Question;Eng;111 ? Winter 2014 Midterm Solutions;Multiple;Choice Questions (3 points each);1. Which of the following is NOT a;mechanism that helps aligning management and owner;interests?;a);Possibility of a hostile takeover;b);Possibility of a proxy fight;c);Manager?s reputation within the financial community;d);Tying managerial pay to the stock price of the company;e);Buying back company?s stocks;2. _____ refers to the firm's interest;payments less any net new borrowing.;a);Operating Cash Flow;b);Capital Spending;c);Net working capital;d);Cash flow to creditors;e);Cash flow from shareholders;3. According to the guest lecturer;Tamra Johnson, which of the following was not a justification;for becoming an entrepreneur right out;of college?;a);Having fewer responsibilities;b);Being cheaper by the hour;c);Being ready to try things that would be found too adventurous by the;establishment;d);Availability of resources for the young entrepreneurs;e);Statistically proven scientific result indicating high success rate of young;entrepreneurs;4. Which of the following is NOT a;reasonable action for a company that is trying to introduce a;new product to the market (e.g. Tesla)?;a);Get ahead of the competition by borrowing.;b);Until making positive profit, rely on internal funds.;c);Increase the financial leverage as the market demand and the production process;require.;d);Keep a high equity multiplier according to the needs of the company.;e);Allow borrowing a long as it helps boost company?s market share.;5. If the dividend payout ratio is 1;you can say for sure that;a);Sustainable growth rate is at its maximum.;b);Internal growth rate is at its maximum.;c);External financing need is zero.;d);Internal growth rate is zero;e);Debt to Equity ratio cannot stay the same.;6. Given the tax rates as shown, what is;the average tax rate for a firm with taxable income of;$126,500?;a);21.38%;b);23.88%;c);25.76%;d);34.64%;e);39.99%;7. Thompson's Jet Skis has operating;cash flow of $218. Depreciation is $45 and interest paid is;$35. A net total of $69 was paid on;long-term debt. The firm spent $180 on fixed assets and;increased net working capital by $38. What;is the amount of the cash flow to stockholders?;a);-$104;b);-$28;c);$28;d);$114;e);$142;8. Occasionally, companies buy back;their own stocks. Which of the following is the least likely;reason for a stock buyback?;a);Trying to hit earnings per share target;b);Not having a better investment opportunity;c);Sending a signal to the market that company is undervalued;d);Increase the value of the remaining shares;e);Increase growth rate;9. Which of the following is least;likely to happen?;a);A big difference between the current ratio and quick ratio for a retailer;b);A high capital intensity ratio for a traditional oil producer;c);A high financial leverage for a startup;d);Stabilization of the growth rate for a well-established company;e);A low price to earnings ratio for a technology company having high growth potential;10. As seen on an income statement;a);interest is deducted from income and increases the total taxes incurred.;b);the tax rate is applied to the earnings before interest and taxes when the firm;has both;depreciation;and interest expenses.;c);depreciation is shown as an expense but does not affect the taxes payable.;d);depreciation reduces both the pretax income and the net income.;e);interest expense is added to earnings before interest and taxes to get pretax;income.;11. Which two of the following represent;the most effective methods of directly evaluating the;financial performance of a firm?;I.;comparing the current financial ratios to those of the same firm from prior;time periods;II.;comparing a firm's financial ratios to those of other firms in the firm's peer;group who have;similar;operations;III.;comparing the financial statements of the firm to the financial statements of;similar firms;operating;in other countries;IV.;comparing the financial ratios of the firm to the average ratios of all firms;located in the same;geographic;area;a);I and II only;b);II and III only;c);III and IV only;d);I and IV only;e);I and III only;12. Which one of the following assets is;generally the most liquid?;a);inventory;b);buildings;c);accounts receivables;d);equipment;e);patents;Short;Answer Questions;13. Income Statement for 2014 and;Balance Sheets for 2013 and 2014 for Alsu Corporation are;given below;Alsu Corp., Balance Sheet;Current Assets;2013 2014 CurrentLiabilities 2013 2014;Cash 160;180 Accounts Payable 300 192;Accounts Receivable 440 560 Notes Payable 100;200;Inventory 600 700 Total Current Liabilities 400 392;Total Current Assets 1,200;1,440 Long-Term Debt;800?;Net Fixed Assets 1,800;? Owners? Equity;Stock;800 840;Retained Earnings 1,000;?;Total Assets;3,000? Total Liabilities and Owners?Equity 3,000;?;a);(3 points) What is the Cash Flow from Operations?;b) (4 points) If the Cash Flow from;Assets is $284, has the firm acquired or sold any fixed;assets from 2013 to 2014? By how much?;c) (4 points) Has the company reduced or;increased its long-term debt from 2013 to 2014?;By how much?;d) (2 points) What is the Retained;Earnings number for 2014?;14. (5 points) A company is expecting to;get $10,000 a year from today if it invests $8,600 now;on project A. Alternatively, project B;asks for twice the cost of A now and promises twice what A;provides, but two years from today.;Should the company take any of these;projects if the best return that can be obtained in the market;is 15%?;15. You are analyzing a consumer;technology company with the following 2013 financial;statements and want to determine the;company?s EFN for 2014. In 2013, sales were $150M;assets $100M, debt $75M, and total costs;$100M. In 2014, sales are projected to be $225M.;Assume assets and costs are proportional;to sales. Assume debt will not change and dividend;payout ratio is 1/3. (assume no;interest, taxes or depreciation);a);(4 points) Construct the company?s pro forma balance sheet and income statement;for;2014.;b) (2 points) What is the external;financing needed (EFN)?;16. a) (4 points) Frederico's has a;profit margin of 6%, a return on assets of 8%, and an equity;multiplier of 1.4. What is the return on;equity?;b);(3 points) The company has renegotiated the terms of its long-term debt payment;plan.;According to this, Frederico?s interest;payments will be lower per year but the time to pay off the;debt will be extended. What kind of a;short term and long term effect will this have on ROE?;17. (3 points) Apple Inc. shareholders;are not in favor of company?s holding a big cash account.;What may be the shareholders? concern?;18.;(1 point) You are the financial manager of ALCU Corporation. Company has a 9%;ROE, and;12% sustainable growth rate when Debt to;Equity ratio is kept at 2/3. What is the maximum;growth rate ACLU can achieve if, going;forward, ACLU wants to use only its internal funds?;19. The following graph showsthe difference;between the increase in assets minus the increase in;spontaneous liabilities as well as the;addition to retained earnings for Corporation X.;a) (3 points) What is the internal growth rate;for Corporation X?;b) (4;points) If the sustainable growth rate is 18%, projected total stockholders?;equity is;$800 Million, and projected total debt;is $400 Million, what is the total debt now (before;the growth occurs)?;c) (3;points) If, instead, the Corporation X management decides to keep the business;as;before and not to grow over the course;of coming year, what will be the total;stockholders? equity?;20.;(5 points) The most recent Income Statement and the Balance Sheet for Tibet;Corporation are;given below;Tibet Corp., Balance Sheet, end of year 2013;Current;Assets Current Liabilities;Cash;160 Accounts Payable 300;Accounts;Receivable;440;Notes Payable 100;Inventory;600 Total Current;Liabilities;400;Total;Current;Assets;1,200;Long-Term Debt 800;Net;Fixed Assets 1,800 Owners? Equity;Stock 800;Retained Earnings 1,000;Total;Assets 3,000 Total Liabilities and 3,000;Assuming that the company gets all of;its supplies (raw materials etc. for the goods produced and;sold) on credit, on average, how long;does it take for Tibet Corp., to pay its suppliers?;21. (5 points) For this question, use;the income statement and the Balance Sheet given in question 20.;Tibet Corporation would like to grow by;10% from 2013 to 2014. What is the External Financing;Need?;22. (4 points) As a proxy, either the;Stockholder?s Equity or Market Capitalization is used to;measure a company?s value. Write down a;disadvantage of using each.;23. (3 points) What does an unusually;high P/E Ratio (Price to Earnings Ratio) indicate?
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