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Maryland Course: BMGT 340 Exam1SP08




Question;Chapter 1;1. Which;of the following statements is CORRECT?;a.;One advantage of forming a corporation;is that equity investors are usually exposed to less liability than in a;partnership.;b.;Corporations face fewer regulations than;sole proprietorships.;c.;One disadvantage of operating a business;as a sole proprietor is that the firm is subject to double taxation, at both;the firm level and the owner level.;d.;It is generally less expensive to form a;proprietorship than a corporation because, with a proprietorship, extensive;legal documents are required.;Chapter 1;2. The;primary operating goal of a publicly-owned firm interested in serving its;stockholders should be to;a.;Maximize its expected total corporate;income.;b.;Maximize its expected EPS.;c.;Minimize the chances of losses.;d.;Maximize the stock price per share over;the long run, which is the stock's intrinsic value.;Chapter 1;3. Which;of the following statements is CORRECT?;a.;Compensating managers with stock options;will do nothing to help eliminate potential conflicts between stockholders;and managers.;b.;Restrictions can be included in credit;agreements, but these restrictions will do nothing to protect bondholders;from conflicts of interest between them and the firm's managers and;stockholders.;c.;The threat of takeovers reduces conflict;of interest problems, but only between bondholders and stockholders.;d.;Compensating managers with stock options;can help reduce conflicts of interest between stockholders and managers, but;if the options are all exercisable on a specific date in the near future;this can motivate managers to deceive stockholders.;Chapter 1;4. Which;of the following statements is CORRECT?;a.;One disadvantage of organizing a;business as a corporation rather than a partnership is that the equity;investors in a corporation are exposed to unlimited liability.;b.;Using restrictive covenants in debt;agreements is an effective way to reduce agency conflicts between stockholders;and managers.;c.;Managers genelly welcome hostile;takeovers since the company seeking to do the taking over generally offers a;price for the stock that is higher than the price before the takeover action;started.;d.;The entrenched managers of established;stable companies sometimes attempt to get their state legislatures to impose;rules that make it more difficult for raiders to succeed with hostile;takeovers.;Chapter 2;5. Kramer;Corporation recently announced that its net income was lower than last year.;However, analysts estimate that the company's net cash flow increased. What;factors could explain this discrepancy?;a.;The company's depreciation and;amortization expenses increased.;b.;The company's interest expense declined.;c.;The company had an increase in its;noncash revenues.;d.;All of these statements are correct.;Not covered this semester;6. Scranton;Shipyards has $30 million in total investor-supplied operating capital. The;company's cost of capital is 10 percent and the tax rate is 40%. The firm?s net income is $3 million and its;interest expense also is $3 million.;What is Scranton?s;EVA?;a.;$ 400,000;b.;$ 1,800,000;c.;$1,200,000;d.;$2,000,000;e.;$4,000,000;Not covered this semester;7. Byrd;Lumber has 2 million shares of common stock outstanding and its stock price is;$15 a share. On the balance sheet, the company has $40 million of common;equity. What is the company's Market Value Added (MVA)?;a.;-$80,000,000;b.;-$20,000,000;c.;-$10,000,000;d.;$20,000,000;e.;$80,000,000;Chapter 2;8. A;stock market analyst has forecasted the following year-end numbers for Raedebe;Technology;Sales;$70 million;EBITDA;$20 million;Depreciation;$ 7 million;Amortization;$ 0;The company's tax rate is 40 percent. The;company does not expect any changes in its net operating working capital. This;year the company's planned gross capital expenditures will total $12 million.;(Gross capital expenditures represent capital expenditures before deducting;depreciation.) What is the company's forecasted free cash flow for the year?;a.;$;2.8 million;b.;$;7.0 million;c.;$;8.0 million;d.;$12.8 million;e.;$26.8 million;Chapter 3;9. Harte;Motors and Mills Automotive each have the same total assets, the same level of;sales, and the same return on equity (ROE). Harte Motors, however, has less;equity and a higher debt ratio than does Mills Automotive. Which of the;following statements is most correct?;a.;Mills Automotive has a higher net income;than Harte Motors.;b.;Mills Automotive has a higher profit;margin than Harte Motors.;c.;Mills Automotive has a higher return on;assets (ROA) than Harte Motors.;d.;All of the statements above are correct.;Not covered this semester;10. Which;of the following statements is most correct?;a.;If two firms have the same ROE and the;same level of risk, they must also have the same EVA.;b.;If a firm has positive EVA, this implies;that its ROE exceeds its cost of equity.;c.;If a firm has positive ROE, this implies;that its EVA is also positive.;d.;All of the statements are correct.;Chapter 3;11. Selzer;Inc. sells all its merchandise on credit. It has a profit margin of 6 percent;days sales outstanding equal to 30 days, receivables of $200,000, total assets;of $5 million, and a debt ratio of 0.4. What is the firm's return on equity;(ROE)? Assume a 365-day year.;a.;7.1%;b.;33.4%;c.;4.9%;d.;71.0%;e.;8.1%;Chapter 3;12. A;firm has a debt/equity ratio of 50 percent. Currently, it has interest expense;of $500,000 on $5,000,000 of total debt outstanding. Its tax rate is 40;percent. If the firm's ROA is 6 percent, by how many percentage points is the;firm's ROE greater than its ROA?;a.;0.0%;b.;3.0%;c.;5.2%;d.;7.4%;e.;9.0%;Chapter 3;13. Company;A has sales of $1,000, assets of $500, a debt ratio of 30 percent, and an ROE;of 15 percent. Company B has the same sales, assets, and net income as Company;A, but its ROE is 30 percent. What is B's debt ratio? (Hint: Begin by looking;at the Du Pont equation.);a.;25.0%;b.;35.0%;c.;50.0%;d.;52.5%;e.;65.0%;Chapter 6;14. The;future value of a lump sum at the end of five years is $1,000. The nominal;interest rate is 10 percent and interest is compounded semiannually. Which of;the following statements is most correct?;a.;The present value of the $1,000 is;greater if interest is compounded monthly rather than semiannually.;b.;The effective annual rate is less than;10 percent.;c.;The periodic interest rate is 5 percent.;d.;All of these statements are correct.;Chapter 6;15. Which;of the following statements is most correct?;a.;An investment that compounds interest;semiannually, and has a nominal rate of 10 percent, will have an effective;rate less than 10 percent.;b.;The present value of a 3-year $100;annuity due is less than the present value of a 3-year $100 ordinary annuity.;c.;The proportion of the payment of a fully;amortized loan that goes toward interest declines over time.;d.;All of these statements are correct.;Chapter 6;16. What;is the present value of a 5-year ordinary annuity with annual payments of $200;evaluated at a 15 percent interest rate?;a.;$;670.43;b.;$;842.91;c.;$1,169.56;d.;$1,348.48;e.;$1,522.64;Chapter 6;17. You;have the opportunity to buy a perpetuity that pays $1,000 annually. Your;required rate of return on this investment is 15 percent. What is the value of;this investment?;a.;$5,000.00;b.;$6,000.00;c.;$6,666.67;d.;$7,500.00;e.;$8,728.50;Chapter 6;18. Which;one of the following investments provides the highest effective rate of return?;a.;An investment that has a 9.9 percent;nominal rate and quarterly annual compounding.;b.;An investment that has a 9.7 percent;nominal rate and daily (365) compounding.;c.;An investment that has a 10.2 percent;nominal rate and annual compounding.;d.;An investment that has a 10 percent;nominal rate and semiannual compounding.;Chapter 6;19. You;have been offered an investment that pays $500 at the end of every 6 months for;the next 3 years. The nominal interest rate is 12 percent, however, interest is;compounded quarterly. What is the present value of the investment?;a.;$2,458.66;b.;$2,444.67;c.;$2,451.73;d.;$2,463.33;e.;$2,437.56;Chapter 6;20. THIS;IS THE BONUS QUESTION - IN MY OPINION THE MOST DIFFICULT, SO SAVE IT FOR;LAST. An investment costs $3,000 today;and provides cash flows at the end of each year for 20 years. The investment's;expected return is 10 percent. The projected cash flows for Years 1, 2, and 3;are $100, $200, and $300, respectively. What is the annual cash flow received;for each of Years 4 through 20 (17 years)? (Assume the same payment for each of;these years.);a.;$285.41;b.;$313.96;c.;$379.89;d.;$417.87;e.;$459.66;Chapter 3;21. Ramala;Corp's sales last year were $48,000, and its total assets were $25,500. What;was its total assets turnover ratio (TATO)?;a.;1.88;b.;1.99;c.;1.10;d.;1.21;e.;1.32


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