FIN202 MID-TERM REVISION QUESTIONS

SEMESTER 1, 2014
1.The primary objective of the firm is:
a. Shareholder wealth maximization
b. Social responsibility
c. Long run survival
d. Profit maximization
ANS: A
2.The shareholder wealth maximization goal states that management should seek to maximize the ____ of the
expected future returns to the owners of the firm.
a. Future value
b. Compound value
c. Percentage value
d. Present value
ANS: D
3.The objective of maximizing shareholder wealth, as measured by the market value of the firm's stock
a. does not consider the timing of the benefits received
b. provides a way to consider the risk of the returns being offered
c. benefits only certain stockholders
d. neither considers the timing of the benefits received nor benefits only certain stockholders
ANS: B
4. The ____ the risk of receiving future cash flows, the ____ will be the present value of those cash flows.
a. greater, greater
b. greater, lower
c. lower, lower
d. lower, greater
ANS: B
5.The primary reason for the divergence between the shareholder wealth maximization goal and the actual goals
pursued by management has been attributed to
a. separation of social responsibility and stakeholders' concerns
b. separation of ownership and control
c. separation of personal welfare and long-run profit goals
d. the granting of "golden parachute" contracts
ANS: B
6.Agency costs include all of the following except:
a. expenditures to monitor management's actions
b. providing stock as part of management's compensation
c. flotation costs
d. bonding expenditures
ANS: C
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7.Financial management draws heavily on the following related disciplines:

a. accounting
b. macroeconomics
c. microeconomics
d. all of the above
ANS: D
8.The major factors that determine the market value of a company's shares of stock include the ____.
a. risk of its cash flows
b. timing of its cash flows
c. book value of its assets
d. risk of its cash flows and the timing of its cash flows
ANS: D
9. There is often a divergence between the shareholder wealth maximization goal and the actual goals
pursued by management. The primary reason for this is ____.
a. geographical dispersion of shareholders
b. separation of ownership and control
c. age differences between managers and shareholders
d. that both have their own agendas
ANS: B
10.A major advantage of the corporate form of business over both sole proprietorships and partnerships is the
a. limited liability
b. reduction in taxes
c. ease of formation
d. ability to maintain ownership
ANS: A
11.Corporate securities represent claims against the
a. corporate officers of the firm
b. agents of the corporation
c. liabilities and net worth of the firm
d. assets and future earnings of the firm
ANS: D
12. The advantages of the corporate form of organization over both sole proprietorships and partnerships
include ____.
a. limited liability
b. permanency
c. limited liability and permanency
d. lower tax rates
ANS: C

13.As a result of accounting scandals, several methods have been developed to deal with the issues of corporate
governance. They are all of the following EXCEPT:
a. The Board must select only SEC approved consultants.
b. Chairman of the Board position should be split from the CEO position.
c. Board of Directors should have a majority of independent directors.
d. The Board of Directors must explain its approach for adopting a code of ethics for the
CEO and senior financial officers.
ANS: A
14.A corporation that operates ethically will notice certain benefits as it applies to shareholder wealth
maximization. With shareholder wealth maximization in mind, all of the following could be experienced
by an ethical corporation EXCEPT:
a. The corporation can expect to have reduced litigation expense.
b. The cooperation can expect to have greater agency costs.
c. The corporation can expect to have reduced damages expenses.
d. The corporation can expect to have a more favorable impression by customers and
investors.
ANS: B
15.A multinational firm ____.
a. has direct investments in manufacturing facilities in more than one country
b. exports finished goods for sale in another country
c. imports raw materials from another country
d. has a manufacturing representative in another country
ANS: A
16.Financial middlemen include
a. securities brokers
b. securities dealers
c. investment bankers
d. all of the above
ANS: D
17.Financial intermediaries include
a. securities brokers
b. commercial banks
c. securities dealers
d. all of the above
ANS: B
18.____ markets deal in short-term securities having maturities of one year or less.
a. Credit
b. Money
c. Capital
d. Capital and credit
ANS: B

19.Which of the following (if any) are not financial intermediaries?

a. commercial bank
b. thrift institution
c. securities broker
d. all are financial intermediaries
ANS: C
20.In any economy as a whole, the actual savings for a given period of time must ____ the actual investments.
a. be greater than
b. be unrelated to
c. equal
d. be less than
ANS: C
21.The main purpose of an economy's financial system is to facilitate the transfer of funds from
a. financial middlemen to financial intermediaries
b. surplus spending units to deficit spending units
c. primary claimholders to secondary claimholders
d. lenders to financial intermediaries
ANS: B
22.In an efficient capital market, all security investments will have:
a. a required rate of return that exceeds the cost of capital
b. a positive NPV
c. a required rate of return that is zero
d. a NPV of zero
ANS: D
23. The present value of a single amount can be represented as
a. PV0 = FVn(PVIFi,n)
b. PV0 = FVn(PVIFAi,n)
c. PV0 = FVn[1/(1 + i)n]
d. a and c
ANS: D
24.The process of finding present values is frequently called
a. annualizing
b. compounding
c. discounting
d. leasing
ANS: C
25.Finding the discounted current value of $1,000 to be received at the end of each of the next 5 years requires
calculating the
a. future value of an annuity
b. future value of an annuity due
c. present value of an annuity
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d. present value of an annuity due

ANS: C
26.An annuity due is one in which
a. payments or receipts occur at the end of each period.
b. payments or receipts occur at the beginning of each period.
c. payments or receipts occur forever.
d. cash flows occur continuously.
ANS: B
27. You have just calculated the present value of the expected cash flows of a potential investment.
Management thinks your figures are too low. Which of the following actions would improve the present
value of your cash flows?
a. extend the cash flows over a longer period of time
b. increase the discount rate
c. decrease the discount rate
d. extend the cash flows over a longer period of time, and decrease the discount rate
ANS: D
28.The effective rate of interest will always be ____ the nominal rate.
a. greater than
b. equal to
c. less than
d. equal to or greater than
ANS: D
29.Annuity due calculations are most common when dealing with:
a. cash dividends
b. loan repayments
c. lease contracts
d. interest payments
ANS: C
30.Determine how much $1,000 deposited in a savings account paying 8% (compounded annually) will be worth
after 5 years.
a. $5,526
b. $ 784
c. $1,400
d. $1,469
ANS: D
31. Mr. Moore is 35 years old today and is beginning to plan for his retirement. He wants to set aside an equal
amount at the end of each of the next 25 years so that he can retire at age 60. He expects to live to the
maximum age of 80 and wants to be able to withdraw $25,000 per year from the account on his 61st
through 80th birthdays. The account is expected to earn 10 percent per annum for the entire period of
time. Determine the size of the annual deposits that must be made by Mr. Moore.
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a.
b.
c.
d.

$212,850
$23,449
$2,164
$8,514

ANS: C
32.Air Atlantic (AA) has been offered a 3-year old jet airliner under a 12-year lease arrangement. The lease
requires AA to make annual lease payments of $500,000 at the beginning of each of the next 12 years.
Determine the present value of the lease payments if the opportunity cost of funds is 14 percent.
a. $2,830,000
b. $13,635,500
c. $6,000,000
d. $3,226,200
ANS: D
33.If you invest $10,000 in a 4-year certificate of deposit (CD) paying 10 percent interest compounded annually,
determine how much the CD will be worth at the end of 4 years.
a. $13,600
b. $45,730
c. $14,640
d. $15,958
ANS: C
34.BB&C bank has agreed to lend you $30,000 today, but you must repay $42,135 in 3 years. What rate is the
bank charging you?
a. 10%
b. 11%
c. 12%
d. 13%
ANS: C
35.Jane wants to have $200,000 in an account in 20 years. If her account earns 11 percent per annum over the
accumulation period, how much must she save per year (end of year) to have the $200,000?
a. $25,116
b. $3,115
c. $10,000
d. $3,492
ANS: B
36. An insurance company offers you an end of year annuity of $48,000 per year for the next 20 years. They
claim your return on the annuity is 9 percent. What should you be willing to pay today for this annuity?
a. $429,600
b. $438,144
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c. $408,672
d. $398,144
ANS: B
37.Your firm, New Sunrise, has just leased a $28,000 BMW for you. The lease requires six beginning of the year
payments that will fully amortize the cost of the car. What is the amount of the payments if the interest
rate is 12 percent?
a. $6,810.99
b. $7,766.99
c. $6,423.74
d. $6,081.25
ANS: D
38.In six years, your daughter will be going to college. You wish to have a fund that will provide her $10,000 per
year (end of year) for each of her four years in college. How much must you put into that fund today if the
fund will earn 10 percent in each of the 10 years?
a. $29,744.65
b. $29,783.76
c. $17,878.80
d. $21,651.10
ANS: C
39.Five years after an accident, you received $100,000 to pay the medical expenses incurred at the time of the
accident. What is the present value (at the time of the accident) of the payment? Assume interest rates are
9%.
a. $153,900
b. $ 68,100
c. $ 65,000
d. $ 70,800
ANS: C
40.What is the most you should pay to receive the following cash flows if your required rate of return is 12
percent?
Year 1
Year 2
Year 3
Year 4-10
a.
b.
c.
d.

$5,000
$8,000
$12,000
$15,000

$58,580
$104,135
$68,105
$40,000

ANS: C
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41.John borrowed $20,000 to finance his college education. If the finance charge on the loan is 6 percent, and he
will pay off the loan in 10 equal, annual, end of year payments, how much total interest will he pay?
a. $7,173.90
b. $2,717.39
c. $12,000.00
d. $25,924.23
ANS: A
42.You just purchased a new $25,000 car and agreed to pay for the car in 50 monthly payments. If the monthly
interest rate is 1 percent, what is your total financing cost?
a. $637.82
b. $12,500
c. $574.25
d. $6,891
ANS: D
43.The Summer Breeze Hotel borrowed $100,000 from the Meadowlands Bank to pay for a new air conditioning
system. The loan is for a period of 5 years at an interest rate of 10% and requires 5 equal end-of-year
payments that include both principal and interest on the outstanding balance. What will be the outstanding
balance after the third payment?
a. $60,000
b. $20,865
c. $45,788
d. $50,866
ANS: C
44.The ____ the investor's required rate of return on a bond, the ____ will be the value of the bond to the
investor.
a. lower, higher
b. higher, higher
c. lower, lower
d. higher, lower
ANS: A
45.Normally the coupon rates on new bonds
a. do not change over the life of the issue
b. are set equal to the market rate plus an inflation premium
c. float with changes in the prime rate
d. are set just over the prevailing prime rate
ANS: A

PTS:

46.There is a(n) ____ relationship between the value of a bond and its required rate of return.
a. direct
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b. distant
c. inverse
d. turgid
ANS: C
47. The basic relationship in bond valuation is for a given percentage point change in the required rate of
return, the ____ the time to maturity, the ____ the change in value.
a. shorter, greater
b. longer, smaller
c. longer, greater
d. shorter, smaller
ANS: C

PTS

48.Preferred stock has a priority over common stock with regard to the company's
a. assets
b. voting rights
c. dividends
d. assets and dividends
ANS: D

PTS:

49.A zero coupon bond is a bond that

a. originally sold at a discount
b. will sell for a premium
c. is a premium value bond
d. has a high current yield
ANS: A

PTS:

50.The State of Adaven issued $50 million of perpetual bonds in 1990. The bonds were issued in $100
denominations with an annual coupon interest rate of 5%. Determine the value of these bonds today to an
investor who requires a 10% return on his investment.
a. $25
b. $5
c. $10
d. $50
ANS: D
51.Two-years ago, Trans-Atlantic Airlines sold a $250 million bond issue to finance the purchase of new jet
airliners. These bonds were issued in $1000 denominations with an original maturity of 12 years and a
coupon rate of 12%. Determine the value today of one of these bonds to an investor who requires a 14%
rate of return on these securities.
a. $626
b. $463
c. $897
d. $270
ANS: C

52.Assume that the dividend on Central Power Company's $3.25 preferred stock issue is paid annually at the end
of the year. Determine the value of this preferred stock to an investor who requires a 12 percent rate of
return.
a. $3.25
b. $39
c. $12
d. $27.08
ANS: D
53.Five years ago, the City of Baltimore sold at par a $1,000 bond with a coupon rate of 8 percent and 20 years
to maturity. If this bond pays interest semiannually, what is the value of this bond to an investor who
requires an 8 percent rate of return?
a. $607.72
b. $692.00
c. $1,000
d. $1,080
ANS: C
54.Which of the following is not a characteristic of common stock:
a. has no maturity date
b. considered a permanent form of long-term financing
c. has claims on assets prior to those of preferred stock
d. is a residual form of ownership
ANS: C
56.Common stockholders have a number of general rights, including all of the following except:
a. voting rights
b. management rights
c. asset rights
d. dividend rights
ANS: B
57.Which of the following is not an advantage of common stock financing?
a. no fixed dividend obligation
b. can lower the firm's weighted cost of capital
c. allows the firm a greater degree of flexibility in financial planning
d. involves relatively high flotation costs
ANS: D
58.In the constant-growth dividend valuation model, the required rate of return must be ____ the dividend
growth rate in order for the formula price to be meaningful.
a. less than
b. equal to
c. greater than
d. proportional to
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ANS: C
59.The valuation of common stock is considerably more complicated than the valuation of bonds or preferred
stocks because:
a. The returns can take two forms, i.e. annual cash payments and price appreciation
b. Common stock dividends are normally expected to grow and not remain constant
c. The returns from common stocks are generally larger and more certain than the returns
from bonds and preferred stocks
d. The returns can be in annual cash payments or price appreciation, and they are normally
expected to grow and not remain constant
ANS: D
60.From an accounting standpoint, stock dividends involve a transfer from the
a. common stock account
b. cash account
c. retained earnings account
d. capital surplus account
ANS: C
61.The returns investors receive from holding common stocks may be in two forms. They are
a. cash dividend payments and capital gains
b. future earnings and treasury stock
c. stock splits and stock dividends
d. cash dividends and stock dividends
ANS: A
62.The zero growth dividend valuation model is used when a firm's future dividends are expected to remain
constant,
a. so the value of the firm should also remain constant
b. so the required rate of return should also remain constant
c. and the firm can not be valued
d. forever
ANS: D
63.In the constant growth dividend valuation model, the required rate of return on a common stock is equal to the
sum of the ____.
a. capital gains yield and cost of capital
b. present value yield and dividend yield
c. cost of capital and dividend yield
d. capital gains yield and dividend yield
ANS: D
64. What is the value of a share of stock of HOV Inc. to an investor who requires a 12 percent rate of return if
HOV's current dividend is $1.20? Assume earnings and dividends are expected to grow at a compound
annual rate of 7 percent.
a. $24.00
b. $18.34
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c. $25.68
d. $19.62
ANS: C
65.The current price of Zebar is $32.00 and the current dividend is $.60. What is an investor's required rate of
return on Zebar if dividends are expected to grow perpetually at a compound annual rate of 8 percent?
a. 9.88%
b. 11.38%
c. 18.75%
d. 10.03%
ANS: D
66.Fast Wheels, Inc. expects to pay an annual dividend of $0.72 next year. Dividends have been growing at a
compound annual rate of 6 percent and are expected to continue growing at that rate. What is the value of
a share of stock of Fast Wheels to an investor who requires a 14 percent rate of return?
a. $9.00
b. $5.14
c. $9.54
d. $8.16
ANS: A
67.Zero-Sum Enterprise expects to pay an annual dividend of $0.48 next year. Dividends and earnings have been
growing at a compound annual rate of 8 percent and are expected to continue growing at that rate. What is
an investor's required rate of return on Zero-Sum if the current price is $12?
a. 12.3%
b. 12.0%
c. 10.0%
d. 10.3
ANS: B
68.The stock of Melody Music City is selling for $37.50 and pays a current annual dividend of $1.10. What is
the implied growth rate of dividends for this firm (assume dividends are expected to grow at a constant
rate) if an investor's required rate of return is 14 percent?
a. 11.07%
b. 14.0%
c. 11.4%
d. 10.75%
ANS: D

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