Quiz 1 Covers Chapter 1 and 3
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Quiz 1 (40 minutes) .
1. Businesses can be organized as A) sole proprietorships B) partnerships C) corporations D) any of the above E) None of the above
Answer: D
2. Generally, a corporation is owned by the: A) Managers B) Board of Directors C) Shareholders D) All of the above. E) None of the above
Answer: C
3. Which of the following would be considered an advantage of the sole proprietorship form of organization? A) Wide access to capital markets B) Unlimited liability C) A pool of expertise D) Profits taxed at more than one levels E) None of the above
E)
4. A firm's investment decision is also called the: A) Financing decision B) Capital budgeting decision C) Liquidity decision D) Any of the above E) None of the above
Answer: B
5. The goal of a financial manager is to: A) Maximize sales B) Maximize profits C) Maximize stock holders’ wealth D) Maximize the value of the firm with both bond and stock holders E) None of the above
Answer: C
6. Which of the following is the function of a financial market A) transfer money across distance B) risk management C) efficient allocation of money D) provide information. E) all of the above
Answer: E
7. One common reason for partnerships to convert to a corporate form of organization is that the partnership: A) faces rapidly growing marketing requirements. B) wishes to avoid taxation of profits. C) has issued all of its allotted shares. D) faces rapidly growing capital needs E) None of the above
Answer: D .
8.The face value of a bond is received by the bondholder: A) at the time of purchase. B) annually. C) whenever coupon payments are made. D) at maturity. E) none of the above
Answer: D
9. Which of the following presents the correct relationship? As the discount rate of a bond decreases, the bond’s: A) face value decreases. B) price tends to increase. C) coupon payments decrease. D) maturity date is decreased. E) none of the above Answer: B
10. Which of the following would be considered a capital budgeting decision? A) Issuing $5 billion common stock B) Issuing $5 billion preferred stock to raise capital C) Repurchasing shares of common stock D) Issuing debt in the form of long-term bonds E) None of the above
Answer: E
11. What is the coupon rate for a bond (par value of $1,000) with three years until maturity, a price of $1,000, and a yield to maturity of 6%? A) 6% B) 7% C) 8% D) 9% E) None of the above
Answer: A
12. Which of the following statements best distinguishes the difference between real assets and financial assets? A) Real assets have less value than financial assets. B) Real assets are tangible; financial assets are not. C) Financial assets represent the voting power on real assets. D) Financial assets claim to cash flows that are generated by using real assets. E) None of the above
Answer: D
13. Corporations that do not issue more financial securities such as stock or debt obligations: A) will not be able to increase sales. B) may use internal cash flows to fulfill their needs C) cannot be profitable. D) generate insufficient funds to fulfill their needs. E) None of the above
Answer: B 14. The net present value formula for a one period project with a positive cost in the initial investment and a negative cash flow in period one is: A) NPV = PV cash flows/initial investment B) NPV = -C0+ [-C1/(1 + r)] C) NPV = C0+[C1/(1 + r)] D) Any of the above E) None of the above
Answer: C NPV = C0+[C1/(1 + r)]
15.You are going to receive 31 pieces of cash flows in the next 31 years. The first piece of cash flow of $1,500 starts next year (year 1). The other 30 pieces of cash flows are the same of $1,000 each year, with the first one starting at year 2. What is the present value of these 31 pieces of cash flows at a discount rate of 10%?
A) $10,221 B) $8,934 C) $11,790 D) $9,934 E) None of the above
Answer: D NPV = 500/1.1 + 1000*( 1/0.1-1/(0.1*1.1^31)) = $9,934
16. You would like to have enough money saved to receive a perpetuity, with the first payment being $60,000, after retirement so that you and your family can lead a good life. How much would you need to save in your retirement fund to achieve this goal (assume that the perpetuity payments start one year from the date of your retirement. The interest rate is 10%)? A) $7,500,000 B) $1,500,000 C) $600,000 D) $545,455 E0 None of the above
Answer: C PV = 60000/0.1 = $600,000
17. You have a car loan of $30,000 (which is called the principal) with the interest rate of 10%. You decide to pay off this loan in next three years with equal payment each year, what is the principal payment in your first payment? A) $12,063.44 B) $3,000.00 C) $9,063.44 D) $20,936.56 E) none of the above
Answer: C
Questions 18-20 are based on the following information:
A 9% coupon bond matures in three years, with a face value of $1,000. The yield to maturity (YTM) now is 9%. The market price of the bond expects to be the same next year. Suppose you buy one share of the bond now and hold it for one year.
18. What is the market price of the bond now (or time zero)? A) $1,000 B) $ 900 C) $1,100 D) there is no enough information E) none of the above
Answer: A
19. What is the yield to maturity next year?
A) 10% B) 12%. C) 11% D) 13% E) None of the above
E) (9%) 20. What is the expected rate of return for your investment (for holding one year)?
A) 10% B) 12%. C) 11% D) 9% E) None of the above
Answer: D