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Administrative Studies
ADMS 3530
Lois King

Sample midterm 1 . 1. Businesses can be organized as A) sole proprietorships B) partnerships C) corporations D) any of the above E) None of the above Answer: D 2. Generally, a corporation is owned by the: A) Managers B) Board of Directors C) Shareholders D) All of the above. Answer: C Shareholders are owners. 3. Limited liability is an important feature of: A) Sole proprietorships B) Partnerships C) Corporations D) All of the above Answer: C 4. A firm's investment decision is also called the: A) Financing decision B) Capital budgeting decision C) Liquidity decision D) None of the above Answer: B 5. The goal of a financial manager is to: A) Maximize sales B) Maximize profits C) Maximize the value of the shareholders D) Maximize the value of the firm with both bond and stock holders Answer: C ( Many of you chose D) This is because shareholders are the owners and managers are hired by them. 6. Which of the following is the function of a financial market A) provide liquidity B) risk management C) efficient allocation of money D) provide information. E) all of the above Answer: E 7. One common reason for partnerships to convert to a corporate form of organization is that the partnership: A) faces rapidly growing marketing requirements. B) wishes to avoid taxation of profits. C) has issued all of its allotted shares. D) agreement expires after ten years of use. E) faces rapidly growing capital needs Answer: E . This is the reason for the firm to go public to raise capital. 8. Unlimited liability is faced by the owners of: A) corporations. B) partnerships and corporations. C) sole proprietorships and partnerships. D) all forms of business organization. Answer: C . 9. A board of directors is elected as a representative of the corporation’s: A) top management. B) stakeholders. C) shareholders. D) customers. E) bond and stock holders Answer: C 10. Which of the following would be considered a capital budgeting decision? A) Planning to issue common stock rather than issuing preferred stock B) A decision to expand into a new line of products, at a cost of $5 million C) Repurchasing shares of common stock D) Issuing debt in the form of long-term bonds Answer: B 11. Corporations are referred to as public companies when their: A) shareholders have no tax liability. B) shares are held by the federal or state government. C) stock is widely traded. D) products or services are available to the public. Answer: C . 12. Which of the following statements best distinguishes the difference between real and financial assets? A) Real assets have less value than financial assets. B) Real assets are tangible; financial assets are not. C) Financial assets represent the voting power on real assets. D) Financial assets claim to cash flows that are generated by real assets. E) Financial assets appreciate in value; real assets depreciate in value. Answer: D 13. Corporations that do not issue more financial securities such as stock or debt obligations: A) will not be able to increase sales. B) may have internal cash flows to fulfill their needs C) cannot be profitable. D) generate insufficient funds to fulfill their needs. E) do not face taxation of their profits. Answer: B To finance good projects, firms can also use internal cash flows. 14. The net present value formula for one period is: A) NPV = PV cash flows/initial investment B) NPV = C /0 1 C) NPV = C +0C /(1 + r)] D) Any of the above E) None of the above Answer: C This is the NPV formula for a project which produces one piece of cash flow in the next period. 15. The managers of a firm are supposed to A) take all projects with positive NPVs B) take all projects with NPVs greater than the discount rate C) take all projects with NPVs greater than present value of cash flow D) All of the above E) None of the above Answer: A 16. What is the net present value of the following cash flows at a discount rate on 12%? t = 0 t = 1 t = 2 t = 3 - 2 5 0 , 0 1 00 0 , 01 05 00 , 02 00 00 , 0 0 0 A) $101,221 B) $200,000 C) $142,208 D) None of the above Answer: A NPV = -250,000 + (100,000/1.12) + (150,000/(1.12^2)) + 200,000/(1.12^3) = 101,221 17. You would like to have enough money saved to receive a perpetuity, with the first payment being $60,000, after retirement so that you and your family can lead a good life. How much would you need to save in your retirement fund to achieve this goal (assume that the perpetuity payments start one year from the date of your retirement. The interest rate is 10%)? A) $7,500,000 B) $1,500,000 C) $600,000 D) None of the above Answer: C After your retirement, you will receive a standard perpetuity. PV = 60,000/0.1 = 600,000 18. Three yeas from now, if the economy is good, you will receive $100; if the economy is bad, you will receive $50. If the probability for the good economy is 30% and the economy has only two states three years from now: good and bad, what is the present value of this expected payment if the discount rate is 3.5%? A) $65.00 B) $72.07 C) $59.48 D) None of the above E) Any of the above Answer : D First calculate C3, which is the expected cash flows at period three. C3 = 0.3*100+0.7*50=$65 PV= C3/(1+r) = 65/1.035 = $58.63 19. 10 years from now, you will receive a payment, which is 1.5 times the present value of this payment? If the discount rate is the same for every year, what is the annual discount rate ? A) 8.10% B) 8.18% C) 7.18% D) 4.14% E) none of the above Answer D. Let the present value be $1. The future value will be $1.5. Then, we have 1=1.5/(1+r) . Then (1+r) =1.5. r = (1.5) 1/1-1 = 4.14%. 20. You have a car loan of $30,000 (which is called the principle) with the interest rate of 6.5%. You decide to pay off this loan in next four years with equal payment each year, what is the remaining principal before the last payment? A) $7,621.03 B) $8,757.08 C) $9,523.36 D) $ 8,222.61 E) none of the above First use the annuity formula to calculate the total payment in each period. 4 That is, 30000=C(1/r-1/(r.(1+r) )), where r=0.065. So C=$8,757 Let the remaining principal be x before the last payment. Then, the interest payment in the last period is 0.065x. Since principal + interest payment = total payment, we have x + 0.065x =C=8757. x = 8757/(1+0.065)=$8,222.61 Answer: D. 21.The annual coupon rate of a bond equals: A) its yield to maturity. B) a percentage of its price. C) the maturity value. D) the ratio of the annual coupon payment to the par value. E) None of the above Answer: D 22.The face value of a bond is received by the bondholder: A) at the time of purchase. B) annually. C) whenever coupon payments are made. D) at maturity. E) none of the above Answer: D 23.Which of the following presents the correct relationship? As the coupon rate of a bond decreases, the bond’s: A) face value increases. B) bond price tends to increase. C) interest payments increase. D) maturity date is extended. E) coupon payments decrease Answer: E 24. How much would an investor expect to pay for a
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