Mid-Term Exam Student 1. A potential future negative impact to value and/or cash flows is ofien discussed in terms of probability of loss and the expected magnitude of the loss. This is called: A. options B, standard deviation. C. coefficient of variation. D. tisk. 2. The practice generally known as double taxation is due to: A. shareholders’ dividends being taxed at both the federal and state levels. B. corporate income being taxed at both the federal and state levels. C. interest on shareholders’ dividends being taxed as income. D. corporate incomes being taxed at the corporate level, then again at the shareholder level when corporate profits are paid out as dividends. 3. For corporations, maximizing the value of owner's equity can also be stated as: A. maximizing retained earnings. B, maximizing earnings per share. C. maximizing net income D. maximizing the stock price. 4. An angel investor differs from a venture capitalist because of the: A. type of investment. B. investment time frame. C. size of investment. D. voting rights. 5. Which financial statement reports the amounts of cash that the firm generated and distributed during a particular time period? A. Balance sheet B. Income statement C. Statement of retained Eamings D, Statement of cash Flows6. For which of the following would one expect the book value of the asset to differ widely from its market value? A. Cash B. Accounts receivable C. Inventory D. Fixed assets 7. When a firm alters its capital structure to include more or less debt (and, in tum, less or more equity), it impacts which of the following? A. The residual cash flows available for stock holders B. The number of shares of stock outstanding C. The earnings per share (EPS) D. All of the choices 8. This is cash flow available for payments to stockholders and debt holders of a firm after the firm has made investments in assets necessary to sustain the ongoing operations of the firm. ‘A. Net income available to common stockholders B, Cash flow from operations C. Net cash flow D. Free cash flow 9. Which statement is true? A. The less liquid assets a firm holds, the less likely it is that the firm will experience financial distress. B, The lower the liquidity ratios, the less liquidity risk a firm has. C. Liquid assets generate profits for the firm. D. Extremely high levels of liquidity guard against liquidity crises, but at the cost of lower returns on assets. 10. Which of these statements is true? A. The age of a firm's cash will affect the current ratio level B, The age of a firm's accounts receivable will affect the current ratio level. C. The age of a firm's fixed assets will affect the fixed asset turnover ratio level. D. The age of a firm's fixed assets will affect the current ratio level. 11. For publicly traded firms, which of these ratios measure what investors think of the company’s future performance and risk? A. Liquidity ratios B. Market value ratios C. Price value ratios D. Profitability ratios r12, Which of the following is the maximum growth rate that can be achieved by financing asset growth with new debt and retained earnings? A. Internal growth rate B. Retained earnings growth rate C. Sustainable growth rate D. Weighted growth rate 13, How are present values affected by changes in interest rates? A. The lower the interest rate, the larger the present value will be. B. The higher the interest rate, the larger the present value will be. C. Present values are not affected by changes in interest rates, D. One would need to know the future value in order to determine the impact. 14, How are future values affected by changes in interest rates? A. The lower the interest rate, the larger the future value will be. B. The higher the interest rate, the larger the future value will be C. Future values are not affected by changes in interest rates, D. One would need to know the present Value in order to determine the impact. 15, The Rule of 72 is a simple mathematical approximation for: A. the present value required to double an investment, B. the future value required to double an investment. C. the payments required to double an investment. D. the number of years required to double an investment. 16. The longer money can earn interest, A. the greater the interest earned on the original deposit exceeds the interest-on-interest BB. the greater the compounding effect. C. the greater the present value must be to reach a financial goal. D. the greater the risk to the investor of not reaching a financial goal. 17. When calculating the number of years needed to grow an investment to a specific amount of money: A. the lower the interest rate, the shorter the time period needed to achieve the growth, B. the higher the interest rate, the shorter the time period needed to achieve the growth, C. the interest rate has nothing to do with the length of the time period needed to achieve the growth. D. the Rule of 72 is the only way to calculate the time period needed to achieve the growth.18. The present value of annuity payments made far into the future is: A. worth very little today. B, worth much more today. C. valued as having no time value of money. D. valued as worthless as their value is not determinable. 19. A perpetuity, a special form of annuity, pays cash flows: A. and is not effected by interest rate changes. B. that do not have time value of money implications C. continuously for one year. D. periodically forever 20. Many people who want to start investing for their future want to start today, which implies an annuity stream that is paid at the beginning of the period. Beginning-of-period cash flows are referred to as: A. ordinary annuities. B. annuities due. C. perpetuities. D. present values. 21. The simple form of an annualized interest rate is called the annual percentage rate (APR). The effective annual rate (EAR) is a: A. less accurate measure of the interest rate paid for monthly compounding B. more accurate measure of the interest rate paid for monthly compounding. C. concept that is only used because the law requires it, and is of no use to a borrower, D. measure that only applies to mortgages. 22. Compounding monthly versus annually causes the interest rate to be effectively higher, and thus the future value: A. grows. B. decreases. C. is independent of the monthly compounding. D. is affected only if the calculation involves an annuity due. 23. Which of these provide a forum in which demanders of funds raise funds by issuing new financial instruments, such as stocks and bonds? A. Investment banks B. Money markets C. Primary markets D. Secondary markets i24. Once firms issue financial instruments in primary markets, these same stocks and bonds are then traded in which of these? A. Initial public offerings B, Direct transfers C. Secondary markets D. Over-the-counter stocks 25. According to this theory of term structure of interest rates, at any given point in time, the yield curve reflects the market's current expectations of future short-term rates. A. Expectations theory B. Future short-term rates theory C. Term structure of interest rates theory D. Unbiased expectations theory 26. Which of these is the expected or "implied” rate on a short-term security that will originate at some point in the future? A. Current yield B, Forward rate C. Spot rate D. Yield to maturity 27. What is computed by dividing the amount of assets tied directly to sales (4*) by the amount of current sales (Si)? A. Capital intensity ratio B, Current ratio C. Quick ratio D. Spontaneous assets 28. Which of the following is the amount of external financing a firm must seek in order to change the asset base as necessary to support a different level of sales? A. Additional funds needed B. Capital intensity r C. Current ratio D. Spontaneous assets29, Which of the following are considered "chunky" or "lumpy" assets? A. Total assets B. Current assets C. Fixed assets D, Additional funds needed (AFN) 30. Which statement is most correct regarding how pro forma financial statements can be used to estimate additional funds needed? A. Pro forma statements can be used to iteratively refine the amount of additional funds needed. B. Pro forma statements are less precise than other methods for determining additional funds needed. C. Pro forma statements take into account changes in cost of goods sold that other methods of determining additional funds needed ignore. D. Pro forma statements take into account dividend payments that other methods of determining additional funds needed ignore. oPart 2: Problems — You only have to do 5 problems. Everyone with do problems | and 6 and you can choose between problems 2 and 3, choose between problems 4 and 5, and choose between problems 7 and 8 1. Chapter 2 Problem 28 2. Chapter3 Problem 26 3. Chapter3_ Problem 27 4. Chapter 4 Problem 17 5. Chapter4 Problem 266. Chapter 5 Problem 21 7. Chapter}6 Problem 8 8. Chapter 6 Problem 9 Part 3: Essay Questions Everyone must write on question 6 and you can choose 4 out of the other 5 questions. 1. Carefully explain the relationship between the balance sheet, income statement and the statement of cash flow. 2. What is the firm’s major goal? Why? How can the agency problem potentially conflict with meeting the major goal?3. What is the difference between the internal growth rate and the sustainable growth rate. Carefully explain why the sustainable growth rate can be easily distorted. 4. Carefully explain the relationship between future value and present value in relationship to time and interest. 5. Discuss and compare the three explanations for the yield curve. Which one is preferable? Why? 6. Compare and contrast the use of pro forma statements in corporate financial planning with their use in accounting. What lies behind pro forma so you do not get “garbage in and garbage out”.