FIN2004 Midterm

FIN2004
MID-TERM
Semester I, 2011/2012

INSTRUCTIONS:

1. This is a restricted open-book examination, consisting of 50 Multiple Choice Questions

on NINE printed pages. You are allowed to refer to a finance textbook and TWO A4-
sized sheets of printed/written materials.
2. You are given 80 minutes to complete the examination.
3. Use a pencil to shade the most appropriate answer for each question in the answer sheet
provided.
4. Remember to write your matriculation number and shade the appropriate bubbles on the
answer sheet. Ignore the preceding letters of your matriculation number when you are
shading the bubbles.
5. ANSWER ALL QUESTIONS. There are no penalties for wrong answers.

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 FIN2004 Midterm

1. Which one of the following accounts is the most liquid?

A. inventory
B. building
C. accounts receivable
D. equipment
E. land

2. The higher the degree of financial leverage employed by a firm, the:

A. .
B. .
C. .
D. .
E. .

3. You have won a contest and will receive $2,500 a year in real terms for the next 3 years.
Each payment will be received at the end of the period with the first payment occurring one
year from today. The relevant nominal discount rate is 6.3 percent and the inflation rate is 4.5
percent. What are your winnings worth today?
A. $7,249
B. $7,367
C. $7,401
D. $7,500
E. $7,838

4. Dija Corp. has a 7 percent, semiannual coupon bond outstanding with a current market price
of $1,023.46. The bond has a par value of $1,000 and a yield to maturity of 6.72 percent. How
many years is it until this bond matures?
A. 12.26 years
B. 12.53 years
C. 18.49 years
D. 24.37 years
E. 25.05 years

5.. Bazaar Markets Inc. has a 6.75 percent coupon rate bond outstanding that matures in 10.5
years. The bond pays interest semiannually. What is the market price per bond if the face
value is $1,000 and the yield to maturity is 6.69 percent?
A. $999.80
B. $999.85
C. $1,003.42
D. $1,004.47
E. $1,007.52

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6.. Which one of the following risks would a floating-rate bond tend to have less of as
compared to a fixed-rate coupon bond?
A. real rate risk
B. interest rate risk
C. default risk
D. liquidity risk
E. taxability risk

7. Which one of the following relationships is stated correctly?

A. The coupon rate exceeds the current yield when a bond sells at a discount.
B. The call price must equal the par value.
C. An increase in market rates increases the market price of a bond.
D. Decreasing the time to maturity increases the price of a discount bond, all else constant.
E. Increasing the coupon rate decreases the current yield, all else constant.

8. Which of the following questions are addressed by financial managers?

I. How should a product be marketed?
II. Should customers be given 30 or 45 days to pay for their credit purchases?
III. Should the firm borrow more money?
IV. Should the firm acquire new equipment?
A. I and IV only
B. II and III only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV

9. Which one of the following is a capital structure decision?

A. determining which one of two projects to accept
B. determining how to allocate investment funds to multiple projects
C. determining the amount of funds needed to finance customer purchases of a new product
D. determining how much debt should be assumed to fund a project
E. determining how much inventory will be needed to support a project

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10. Which of the following statements is NOT CORRECT?

A. A discount bond is a bond that gives only one cash payment, equal to the face value of the
bond, at the time of the bond’s maturity.
B. The expected return for a portfolio of securities is equal to the weighted average of the
expected returns of each of the individual securities in the portfolio
C. Due to the elimination of specific risk, the Beta of a portfolio of securities is less than the
weighted average of the Betas of each of the individual securities in the portfolio
D. If the price of a government bond is less than the present value of its future cash flows,
then investors will bid up the price of the bond.
E. A, B and C above are all tru

11.Depreciation:
A. reduces both taxes and net income.
B. increases the net fixed assets as shown on the balance sheet.
C. reduces both the net fixed assets and the costs of a firm.
D. is a non cash expense which increases the net income.
E. decreases net fixed assets, net income, and operating cash flows.

12. Meijun Inc. has shareholders' equity of $141,800. The firm owes a total of $126,000 of
which 60 percent is payable within the next year. The firm net fixed assets of $161,900. What
is the amount of the net working capital?
A. $25,300
B. $30,300
C. $75,600
D. $86,300
E. $111,500

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13. Which of the following can be used to compute the return on equity?
I. Profit margin × Return on assets
II. Return on assets × Equity multiplier
III. Net income/Total equity
IV. Return on assets × Total asset turnover
A. I and III only
B. II and III only
C. II and IV only
D. I, II, and III only
E. I, II, III, and IV

14. The Du Pont identity can be used to help managers answer which of the following
questions related to a firm's operations?
I. How many sales dollars has the firm generated per each dollar of assets?
II. How many dollars of assets has a firm acquired per each dollar in shareholders' equity?
III. How much net profit is a firm generating per dollar of sales?
IV. Does the firm have the ability to meet its debt obligations in a timely manner?
A. I and III only
B. II and IV only
C. I, II, and III only
D. II, III and IV only
E. I, II, III, and IV

15. A firm has 160,000 shares of stock outstanding, sales of $1.94 million, net income of
$126,400, a price-earnings ratio of 18.7, and a book value per share of $9.12. What is the
market-to-book ratio?
A. 1.62
B. 1.84
C. 2.23
D. 2.45
E. 2.57

16. WaiMun Inc. has net income of $161,000, a profit margin of 7.6 percent, and an accounts
receivable balance of $127,100. Assume that 66 percent of sales are on credit. What is the
days' sales in receivables?
A. 21.90 days
B. 27.56 days
C. 33.18 days
D. 35.04 days
E. 36.19 days

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17. You just received $225,000 from an insurance settlement. You have decided to set this
money aside and invest it for your retirement. Currently, your goal is to retire 25 years from
today. How much more will you have in your account on the day you retire if you can earn an
average return of 10.5 percent rather than just 8 percent?
A. $417,137
B. $689,509
C. $1,050,423
D. $1,189,576
E. $1,818,342

18. You estimate that you will owe $42,800 in student loans by the time you graduate. The
interest rate is 4.25 percent. If you want to have this debt paid in full within six years, how
much must you pay each month?
A. $611.09
B. $674.50
C. $714.28
D. $736.05
E. $742.50

19. You just received an insurance settlement offer related to an accident you had six years
ago. The offer gives you a choice of one of the following three offers:

You can earn 7.5 percent on your investments. You do not care if you personally receive the
funds or if they are paid to your heirs should you die within the settlement period. Which one
of the following statements is correct given this information?
A. Option A is the best choice as it provides the largest monthly payment.
B. Option B is the best choice because it pays the largest total amount.
C. Option C is the best choice because it is has the largest current value.
D. Option B is the best choice because you will receive the most payments.
E. You are indifferent to the three options as they are all equal in value.

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20. Ramz Corp., an unleveraged firm, is a manufacturer of space satellite equipment. The
company’s operating performance moves little with variations in the overall market and not
surprisingly, has a firm beta of 0.25. The company’s stock is presently priced on the market
such that it gives a 10% return. Assuming that the CAPM is correct, the company’s stock is:
(Note that the risk free rate is 5%, while the market risk premium is 10%)
A. Overpriced
B. Underpriced
C. Correctly priced
D. We can not fully comment on pricing as we do not know the company’s expected
return.

21. Excess return is computed as the:

A. return on a security minus the inflation rate.
B. return on a risky security minus the risk-free rate.
C. risk premium on a risky security minus the risk-free rate.
D. the risk-free rate plus the inflation rate.
E. risk-free rate minus the inflation rate.

22. If the variability of the returns on large-company stocks were to increase over the long-
term, you would expect which of the following to occur as a result?
I. decrease in the average rate of return
II. increase in the risk premium
III. increase in the 68 percent probability range of the frequency distribution of returns
IV. decrease in the standard deviation
A. I only
B. IV only
C. II and III only
D. I and III only
E. II and IV only

23. A stock had returns of 11 percent, -18 percent, -21 percent, 5 percent, and 34 percent over
the past five years. What is the standard deviation of these returns?
A. 18.74 percent
B. 20.21 percent
C. 20.68 percent
D. 22.60 percent
E. 23.49 percent

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24. Which one of the following is a positively sloped linear function that is created when
expected returns are graphed against security betas?
A. reward-to-risk matrix
B. portfolio weight graph
C. capital market line
D. security market line
E. market real returns

25. The expected return on a portfolio considers which of the following factors?
I. percentage of the portfolio invested in each individual security
II. projected states of the economy
III. the performance of each security given various economic states
IV. probability of occurrence for each state of the economy
A. I and III only
B. II and IV only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV

26. The expected return on a portfolio:

I. can never exceed the expected return of the best performing security in the portfolio.
II. must be equal to or greater than the expected return of the worst performing security in the
portfolio.
III. is independent of the unsystematic risks of the individual securities held in the portfolio.
IV. is independent of the allocation of the portfolio amongst individual securities.
A. I and III only
B. II and IV only
C. I and II only
D. I, II, and III only
E. I, II, III, and IV

27. The standard deviation of a portfolio:

A. is a measure of that portfolio's systematic risk.
B. is a weighed average of the standard deviations of the individual securities held in that
portfolio.
C. measures the amount of diversifiable risk inherent in the portfolio.
D. serves as the basis for computing the appropriate risk premium for that portfolio.
E. can be less than the weighted average of the standard deviations of the individual securities
held in that portfolio.

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28. Which of the following are examples of diversifiable risk?

I. earthquake damages an entire town
II. federal government imposes a $100 fee on all business entities
III. employment taxes increase nationally
IV. toymakers are required to improve their safety standards
A. I and III only
B. II and IV only
C. II and III only
D. I and IV only
E. I, III, and IV only

29. Your portfolio has a beta of 1.12. The portfolio consists of 20 percent U.S. Treasury bills,
50 percent stock A, and 30 percent stock B. Stock A has a risk-level equivalent to that of the
overall market. What is the beta of stock B?
A. 1.47
B. 1.52
C. 1.69
D. 1.84
E. 2.07

30. Suppose you observe the following situation:

Assume these securities are correctly priced. Based on the CAPM, what is the return on the
market?
A. 13.99 percent
B. 14.42 percent
C. 14.67 percent
D. 14.78 percent
E. 15.01 percent