FIN 335 Test 1
Fall 2008
Clay M. Moffett
Name: _______________________________________
Questions 1-32 are worth 3 points. Question 33, 34 are worth 5 points. Total point on test is 106 points. Grade is out of
100. Turn in your test and formula sheet when finished with scantron. Good luck! Bonne chance! Viel Glück! Hodně
štěstí!! Held og lykke! Lycka till!
1.
Which one of the following is a capital structure decision?
a. Should a new machine be purchased this year?
b. Should the credit terms offered to customers be revised?
c. Should debt or equity financing be used to purchase a building?
d. Should the level of inventory be increased?
2.
Which one of the following functions is generally under the control of the corporate treasurer?
a. cost accounting
b. tax management
c. financial planning
d. financial accounting
3.
Which one of the following best describes the liability a general partner has for the partnership debts?
a. none
b. liability limited to amount invested in the firm
c. liability limited based on percentage ownership
d. unlimited
4.
Which one of the following provides you with the greatest control over a firm’s daily operations?
a. limited partner
b. major stockholder in a corporation
c. minor stockholder in a joint stock company
d. sole proprietor
5.
A limited partner:
a. has no personal responsibility for the debts incurred by the partnership.
b. is guaranteed a return of his or her entire investment in the partnership if the partnership terminates.
c. can only control the daily operations for an individual segment of the partnership.
d. has minimal control, if any, over the daily operations of the partnership.
6. The Sarbanes-Oxley Act in 2002 is designed to protect the public against:
a. a firm’s net operating losses if those losses extend beyond a 2-year period.
b. declines in the market value of a firm’s outstanding shares of stock.
c. financial malpractice and accounting fraud.
d. a firm’s issuing additional shares of stock if the issue will reduce the market value of the current
outstanding shares.
7.
Who has the ultimate control over a corporation?
a. SHAREHOLDERS
b. chief executive officer
c. chairman of the board
d. board of directors
8.
Which one of the following is a primary market transaction?
a. Theo, the president of ABC, sells some of his shares in ABC on the NYSE
b. ABC offers newly issued shares to the general public
c. Tom instructs his broker to sell all of his shares in ABC, Inc.
d. Mary gifts shares of ABC stock to her son
Use these financial statements to answer questions 9 through 13.
Balance Sheet
Cash
Accounts receivable
Inventory
Net fixed assets
Total assets
2007
2008
$ 1,700 $ 1,600
14,300
17,400
22,500
23,700
82,900
81,600
$121,400 $124,300
Accounts payable
Long-term debt
Common stock
Retained earnings
Total liabilities and equity
2007
$13,800
47,500
17,000
43,100
$121,400
2008
$ 12,900
48,600
22,000
40,800
$124,300
Income Statement
Net Sales
$163,700
Costs
108,200
Depreciation
14,100
EBIT
41,400
Interest
3,800
Taxable income
37,600
Taxes
13,200
Net Income
$ 24,400
9.
10
What is the amount of the operating cash flow?
a. $24,400
b. $30,500
c. $38,500
d. $42,300
What is the cash flow to stockholders for 2008?
a. $5,000
b. $19,400
c. $21,700
d. $29,400
11. What is the net new borrowing for 2008?
a. -$2,700
b. $200
c. $1,100
d. $4,900
12. What is the change in net working capital for 2008?
a. $5,100
b. $6,300
c. $24,700
d. $25,200
13. What is the cash flow to creditors for 2008?
a. -$2,700
b. -$1,100
d. $2,700
c. $1,100
14. A firm currently has an average tax rate of 20 percent and a marginal tax rate of 25 percent based on its
current taxable income of $36,600. What will the firm’s average tax rate be if it increases its taxable income by
$1,100?
a. 20 percent
b. 20.05 percent c. 20.09 percent d. 20.15 percent
15. Redding Industrial Supply had common stock of $6,800 and retained earnings of $4,925 at the beginning of the year.
At the end of the year, the common stock balance is $7,000 and the retained earnings account balance is $5,498. The
net income for the year is $938. What is the retention ratio?
a. 17.59 percent
b. 38.91 percent
c. 61.09 percent
d. 82.41 percent
16. Which one of the following formulas is correct?
a. Profit margin = EBIT / Sales
b. Capital intensity ratio = 1 / Return on assets
c. ROA = ROE / Equity multiplier
d. Quick ratio = Cash / Current liabilities
17. If a firm uses cash to purchase inventory, its quick ratio will increase.
a. True
b. False
18. Use the following tax table to answer this question.
Taxable Income
$0-50,000
$50,001-75,000
$75,001-100,000
$100,001-335,000
Tax Rate
15%
25%
34%
39%
Pools, Inc., has taxable income of $77,000 for the year. Which one of the following statements is correct concerning
Pools' tax situation?
a. Pools' average tax rate is 18.74 percent.
b. Pools' average tax rate is 34.00 percent.
c. Pools' marginal tax rate is 15.00 percent.
d. Pools' marginal tax rate is 18.74 percent.
19. You currently have $7,200 in your investment account. You can earn an average rate of return of 11.7 percent
year. How long will you have to wait until your account is worth $50,000?
a. 9.47 years b. 11.28 years
c. 14.67 years
d. 17.51 years
per
20. Your savings account is currently worth $1,200. The account pays 4.5 percent interest compounded annually. How
much will your account be worth 6 years from now?
a. $1,524.00
b. $1,562.71
c. $1,611.18
d. $1,627.19
21. You purchased a new 1972 Plymouth Barracuda Ragtop with a 426-Hemi 36 years ago at a cost of $3,900. You took
care of this car, realizing it’s divine nature. Today, you sold that car for $1,750,000 in order to afford tuition and meals
and buy a little gas for your moped. What annual rate of return did you earn on this vehicle?
a. 1.42 percent
b. 18.48 percent
c. 8.48 percent
d. 8.38 percent
22. The Corner Bank is offering you a credit card with an APR of 12.9 percent. The bank compounds the interest rate on a
monthly basis. What is the effective annual rate?
a. 13.69 percent
b. 13.87 percent
c. 14.03 percent
d. 14.14 percent
23. A preferred stock is currently valued at $62.80 a share and pays an annual dividend of $7. The par value is
$100 per share. What is the rate of return on this security?
a. 8.97 percent
b. 10.58 percent
c. 11.15 percent
d. 11.33 percent
24. Over the past 30 years your parents saved money each month for their retirement. They retired this week and expect
to live another 28 years. Their investment account is currently valued at $487,300 and is expected to earn 7 percent
annually in the future. How much money can they withdraw annually if they wish to spend all of their money during
their lifetime?
a. $5,158.75
b. $6,038.59
c. $39,269.75
d. $40,149.59
25. Suzie has $16,000 in her investment account today. She saves $500 a quarter and earns 8 percent interest, compounded
quarterly. How much money will she have in her account three years from now?
a. $16,821.87
b. $18,509.53
c. $22,300.16
d. $26,997.91
26. Tom invested $150 at the beginning of each month for the last 14 years and earned 6 percent interest, compounded
monthly. Julia invested $300 at the end of each month for the past 7 years and earned 6 percent interest, compounded
monthly. Today, Tom has ______ than Julia.
a. $8,164.15 less
b. $8,320.26 less
c. $8,164.15 more
d. $8,320.26 more
27. A series of equal cash flows that occur at the beginning of each time period for a limited number of time periods is
called a(n):
a. ordinary annuity.
b. beginning annuity.
c. annuity due.
d. perpetuity.
e. perpetuity due.
28. In Canada and the United Kingdom, a perpetuity is also called a(n):
a. consul.
b. infinite bond.
c. infinity flow.
d. dowry.
e. forever bond.
29. Which type of loan is comparable to the present value of a future lump sum?
a. effective annual rate
b. amortized
c. interest-only
d. annual percentage
e. pure discount
30. Which one of the following is a correct statement, all else held constant?
a. The present value is inversely related to the future value.
b. The future value is inversely related to the period of time.
c. The period of time is directly related to the interest rate.
d. The present value is inversely related to the interest rate.
e. The interest rate is inversely related to the future value.
31. Which one of the following is a breakdown of the ROE into its three component parts?
a. equity analysis
b. efficiency breakout
c. Du Pont identity
d. sustainable growth
e. profitability ratios
32. Suppose given NI= $132,186, Sales = $2,678,461, TA = $784,596 and Debt/Asset = 0.48062. Calc ROE.
a. 32.44
b. 44.32
c. nope
d. not this one either.
33. (5 Points) In 2006 a 50-cent piece (0.50 coin) issued in 1904 sold for $1,300. What is the rate of return on this
investment? Show your work.
34. (5 Points)Describe in 10 words or less what is a) a zero or b) an amortizing loan. (I penalize severely for wordiness!!!)
Bonus: Who was the lead singer for the Amboy Dukes???
Answer Sheet:
1. c
2. c
3. d
4. d
5. d
6. c
7. a
8. b
9. d
10. c
11. c
12. a
13. d
14. d
15. c
16. c
17. b
18. a
19. d
Operating cash flow $41,400 + $14,100 − $13,200 = $42,300
Dividends paid = $24,400 − ($40,800 − $43,100) = $26,700
Cash flow to stockholders = $26,700 − ($22,000 − $17,000) = $21,700
Net new borrowing = $48,600 − $47,500 = $1,100
Change in net working capital = ($1,600 + $17,400 + $23,700 − $12,900) − ($1,700 + $14,300 + $22,500 −
$13,800) = $5,100
Cash flow to creditors = $3,800 − ($48,600 − $47,500) = $2,700
Average tax = [($36,600 × .20) + ($1,100 × .25)] / ($36,600 + $1,100) = 20.15 percent
Retention ratio = ($5,498 − $4,925) / $938 = .61087 = 61.09 percent
$50,000 = $7,200 × (1 + .117)t
6.94444 = 1.117t
ln6.94444= t × ln1.117
1.93794 = .11065t
t = 17.51
Enter
N
Solve for
20.. b
11.7
I/Y
-7,200
PV
PMT
4.5
I/Y
-1,200
PV
PMT
50,000
FV
17.51
FV = $1,200 × (1 + .045)6
FV = $1,562.71
Enter
6
N
Solve for
FV
1,562.71
21. b
22. a
23. c
EAR = [1 + (.129/12)]12 − 1 = .13691 = 13.69 percent
Rate of return = $7/$62.80 = .11146 = 11.15 percent
24. d
1  1 / 1  .07 28 
$487 ,300  x  
 ; $487,300 = x  12.137111; APV = $40,149.59
.07



Enter

28
N
7
I/Y
487,300
PV
3×4
N
8/4
I/Y
-16,000
PV
Solve for
25. d
Enter
Solve for
PMT
FV
40,149.59
-500
PMT
FV
26,997.91
26.. d
 .06 1412 
 1

1 
12 


  1  .06  ; A FV = $150 × 263.616290; A FV = $39,542.44
Tom: A dueFV  $150 

 due
due
.06
12 

12
Enter
14×12
N
6/12
I/Y
PV
Solve for
-150BGN
PMT
FV
39,542.44
 .06  712 
  1
1 
 12 

Julia: AFV  $300 
; AFV = $300 × 104.073927; A FV = $31,222.18
.06
12
Enter
7×12
N
6/12
I/Y
PV
Solve for
-300
PMT
FV
31,222.18
Difference: $39,542.44 − $31,222.18 = $8,320.26; Tom has $8,320.26 more than Julia.
27.
28.
29.
30.
31.
32.
c
a
e
d
c
A/A – D/A = E/A =>> .51937. 1/(E/A) = A/E = 1.9254.
Using the Du Pont identity to calculate ROE, we get:
ROE = (Profit margin)(Total asset turnover)(Equity multiplier)
ROE = (Net income / Sales)(Sales / Total assets)(Total asset / Total equity)
ROE = ($132,186 / $2,678,461)($2,678,461 / $784,596)($784,596 / $407,490)
ROE = 0.3244 or 32.44%
33. To answer this question, we can use either the FV or the PV formula. Both will give the same answer since they are the
inverse of each other. We will use the FV formula, that is:
FV = PV(1 + r)t
Solving for r, we get:
r = (FV / PV)1 / t – 1
r = ($1,300 / $0.50)1/102 – 1
r = 0.0801 or 8.01%