Finance Exam 1

Last year, your company had sales of $3.6 million, cost of goods sold of $2.3 million and operating expenses amounting to $840,000. The firm had $114,000 in depreciation expense. In addition, the firm paid 8% interest on $625,000 in bonds, received $30,00

$102,200

Given an anticipated inflation premium of 1.30% and a nominal rate of interest of 5.20%, what is the real interest rate? Round your answer to 4 decimal places.

3.85%

Given an anticipated inflation premium of 1.25% and a real rate of interest of 3.75%, what is the nominal interest rate? Round your answer to 4 decimal places.

5.05%

Which of the following best describes the goal of the firm?

Maximizing the value of the firm's equity.

Last year, California Sushi and Such (CSS) had sales of $65 million. The firm's operating expenses amounted to $20 million and costs of goods sold totaled $15 million. In addition, CSS received $80,000 in dividend income, and paid $300,000 in dividends to

$6,570,900

Dividends received by the firm

are usually 70% excluded from taxation

Which of the following are tax deductible expenses for a corporation?

interest paid on debt

What is the tax liability for a corporation with $10,200,000 in taxable income?

$3,470,000

What is the tax liability for a corporation with $13,100,000 in taxable income?

$4,485,000

Which of the term structure theories claims that investors are limited to certain maturity ranges due to legal restrictions and personal preferences?

The market segmentation theory.

What distinguishes a public offering from a private placement?

In a public offering, all investors have the opportunity to acquire a portion of the financial claims being sold, but not so in a private placement.

Since there is a virtual certainty that the U.S. government will pay interest on Treasury securities and will redeem them at face value when they mature, Treasury securities are free of any _________ risk.

default

What is underwriting?

Underwriting is the process of purchasing and selling of a new security issue by an investment banker.

What business type is a business owned by individual, therefore subject to a limited life and unlimited liability?

Sole proprietorship

Of the legal forms of organizations discussed in chapter 1, which form of organization has the advantage of limited liability for all owners?

corporation.

If an issuing firm sells securities to the investing public without involving an investment banker, the issue is called:

a direct sale

If you sell 100 shares of General Electric common stock, this transaction takes place in:

the secondary capital market.

The true owners of a corporation are the _______.

stockholders

Suppose your firm had the following taxable income amounts:
2005 ($2 million) operating loss
2006 ($2 million) operating loss
2007 ($2 million) operating loss
2008 $5 million
After you "carry forward" the operating losses, how much operating loss can you

$1 million

(Brain teaser) In a brilliant move to improve its financial strength, your company increased its debt ratio to 40% and interest expense to $15,000 per year. Sales should remain unchanged at $200,000 with an EBIT of $27,000. If your firm's total assets tur

30.0%

Given an anticipated inflation premium of 1.35% and a nominal rate of interest of 5.40%, what is the real interest rate? Round your answer to 4 decimal places.

4.00%

Given an anticipated inflation premium of 1.40% and a real rate of interest of 4.14%, what is the nominal interest rate? Round your answer to 4 decimal places.

5.60%

Last year, California Sushi and Such (CSS) had sales of $65 million. The firm's operating expenses amounted to $20 million and costs of goods sold totaled $15 million. In addition, CSS received $80,000 in dividend income, and paid $300,000 in dividends to

$7,970,900

Capital losses may be _______.

carried back 3 years or carried forward up to 5 years

What is the tax liability for a corporation with $17.5 million of taxable income?

$6,100,000

What is the tax liability for a corporation with $13,600,000 in taxable income?

$4,660,000

Which of the term structure theories claims that investors require maturity premiums to compensate them for buying securities that expose them to the risks of fluctuating interest rates?

The liquidity preference theory.

If Electro Corporation sells a $20 million stock issue to an investment banking firm such as Merrill Lynch, this transaction takes place in:

the primary capital market

To raise $5 million, Southeastern Corporation decides to issue bonds. If Southeastern does not register the bonds with the SEC and then sells the entire bond issue to Metropolitan Life Insurance Company, this issue is called a(n):

private placement

Cash available from operations after the firm pays for investments (in operating working capital and fixed assets) is called:

free cash flow

The sale of additional stock by a company whose shares are already publicly traded is called:

a seasoned equity offering

The legal form of business that allows a firm to function separate and apart from its owners is the _________.

corporation

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 me

a best efforts offer

What is the tax liability for a corporation with $10,800,000 in taxable income?

$3,680,000

What is the tax liability for a corporation with $12,500,000 in taxable income?

$4,275,000

Last year, your company had sales of $2.4 million. The firm's costs of goods sold amounted to 34% of sales. The firm also paid cash operating expenses of $1,200,000, and had $80,500 in depreciation expense. The firm had $450,000 in 9% coupon bonds outstan

$90,500

If a new security issue is marketed to a definite and select group of investors (such as current stockholders, employees or customers) the issue is called:

a privileged subscription

The yield curve is typically _______.

upward sloping

Dividends paid by the firm ________.

are paid out of net income

Last year, California Sushi and Such (CSS) had sales of $65 million. The firm's operating expenses amounted to $20 million and costs of goods sold totaled $15 million. In addition, CSS received $80,000 in dividend income, and paid $300,000 in dividends to

$7,270,900

Maximization of shareholder wealth as a goal is superior to profit maximization because ________.

it considers time value of money and uncertainty

Suppose your firm had the following taxable income amounts:
2005 $2 million
2006 $2 million
2007 $2 million
2008 ($5 million) operating loss
After you "carry back" the operating loss, what is the effective taxable income for 2007?

$0

corporate bonds
municipal bonds
treasury bonds
corporate stock

Capital market instruments

The American Stock Exchange is an example of what market?

secondary market

which of the term structure theories would support the argument that the yield curve is upward sloping because investors expect future interest rates to rise?

unbiased expectations theory

nominal interest rate is 9%, real rate is 2%, what is the expected rate of inflation?

6.86%

Inflation premium of 5.75% and the real rate of 3.25%, what is the nominal interest rate?

9.2%

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

private placement

Money market instruments exclude

preferred stocks

investment bank will buy the entire issue and sell each new bond to investors. this distribution method is:

negotiated purchase

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:

best efforts

which of the term structure theories claims that legal restrictions an personal preferences limit choices for investors to certain ranges of maturities

market segmentation theory

new issue of securities is marketed to a definite and select group of investors, such as employees or current stockholders, the issue is called:

privileged subscription

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

primary capital market