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Finance Exam




Question;True/False;Indicate whether the statement is;true or false.;1.;There are three primary disadvantages of a regular;partnership: (1) unlimited liability, (2) limited life of the;organization, and (3);difficulty of transferring ownership. These combine to make it difficult for;partnerships;to attract large amounts of capital and thus to;grow to a very large size.;2.;One of the functions of NYSE specialists is to;facilitate trading by keeping an inventory of shares of the;stocks in which they;specialize, buying when investors want to sell and selling when they want to buy.;They;change the bid and ask prices of the securities so;as to keep supply and demand in balance.;3.;Suppose an investor plans to;invest a given sum of money. She can earn an effective annual rate of 5% on;Security A, while Security B;will provide an effective annual rate of 12%. Within 11 years' time, the;compounded value of Security B;will be more than twice the compounded value of Security A. (Ignore risk;and assume;that compounding occurs daily.);4.;When a loan is amortized, a;relatively high percentage of the payment goes to reduce the outstanding;principal in the early years;and the principal repayment's percentage declines in the loan's later years.;5.;Consider the balance sheet of;Wilkes Industries as shown below. Because Wilkes has $800,000 of retained;earnings, the company would be;able to pay cash to buy an asset with a cost of $200,000.;Cash;$;50,000;Accounts payable;$;100,000;Inventory;200,000;Accruals;100,000;Accounts receivable;250,000;Total CL;$;200,000;Total CA;$;500,000;Debt;200,000;Net fixed assets;$;900,000;Common stock;200,000;Retained earnings;800,000;Total assets;$;1,400,000;Total L & E;$;1,400,000;6.;To estimate the cash flow from operations;depreciation must be added back to net income because it is a;non-cash charge that has been;deducted from revenue.;7.;The first, and most critical;step in constructing a set of pro forma financial statements is the sales;forecast.;8.;Two firms;with identical capital intensity ratios are generating the same amount of;sales. However, Firm A is;operating at full capacity;while Firm B is operating below capacity. If the two firms expect the same;growth;in sales during the next period;then Firm A is likely to need more additional funds than Firm B, other things;held constant.;Multiple Choice;Identify the choice that best;completes the statement or answers the question.;9. Which of the following statements is CORRECT?;a.;One;of the disadvantages of a sole proprietorship is that the proprietor is exposed;to unlimited liability.;b.;It;is generally easier to transfer one's ownership interest in a partnership than;in a corporation.;c.;One;of the advantages of the corporate form of organization is that it avoids;double taxation.;d.;One;of the advantages of a corporation from a social standpoint is that every;stockholder has equal voting rights, i.e., "one person, one vote.;e. Corporations of all types are;subject to the corporate income tax.;10. Which of the following could explain why a business might choose to operate;as a corporation rather than as a sole proprietorship or a partnership?;a. Corporations generally find it;relatively difficult to raise large amounts of capital.;b.;Less;of a corporation's income is generally subjected to taxes than would be true if;the firm were a partnership.;c.;Corporate;shareholders escape liability for the firm's debts, but this factor may be;offset by the tax disadvantages of the corporate form of organization.;d. Corporate investors are exposed;to unlimited liability.;e. Corporations generally face;relatively few regulations.;11. Which of the following statements is CORRECT?;a.;In;a regular partnership, liability for other partners' misdeeds is limited to the;amount of a particular partner's investment in the business.;b.;Partnerships;have more difficulty attracting large amounts of capital than corporations;because of such factors as unlimited liability, the need to reorganize when a;partner dies, and the illiquidity (difficulty buying and selling) of;partnership interests.;c.;A;slow-growth company, with little need for new capital, would be more likely to;organize as a corporation than would a faster growing company.;d.;In;a limited partnership, the limited partners have voting control, while the;general partner has operating control over the business. Also, the limited;partners are individually responsible, on a pro rata basis, for the firm's;debts in the event of bankruptcy.;e. A major disadvantage of all;partnerships relative to all corporations is the fact that federal income taxes;must be paid by the partners rather than by the firm itself.;12. Which of the following statements is CORRECT?;a.;The;proper goal of the financial manager should be to attempt to maximize the;firm's expected cash flows, because this will add the most to the wealth of the;individual shareholders.;b.;The;financial manager should seek that combination of assets, liabilities, and;capital that will generate the largest expected projected after-tax income over;the relevant time horizon, generally the coming year.;c.;The;riskiness inherent in a firm's earnings per share (EPS) depends on the;characteristics of the projects the firm selects, and thus on the firm's;assets. However, EPS is not affected by the manner in which those assets are;financed.;d.;Potential;agency problems can arise between stockholders and managers, because managers;hired as agents to act on behalf of the owners may instead make decisions;favorable to themselves rather than the stockholders.;e.;Large;publicly-owned firms like AT&T and GM are controlled by their management;teams. Ownership is generally widely dispersed, hence managers have great;freedom in how they manage the firm. Managers may operate in stockholders' best;interests, but they may also operate in their own personal best interests. As;long as managers stay within the law, there is no way to either force or;motivate them to act in the stockholders' best interests.;13. You are analyzing the value of a potential investment by calculating the;sum of the present values of its expected cash flows. Which of the following;would lower the calculated value of the investment?;a.;The;cash flows are in the form of a deferred annuity, and they total to $100,000.;You learn that the annuity lasts for only 5 rather than 10 years, hence that;each payment is for $20,000 rather than for $10,000.;b. The discount rate increases.;c. The riskiness of the investment's;cash flows decreases.;d.;The;total amount of cash flows remains the same, but more of the cash flows are;received in the earlier years and less are received in the later years.;e. The discount rate decreases.;14. Last year Toto Corporation's sales were $225 million. If sales grow at 6%;per year, how large (in millions) will they be 5 years later?;a. $271.74;b. $286.05;c. $301.10;d. $316.16;e. $331.96;15. Last year Mason Corp's earnings per share were $2.50, and its growth rate;during the prior 5 years was 9.0% per year. If that growth rate were;maintained, how many years would it take for Mason's EPS to double?;a. 5.86;b. 6.52;c. 7.24;d. 8.04;e. 8.85;16. Your aunt is about to retire, and she wants to buy an annuity that will;provide her with $65,000 of income a year for 25 years, with the first payment;coming immediately. The going rate on such annuities is 6.25%. How much;would it cost her to buy the annuity today?;a. $739,281.38;b. $778,190.93;c. $819,148.35;d. $862,261.42;e. $905,374.49;17. What is the present value of the following cash flow stream at an interest;rate of 12.0% per year? $0 at Time 0, $1,500 at the end of Year 1, $3,000 at;the end of Year 2, $4,500 at the end of Year 3, and $6,000 at the end of Year;4.;a. $9,699.16;b. $10,209.64;c. $10,746.99;d. $11,284.34;e. $11,848.55;18. An investment costs $1,000 (CF at t = 0) and is expected to produce cash;flows of $75 at the end of each of the next 5 years, then an additional lump;sum payment of $1,000 at the end of the 5th year. What is the expected rate of;return on this investment?;a. 6.77%;b. 7.13%;c. 7.50%;d. 7.88%;e. 8.27%;19. Suppose a bank offers to lend you $10,000 for 1 year on a loan contract;that calls for you to make interest payments of $250.00 at the end of each quarter;and then pay off the principal amount at the end of the year. What is the;effective annual rate on the loan?;a. 8.46%;b.;8.90%;c. 9.37%;d. 9.86%;e. 10.38%;20. Other things held constant, which of the following actions would increase;the amount of cash on a company's balance sheet?;a. The company repurchases common;stock.;b. The company pays a dividend.;c. The company issues new common;stock.;d. The company gives customers more;time to pay their bills.;e. The company purchases a new piece;of equipment.;21.;Below are the 2005 and 2006 year-end balance sheets for Wolken Enterprises;Assets;2006;2005;Cash;$;200,000;$;170,000;Accounts receivable;864,000;700,000;Inventories;2,000,000;1,400,000;Total current assets;$;3,064,000;$;2,270,000;Net fixed assets;6,000,000;5,600,000;Total assets;$;9,064,000;$;7,870,000;Liabilities and equity;Accounts payable;$;1,400,000;$;1,090,000;Notes payable;1,600,000;1,800,000;Total current liabilities;$;3,000,000;$;2,890,000;Long-term debt;2,400,000;2,400,000;Common stock;3,000,000;2,000,000;Retained earnings;664,000;580,000;Total common equity;$;3,664,000;$;2,580,000;Total liabilities and equity;$;9,064,000;$;7,870,000;Wolken has never paid a dividend;on its common stock, and it issued $2,400,000 of 10-year non-callable;long-term debt in 2005. As of the end of 2006, none of the principal on this;debt had been repaid. Assume that the company's sales in 2005 and 2006 were the;same. Which of the following statements must be CORRECT?;a. Wolken increased its short-term;bank debt in 2006.;b. Wolken issued long-term debt in;2006.;c. Wolken issued new common stock in;2006.;d. Wolken repurchased some common;stock in 2006.;e. Wolken had negative net income in;2006.;22. Hunter Manufacturing Inc.'s December 31, 2006, balance sheet showed total;common equity of $2,050,000 and 100,000 shares of stock outstanding. During;2007, Hunter had $250,000 of net income, and it paid out $100,000 as dividends.;What was the book value per share at 12/31/07, assuming that Hunter neither;issued nor retired any common stock during 2007?;a. $20.90;b. $22.00;c. $23.10;d. $24.26;e. $25.47;23. Companies generate income from their "regular" operations and;from other sources like interest earned on the securities they hold, which is;called non-operating income. Lindley Textiles recently reported $12,500 of;sales, $7,250 of operating costs other than depreciation, and $1,000 of;depreciation. The company had no amortization charges and no non-operating;income. It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and;its federal-plus-state income tax rate was 40%. How much was Lindley's;operating income, or EBIT?;a. $3,462;b. $3,644;c. $3,836;d. $4,038;e. $4,250;24. Meric Mining Inc. recently reported $15,000 of sales, $7,500 of operating;costs other than depreciation, and $1,200 of depreciation. The company had no;amortization charges, it had outstanding $6,500 of bonds that carry a 6.25%;interest rate, and its federal-plus-state income tax rate was 35%. How much was;the firm's net income after taxes? Meric uses the same depreciation expense for;tax and stockholder reporting purposes.;a. $3,284.55;b. $3,457.42;c. $3,639.39;d. $3,830.94;e. $4,022.48;25. EP Enterprises has the following income;statement. How much net operating profit after taxes (NOPAT) does;the;firm have?;Sales;$;1,800.00;Costs;1,400.00;Depreciation;250.00;EBIT;$;150.00;Interest;expense;70.00;EBT;$;80.00;Taxes;(40%);32.00;Net;income;$;48.00;a. $81.23;b. $85.50;c. $90.00;d. $94.50;e. $99.23;26. Tibbs Inc. had the following data for the;year ending 12/31/06: Net income = $300, Net operating profit after taxes;(NOPAT) = $400, Total assets = $2,500, Short-term investments = $200;Stockholders' equity = $1,800, Total debt = $700, and Total operating capital =;$2,300. What was its return on invested capital (ROIC)?;a. 14.91%;b. 15.70%;c. 16.52%;d. 17.39%;e. 18.26%;27. Jefferson City Computers has developed a forecasting model to estimate its;AFN for the upcoming year. All else being equal, which of the following factors;is most likely to lead to an increase of the additional funds needed;(AFN)?;a. A sharp increase in its;forecasted sales.;b. A sharp reduction in its;forecasted sales.;c.;The;company reduces its dividend payout ratio.;d.;The;company switches its materials purchases to a supplier that sells on terms of;1/5, net 90, from a supplier whose terms are 3/15, net 35.;e. The company discovers that it has;excess capacity in its fixed assets.;28. The capital intensity ratio is generally;defined as follows;a. Sales divided by total assets;i.e., the total assets turnover ratio.;b. The percentage of liabilities;that increase spontaneously as a percentage of sales.;c. The ratio of sales to current;assets.;d. The ratio of current assets to;sales.;e. The amount of assets required per;dollar of sales, or A*/S0.;29. Spontaneously generated funds are generally;defined as follows;a. The amount of assets required per;dollar of sales.;b.;A;forecasting approach in which the forecasted percentage of sales for each item;is held constant.;c.;Funds;that a firm must raise externally through borrowing or by selling new common or;preferred stock.;d.;Funds;that are obtained automatically from normal operations, and they include;spontaneous increases in accounts payable and accruals, plus additions to;retained earnings.;e. The;amount of cash raised in a given year minus the amount of cash needed to;finance the additional capital expenditures and working capital needed to;support the firm's growth.;30. Which of the following statements is CORRECT?;a. Since;accounts payable and accrued liabilities must eventually be paid off, as these;accounts increase, AFN as calculated by the AFN equation must also increase.;b.;Suppose;a firm is operating its fixed assets at below 100% of capacity, but it has no;excess current assets. Based on the AFN equation, its AFN will be larger than;if it had been operating with excess capacity in both fixed and current assets.;c.;If;a firm retains all of its earnings, then it cannot require any additional funds;to support sales growth.;d.;Additional;funds needed (AFN) are typically raised using a combination of notes payable;long-term debt, and common stock. Such funds are non-spontaneous in the sense;that they require explicit financing decisions to obtain them.;e. If a firm has a positive free;cash flow, then it must have either a zero or a negative AFN.;31. Kamath-Meier Corporation's CFO uses this equation, which was developed by;regressing inventories on sales over the past 5 years, to forecast inventory;requirements: Inventories = $22.0 + 0.125(Sales). The company expects sales of;$400 million during the current year, and it expects sales to grow by 30% next;year. What is the inventory forecast for next year? All dollars are in;millions.;a. $74.6;b. $78.5;c. $82.7;d. $87.0;e. $91.4;32. Last year Wei Guan Inc. had $350 million of;sales, and it had $270 million of fixed assets that were used at 65% of;capacity. In millions, by how much could Wei Guan's sales increase before it is;required to increase its fixed assets?;a. $170.1;b. $179.0;c. $188.5;d. $197.9;e. $207.8;33. Clayton Industries is planning its operations for next year, and Ronnie;Clayton, the CEO, wants you to forecast the firm's additional funds needed;(AFN). Data for use in your forecast are shown below. Based on the AFN;equation, what is the AFN for the coming year? Dollars are in millions.;Last;year's sales = S0;$350;Sales;growth rate = g;30%;Last;year's total assets = A0;$500;Last;year's profit margin = M;5%;a.;$102.8;b.;$108.2;c.;$113.9;d.;$119.9;e.;$125.9


Paper#51331 | Written in 18-Jul-2015

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