FIN 301-02 :Managerial Finance Le Moyne College

Dr. C. Kim Test I Sample

Student Name_____________________________________

I. Multiple choice, True/False questions.(40)

1. Sole proprietorships do not have to pay corporate tax.

a. True. b. False.

2. The primary goal of a corporation interested in serving its stockholders should be

a. to maximize corporate profit. c. to minimize chances of losses.

b. to maximize the stock price. d. to maximize net income.

3. On the balance sheet, total assets must always equal to total liabilities. The amount remaining is what is used to finance the firm and it includes equity and long-term debt.

a. True. b. False.

4.Corporations are allowed to exclude 70% of their interest income from corporate taxes.

a. True. b. False.

5. Money markets are markets for

a. consumer automobile loans. c. corporate stocks.

b. long-term bonds. d. short-term securities.

6. Inverted yield curve

a. exists when short-term rates exceed long-term rates.

b. exists when long-term rates exceed short-term rates.

c. represents the normal term structure.

d. signifies that investors can get higher returns by investing in bonds than

by investing in stocks.

7. For a given interest rate (e.g. 8%), the present value of an annuity payments will exceed the future value of the same annuity.

a. True. b. False.

8. The effective annual rate will always be less than the nominal rate except in situations where the periodic rate is equal to the nominal rate.

a. True. b. False.

9. If you take out a home mortgage loan with a given interest rate and a maturity of given years, the proportion of monthly payment that represents principal will be lower for the last payment than for the first payment on the loan.

a. True. b. False.

10. Retained earnings on ___________ represent the annual amount of retained earnings.

  1. income statement c. balance sheet
  2. statement of cash flow d. loss statement

 

Part II. Do the following problems. Show each step of your computations.(40 points)

1. Syr, Inc. made a taxable income of $200,000 last year from operations after all

operating costs but before (1) interest charges(expenses) of $50,000,

  1. dividends received of $15,000, (3) dividends paid of $25,000, and

(4) income taxes. (Use the tax table given below.)

a. How much will Syr pay in taxes? (6)

b. What was the Syr's average and marginal tax rate? (4)

2. Interest rates on 1-year Treasury securities are currently 8%, while 2-year ones are yielding 6%. What would be the rates on 1-year securities 1 year from now? (10)

3. ABC's 1998 sales were $20 million. Sales were $8 million 8 years earlier(in 1990). To the nearest percentage point, at what rate have sales been growing? (10)

4. Assume that your aunt sold her house on Dec. 31, and that she took a mortgage in the amount of $10,000 as part of the payment. The mortgage has a quoted interest rate of 8%, but it calls for payments every 6 months, beginning on June 30, and the mortgage is to be amortized over 10 years. What will be the amount of semiannual payment? (10)

 

Formulas: PVIF=1/(1+i)^n PVIFA=(1-1/(1+i)^n)/i

FVIF=(1+i)^n FVIFA=((1+i)^n-1)/i

Price=INT(PVIFA%,n)+M(PVIF%,n) PVA=PMT(PVIFA%,n)

FVA=PMT(FVIFA%,n)

Corporate Tax rates: refer to P.66

Answers:

  1. 1.A, 2.B, 3.B, 4.B, 5.D, 6.A, 7.B, 8.B, 9.B, 10.A.
  2. 1. (a) 22250+54,500(.39)=$43,505 (b) ATR=43,505/154,500=28.16%, MTR=39%

2. (8+x)/2=6, x=12-8=4%

3. 8m(FV%,8)=20m, (FV%,8)=20/8=2.5, look for 2.5 in the FV table à 12%

4. 10,000=pmt(PVIFA4%,20), SA pmt=10,000/13.5903=$735.82