Finance Exam 1 Practice Test Flashcards
The American Stock Exchange is an example of:
The secondary market
Which of the of the term structure theories would support the argument that the yield curve is upward sloping because investors expect future interest rates to rise?
The unbiased expectations theory.
Suppose your firm selects an investment banking firm to assist with your firm’s $10 million stock issue. The investment banker will act as a broker and will attempt to sell each new share of stock for a commission for each share sold. This distribution method is referred to as:
Best efforts
If the nominal interest rate is 9% and the real rate of interest is 2%, what is the expected rate of inflation? Be precise (4 decimal places). [Hint: (1 + krf) = (1 + k*)(1 + IRP)]
6.86%
Profit maximization does not adequately describe the goal of the firm because:
Profit maximization does not consider the riskiness of returns.
AND
Profit maximization ignores the timing of returns.
Given the anticipated inflation premium of 5.75% and the real rate of interest of 3.25%, what is the nominal interest rate?
9.2%
The taxable income for Franklin Company for the past two years is as follows. What is the firm’s tax payment in 2018? The tax rate is 21%.
Year: Income:
2017 (20,000)
2018 180,000
$33,600
Last year, Western Corporation had sales of $5 million, cost of goods sold of $3 million, operating expenses of $175,000 and depreciation of $125,000. The firm received $40,000 in dividend income and paid $200,000 in interest on loans. Also, Western sold stock during the year, receiving a $40,000 gain on stock owned 6 years, but losing $60,000 on stock owned 4 years. What is the firm’s tax payment? The tax rate is 21%.
$319,200
Which of the following is true regarding a sole proprietorship?
The owner has unlimited liability.
Capital market instruments include:
Corporate stocks & bonds, treasury bonds, and municipal bonds.
Your firm has operating income of $800,000, interest expense of $100,000, a capital gain of $80,000 and a capital loss of $20,000. What is your tax payment if the tax rate is 21%?
$159,600
Net capital losses may be:
Carried back 3 years or carried forward up to 5 years.
The goal of the firm is best described as:
Maximizing the value of the firm’s common stock.
Bypassing SEC registration to sell securities directly to a pension fund or insurance company is an example of a:
Private placement.
The law that established the SEC is:
The Securities Exchange Act of 1934.
Money market instruments include all of the following except:
Preferred stocks.
Suppose your firm selects an investment banking firm to assist with your firm’s $50 million bond issue. The investment bank will buy the entire issue and sell each new bond to investors. This distribution method is referred to as:
A negotiated purchase.
Which of the term structure theories claims that legal restrictions and personal preferences limit choices for investors to certain ranges of maturities?
The market segmentation theory.
Which of the following is true regarding the over-the-counter market?
The OTC brokers and dealers are linked by NASDAQ.
When a new issue of securities is marketed to a definite and select group of investors, such as the firm’s employees or current stockholders, the issue is called a(n):
Privileged subscription.
If a syndicate of investment banks purchases a common stock issue from a corporation, this transaction takes place in:
The primary capital market.
Last year, Hammond Corporation had sales of $120 million, costs of goods sold of $65 million, and total operating expenses of $38 million. Also, Hammond received $60,000 in dividend income, paid $30,000 in dividends to its stockholders, and sold land for $1.5 million that had been purchased for $1 million several years earlier. What is Hammond’s tax payment if their tax rate is 21%?
$3,681,300
Ocean Side Corporation expects to have $100,000 in taxable income this year. The firm had an operating loss last year of $30,000, which they plan to carry forward to this year. Calculate the firm’s tax payment for this year. Their tax rate is 21%.
$14,700
