# Bu 340 exam 1, 3, 5 and 7

BU 340 EXAM 1, 3, 5 AND 7

EXAM 1

__________ addresses the question of how to handle our day-to-day business needs.

A. Capital budgeting

B. Capital structure

C. Working capital management

D. Accounts receivable management

A __________ is a business that is jointly owned by two or more individuals.

A. partnership

B. sole proprietorship

C. subchapter S corporation

D. corporation

Capital budgeting is best defined by which of the following questions?

A. How will we fund our product and service choices?

B. What business are we in?

C. How will we manage our day-to-day financial needs?

D. What is our firm’s best choice for corporate governance?

Of the following, which is NOT one of the four main areas of finance?

A. International Finance

B. Corporate Finance

C. Investments

D. All are considered main areas of finance.

The movement of money from lender to borrower and back again is known as:

A. the circle of life.

B. corporate finance.

C. the cycle of money.

D. money laundering.

The form of business organization in the United States that has the greatest amount of capital is:

A. the sole proprietorship.

B. the partnership.

C. the subchapter corporation.

D. the publicly traded corporation.

Financial assets that will mature within a year are bought and sold in the __________ market.

A. debt

B. capital

C. stock

D. money

Currencies are bought and sold in __________ markets.

A. equity

B. debt

C. derivatives

D. foreign exchange

Capital structure is best defined by which of the following questions?

A. How will we fund our product and service choices?

B. What business are we in?

C. How will we manage our day-to-day financial needs?

D. What is our firm’s best choice for corporate governance?

In agency theory, the owners of the business are referred to as __________, and the managers are referred to as __________.

A. bondholders, principals

B. stockholders, bondholders

C. agents, principals

D. principals, agents

__________ is the area of finance concerned with the activities of buying and selling financial assets such as stocks and bonds.

A. Investments

B. Corporate finance

C. International finance

D. Financial markets and institutions

The sale of “new” securities, where the financial asset is being traded for the very first time, is said to take place in the __________ market.

A. primary

B. money

C. secondary

D. capital

“Concern with the multinational elements of financial activities” best describes which of the four main areas of finance?

A. Investments

B. International finance

C. Corporate finance

D. Financial institutions and markets

Which of the following best identifies the four main areas of finance?

A. Exchange rate management, investments, financial institutions and markets, international

B. Corporate, investments, capital structure, international

C. Corporate, investments, financial institutions and markets, international

D. Corporate, capital budgeting, financial institutions and markets, regulation

Which of the following is an advantage of a sole proprietorship?

A. The owner’s unlimited liability

B. The lack of continuity upon death of the owner

C. The ease of start-up

D. The ability to raise capital

Stocks are bought and sold in __________ markets.

A. equity

B. debt

C. derivatives

D. foreign exchange

The problem of motivating one party to act in the best interest of another party is known as the:

A. leadership directive.

B. management priority.

C. principal-agent problem.

D. sigma six structure.

The set of financial activities that support the OPERATIONS of a business is best described by which main area of finance?

A. Corporate finance

B. Investments

C. Financial institutions and markets

D. International finance

__________ are the forums where buyers and sellers of financial assets and commodities meet.

A. Housing markets

B. Federal Reserve banks

C. Financial markets

D. Automotive shows

__________ addresses the question of what business we should be in over the long run.

A. Capital budgeting

B. Capital structure

C. Working capital management

D. Accounts receivable management

EXAM 3

Average U.S. wages in 1990 were $28,960, far larger than the average wage in 1930 of $1,970. What was the average annual increase in wages over this 60-year period?

A. 3.31%

B. 2.45%

C. 24.50%

D. 4.58%

You won the state lottery and took the payout as a $1,283,475 lump sum today. Your spouse has decided that you need to invest this money for the next 10 years and can expect it to earn an average annual rate of return of 7.18%. If this comes to pass, how much money will be in the account at the end of the period?

A. $8,471,253

B. $2,567,586

C. $1,920,388

D. $1,890,471

Which of the following investments has a larger future value? A $100 investment earning 10% per year for 5 years, or a $100 investment earning 5% per year for 10 years?

A. An investment of $100 invested at 10% per year for 5 years because it has a future value of $161.05.

B. An investment of $100 invested at 10% per year for 5 years because it has a future value of $162.89.

C. An investment of $100 invested at 5% per year for 10 years because it has a future value of $161.05.

D. An investment of $100 invested at 5% per year for 10 years because it has a future value of $162.89.

Dan Preston made $18,000 in the first movie he ever starred in. Dan soon made more and more movies and more and more money. At a 46.18% rate of salary increase per movie, how many movies did Dan make in order to earn $5,350,000 in a single movie?

A. 84 movies

B. 34 movies

C. 22 movies

D. 15 movies

In 1975, the era of major league baseball free agency began. The average player salary was $16,000. In 1980, the average salary was $30,000. What was the average annual growth in the minimum salary in major league baseball over those five years?

A. 37.50%

B. 13.40%

C. 5.92%

D. 10.67%

Your production manager informs you that currently the firm is producing 1,438 heating units per month but has plans to increase production at a rate of 5% per month until the firm is producing 3,000 units per month. How many months will this take?

A. 27.33 months

B. 15.07 months

C. 14 months

D. There is not enough information to answer this question.

A two-year investment of $200 is made today at an annual interest rate of 6%. Which of the following statements is true?

A. The future value would be greater if the interest rate was higher.

B. The present value would be greater if the interest rate was higher.

C. The future value would be greater if the interest rate was lower.

D. The future value does not change as the interest rate changes.

Rory has $2,500 but needs $5,000 to purchase a new golf cart. If he can invest his money at a rate of 12% per year, approximately how many years will it take the money in Rory’s account to grow to $5,000? Use the Rule of 72 to determine your answer.

Note: The golf cart’s price may have changed by the time Rory’s account reaches a value of $5,000.

A. 2 years

B. 4 years

C. 6 years

D. 8 years

If you can earn 5.25% per year on your investments, how long will it take to double your money?

A. 6.31 years

B. 19.05 years

C. 13.55 years

D. There is not enough information to answer this question.

__________ is simply the interest earned in subsequent periods on the interest earned in prior periods.

A. Quoted interest

B. Anticipated interest

C. Simple interest

D. Compound interest

You can invest your money at a rate of 7% per year. At this rate it will take you just over __________ years to double your money. Use the Rule of 72 to determine your answer.

A. 4

B. 10

C. 5.5

D. There is not enough information to answer this question.

Which of the following will result in a future value greater than $100?

A. PV = $50, r = an annual interest rate of 10%, and n = 8 years.

B. PV = $75, r = an annual interest rate of 12%, and n = 3 years.

C. PV = $90, r = an annual interest rate of 14%, and n = 1 year.

D. All of the future values are greater than $100.

The one-time payment of money at a future date is often called a:

A. lump-sum payment.

B. present value.

C. principal amount.

D. perpetuity payment.

Which of the following actions will increase the present value of an investment?

A. Decrease the interest rate.

B. Decrease the future value.

C. Increase the amount of time.

D. All of the above will increase the present value.

An investment promises a payoff of $195 two and one-half years from today. At a discount rate of 7.5% per year, what is the present value of this investment?

A. $162.03

B. $162.75

C. $169.47

D. There is not enough information to answer this question.

The question, “How much will I have in my account at a specific point in the future, given a specific interest rate?” is best answered by which form of the TVM equation?

A.

B.

FV = PV × (1 + r)n

C.

FV = (FV/PV)1/n – 1

D.

You could double your money in about 9 years if you could earn an annual rate of return of what? Use the Rule of 72 to determine your answer.

A. You would need to earn an annual rate of return of about 12%.

B. You would need to earn an annual rate of return of about 10%.

C. You would need to earn an annual rate of return of about 8%.

D. There is not enough information to answer this question.

A $100 deposit today that earns an annual interest rate of 10% is worth how much at the end of two years? Assume all interest received at the end of the first year is reinvested the second year.

A. $100

B. $120

C. $121

D. $122

Your aunt places $13,000 into an account earning an interest rate of 7% per year. After 5 years the account will be valued at $18,233.17. Which of the following statements is correct?

A. The present value is $13,000, the time period is 7 years, the present value is $18,233.17, and the interest rate is 5%.

B. The future value is $13,000, the time period is 5 years, the principal is $18,233.17, and the interest rate is 7%.

C. The principal is $13,000, the time period is 5 years, the future value is $18,233.17, and the interest rate is 7%.

D. The principal is $13,000, the time period is 7 years, the future value is $18,233.17, and the interest rate is 5%.

Which of the following is the correct formula for calculating the future value?

A.

B.

FV = PV × (1 + r)n

C.

PV = FV × (1 + r)n

D.

EXAM 5

If you borrow $100,000 at an annual rate of 8% for a 10-year period and repay with 10 equal annual end-of-the-year payments of $14,902.95, then you have just repaid what type of loan?

A. Amortized loan

B. Interest-only loan

C. Discount loan

D. Compound loan

Given the following cash flows, what is the future value at Year 6 when compounded at an interest rate of 8%?

Year 0 2 4 6

Cash Flow $5,000 $7,000 $9,000 $11,000

A. $38,955.39

B. $56,687.43

C. $42,074.42

D. $32,000

What is the future value in Year 25 of an ordinary annuity cash flow of $2,000 per year at an interest rate of 10% per year?

A. $66,505.81

B. $55,000.00

C. $196,694.12

D. $216,363.53

A/An __________ is a series of cash flows at regular intervals across time.

A. annuity

B. annuity due

C. perpetuity due

D. None of the above

An annuity is a series of:

A. variable cash payments at regular intervals across time.

B. equal cash payments at regular intervals across time.

C. variable cash payments at different intervals across time.

D. equal cash payments at different intervals across time.

If you borrow $100,000 at an annual rate of 8% for a 10-year period and repay the interest of $8,000 at the end of each year prior to maturity and the final payment of $108,000 at the end of 10 years, then you have just repaid what type of loan?

A. Amortized loan

B. Interest-only loan

C. Discount loan

D. Compound loan

If for the next 40 years you place $3,000 in equal year-end deposits into an account earning 8% per year, how much money will be in the account at the end of that time period?

A. $120,000.00

B. $777,169.56

C. $839,343.12

D. $2,606,942.58

Your firm intends to finance the purchase of a new construction crane. The cost is $1,500,000. How large is the payment at the end of Year 10 if the crane is financed at a rate of 8.50% as a discount loan?

A. $228,611.56

B. $127,500

C. $3,391,475.16

D. There is not enough information to answer this question.

The furniture store offers you no-money-down on a new set of living room furniture. Further, you may pay for the furniture in three equal annual end-of-the-year payments of $1,000 each with the first payment to be made one year from today. If the discount rate is 6%, what is the present value of the furniture payments?

A. $3,183.60

B. $3,000

C. $2,833.39

D. $2,673.01

The main variables of the TVM equation are:

A. present value, future value, time, interest rate, and payment.

B. present value, future value, perpetuity, interest rate, and payment.

C. present value, future value, time, annuity, and interest rate.

D. present value, future value, perpetuity, interest rate, and principal.

What is the present value of a stream of annual end-of-the-year annuity cash flows if the discount rate is 0%, and the cash flows of $50 last for 20 years?

A. Less than $1,000

B. Exactly $1,000

C. More than $1,000

D. This question cannot be answered because we have an interest rate of 0%.

When you pay off the principal and all of the interest at one time at the maturity date of the loan, we call this type of loan a(n):

A. amortized loan.

B. interest-only loan.

C. discount loan.

D. compound loan.

Randy W. recently won the Western States Lottery of $6,500,000. The lottery pays either a total of twenty $325,000 payments per year with the first payment today (i.e., an annuity due), or $3,500,000 today. At what interest rate would Randy be financially indifferent between these two payout choices?

A. 5.37%

B. 7.36%

C. 7.76%

D. 8.00%

What type of loan makes interest payments throughout the life of the loan and then pays the principal and final interest payment at the maturity date?

A. Amortized loan

B. Interest-only loan

C. Discount loan

D. Compound loan

Present value calculations do which of the following?

A. Compound all future cash flows into the future

B. Compound all future cash flows back to the present

C. Discount all future cash flows back to the present

D. Discount all future cash flows into the future

You have just won the Reader’s Digest lottery of $5,000 per year for 20 years, with the first payment today followed by 19 more start-of-the-year cash flows. At an interest rate of 5%, what is the present value of your winnings?

A. $100,000

B. $65,426.60

C. $62,311.05

D. $47,641.18

Your firm intends to finance the purchase of a new construction crane. The cost is $1,500,000. What is the size of the first payment if the crane is financed with an interest-only loan at an annual rate of 8.50%?

A. $228,611.56

B. $127,500

C. $3,391,475.16

D. There is not enough information to answer this question.

You currently have $67,000 in an interest-earning account. From this account, you wish to make 20 year-end payments of $5,000 each. What annual rate of return must you make on this account to meet your objective?

A. 4.16%

B. 5.03%

C. 6.42%

D. 7.32%

What is the future value in Year 12 of an ordinary annuity cash flow of $6,000 per year at an interest rate of 4% per year?

A. $90,154.83

B. $93,761.02

C. $28,675.97

D. $32,117.08

EXAM 7

The __________ is a market derived interest rate used to discount the future cash flows of the bond.

A. coupon rate

B. semiannual coupon rate

C. yield to maturity

D. compound rate

The four steps to determining the price of a bond are:

A. determine the amount and timing of the present cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and add the PVs of the principal and coupons.

B. determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the future value of the lump-sum principal and the annuity stream of coupons, and add the FVs of the principal and coupons.-WRONG

C. determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and multiply the PVs of the principal and coupons.

D. determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and add the PVs of the principal and coupons.

From 1980 to 2006, the default risk premium differential between Aaa-rated bonds and Aa-rated bonds has averaged between:

A. 50 to 150 basis points.

B. 90 to 190 basis points.

C. 120 to 220 basis points.

D. 250 to 350 basis points (not 100% sure it is either C or D.)

Which of the following is NOT an example of a bond that contains an option feature?

A. Callable bond

B. Putable bond

C. Convertible bond

D. The above are all examples of bonds with option features.

Espresso Petroleum Inc. has a contractual option to buy back, prior to maturity, bonds the firm issued five years ago. This is an example of what type of bond?

A. Putable bond

B. Callable bond

C. Convertible bond

D. Junior bond

The __________ is the yield an individual would receive if the individual purchased the bond today and held the bond to the end of its life.

A. current yield

B. yield to maturity

C. prime rate

D. coupon rate

Most U.S. corporate and government bonds choose to make __________ coupon payments.

A. annual

B. semiannual

C. quarterly

D. monthly

The __________ is the return the bondholder receives on the bond if held to maturity.

A. coupon

B. coupon rate

C. yield to maturity

D. par rate

Which of the following types of bonds may the issuer buy back before maturity?

A. Callable bond

B. Putable bond

C. Convertible bond

D. Zero-coupon bond

When the __________ is less than the yield to maturity, the bond sells at a/the __________ the par value.

A. coupon rate; premium over

B. coupon rate; discount to

C. time to maturity; discount to

D. time to maturity; same price as

The __________ is the interest rate printed on the bond.

A. coupon rate

B. semiannual coupon rate

C. yield to maturity

D. compound rate

Which of the following statements about the relationship between yield to maturity and bond prices is false?

A. When the yield to maturity and coupon rate are the same, the bond is called a par value bond.

B. A bond selling at a premium means that the coupon rate is greater than the yield to maturity.

C. When interest rates go up, bond prices go up.

D. A bond selling at a discount means that the coupon rate is less than the yield to maturity.

The __________ is the regular interest payment of the bond.

A. dividend

B. par

C. coupon rate

D. coupon

With a bearer bond, whoever held it was entitled to the __________ and the __________.

A. interest payments; principal

B. dividend payments; principal

C. interest payments; dividend payments

D. interest payments; voting rights

Bonds are sometimes called __________ securities because they pay set amounts on specific future dates.

A. variable-income

B. fixed-income

C. bully

D. real

__________ are always unsecured bonds.

A. Mortgage bonds

B. Debentures

C. Callable bonds

D. Junior debt bonds

When real property is used as collateral for a bond, it is termed a/an:

A. debenture.

B. mortgaged security.

C. indenture.

D. senior bond.

The difference between the price and the par value of a zero-coupon bond represents:

A. taxes payable by the bond buyer.

B. the accumulated principal over the life of the bond.

C. the bond premium.

D. the accumulated interest over the life of the bond.

“Junk” bonds are a street name for __________ grade bonds.

A. investment

B. speculative

C. extremely speculative

D. speculative and investment

A bond is a __________ instrument by which a borrower of funds agrees to pay back the funds with interest on specific dates in the future.

A. long-term equity

B. long-term debt

C. short-term debt

D. short-term equity

You can think of the __________ as the “used stock” market because these shares have been owned or “used” previously.

A. secondary market

B. primary market

C. NYSE market

D. initial public offering market

Which of the statements below is true?

A. The profits for common stock owners come after payment to the employees, suppliers, government, and creditors.

B. Shareholders elect the board of directors, which ultimately selects the bondholder team that runs the day-to-day operations of the company.

C. Stock is a minor financing source for public companies.

D. Stockholders are paid before debtholders (bondholders) if a company fails.

__________ has to do with the speed and accuracy of processing a buy or sell order at the best available price.

A. Market efficiency

B. Mechanical efficiency

C. Informational efficiency

D. Operational efficiency

Which of the following statements is true?

A. The dealers of stock are not allowed to make money on the difference between what they buy the stock for and what they sell it for.

B. A bear market is a prolonged rising market, one in which stock prices in general are increasing.

C. The ask price is the price at which a dealer is willing to sell, and the bid price is the price at which a dealer is willing to buy.

D. A bull market is a prolonged declining market, one in which stock prices in general are decreasing.

The dividend model requires that a firm has a cash dividend history and that the dividend history shows a:

A. constant dividend or a constant growth in price where constant growth can be either positive or negative.

B. positive dividend or a negative growth in dividends.

C. constant dividend or a positive growth in dividends.

D. constant price or a positive growth in dividends.

You buy a stock for which you expect to receive an annual dividend of $2.10 for the 15 years that you plan on holding it. After 15 years, you expect to sell the stock for 32.25. What is the present value of a share for this company if you want a 10% return?

A. $7.72

B. $15.97

C. $23.69

D. $31.41

Which of the statements below is FALSE?

A. If an investor purchases 20% of the initial issue of the company, the investor then owns 20% of the company, given the one vote/one share norm.

B. After an initial offering, the company can sell more shares to the public at a later date. If the investor who originally purchased 20% does not purchase 20% of the subsequent issue, his or her ownership is diluted below 20%.

C. A preemptive right enables one to maintain one’s proportional level of ownership.

D. A preemptive right is never particularly valuable to shareholders with large ownership percentages.

Dividend models suggest that the value of a financial asset is determined by future cash flows. A problem arises, however, in that future cash flows may be difficult to predict as to __________ of these cash flows.

A. both the timing and the amount

B. the timing but not the amount

C. the amount but not the timing

D. neither the timing nor the amount

The __________ are quite dynamic in terms of processing trades and incorporating information in prices and thus are considered very efficient markets.

A. domestic bond markets

B. equity markets

C. fixed income markets

D. foreign bond markets

The hiring process for an investment banker can happen in two ways. Which of the below is one of these ways?

A. Randomly choose an investment banking firm from a list of underwriting firms.

B. Pick a desirable investment banking firm, usually basing the choice on the reputation and history of the banker in its particular industry.

C. Have the primary government regulator of your industry choose the best investment banking firm for your company.

D. Solicit advice from a government agency and use it as your primary guide in choosing an investment banker.

Shortcomings of the dividend pricing models suggest that we need a pricing model that is more inclusive than the dividend models and provides expected returns for companies based on aspects besides their historical dividend patterns. Which of the below is NOT one of these aspects?

A. The company’s risk

B. The premium for taking on risk

C. The reward for waiting

D. Stable dividends

What if the company goes out of business in 15 years and thus pays an annual dividend of $2.10 for only those 15 years? What is the present value of a share for this company if we want a 10% return on the stock?

A. $15.97

B. $16.97

C. $17.97

D. $18.97 WRONG

__________ means that the percentage increase in the dividend is the same each year.

A. Constant growth

B. Inconsistent growth

C. No growth

D. A constant cash flow

Which of the statements below is true?

A. A problem with using the dividend growth model is that it appears to underestimate the expected return for all stocks.

B. A problem with using the dividend growth model is that it produces a negative expected return whenever a firm cuts dividends.

C. A problem with using the dividend growth model is that it produces a positive expected return whenever a firm cuts dividends.

D. A problem with using the dividend growth model is that it produces a negative expected return whenever a firm increases its dividends.

If we know the dividend stream, the future price of the stock, the future selling date of the stock, and the required return, we can price stocks just as we priced:

A. annuities.

B. perpetuities.

C. bonds.

D. preferred stocks.

Which of the statements below is FALSE?

A. The profits for common stock owners come before payment to employees, suppliers, government, and creditors.

B. Shareholders elect the board of directors, which ultimately selects the management team that runs the day-to-day operations of the company.

C. Stock is a major financing source for public companies.

D. Common stock’s ownership claim on the assets and cash flow of a company is often referred to as a residual claim.

You want to invest in a stock that pays $6 annual cash dividends for the next five years. At the end of the five years, you will sell the stock for $30. If you want to earn 10% on this investment, what is a fair price for this stock if you buy it today?

A. $41.37

B. $40.37

C. $22.75

D. $18.63

Which of the statements below is FALSE? Answer: D

A. The dividend model requires that a firm have a cash dividend history and that the dividend history shows a constant dividend or a positive growth in dividends.

B. A problem with using the dividend growth model is that it appears to underestimate the expected return for some stocks.

C. A problem with using the dividend growth model is that it produces a negative expected return whenever a firm cuts its dividends.

D. A problem with using the dividend growth model is that it appears to underestimate the expected return for all stocks.

There are two typical ways to alter the one vote/one share standard. One way is:

A. to have companies buy back nonvoting common stock.

B. to not have companies pay dividends.

C. to have companies issue classes of stock whereby one or more classes have super voting rights.

D. to not have companies issue bonds.

ALL ANSWER IS 100% CORRECT