sales for the year were $1,678,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $1,141,000, $304,000, and $143,000, respectively. In addition, the company had an interest expense of $74,000 and a tax rate of 34 percent. What is the operating cash flow for the year?

$217,700

$223,330

$271,420

$285,400

$227,560

 

7.    
Cash flow from assets is defined as:

operating cash flow plus net capital spending plus the change in net working capital.

operating cash flow plus the cash flow to creditors plus the cash flow to shareholders.

operating cash flow minus the change in net working capital minus net capital spending.

cash flow to shareholders minus net capital spending plus the change in net working capital.

the cash flow to shareholders minus the cash flow to creditors.

 

 

8.  The financial statement that summarizes a firm’s accounting value as of a particular date is called the:

income statement.

liquidity position.

balance sheet.

periodic operating statement.

cash flow statement.

 

 

9. Gino’s Winery has net working capital of $29,800, net fixed assets of $64,800, current liabilities of $34,700, and long-term debt of $23,000. What is the value of the owners’ equity?

$106,300

$36,900

$89,400

$71,600

$66,700

 

 

 

10.   Andersen’s Nursery has sales of $318,400, costs of $199,400, depreciation expense of $28,600, interest expense of $1,100, and a tax rate of 35 percent. The firm paid out $23,400 in dividends. What is the addition to retained earnings?

$37,208

$44,141

$40,615

$36,909

$34,645

 

 

11.   A firm can increase its sustainable rate of growth by decreasing its:

target debt-equity ratio.

dividends.

profit margin.

total asset turnover.

equity multiplier.

 

 

12.   Gorilla Movers has sales of $645,560, cost of goods sold of $425,890, depreciation of $32,450, and interest expense of $12,500. The tax rate is 30 percent. What is the times interest earned ratio?

14.98

2.75

12.75

6.25

11.63

 

 

13.  Outdoor Gear reduced its general and administrative costs this year. This cost improvement will increase which of the following ratios?

I. Profit margin
II. Return on assets
III. Total asset turnover
IV. Return on equity

 

I and II only

I and III only

II, III, and IV only

I, II, and IV only

 

 

14.  A firm has a current ratio of 1.4 and a quick ratio of .9. Given this, you know for certain that the firm:

has positive net working capital.

has more current liabilities than it does current assets.

pays cash for its inventory.

has more than half its current assets invested in inventory.

has more cash than inventory.

 

 

15.    The DuPont identity can be accurately defined as:

Equity multiplier × Return on assets × Profit margin.

Equity multiplier × Return on assets.

Total asset turnover × Profit margin × Debt-equity ratio.

Profit margin × Return on equity.

Return on equity × Total asset turnover × Equity multiplier.

 

 

16  Kendall is investing $3,333 today at 3 percent annual interest for three years. Which one of the following will increase the future value of that amount?

Increasing the interest rate

Shortening the investment time period

Paying interest only at the end of the investment period rather than throughout the investment period

Paying interest only on the principal amount

Paying simple interest rather than compound interest

 

17.  Western Bank pays 5 percent simple interest on its savings account balances, whereas Eastern Bank pays 5 percent compounded annually. If you deposited $6,000 in each bank, how much more money would you earn from the Eastern Bank account at the end of 3 years?

$60.47

$50.14

$45.75

$40.09

$55.84

 

18.  You are due to receive a lump-sum payment of $1,350 in four years and an additional lump-sum payment of $1,450 in five years. Assuming a discount rate of 2.0 percent interest, what would be the value of the payments today?

$2,560.50

$2,536.05

$2,205.50

$2,586.77

$2,663.31

 

 

19.  South Central Bank pays 2.5 percent interest, compounded annually, on its savings accounts. Northern Bank pays 2.5 percent simple interest on its savings accounts. You want to deposit sufficient funds today so that you will have $1,500 in your account 2 years from today. The amount you must deposit today:

is the same regardless of which bank you choose because they both pay the same rate of interest.

is the same regardless of which bank you choose because they both pay simple interest.

will be greater if you invest with South Central Bank.

will be greater if you invest with Northern Bank.

is the same regardless of which bank you choose because the time period is the same for both banks.

 

 

20. 

Your grandparents just gave you a gift of $3,000. You are investing this money at 3 percent simple interest. How much money will you have at the end of the 10 years?

 

$4,031.75

$3,450

$3,270

$3,900

$3.090

 

 

21.  City Loans wants to earn an effective annual return on its consumer loans of 18.9 percent per year. The bank applies daily compounding. What interest rate is the firm required by law to report to potential borrowers?

18.90 percent

17.86 percent

17.47 percent

17.32 percent

16.39 percent

 

 

22  Sheet Metals has an outstanding loan that calls for equal annual payments of $12,600.47 over the life of the loan. The original loan amount was $72,000 at an APR of 8.15 percent. How much of the third loan payment is interest?

$5,868.00

$4,725.89

$4,687.53

$5,009.16 

$4,896.48

 

 

23  Today, you are purchasing a 10-year, 4.8 percent annuity at a cost of $50,000. The annuity will pay annual payments starting one year from today. What is the amount of each payment?

$6,412.49

$13,189.57

$6,874.70

$6,679.71

$13,619.19

 

 

24.  Which one of the following is an ordinary annuity, but not a perpetuity?

$25 paid weekly for 1 year, starting one week from today

$50 paid every year for ten years, starting today

$75 paid at the beginning of each monthly period for 50 years

$40 paid quarterly for 5 years, starting today

$15 paid at the end of each monthly period for an infinite period of time

 

 

25. Forni’s Furniture is offering a bedroom suite for $2,700. The credit terms are 60 months at $73.00 per month. What is the interest rate on this offer?

20.05 percent

21.75 percent

1.75 percent

19.26 percent

20.97 percent

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Midterm Exam Answers

 

1. Uptown Markets is financed with 45 percent debt and 55 percent equity. This mixture of debt and equity is referred to as the firm’s:

 

capital budget.

capital structure.

working capital.

asset allocation.

risk structure.

 

Answer: capital structure.

This question is taken from BUSAD 131 – Introduction to Finance » Spring 2022 » Exams