FIN 3000 Financial Management

Mid-Term Exam
Summer 2024
Mahdy F. Elhusseiny

Name:____________________________

Please read the following instructions carefully.

1. There are 8 pages in the exam.

2. You are required to read all the answers carefully and select the best answer for each
question. You may write in the exam.
3. Exam grade will be posted during the next week.

Good Luck in the Exam!

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 FIN 3000 Financial Management

40 Questions (2.5 Points per question)

Answer All Questions. Read all the answers carefully and select the best answer for each
question.

1. The process of planning and managing a firm's long-term investments is called:

A) Financial depreciation.
B) Capital structure.
C) Agency cost analysis.
D) Capital budgeting.
E) Working capital management.

2. When does the double taxation problem faced by corporations exist?

A) Whenever stockholders are paid a dividend and are taxed on that dividend income.
B) Whenever a corporation earns a profit, pays taxes on that profit, and then pays interest
to its bondholders.
C) Whenever a corporation earns a profit and pays taxes on that profit.
D) Whenever a corporation earns a profit, pays taxes on that profit, and then pays
dividends to its stockholders who pay personal taxes.
E) Whenever a corporation earns a profit, pays taxes on that profit, and then pays
dividends to its tax-exempt shareholders.

3. Which of the following refers to capital structure?

A) the types of projects a firm invests in.
B) the amount of long-term debt and equity a firm has on its balance sheet.
C) the amount of short-term assets and short-term liabilities a firm has on its balance
sheet.
D) the size, timing, and risk of a firm's future cash flows.

4. Which of the following refers to the secondary market?

A) a market which has no central location
B) the market in which dealers buy and sell for themselves, at their own risk
C) the market in which securities are bought and sold after original sale
D) the market for the original sale of securities by governments and corporations

5. Out of the following, what should the goal of the financial manager be?
A) maximize profits
B) maximize the firm's current stock price
C) operate to the point where the social welfare of the entire economy is maximized in
relationship to the firm's output
D) minimize costs

6. Agency costs refer to:

A) The total interest paid to creditors over the lifetime of the firm.
B) Corporate income subject to double taxation.
C) The costs that result from default and bankruptcy of the firm.
D) The costs of the conflict of interest between stockholders and management.
E) The total dividends paid to shareholders over the lifetime of the firm

7. Choose the best description of the quick ratio.

A) will always be larger than the current ratio
B) incorporates all current assets except inventory
C) excludes only the cash account from current assets in its computation
D) considers only those assets and liabilities with a life of one year or less

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8. The Pounds R Us Company produces weight lifting equipment. It has a long-term

debt ratio [LTD/(LTD+Equity)] of .65 and a current ratio of 1.2. Current liabilities
are $800, sales are $4000, the profit margin is 7%, and ROE is 25%. What is the $
amount of current assets?
A) $667
B) $960
C) $920
D) $800

9. The inventory turnover ratio is measured as:

A) Inventory plus cost of goods sold.
B) Cost of goods sold divided by inventory.
C) Inventory times total sales.
D) Inventory times cost of goods sold.
E) Total sales minus inventory.

10. A firm has a times interest earned ratio of 2.7 times. This means:
A) The firm has sufficient EBIT to cover its interest expense 2.7 times.
B) The interest expense of this firm exceeded earnings before taxes by 2.7 times.
C) The firm generated enough cash to cover its interest expense 2.7 times.
D) The firm earned $1.00 in EBIT for every $2.70 it paid out in interest.
E) The net income of this firm is sufficient to cover its interest expense 2.7 times.

11. A firm has sales of $500, total assets of $300, and a debt/equity ratio of 2. If its return
on equity is 15%, what is its net income?
A) $50.00
B) $ 7.50
C) $32.50
D) $22.50
E) $15.00

12. The process of accumulating interest on an investment over time to earn more interest
is called:
A) Compounding.
B) Accumulation.
C) Growth.
D) Aggregation.

13. You have just made your first $5,000 contribution to your individual retirement
account. Assuming you earn a 7% rate of return and make no additional
contributions, what will your account be worth when you retire in 35 years?
A) $17,250.00
B) $6,128.76
C) $53,382.90
D) $46,831.46

14. You just received $50,000 from a rich aunt. If you invest this at 6% compounded
annually and never withdraw any funds from the account. When will the account
reach one million dollars?
A) 51.4 years
B) 48.6 years
C) Never
D) 61.4 years

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15. You have deposited $1,500 in an account that promises to pay 8% compounded
quarterly for the next five years. How much will you have in the account at the end?
A) $1,598.33
B) $2,203.99
C) $2,228.92
D) $6,991.44

16. A court settlement awarded an accident victim four payment of $50,000 to be paid at
the end of each of the next four years. Using a discount rate of 4%, calculate the
present value of the annuity.
A) $173,255
B) $178,495
C) $181,495
D) $184,095
E) $200,000

17. Mulberry Company paid dividends of $400 and retained 33.33% of their earnings. The
sales for the year were $12,000 and total assets were $10,000. What was the return on
assets (ROA)?
A) 5%
B) 6%
C) 10%
D) 12%

18. The NYSE and NASDAQ are both

A) primary markets.
B) dealer markets.
C) secondary markets.
D) All of the above.

The balance sheet and income statement shown below are for Byrd Inc, and the data
are to be used for questions 19 through 21. Note that the firm has no amortization
charges, it does not lease any assets, and none of its debt must be retired during the
next 5 years.

BALANCE SHEET
Cash $ 140.0 Accounts payable $ 800.0
Accts. receivable 880.0 Notes payable 600.0
Inventories 1,320.0 Accruals 400.0
Total current assets $2,340.0 Total current liabilities $1,800.0
Long-term bonds 1,000.0
Total debt $2,800.0
Common stock (50,000 shares) 200.0
Retained earnings 1,000.0
Net plant & equip. 1,660.0 Total common equity $1,200.0
Total assets $4,000.0 Total liabilities & equity $4,000.0

INCOME STATEMENT
Net sales $ 6,000.0
Operating costs 5,599.8
Depreciation 100.2
EBIT $ 300.0
Less: Interest 96.0
EBT $ 204.0
Less: Taxes 81.6
Net income $ 122.4
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OTHER DATA
Shares outstanding (millions) 60.00
Common dividends $42.8
Interest rate on N/P and long-term bonds 6.0%
Federal plus state income tax rate 40%
Year-end stock price $30.60

19. What is the firm's EPS?

A) $2.04
B) $2.11
C) $2.25
D) $2.39
E) $2.50

20. What is the firm's quick ratio?

A) 0.25
B) 0.33
C) 0.41
D) 0.49
E) 0.57

21. What is the firm's dividends per share?

A) $0.31
B) $0.41
C) $0.51
D) $0.61
E) $0.71

22. Calculate net income based on the following information. Sales are $250; Cost of
goods sold is $160; Depreciation expense is $35; Interest paid is $20; and the tax rate
is 34%.
A) $11.90
B) $23.10
C) $35.00
D) $36.30
E) $46.20

23. Which of the following mechanisms would be most likely to help motivate managers to
act in the best interest of shareholders?
A) Decrease the use of restrictive covenants in bond agreements.
B) Take actions that reduce the possibility of a hostile takeover.
C) Have the board of directors allow managers greater freedom of action.
D) Increase the proportion of executive compensation that comes from stock options
E) Eliminate a requirement that members of the board of directors have a substantial
investment in the firm’s stock.

24. Which of the following statements is CORRECT?

A) The New York Stock Exchange is an auction market with a physical location.
B) Over-the-Counter (OTC) Market is a large collection of brokers and dealers, connected
electronically by telephones and computers that provides for trading in financial
securities.
C) Organized Security Exchanges is formal organizations having tangible physical
locations that conduct auction markets in financial securities
D) All of the above

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25. Financial markets have the basic function of

A) getting people with funds to lend together with people who want to borrow funds.
B) assuring that the swings in the business cycle are less pronounced.
C) assuring that governments need never resort to printing money.
D) both (a) and (b) of the above.
E) both (b) and (c) of the above.

26.Which of the following can be described as involving direct finance?

A)A corporation’s stock is traded in an over-the-counter market.
B)People buy shares in a mutual fund.
C)A pension fund manager buys a short-term corporate security in the secondary
market.
D) An insurance company buys shares of common stock in the over-the-counter markets.

27 Secondary markets make financial instruments more

A) solid.
B) fluid.
C) liquid.
D) risky.

28 An important financial institution that assists in the initial sale of securities in the
A) primary market is the
B) investment bank.
C) commercial bank.
D) stock exchange.

29. The principal amount of a bond that is repaid at the end of the loan term is called the
bond’s:
a. coupon.
b. face value.
c. maturity.
d. yield to maturity.
e. coupon rate

30. The rate of return required by investors in the market for owning a bond is called
the:
a. coupon.
b. face value.
c. maturity.
d. yield to maturity.
e. coupon rate

31. The annual coupon of a bond divided by its face value is called the bond’s:
a. coupon.
b. face value.
c. maturity.
d. yield to maturity.
e. coupon rate

32. The written, legally binding agreement between the corporate borrower and the
lender detailing the terms of a bond issue is called the:
a. indenture.
b. covenant.
c. terms of trade.
d. form 5140.
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33. An agreement giving the bond issuer the option to repurchase the bond at a specified
price prior to maturity is the _____ provision.
a. sinking fund
b. call
c. seniority
d. collateral
e. trustee

34. The bonds of Frank’s Welding, Inc. pay an 8 percent coupon, have a 7.98 percent
yield to maturity and have a face value of $1,000. The current rate of inflation is 2.5
percent. What is the real rate of return on these bonds?
a. 5.32 percent
b. 5.35 percent
c. 5.37 percent
d. 5.42 percent
e. 5.48 percent

35. Wine and Roses, Inc. offers a 7 percent coupon bond with semiannual payments and
a yield to maturity of 7.73 percent. The bonds mature in 9 years. What is the market
price of a $1,000 face value bond?
a. $953.28
b. $953.88
c. $1,108.16
d. $1,401.26
e. $1,401.86

36. High Noon Sun, Inc. has a 5 percent, semiannual coupon bond with a current market
price of $988.52. The bond has a par value of $1,000 and a yield to maturity of 5.29
percent. How many years is it until this bond matures?
a. 4.0 years
b. 4.5 years
c. 6.5 years
d. 8.0 years
e. 9.0 years

Use the following to answer Question 37-39

Bonds Cur Yld. Vol. Close Net Chg.

McLeod 11 09 ? 20 65 1/2 -1/2

37 On this trading day, the number of Mcleod bonds which changed hands was:
a. 20
b. 200
c. 2,000
d. 20,000
e. 65,500

38 Assume this bond’s face value is $1,000. What is the bond’s current market price?
a. $34.00
b. $65.50
c. $340.00
d. $655.00
e. $6,550.00

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39. What is the current yield for this bond? (Assume semiannual coupons.)
a. 11.0%
b. 14.2%
c. 16.8%
d. 18.9%
e. 20.45

40. Assume this bond has a face value of $1,000. On the previous trading day, this bond
must have closed at a price of?
a. $558.00
b. $559.00
c. $660.00
d. $661.00
e. $662.00