Finance Exam 1 Practice Test

Question 1

The American Stock Exchange is an example of:

Answer 1

The secondary market

Question 2

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?

Answer 2

The unbiased expectations theory.

Question 3

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:

Answer 3

Best efforts

Question 4

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)]

Answer 4

6.86%

Question 5

Profit maximization does not adequately describe the goal of the firm because:

Answer 5

Profit maximization does not consider the riskiness of returns.
AND
Profit maximization ignores the timing of returns.

Question 6

Given the anticipated inflation premium of 5.75% and the real rate of interest of 3.25%, what is the nominal interest rate?

Answer 6

9.2%

Question 7

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

Answer 7

$33,600

Question 8

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%.

Answer 8

$319,200

Question 9

Which of the following is true regarding a sole proprietorship?

Answer 9

The owner has unlimited liability.

Question 10

Capital market instruments include:

Answer 10

Corporate stocks & bonds, treasury bonds, and municipal bonds.

Question 11

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%?

Answer 11

$159,600

Question 12

Net capital losses may be:

Answer 12

Carried back 3 years or carried forward up to 5 years.

Question 13

The goal of the firm is best described as:

Answer 13

Maximizing the value of the firm’s common stock.

Question 14

Bypassing SEC registration to sell securities directly to a pension fund or insurance company is an example of a:

Answer 14

Private placement.

Question 15

The law that established the SEC is:

Answer 15

The Securities Exchange Act of 1934.

Question 16

Money market instruments include all of the following except:

Answer 16

Preferred stocks.

Question 17

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:

Answer 17

A negotiated purchase.

Question 18

Which of the term structure theories claims that legal restrictions and personal preferences limit choices for investors to certain ranges of maturities?

Answer 18

The market segmentation theory.

Question 19

Which of the following is true regarding the over-the-counter market?

Answer 19

The OTC brokers and dealers are linked by NASDAQ.

Question 20

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):

Answer 20

Privileged subscription.

Question 21

If a syndicate of investment banks purchases a common stock issue from a corporation, this transaction takes place in:

Answer 21

The primary capital market.

Question 22

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%?

Answer 22

$3,681,300

Question 23

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%.

Answer 23

$14,700