FNAN 522 Midterm Review – Finance Problems, Topics & Exam Preparation
Guide
A company needs to raise cash to cover its operating expenses. The company will only need the
funds for a short period of time. Which financial market is the most appropriate for the
company use to raise money (that is, likely the lowest cost and best-matched maturity)? -
correct answer ✔✔Money market
What is the primary goal of the Sarbanes-Oxley act according to the Module 1 video "The Goal
of Financial Management"? - correct answer ✔✔To protect investors from corporate abuse.
Which of the following is an accurate characteristic of a sole proprietorship? - correct answer
✔✔The owner is personally liable for the business's debt and obligations.
Which of the following is a source of agency costs in an organization? - correct answer ✔✔1.
Parties associated with the organization have different risk preferences.
2. The managers of the organization have different objectives than the other shareholders.
3. The people who make the day-to-day decisions are not the owners
Which of the following occurred during the financial crisis of 2007-2008? - correct answer
✔✔1.Several major institutions failed or were subject to government takeover.
2. Significant declines in consumer wealth and prolonged unemployment.
3. A currency crisis, with investors transferring their wealth to countries with stronger
currencies.
Which of the following terms describes the protection of personal assets stemming from the
corporate structure? - correct answer ✔✔limited liability
, What will $250,000 grow to be in 11 years if it is invested today in an account with an annual
interest rate of 6%? - correct answer ✔✔$474,574.64
Approximately how many years will it take for $36,000 to grow to be $68,000 if it is invested in
an account with an annual interest rate of 8%? - correct answer ✔✔8 years
You are offered a loan with a quoted annual interest rate of 13% with monthly compounding of
interest. What is your effective annual interest rate? - correct answer ✔✔EAR = ((1+
(.13/12))^12) - 1 =13.8%
John and Peggy would like to buy a house. They have looked at their budget and determined
that they can afford a maximum monthly mortgage payment of $1,100. Interest rates on 30-
year, fixed-rate mortgages currently have a nominal annual interest rate of 7 percent with
monthly compounding (payments due at the end of each month). Given these loan terms, what
is the maximum amount John and Peggy borrow today to purchase a house and not exceed a
monthly payment of $1,100 on the loan? Round to the nearest dollar. - correct answer
✔✔$165,338
A company's security is priced above the security market line. Which of the following
statements regarding that security is true? - correct answer ✔✔This is not an attractive market
situation for the company issuing the security
A portfolio is composed of 40% stock, 20% bonds, and 40% mutual funds. The stock is expected
to have a 8% return, the bonds a 4% return and the mutual funds a 6% return. What is the
expected return of the portfolio? - correct answer ✔✔Expected Return =
(40*.08)+(20*.04)+(40*.06)=6.4%
A portfolio is composed of 60% stock and 40% bonds. The variance of stock is 160 and the
variance of bonds is 120. The covariance is 40. What is the portfolio's variance - correct answer
✔✔variance = (.60^2)*160 + (.40^2)*120+ (2*.60*.40*40)=96
Guide
A company needs to raise cash to cover its operating expenses. The company will only need the
funds for a short period of time. Which financial market is the most appropriate for the
company use to raise money (that is, likely the lowest cost and best-matched maturity)? -
correct answer ✔✔Money market
What is the primary goal of the Sarbanes-Oxley act according to the Module 1 video "The Goal
of Financial Management"? - correct answer ✔✔To protect investors from corporate abuse.
Which of the following is an accurate characteristic of a sole proprietorship? - correct answer
✔✔The owner is personally liable for the business's debt and obligations.
Which of the following is a source of agency costs in an organization? - correct answer ✔✔1.
Parties associated with the organization have different risk preferences.
2. The managers of the organization have different objectives than the other shareholders.
3. The people who make the day-to-day decisions are not the owners
Which of the following occurred during the financial crisis of 2007-2008? - correct answer
✔✔1.Several major institutions failed or were subject to government takeover.
2. Significant declines in consumer wealth and prolonged unemployment.
3. A currency crisis, with investors transferring their wealth to countries with stronger
currencies.
Which of the following terms describes the protection of personal assets stemming from the
corporate structure? - correct answer ✔✔limited liability
, What will $250,000 grow to be in 11 years if it is invested today in an account with an annual
interest rate of 6%? - correct answer ✔✔$474,574.64
Approximately how many years will it take for $36,000 to grow to be $68,000 if it is invested in
an account with an annual interest rate of 8%? - correct answer ✔✔8 years
You are offered a loan with a quoted annual interest rate of 13% with monthly compounding of
interest. What is your effective annual interest rate? - correct answer ✔✔EAR = ((1+
(.13/12))^12) - 1 =13.8%
John and Peggy would like to buy a house. They have looked at their budget and determined
that they can afford a maximum monthly mortgage payment of $1,100. Interest rates on 30-
year, fixed-rate mortgages currently have a nominal annual interest rate of 7 percent with
monthly compounding (payments due at the end of each month). Given these loan terms, what
is the maximum amount John and Peggy borrow today to purchase a house and not exceed a
monthly payment of $1,100 on the loan? Round to the nearest dollar. - correct answer
✔✔$165,338
A company's security is priced above the security market line. Which of the following
statements regarding that security is true? - correct answer ✔✔This is not an attractive market
situation for the company issuing the security
A portfolio is composed of 40% stock, 20% bonds, and 40% mutual funds. The stock is expected
to have a 8% return, the bonds a 4% return and the mutual funds a 6% return. What is the
expected return of the portfolio? - correct answer ✔✔Expected Return =
(40*.08)+(20*.04)+(40*.06)=6.4%
A portfolio is composed of 60% stock and 40% bonds. The variance of stock is 160 and the
variance of bonds is 120. The covariance is 40. What is the portfolio's variance - correct answer
✔✔variance = (.60^2)*160 + (.40^2)*120+ (2*.60*.40*40)=96
