MG 360 Midterm Examination Answers


Select Ture and False From below Questions:


1. It is important to evaluate all financial decisions by measuring how they affect a firm’s stock price, hence ensuring maximization of shareholder wealth.

2. One advantage of organized stock exchanges is increased stock price volatility resulting from the efficient exchange of pricing information.

3. Real assets are tangible, whereas financial assets merely reflect claims for future payment on other economic units.

4. If two companies have the same revenues and operating expenses, their net incomes will still be different if one company finances its assets with more debt and the other company with more equity.

5. If a company’s cash balance increases during the year, and the company also reports positive net income, then the company’s retained earnings balance must increase.

6. A car manufacturer offers either $2,000 cash back or zero percent financing for 5 years. A rational consumer will always take the cash back because money received today is worth more than money received in the future.

7. If an asset is sold for a price above its book value, the difference is considered taxable income to the firm.

8. Equity is a measure of the monetary contributions that have been made either directly or indirectly on behalf of the owners of the company.

9. The total assets of a firm are financed with liabilities and stockholder’s equity.

10. A firm’s cash borrowing needs can be reduced if its inventory turnover rate can be increased, other things remaining constant.

11. Profitability ratios are distorted by inflation because profits are stated in current dollars and assets and equity are stated in historical dollars.

12. Operating profit is essentially a measure of how efficient management is in generating revenues and controlling expenses.

13. When the inflation rate is zero, the present value of $1.00 is identical to the future value of $1.00.





1. If an investor is said to be “risk averse” then that investor ________.

a. will not be induced to take on any risk

b. will only take on the least risk possible

c. will only take on additional risk if they expect to be compensated in the form of additional return

d. is not behaving in a typical manner



2. A corporation’s capital losses can be carried back three years and, if any loss still remains, it may be carried forward ________.

a. 1 year

b. 3 years

c. 5 years

d. 7 years



3. Which of the following are tax-deductible for a corporation?

a. common stock dividends

b. interest expense

c. preferred stock dividends

d. all of the above e. both A and B



4. Which of the following will likely result in a greater use of external funding?

a. higher corporate profits and higher interest rates

b. lower corporate profits and lower interest rates

c. higher corporate profits and lower interest rates

d. lower corporate profits and higher interest rates



5. The real rate of return is the return earned above the ________.

a. default risk premium

b. risk-adjusted return

c. inflation risk premium

d. variability of returns measured by standard deviation



6. Company A and Company B both report the same level of sales and net income. Therefore, ________.

a. both A and B will report the same Earnings Per Share

b. both A and B will report the same Gross Profit Margin

c. both A and B will report the same Net Profit Margin

d. both A and C are true



7. Investment A has an expected return of 15% per year, while investment B has an expected return of 12% per year. A rational investor will choose ________.

a. investment A because of the higher expected return

b. investment B because a lower return means lower risk

c. investment A if A and B are of equal risk

d. investment A only if the standard deviation of returns for A is higher than the standard deviation of returns for B



8. A short-term creditor would be most interested in

a. profitability ratios.

b. asset utilization ratios.

c. liquidity ratios.

d. leverage ratios.



9. A quick ratio much smaller than the current ratio reflects

a. a small portion of current assets are in inventories.

b. a large portion of current assets are in inventories.

c. that the firm will have a high inventory turnover rate.

d. that the firm will have a high return on assets rate.



10. The residual income of the firm belongs to

a. creditors.

b. preferred stockholders.

c. common stockholders.

d. bondholders



11. The major advantage of corporations relative to proprietorships and general partnerships is that

a. corporations are simpler to form.

b. corporations receive preferential tax treatment from the federal government.

c. owners of corporations enjoy voting power.

d. owners of corporations enjoy limited liability.

e. None of the above are major advantages of corporations.



12. Assuming a 34% tax rate, depreciation expenses of $300,000 will

a. reduce income by $102,000.

b. reduce taxes by $300,000.

c. reduce taxes by $102,000.

d. have no effect on income or taxes since depreciation is not a cash expense.



13. Inflation has it major impact on which of the following balance sheet areas?

a. inventory and accounts payable b. plant & equipment and long-term debt

c. plant & equipment and inventory d. interest expense and marketable securities