Unformatted text preview: Name: __________________________ Student Number: ___________________ St. Francis Xavier University Department of Business Administration BSAD 241: Intro to Financial Management Final Examination Fall 2010 Prof. Kirk Collins Instructions: Please be sure to show your work when performing calculations for the Short Answer section; you must do so to receive full marks. You must hand in everything, upon completion of the exam. You have 75 minutes to complete the exam. Multiple Choice (40% of exam) 1. A firm has recently purchased Class 10 equipment for $100,000 with a CCA rate of 30%. Under the half-year rule, what is the amount of depreciation that the firm can claim as a tax-deductible expense in the second year? A) $30,000 B) $15,000 C) $42,000 D) $25,500 E) $45,000 2. The owner of Fred's Electronics is trying to sell the business. The company built a building four years ago at a cost of $2.2 million. The building is currently appraised at $2.46 million. The firm's equipment originally cost $1.2 million and is currently valued at $700,000. The inventory is listed on the balance sheet at $150,000 but is only worth $125,000. The owner expects to collect 90 percent of the $300,000 in accounts receivable. The firm has $14,000 in cash and has total debt of $3.1 million. What is the market value of this firm? A) $455,000 B) $469,000 C) $499,000 D) $504,000 E) $524,000 3. Which of the following are agency costs? I. foregoing an investment opportunity which would add to the market value of the owner's equity II. paying a dividend to each of the existing shareholders III. purchasing new equipment which increases the value of each share of stock IV. hiring outside auditors to verify the accuracy of the company financial statements A) II and III only B) I and III only C) I and IV only D) II and IV only E) I, II, and IV only 4. Syed's Industries has accounts receivable of $700, inventory of $1,200, sales of $4,200, and cost of goods sold of $3,400. How long does it take Syed's to both sell its inventory and then collect the payment on the sale? A) 128 days B) 146 days C) 163 days D) 190 days E) 211 days 5. The greater the number of years, the: A) Smaller the future value of a single sum. B) Larger the present value of a single sum. C) Larger the present value factor. D) Smaller the future value factor. E) Greater the compounding effect. 6. Jack's Shoes has net income of $19,600 in 2006 and owes $8,650 in taxes for the year. The company repaid $4,200 in loan principal and $650 in loan interest during the year. No new funds were borrowed. The depreciation expense is $420. What is the operating cash flow for the year? A) $10,720 B) $19,370 C) $20,670 D) $28,670 E) $29,320 7. A firm has sales of $1,500, net income of $100, total assets of $1,000, and total equity of $700. Interest expense is $50. What is the common-size statement value of the interest expense? A) 3.3 percent B) 5.0 percent C) 7.1 percent D) 16.7 percent E) 50.0 percent 8. At the start of the year, Gershon, Inc. had total shareholders' equity = $12,011. If net income during the year was a $200 loss, dividends paid = $400, and $1,000 was raised from the sale of new stock, what is the end of year value for total shareholders' equity? A) $10,060 B) $11,800 C) $12,400 D) $12,800 E) $13,200 9. Which of the following represent cash outflows from a firm? I. issuance of securities II. payment of dividends III. new loan proceeds IV. payment of government taxes A) I and III only B) II and IV only C) I and IV only D) I, II, and IV only E) II, III, and IV only 10. A firm has 5,000 shares of stock outstanding, sales of $6,000, net income of $800, a price-earnings ratio of 10, and a book value per share of $.50. What is the market-to- book ratio? A) 1.6 B) 2.4 C) 3.0 D) 3.2 E) 3.6 11. Suppose you are trying to find the present value of two different cash flows using the same interest rate for each. One cash flow is $1,000 ten years from now, the other $800 seven years from now. Which of the following is true about the discount factors used in these valuations? A) The discount factor for the cash flow ten years away is always less than or equal to the discount factor for the cash flow that is received seven years from now. B) Both discount factors are greater than one. C) Regardless of the interest rate, the discount factors are such that the present value of the $1,000 will always be greater than the present value of the $800. D) Since the payments are different, no statement can be made regarding the discount factors. E) You should factor in the time differential and choose the payment that arrives the soonest. 12. Given r and t greater than zero: I. Present value interest factors are less than one. II. Future value interest factors are less than one. III. Present value interest factors are greater than future value interest factors. IV. Present value interest factors grow as t grows, provided r is held constant. A) I only B) I and III only C) I and IV only D) II and III only E) II and IV only 13. Working capital management includes decisions concerning which of the following? I. accounts payable II. long-term debt III. accounts receivable IV. inventory A) I and II only B) I and III only C) II and IV only D) I, II, and III only E) I, III, and IV only 14. Fresh out of college, you are negotiating with your prospective new employer. They offer you a signing bonus of $2,000,000 today or a lump sum payment of $2,500,000 three years from now. If you can earn 7% on your invested funds, which of the following is true? A) Take the signing bonus because it has the lower present value. B) Take the signing bonus because it has the higher future value. C) Take the lump sum because it has the higher present value. D) Take the lump sum because it has the lower future value. E) Based on these numbers, you are indifferent between the two. 15. Which one of the following is a primary market transaction? A) a dealer selling shares of stock to an individual investor B) a dealer buying newly issued shares of stock from a corporation C) an individual investor selling shares of stock to another individual D) a bank selling shares of a medical firm to an individual E) a sole proprietor buying shares of stock from an individual investor 16. Freda's, Inc. has sales of $3,200, current liabilities of $900, total assets of $3,000, and net working capital of $500. How many dollars worth of sales are generated from every $1 in net fixed assets? A) $.91 B) $1.07 C) $1.67 D) $2.00 E) $2.29 17. Tom and Antonio both want to open savings accounts today. Tom wants to have $1,000 in his savings account six years from now. Antonio wants to have $1,000 in his savings account three years from now. Which of the following statements is(are) correct assuming that both Antonio and Tom earn the same rate of interest? I. Tom needs to deposit more money into his account today than does Antonio. II. Tom will need to deposit twice the amount of money today as Antonio. III. Antonio needs to deposit more money into his account today than does Tom. IV. Antonio needs to deposit twice the amount of money today as Tom. A) I only B) III only C) I and II only D) III and IV only E) II only 18. Cantrell Industries spent $386,000 to purchase equipment three years ago. This equipment is currently valued at $276,000 on today's balance sheet but could actually be sold for $298,000. Net working capital is $56,000 and long-term debt is $171,000. What is the book value of shareholders' equity? A) $49,000 B) $71,000 C) $105,000 D) $161,000 E) $183,000 19. Patti's has net income of $1,800, a price-earnings ratio of 12, and earnings per share of $1.20. How many shares of stock are outstanding? A) 1,200 B) 1,400 C) 1,500 D) 1,600 E) 1,800 20. Which one of the following actions by a financial manager creates an agency problem? A) refusing to borrow money when doing so will create losses for the firm B) refusing to lower selling prices if doing so will reduce the net profits C) agreeing to expand the company at the expense of stockholders' value D) agreeing to pay bonuses based on the market value of the company stock E) increasing current costs in order to increase the market value of the stockholders' equity Answer Key 1. D 2. B 3. C 4. D 5. E 6. C 7. A 8. C 9. B 10. D 11. A 12. A 13. E 14. C 15. B 16. D 17. B 18. D 19. C 20. C Short Answer (60% of the exam) 1. Over the 13 years ending in 2008, the Royal Bank of Canada's dividend grew from $0.29 to $2.00. Assuming this growth continues what will the dividend be in 2010? Example 5.4 Dividend Growth from Textbook . Use the growth question from the textbook chapter 5 2. Present value is used extensively by managers who are reviewing proposed projects. Why is this so and how does the present value of a cash flow assist management in making these business decisions? ANSWER: By converting cash flows into present values, management can compare and contrast various alternative opportunities and determine which course of action is best for the firm. The present value allows management to view projects on an equivalent basis. Also, by knowing the present value of the future cash flows of a project, management can determine if those cash inflows are sufficient to offset the required investment in the project. While students may have various answers, this question starts them thinking about financial decision-making, which is covered later in the text. Chapter 5 3. Maritime Industries Inc. recently purchased new, ultra-modern, production equipment. The equipment cost the company $600,000. The equipment was classified as a Class 10 asset for tax purposes and therefore eligible for Capital Cost Allowance (CCA) at a rate of 30% per year. Calculate the dollar amounts of Capital Cost Allowance the company would be able to charge against taxable income, in the first three years, related to this purchase. 4. The DuPont system merges financial statements into two summary measures of profitability. In doing so, it links 3 key measures together. Briefly, describe what each of these 3 measures represents (no more than a sentence for each is needed). Answer: Dupont links together 1) profit-on-sales (PM) 2) efficiency use of asset use (TAT) and 3) use of leverage (FLM). 5. Represent, in a diagram, the cash flows to and from the firm (chapter 1) ...
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