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PRINCIPLES OF FINANCE FINAL EXAM QUESTIONS AND ANSWERS[MID TERM].FIN100
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PRINCIPLES OF FINANCE FINAL EXAM QUESTIONS AND ANSWERS[MID TERM].FIN100
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PRINCIPLES0FFI NANCEFI NALEXAM
QUESTIONSANDANSWERSTEST
PREPARATIONbyblackdollar4
https://www.stuvia.com/user/BlackDollar4
Thepr
imar
ygoal
ofapubl
i
clyownedcor
por
ati
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imi
ze
shar
ehol
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th
Thef
ivebas
icpr
inci
pl
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inancei
ncl
udeal
oft
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oll
owi
ngEXCEPT:
incr
ement
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det
ermi
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Al
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urel
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etur
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s
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l
li
amsInc.hasacurr
entrat
ioequal
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aqui
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ati
oequal
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otal
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etsof6
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Wi l
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tCorpor
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esof5,
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ncomeof800,
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otal
assetsof2,
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100,
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fBenk
art
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sthecompany'
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ockpri
ce?
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rmthatwant
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omeeti
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kel
ytousewhi
ch
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l
i
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Thepr
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um dependsupont
henumberofdi
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ssuesaddr
essedbyt
hest
udyoff
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ecapi
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ing,
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kingcapi
tal
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Thepr
esentv
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$548
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esent
s.Yourcredi
tcar
dcompanychar
ges
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erest
,compoundedmont hl
y.Ify
oumaketheminimum payment
sof25per
month,howlongwil
litt
aketopayoffyourbal
ance
94mont
hs
Yourcompanyhasrecei
veda50,
000loanfrom ani
ndust
ri
alf
inancecompany.Theannual
paymentsar
e6,202.
70.I
fthecompanyispayi
ng9percenti
nter
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paymentsmustthecompanymake?
15
Youhavecontr
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ng30,
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ull
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hebalance,
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rat
efor30year
s.Whatwill
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paymentbeift
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hlyins
tal
l
mentsovert
henext30year
s?
1,
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St
ockA'
sex
pect
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etur
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St
ockW'
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andar
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etur
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s
17%
Changesi
nthegener
aleconomy
,li
kechangesi
nint
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axl
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epr
esentwhatt
ypeof
ri
sk?
mar
ketr
isk
Oft
hef
oll
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ngdi
ff
erentt
ypesofsecur
it
ies,
whi
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sty
pical
l
yconsi
der
edmostr
isk
y?
Commons
tock
sofsmal
lcompani
es
Whi
choft
hef
oll
owi
ngwoul
dNOTnor
mal
l
ybeconsi
der
edaf
lot
ati
oncostdi
vi
dends
Therealr
ateofr
etur
nist
her
etur
near
nedabov
ethei
nfl
ati
onr
isk
premium
I
fyouweret ousethestandarddevi
ati
onasameas
ureofi
nvest
mentr
isk
,whi
choft
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oll
owi
ng
hashi
stor
icall
ybeentheleastri
skyi
nvest
ment
USTr
eas
uryBi
l
l
At
ypi
cal
measur
efort
her
isk
-fr
eer
ateofr
etur
nist
he
USTr
eas
uryBi
l
lrat
e
Thebas
icf
ormatofani
ncomes
tat
ementi
s
Sal
es-Ex
pens
es=Pr
ofi
ts
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hefol
l
owi
ngbondpr
ovi
si
onswi
l
lmak
eabondmor
edes
irabl
etoi
nvest
ors
,ot
hert
hings
bei
ngequal
?
Thebondi
sconv
ert
ibl
e
,Twocons i
derati
onthatcaus
ecorporati
on'scostofcapi
talt
obedif
fer
entt
hanit
s
i
nvestor
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redret
urnsarecorporat
etaxesandfloat
ati
oncost
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rm'
scostof
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uencedbycapit
alstr
ucture
Shar
ehol
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thmax
imi
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ionmeansmax
imi
zi
ngt
he
pr
iceofex
ist
ingcommons
tock
.
Al
loft
hef
oll
owi
ngst
atement
saboutbal
ancesheet
sar
etr
ueEXCEPTbal
ances
heet
s
s
howav
erageass
etbal
ancesov
eraone-
yearper
iod
Whi
choft
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oll
owi
ngaccount
sbel
ongsi
ntheequi
tysect
ionofabal
ances
heet
?ret
ained
ear
nings
Si
ski
you,I
nc.hastotal
currentasset
sof1,200,
000;t
otal
cur
rentl
i
abi
l
it
iesof500,000;l
ongt
erm
as
setsof800,000andlong-ter
m debtof600,
000.Howmuchi st
hef
ir
m' st
otalequit
y
900,
000
Whati
nfor
mat
iondoesaf
ir
m'sst
atementofcashf
lowspr
ovi
det
othev
iewi
ngpubl
i
c?
arepor
tdocumenti
ngafi
rm'scas
hinfl
owsandcas
hout
fl
owsf
rom oper
ati
ng,
fi
nanci
ng,
and
i
nvesti
ngacti
vi
ti
esf
oradefi
nedperi
odoft
ime
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etur
nthatsat
isf
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hef
oll
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ngex
pect
ati
ons
:
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nor
dert
oreduceagencypr
obl
ems,
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smaybepr
ovi
dedcompensat
iont
hati
ncl
udes:
anopt
iont
obuyt
hecompany
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tock
I
nvest
orsgener
all
ydon'
tl
ik
eri
sk.
Ther
efor
e,at
ypi
cal
inv
est
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lonl
ytak
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ti
onal
ri
ski
fhe
ex
pect
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edi
nthef
orm ofaddi
ti
onal
ret
urn.
Thet
rueowner
soft
hecor
por
ati
on
ar
ethecommons
tock
hol
der
s.
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onMobil
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atesabout$50bil
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ioni
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lyf
rom i
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onsandi
nves
tsabouthal
f
oft
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orat
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e,Ex
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savi
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Threewaysthatsavi
ngscanbetransf
err
edt
hrought
hefinanci
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he
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l
owingexcept:
indi
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ferusi
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entur
ecapi
talfi
rm.
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rans
act
ionsi
ncl
udewhi
choft
hef
oll
owi
ng?s
ecur
it
iest
hat
hav
eamat
uri
tyofl
esst
hanoney
ear
Thei
nvest
mentbank
erper
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mswhatt
hreebasi
cfunct
ions?
under
wri
ti
ng,
dis
tri
but
ing,
andadv
isi
ng
Whichofthefol
l
owingisnotav al
i
dtheoryt
hatat
tempt
stoex
plai
ntheshapeoft
het
erms
truct
ure
ofi
nter
estrat
estheFisherEf
fectt
heory
Acor
porat
ion'
soper
ati
ngpr
ofi
tmar
gini
sequal
toEBI
T
di
vi
dedbySales.
PDQCor
p.hass
alesof$4,
000,
000;
thef
ir
m'scostofgoodssol
dis$2,
500,
000;
andi
tst
otal
, oper
ati
ngex
pensesar
e$600,
000.
Whati
sPDQ'
sEBI
T?
$900,
000
Thet
wopr
inci
pal
sour
cesoff
inanci
ngf
orcor
por
ati
onsar
edebtand
equi
ty.
Al
loft
hef
oll
owi
ngst
atement
saboutbal
ancesheet
sar
etr
ueex
cept
:
bal
ancesheet
sshowav
erageas
setbal
ancesov
eraone-
yearper
iod.
Common-
siz
edbal
ancesheet
sshoweachbal
ances
heetaccountasa
per
cent
ageoft
otal
asset
s.
Youhavethechoi
ceoftwoequal
l
yri
skannui
ti
es,
eachpay
ing$5,
000pery
earf
or8year
s.Oneis
anannui
tydueandtheotheri
sanor
dinar
yannui
ty.
Ify
ouaregoi
ngtober
ecei
vi
ngt
heannuit
y
payments,
whichannui
tywoul
dyouchooset
omax imi
zey
ourwealt
h?
t
heannui
tydue
Mos
tst
ock
shav
ebet
asbet
ween
0.
60and1.60.
)Youareconsi
der
ingi
nves
tingi
nFor
dMot
orCompany
.Whi
choft
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oll
owi
ngar
eex
ampl
esof
di
versi
fi
abl
eri
sk?
I
I.
Riskresult
ingf r
om uncertai
ntyr
egardi
ngapossi
blest
ri
keagai
nstFor
d.I
II
.
Ri
skresult
ingf r
om anex pensi
verecal
lofaFordpr
oduct
.Bet
aisa
st
ati
sti
calmeasur eofther el
ati
onshi
pbetweenani
nvest
ment'
sretur
nsand
t
hemar ketreturn.
Youhavej
ustpur
chasedashareofpr
efer
redstockfor$50.
00.
Thepreferr
edst
ockpay
sanannual
di
vi
dendof$5.
50pershar
eforever
.Whatistherat
eofretur
nonyourinvest
ment?
.
110
Shaf
erCor
por
ati
oni
ssuedcal
l
abl
ebonds.
Thebondsar
emostl
i
kel
ytobecal
l
edi
fi
nter
estr
ates
decr
ease.
Putthef
oll
owingi
norderoftheircl
ai
m onasset
sofaf i
rm, st
art
ingwi
tht
heLASTt
ohav
eacl
ai
m:
A.Subor
dinat
eddebent
uresB. Debentur
es(
unsubor
dinated)
C.CommonSt ockD.Pref
err
eds t
ock
Commons
tock
,pr
eff
ereds
tock
,subor
dinat
ed,
uns
ubor
diant
ed
I
nanef
fi
ci
entsecur
it
iesmar
kett
hemar
ketv
alueofas
ecur
it
yisequal
to:
it
sint
ri
nsi
c
v
alue.
Whati
stheval
ueofabondthathasaparvalueof$1,
000,acouponof$120(
annual
l
y),
and
matur
esin10year
s?Assumear equi
redr
ateofret
urnof7.
8%.
1,
284.
38
Financetheor
ysuggest
sthatt
hecur
rentmar
ketv
alueofabondi
sbaseduponwhi
choft
he
foll
owing?
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