SAMPLE TEST 1 Finance 3000 No answers provided ask around and compare notes at the blackboard discussion board Question 1 Your corporation has a marginal tax rate of 35 and has purchased preferred stock in another company The before tax dividend yield on the preferred stock is 12 What is the company s aftertax return on the preferred assuming a 70 dividend exclusion a 11 28 b 10 20 c 12 43 d 10 74 e 11 84 QUESTION 2 Houston Pumps recently reported 185 250 of sales 140 500 of operating costs other than depreciation and 9 250 of depreciation The company had 35 250 of outstanding bonds that carry a 6 75 interest rate and its federal plus state income tax rate was 35 In order to sustain its operations and thus generate future sales and cash flows the firm was required to spend 15 250 to buy new fixed assets and to invest 6 850 in net operating working capital What was the firm s free cash flow a 11 273 b 10 225 c 12 429 d 10 736 e 11 837 5 points QUESTION 3 A firm wants to strengthen its financial position Which of the following actions would increase its quick ratio a Offer price reductions along with generous credit terms that would 1 enable the firm to sell some of its excess inventory and 2 lead to an increase in accounts receivable b Use some of its cash to purchase additional inventories c Issue new common stock and use the proceeds to increase inventories d Speed up the collection of receivables and use the cash generated to increase inventories e Issue new common stock and use the proceeds to acquire additional fixed assets 5 points QUESTION 4 Exhibit 4 1 The balance sheet and income statement shown below are for Koski Inc Note that the firm has no amortization charges it does not lease any assets none of its debt must be retired during the next 5 years and the notes payable will be rolled over Balance Sheet Millions of Assets Cash and securities Accounts receivable Inventories Total current assets Net plant and equipment Total assets Liabilities and Equity Accounts payable Accruals Notes payable Total current liabilities Long term bonds Total liabilities Common stock Retained earnings Total common equity Total liabilities and equity 2014 2 500 11 500 16 000 30 000 20 000 50 000 9 500 5 500 7 000 22 000 15 000 37 000 2 000 11 000 13 000 50 000 Income Statement Millions of Net sales Operating costs except depreciation Depreciation Earnings bef interest and taxes EBIT Less interest Earnings before taxes EBT Taxes Net income 2014 87 500 81 813 1 531 4 156 1 375 2 781 973 1 808 Other data Shares outstanding millions Common dividends Int rate on notes payable L T bonds Federal plus state income tax rate Year end stock price 500 00 632 73 6 25 35 43 39 Refer to Exhibit 4 1 What is the firm s inventory turnover ratio a 5 47 b 6 33 c 5 74 d 6 65 e 6 03 QUESTION 5 Suppose that you have 1 500 and plan to purchase a five year certificate of deposit CD that pays 3 5 interest compounded annually How much will you have when the CD matures a 1 870 61 b 2 062 34 c 1 964 14 d 2 165 46 e 1 781 53 QUESTION 6 What annual payment must you receive in order to earn a 6 5 rate of return on a perpetuity that has a cost of 1 250 a 89 58 b 77 19 c 94 06 d 81 25 e 85 31 5 points QUESTION 7 Your child s orthodontist offers you two alternative payment plans The first plan requires a 4 000 immediate up front payment The second plan requires you to make monthly payments of 137 41 payable at the end of each month for 3 years What nominal annual interest rate is built into the monthly payment plan a 13 64 b 15 08 c 12 96 d 14 36 e 12 31 5 points QUESTION 8 Your father is about to retire and he wants to buy an annuity that will provide him with 85 000 of income a year for 25 years with the first payment coming immediately The going rate on such annuities is 5 15 How much would it cost him to buy the annuity today a 1 063 968 b 1 303 008 c 1 240 960 d 1 178 912 e 1 119 966 5 points QUESTION 9 You want to buy a new sports car 3 years from now and you plan to save 4 200 per year beginning one year from today You will deposit your savings in an account that pays 5 2 interest How much will you have just after you make the 3rd deposit 3 years from now a 14 626 b 13 267 c 11 973 d 13 930 e 12 603 5 points QUESTION 10 What s the future value of 1 500 after 5 years if the appropriate interest rate is 6 compounded semiannually a 2 117 b 2 016 c 1 915 d 1 819 e 2 223 5 points QUESTION 11 Bond A has a 9 annual coupon while Bond B has a 7 annual coupon Both bonds have the same maturity a face value of 1 000 an 8 yield to maturity and are noncallable Which of the following statements is CORRECT a If the yield to maturity for both bonds immediately decreases to 6 Bond A s bond will have a larger percentage increase in value b If the yield to maturity for both bonds remains at 8 Bond A s price one year from now will be higher than it is today but Bond B s price one year from now will be lower than it is today c Bond A s capital gains yield is greater than Bond B s capital gains yield d Bond A trades at a discount whereas Bond B trades at a premium e Bond A s current yield is greater than that of Bond B 5 points QUESTION 12 Moerdyk Corporation s bonds have a 15 year maturity a 7 25 semiannual coupon and a par value of 1 000 The going interest rate rd is 6 20 based on semiannual compounding What is the bond s price a 1 047 19 b 1 157 35 c 1 074 05 d 1 101 58 e 1 129 12 5 points QUESTION 13 Radoski Corporation s bonds make an annual coupon interest payment of 7 35 The bonds have a par value of 1 000 a current price of 1 130 and mature in 12 years What is the yield to maturity on these bonds a 6 73 b 6 41 c 5 52 d 5 82 e 6 11 5 points QUESTION 14 Taussig Corp s bonds currently sell for 1 150 They have a 6 35 annual coupon rate and a 20 year maturity but they can be …