BFIN Midterm Practice Questions

Aaron Judge invested $2,000 six years ago at 4.5%. He spends his earnings as soon as he earns any interest so he only receives interest on his initial investment. Which type of interest is Mr. Judge earning?

Free interest
Complex interest
Simple interest
Interest on interest
Compound interest

Simple interest

A business partner whose potential financial loss in the partnership will not exceed his or her investment in the partnership is called:

General partner
Sole proprietor
Limited partner
Corporate shareholder
Zero partner

Limited partner

Which of the following accounts are included in working capital management?

Account payable
Accounts receivable
Fixed assets
Inventory

Account payable
Accounts receivable
Inventory

Which of the following are advantages of the corporate form of business ownership?

I. limited liability for the firm debt
ii. double taxation
Iii. ability to raise capital
Iv. unlimited firm life

I. limited liability for the firm debt
Iii. ability to raise capital
Iv. unlimited firm life

Which one of the following best describes the primary advantage of being a limited partner instead of a general partner?

Tax-free income
Active participation in the firm's activities
non -potential financial loss
Greater control over the business affairs of the partnership
Maximum loss limited to the capital invested

Maximum loss limited to the capital invested

What is a secondary market?

Ailaba IPO
Primary market
Citigroup USD bond
Existing shares traded amongst investors
London stock exchange

Existing shares traded amongst investors

What is the measure of a company's liquidity?

Price to earnings ratio
Inventory days
Quick ratio
Times interest earned
Return on assets

Times interest earned

What are bond yield the combined effect of?

Inflation
Rate risk
Default risk
Taxability
All of the above

(All of the above)

What does the phrase inversely proportional mean when it comes to bonds?

Inverted yield curve
Normal yield curve
Interest rates increasing, bond value increasing
Term structure of interest rates
Interest rates declining, bond value increasing

Interest rates declining, bond value increasing

Interest earned on both the initial principal and the interest reinvested from the prior periods is called:

Free interest
Dual interest
Simple interest
Interest on interest
Compound interest

Compound interest

What is a market dealer do?

Broker
Acts on behalf of customers
Manages NASDAQ
Buys and sells for its own account
Only provides bid pricing

Acts on behalf of customers

What is a junk bond?

Russian debt
Rated below BBB
Below investment grade
Puerto rico municipal debt
All of the above

All of the above

What is an example of an interest only (I/O) security?

Corporate bond
Mortgage
Treasury bill
Effective interest
Amortizing security

Mortgage

Which is a financial leverage ratio?

Current ratio
Profit margin
Price to book value
Debt to equity ratio
Inventory turnover

Debt to equity

Which one of these set forth the common set of standards and procedures by which audited financial statements are prepared?

The matching principal
The cash flow identity
Generally accepted accounting principles
Financial accounting reported principles
Standard accounting value guidelines

GAAP

Which one of the following accounts is most liquid?

Inventory
Building
Accounts receivable
Equipment
Land

Accounts receivable

Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date?

Income statement
Creditor statement
Balance sheet
Statement of cash flows
Dividend statement

Balance sheet

Which one of the following parties has theoretical control of a corporation?

Chairman of the board
Board of directors
Chief executive officer
Chief operating officer
share holders

Shareholders

Which of the following represents cash outflows from a corporation?
I. issuance of securities
Ii.payment of dividends
Iii. new loan proceeds
Iv.payment of government taxes

Payment of dividends + payment of gov't taxes

The sources and uses of cash over a period of time are reflected on the:

Income statement
Balance sheet
Tax reconciliation statement
Statement of cash flow
Statement of operations position

Statement of cash flow

Which of the following is a source of cash for a non-tax paying firm?

Increases in accounts receivable
Increase in depreciation
Decrease in accounts receivables
Increase in common stock
Increase in inventory

Inc in common stock

According to the cash flow statement, an increase in inventory will the cash flow from activities

Increase operating
Decrease financing
Decrease operating
Increase financing
Increase investment

Decrease operating

Net working capital is defined as:
Total liabilities- stockholders equity
Current liabilities- stockholders equity
Fixed assets- long term liabilities
Total assets- total liabilities
Current assets - current liabilities

Current assets - current liabilities

A company has a 2021 profit before tax of $10,000,000, a tax rate of 20% and a debt due in 2027 of $19,000,000. Its depreciation and amortization for 2021 aggregates $3,000,000. What is the approximate cash flow in 2021?

$11,000,000
10,000,000
29,000,000
2,000,000
3,000,000

$11,000,000

What is the real rate of interest?

Inflation
Coupon rate you earn on a bond
Capital yield less the dividend yield
Interest rate less the inflation rate
5%

Interest rate less the inflation rate

The cash flow related to interest payments less any new borrowing is called the:

Operating cash flow
Capital spending cash flow
Net working capital
Cash flow from assets cash flow from assets
Cash flow to creditors

Cash flow to creditors

Noncash items refer to:

Accrued expenses
Inventory items purchased using credit
The ownership of intangible assets such as patents
Expenses which do not directly affect net cash flows
Sales which are made using store credit

The ownership of intangible assets such as patents

Which of the following are current assets?
Cash
Trademark
Accounts receivable
Notes payable
A and C

cash and accounts receivable

Which of the following are included in current liabilities?
Note payable to supplier in 13 months
Amount due from a customer last week
Account payable to a supplier that is due next week
Loan payable to the bank in 10 months
C & D

Account payable to a supplier that is due next week

Loan payable to the bank in 10 months

Which of the following statements concerning net working capital is correct?
Net working capital increases when inventory is purchased w/ cash
Net working capital excludes inventory
Total assets must increase if net working capital increases
Net working capital may be a negative value
Net working capital is the amount of cash a firm currently has available for spending

Net working capital may be a negative value

The process of planning and managing a firm's long-term investments is called
A. Capital Budgeting
B. Working Capital
C. Profit Maximization
D. Capital Structure

A. Capital budgeting

Which of the following is an example of an indirect agency cost?
A. Unnecessary corporate expenditure
B. Management auditing expense C. A lost opportunity
D. All the above

C

Which of the following forms of business organization is subject to double taxation?
A. Corporation
B. Partnership
C. Limited Partnership
D. Sole Proprietorship

A

Control of a firm ultimately rests with. . .
A. The CEO
B. The SEC
C. The Stockholders
D. The Founder

C

Which of the following should a financial manager take into account when considering an opportunity?
A. How much cash they expect to receive
B. When will they receive the funds C. How likely they are to receive the funds
D. All of the above

D

ABC Corporation has current assets of $5,200, fixed assets of $26,000, current liabilities of $4,900, and long-term debt of $15,000.

What is the ABC Corporation's total equity?
What is the NWC of ABC Corporation?

A. Total Equity $11,000, NWC $11, 300
B. Total Equity $11,300, NWC $300 C. Total Equity $11,000, NWC $300 D. Total Equity 11,300, NWC $11,000

B

XYZ Corporation's balance sheet of 2019 showed net fixed assets of $1.56million, and the 2020 balance sheet showed net fixed assets of $1.78 million. The company's 2020 income statement showed a depreciation expense of $140,000. What was the company's net capital spending for 2020?
A. $80,000
B. $360,000
C. $220,000
D. $140,000

B

Which one of the following is the financial statement which shows the accounting value of a firm's equity as of a particular date?
A. Income statement
B. Creditor statement
C. Balance sheet
D. Statement of cash flows
E. Dividend statement

C

Which is a key turnover ratio?
A. Inventory turnover ratio
B. Asset turnover ratio
C. Receivables turnover ratio
D. Fixed asset turnover ratio
E. All of the ratios above

E

Which of the following ratios are market-based ratios?
A. P/E ratio
B. P/BV ratio
C. Profit margin
D. Both a and b
E. All of choices above

D

Which of the followings are the correct set of components of ROE?
A. Profit margin, asset turnover, equity multiplier
B. NWC ratio, fixed asset turnover, enterprise value
C. Current ratio, receivables turnover, total debt ratio

A

Find Current ratio: Company A's balance sheet shows current assets of $6,300, fixed assets of $32,000, total long-term liabilities of $16,200 and total equity of $18,100.
A. 0.64x
B. 1.98x
C. 1.58x
D. 2.74x

C

Interest earned on both the initial principal and the interest reinvested from the prior periods is called:
A. Free interest
B. Dual interest
C. Simple interest
D. Interest on interest
E. Compound interest

E

Don Lemon invested $2,000 six years ago at 4.5%. He spends his earnings as soon as he earns any interest so he only receives interest on his initial investment. Which type of interest is Mr. Lemon earning?
A. Free interest
B. Complex interest
C. Simple interest
D. Interest on interest
E. Compound interest.

C

Alan Fishman just computed the present value of a $10,000 bonus he will receive in the future. The interest rate he used in this process is referred to as which one of the following?
A. Current yield
B. Effective rate
C. Compound rate
D. Simple rate
E. Discount rate

E

The process of determining the present value of future cash flows in order to know their worth today is referred to as:
A. Compound interest valuation
B. Interest on interest computation C. Discounted cash flow valuation D. Present value interest factoring E. Complex factoring

C

Interest earned on interest is referred to as the __________ of interest.

Compounding

Which is the best example of a perpetuity?
A. Automobile payment
B. Tuition
C. Pension plan with TIAA
D. Homeowners insurance with Chubb Insurance.

C

Capital One is charging you 1.5% per month on your credit card. What is your Annual Percentage Rate (APR)?
A. 1.5%
B. 18.0%
C. 3.0%
D. Can't calculate from information provided.

B

During the Global Financial Crisis, Interest Only financial products were a significant problem. Which is the best example of an I/O security?
A. Mortgage
B. Corporate bond
C. A Pure discount loan
D. All of the above.

B

Which is the best definition of an annuity?
A. A cash flow stream which arises when the stream of consistent cash flows continues forever
B. Preferred shares
C. A cash flow stream where a fixed amount is received every year
D. Effective annual rate

C

What is a financial security?
A. Ease with which an owner of an asset can sell it
B. A claim against assets of cash flows of a company
C. Dow Jones Industrial Average
D. Voting rights to elect firm directors

B

Who is the primary regulator of the US securities markets?
A. Federal Reserve Bank of New York
B. Chicago Board of Options Exchange
C. Securities and Exchange Commission
D. New York Stock Exchange.

C

The Securities and Exchange Commission does all of the following except
A. Licensing securities professionals
B. Provide investors with complete disclosure of material information on listed securities
C. Regulates US stock exchanges; D. Regulates all national banks in the US.

D

Which of the following is a security traded in the US money market?
A. Mortgage-backed securities
B. Treasury Bills
C. Preferred Stock
D. Corporate bonds.

B

What is the best definition of a derivative in the context of securities markets?
A. The degree to which an asset or security can be bought or sold in the market without affecting its price
B. Buying or selling a stock at the current market price
C. Financial decisions and their impact on the value of a company; D. A security where the value is based on the value of another security.

D

A Johnson & Johnson bond pays an 8% coupon rate on a bond provided that its earnings exceed an ROE of 8%. What type of security is this?
A. Perpetual bond
B. Equity
C. Dividend
D. Income bond.

D

Which security has the greatest preference in liquidation?
A. Equity
B. Preferred shares
C. Subordinated debt
D. Senior debt

D

Which security has a "residual claim" on a company's cash flows? A. Equity
B. Preferred shares
C. Subordinated debt
D. Senior debt.

A

Which two cash flows are received by a typical bond?
A. Dividends and interest
B. Share sale and principal at maturity
C. Dividends and share sale
D. Interest and principal at maturity

D

Which best explains a fixed coupon bond?
A. Sukuk
B. Fixed coupon paid until maturity, and lump sum returned at maturity; C. Fixed coupon paying bond with no maturity
D. A debt security which promises one payment in the future.

B

A bonds coupon rate is equal to the annual interest divided by which one of the following?
A. Call Price
B. Current Price
C. Face Value
D. Clean Price
E. Dirty Price

C

The bond principal is repaid on which one of these dates?
A. Coupon date
B. Yield date
C. Maturity date
D. Dirty date
E. Clean dare

C

Protective covenants:
A. Apply to short-term debt issues but not to long-term debt issues
B. Only apply to privately issued bonds;
C. Are a feature found only in government-issued bonds
D. Only apply to bonds with a deferred call provision
E. Are primarily designed to protect bondholders.

E

The items included in an indenture that can limit actions of the issuer in order to protect bondholders interests are referred to as the:
A. Trustee relationships
B. Bylaws;
C. Legal bounds;
D. Trust deeds;
E. Protective covenants

E

What is the average life of common equity?
A. One day;
B. One year;
C. 10 years;
D. 30 years;
E. Forever

E

How is the Dividend Discount Model get calculated?
A. Dividend per share / share price; B. P/BV;
C. Market Cap / Net Income;
D. A model which determines the current price of a stock as its dividend next period divided by the discount rate less the dividend growth rate
E. The sum of money paid regularly by a company to its shareholders from profits

D

What are the relevant cash flows for valuing a share of common stock?
A. Investment gains;
B. Net income;
C. Dividends;
D. Bank financing; or
E. Depreciation

C

Which is not a feature of common stock?
A. Dividends;
B. Cumulative voting;
C. Listing on an exchange;
D. Protective covenant; or
E. Interest

E