FIN 534 MIDTERM EXAM PART I
Which of the following statements is CORRECT
The New York Stock Exchange is an auction market with a physical location.
Capital market transactions involve only the purchase and sale of equity securities, i.e., common stocks.
If an investor sells shares of stock through a broker, then this would be a primary market transaction.
Consumer automobile loans are evidenced by legal documents called "promissory notes," and these individual notes are traded in the money market.
While the distinctions are blurring as investment banks are today buying commercial banks, and vice versa, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.
Question 2
Which of the following statements is CORRECT?
One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability.
It is generally easier to transfer one's ownership interest in a partnership than in a corporation.
One of the advantages of the corporate form of organization is that it avoids double taxation.
One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., "one person, one vote."
Corporations of all types are subject to the corporate income tax.
Question 3
Which of the following statements is CORRECT?
If expected inflation increases, interest rates are likely to increase.
If individuals in general increase the percentage of their income that they save, interest rates are likely to increase.
If companies have fewer good investment opportunities, interest rates are likely to increase.
Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities.
Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills.
Question 4
Which of the following statements is CORRECT?
In Europe and Asia hedge funds are legal, but they are not permitted to operate in the United States.
Hedge funds have more in common with commercial banks than with any other type of financial institution.
Hedge funds have more in common with investment banks than with any other type of financial institution.
In the United States hedge funds are legal, but in Europe and Asia they are not permitted to operate.
The justification for the "light" regulation of hedge funds is that only "sophisticated" investors with high net worths and high incomes are permitted to invest in these funds, and such investors supposedly can do the necessary "due diligence" on their own rather than have it done by the SEC or some other regulator.
Question 5
Which of the following statements is CORRECT?
While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.
A security whose value is derived from the price of some other "underlying" asset is called a liquid security.
Money market mutual funds usually invest most of their money in a well-diversified portfolio of liquid common stocks.
Money markets are markets for common stocks and long-term debt.
The NYSE operates as an auction market, whereas the Nasdaq is a dealer market.
Question 6
Which of the following statements is CORRECT?
If Apple issues additional shares of common stock through an investment banker, this would be a secondary market transaction.
If you purchased 100 shares of Apple stock from your sister-in-law, this would be an example of a primary market transaction.
The IPO market is a subset of the secondary market.
Only institutions, and not individuals, can participate in derivatives market transactions.
As they are generally defined, money market transactions involve debt securities with maturities of less than one yea
Question 7
Money markets are markets for
Foreign stocks.
Consumer automobile loans.
U.S. stocks.
Short-term debt securities.
Long-term bonds.
Question 8
You recently sold 200 shares of Apple stock to your brother. The transfer was made through a broker, and the trade occurred on the NYSE. This is an example of:
A futures market transaction.
A primary market transaction.
A secondary market transaction.
A money market transaction.
An over-the-counter market transaction.
Question 9
The LeMond Corporation just purchased a new production line. Assume that the firm planned to depreciate the equipment over 5 years on a straight-line basis, but Congress then passed a provision that requires the company to depreciate the equipment on a straight-line basis over 7 years. Other things held constant, which of the following will occur as a result of this Congressional action? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.
LeMond's tax liability for the year will be lower.
LeMond's taxable income will be lower.
LeMond's net fixed assets as shown on the balance sheet will be higher at the end of the year.
LeMond's cash position will improve (increase).
LeMond's reported net income after taxes for the year will be lower.
Question 10
Which of the following statements is CORRECT?
If a company pays more in dividends than it generates in net income, its retained earnings as reported on the balance sheet will decline from the previous year's balance.
Dividends paid reduce the net income that is reported on a company's income statement.
If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will cause a decline in its current assets as shown on the balance sheet.
If a company issues new long-term bonds during the current year, this will increase its reported current liabilities at the end of the year.
Accounts receivable are reported as a current liability on the balance sheet.
Question 11
Which of the following factors could explain why Regal Industrial Fixtures had a negative net cash flow last year, even though the cash on its balance sheet increased?
The company repurchased 20% of its common stock.
The company sold a new issue of bonds.
The company made a large investment in new plant and equipment.
The company paid a large dividend.
The company had high amortization expenses.
Question 12
Which of the following statements is CORRECT?
increased or decreased during a given year.the total of currency, bank deposits, and short-term liquid securities (or cash equivalents)The statement of cash flows shows how much the firm's cash
The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets.
The statement of cash flows shows where the firm's cash is located; indeed, it provides a listing of all banks and brokerage houses where cash is on deposit.
The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital.
The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock.
Question 13
Which of the following statements is CORRECT?
The maximum federal tax rate on personal income in 2010 was 50%.
Since companies can deduct dividends paid but not interest paid, our tax system favors the use of equity financing over debt financing, and this causes companies' debt ratios to be lower than they would be if interest and dividends were both deductible.
Interest paid to an individual is counted as income for tax purposes and taxed at the individual's regular tax rate, which in 2010 could go up to 35%, but dividends received were taxed at a maximum rate of 15%.
The maximum federal tax rate on corporate income in 2010 was 50%.
Corporations obtain capital for use in their operations by borrowing and by raising equity capital, either by selling new common stock or by retaining earnings. The cost of debt capital is the interest paid on the debt, and the cost of the equity is the dividends paid on the stock. Both of these costs are deductible from income when calculating income for tax purposes.
Question 14
Which of the following statements is CORRECT?
A typical industrial company's balance sheet lists the firm's assets that will be converted to cash first, and then goes on down to list the firm's longest lived assets last.
The balance sheet for a given year, say 2012, is designed to give us an idea of what happened to the firm during that year.
The balance sheet for a given year, say 2012, tells us how much money the company earned during that year.
The difference between the total assets reported on the balance sheet and the debts reported on this statement tells us the current market value of the stockholders' equity, assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP).
For most companies, the market value of the stock equals the book value of the stock as reported on the balance sheet.
Question 15
Which of the following statements is CORRECT?
The income statement for a given year, say 2012, is designed to give us an idea of how much the firm earned during that year.
The focal point of the income statement is the cash account, because that account cannot be manipulated by "accounting tricks."
The reported income of two otherwise identical firms cannot be manipulated by different accounting procedures provided the firms follow Generally Accepted Accounting Principles (GAAP).
The reported income of two otherwise identical firms must be identical if the firms are publicly owned, provided they follow procedures that are permitted by the Securities and Exchange Commission (SEC).
If a firm follows Generally Accepted Accounting Principles (GAAP), then its reported net income will be identical to its reported net cash flow.
Question 16
Which of the following statements is CORRECT?
The primary difference between EVA and accounting net income is that when net income is calculated, a deduction is made to account for the cost of common equity, whereas EVA represents net income before deducting the cost of the equity capital the firm uses.
MVA gives us an idea about how much value a firm's management has added during the last year.
MVA stands for market value added, and it is defined as follows:
MVA = (Shares outstanding)(Stock price) + Book value of common equity.
EVA stands for economic value added, and it is defined as follows:
EVA = EBIT(1 - T) - (Investor-supplied op. capital) x (A - T cost of capital).
EVA gives us an idea about how much value a firm's management has added over the firm's life.
Question 17
DeYoung Devices Inc., a new high-tech instrumentation firm, is building and equipping a new manufacturing facility. Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years. If the legislation becomes law, which of the following would occur in the year following the change?
The firm's reported net income would increase.
The firm's operating income (EBIT) would increase.
The firm's taxable income would increase.
The firm's net cash flow would increase.
The firm's tax payments would increase.
Question 18
Which of the following would, generally, indicate an improvement in a company's financial position, holding other things constant?
The total assets turnover decreases.
The TIE declines.
The DSO increases.
The EBITDA coverage ratio increases.
The current and quick ratios both decline.
Question 19
A firm's new president wants to strengthen the company's financial position. Which of the following actions would make it financially stronger?
Increase inventories while holding sales and cost of goods sold constant.
Increase accounts receivable while holding sales constant.
Increase EBIT while holding sales constant.
Increase accounts payable while holding sales constant.
Increase notes payable while holding sales constant.
2 points
Question 20
If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., "grading" the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant.
The division's DSO (days' sales outstanding) is 40, whereas the average for its competitors is 30.
The division's basic earning power ratio is above the average of other firms in its industry.
The division's total assets turnover ratio is below the average for other firms in its industry.
The division's debt ratio is above the average for other firms in the industry.
The division's inventory turnover is 6, whereas the average for its competitors is 8.
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Question 21
Arshadi Corp.'s sales last year were $52,000, and its total assets were $22,000. What was its total assets turnover ratio (TATO)?
2.03
2.13
2.25
2.36
2.48
Question 22
Which of the following statements is CORRECT?
If a firm increases its sales and cost of goods sold while holding its inventories constant, then, other things held constant, its inventory turnover ratio will decrease.
A reduction in inventories held would have no effect on the current ratio.
An increase in inventories would have no effect on the current ratio.
If a firm increases its sales and cost of goods sold while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.
A reduction in the inventory turnover ratio will generally lead to an increase in the ROE.
Question 23
Which of the following statements is CORRECT?
All else equal, increasing the debt ratio will increase the ROA.
The use of debt financing will tend to lower the basic earning power ratio, other things held constant.
A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure.
If two firms have identical sales, interest rates paid, operating costs, and assets, but differ in the way they are financed, the firm with less debt will generally have the higher expected ROE.
Holding bonds is better than holding stock for investors because income from bonds is taxed on a more favorable basis than income from stock.
2 points
Question 24
If a bank loan officer were considering a company's request for a loan, which of the following statements would you consider to be CORRECT?
Other things held constant, the lower the current ratio, the lower the interest rate the bank would charge the firm.
The lower the company's EBITDA coverage ratio, other things held constant, the lower the interest rate the bank would charge the firm.
Other things held constant, the higher the debt ratio, the lower the interest rate the bank would charge the firm.
Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge the firm.
The lower the company's TIE ratio, other things held constant, the lower the interest rate the bank would charge the firm.
Question 25
Companies Heidee and Leaudy are virtually identical in that they are both profitable, and they have the same total assets (TA), Sales (S), return on assets (ROA), and profit margin (PM). However, Company Heidee has the higher debt ratio. Which of the following statements is CORRECT?
Company Heidee has a lower operating income (EBIT) than Company LD.
Company Heidee has a lower total assets turnover than Company Leaudy.
Company Heidee has a lower equity multiplier than Company Leaudy.
Company Heidee has a higher fixed assets turnover than Company Leaudy.
Company Heidee has a higher ROE than Company Leaudy.
USA 
India