Last Name: _________________ First Name:___________________ ID:_______________________

Sample Mid-Term Exam

(Financial Management, 2019 Fall)

Instruction: circle the alphabet corresponding to the answer of your choice. Do

not circle more than one alphabet.

1. Capital structure decisions primarily impact the ____________ portion(s) of the

balance sheet.
A. Fixed asset
B. Long-term debt
C. Equity
D. All of the above
E. Only B and C above

2. Why might a successful general partnership choose to convert itself into a

corporation?
A. To limit the personal liability of the owner(s)
B. To eliminate the opportunity for agency issues to arise
C. To eliminate the double taxation of earnings
D. All of the above
E. Both A and B above

3. What is the goal of financial management? To:

A. Minimize financial distress and avoid bankruptcy
B. Minimize income tax expense
C. Maximize the value of existing owners' equity
D. Maximize sales and/or market share
E. Maximize net profit and/or Earnings Per Share (EPS)

4. Which of the following actions would be most likely to decrease agency costs for the
firm?
A. Align management goals with stockholder goals
B. Ensure that all of the firm's managers are also stockholders of the firm
C. Ensure that management can be replaced if they do not pursue stockholder goals
D. All of the above
E. Only A and C above

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Last Name: _________________ First Name:___________________ ID:_______________________

Use the following to answer questions 5-10:

Seoul Advantage, Inc. reported the following financial data for fiscal 2018. Unfortunately,
the data is sorted alphabetically. All figures in the table are in millions of dollars. Use all
of the data in the table to create the company's balance sheet and income statement.

In addition, at the end of 2018:

- The company had 500 million shares outstanding.

- The closing stock price was $24.65 per share.
- The company paid $340 million in dividends and intends to hold its payout ratio constant.

Accounts Payable $371 Inventory $885

Accounts Receivable 728 Long-Term Debt 653
Cash 167 Net Property, Plant and Equipment 2,630
Common Stock and Capital Surplus 960 Notes Payable 314
Cost of Goods Sold 750 Accumulated Retained Earnings 2,112
Depreciation Expense 104 Sales Revenue 2,414
Income Tax Expense 210 SG&A Expense 450
Interest Expense 110

5. How much Net Working Capital did the company have?

A. $1,095 million
B. –$442 million
C. $1,780 million
D. $3,072 million
E. $581 million

6. What were both the accounting (book) value and the market value of Total Equity?
A. Book value: $2,112 million; Market value: $12,325 million
B. Book value: $960 million; Market value: $12,325 million
C. Book value: $2,112 million; Market value: $960 million
D. Book value: $3,072 million; Market value: $2,112 million
E. Book value: $3,072 million; Market value: $12,325 million

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Last Name: _________________ First Name:___________________ ID:_______________________

7. How much did the company add to or subtract from Retained Earning during the
year?
A. Added $1,130 million
B. Added $450 million
C. Subtracted $450 million
D. Added $340 million
E. Subtracted $340 million

8. What was the company's Operating Cash Flow?

A. $894 million
B. $1,004 million
C. $1,214 million
D. $900 million
E. $784 million

9. The company's Total Debt Ratio was 40.0% at the end of 2017. The company's Total
Assets balance was the same in both 2017 and 2018. Based on this information, we
can conclude that during 2018:
A. The company reduced its Long-Term Debt
B. The company reduced the sum of its Current Liabilities and Long-Term Debt
C. The company increased the sum of its Current Liabilities and Long-Term Debt
D. The company increased its Long-Term Debt

10. During 2018, Juneau Corp generated $730,000 in Sales Revenue, on which it earned
Net Income of $146,000. The company paid $58,400 in dividends and ended the
year with $1,604,000 in Total Assets. The company intends to maintain a constant
dividend payout ratio. At what annual rate can the company grow without having to
raise external funds?
A. 5.8%
B. 3.8%
C. 37.6%
D. 22.3%
E. 9.1%

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Last Name: _________________ First Name:___________________ ID:_______________________

11. Last year's simplified financial statements for Raleigh Corp. are shown below
(assuming no income taxes). Raleigh is forecasting a Sales increase of 12%. Assets
and Expenses are proportional to Sales, but Debt and Equity are not. Raleigh does
not plan to pay dividends. How much external financing will Raleigh need to support
its growth?
Income Statement Balance Sheet
Sales $77,100 Asset $385,500
Expenses 61,680 Debt 154,200
Equity 231,300
A. $46,260
B. $276,326
C. $28,990
D. $17,271
E. $172,704

12. Assume each of the following payment streams begins in one year with the exact
same cash flow amount, CF1. Also assume that each has the same discount rate, r,
and the same growth rate (if any), g. Which of the following will have the lowest
present value?
A. Perpetuity
B. Annuity
C. Growing perpetuity
D. Growing annuity

13. Sacramento Systems is launching a project that will provide zero cash flow at the
end of years 1 and 2, and a cash inflow of $250,000 per year, forever, beginning at
the end of year 3. Assuming a discount rate of 13%, what is the present value of the
project's future cash flows?
A. $1,923,077
B. $1,332,789
C. $590,288
D. $1,506,051
E. $1,701,838

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Last Name: _________________ First Name:___________________ ID:_______________________

14. Pierre Performance, Inc. borrowed $400,000 at a rate of 8% per year, compounded
monthly. The loan is for 17 years. How much is each monthly payment?
A. $24,966.19
B. $32,000.00
C. $3,593.03
D. $43,851.77
E. $3,654.31

15. Atlanta Resources has offered temporary sponsorship to a local charitable

organization. Atlanta will pay $650,000 to the charity one year from today. The annual
payment will increase by 3% per year for 8 years. After the 8th year, Atlanta will no
longer sponsor the charity. Atlanta expects that it can earn 9% per year, compounded
annually, on the funds it invests. How much must Atlanta invest today to fulfill its
sponsorship obligation?
A. $3,946,050
B. $6,887,283
C. $5,416,667
D. $3,921,419
E. $4,039,062

16. Assume you have owned the stock of San Marcos Analytics for the past 3 years. The
stock experienced the following annual returns: 7% in year 1, –22% in year 2, and
11% in year 3. What was the stock's compound annual rate of growth?
A. 13.3%
B. –1.3%
C. 13.2%
D. –2.5%
E. 4.4%

17. Yesterday morning, an investor read favorable information about Trinity Corp. in the
Wall Street Journal. She immediately purchased 1,000 shares of Trinity stock. By the
close of business today, the stock price had increased 5%. During the same time
period, the market in total increased only 1%. These results would suggest that the
stock market is, at most:
A. Weak form efficient

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Last Name: _________________ First Name:___________________ ID:_______________________

B. Semi-strong form efficient

C. Strong form efficient

18. Assume you are interested in purchasing a 10-year bond that has a par value of
$1,000 and an annual coupon rate of 6.0%. Coupons are paid semi-annually. The
annual rate of return for other bonds of similar risk is 3.0%. What is the price you
would be willing to pay for the bond?
A. $1,255.91
B. $1,257.53
C. $1,138.33
D. $655.90
E. $1,000.00

19. Which of the following statements regarding interest rate risk is/are true?
A. The higher the coupon rate on the bond, the greater the interest rate risk
B. The longer the term to maturity, the greater the interest rate risk
C. The higher the bond rating, the greater the interest rate risk
D. All of the above
E. Only A and B above

20. The Treasury yield curve, that is, the term structure of interest rates, includes:
A. An inflation premium
B. An interest rate risk (also called maturity risk) premium
C. A default risk premium
D. All of the above
E. Only A and B above

Write your answers to the last five questions in the spaces provided.

21. What are the 2 reasons the corporate form of business is superior when it comes to
seeking external financing? (Use no more than 6 words per line; complete sentences
are not necessary.)

• __________________________________________________________________

• __________________________________________________________________

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Last Name: _________________ First Name:___________________ ID:_______________________

22. Pass-through taxation (that is, distributing all income to the owner(s) for purposes of
taxation) is a benefit for which of the 3 main forms of business organization? (Use no
more than 6 words; complete sentence are not necessary.)

• __________________________________________________________________

• __________________________________________________________________

23. What is the basic difference between a perpetuity and an annuity? (Use no more
than 10 words; complete sentences are not necessary.)

___________________________________________________________________

___________________________________________________________________

24. Under what circumstances would a corporate bond trade for less than its par value?
(Use no more than 10 words; complete sentences are not necessary.)

___________________________________________________________________

___________________________________________________________________

25. What does beta measure?

___________________________________________________________________

___________________________________________________________________

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