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**Unformatted text preview: **FIN2004 Midterm
2013/14 Semester 1 Midterm Answers FIN2004 Midterm
1. The corporate form of organization is characterized by all of the following EXCEPT:
1. The corporate form of organization is characterized by all of the following EXCEPT:
A. Its owners enjoy limited liability.
B. In theory it has an unlimited life.
A. Its owners enjoy limited liability.
C. In all of the following jurisdictions – U.S., UK and Singapore – its benefits include that it
B. In theory it has an unlimited life.
makes it easier to raise funds and facilitates the transfer of ownership over and above the
C. In all of the following jurisdictions – U.S., UK and Singapore – its benefits include that it
partnership form of organization.
makes it easier to raise funds and facilitates the transfer of ownership over and above the
D. In all of the following jurisdictions – U.S., UK and Singapore – its drawbacks include its
partnership form of organization.
agency costs and double taxation.
D. In all of the following jurisdictions – U.S., UK and Singapore – its drawbacks include its
E. All ofcosts
the and
above
choices
are correct.
agency
double
taxation. E. All of the above choices are correct.
1. Choice D because there are double tax agreements (DTA) for corporations. 2. Prabhala’s Products Inc. has the following data:
Net income: $240
Sales: $10,000
Total assets: $6,000
2. Prabhala’s Products Inc. has the following data:
Debt ratio:
75%
TIE ratio: 2.0
Current ratio: 1.2
Net income: $240
Sales: $10,000
Total assets: $6,000
Debt ratio:
75%
TIE ratio: 2.0
Current ratio: 1.2
If Prabala could streamline operations, cut operating costs, and raise net income to $300,
without affecting sales or the balance sheet (the additional profits will be paid out as
If Prabala could streamline operations, cut operating costs, and raise net income to $300,
dividends), by how much would its ROE increase?
without affecting sales or the balance sheet (the additional profits will be paid out as
dividends), by how much would its ROE increase?
A.
3.00%
B.
3.50%
A.
3.00%
C.
4.00%
B.
3.50%
D.
4.25%
C.
4.00%
E.
5.50%
D.
4.25% E. 5.50% 3. Ramy Inc. and Sami Corp. each have assets of $10,000 and a return on common equity
2. equal ROE = NI/Equity to 15%.
Ramy
has Corp.
twice as
much
debt
and of
twice
as many
relative
3.
Ramy
Inc.
and
Sami
each
have
assets
$10,000
andsales
a return
on to
common equity Sami debt r
atio = 7
5% Corp.
Ramy’s
net twice
income
equals
$750,
and
its total
assetsales
turnover
is equal
to 3. What is
equal
to
15%.
Ramy
has
as
much
debt
and
twice
as
many
relative
to Sami total a
ssets = $
6,000 à E
quity = $
1,500 Corp.’s profit margin?
net =income Sami Corp.
ROE =Ramy’s 240/1500 16% equals $750, and its total asset turnover is equal to 3. What is
Sami
Corp.’s
profit
margin? New 300/1500 = 20% A. ROE =2.50% Change = 22.50%
0% -‐ 16% = 4% (Choice C) B.
5.00%
A. C.
7.50%
B.
5.00% D.
10.00%
C.
7.50%
E.
12.50%
D.
10.00%
E.
12.50% 4. Other things held constant, which of the following will cause an increase in current assets?
4. Other things held constant, which of the following will cause an increase in current assets?
A.
Cash is used to buy marketable securities.
B.
A cash
dividend
is declared
andsecurities.
paid.
A.
Cash
is used
to buy
marketable
C.
Missing
inventory
is
written
off
against
B.
A cash dividend is declared and paid. retained earnings
D.
Long-term
bonds are
retiredoff
with
the proceeds
a preferred stock issue.
C.
Missing
inventory
is written
against
retainedof
earnings
E.
Merchandise
is
sold
at
a
profit,
but
the
sale
is
on
credit.
D.
Long-term bonds are retired with the proceeds of a preferred stock issue.
E.
Merchandise is sold at a profit, but the sale is on credit. B.
3.50%
C.
4.00%
D.
4.25%
2. Prabhala’s Products Inc. has the following data:
E.
5.50%
Net income: $240
Sales: $10,000
Debt ratio:
75%
TIE ratio: 2.0 Total assets: $6,000
Current ratio: 1.2 3. Ramy Inc. and Sami Corp. each have assets of $10,000 and a return on common equity
If
Prabala
could
streamline
costs,sales
and relative
raise net
equal
to 15%.
Ramy
has twice operations,
as much debtcut
andoperating
twice as many
to income to $300,
without
affecting
sales
or
the
balance
sheet
(the
additional
profits
will
Sami Corp. Ramy’s net income equals $750, and its total asset turnover is equal be
to 3.paid
Whatout
is as
dividends),
how margin?
much would its ROE increase?
Sami Corp.’sbyprofit
A.
B.
C.
D.
D.
E.
E. 2.50%
3.00%
5.00%
3.50%
7.50%
4.00%
10.00%
4.25%
12.50%
5.50% 4. Other
heldSami
constant,
which
the following
cause and
an increase
current
assets?
3. 3.
R’s things
NInc.
I = $and
750 Ramy
Corp.
eachofhave
assets ofwill
$10,000
a returnin on
common
equity equal R’s R
OE = 1
5% à R
’s E
quity = 7
50/15% = $
5,000 toA.15%. Ramy
has
twice
as much
debt and
twice as many sales relative to
Cash
used
to buy
marketable
securities. Sami à R’s D
ebt = $is
5,000 Corp.
Ramy’s
net
income
equals
$750,
and
B.S’s Debt A cash
dividend is declared and paid.its total asset turnover is equal to 3. What is Sami à = $
2,500 Corp.’s profit
margin?
Missing
inventory is written off against retained earnings à C.S’s Equity = $7,500 D.
bonds(TAT) are retired R’s A2.50%
sset Turnover = 3 with the proceeds of a preferred stock issue.
A.Total Long-term
E.
Merchandise
is
sold
at
a
profit, but the sale is on credit. à B.
R’s Sales = $30,000 5.00% à C.
S’s Sales 7.50%
= $15,000 S’s N
I = 7
500*15% D.
10.00% = $1,125 à E.
S’s Profit Margin = 1125/15000 = 7.5% (Choice C) 12.50% 2 4. Other things held constant, which of the following will cause an increase in current assets?
A.
B.
C.
D.
E. 4. Cash is used to buy marketable securities.
A cash dividend is declared and paid.
Missing inventory is written off against retained earnings
Long-term bonds are retired with the proceeds of a preferred stock issue.
Merchandise is sold at a profit, but the sale is on credit. Choice E because increase in accounts receivable is more than decrease in inventory. 2 USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS #5 TO #9
Meijun Metals Inc.
2012 and 2013 Balance Sheets Cash
Accounts receivable
Inventory
Total
Net fixed assets 2012
$600
2,000
4,000
$6,600
25,000 2013
$300
2,500
3,700
$6,500
27,000 Total assets $31,600 $33,500 Accounts payable
Notes payable
Total
Long-term debt
Common stock
Retained earnings
Total liab. & equity 2012
$2,000
2,000
$4,000
14,000
7,500
6,100
$31,600 2013
$1,800
1,000
$2,800
16,000
7,000
7,700
$33,500 Meijun Metals Inc.
2013 Income Statement
Net sales
Cost of goods sold
Depreciation
Earnings before interest and taxes
Interest paid
Taxable Income
Less: Taxes (40%)
Net income $30,000
20,000
2,000
8,000
2,000
$6,000
2,400 FIN2004$3,600
Midterm 5. What is the cash flow from assets (CFFA) for 2013 (please refer to CFFA as defined and
applied in your class notes)?
A. $6,800
B. $4,000
C. $2,500
D. $6,900
E. $2,700 Change
in net
capital
= ($6500
- $1800) - ($6600 - $2000) = 100
5. CFFA = working
OCF – NCS – Change in NOWC Net capital = 8
000*(1-‐0.4) + 2
000 – (
27000-‐25000+2000) spending = $27000 - $25000 + $2000 = $4000 – [6500-‐1800-‐(6600-‐2000)] Operating = 6flow
800 –= 4$8000
000 – 1
= 2700 (Choice E) cash
+00 $2000
– ($8000*0.40=3200)
= $6800 Cash flow from assets = $6800 - $4000 - $100 = $2700 6. What is the amount of net new borrowing for 2013 (as defined and applied in your class
3
notes)?
A. -$1,000
B. $1,000 Operating cash flow = $8000 + $2000 – ($8000*0.40=3200) = $6800
Cash flow from assets = $6800 - $4000 - $100 = $2700 6. What is the amount of net new borrowing for 2013 (as defined and applied in your class
notes)?
A. -$1,000
B. $1,000
C. $2000
D. -$2000
E. -$1650 FIN2004 Midterm FIN2004
Midterm
= =($16000
2000)= =1,000 $1000
6. Net new
Net borrowing
Borrowing 16000 –+1000) 14000 –+($14000 (1000 – +
2000) (Choice B) FIN2004
Midterm
2013 (as
defined and applied in your class notes)? 7. What is the cash flow to creditors for 7.
A.What
$1000is the cash flow to creditors for 2013 (as defined and applied in your class notes)?
B.
-$200is the cash flow to creditors for 2013 (as defined and applied in your class notes)?
A.
$1000
7. What
C.
$2000
B.
A.-$200
$1000
D.
$1600
C.
B. $2000
-$200
E.
D.
$1600
C. $2200
$2000
E.
D.$2200
$1600
Cash
flow to creditors = $2000 – [($16000 +1000) – ($14000 + 2000))] = $1000
E. $2200 Cash flow to creditors = $2000 – [($16000 +1000) – ($14000 + 2000))] = $1000
flow
creditors= =2000 $2000
[($16000
+ 2000))] = $1000
7. Cash CF to to
Creditors – 1–000 = 1,000 +1000)
(Choice –A($14000
) 8. What is the amount of the interest tax shield for 2013?
8. What is the amount of the interest tax shield for 2013?
8. What
A.
$1200is the amount of the interest tax shield for 2013?
B. $1200
$800
A.
A.
$1200
C. $800
$2000
B.
B. $2000
$800
D.
$1000
C.
C. $400
$2000
E.
D.
$1000
D.
$1000
E. $400 E. $400
= $800 $2000*0.40
8. Interest ax Shield = 2000*0.4 = 800 (Choice B) $2000*0.40
= T$800 $2000*0.40 = $800 9. What is the cash flow to stockholders for 2013?
9. What is the cash flow to stockholders for 2013?
9. What is the cash flow to stockholders for 2013?
A. $500
B. $500
$800
A.
A.
$500
B.
C. $800
$1500
B. $1500
$800
C.
D.
$2000
C. $2000
$1500
D.
E.
$2500 D.
$2000
$2500 E.
E. $2500
9. 2000 to Stockholders = -2700 1000 + 800 = 2500 –CF (7000-7500)
= 2000
- 500– =
2500 2000 –OR = [
3600 – (
7700 (7000-7500) = 2000 - - 500 = 2500 – 6100)] – (7000-‐7500) = 2,500 (Choice E) 2000
–
(7000-7500) = 2000 - - 500 = 2500 4 10. WaiMun Inc. purchased its factory equipment 2 years ago for $10 million. The machinery 10.
its factory
equipment
2 years agocurrent
for $10
million.
Theshows
machinery
canWaiMun
be sold toInc.
thepurchased
Ruth Co. today
for $8
million. WaiMun's
balance
sheet
net 10. WaiMun Inc. purchased its factory equipment 2 years ago for $10 million. The machinery
can
sold
Ruth
today
for
$8 million.
million.
WaiMun's current
current
balance
sheet
shows
net
fixed
ofthe
$6,000,000,
liabilities
of $2,000,000,
and netbalance
working
capital
of net
can be
beassets
sold to
to
the
Ruth Co.
Co. current
today for
$8
WaiMun's
sheet
shows
fixed
current
liabilities
of $2,000,000,
$2,000,000,
andcompany
networking
working
capital
$1,000,000.
If $6,000,000,
all
the current
assetsliabilities
were liquidated
today, the
would
receive
fixed assets
assets of
of
$6,000,000,
current
of
and
net
capital
ofof $2.5
$1,000,000.
If
the
assets
were liquidated
liquidated
today,of
the
company
wouldreceive
receive$2.5
$2.5
million
in cash.
to book value
total
assets would
is:
$1,000,000.
If all
allWaiMun’s
the current
currentcurrent
assets market
were
today,
the
company
million
in
cash.
WaiMun’s
current
market
to
book
value
of
total
assets
is:
A.
1.39 in cash. WaiMun’s current market to book value of total assets is:
million
A.
1.39
B.
1.43
A. 1.39 C.
E. $1500
$2500
D. $2000
E.
$2500
2000
– (7000-7500) = 2000 - - 500 = 2500
2000 – (7000-7500) = 2000 - - 500 = 2500
10. WaiMun Inc. purchased its factory equipment 2 years ago for $10 million. The machinery
can be sold to the Ruth Co. today for $8 million. WaiMun's current balance sheet shows net
10.
WaiMun
purchasedcurrent
its factory
equipment
2 years ago
million.
Theofmachinery
fixed
assets ofInc.
$6,000,000,
liabilities
of $2,000,000,
andfor
net$10
working
capital
can
be sold to
Ruth
Co. today
$8 liquidated
million. WaiMun's
balance
shows
$1,000,000.
If the
all the
current
assetsfor
were
today, thecurrent
company
wouldsheet
receive
$2.5net
fixed
assets
of $6,000,000,
currentmarket
liabilities
of $2,000,000,
andassets
net working
capital of
million
in cash.
WaiMun’s current
to book
value of total
is:
$1,000,000.
If all the current assets were liquidated today, the company would receive $2.5
A. 1.39
million
in
cash.
WaiMun’s current market to book value of total assets is:
B. 1.43
A.
C. 1.39
1.17
D. 1.43
2.11
B.
E. 1.82
C.
1.17 D. 2.11
10. Book Value of CA = 2m + 1m = 3m E. 1.82 Market value/Book Value = (8+2.5)/(6+3) = 10.5/9 = 1.17 (Choice C) 11. Given a profit margin = 10%, ROEFIN2004
= 20% and
a D/E = 1.5, what is total asset turnover?
Midterm A. Given
0.80
times margin = 10%, ROE = 20% and a D/E = 1.5, what is total asset turnover?
11.
a profit
B.
1.01
times 2.00 times C.
A.
0.80
5
11. Multiplier = D/E + 1 = 2.5 D. Equity 2.13 times
times E.
TAT = R
OE/(PM*EM) = 0.2/(0.1*2.5) = 0.8 (Choice A) 3.72
times 5
12. You are given the following cash flow information. The appropriate discount rate is 12%
for years 1-5 and 10% for years 6-10. Payments are received at the end of the year.
Year
1-5
6-10 Amount
$20,000
$25,000 What should you be willing to pay right now to receive the income stream above?
A.
B.
C.
D.
E. $166,866
$158,791
$225,000
$125,870
$198,433 13. SweeSum
just 1borrowed
$1,000,000
12. PV = Company
PV of annuity + PV of annuity 2 for 3 years at a quoted rate of 8%, quarterly
compounding.
The
loan
is
to
be
amortized
in
equal end of quarter payments over its 3-year life. How much interest( (in dollars)
will the%company
have
+
( to "pay during the
"
%+ second quarter?
1
1
1
* 1 $
* 1 $
'' = 20,000 * *
* $1− + 25,000 * * * $1−
* 5 '5 '0.12 $
0.1 $
'
' 1+ 0.12 5
A.
$15,675.19
1+
0.12
1+
0.1
*)
*)
#
&-,
#
&-,
B.
$18,508.81 C. $21,205.33 D. $24,678.89
= 72,095.52 + 53,774.86 = 125,870.38 (Choice D) E.
$28,111.66 ( ) ( ) ( ) 14. At an inflation rate of 9%, the purchasing power of $1 would be cut in half in 8.04 years.
How long to the nearest year would it take the purchasing power of $1 to be cut in half if the
inflation rate were only 4%? E.
3.72 times
B.
$158,791
C.
$225,000
D.
$125,870
12.
You
are given the following cash flow information. The appropriate discount rate is 12%
E.
$198,433
for years 1-5 and 10% for years 6-10. Payments are received at the end of the year. Year $1,000,000
Amount
13. SweeSum Company just borrowed
for 3 years at a quoted rate of 8%, quarterly
1-5
$20,000
compounding. The loan is to be amortized in equal end of quarter payments over its 3-year
6-10 will the company
$25,000have to pay during the second quarter?
life. How much interest (in dollars) What
you be willing to pay right now to receive the income stream above?
A. should
$15,675.19
B.
$18,508.81
A.
$166,866
C.
$21,205.33
B.
$158,791
D.
$24,678.89
C.
$225,000
E.
$28,111.66 D.
$125,870 $198,433 1E.3. PV = 1,000,000 14.
At
an
inflation I/Y = 8%/4 =rate 2% of 9%, the purchasing power of $1 would be cut in half in 8.04 years.
How
long
to
the
nearest
year would it take the purchasing power of $1 to be cut in half if the N = 3*4 =12 inflation
rate
were
only 4%?
SweeSum
Company 13.
PMT = 9
4,559.60 just borrowed $1,000,000 for 3 years at a quoted rate of 8%, quarterly
The loan is to be amortized in equal end of quarter payments over its 3-year compounding. A. How
12
year
life.
much
(in dollars)
companyPhave
during the second
quarter?
Time interest
Starting PMT will the Interest aid to pay
Principal Ending B.
15 year Principal Paid Principal C.
16
year
A.
$15,675.19
Qtr 1 1,000,000 94,559.60 = 2%*1m 74,559.60 = 1m – 74,559.60 D.
18
year
B.
$18,508.81
= 20,000 = 925,440.40 E.
20
year
C.
$21,205.33
Qtr 2 925,440.40 94,559.60 = 2%* 925,440.40 ….. ….. = 18,508.81 D.
$24,678.89
15. Consider
the
following
information,
and
then calculate the required rate of return for the E.
(Choice B
) $28,111.66 Luis Active Investment Fund. The market required rate of return is 15%, and the risk-free rate is 7%.
14. At an inflation rate of 9%, the purchasing power of $1 would be cut in half in 8.04 years.
Stock
Beta
How long to the
nearest yearInvestment
would it take the purchasing
power of $1 to be cut in half if the
A
$ 200,000
1.50
inflation rate were only 4%?
B
$ 300,000
-0.50
C
$ 500,000
1.25
A.
12 year
B.
15 year
6
C.
16 year
D.
18 year
E.
20 year 15. Consider the following information, and then calculate the required rate of return for the
n = 2 Luis
Investment
Fund. The market required rate of return is 15%, and the risk-free rate
14. Active
(1 + 0.04) is 7%.n*Ln (1.04) = Ln (2) à n = Ln (2)/Ln (1.04) = 0.6931/0.0392 = 17.68 ~ 18 years (Choice D) Investment
Stock
Beta A
B
C $ 200,000
$ 300,000
$ 500,000 1.50
-0.50
1.25
6 A.
B.
C.
D.
E. 12 year
15 year
16 year
18 year
20 year 15. Consider the following information, and then calculate the required rate of return for the
Luis Active Investment Fund. The market required rate of return is 15%, and the risk-free rate
is 7%.
Stock
A
B
C D
A.
B.
C.
D.
E. 14.3%
15.0%
13.1%
12.7%
D
10.3% Investment
Beta
$ 200,000
1.50
FIN2004 Midterm
$ 300,000
-0.50
$ 500,000
1.25 $1,000,000 0.75 6 FIN2004 Midterm
$1,000,000 0.75 A.
14.3% B.
15.0%
16. TheFund
systematic
(market) risk–associated
with an+individual
stock is most
closely identified 15. = 1.5*(200/2000) 0.5*(300/2000) 1.25*(500/2000) + 0.75*(1000/2000) C. β13.1%
with
the D. 12.7% = 0.7625 E.
R10.3%
Fund = 0.07 + 0.7625*(0.15-‐0.07) = 0.131 or 13.1% (Choice C) A.
Standard
deviation of the returns on the stock. B. Standard deviation of the returns on the market.
C. Beta
of the stock.
16.
The systematic
(market) risk associated with an individual stock is most closely identified
D. Coefficient
of variation of returns on the stock.
with
the
E. Coefficient of variation of returns on the market. A. Standard deviation of the returns on the stock.
B. Standard deviation of the returns on the market.
17.Beta
What
present value of a 5 year annuity due with annual payments of $1000 and an
C.
of is
thethe
stock.
annual
interest
rate
of 10%:
D. Coefficient of variation
of returns on the stock.
E. Coefficient of variation of returns on the market.
A.
$4,000.50 B.
$3,790.79
16. Choice C bpresent
ecause value
Beta of
is saystematic risk odue
f stock. C. What
$4,169.87
17.
is the
5 year annuity
with annual payments of $1000 and an annual
D.
$4356.73
interest
rate of 10%: E. $3,996.95
A.
$4,000.50
B.
$3,790.79
18.
An
investment pays you 9% APR compounded semiannually. A second investment of
C.
$4,169.87
equal risk,
pays interest compounded quarterly. What APR of interest would you have to
D.
$4356.73
receive
on
the
second investment in order to make you indifferent between the two
E.
$3,996.95
investments? A. An
8.71%
18.
investment pays you 9% APR compounded semiannually. A second investment of
B.
8.85%
equal risk, pays interest compounded quarterly. What APR of interest would you have to
C. 8.90%
receive
on the second investment in order to make you indifferent between the two
D. 9.31%
investments?
E. 9.20%
A. 8.71%
B. 8.85%
C.
19.8.90%
Stock A and Stock B both have an expected return of 10% and a standard deviation of
D.
9.31%
returns of 25%. Stock A has a beta of 0.8 and Stock B has a beta of 1.2. The correlation
E.
9.20% between the two stocks is 0.6. Portfolio P is a portfolio with 50% invested in Stock
coefficient
A and 50% invested in Stock B. Which of the following statements is CORRECT? C. Beta of the stock.
D.
A. Coefficient
14.3% of variation of returns on the stock.
E.
Coefficient
B.
15.0%of variation of returns on the market.
C.
13.1%
D.
12.7%
17.
What
is the present value of a 5 year annuity due with annual payments of $1000 and an
E.
10.3%
annual interest rate of 10%:
A.
16. The$4,000.50
systematic (market) risk associated with an individual stock is most closely identified
B.
$3,790.79
with the
C.
$4,169.87
D.
$4356.73
A. Standard
deviation of the returns on the stock.
E.
$3,996.95
B. Standard deviation of the returns on the market. (
+
C. Beta of the stock.
"
%
1 on'-the stock.
* 1 $of returns
D.
Coefficient
of
variation
17. PV = 1,000 * * * $1−
*(1+ 0.1)
5 '18.
An investment
pays0.1
youof
APR compounded
semiannually. A second investment of
$9%
'
E. Coefficient
of variation
returns
on
the
1+
0.1
) &-, market.
# (
equal risk, pays interest*) compounded
quarterly.
What APR of interest would you have to receive on the second investment in order to make you indifferent between the two investments? = 3,790.79*1.1 = 4,169.87 (choice C) 17.
What
is
the
present value of a 5 year annuity due with annual payments of $1000 and an annualOR interest rate of 10%: A.
8.71% B. 8.85%
A. PMT $4,000.50 C.
8.90% = 1000 B.
$3,7...

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- Spring '11
- tohmunheng
- Capital Asset Pricing Model, Stock B