"For Topnotcher Only"
You must submit a completed answer sheet with your answers. You are not required to submit your working. However, complete working in MS Excel, showing formulas and calculations may be considered for partial credit for incorrect answers.
Please refer to the Syllabus for the policy regarding late submissions. There will be no makeup exams unless for documented emergencies.
Identify the letter of the choice that best completes the statement or answers the question.
______1. Which of the following mechanisms helps to align management interests with those of shareholders?
a. 
A well designed compensation package. 
b. 
An efficient managerial labor market. 
c. 
The SarbanesOxley Act of 2002. 
d. 
All of the above. 
______2. Assume the pretax profit of $50,000 has been earned by a business, and the owner/proprietor wants to withdraw all of the aftertax profit for personal use. Assume the tax rate for a C corporation is 33%, while the rate for a person is 25%. The aftertax earnings available under the corporate and proprietorship forms of business are:
a. 
for a corporation, $25,125; for a proprietorship, $37,500. 
b. 
for a corporation, $24,090; for a proprietorship, $36,500. 
c. 
for either a corporation or a proprietorship, $36,500. 
d. 
for either a corporation or a proprietorship, $24,090.

______3. Galan Associates prepared its financial statements for 2013 based on the information below.
The company had cash of $1,350, inventory of $12,480, and accounts receivables
of $6,589. The company’s net fixed assets are $40,331, and other assets are $1,822.
It has accounts payable of $10,604, notes payable of $2,886, common stock of $22,400,
and retained earnings of $14,368. How much longterm debt does the firm have?
a. 
$16,342 
b. 
$18,334 
c. 
$12,314 
d. 
$22,342 
______4. Mike’s Boutique announced that for the period ending December 31, 2013, it had revenues of $640,000. The company’s costs (excluding depreciation and amortization) amounted to 75% of revenues, and Art’s boutique had interest expenses of $40,000 and depreciation of 60,000. What is the firm’s net income if the tax rate was 34 percent?
a. 
$ 39,600 

b. 
$ 20,400 

c. 
$ 50,400 

d. 
$ 79,600
The information below should be used for question 5

______ 5. What is the change in net working capital from 2012 to 2013?
a. 
$4,015 
b. 
$1,200 
c. 
$1,335 
d. 
$3,405 
______6. ShiptoShore had earnings after tax (EAT) of $320,000 last year. Its expenses included
depreciation of $55,000, interest of $40,000. It purchased new equipment for $20,000.
The company also sold stock for $40,000. What is ShiptoShore’s net cash flow for last year?
a. 
$395,000 
c. 
$380,000 
b. 
$315,000 
d. 
$475,000 
______7. Given the following information for Tandoori Grill Restaurant, calculate the total asset turnover and return on equity ratios:
Net Profit Margin = 8% Return on Assets = 15% Debt Ratio = 30%
a. 
1.875; 15.34% 
c. 
2.000; 26.67% 
b. 
1.875; 21.43% 
d. 
3.750; 26.67% 
______8. The Felix Corporation has just decided to save $10,000 each quarter for the next five years to serve as a safety net for economic downturns. The money will be set aside in a separate savings account that pays 5.25 percent annual rate, with interest compounded quarterly. The first deposit will be made today. If the company wanted to deposit an equivalent lump sum today, how much would it have to deposit?
a. 
$190,454.86 
c. 
$189,468.05 
b. 
$174,902.14 
d. 
$177,197.73 
______ 9. You are comparing two investment options. The cost to invest in either option is the same today. Both options provide you with $20,000 of income. Option A pays five annual payments starting with $8,000 the first year followed by four annual payments of $3,000 each. Option B pays five annual payments of $4,000 each. Which one of the following statements is correct given these two investment options?
a. 
Both options are of equal value given that they both provide $20,000 of income. 
b. 
Option A has a higher present value than option B given any positive rate of return. 
c. 
Option B has a higher present value than option A given any positive rate of return. 
d. 
Option B has a lower future value at year 5 than option A given a zero rate of return. 
____ 10. You want to buy a car for $25,650. The finance company will charge you 6.6% annual rate compounded monthly on a 4year loan. If you can afford $485 monthly payments, how much do you need to borrow? How much do you need for a down payment?
a. 
$18,441; $7,209 
c. 
$22,590; $3,060 
b. 
$25,650; $0 
d. 
$20,412; $5,238 
_____ 11. You are the manager of an annuity settlement company. Jim Patton just won the state lottery which promises to pay him $1,000 per year for 20 years, starting from today, and $2,000 per year for years 2145, given a 9% discount rate. Your company wants to purchase the proceeds from the lottery from Jim. What is the most that your company can offer?
a. 
$12,633.85 
b. 
$13,770.90 
c. 
$16,940.38 
d. 
$18,680.95 
____ 12. Jean Cleveland currently has $7,750 in a money market account paying 7.25 percent compounded semiannually. She plans to use this amount and her savings over the next 5 years to make a down payment on a townhouse. She estimates that he will need $20,000 in 5 years. How much should she
invest in the money market account semiannually over the next 5 years to achieve this target?
a. 
$ 886.28 
b. 
$ 757.25 
c. 
$ 650.97 
d. 
$ 610.79 
____ 13. Fabian has a 6year, 8% annual coupon bond with a $1,000 par value. Feaster Enterprises has a 12year, 8% annual coupon bond with a $1,000 par value. Both bonds currently have a yield to maturity of 6%. Which of the following statements are correct if the market yield increases to 7%?
a. 
Both bonds will decrease in value by 4.61%. 
b. 
The Feaster bond will increase in value by $88.25. 
c. 
The Fabian bond will increase in value by 4.61%. 
d. 
The Feaster bond will decrease in value by 7.56%. 
____ 14. BioMax Inc. offers an 8 percent coupon bond that has a $1,000 par value, semiannual coupon payments and 20 years of its original 25 years left to maturity. Which of the following
statements is true if the market return on similar bonds is 10%?
a. 
The bond will sell at a premium of $1,198 because the coupon rate is less than the market interest rate. 
b. 
The bond will sell at a discount of $828 because the coupon rate is greater than the market interest rate. 
c. 
The bond will sell at a discount of $817 because the coupon rate is less than market interest rate. 
d. 
The bond will sell at a discount of $828 because the coupon rate is less than the market interest rate. 
____ 15. If a stock portfolio is well diversified, then the portfolio variance
a. 
will equal the variance of the most volatile stock in the portfolio. 
b. 
may be less than the variance of the least risky stock in the portfolio. 
c. 
must be equal to or greater than the variance of the least risky stock in the portfolio. 
d. 
will be a weighted average of the variances of the individual securities in the portfolio. 
____ 16. Aquaman stock has exhibited a standard deviation in returns of 0.7, whereas Green Lantern
stock has exhibited a standard deviation of 0.8. The correlation coefficient between the
stock returns is 0.1. What is the standard deviation of a portfolio composed of 70%
Aquaman and 30% Green Lantern?
a. 
0.56676 
b. 
0.32122 
c. 
0.61743 
d. 
0.75000 
_____17. The stocks of Microsoft and Apple have a correlation coefficient of 0.6. The variance of
Microsoft stock is 0.4 and the variance of Apple stock is 0.3. What is the covariance
between the two stocks?
a. 
0.72 
b. 
0.07 
c. 
0.21 
d. 
0.36 
_____18. Star Solutions, Inc. paid a dividend last year of $3.55, which is expected to grow at a constant rate of 3%. Star Solutions has a beta of 1.8 and their stock is currently selling for $31.47. If the market rate of return is 9% and the riskfree rate is 4%, would you purchase Star Solutions’ stock?
a. 
No, because it is overvalued $5.10 
c. 
No, because it is overvalued $9.85 
b. 
Yes, because it is undervalued $5.10 
d. 
Yes, because it is undervalued $9.85 




_____ 19. You are comparing stock A to stock B. Given the following information, which one of these two
Stocks should you prefer and why?


Rate of Return if State Occurs 

State of the Economy 
Probability of State of the Economy 
Stock A 
Stock B 
Boom 
60% 
9% 
15% 
Recession 
40% 
4% 
6% 
a. 
Stock A; because it has a higher expected return and appears to be less risky than stock B. 
b. 
Stock A; because it has a lower expected return but appears to be less risky than stock B. 
c. 
Stock B; because it has a higher expected return and appears to be more risky than stock A. 
d. 
Stock B; because it has a higher expected return and appears to be less risky than stock A. 
_____20. Carmen Electronics bought a new machine for $2,538,966. The company expects additional cash flows from the machine of $950,225, $1,058,436, and $1,491,497 over the next three years. What is the payback period? If their acceptance period is 2.5 years, will this project be accepted?
a. 
4.17 years; yes 
c. 
2.36 years, yes 
b. 
4.17 years; no 
d. 
3.83 years; no 
_____21. Jekyll and Hyde, Inc. has just purchased the rights to a movie. The company has the option of producing the movie on either a large budget of $25 million or a small budget of $10 million. The cash flow in year 1 for the large budget movie is $65 million, while the cash flow in year 1 for the smallbudget movie is $40 million. The cost of capital is 25%. Which project should be accepted?
a. 
The largebudget movie because the IRR is higher. 
b. 
The smallbudget movie because the NPV is lower. 
c. 
The largebudget movie because the NPV is higher. 
d. 
The smallbudget movie because the IRR is lower. 
_____22. Which of the following statements is correct?
a. 
If Project A has a higher IRR than project B, then project A must also have a higher NPV. 
b. 
If a project’s IRR exceeds the cost of capital, then the project’s NPV must be positive. 
c. 
The IRR calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the firm’s cost of capital. 
d. 
Statements (a) and (c) are correct. 
____ 23. The projected cash flows for two mutually exclusive projects are as follows:
Year 
Project A 
Project B 
0 
($150,000) 
($150,000) 
1 
0 
50,000 
2 
0 
50,000 
3 
0 
50,000 
4 
0 
50,000 
5 
250,000 
50,000 
If the cost of capital is 10%, the decidedly more favorable project is:
a. 
project A with an NPV of $39,539 and an IRR of 10.8%. 
b. 
project A with an NPV of $5,230 and an IRR of 10.8%. 
c. 
project B with an NPV of $39,539 and an IRR of 19.9%. 
d. 
project B with an NPV of $5,230 and an IRR of 19.9%. 
____ 24. You are considering two mutually exclusive projects with the following cash flows. Will your choice between the two projects differ if the required rate of return is 8% rather than 11%? If so, what should you do?
Year 
Project A 
Project B 


0 
($240,000) 
($198,000) 


1 
0 
110,800 


2 
0 
82,500 


3 
325,000 
45,000 













a. 
Yes; select A at 8% and B at 11%. 


b. 
Yes; select B at 8% and A at 11%. 


c. 
No; regardless of the required rate, project A always has the higher NPV. 


d. 
No; regardless of the required rate, project B always has the higher NPV. 

_____25. Capital budgeting analysis of mutually exclusive projects A and B yields the following:

Project A 
Project B 
IRR 
18% 
22% 
NPV 
$270,000 
$255,000 
Payback Period 
2.5 yrs 
2.0 yrs 
Management should choose:
a. 
project A because NPV is the best of the three methods. 
b. 
project B because two out of three methods choose it. 
c. 
project B because most executives prefer the IRR method. 
d. 
either project because the results aren’t consistent. 
Subject  Mathematics 
Due By (Pacific Time)  10/24/2014 09:00 pm 
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