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King Saud University, Riyadh
COLLEGE OF BUSINESS ADMINISTRATION, DEPARTMENT OF FINANCE
ADVANCED TOPICS IN FINANCE (BA 528)
1st Midterm examination Date: 7th Dec.2010
Time: 6.30 pm – 7.30 pm Marks: 20
Section: 30661 (MBA) Room No. 60
Instructor: Dr. Durga Prasad Samontaray
GIVE ALL ANSWERS ONLY IN THE QUESTION PAPER. EXERCISES ARE TO BE ANSWERED IN THE BACKSIDE BLANK SPACE AVAILABLE.
Section A
Select the best alternative from the following questions (0.5*20 = 10 Marks)
1. Which of the following statements is CORRECT? a. In the statement of cash flows, a decrease in accounts receivable is reported as a use of cash.
b. Dividends do not show up in the statement of cash flows because dividends are considered to be a financing activity, not an operating activity.
c. In the statement of cash flows, a decrease in accounts payable is reported as a use of cash.
d. In the statement of cash flows, depreciation charges are reported as a use of cash.
e. In the statement of cash flows, a decrease in inventories is reported as a use of cash.
2. Which of the following statements is CORRECT? a. Since companies can deduct dividends paid but not interest paid, our tax system favors the use of equity financing over debt financing, and this causes companies’ debt ratios to be lower than they would be if interest and dividends were both deductible.
b. Interest paid to an individual is counted as income for tax purposes and taxed at the individual’s regular tax rate, which in 2008 could go up to 35%, but dividends received were taxed at a maximum rate of 15%.
c. The maximum federal tax rate on corporate income in 2008 was 50%.
d. Corporations obtain capital for use in their operations by borrowing and by raising equity capital, either by selling new common stock or by retaining earnings. The cost of debt capital is the interest paid on the debt,

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