FIN 335 Test 1

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

a. Should a new machine be purchased this year?

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b. Should the credit terms offered to customers be revised?

c. Should debt or equity financing be used to purchase a building?

d. Should the level of inventory be increased?

2. Which one of the following functions is generally under the control of the corporate treasurer?

a. cost accounting

b. tax management

c. financial planning

d. financial accounting

3. Which one of the following best describes the liability a general partner has for the partnership debts?

a. none

b. liability limited to amount invested in the firm

c. liability limited based on percentage ownership

d. unlimited

4. Which one of the following provides you with the greatest control over a firm’s daily operations?

a. limited partner

b. major stockholder in a corporation

c. minor stockholder in a joint stock company

d. sole proprietor

5. A limited partner:

a. has no personal responsibility for the debts incurred by the partnership.

b. is guaranteed a return of his or her entire investment in the partnership if the partnership terminates.

c. can only control the daily operations for an individual segment of the partnership.

d. has minimal control, if any, over the daily operations of the partnership.

6. The Sarbanes-Oxley Act in 2002 is designed to protect the public against:

a. a firm’s net operating losses if those losses extend beyond a 2-year period.

b. declines in the market value of a firm’s outstanding shares of stock.

c. financial malpractice and accounting fraud.

d. a firm’s issuing additional shares of stock if the issue will reduce the market value of the current

outstanding shares.

7. Who has the ultimate control over a corporation?


b. chief executive officer

c. chairman of the board

d. board of directors

8. Which one of the following is a primary market transaction?

a. Theo, the president of ABC, sells some of his shares in ABC on the NYSE

b. ABC offers newly issued shares to the general public

c. Tom instructs his broker to sell all of his shares in ABC, Inc.

d. Mary gifts shares of ABC stock to her son

Use these financial statements to answer questions 9 through 13.

Balance Sheet

2007 2008 2007 2008

Cash $ 1,700 $ 1,600 Accounts payable $13,800 $ 12,900

Accounts receivable 14,300 17,400 Long-term debt 47,500 48,600

Inventory 22,500 23,700 Common stock 17,000 22,000

Net fixed assets 82,900 81,600 Retained earnings 43,100 40,800

Total assets $121,400 $124,300 Total liabilities and equity $121,400 $124,300

Income Statement

Net Sales $163,700

Costs 108,200

Depreciation 14,100

EBIT 41,400

Interest 3,800

Taxable income 37,600

Taxes 13,200

Net Income $ 24,400

9. What is the amount of the operating cash flow?

a. $24,400 b. $30,500 c. $38,500 d. $42,300

10 What is the cash flow to stockholders for 2008?

a. $5,000 b. $19,400 c. $21,700 d. $29,400

11. What is the net new borrowing for 2008?

a. -$2,700 b. $200 c. $1,100 d. $4,900

12. What is the change in net working capital for 2008?

a. $5,100 b. $6,300 c. $24,700 d. $25,200

13. What is the cash flow to creditors for 2008?

a. -$2,700 b. -$1,100 c. $1,100 d. $2,700

14. A firm currently has an average tax rate of 20 percent and a marginal tax rate of 25 percent based on its

current taxable income of $36,600. What will the firm’s average tax rate be if it increases its taxable income by $1,100?

a. 20 percent b. 20.05 percent c. 20.09 percent d. 20.15 percent

15. Redding Industrial Supply had common stock of $6,800 and retained earnings of $4,925 at the beginning ofthe year. At the end of the year, the common stock balance is $7,000 and the retained earnings account balance is $5,498. The net income for the year is $938. What is the retention ratio?

a. 17.59 percent b. 38.91 percent c. 61.09 percent d. 82.41 percent

16. Which one of the following formulas is correct?

a. Profit margin = EBIT / Sales

b. Capital intensity ratio = 1 / Return on assets

c. ROA = ROE / Equity multiplier

d. Quick ratio = Cash / Current liabilities

17. If a firm uses cash to purchase inventory, its quick ratio will increase.





18. Use the following tax table to answer this question.

Taxable Income

Tax Rate









Pools, Inc., has taxable income of $77,000 for the year. Which one of the following statements is correct concerning Pools’ tax situation?


Pools’ average tax rate is 18.74 percent.


Pools’ average tax rate is 34.00 percent.


Pools’ marginal tax rate is 15.00 percent.


Pools’ marginal tax rate is 18.74 percent.

19. You currently have $7,200 in your investment account. You can earn an average rate of return of 11.7 percent per year. How long will you have to wait until your account is worth $50,000?

a. 9.47 years b. 11.28 years c. 14.67 years d. 17.51 years

20. Your savings account is currently worth $1,200. The account pays 4.5 percent interest compounded annually. How much will your account be worth 6 years from now?

a. $1,524.00 b. $1,562.71 c. $1,611.18 d. $1,627.19

21. You purchased a new1972 Plymouth Barracuda Ragtop with a 426-Hemi36years ago at a cost of $3,900. You took care of this car, realizing it’s divine nature. Today, you sold that car for $1,750,000 in order to afford tuition and meals and buy a little gas for your moped. What annual rate of return did you earn on this vehicle?

a.1.42 percent b.18.48percent c. 8.48percent d. 8.38 percent

22. The Corner Bank is offering you a credit card with an APR of 12.9 percent. The bank compounds the interest rate on a monthly basis. What is the effective annual rate?

a. 13.69 percent b. 13.87 percent c. 14.03 percent d. 14.14 percent

23. A preferred stock is currently valued at $62.80 a share and pays an annual dividend of $7. The par value is

$100 per share. What is the rate of return on this security?

a. 8.97 percent b. 10.58 percent c. 11.15 percent d. 11.33 percent

24. Over the past 30 years your parents saved money each month for their retirement. They retired this week and expect to live another 28 years. Their investment account is currently valued at $487,300 and is expected to earn 7 percent annually in the future. How much money can they withdraw annually if they wish to spend all of their money during their lifetime?

a. $5,158.75 b. $6,038.59 c. $39,269.75 d. $40,149.59

25. Suzie has $16,000 in her investment account today. She saves $500 a quarter and earns 8 percent interest, compounded quarterly. How much money will she have in her account three years from now?

a. $16,821.87 b. $18,509.53 c. $22,300.16 d. $26,997.91

26. Tom invested $150 at the beginning of each month for the last 14 years and earned 6 percent interest, compounded monthly. Julia invested $300 at the end of each month for the past 7 years and earned 6 percent interest, compounded monthly. Today, Tom has ______ than Julia.

a. $8,164.15 less

b. $8,320.26 less

c. $8,164.15 more

d. $8,320.26 more

27. A series of equal cash flows that occur at the beginning of each time period for a limited number of time periods is called a(n):

a. ordinary annuity.

b. beginning annuity.

c. annuity due.

d. perpetuity.

e. perpetuity due.

28. In Canada and the United Kingdom, a perpetuity is also called a(n):

a. consul.

b. infinite bond.

c. infinity flow.

d. dowry.

e. forever bond.

29. Which type of loan is comparable to the present value of a future lump sum?

a. effective annual rate

b. amortized

c. interest-only

d. annual percentage

e. pure discount

30. Which one of the following is a correct statement, all else held constant?

a. The present value is inversely related to the future value.

b. The future value is inversely related to the period of time.

c. The period of time is directly related to the interest rate.

d. The present value is inversely related to the interest rate.

e. The interest rate is inversely related to the future value.

31. Which one of the following is a breakdown of the ROE into its three component parts?

a. equity analysis

b. efficiency breakout

c. Du Pont identity

d. sustainable growth

e. profitability ratios

32. Suppose given NI= $132,186, Sales = $2,678,461, TA = $784,596 and Debt/Asset = 0.48062. Calc ROE.

a. 32.44

b. 44.32

c. nope

d. not this one either.

33. (5 Points) In 2006 a 50-cent piece (0.50 coin) issued in 1904 sold for $1,300. What is the rate of return on this investment? Show your work.

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