BUAD 306 Business Finance Fall 2014 Midterm Exam 1 There are 28 questions in the exam You have 90 minutes I agree that I will not give or receive unauthorized help during this test I understand that giving or receiving such help during the test is cheating and will result in a failure of the test and other possible repercussions according to University policy I pledge my honor that I have not violated the USC Student Conduct Code in this examination Name Print Clearly Signature Date ID Number Your grade will be based on answers recorded on your scantron not this paper Therefore make sure you fill in your scantron sheet as you go along because you will not be given any extra time at the end of the exam to fill out your form Fill the oval in completely with an appropriate pencil Students are responsible for any incorrect erasure so make sure you completely erase any unintended answers You are allowed to use calculators for this test but not any device that can connect wirelessly to other devices This test is closed book no notes are allowed Formulas are provided at the end of the test Do all of the following BEFORE answering any test questions 1 Write your name on the front side of the scantron sheet 2 Write your Student ID Number in the subject box 3 Write the test form letter in the Test No box EXAM FORM A 1 The following is a good measure of a firm s liquidity a Net working capital b Marginal tax rate c Net capital spending d Average tax rate e Net income 2 Which of the following best states the goal of financial management a Maximize current profits b Avoid financial distress c Maximize the firm s current stock price d Maximize sum of current employee salaries e Maximize current dividends paid to shareholders 3 Which of the following statements regarding liquidity is correct a Liquid assets can be sold immediately but significant loss in price occurs b Liquid assets can be sold without significant loss in price but this entails a long search for a buyer c Any asset that can be sold within the next two years is considered liquid d Small firms typically have more liquid stock than large firms e More liquid assets are at the top of a firm s balance sheet 4 You purchase 200 shares of stock in a corporation called USC Co and each share of stock costs 10 The fact that you cannot lose more than 2 000 on this trade is an example of a Double taxation b Limited liability c An agency problem d Single taxation e Limited partnership 5 Which of the following illustrates an example of the agency problem a The CEO buys a corporate jet as a result the company is managed more efficiently b The CEO is the only shareholder in the company c The CEO is paid exclusively in stock options d The CEO decides to open several new stores solely because his compensation is based in part on the total stores open e The CEO decides to launch a new product that will help maximize shareholder s wealth 6 Which of the following are disadvantages of the corporate form of business ownership I limited liability II double taxation III agency problems can arise IV large amounts of regulation a I and II only b III and IV only c I III and IV only d II III and IV only e I II III and IV 7 As an individual investor you must pay tax on all of the following except a Dividends from corporate stock b Interest from a corporate bond c Interest from a US government issued bond d Realized capital gains e Interest from a municipal bond 8 Corporation ABC holds 100 000 shares of Corporation XYZ In the second quarter of 2014 XYZ paid a dividend of 0 40 share The following best describes the tax treatment of these dividends a ABC needs to pay taxes on the entire dividend received b ABC needs to pay taxes only on 30 of the dividends received c XYZ does not need to pay tax on the income that generated these dividends d ABC does not need to pay taxes on any portion of the dividends received e ABC can choose to defer the tax payment on the received dividends into the future 9 A firm has taxable income of 2 500 000 Using the tax schedule above the tax liability of the firm is and the firm s average tax rate is Rounded to the nearest dollar a 104 400 39 0 b 736 100 29 4 c 850 000 34 0 d 736 100 34 0 e 535 414 28 3 Star Electronics 2014 Income Statement in millions Net Sales Cost of good solds Depreciation Earnings before interest and taxes Interest paid Taxable Income Less Taxes Net Income 25 343 18 424 998 5 921 2 355 3 566 1 070 2 496 Star Electronics Balance Sheet in millions Cash Accounts receivable Inventory Total Net fixed assets Total Assets 2013 242 1 502 6 353 8 097 13 424 2014 890 1 900 9 424 12 214 14 141 21 521 26 355 Accounts payable Notes payable Total LongPterm debt Common stock Retained earnings Total liab equity a f 10 What is Star Electronics net working capital in 2014 a 8 313 b 6 410 c 4 224 d 9 959 e 3 549 11 What is Star Electronics net capital spending in 2014 a 833 b 1 715 c 1 414 d 299 e 1 400 2013 1 525 3 023 4 548 3 400 5 600 7 973 21 521 2014 1 411 844 2 255 13 334 7 420 3 346 26 355 12 What is Star Electronics operating cash flow for 2014 rounded to nearest dollar a 4 847 b 2 422 c 3 231 d 5 143 e 4 244 13 You expect to receive 9 000 at graduation in two years You plan on investing it at 12 percent until you have 107 000 How long will you wait from now a 23 84 years b 21 84 years c 19 84 years d 26 23 years e 26 71 years 14 In 2003 a sculpture was sold at auction for a price of 10 306 500 Unfortunately for the previous owner he had purchased it in 1999 at a price of 12 377 500 What was his annual rate of return on this sculpture a 4 03 b 3 80 c 4 68 d 4 47 e 5 06 15 Financial asset 1 pays off 100 000 in 5 years from now Financial asset 2 pays off 90 000 in 4 years from now Which of the following is true a If interest rates rise then both assets will decrease in price b The price of asset 1 is higher than the price of asset 2 c If interest rates rise asset 1 will decrease in price but asset 2 will increase in price d If interest rates rise asset …