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##### Finance exam 1

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solution

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Question;TUTORIAL EXAM 1;1. An increase in;financial leverage generally results in a higher return on equity (ROE).;Top of;Form;?;True;?;False;2. A;company's return on assets should be greater than its return on equity.;Top of;Form;?;True;?;False;3. An;optimal current ratio should be greater than 1.0.;Top of;Form;?;True;?;False;4. GoodTimes;Inc. has asset turnover of 0.5 times, a net profit margin of 10% and average;total assets of $100, what is its net income (assuming no unusual items)?;Top of;Form;?;$50;?;$500;?;$5;?;The answer cannot be determined with the;information provided;5. Which of the following ratios appears;on a common-size balance sheet?;I. Debt to asset ratio;II. Net working capital to total assets;III. Net profit margin;Top of;Form;?;I, II, III;?;I only;?;I and III;?;III only;6.;Common-size financial statements are constructed in order to;Top of;Form;?;Adjust for inflation and risk;?;Facilitate comparisons of different-sized;companies;?;To comply with SEC requirements;?;All of the above;7. A;company builds a new plant and finances its construction by issuing stock.;Which ratio is least likely to be affected, all else being equal?;Top of;Form;?;Current ratio;?;Debt to equity ratio;?;Debt to asset ratio;?;Net fixed assets to total assets;8. A;company has net working capital of $0, current liabilities of $25 and total;assets equal to $100. What is its current ratio?;Top of;Form;?;0.0;?;1.0;?;0.5;?;4.0;9. Analysis of a company's financial;statements: Below are simplified versions of the;balance sheet and income statement for Toys by Tom, Inc. Use this;information to answer question 9.;Sales in 2003 were $10,000. Therefore, the compounded average growth;rate is;Top of Form;?;8.6%;?;6.7%;?;6.3%;?;Not enough information available;10. Analysis of a company's financial;statements: Below are simplified versions of the;balance sheet and income statement for Toys by Tom, Inc. Use this;information to answer question 10.;A 15% increase in inventory turns for Toys by Tom, Inc. would;bring this ratio to ____, suggesting ________ in ________.;Top of;Form;?;109 days, a deterioration, profitability;?;3.9 days, a deterioration, profitability;?;4.8 times, an improvement, efficiency;?;3.9 times, an improvement, efficiency;11. The;cash cycle measures the days required to produce finished goods or delivered;services.;Top of;Form;?;True;?;False;12. In;general, an increase in a liability is a source of funds.;Top of;Form;?;True;?;False;13. The;sustainable growth rate is the maximum growth rate achievable over an extended;period of time.;Top of;Form;?;True;?;False;14. The;cash conversion cycle is calculated as;Top of;Form;?;Days in Inventory + Collection Period;?;Days in Inventory - Payables Period;?;Days in Inventory + Collection Period -;Payables Period;?;None of the above;15. Which;of following are sources of cash in a statement of sources and uses?;I. Collection of accounts receivables;II. Reduction of long-term debt;III. Payment of dividends;IV. Reduction in the cash account;Top of;Form;?;I only;?;II and III;?;III and IV;?;I and IV;16. Which;of the following actions, all else being equal, will increase the sustainable;growth rate?;Top of;Form;?;Increasing asset turnover;?;Reducing dividend payout;?;Increasing leverage;?;All of the above;17. Biases;can and should always be eliminated in financial forecasts.;Top of;Form;?;True;?;False;18. Which;of the following is commonly forecasted as a percent of sales;Top of;Form;?;Common stock;?;Gross profit;?;Long-term debt;?;Revolving credit;19. External funding needs are computed;as;Top of;Form;?;Projected total assets - (projected;liabilities + projected net worth);?;Projected total assets - (actual;liabilities + net worth);?;Projected current assets - (projected;current liabilities + net worth);?;None of the above;20. "Real;activities create cash for a business, while "financial" activities;distribute cash within the company.;Top of;Form;?;True;?;False;21. The;item that roughly divides "real" from "financial;activities on an income statement is;Top of;Form;?;EBIT;?;Interest Expense;?;SG&A Expense;?;None of the above;22. The;cost of debt is generally lower than the cost of equity.;Top of;Form;?;True;?;False;23. The;Static Tradeoff theory of capital structure implies that firms with higher;business risk have should have lower leverage.;Top of;Form;?;True;?;False;24. A share;repurchase is financially equivalent to a dividend.;Top of;Form;?;True;?;False;25. The;Pecking Order Theory of capital structure implies a unique optimum capital;structure.;Top of;Form;?;True;?;False;26. A firm;is all equity financed, with 10,000 outstanding shares with a market value of;$20 each. Its net income was $30,000, and it decides to pay a cash dividend of;$2,000. Calculate the value of each share after the dividend payout.;Top of;Form;?;$22.8;?;$20.0;?;$19.8;?;Not enough information;Bottom of;Form;Bottom of;Form;Bottom of;Form;Bottom of;Form;Bottom of Form;Bottom of;Form;Bottom of;Form;Bottom of;Form;Bottom of;Form;Bottom of;Form;Bottom of;Form;Bottom of;Form;Bottom of;Form;Bottom of;Form;Bottom of;Form;Bottom of;Form;Bottom of;Form;Bottom of;Form;Bottom of;Form;Bottom of;Form;Bottom of;Form;Bottom of Form;Bottom of;Form;Bottom of;Form;Bottom of;Form;Bottom of;Form;Bottom of;Form;27. Grandma's;Applesauce, Inc. has a 0.60 probability of a good year with operating cash flow;of $50,000, and 0.40 probability of a bad year with operating cash flow of;$30,000. The company has a debt of $35,000 with 8 percent interest due next;year. Assuming the company has no means of servicing its debt other than;operations, and a 0% tax rate, which of the following is true?;Top of;Form;?;Shareholders expected claim is $12,200;?;Creditors expected claim is $37,800;?;Creditors expected claim is $34,680;?;None of the above;28. The;owners of a firm facing a high probability of bankruptcy prefer to invest in;projects, because ______.;Top of;Form;?;safer, riskier projects make bankruptcy;more likely;?;no new, the firm is likely to go bankrupt;anyway;?;risky, the shareholders have little to;lose and might win if successful;?;risky, creditors prefer taking a gamble;rather than having the company default;29. Which of the following expresses the value of a levered firm (VL) in the Static Tradeoff model of optimal capital structure? [Note: VU denotes the value of the unlevered firm, CFD denotes expected costs of;financial distress, and PV denotes present value.];Top of;Form;?;VL = PV(Tax Shield) - PV(CFD);?;VL = VU + PV(Tax Shield) / PV(CFD);?;VL = VU + PV(Tax Shield) - PV(CFD);?;VL = VU + PV(Tax Shield);30. A;company has net income of $20,000 and a tax rate of 35 percent. Its total debt;is $25,000, with principal payments of $5,000 due at the end of each year and;an annual interest rate of 8%. What will be the company's interest tax shield;in the upcoming year?;Top of;Form;?;$8,750;?;$700;?;$9,450;?;$2,450;31. Which;of the following is correct?;I. Tax shields make debt financing more;attractive, all else equal.;II. A firm's debt ratio falls when it uses excess;cash to pay dividends.;III. The cost of equity is low for firms that pay;no dividends, all else equal.;IV. Bankruptcy costs decrease the benefits of;debt financing all else equal.;Top of;Form;?;I and IV;?;I, II and IV;?;I, III and IV;?;I, II, III and IV;32. The;Pecking Order Theory of capital structure rests on an assumption of;Top of;Form;?;Agency costs;?;Barriers to entry;?;Asymmetric information;?;Tax shields and cost of financial distress;33. Which;of the following are equivalent under M&M proposition I?;Top of;Form;?;Maximizing firm value and maximizing firm;profit;?;Maximizing firm value and minimizing the;cost of capital;?;Minimizing firm's cost of capital and;minimizing firm's debt burden;?;Maximizing profit and minimizing taxes;34. Share;repurchases and dividend payouts are most likely to differ in their;Top of;Form;?;effects on a firm's capital structure;?;effects on corporate taxes;?;effects on corporate cash flow;?;effects on shareholders' personal taxes;35. A;perpetuity is a stream of cash flows that lasts forever.;Top of;Form;?;True;?;False;36. The;higher the opportunity cost of capital the higher the NPV.;Top of;Form;?;True;?;False;37. A;project with an internal rate of return greater than the cost of capital should;always be accepted.;Top of;Form;?;True;?;False;38. The;phenomenon of compounding connotes which of the following?;Top of;Form;?;Investment of principal for a prolonged;period.;?;Interest earned over a prolonged period.;?;Earning income on previously earned;income.;?;Rising interest rates over time.;39. If you;invest $2,000 today for three years at 5% interest paid annually, you will earn;a total of $_____ in interest. Assume you re-invest all interest.;Top of;Form;?;205.00;?;300.00;?;315.25;?;500.00;40. Enterprise;Free Cash Flows should include;I. Capital expenditures;II. Financing costs;III. Taxes;IV. Working capital requirements;Top of;Form;?;I and IV;?;I, II and IV;?;I, III and IV;?;I, II, III, IV;41. You are;trying to decide whether to accept or reject a one-year project. The project is;estimated to generate $5,000 in incremental gross profit, which includes $200;in depreciation. Incremental SG&A expense is $400. At a 35% tax rate, the;after-tax incremental cash flow is;Top of;Form;?;$2,990;?;$3,190;?;$3,250;?;$3,510;42. You are saving money for a down;payment on a house. Suppose you want to have total savings of $20,000 in 10;years time and you have currently $5,000. What annual interest rate do you need;to earn on your initial investment, assuming you contribute no additional;savings?;Top of;Form;?;10.0%;?;18.5%;?;12.5%;?;15.0%;43. What is;the present value of a growing perpetuity that makes a payment of $100 in the;first year, which thereafter grows at 3% per year? Apply a discount rate of 7%.;Top of;Form;?;$ 2,000;?;$ 3,500;?;$ 2,500;?;$ 4,000;44. A;company's beta (from the CAPM) is affected by its capital structure.;Top of;Form;?;True;?;False;45. The;cost of capital for an all-equity-financed company that pays no dividends is;zero.;Top of;Form;?;True;?;False;46. The;beta for the market as a whole equals 1.0.;Top of;Form;?;True;?;False;47. What is the risk premium for a stock;where;?;the risk;free rate is 5.1%;?;the equity;market risk premium is 5.0%;?;the beta of;the stock is 1.2;Top of;Form;?;11.1%;?;6.1%;?;6.0%;?;12.1%;48. What is;the expected return on a risky investment where;?;the risk;free rate is 5.1%;?;the;investment's beta is 1.4;?;the equity;market risk premium is 5.0%;?;the cost of;debt is 4.5%;Top of;Form;?;10.8%;?;9.6%;?;12.1%;?;9.2%;49. Which;is a commonly used proxy for the "risk-free rate"?;Top of;Form;?;the average historical interest rate on;long-term government bonds;?;the current market rate interest rate on a;government-insured savings account;?;the current yield to maturity on a;long-term government bond;?;the rate of return on a low volatility;stock;50. In the;CAPM, the parameter beta measures;Top of;Form;?;non-systematic (diversifiable) risk;?;systematic (non-diversifiable) risk;?;total risk;?;risk-adjusted stock returns

Paper#47719 | Written in 18-Jul-2015

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