Finance 3227: Introduction to Finance
Midterm Examination #1, Fall 2020
Time Permitted: 80 Minutes
Name: ______________ Student Number: ______________
Section: 007_________________ Instructor’s Name: __________________________
Questions Marks Earned
MCQ (Question 1 – Question 15) /30
Question 16 /6
Question 17 /8
Question 18 /8
Question 19 /6
Total /58
Instructions:
- Please write your first name, last name, student ID, section number and Instructor’s name
correctly
- Answer all the questions
- The exam has a total of 15 MCQ and 4 Analytical Questions
- The exam consists of 9 pages in total
- Only BA II Plus Calculator is permitted in the exam
- Show your work clearly for questions 16 - 19
- You can use the text book, lecture notes and formula sheet
- You cannot communicate with anyone else during the exam. That will be considered a serious
violation of academic integrity.
Section A: Multiple Choice Questions (each MCQ is worth 2 points)
For each of the following, please pick the best answer
1. Which of the following is an advantage of a sole proprietorship?
a. double taxation
b. ease of setup
c. limited liability
d. separation of ownership and control
Answer is C
1
, 2. Whose interests should a financial manager consider paramount when making a decision?
a. the stockholders who have risked their money to become owners of the company
b. the employees and associated stakeholders who are employed by the company
c. the public who consume the company's goods and services
d. the financial manager's own interests
Answer is A
3. Which of the following are major duties of a financial manager?
I. To make investment decisions
II. To make financing decisions
III. To hire prudent employees
a. I and II only
b. II and III only
c. I and III only
d. I, II and III
Answer is A
4. Which of the following would be best considered to be a principal-agent problem in the
behaviour of the following financial managers?
a. Sue instructs her staff to skip safety inspections in one of the company's factories, knowing
that it will likely fail the inspection and incur significant costs to fix.
b. James ignores an opportunity for his company to invest in a new drug to fight Alzheimer's
disease, judging the drug's chances of succeeding as low.
c. Bill chooses to pursue a risky investment for the company's funds, solely because his
compensation will substantially rise if it succeeds.
d. Michael chooses to enhance his firm's reputation at some cost to its shareholders by
sponsoring a team of athletes for the Special Olympics.
Answer is C
5. A firm has sales of $1000. Its EBIT is $250, and it has interest expense of $50. Further, its
tax rate is 25%. What is its net profit margin?
a. 75%
b. 40%
c. 15%
d. 25%
Answer is C
6. Suppose that a company has following short-term assets: Cash: $50,000; Marketable
Securities: $50,000; Accounts Receivable: $100,000; Inventory: $100,000. Further, the
company has Property, Plant and Equipment worth $1,000,000. In terms of liabilities, the
2
Midterm Examination #1, Fall 2020
Time Permitted: 80 Minutes
Name: ______________ Student Number: ______________
Section: 007_________________ Instructor’s Name: __________________________
Questions Marks Earned
MCQ (Question 1 – Question 15) /30
Question 16 /6
Question 17 /8
Question 18 /8
Question 19 /6
Total /58
Instructions:
- Please write your first name, last name, student ID, section number and Instructor’s name
correctly
- Answer all the questions
- The exam has a total of 15 MCQ and 4 Analytical Questions
- The exam consists of 9 pages in total
- Only BA II Plus Calculator is permitted in the exam
- Show your work clearly for questions 16 - 19
- You can use the text book, lecture notes and formula sheet
- You cannot communicate with anyone else during the exam. That will be considered a serious
violation of academic integrity.
Section A: Multiple Choice Questions (each MCQ is worth 2 points)
For each of the following, please pick the best answer
1. Which of the following is an advantage of a sole proprietorship?
a. double taxation
b. ease of setup
c. limited liability
d. separation of ownership and control
Answer is C
1
, 2. Whose interests should a financial manager consider paramount when making a decision?
a. the stockholders who have risked their money to become owners of the company
b. the employees and associated stakeholders who are employed by the company
c. the public who consume the company's goods and services
d. the financial manager's own interests
Answer is A
3. Which of the following are major duties of a financial manager?
I. To make investment decisions
II. To make financing decisions
III. To hire prudent employees
a. I and II only
b. II and III only
c. I and III only
d. I, II and III
Answer is A
4. Which of the following would be best considered to be a principal-agent problem in the
behaviour of the following financial managers?
a. Sue instructs her staff to skip safety inspections in one of the company's factories, knowing
that it will likely fail the inspection and incur significant costs to fix.
b. James ignores an opportunity for his company to invest in a new drug to fight Alzheimer's
disease, judging the drug's chances of succeeding as low.
c. Bill chooses to pursue a risky investment for the company's funds, solely because his
compensation will substantially rise if it succeeds.
d. Michael chooses to enhance his firm's reputation at some cost to its shareholders by
sponsoring a team of athletes for the Special Olympics.
Answer is C
5. A firm has sales of $1000. Its EBIT is $250, and it has interest expense of $50. Further, its
tax rate is 25%. What is its net profit margin?
a. 75%
b. 40%
c. 15%
d. 25%
Answer is C
6. Suppose that a company has following short-term assets: Cash: $50,000; Marketable
Securities: $50,000; Accounts Receivable: $100,000; Inventory: $100,000. Further, the
company has Property, Plant and Equipment worth $1,000,000. In terms of liabilities, the
2
