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1. Maximization of shareholder wealth as a goal is...

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1. Maximization of shareholder wealth as a goal is superior to profit maximization because: a. it considers the time value of the money. c. it considers uncertainty. d. A and C 2. Revenues are taxed a. to achieve socially desirable goals. b. to provide revenues for government expenditures. c. for economic stabilization. d. all of the above 3. Emery Inc. had $5 million of gross income, operating expenses of $1 million, paid $1 million of interest on borrowing of $10 million, and paid a dividend of $0.50 million. Emery Inc.?s taxable income is a. $4 million. b. $3 million. c. $3.5 million. d. $2.5 million. 4. Given the following tax rate schedule, what is the tax liability for a corporation with taxable income of $8 million? Corporate Tax Rates Taxable Income 15% $0 - $50,000 25% $50,001 - $75,000 34% $75,001 - $10,000,000 35% over $10,000,000 Additional surtax of 5% on income between $100,000 and $335,000 Additional surtax of 3% on income between $15,000,000 and $18,333,333 a. $2,715,000 b. $2,720,000 c. $2,694,500 d. $2,708,250 5. The curse of competitive markets a. May be lessened by obtaining patents for new ideas that protect companies from competitors. b. Implies that profitable industries will become smaller as companies drop out to avoid competition. c. Means that money spent on innovation is wasted because competitors will rush in and eliminate any excess profits. d. Means that companies cannot earn exceptional profits. 6. Which of the following statements best represents the ?Agency Problem?? a. The agency problem results from the separation of management and the ownership of the firm. b. The agency problem may interfere with the implementation of maximizing shareholder wealth. c. Managers might attempt to benefit themselves in terms of salary and perquisites at the expense of shareholders. d. all of the above 7. What was the average annual rate of return on 3-month U.S. Treasury bills during the period 1981 to 2005? a. 10.4% b. 5.68% c. 3.84% d. 6.99% Table 3-1 Jones Company Financial Information December 2007 December 2008 Net income $2,000 $5,000 Accounts receivable 750 750 Accumulated depreciation 1,000 1,500 Common stock 4,500 5,000 Paid-in capital 7,500 8,000 Retained earnings 1,500 2,500 Accounts payable 750 750 8. Based on the information in Table 3-1, assuming that no common stock was repurchased during the year, the firm issued how much new common stock during 2008? a. $1,500 b. $1,000 c. $2,000 d. $500 9. Higher inventory turnover suggests that a. the company?s inventory is more liquid. b. the company?s inventory is somewhat obsolete. c. the company has a higher inventory balance. d. the company?s sales are higher. 10. Given an accounts receivable turnover of 20 and annual credit sales of $400,000, the average collection period is: a. 20 days b. 45.625 days c. 17.49 days d. 18.25 days Table 4-1 Garland Company Balance Sheet Assets: Cash and marketable securities $500,000 Accounts receivable 800,000 Inventories 1,350,000 Prepaid expenses 50,000 Total current assets $2,700,000 Fixed assets 5,000,000 Less: accum. depr. (2,000,000) Net fixed assets $3,000,000 Total assets $5,700,000 Liabilities: Accounts payable $400,000 Notes payable 900,000 Accrued taxes 75,000 Total current liabilities $1,375,000 Long-term debt 1,200,000 Owner?s equity 3,125,000 Total liabilities and owner?s equity $5,700,000 Net sales (all credit) $8,000,000 Less: Cost of goods sold (3,500,000) Selling and administrative expense (2,000,000) Depreciation expense (250,000) Interest expense (150,000) Earnings before taxes 2,100,000 Income taxes (700,000) Net income $1,400,000 Common stock dividends $500,000 Common Shares Outstanding 1,000,000 11. Based on the information in Table 4-1, the debt ratio is: a. 21.1% b. 48.8% c. 45.2% d. 22.6% Table 4-3 Lesli Corporation Balance Sheet Income Statement Assets: Cash $150,000 Sales (all credit) $6,000,000 Accounts receivable 350,000 Cost of goods sold (3,000,000) Inventory 600,000 Operating expenses (900,000) Net fixed assets 1,900,000 Interest expense (750,000) Total assets 3,000,000 Income taxes (500,000) Net income 850,000 Liabilities and owners? equity: Accounts payable $150,000 Notes payable 250,000 Long-term debt 1,200,000 Owners? Equity 1,400,000 Total L. + O.E. 3,000,000 12 Based on the information in Table 4-3, assuming that the firm has no preferred stock, and paid $250,000 in common dividends, the firm?s return on equity was: a. 61% b. 32% c. 43% d. 79% 13. You deposit $4,500 per year at the end of each of the next 25 years into an account that pays 10% compounded annually. How much could you withdraw at the end of each of the 20 years following your last deposit if all withdrawals are the same dollar amount? (The twenty-fifth and last deposit is made at the beginning of the 20-year period. The first withdrawal is made at the end of the first year in the 20-year period.) a. $51,983 b. $22,128 c. $45,987 d. $38,323 14. If you put $10,000 in an investment that returns 14 percent compounded monthly what would you have after 12 years (round to nearest $10)? a. $11,490 b. $53,140 c. $48,180 d. $61,270 15. Assume that WhirledCom has an issue of 15-year $1,000 par value bonds that pay 6% interest, semi-annually. Further assume that today?s required rate of return on these bonds is 9%. How much would these bonds sell for today? Round off to the nearest $1. a. $1,321 b. $1,066 c. $756 d. $864 16. $1,000 par value 12-year bond with a 9 percent coupon rate recently sold for $980. The yield to maturity is: a. 8.8% b. less than 8% c. 9 percent d. greater than 9 percent 17. What is the yield to maturity of a corporate bond with 10 years to maturity, a coupon rate of 6% per year, a $1,000 par value, and a current market price of $1,147? Assume semi-annual coupon payments. a. 4.7% b. 5.3% c. 6.0% d. 4.2% 18. Linen Supply Co. paid a dividend of $3.25 on its common stock yesterday. The company?s dividends are expected to grow at a constant rate of 5.5% indefinitely. The required rate of return on this stock is 17.5%. You observe a market price of $27.50 for the stock. Should you purchase this stock? a. Yes, the market price is below the intrinsic value of the stock. b. Yes, but only if you can keep the stock for at least 5 years. c. No, the growth rate in dividends is too far below the required return. d. No, the market price is above the intrinsic value of the stock. 19. Chambers Corporation?s ROE is 18%. Their dividend payout ratio is 80%. The last dividend, just paid, was $2.20. If dividends are expected to grow by the company?s internal growth rate indefinitely, what is the current value of Chambers common stock if its required return is 20%? a. $12.89 b. $12.56 c. $15.43 d. $13.90 20. Northwest Industries is considering a project with the following cash flows: Initial Outlay = $2,800,000 After-tax operating cash flows for years 1-4 = $850,000 per year Additional after-tax terminal cash flow at end of Year 4 = $125,000 Compute the net present value of this project if the company?s discount rate is 14%. a. $239,209 b. $725,000 c. -$138,561 d. -$249,335 21 Compute the payback period for a project with the following cash flows received uniformly within each year: Initial Outlay = $100 Cash Flows: Year 1 = $40 Year 2 = $50 Year 3 = $60 a. 2.17 years b. 3 years c. 4 years d. 3.17 years 22. What is the net present value?s assumption about how cash flows are re-invested? a. They are reinvested at the IRR. b. They are reinvested only at the end of the project. c. They are reinvested at the APR. d. They are reinvested at the firm?s discount rate. 23. Your firm is considering an investment that will cost $750,000 today. The investment will produce cash flows of $250,000 in year 1, $300,000 in years 2 through 4, and $100,000 in year 5. The discount rate that your firm uses for projects of this type is 13.25%. What is the investment?s profitability index? a. 1.4 b. 1.6 c. 1.2 d. .2 24. If the NPV (Net Present Value) of a project with multiple sign reversals is positive, then the project?s required rate of return ________ its calculated IRR (Internal Rate of Return). a. must be greater than b. could be greater or less than c. must be less than d. Cannot be determined without actual cash flows. 25. Your company is considering the replacement of an old delivery van with a new one that is more efficient. The old van cost $30,000 when it was purchased 5 years ago. The old van is being depreciated using the simplified straight-line method over a useful life of 10 years. The old van could be sold today for $5,000. The new van has an invoice price of $75,000, and it will cost $5,000 to modify the van to carry the company?s products. Cost savings from use of the new van are expected to be $22,000 per year for 5 years, at which time the van will be sold for its estimated salvage value of $15,000. The new van will be depreciated using the simplified straightline method over its 5-year useful life. The company?s tax rate is 35%. Working capital is expected to increase by $3,000 at the inception of the project, but this amount will be recaptured at the end of year five. What is the incremental free cash flow for year one? a. $22,250 b. $18,850 c. $21,305 d. $19,900 26. A new machine can be purchased for $1,000,000. It will cost $65,000 to ship and $35,000 to modify the machine. A $30,000 recently completed feasibility study indicated that the firm can employ an existing factory owned by the firm, which would have otherwise been sold for $150,000. The firm will borrow $750,000 to finance the acquisition. Total interest expense for 5-years is expected to approximate $250,000. What is the investment cost of the machine for capital budgeting purposes? a. $2,030,000 b. $1,530,000 c. $1,100,000 d. $1,250,000 e. $1,280,000 27. A company has preferred stock that can be sold for $28 per share. The preferred stock pays an annual dividend of 5% based on a par value of $100. Flotation costs associated with the sale of preferred stock equal $1.50 per share. The company?s marginal tax rate is 35%. Therefore, the cost of preferred stock is: a. 18.87% b. 17.86% c. 11.61% d. 12.26% 28. Burns and Nuble is considering an investment in a project which would require an initial outlay of $320,000 and produce expected cash flows in years 1-5 of $87,385 per year. You have determined that the current after-tax cost of the firm?s capital (required rate of return) for each source of financing is as follows: Cost of Long-Term Debt 8% Cost of Preferred Stock 12% Cost of Common Stock 16% Long term debt currently makes up 20% of the capital structure, preferred stock 10%, and common stock 70%. What is the net present value of this project? a. -$13,876 b. -$20,000 c. $0 d. $287,692 e. $1,568 29. JBC Corp. declared a dividend of $2 per share, which was an increase of 25% from the prior year, yet JBC Corp. stock declined by 3% the day of the announcement. RBG Corp. declared a dividend of $2 per share, which was the same as the prior year, and its stock increased in value by 2% on the day of the announcement. These events could be most readily explained by the a. information effect. b. expectations theory. c. clientele effect. d. residual dividend theory. 30. Use the ?percent of sales method? of preparing pro forma financial statements to determine the projection for next year?s inventory. Make the following assumptions: current year?s sales are $24,500,000; current year?s cost of goods sold is $15,925,000; sales are expected to rise by 25%. The firm?s investment in inventory in the current year is $3,621,300. What is the projection for next year?s inventory? a. $5,555,000 b. $6,125,000 c. $4,526,600 d. $3,981,250 31. Buster Enterprises? projected sales for the first six months of 2008 are given below: Jan. $400,000 April $450,000 Feb. $540,000 May $480,000 Mar. $350,000 June $520,000 30% of sales are collected in cash at time of sale, 60% are collected in the month following the sale, and the remaining 10% are collected in the second month following the sale. Cost of goods sold is 70% of sales. Purchases are made in the month prior to the sales, and payments for purchases are made in the month of the sale. Total other cash expenses are $50,000/month. The company?s cash balance as of February 28, 2008 will be $30,000. Excess cash will be used to retire short-term borrowing (if any). Buster Enterprises has no short term borrowing as of February 28, 2008. Assume that the interest rate on short-term borrowing is 1% per month. The company must have a minimum cash balance of $20,000 at the beginning of each month. What is Buster Enterprises? earnings before interest and taxes for April 2008? a. $ 85,000 b. $159,000 c. $138,000 d. $135,000 32. Fielding Wilderness Outfitters had projected its sales for the first six months of 2008 to be as follows: Jan. $ 50,000 April $180,000 Feb. $ 60,000 May $240,000 Mar. $100,000 June $240,000 Cost of goods sold is 60% of sales. Purchases are made and paid for two months prior to the sale. 40% of sales are collected in the month of the sale, 40% are collected in the month following the sale, and the remaining 20% in the second month following the sale. Total other cash expenses are $40,000/month. The company?s cash balance as of March 1st, 2008 is projected to be $40,000, and the company wants to maintain a minimum cash balance of $15,000. Excess cash will be used to retire short-term borrowing (if any exists). Fielding has no short-term borrowing as of March 1st, 2008. Assume that the interest rate on short-term borrowing is 1% per month. What is Fielding?s projected total receipts (collections) for April? a. $36,000 b. $124,000 c. -$4,000 d. $180,000

 

Paper#2663 | Written in 18-Jul-2015

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