BUS 330: Corporate Finance I American University In Bulgaria
A finance course assessment covering corporate financial principles.
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AMERICAN UNIVERSITY IN BULGARIA
BUS 330: CORPORATE FINANCE I
FALL 2012, AUBG
MIDTERM EXAM 1
Name: ___________________________________ ID _________
Version 1 Solution Guide
INSTRUCTIONS:
1. You have 75 minutes to complete the exam.
2. The exam is worth a total of 100 points.
3. You may use a calculator and scratch paper sheets. You must hand in the sheets with
your exam (put your name on it).
4. Allocate your time wisely. Use the number of points assigned to each problem as
your guide.
5. In order to get full credit on the problems, you must show ALL your work!
6. You can get partial credits if you show your calculations or provide arguments to
support your answer.
7. No credits will be warded if you fail to state your assumptions or conclusions
explicitly.
AMERICAN UNIVERSITY IN BULGARIA
BUS 330: CORPORATE FINANCE I
FALL 2012, AUBG
MIDTERM EXAM 1
Name: ___________________________________ ID _________
Version 1 Solution Guide
INSTRUCTIONS:
1. You have 75 minutes to complete the exam.
2. The exam is worth a total of 100 points.
3. You may use a calculator and scratch paper sheets. You must hand in the sheets with
your exam (put your name on it).
4. Allocate your time wisely. Use the number of points assigned to each problem as
your guide.
5. In order to get full credit on the problems, you must show ALL your work!
6. You can get partial credits if you show your calculations or provide arguments to
support your answer.
7. No credits will be warded if you fail to state your assumptions or conclusions
explicitly.
2
Part A: Multiple choice questions (16 points in total):
1. Which of the following statements is CORRECT?
a. One of the disadvantages of incorporating a business is that the owners then become
subject to liabilities in the event the firm goes bankrupt.
b. Sole proprietorships are subject to more regulations than corporations.
c. In any type of partnership, every partner has the same rights, privileges, and liability
exposure as every other partner.
d. Sole proprietorships and partnerships generally have a tax advantage over many
corporations, especially large ones.
e. Corporations of all types are subject to the corporate income tax.
Answer: D
2. Which of the following statements is CORRECT?
a. The cash flows for an ordinary (or deferred) annuity all occur at the beginning of
the periods.
b. If a series of unequal cash flows occurs at regular intervals, such as once a year,
then the series is by definition an annuity.
c. The cash flows for an annuity due must all occur at the ends of the periods.
d. The cash flows for an annuity must all be equal, and they must occur at regular
intervals, such as once a year or once a month.
e. If some cash flows occur at the beginning of the periods while others occur at the
ends, then we have what the textbook defines as a ‘variable’ annuity.
Answer: D
3. Which of the following statements is CORRECT?
a. The more depreciation a firm reports, the higher its tax bill, other things held constant.
b. People sometimes talk about the firm’s net cash flow, which is shown as the lowest entry
on the income statement, hence it is often called "the bottom line.”
c. Depreciation reduces a firm’s cash balance, so an increase in depreciation would
normally lead to a reduction in the firm’s net cash flow.
d. Net cash flow (NCF) is often defined as follows:
Net Cash Flow = Net Income + Depreciation and Amortization Charges.
a. Depreciation and amortization are not cash charges, so neither of them has an effect on a
firm’s reported profits.
Answer: D
4. The term “additional funds needed (AFN)” is generally defined as follows:
a. Funds that are obtained automatically from routine business transactions.
b. Funds that a firm must raise externally from non-spontaneous sources, i.e., by
borrowing or by selling new stock or bonds to support operations.
c. The amount of assets required per dollar of sales.
d. The amount of internally generated cash in a given year minus the amount of cash
needed to acquire the new assets needed to support growth.
e. A forecasting approach in which the forecasted percentage of sales for each
balance sheet account is held constant.
Answer: B
Part A: Multiple choice questions (16 points in total):
1. Which of the following statements is CORRECT?
a. One of the disadvantages of incorporating a business is that the owners then become
subject to liabilities in the event the firm goes bankrupt.
b. Sole proprietorships are subject to more regulations than corporations.
c. In any type of partnership, every partner has the same rights, privileges, and liability
exposure as every other partner.
d. Sole proprietorships and partnerships generally have a tax advantage over many
corporations, especially large ones.
e. Corporations of all types are subject to the corporate income tax.
Answer: D
2. Which of the following statements is CORRECT?
a. The cash flows for an ordinary (or deferred) annuity all occur at the beginning of
the periods.
b. If a series of unequal cash flows occurs at regular intervals, such as once a year,
then the series is by definition an annuity.
c. The cash flows for an annuity due must all occur at the ends of the periods.
d. The cash flows for an annuity must all be equal, and they must occur at regular
intervals, such as once a year or once a month.
e. If some cash flows occur at the beginning of the periods while others occur at the
ends, then we have what the textbook defines as a ‘variable’ annuity.
Answer: D
3. Which of the following statements is CORRECT?
a. The more depreciation a firm reports, the higher its tax bill, other things held constant.
b. People sometimes talk about the firm’s net cash flow, which is shown as the lowest entry
on the income statement, hence it is often called "the bottom line.”
c. Depreciation reduces a firm’s cash balance, so an increase in depreciation would
normally lead to a reduction in the firm’s net cash flow.
d. Net cash flow (NCF) is often defined as follows:
Net Cash Flow = Net Income + Depreciation and Amortization Charges.
a. Depreciation and amortization are not cash charges, so neither of them has an effect on a
firm’s reported profits.
Answer: D
4. The term “additional funds needed (AFN)” is generally defined as follows:
a. Funds that are obtained automatically from routine business transactions.
b. Funds that a firm must raise externally from non-spontaneous sources, i.e., by
borrowing or by selling new stock or bonds to support operations.
c. The amount of assets required per dollar of sales.
d. The amount of internally generated cash in a given year minus the amount of cash
needed to acquire the new assets needed to support growth.
e. A forecasting approach in which the forecasted percentage of sales for each
balance sheet account is held constant.
Answer: B
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Document Details
University
American University in Bulgaria
Subject
Finance