FIN 335 Summer 2010 Test 1

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FIN 335 Test 1

Summer 2010

Name: _______________________________________

Clay M. Moffett

Turn in your test and formula sheet when finished with scantron. Good luck! Bonne chance! Viel Glück! Hodně štěstí!!

4.

2.

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?

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

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

7.

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 by making executives liable for the financial statements.

d. a firm’s issuing additional shares of stock if the issue will reduce the market value of the current

outstanding shares.

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.

Cash

Accounts receivable

Inventory

Total assets

$ 1,700 $ 1,600

Net fixed assets

Balance Sheet

2007 2008

14,300 17,400

22,500 23,700

82,900 81,600

$121,400 $124,300

Accounts payable

Long-term debt

2007 2008

$13,800 $ 12,900

47,500 48,600

Common stock

Retained earnings

17,000 22,000

43,100 40,800

Total liabilities and equity $121,400 $124,300

Income Statement

Net Sales $163,700

Costs 108,200

Depreciation

EBIT

Interest

Taxable income

Taxes

Net Income

14,100

41,400

3,800

37,600

13,200

$ 24,400

9.

10

What is the amount of the operating cash flow? a. $24,400 b. $30,500 c. $38,500

What is the cash flow to stockholders for 2008? a. $5,000 b. $19,400

11. What is the net new borrowing for 2008? a. -$2,700 b. $200 c. $21,700 c. $1,100 d. $42,300 d. $29,400 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

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 c. $1,100 d. $2,700 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. Ann is interested in purchasing Ted's factory. Since Ann is a poor negotiator, she hires Mary to negotiate a purchase price. Identify the parties to this transaction. a.

Mary is the principal and Ann is the agent. b.

Ted is the principal and Ann is the agent.

c.

d.

Ted is the agent and Ann is the principal.

Ann is the principal and Mary is the agent.

17. If a firm uses cash to purchase inventory, its quick ratio will increase. e.

f.

True

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.

b.

c.

d.

Pools' average tax rate is 18.74 percent.

Pools' average tax rate is 34.00 percent.

Pools' marginal tax rate is 15.00 percent.

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 per 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

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 corporate officer responsible for cash management is the ___________? a. Treasurer b. Controller c. Grand Poohbah d. Marketing dude..

23. The cost of capital for a firm… a.should approximate 0. b. equals the interest rate c. rate demanded by the market on shares d. is irrelevant

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.

Suppose KLM, Inc., just received a patent on a new anti-cholesterol drug. This patent is an: a.

intangible fixed asset. b.

Can be depreciated c.

Is a R&D Liability d.

Is worthless to me b/c I use Metamucil e.

This answer shouldn’t be selected.

30. 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. Who is the lead guitarist for the Amboy Dukes? a. Barak Obama b. Pee Wee Herman c. Jimmi Hendrix d. Eric Clapton e. Ted Nugent

Formula Sheet.

Cash Flow From Assets = Operating Cash Flow – Net Capital Spending – Changes in NWC

ROE = PM * AT * EM

Internal Growth Rate

1

ROA

ROA b

b t = ln(FV / PV) / ln(1 + r)

Sustainabl r = (FV / PV)

1/t

– 1 e Growth Rate

1

ROE

-

ROE b

b

25. d

21. b

22. a

23. c

Answer Sheet:

1.

2.

c c

3.

4.

5.

6.

d d d c

7.

8.

a b

9.

d

10.

c

11.

c

12.

a

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

13.

d

14.

d

15.

c

16.

d

17.

b

18.

a

19.

d

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 = 1.117

t ln6.94444= t × ln1.117

1.93794 = .11065t t = 17.51

20.. b

Enter

Solve for 17.51

N

FV = $1,200 × (1 + .045)

6

FV = $1,562.71

11.7 -7,200

I/Y PV

50,000

PMT FV

Enter

Solve for

6

N

4.5 -1,200

I/Y PV PMT FV

1,562.71

EAR = [1 + (.129/12)]

12

− 1 = .13691 = 13.69 percent

Rate of return = $7/$62.80 = .11146 = 11.15 percent

24. d $ 487 , 300

 x

1

1 /

1

.

07

.

07

28

; $487,300 = x

12.137111; APV = $40,149.59

Enter 28 7 487,300

Solve for

N I/Y PV PMT

40,149.59

FV

Enter 3×4

N

Solve for

8/4 -16,000 -500

I/Y PV PMT FV

26,997.91

26.. d Tom: A due

FV

$ 150

 

1

.

06

12

.

06

14

12

1

12

.

06

12

; A due

FV = $150 × 263.616290; A due

FV = $39,542.44

Enter 14×12 6/12 -150BGN

Solve for

Julia:

N I/Y PV PMT FV

39,542.44

AFV

$ 300

 

1

.

06

12

7

1 2

1

.

06

; AFV = $300 × 104.073927; A

FV = $31,222.18

12

Enter 7×12 6/12 -300

Solve for

N I/Y PV PMT FV

31,222.18

Difference: $39,542.44 − $31,222.18 = $8,320.26; Tom has $8,320.26 more than Julia.

27. c

28. a

29. a

30. c

31. c

32. 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. e

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