Free Printable Finance Exam 1 Practice (FIN3403)

1.

American Stock Exchange is an Example of:

a)

Over-the-Counter Market

b)

Primary Market

c)

Secondary Market

2.

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?

a)

Term Structure of Interest Rates Theory

b)

Yield Curve Theory

c)

Liquidity Preference Theory

d)

Market Segmentation Theory

e)

Unbiased Expectations Theory

3.

A firm selects an investing banking firm to assist with your firms $10 million stock issue. The investment banker will act a s a broker and will attempt to sell each new share of stock for a commission for each share sold. What is the distribution method?

a)

Underwritten Rights Offer

b)

Privileged Subscription

c)

Negotiated Purchase

d)

Competitive Bid

e)

Best Efforts

4.

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

HINT: (1 + Nominal Interest Rate) = (1 + Real Interest Rate) x (1 + Anticipated Inflation Rate)

a)

7.00%

b)

3.33%

c)

6.86%

d)

11.00%

e)

18.00%

5.

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

a)

Does not consider riskiness of returns.

b)

Does not consider interest bond payments.

c)

Ignores timing of returns.

6.

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

a)

2.4%

b)

9.0%

c)

18.7%

d)

9.2%

e)

7.7%

7.

Taxable Income for Franklin Company for the past 2 years is as follows:

Year: Income:

2017 (20,000)

2018 180,000

What is the firm's tax payment in 2018? Tax Rate = 21%.

a)

$4,200

b)

$37,800

c)

$29,400

d)

$42,000

e)

$33,600

8.

A firm had sales of 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, the firm sold stock during the year, receiving a $400,000 gain on stock owned 4 years. What is the firms tax rate?

a)

$319,200

b)

$310,800

c)

$315,000

d)

$323,400

e)

$327,600

9.

Which of the following is true regarding a sole proprietorship?

a)

Owner has limited liability.

b)

Owner has unlimited liability.

c)

Firm legally functions separately and apart from owner.

10.

Capital Market Instruments include:

a)

Corporate Bonds

b)

Treasury Bonds

c)

Municipal Bonds

d)

Corporate Stocks

11.

A 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?

a)

$147,000

b)

$159,600

c)

$168,000

d)

$184,800

e)

$163,800

12.

Net Capital Losses may be:

a)

Deducted from current years earnings.

b)

Carried back 5 years or carried forward up to 15 years.

c)

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

d)

Allocated over the next 3 years.

e)

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

13.

The goal of the firm is best described as:

a)

Maximizing value of common stock (equity).

b)

Maximizing firms profits.

c)

Maximizing risk.

d)

Minimizing taxes.

14.

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

a)

Direct Sale

b)

Privileged Subscription

c)

Competitive Bid

d)

Negotiated Purchase

e)

Private Placement

15.

The law that established the SEC is:

a)

The Securities Act of 1933

b)

The Securities Exchange Act of 1934

c)

The Securities Act Amendments of 1975

d)

The SEC Act of 1935

e)

The Glass-Steagall Act of 1933

16.

Money Market Instruments include all of the following except:

a)

Negotiable CDs

b)

Preferred Stocks

c)

Commercial Paper

d)

Treasury Bills

17.

A firm selects an investment banking to assist with your firms $50 million bond issue. The investment bank will buy the entire issue and sell the new bond to investors. What is this distribution method?

a)

Underwritten Rights Offer

b)

Privileged Subscription

c)

Negotiated Purchase

d)

Best Efforts

e)

Private Placement

18.

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

a)

Liquidity Preference Theory

b)

Expected Interest Rate Theory

c)

Market Segmentation Theory

d)

Unbiased Expectations Theory

e)

Term Structure of Interest Rates Theory

19.

Balance Sheet: Income Statement:

Assets

Cash $ 1,500 Sales (All Credit) $ 57,500

Accounts Receivable 8,000 Cost of Goods Sold (33,500)

Inventories 7,500 Gross Profit 24,000

Land 15,000 Operating Expenses (20,000)

Other Fixed Assets 14,000 Depreciation (1,000)

Liabilities & Owner's Equity Operating Income 3,000

Accounts Payable $ 3,800 Interest Expense (450)

Long-Term Debt 5,400 EBIT 2,550

Common Stock 30,000 Taxes (850)

Retained Earnings 6,800

What is the firm's Net Profit Margin?

a)

4.43%

b)

5.22%

c)

3.70%

d)

7.08%

e)

2.96%

20.

Balance Sheet: Income Statement:

Assets

Cash $ 1,500 Sales (All Credit) $ 57,500

Accounts Receivable 8,000 Cost of Goods Sold (33,500)

Inventories 7,500 Gross Profit 24,000

Land 15,000 Operating Expenses (20,000)

Other Fixed Assets 14,000 Depreciation (1,000)

Liabilities & Owner's Equity Operating Income 3,000

Accounts Payable $ 3,800 Interest Expense (450)

Long-Term Debt 5,400 EBIT 2,550

Common Stock 30,000 Taxes (850)

Retained Earnings 6,800

What is the firm's Return on Equity?

a)

4.03%

b)

5.67%

c)

6.93%

d)

4.62%

e)

3.70%

21.

Balance Sheet: Income Statement:

Assets

Cash $ 1,500 Sales (All Credit) $ 57,500

Accounts Receivable 8,000 Cost of Goods Sold (33,500)

Inventories 7,500 Gross Profit 24,000

Land 15,000 Operating Expenses (20,000)

Other Fixed Assets 14,000 Depreciation (1,000)

Liabilities & Owner's Equity Operating Income 3,000

Accounts Payable $ 3,800 Interest Expense (450)

Long-Term Debt 5,400 EBIT 2,550

Common Stock 30,000 Taxes (850)

Retained Earnings 6,800

Calculate the firms Operating Income Return on Investment.

a)

6.52%

b)

52.17%

c)

5.54%

d)

8.70%

e)

3.70%

22.

Which of the following is true regarding Over-the Counter Market?

a)

OTC Market is not regulated by SEC.

b)

OTC Market includes most security exchanges.

c)

OTC brokers and dealers are linked by NASDAQ.

d)

OTC Market is a primary market.

23.

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

a)

Private Placement

b)

Direct Sale

c)

Underwritten Issue

d)

Best Efforts Issue

e)

Privileged Subscription

24.

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

a)

Secondary Money Market

b)

Primary Bond Market

c)

Debt Market

d)

Secondary Capital Market

e)

Primary Capital Market

25.

A firm had sales of $120 million, cost of goods sold of $65 million, and total operating expenses of $38 million. The firm also 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 the firms tax payment?

a)

$3,687,600

b)

$3,681,300

c)

$3,675,000

d)

$3,668,700

e)

$3,891,300

26.

A firm 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 firms tax payment for this year.

a)

$8,400

b)

$21,000

c)

$33,600

d)

$14,700

e)

$27,300

27.

Which of the following is true?

a)

Maximizing shareholder wealth is not good for the economy.

b)

Maximizing shareholder wealth should be the goal of the firm.

c)

Profit maximization is equivalent to maximization of the firm value.

d)

Profit maximization should be the goal of the firm.

28.

Legal form of business that allows a firm to function separate and apart from its owners is:

a)

Corporation

b)

Limited Partnership

c)

Association

d)

Sole Proprietorship

e)

General Partnership

29.

Business owned by an individual, therefore the subject to limited life and unlimited liability:

a)

Corporation

b)

Association

c)

Sole Proprietorship

d)

General Partnership

e)

Limited Partnership

30.

Which form of organization has the advantage of limited liability of all owners?

a)

Sole Proprietorship

b)

General Partnership

c)

Limited Partnership

d)

Corporation

31.

Who are the true owners of a corporation?

a)

Bondholders

b)

Stockholders

c)

Board of Directors

d)

Stakeholders

32.

Anticipated inflation premium of 3% and nominal interest rate of 9%, what is the real interest rate?

(a)

33.

Anticipated inflation premium of 4% and real interest rate of 7%, what is Nominal Interest Rate?

(a)

34.

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

a)

Yield Curve Theory

b)

Market Segmentation Theory

c)

Term Structure of Interest Rates Theory

d)

Unbiased Expectations Theory

e)

Liquidity Preference Theory

35.

What is the difference between Public Offering and Private Placement?

a)

In Public Offerings, all investors have the opportunity to acquire a portion of the financial claims being sold, but not so in Private Placement.

b)

In Private Placement, all investors have the opportunity to acquire a portion of the financial claims being sold, but not so in Public Offerings.

c)

Private Placements are illegal in the U.S.

d)

They're the same, just different terms used by different industries.

36.

If Electro Corp sells a $20 million stock issues to an investment banking firm, this takes place in:

a)

Secondary Capital Market

b)

Private Placement Market

c)

Primary Money Market

d)

Secondary Money Market

e)

Primary Capital Market

37.

Treasury securities are free of (a) risk.

38.

The New York Stock Exchange is an example of:

a)

Primary Market

b)

Over-the-Counter Market

c)

Derivative Securities Market

d)

Secondary Market

e)

Commodity Exchange

39.

If you sell 100 General Electric Common Stock, this takes place in:

a)

Secondary Capital Market

b)

Primary Money Market

c)

Primary Capital Market

d)

Secondary Money Market

e)

Private Placement Market

40.

What distinguishes the Money Market from the Capital Market?

a)

Money Market deals with instruments valued at $1 million or less, whereas the Capital Market deals with larger instruments.

b)

Money Market deals with short-term instruments, whereas the capital market deals with long-term instruments.

c)

Money Market cash instruments, whereas the capital market deals with real assets.

d)

Money Market deals with stocks, whereas the capital market deals with bonds.

41.

The Yield Curve is typically (a) .

42.

Dividends paid by the firm:

a)

Tax deductable

b)

Paid out of net income

c)

Considered non-cash expense

d)

Increase firms equity

e)

Treated as operating expense

43.

Net Operating Losses may be:

a)

Allocated over next 3 years

b)

Paid off by stockholders

c)

Carried forward indefinitely

d)

Deducted from current years earnings

44.

What is the tax liability for a corporation with $12,861,273 of a taxable income?

(a)

45.

Suppose a firm had the following taxable income amounts:

2018 ($2 million) operating loss

2019 ($2 million) operating loss

2020 ($2 million) operating loss

2021 $10 million

After you "carry forward" the operating losses, what is the effective taxable income for 2021?

a)

$1 million

b)

$2 million

c)

$3 million

d)

$4 million

46.

The least liquid current asset:

a)

Common Equity

b)

Accounts Recievable

c)

Inventory

d)

Plant and Equipment

47.

Suppose a firm had the following taxable income amounts:

2018 ($5 million) operating loss

2019 $4 million

2020 $4 million

2021 $4 million

After you "carry forward" the operating losses, what is the effective taxable income for 2021?

a)

$1 million

b)

$2 million

c)

$3 million

d)

$4 million

48.

Gross Profit =

(a)

49.

Dividends received by the firm:

a)

Treated as an operating expense

b)

Taxed like ordinary income

c)

Usually 50% excluded from taxation

d)

Not taxed

e)

Considered capital gains

50.

Return on Equity =

(a)

51.

If a bank loan officer were considering a company's request for a loan, which of the following statements would you consider to be correct?

a)

Other things held constant, the higher the debt ratio, the lower the interest rate the bank would charge the firm.

b)

The lower the company's times interest earned ratio, other things held constant, the lower the interest rate the bank would charge the firm.

c)

Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge the firm.

d)

Other things held constant, the lower the current ratio, the lower the interest rate the bank would charge the firm.

52.

Which of the following would indicate an improvement in a company's financial position, holding other things constant?

a)

Current and quick ratios both increase

b)

Debt ratio increases

c)

Profit margin declines

d)

Inventory and total assets turnover ratios both decline

53.

Which is NOT a current asset on the balance sheet?

a)

Marketable Securities

b)

Short-Term Debt

c)

Cash

d)

Inventories

54.

Suppose your firm had the following taxable income amounts:
2018 ($5 million) operating loss
2019 $4 million
2020 $4 million
2021 $4 million
After you "carry forward" the operating loss, what is the effective taxable income for 2020?

a)

$1 million

b)

$2 million

c)

$3 million

d)

$4 million

Finance Exam 1 Practice (FIN3403)

Total questions: 54

Worksheet time: 2hrs 12mins

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