2013-14 Sem I Midterm answers - FIN2004 Midterm 2013\/14 Semester 1 Midterm Answers FIN2004 Midterm 1 The corporate form of organization is characterized

2013-14 Sem I Midterm answers - FIN2004 Midterm 2013/14...

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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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