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EXAM MID-TERM FINC 330 SPRING 2009 TRUE/FALSE (20 pts.) 1. For the risk-averse financial manager, the more risky a given course of action, the higher the expected return must be. ANSWER: _______ The financial manager should examine available risk-return trade-offs and make his decision based upon the greatest expected return. ANSWER: _______ In a general partnership, all partners have unlimited liability for the actions of any one partner when that partner is conducting business for the firm. ANSWER: _______ There is no legal distinction made between the assets of the business and the personal assets of the owners in the limited partnership. ANSWER: _______ Limited partners may actively manage the business. ANSWER: _______ The agency problem arises due to the separation of ownership and control in a firm. ANSWER: _______ The income statement represents a snapshot of account balances at one point in time-on a given day. ANSWER: _______ A balance sheet is a statement of the financial position of the firm on a given date, including its asset holdings, liabilities, and equity. ANSWER: _______ Under current accounting rules, plant and equipment appear on a companys balance sheet valued at replacement value. ANSWER: _______ The current ratio and the acid test ratio are both measures of financial leverage. ANSWER: _______ Financial ratios that are higher than industry averages may indicate problems which are as detrimental to the firm as ratios that are too low. ANSWER: _______ The projected change in retained earnings equals projected net income less any dividends to be paid. ANSWER: _______ Holding all other variables constant, as the plowback ratio increases, the sustainable growth rate increases. ANSWER: _______ Discretionary sources of financing are those sources that vary automatically with a firms level of sales. ANSWER: _______ 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Because accounts payable and accrued expenses increase with sales, they represent sources of spontaneous financing. ANSWER: _______ Budgets provide management a tool for attempting to deal with agency problems because the budget is a tool that can be used to evaluate employee performance. ANSWER: _______ In general, the required rate of return is a function of (1) the time value of money, (2) the risk of an asset, and (3) the investors attitude toward risk. ANSWER: _______ The CAPM designates the risk-return tradeoff existing in the market, where risk is defined in terms of beta. ANSWER: _______ Unsystematic risk can be eliminated through diversification. ANSWER: _______ As market interest rates increase, bond prices decrease. ANSWER: _______ Bonds that sell at a discount have a coupon rate lower than the market interest rate. ANSWER: _______ Book value represents the sum of an assets market value and liquidation value. ANSWER: _______ The intrinsic value should necessarily be below the market value in order to make it desirable in the eyes of an investor. ANSWER: _______ Any unsecured long-term debt instrument is a debenture. ANSWER: _______ Eurobonds are bonds issued in a country different from the one in whose currency the bond is denominated. ANSWER: _______ The current yield of a bond will equal its coupon rate when the bond is selling at par value. ANSWER: ______ A call provision allows the issuer to buy its stock back from the investor. ANSWER: _______ When the firm decides to retain a portion of its earnings, the stockholders are indirectly investing in the firm. ANSWER: _______ In the event of bankruptcy, preferred stockholders and common stockholders have the same claim on the firms assets. ANSWER: _______ The cumulative feature is necessary to protect the rights of preferred stockholders. ANSWER: _______ The preemptive right helps existing common shareholders protect their proportionate share of ownership of the firm. ANSWER: _______ 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. The hedging principle involves matching the cash flow from an asset with the cash flow requirements of the financing used. ANSWER: _______ A firm can reduce net working capital by substituting long-term financing, such as bonds, with short-term financing, such as a one-year notes payable. ANSWER: _______ Managing a firms liquidity is basically the same as managing a firms net working capital. ANSWER: _______ Holding all other variables constant, as accounts receivable increases, the cash conversion cycle decreases. ANSWER: _______ Major sources of secured credit include commercial banks, finance companies, and factors. ANSWER: _______ The cost of trade credit varies directly with the size of the cash discount and inversely with the length of time between the end of the discount period and the final due date. ANSWER: _______ Trade credit appears on a companys balance sheet as accounts payable. ANSWER: _______ All other things remaining the same, the greater the firms reliance on short-term debt or current liabilities in financing its asset investments, the lower the risk of illiquidity. ANSWER: _______ The purpose of a clean-up requirement is to ensure that the borrower is not using short-term bank credit to finance a part of its permanent need for funds. ANSWER: _______ 33. 34. 35. 36. 37. 38. 39. 40. Multiple Choice (25 pts.) 1. Consider the timing of the profits of the following certain investment projects: Profit L S Year 1 $ 0 $ 3000 Year 2 $ 3000 $ 0 a. b. c. d. Project S is preferred to Project L. Project L is preferred to Project S. Projects S and L are equally desirable. A goal of profit maximization would favor Project S only. ANSWER: _______ 2. Why is maximizing shareholder wealth a better goal than maximizing profits? a. Maximizing shareholder wealth places greater emphasis on the short term. b. Maximizing profits ignores the uncertainty that is related to expected profits. c. Maximizing shareholder wealth gives superior consideration to the entire portfolio of shareholder investments. d. Maximizing profits gives too much weight to the tax position of shareholders. ANSWER: _______ 3. Assume that you are starting a business. Further assume that the business is expected to grow very quickly and a great deal of capital will be needed soon. What type of business organization would you choose? a. Corporation b. General Partnership c. Sole proprietorship d. Limited partnership ANSWER: _______ 4. Which of the following is a characteristic of a limited partnership? a. It allows one or more partners to have limited liability. b. It requires one or more of the partners to be a general partner to whom the privilege of limited liability does not apply. c. It prohibits the limited partners from participating in the management of the partnership. d. all of the above. ANSWER: _______ 5. What does the agency problem refer to? a. The conflict that exists between the board of directors and the employees of the firm b. The problem associated with financial managers and Internal Revenue agents c. The conflict that exists between stockbrokers and investors d. The problem that results from potential conflicts of interest between the manager of a business and the stockholders e. None of the above ANSWER: _______ 6. Foregoing the earning potential of a dollar today is referred to as the: a. time value of money. b. opportunity cost concept. c. risk/return tradeoff. d. creation of wealth. ANSWER: _______ 7. Who owns the retained earnings of a public firm? a. The IRS b. Common stockholders c. Bondholders d. Preferred stockholders ANSWER: b_______ 8. How does "free cash flow" differ from net profit? a. It is determined by accrual basis accounting. b. It takes into consideration a firms ongoing investment in working capital and fixed assets. c. It ignores depreciation and taxes. d. It is less expensive. ANSWER: _______ 9. Which of the following items is part of the computation of net operating working capital for purposes of determining free cash flow? a. Accounts payable b. Fixed assets c. Interest expense d. Dividend payments ANSWER: _______ 10. You are about to determine your corporations taxable income. Which of the below would not be included as a tax-deductible expense? a. Marketing expenses b. Depreciation expense c. Cost of goods sold d. Dividend expense ANSWER: _______ 11. Which of the following statements is true? a. Current assets consist of cash, accounts receivable, inventory, and net plant, property, and equipment. b. The quick ratio is a more restrictive measure of a firms liquidity than the current ratio. c. For the average firm, inventory is considered to be more "liquid" than accounts receivable. d. A successful firms current liabilities should always be greater than its current assets. ANSWER: _______ 12. Given an accounts receivable turnover of 8 and annual credit sales of $362,000, the average collection period (360-day year) is: a. 90 days. b. 45 days. c. 75 days. d. 60 days. ANSWER: _______ 13. The percent-of-sales method can be used to forecast: a. expenses. b. assets. c. liabilities. d. all of the above. ANSWER: _______ 14. The capital asset pricing model: a. provides a risk-return trade-off in which risk is measured in terms of the market returns. b. provides a risk-return trade-off in which risk is measured in terms of beta. c. measures risk as the coefficient of variation between security and market rates of return. d. depicts the total risk of a security. ANSWER: _______ 15. You are considering investing in Ford Motor Company. Which of the following is an example of diversifiable risk? a. Risk resulting from the possibility of a stock market crash b. Risk resulting from uncertainty regarding a possible strike against Ford c. Risk resulting from an expected recession d. Risk resulting from interest rates decreasing ANSWER: _______ 16. Tanzlin Manufacturings common stock has a beta of If 1.5. the expected risk-free return is 9% and the expected return on the market is 14%, what is the expected return on the stock? a. 13.5% b. 21.0% c. 16.5% d. 21.5% ANSWER: _______ 17. UVP preferred stock pays $5.00 in annual dividends. If your required rate of return is 13%, how much will you be willing to pay for one share? a. $38.46 b. $26.26 c. $65.46 d. $46.38 ANSWER: _______ 18. Davis Gas & Electric issued preferred stock in 1985 that had a par value of $50. The stock pays a dividend of 7.875%. Assume that shares are currently selling for $62.50. What is the preferred stockholders expected rate of return? Round to the nearest 0.01%. a. 6.30% b. 7.88% c. 10.25% d. 5.02% ANSWER: _______ 19. McMillen House of Books recently paid a $3 dividend on its preferred stock. Investors require a 6% return on the stock. The stock is currently selling for $45. Is the stock a good buy? a. Yes, as it is undervalued $5. b. Yes, as it is undervalued $10. c. No, as it is overvalued $5. d. No, as it is overvalued $10. ANSWER: _______ 20. A _________________ is an agreement where the borrower gives the lender a lien against all its inventories. a. floating lien b. blanket lien c. chattel lien d. both a and b e. both b and c ANSWER: _______ 21. A company which foregoes the discount when credit terms are 4/15 net 70 is essentially borrowing money from his supplier for an additional: a. b. c. d. 40 days. 55 days. 70 days. 85 days. ANSWER: _______ 22. Market efficiency implies which of the following? a. Book value = intrinsic value b. Market value = intrinsic value c. Book value = market value d. Liquidation value = book value ANSWER: _______ 23. Which of the following is the correct method of determining discretionary financing needed (DFN)? a. Projected change in assets, divided by projected change in liabilities, plus projected change in owners equity b. Projected change in assets, times projected change in owners equity, minus projected change in liabilities c. Projected change in owners equity, minus projected change in liabilities, plus projected change in assets d. Projected change in assets, minus projected change in liabilities, minus projected change in owners equity ANSWER: _______ 24. A decrease in the sustainable growth rate is caused by a decrease in: a. plowback ratio. b. dividend payout ratio. c. common equity. d. both a and c. ANSWER: _______ 25. The present value of a single future sum: a. increases as the number of discount periods increases. b. is generally larger than the future sum. c. depends upon the number of discount periods. d. increases as the discount rate increases. ANSWER: _______ PROBLEMS: Table 1 (10 pts.) Financial Data for Dooley Sportswear, December 31, 1996 Inventory $206,250 Long-term debt 300,000 Interest expense 5,000 Accumulated depreciation 442,500 Cash 180,000 Net sales (all credit) 1,500,000 Common stock 800,000 Accounts receivable 225,000 Operating expenses 525,000 Notes payable-current 187,500 Cost of goods sold 937,500 Plant and equipment 1,312,500 Accounts payable 168,750 Marketable securities 95,000 Prepaid insurance 80,000 Accrued wages 65,000 Retained earnings-current-year ? Federal income taxes 5,750 1. From the scrambled list of items presented in Table 4, prepare an income statement and a balance sheet for Dooley Sportswear Company. ANSWER: Dooley Sportswear Company Income Statement for the Year Ending December 31, 1996 Dooley Sportswear Company Balance Sheet December 31, 1996 TABLE 2 (5 pts) Bird Industries, Inc. Balance Sheets 1995 Cash $ 1,000 Accounts receivable 5,000 Inventories 6,500 Land 10,000 Other fixed assets 8,000 Accumulated depreciation (1,000) Total assets $29,500 Accounts payable Bonds Common stock Retained earnings Total debt and equity $3,200 4,000 17,000 5,300 $29,500 1996 $? 6,000 6,000 12,000 9,000 (1,600) $? $ 6,800 4,000 16,000 5,000 $? Bird Industries, Inc. Income Statement Sales Cost of goods sold Gross profit Operating expenses Depreciation EBIT Interest expense EBT Taxes Net Income $84,000 66,400 $17,600 (13,000) (600) $ 4,000 (500) $ 3,500 (1,500) $ 2,000 1. Based on the information contained in Table 2, what was the total amount of Bird Industries common stock 2. 3. 4. 5. dividend for 1996? $800 $2,300 $2,000 Cannot be determined with available information ANSWER: _______ 2. Based on the information contained in Table 2, what was Bird Industries cash balance as of December 31, 1996? a. $300 b. $400 c. $100 d. $1,100 ANSWER: _______ Table 3 (10 pts) Smith Company Balance Sheet Assets: Cash and marketable securities Accounts receivable Inventories Prepaid expenses Total current assets Fixed assets Less: accumulated depreciation Net fixed assets Total assets Liabilities: Accounts payable Notes payable Accrued taxes Total current liabilities $300,000 2,215,000 1,837,500 24,000 $3,286,500 2,700,000 1,087,500 $1,612,500 $4,899,000 $240,000 825,000 42,500 $1,107,000 Long-term debt Owners equity Total liabilities and owners equity Net sales (all credit) Less: Cost of goods sold Selling and administrative expense Depreciation expense Interest expense Earnings before taxes Income taxes Net income Common stock dividends Change in retained earnings 975,000 2,817,000 $4,899,000 $6,375,000 4,312,500 1,387,500 135,000 127,000 $412,500 225,000 $187,500 $97,500 $90,000 1. Based on the information in Table 3, the current ratio is: a. 2.97. b. 1.46. c. 2.11. d. 2.23. ANSWER: ________ 2. Based on the information in Table 3, and using a 360-day year, the average collection period is: a. 71 days. b. 84 days. c. 64 days. d. 125 days. ANSWER: ________ 3. Based on the information in Table 3, the debt ratio is: a. 0.70. b. 0.20. c. 0.74. d. 0.42. ANSWER: ________ 4. Based on the information in Table 3, the net profit margin is: a. 4.61%. b. 2.94%. c. 1.97%. d. 5.33%. ANSWER: ________ 5. Based on the information in Table 3, the inventory turnover ratio is: a. 0.29 times. b. 2.35 times. c. 0.43 times. d. 3.47 times. ANSWER: ________ SHORT PROBLEMS (30 pts.) 1. Based on the following selected financial information for Sheets Metalworks, calculate net income for 2003. Dividends paid Accts. payable/accr. Long-term debt Common stock Retained earnings a. b. c. d. e. $100 $300 $500 $700 $900 2002 $400 300 2,300 2,200 6,150 2003 $700 500 2,000 3,000 6,350 ANSWER: _______` 2. Water Works, Inc. has a current ratio of 1.33, current liabilities of $540,000, and inventory of $400,000. What is Water Works, Inc.s quick ratio? a. 1.11 b. 0.86 c. 1.90 d. 0.59 ANSWER: _______ 3. Snort and Smiley Incorporated has a debt ratio of .42, noncurrent liabilities of $20,000, and total assets of $70,000. What is Snort and Smileys level of current liabilities? a. $8,400 b. $9,400 c. $12,340 d. $10,600 ANSWER: _______ 4. Lorna Dome, Inc. has an annual interest expense of $30,000. Lorna Domes times-interest-earned ratio is 4.2. What is Lorna Domes operating income? a. $96,000 b. $57,000 c. $126,000 d. $57,600 ANSWER: _______ 5. Sputter Motors has sales of $3,450,000, total assets of $1,240,000, cost of goods sold of $2,550,000, and an inventory turnover of 6.38. What is the amount of Sputters inventory? a. $421,054 b. $638,112 c. $543,000 d. $399,687 ANSWER: _______ 6. Wireless Communications has a total asset turnover of 2.66, total liabilities of $1,004,162, and sales revenues of $7,025,000. What is Wirelesss debt ratio? a. 38.0% b. 14.3% c. 26.7% d. 81.1% ANSWER: _______ 7. A company collects 60% of its sales during the month of the sale, 30% one month after the sale, and 10% two months after the sale. The company expects sales of $10,000 in August, $20,000 in September, $30,000 in October, and $40,000 in November. How much money is expected to be collected in October? a. $25,000 b. $15,000 c. $35,000 d. None of the above ANSWER: _______ 8. What is the value of a bond that has a par value of $1,000, a coupon rate of $80 (annually), and matures in 11 years? Assume a required rate of return of 11%, and round your answer to the nearest $10. a. $320 b. $500 c. $810 d. $790 ANSWER: _______ 9. Georgia Peaches Corporation (GPC) has a line of credit with Trust Company Bank that allows GPC to borrow up to $300,000 at an annual interest rate of 11%. However, GPC must keep a compensating balance of 20% of any amount borrowed on deposit at the Trust Company Bank. GPC does not normally have a cash balance account with the Trust Company. What is the effective annual cost of credit? a. 13.75% b. 13.95% c. 14.15% d. 15.55% ANSWER: _______ 10. You just purchased a parcel of land for $10,000. If you expect a 12% annual rate of return on your investment, how much will you sell the land for in 10 years? a. $25,000 b. $31,060 c. d. $38,720 $34,310 ANSWER: _______ 11. Which of the following formulas represents the future value of $500 invested at 8% compounded quarterly for five years? a. 500(1+.08)5 b. 500(1+.08)20 c. 500(1+.02)5 d. 500(1+.02)20 ANSWER: _______ 12. What is the present value of $27 received at the end of each year for five years? Assume a discount rate of 9%. The first payment will be received one year from today (round to the nearest $1). a. $42 b. $114 c. $88 d. $105 ANSWER: _______ 13. A commercial bank will loan you $7,500 for two years to buy a car. The loan must be repaid in 24 equal monthly payments. The annual interest rate on the loan is 12% of the unpaid balance. What is the amount of the monthly payments? a. $282.43 b. $390.52 c. $369.82 d. $353.05 ANSWER: _______ 14. At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years? a. 6% b. 5% c. 7% d. 8% ANSWER: _______ 15. MI has a $1,000 par value, 30-year bond outstanding that was issued 20 years ago at an annual coupon rate of 10%, paid semiannually. Market interest rates on similar bonds are 7%. Calculate the bonds price. a. $956.42 b. $1,000.00 c. $1,168.31 d. $1,213.19 ANSWER: _______ ... View Full Document

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