Principles of finance fin 301 midterm examination

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Principles of finance fin 301 Midterm examination


1.      If bank pays 5% compounded semi-annually, the true rate of interest is less than 5% annually.

a.       True

b.      False


2.      An annuity of $100 for 10 years is currently less valuable if interest rates are 10% instead of 12%
a. True

b. False


3.      It takes longer than 8 years to retire a $24,000 loan at 8% if the annual payment is $3,000.

a.       True

b.      False


4.      If a person buys a stock for $10 and sells it after ten years for $20, the annual compound return is 10%.

a.    True

b.    False


5.      If Liabilities are decreased or assets increased, that generates a cash inflow.

a.       True

b.      False


6.      If inventory is sold on credit, the quick ratio declines.

a.       True

b.      False


7.      If accounts receivable are collected, the quick ratio increases. 

a.       True

b.      False


8.      The numerical value of the quick ratio can never exceed the numerical value of the current ratio. 

a.       True

b.      False


9.      If a firm sells inventory at cost for cash, its total assets rise. 

a.       True

b.      False


10.  The higher the ratio of debt to total assets, the smaller is the use of financial leverage. 

a.       True

b.      False


11.  The use of financial leverage may permit the firm to increase the return on equity.

a.       True

b.      False


12.  Accountants suggest that assets should always be valued at their market value. 

a.       True

b.      False


13.  If a firm’s current assets and current liabilities decline, the firm had a cash inflow. 

a.       True

b.      False


14.  Accounts receivable are adjusted for doubtful accounts (Ie, accounts that may not be paid). 

a.       True

b.      False


15.  A cash dividend reduces the firm’s assets.

a.       True

b.      False


16.  The required return for an investment in a stock increases if the firm’s beta declines.

a.       True

b.      False

17.  One measure of the safety of a preferred stock’s dividend is the ratio of dividends to earnings before interest and taxes.

a.       True

b.      False


  1. Federal income taxes favor the retention of earnings over the distribution of earnings.

a.       True

b.      False


19.  A stock dividend decreases retained earnings.

a.       True

b.      False


20.  The dividend‑growth model may be applied only if it is assumed that the growth in dividends will be constant.

a.       True

b.      False


21.  The return on an investment in stock depends on both dividends and capital gains.




22.  Arrearage means cumulative preferred stock’s dividend is not being paid.

a.       True

b.      False


23.  An increase in the required return on the market will tend to decrease stock prices.

a.       True

b.      False


24.  A 5% stock dividend reduces a firm’s total equity.

a.      True

b.      False


      25.  The P/E ratio measures a stock’s price relative to the firm’s equity

             a. True

             b. False


26. Preferred stock dividends are paid after interest but before dividends to common stock.

a.       True

b.      False

27. Income bonds are the safest bonds issued by a firm.

a. True

b. False


28. Many bonds have a call feature that permits the firm to retire the bonds prior to maturity.

a.       True

b.      False

29. Bonds only sell for a discount when the firm is having financial difficulty.

a. True

b. False


30. The current yield and yield to maturity are equal when the bond is initially sold for its face value.

a.       True

b.      False


31. The highest credit rating is triple A.

c.       True

d.      False


32. The document stating the terms of a bond is the indenture.

a.       True

b.      False


Part II Multiple choice

33. The present value of a dollar

1. Increases with lower interest rates

2. increases with higher interest rates

3. increases with longer periods of time

4. decreases with longer periods of time

a.       1 and 3

b.      1 and 4

c.       2 and 3

d.      2 and 4

34. Which is the largest if the interest rate is 10%?

a. present value of $100 after five years
b. present value of $100 annuity for five years
c. future value of $100 annuity for five years
d. future value of $100 after five years


35. Liabilities equal 

      a. assets 

      b. equity 

      c. equity minus assets 

       d.assets minus equity 


36. Which of the following is a cash inflow? 

      a. an increase in accounts receivable 

      b. a decrease in inventory 

      c. distributing cash dividends 

      d. a decrease in long-term debt 


37. A high current ratio suggests that the firm

a. has a small amount of long-term debt

b. is carrying little inventory

c. is able to meet its current obligations

d. is profitable


38. Which of the following is equity?


1.      investments

2.      additional paid-in capital

3.      retained earnings

a.       1 and 2

b.      1 and 3

c.       2 and 3

d.      1, 2, and 3


39. According to the dividend-growth model, the value of a stock does NOT depend on


a. future dividends

b. past dividends

c. future growth

d. investor’s required rate of return


40. A stock dividend causes the firm’s


a.       Liabilities to remain the same

b.      Assets to increase

c.       Equity to increase

d.      Assets to decrease


41. Preferred stock and bonds are similar because
     a.  both are a source of financial leverage

     b.   they both have voting power                        

      c.   interest and dividend payments are legal obligations
      d.   neither interest nor dividends are tax deductible       


42. When risk analysis is introduced into the dividend-growth model, the required rate of return considers the firm’s

a.       beta coefficient

b.      growth rate

c.       dividend

d.      post dividends


43. Which of the following are true concerning dividend reinvestment plans?

1.      Taxes are deferred.

2.      They offer stockholders a convenient means to save.

3.      The firm may pay the brokerage and other fees associated with the plans

a.       1 and 2

b.      1 and 3

c.       2 and 3

d.      1, 2, and 3


44. Dividends are paid on the

 a. declaration date.

 b. distribution date.

 c. ex dividend date.

 d.  date of record.


45. Common features of preferred stock include

a.       Variable, cumulative dividends

b.      Variable, noncumulative dividends

c.       Fixed, noncumulative dividends

d.      Fixed, cumulative dividends

46. Interest is exempt from federal income taxation on
    a. equipment trust certificates     

    b. zero coupon      bonds     

    c.   federal bonds such as savings bonds    
    d. state of Florida bonds

47. Which of the following bonds is supported by collateral?
  a.   Convertible bonds     

  b. Income bonds     

   c. Equipment trust certificates         

  d. debentures


48. Which of the following reduces the investor’s risk associated with investing in bonds?

1. A Sinking fund

2. A variable interest rate

3. A call feature

a. 1 and 2

b. 1 and 3

c. 2 and 3

d. 1, 2, and 3


49. If a bond is selling for a discount, that implies

1. interest rates have fallen

2. interest rates have risen

3. the yield to maturity exceeds the current yield

4. the yield to maturity is less than the current yield


c.       1 and 3

d.      1 and 4

e.       2 and 3

f.       2 and 4


50.  The yield to maturity on a bond is

a. the interest paid divided by the price of the bond

b. the bond’s coupon divided by the principal amount

c. the price appreciation earned by the bond

d. interest plus price appreciation (or loss) achieved by holding the bond to maturity.



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