Maryland Course: BMGT 340 Exam1SP08

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

Maryland Course: BMGT 340 Exam1SP08

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