BAM 313 Unit 1 Exam Answers (CCU)
1. Determining the best way to raise money to fund a firm’s long-term investments is called:
a. The capital budgeting decision
b. The money flow processing decisions
c. The portfolio decision
d. The capital structure decision
2. Which of the following is NOT true regarding mortgaged-backed securities (MBS)?
a. Securitization provides liquidity to the mortgage market and makes it possible for banks to loan more money to home buyers
b. MBS are sold to investors who can hold them as an investment or resell them to other investors
c. The MBS process allows the mortgage bank or other financial institution that made the original mortgage loan to get its money back out of the loan and lend it to someone else
d. All of the above are true regarding mortgaged-backed securities
3. To measure value, the concept of time value of money is used:
a. To bring the future benefits and costs of a project, measured by its cash flows, back to the present
b. To determine the interest rate paid on corporate debt
c. To bring the future benefits and costs of a project, measured by its expected profits, back to the present
d. To ensure that expected future profits exceed current profits today
4. An investor is considering two equally risky investments. Investment A is expected to return $1,000 per year for the next 5 years. Investment B is expected to return $6,000 at the end of 5 years. Which of the following statements is MOST correct if both investment A and B have the same cost?
a. A risk averse investor will select investment A because it provides cash earlier than investment B
b. A risk averse investor will select investment B because it is expected to provide the most cash ($6,000 > $5,000)
c. The investor will select investment A only if the cost is less than $1,000
d. The investor may select investment A or investment B depending on the opportunity cost of money
5. Assume that you won the Lotta Dough Lotto jackpot for $20 million. Further assume that you were offered a choice to receive the $20 million today, or receive it in equal installments of $1 million per year for 20 years. According to one of the principals of finance, which would you take?
a. You would be indifferent as to when you would receive the $20 million since the total number of dollars received is the same either way.
b. You would take the $20 million is equal installments of $1 million per year for 20 years because it would be worth more than if you would receive it today
c. You would take the $20 million in equal installments of $1 million per year for 20 years because you would be afraid of spending it all right away
d. You would take the $20 million today because it would be worth more than if you would receive it in installments of $1 million per year for 20 years
6. Maximization of shareholder wealth:
a. Is achieved only if cash flows exceed accounting profits
b. Represents a zero sum game in which one corporation gains at the expense of others
c. Is not a practical goal since it cannot be measured effectively
d. Provides benefits to society as scarce resources are directed to their most productive use
7. Which of the following securities will likely have the highest liquidity premium?
a. U.S. Treasury Bond maturing in 2027?
b. U.S. Treasury Bill
c. AAA-rated corporate bond maturing in 2015 not actively traded
d. BBB-rated corporate bond maturing in 2020 actively traded on a major exchange
8. Private placements usually have several advantages associated with them, but also tend to suffer from specific disadvantages. Which of the following is a disadvantage of a private placement when compared to other methods of selling new securities?
a. Higher interest costs
b. Reduced flotation costs
c. Avoidance of registration with the SEC
d. Strictly standardization features/terms
9. Common examples of financial intermediaries include all of the following EXCEPT:
a. Life insurance companies
b. Venture capital firms
c. Pension funds
d. Mutual funds
10. A life insurance company purchases $1 billion in corporate bonds from premiums collected on its life insurance policies. Therefore:
a. The corporate bonds are direct securities and the life insurance policies are direct securities
b. The corporate bonds are indirect securities and the life insurance policies are indirect securities
c. The corporate bonds are indirect securities and the life insurance policies are direct securities
d. The corporate bonds are direct securities and the life insurance policies are indirect securities
11. Which of the following represents an attempt to measure the net results of the firm’s operations (revenues versus expenses) over a given time period?
a. Statement of cash flows
b. Sources and uses of funds statement
c. Balance sheet
d. Income statement
12. Gross profit is equal to:
a. Revenues minus expenses
b. Profits plus depreciation
c. Sale minus cost of goods sold
d. Earnings before taxes minus taxes payable
13. An income statement may be represented as follows:
a. Sales-Expenses=Retained Earnings
c. Revenues-Liabilities=Net Income
14. Which of the following ratios would be the poorest indicator of how rapidly the firm’s credit accounts are being collected?
a. Average collection period
b. Cash conversion cycle
c. Times interest earned
d. Accounts receivable turnover ratio
15. An analyst is evaluating two companies, A and B. Company A has a debt ratio of 50% and Company B has a debt ratio of 25%. In his report, the analyst is concerned about Company B’s debt level, but not about Company A’s debt level. Which of the following would best explain this position?
a. Company A has a lower times interest earned ratio and thus the analyst is not worried about the amount of debt
b. Company B has a much higher operating income than Company A
c. Company B has a higher operating return on assets than Company A, but Company A has a higher return on equity than Company B
d. Company B has more total assets than Company A
16. Jeter Industries has an accounts receivable turnover ratio of 4.5. If Jeter has an accounts receivable balance of $100,000, what is Jeter’s average daily credit sales?
17. As of today, the most severe economic crisis to afflict the United States’ economy is considered to be:
a. The Great Depression of the 1930’s
b. The Reagan Tax Law Changes of 1985
c. The Great Recession of 207-2009
d. The Savings and Loan Crisis of 1978-1982
18. A corporate treasurer is typically responsible for each of the following duties EXCEPT:
a. Credit management
b. Capital expenditures
c. Cash management
d. Cost accounting
19. A wealthy private investor providing a direct transfer of funds is called:
a. A financial intermediary
b. An angel investor
c. An investment banker
d. A venture capitalist
20. Rouge Industries reported the following items for the current year: Sales=$3,000,000; Cost of Goods Sold=$1,500,000; Depreciation Expense: $170,000; Administrative Expenses: $150,000; Interest Expenses=$30,000; Marketing Expenses=$80,000; and Taxes=$300,000. Rouge’s net profit margin is equal to:
21. Septon Inc. has an average collection period of 74 days. What is the accounts receivable turnover ratio for Septon Inc.?
22. What form of organization is free of initial legal requirements?
a. Sole proprietorship
b. General partnership
d. Both A and B
23. Which of the following is NOT a benefit provided by the existence of organized security exchanges?
a. Standardization of all debt agreements
b. Helping businesses raise new capital
c. Providing a continuous market
d. Establishing and publicizing fair security prices
24. California Retailing Inc. has sales of $4,000,000; the firm’s cost of goods sold is $2,500,000; and its total operating expenses are $600,000. The firm’s interest expense is $250,000 and the corporate tax rate is 40%. What is California Retailing’s net income?
25. Company A and Company B have the same gross profit margin and the same total asset turnover, but Company A has a higher return on equity. This may result from:
a. Company B has more common stock
b. Company A has lower selling and administrative expenses, resulting in a higher net profit margin
c. Company A has lower cost of goods sold, resulting in a higher net profit margin
d. Company A has a lower debt ratio