Midterm Exam – S2 2024/25 – Practice Set 1

School of Business/UEH
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EXAM INSTRUCTIONS
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Unit Name: Corporate Finance

Unit Number: FIN201

Number of Questions: Fifty (50) multiple-choice questions

Total Number of Pages: Fourteen (14) pages (excluding exam cover sheet)

Value of Questions: Each question is worth 1 mark, giving a total of 50

marks.

Answering Questions: Answer all questions in the Examination Answer Sheets

provided.

Lecturer/Unit Coordinator: Mr. Manoj Menon

Time Allowed: 90 minutes

RESOURCES ALLOWED
Only the resources listed below are allowed in this exam.

Closed book. Any calculator which has the primary function of a calculator is allowed. For example,
calculators on mobile phones or similar electronic devices are not allowed.

DO NOT TAKE THIS PAPER FROM THE EXAM ROOM

1) The focus of short-term finance is on:
A) the timing of cash flows.
B) acquiring and selling fixed assets.
C) financing long-term projects.
D) capital budgeting.
E) issuing additional shares of common stock.

2) The primary advantage of being a limited partner rather than a general partner is:
A) being entitled to a larger portion of the partnership’s income.
B) having responsibility for day-to-day management of the business.
C) earning profits that are free from income taxation.
D) the ability to have overall control of the partnership.
E) one’s personal financial liability is limited to the amount of capital invested.

3) Which one of the following statements is accurate?

A) Individuals generally prefer later cash flows rather than current cash flows.
B) The value of an investment depends on the size, timing, and risk of the investment’s cash
flows.
C) When selecting one of two projects, managers should select the project with the higher total
expected cash flow.
D) Most investors prefer greater risk rather than less risk.
E) Accountants record sales and expenses after the related cash flows occur.

4) Which one of the following actions by a financial manager creates an agency problem?
A) Borrowing money, when doing so creates value for the firm
B) Lowering selling prices, which will result in increased firm value
C) Agreeing to expand the company at the expense of stockholders’ value
D) Agreeing to pay management bonuses based on the market value of the firm’s stock
E) Refusing to spend current cash on an unprofitable project
5) A firm creates value by:
A) having a greater cash inflow from its stockholders than its outflow to them.
B) paying more cash to its creditors and stockholders than the amount it received from them.
C) borrowing long-term debt.
D) generating sales whether or not payment is received for all of those sales.
E) purchasing assets that create cash inflows equal to the cost of those assets.

6) Which one of the following statements is correct?

A) Both partnerships and corporations are subject to double taxation.
B) Sole proprietorships and partnerships are taxed in a similar fashion.
C) Partnerships are the most complicated type of business to form.
D) Both partnerships and corporations have limited liability for all owners.
E) All types of business formations have limited lives.

7) The term “noncash items” is referring to:

A) the credit sales of a firm.
B) the accounts payable of a firm.
C) the costs incurred for the purchase of intangible fixed assets.
D) expenses charged against revenues that do not directly affect cash flow.
E) all accounts on the balance sheet other than cash on hand.

8) A firm starts its year with positive net working capital. During the year, the firm acquires
more short-term debt than it does short-term assets. This means that:
A) the ending net working capital must be negative.
B) both accounts receivable and inventory decreased during the year.
C) the beginning current assets were less than the beginning current liabilities.
D) accounts payable and inventory increased during the year.
E) the ending net working capital can be positive, negative, or equal to zero.
9) Which of the following activity represent the “Uses of cash”?
A) Decrease in Account Receivable
B) Increase in Account Payable
C) Decrease in Inventory
D) Decrease in Note Payable
E) Decrease in Fixed asset purchases

10) A company has net working capital of $2,399, current assets of $6,575, equity of $22,395,
and long-term debt of $10,595. What is the company's net fixed assets?
A) $28,814
B) $24,794
C) $30,591
D) $26,415
E) $39,565

11) One of the reasons why cash flow analysis is popular is because:
A) cash flows are more subjective than net income.
B) deferred taxes require future cash payment.
C) cash flows are strictly defined by Generally Accepted Accounting Principles (GAAP).
D) it is difficult to manipulate, or spin the cash flows.
E) operating cash flows are found on the income statement.

12) Mariota Industries has sales of $322,280 and costs of $158,890. The company paid $25,990
in interest and $13,000 in dividends. It also increased retained earnings by $64,946 during the
year. If the company's depreciation was $16,370, what was its average tax rate?
A) 55.27%
B) 27.39%
C) 13.37%
D) 35.60%
E) 28.09%
13) Reed & Barr has interest expense of $168, total revenues of $38,411, costs of $28,515,
depreciation of $306, and taxes of $1,979. The beginning balance sheet has total assets of
$48,354, net fixed assets of $31,202, current liabilities of $14,207, and total liabilities of
$29,407. The ending balance sheet shows total assets of $49,305, net fixed assets of $33,406,
current liabilities of $17,318, and total liabilities of $30,404. What is the annual cash flow of the
firm?
A) $9,771
B) −$2,160
C) $15,168
D) $8,474
E) $2,857

14) The ________ shows the amount that investors are willing to pay for each dollar of annual
earnings.
A) return on assets
B) return on equity
C) debt-equity ratio
D) price-earnings ratio
E) DuPont identity

15) Mario's Home Systems has sales of $2,790, costs of goods sold of $2,130, inventory of $498,
and accounts receivable of $427. How many days, on average, does it take Mario's to sell its
inventory?
A) 84.17 days
B) 55.86 days
C) 73.17 days
D) 85.34 days
E) 65.15 days
16) Merritt Stoneworks is all-equity financed and has net sales of $217,800, taxable income of
$32,600, a return on assets of 11.5 percent, a tax rate of 21 percent, and total debt of $63,700.
What are the values for the three components of the DuPont identity?
A) 11.82%; .9725; 1.3975
B) 11.82%; 1.0282; 1.3975
C) 11.82%; .9725; .7156
D) 10.24%; 1.0282; .7156
E) 10.24%; 1.0282; 1.3975

17) Last year, Seo & Stewart had a price-earnings ratio of 12 and earnings per share of $.97. This
year, the price-earnings ratio is 16 and the earnings per share is $.97. Based on this information,
it can be stated with certainty that:
A) the price per share decreased.
B) the earnings per share decreased.
C) investors are paying a lower price per share this year as compared to last year.
D) investors are receiving a higher rate of return this year.
E) the investors' outlook for the firm has improved.

18) Willard Windows has total sales of $387,200 on total assets of $429,600, current liabilities of
$45,000, and $24,000 of dividends paid on net income of $57,700. Assume that all costs, assets,
and current liabilities change spontaneously with sales. The tax rate and dividend payout ratios
remain constant. If the firm's managers project a firm growth rate of 12 percent for next year,
what will be the amount of external financing needed to support this level of growth? Assume
the firm is currently operating at full capacity.
A) $11,706
B) $14,350
C) $9,911
D) $5,667
E) $8,408
19) An increase in ________ will increase a firm’s current ratio, but will not affect its quick
ratio.
A) accounts payable
B) cash
C) inventory
D) accounts receivable
E) fixed assets

20) Flash eBikes has a net profit margin of 6.2 percent and a dividend payout ratio of 40 percent.
The capital intensity is 1.08 and the debt-equity ratio is .54. What is the sustainable rate of
growth?
A) 6.30%
B) 5.53%
C) 5.60%
D) 6.41%
E) 5.89%

21) In which way does a perpetuity differ from an annuity?

A) Perpetuity cash flows vary with the rate of inflation.
B) Perpetuity cash flows vary with the market rate of interest.
C) Perpetuity cash flows are variable while annuity payments are constant.
D) Perpetuity cash flows never cease.
E) Annuity cash flows occur at irregular intervals of time.

22) Assume you are comparing two investments, each of which will result in $20,000 of total
cash inflow. Investment A pays $8,000 in Year 1, followed by four annual payments of $3,000
each. Investment B pays five annual payments of $4,000 each. Which one of the following
statements regarding the investments is correct?
A) Both options are of equal value today.
B) Given a positive rate of return, Option A has a higher present value than Option B.
C) Given a positive rate of return, Option B has a higher present value than Option A.
D) Given a zero rate of return, Option B has a lower present value than Option A.
E) Option A is preferable because it is an annuity due.
23) You need to have $32,500 in 20 in years. You can earn an annual interest rate of 5 percent
for the first 6 years, 5.6 percent for the next 5 years, and 6.3 percent for the final 9 years. How
much do you have to deposit today?
A) $10,521.99
B) $8,745.59
C) $9,664.67
D) $10,656.84
E) $12,248.91

24) You just purchased two coins at a price of $250 each. Because one of the coins is more
collectible, you believe that its value will increase at a rate of 6.4 percent per year, while you
believe the second coin will only increase at 5.8 percent per year. If you are correct, how much
more will the first coin be worth in 10 years?
A) $265.41
B) $29.75
C) $15.41
D) $168.05
E) $25.56

25) Assume a project has an initial cash outflow followed by seven years of cash inflows. If the
discount rate increases, the present value will:
A) remain unchanged.
B) change, but the direction of the change is unknown.
C) remain unchanged, but the timing of the cash flows must change.
D) increase.
E) decrease.

26) The winner of the first annual Tom Morris Golf Invitational won $115 in the competition
which was held in 1901. In 2015, the winner received $1,480,000. If the winner's purse continues
to increase at the same interest rate, how much will the winner receive in 2052?
A) $31,920,341.90
B) $29,464,930.99
C) $29,018,492.64
D) $35,910,384.64
E) $25,536,273.52
27) Assume you graduate with $26,800 in student loan debt at an interest rate of 4.25 percent,
compounded monthly. If you want to have this debt paid in full within seven years, how much
must you pay each month?
A) $4,506.48
B) $369.42
C) $1,174.60
D) $3,883.00
E) $375.54

28) You have $2,500 to deposit into a savings account. The five banks in your area offer the
following rates. In which bank should you deposit your savings?
A) Bank A: 3.75%, compounded annually
B) Bank B: 3.69%, compounded monthly
C) Bank C: 3.70% compounded semiannually
D) Bank D: 3.67% compounded continuously
E) Bank E: 3.65% compounded quarterly

29) Two mutually exclusive projects have 3-year lives and a required rate of return of 10.5
percent. Project A costs $75,000 and has cash flows of $18,500, $42,900, and $28,600 for Years
1 to 3, respectively. Project B costs $72,000 and has cash flows of $22,000, $38,000, and
$26,500 for Years 1 to 3, respectively. Using the IRR, which project, or projects, if either, should
be accepted?
A) Accept both projects.
B) Select either project as there is no significant difference between them.
C) Accept Project A and reject Project B.
D) Accept Project B and reject Project A.
E) Reject both projects.
30) All else equal, the payback period for a project will decrease whenever the:
A) initial cost increases.
B) required return for a project increases.
C) assigned discount rate decreases.
D) cash inflows are moved earlier in time.
E) duration of a project is lengthened.

31) A project with an initial cost of $25,850 is expected to generate cash flows of $6,200,
$8,300, $8,900, $7,800, and $7,000 over each of the next five years, respectively. What is the
project's payback period?
A) 3.72 years
B) 3.68 years
C) 3.43 years
D) 3.52 years
E) 3.31 years

32) Your company has a project available with the following cash flows:
Year Cash Flow
0 −$80,900
1 21,600
2 25,200
3 31,000
4 26,100
5 20,000
If the required return is 15 percent, should the project be accepted based on the IRR?
A) No, because the IRR is 16.13 percent.
B) Yes, because the IRR is 16.80 percent.
C) No, because the IRR is 17.47 percent.
D) Yes, because the IRR is 17.47 percent.
E) Yes, because the IRR is 16.13 percent.
33) A company. has a project available with the following cash flows:
Year Cash Flow
0 −$31,910
1 13,080
2 14,740
3 20,850
4 12,020
If the required return for the project is 9.6 percent, what is the project's NPV?
A) $16,462.59
B) $15,090.71
C) $28,780.00
D) $8,132.26
E) $18,814.39

34) The elements that cause problems with the use of the IRR in projects that are mutually
exclusive are referred to as the:
A) discount rate and scale problems.
B) timing and scale problems.
C) discount rate and timing problems.
D) scale and reversing flow problems.
E) timing and reversing flow problems.

35) A project manager wants to invest in a project with an initial cost of $58,500 and cash flows
of $32,400 and $38,500 in Years 1 and 2. The manager’s employer requires a discount rate of 10
percent and also a return of $1.10 in today’s dollars for every $1 invested. Will the project be
approved? Why or why not?
A) Yes; because the NPV is positive.
B) Yes; because the PI is greater than 1.
C) Yes; because both criteria are met.
D) No; because the project does not meet either requirement.
E) No; while the project returns more than 10 percent it does meet the $1.10 per $1
requirement.
36) All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon
rate.
A) a premium; greater than
B) a discount; greater than
C) at par; greater than
D) at par; less than
E) a premium; equal to

37) Which one of these bonds is the most interest-rate sensitive?

A) 5-year zero coupon bond
B) 10-year zero coupon bond
C) 5-year, 6 percent, annual coupon bond
D) 10-year, 6 percent, semiannual coupon bond
E) 10-year, 6 percent, annual coupon bond

38) AB Builders, Incorporated, has 20-year bonds outstanding with a par value of $2,000 and a
quoted price of 104.347. The bonds pay interest semiannually and have a yield to maturity of
6.68 percent. What is the coupon rate?
A) 7.08%
B) 10.62%
C) 6.72%
D) 6.37%
E) 14.15%

39) Broke Benjamin Company has a bond outstanding that makes semiannual payments with a
coupon rate of 5.3 percent. The bond sells for $948.63 and matures in 17 years. The par value is
$1,000. What is the YTM of the bond?
A) 4.33%
B) 5.78%
C) 5.20%
D) 2.89%
E) 5.49%
40) To increase your purchasing power when investing in a bond:
A) you must purchase that bond at a discount.
B) the nominal rate of return on that bond must be less than the inflation rate.
C) you must earn a positive real rate of return on that bond.
D) the nominal rate of return must equal or exceed the rate of inflation.
E) you should purchase a premium bond.

41) Morris has an outstanding bond with a coupon rate of 5.5 percent that matures in 12 years.
The bond pays interest semiannually. What is the market price of one $1,000 face value bond if
the yield to maturity is 7.13 percent?
A) $934.59
B) $880.86
C) $870.01
D) $905.92
E) $947.87

42) Khanijow’s wants to raise $12.4 million to expand its business. To accomplish this, it plans
to sell 25-year, $1,000 face value, zero-coupon bonds. The bonds will be priced to yield 6.5
percent, with semiannual compounding. What is the minimum number of bonds the firm must
sell to raise the $12.4 million it needs?
A) 60,107
B) 61,366
C) 52,667
D) 59,864
E) 60,435

43) Nihal just purchased a $1,000 face value bond at a quoted price of $1,288.16. The bond has a
coupon rate of 6.2 percent, semiannual interest payments, and the next interest payment occurs
one month from today. Of the amount paid for the bond, what is the dirty price of this bond?
A) $1,313.99
B) $1,312.79
C) $1,262.33
D) $1,282.49
E) $1,233.83
44) The dividend yield on Estrella common stock is 5.2 percent. The company just paid a $2.10
dividend. The rumor is that the dividend will be $2.30 next year. The dividend growth rate is
expected to remain constant at the current level. What is the required rate of return on Estrella’s
stock?
A) 14.72%
B) 12.31%
C) 18.29%
D) 20.01%
E) 24.21%

45) A limit order to buy:

A) guarantees the quantity purchased but not the price.
B) guarantees both the purchase price and the order fulfillment.
C) is executed only if the purchase price is less than the limit amount.
D) guarantees the purchase price but not the order execution.
E) will be executed either at the limit price or at the end-of-day price.

46) The Bell Weather Company is a new firm in a rapidly growing industry. The company is
planning on increasing its annual dividend by 18 percent a year for the next 4 years and then
decreasing the growth rate to 6 percent per year. The company just paid its annual dividend in
the amount of $3.20 per share. What is the current value of one share of this stock if the required
rate of return is 8.70 percent?
A) $190.24
B) $193.44
C) $243.57
D) $174.46
E) $246.77

47) Longshire just paid $1.50 as its annual dividend and increases its dividend by 2.5 percent
each year. What will Longshire's stock price be in ten years at a discount rate of 12.25 percent?
A) $19.46
B) $22.08
C) $20.19
D) $19.70
E) $21.50

48) Of the following choices, which one applies to the dividend growth model of stock
valuation?
A) The dividend must be for the same time period as the stock price.
B) The growth rate must be less than the discount rate.
C) The rate of growth must be positive.
D) The model cannot be applied if the growth rate is zero.
E) The dividend amount must be constant over time.

49) General Importers announced that it will pay a dividend of $4.15 per share one year from
today. After that, the company expects a slowdown in its business and will not pay a dividend for
the next 7 years. Then, 9 years from today, the company will begin paying an annual dividend of
$2.25 forever. The required return is 12.4 percent. What is the price of the stock today?
A) $18.15
B) $11.70
C) $13.69
D) $10.81
E) $10.03

50) Outbound Trading has annual revenue of $387,000 with costs of $216,400. Depreciation is
$48,900 and the tax rate is 21 percent. The firm has debt outstanding with a market value of
$182,000 along with 9,500 shares of stock that is selling at $67 per share. The firm has $48,000
of cash of which $29,500 is needed to run the business. What is the firm's EV/EBITDA ratio?
A) 5.57
B) 4.69
C) 3.39
D) 3.93
E) 6.20

This is the end of the exam!