FI 302, Business Finance ___________________
Exam 1 Buy-Back, Fall 2000
your name
Version 5
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lab-time
lab teacher
You may re-work the exam for extra credit. This is optional and will never lower your
score. The syllabus precisely describes how the buy-back adds points to your score.
To exercise the buy-back option, simply re-work the exam completely and entirely. It is
advisable, but not essential, that you re-work the same version that you worked for
Tuesday’s sitting. The reworked exam, referred to as the buy-back, is due at the
Thursday lecture. The buy-back can be submitted late, without penalty, at the
receptionist’s desk in the Finance Department (Alston 200) until 10am Friday.
BUY-BACK EXAMS WILL NOT BE ACCEPTED AFTER 10AM FRIDAY REGARDLESS
OF REASON OR CALAMITY.
The buy-back will be hand-graded, not machine graded. We therefore reserve the right
to subtract points on papers that fail to follow these 3 guidelines.
1. NEATNESS: Write solutions to ALL problems in this test packet in the space
provided beneath each question very neatly; we won’t try to guess what you
mean. Do not use attachments; show your work in the space provided.
2. COMPLETENESS: You may not receive full credit even though you might
arrive at the correct letter choice unless you show steps. You are NOT
required to show steps for 3-point word problems that involve NO
computations. For problems that involve computations, show sufficient steps!
Showing calculator settings does not count as showing sufficient steps!
3. SUMMARIZE your multiple choices in the table below.
You may work together on buy-backs; it is not considered cheating. It is cheating,
however, to copy someone else's work. The objective of the buy-back is to provide
a reward for learning how to do the exam problems.
TABLE OF ANSWERS: List the letter choice for each of your answers below.
1.
5.
9.
13.
17.
2.
6.
10.
14.
18.
3.
7.
11.
15.
19.
4.
8.
12.
16.
20.
For Instructor Use Only:
FI 302, Business Finance
Exam 1 , Fall 2000
1. (3 points)
Which attribute of the cash flow cycle is true?
a. Markets and institutions provide financial resources to business solely for the
purpose of getting voting rights in corporate decisions.
b. Wealth that business creates flows primarily as profits to financial markets.
c. Labor provides services to business and receive wages in a competitive and fluid
economy that are much less the value of labor's contribution.
d. Businesses typically borrow money from stakeholders such as employees and
promise to repay superior wages in the future.
e. Businesses borrow money from stakeholders to purchase capital goods, labor, and
other productive services from financial markets.
The following set-up pertains to the next few questions
The balance sheets for the Raider Company and the Target Company appear below:
Raider Balance Sheet
$2,900 Curr. assets
$4,200 Debt
$8,500 PP&E
$7,200 Stockholders Equity
$11,400 Total Assets
$11,400
Target Balance Sheet
$2,100 Curr. assets
$2,100 Debt
$5,000 PP&E
$5,000 Stockholders Equity
$7,100 Total Assets
$7,100
The Raider Company plans to takeover the Target Company. The Raider Company
has 700 common shares outstanding, their equity price-to-book ratio is 3.10, and their
price-to-earnings ratio is 32.4. The Target Company has 680 common shares
outstanding, their equity price-to-book ratio is 0.60, and their price-to-earnings ratio is
12.6. The Raider Company offers 3 shares of Raider stock to Target shareholders that
tender 16 Target shares (the exchange ratio is 3 for 16; assume fractional shares can
be exchanged). Suppose tax effects and synergistic gains and losses equal zero; that
is, sales and profit margins remain the same.
2.
After the Raider takes control of all Target shares, what is the price-to-earnings ratio for
the new conglomerated Company?
a. 27.3
b. 37.2
c. 29.5
d. 31.9
e. 34.4
3.
After the Raider takes control of all Target shares, what is the percentage change in
Target shareholder wealth?
a. 23% b. 25% c. 21% d. 27% e. 30%
4. (3 points)
Which statement about a venture capitalist is most accurate.
a. generally they are extremely involved in managerial decision-making
b. usually their plans involve a lifetime commitment to helping the company
c. venture financing typically is like a loan with fixed interest payments and repayment
of principal
d. venture financing typically goes to established large companies with impressive
histories
e. venture financing represents more than half of all money borrowed by US companies
5.
Find below the Company’s balance sheet for year 2525.
Balance Sheet, 12/31/2525
$600 Debt
$4,000 Stockholders
Equity
$4,600 Total Assets
$4,600
There are 310 shares outstanding at year-end 2525. The company plans to obtain
venture capital by selling 120 additional shares at their current book value to a venture
capitalist. The company agrees to repurchase the shares at year-end 2526 at a price
equal to 144% of that year’s book value. For year 2526 the company forecasts sales of
$30,820 , a net profit margin (= net income ÷ sales) of 12.80%, and a dividend payout
ratio (=dividends÷net income) of 35%. Assume debt remains unchanged.
How much is the equity repurchase shareprice at year-end 2526?
a. $28.82
b. $27.99
c. $30.58
d. $27.17
e. $29.69
6.
Find below the Company’s balance sheet for year 2525.
Balance Sheet, 12/31/2525
$1,600 Debt
$2,500 Stockholders Equity
$4,100 Total Assets
$4,100
For year 2526 the company forecasts an asset turnover ratio (= sales2526 ÷ total
assets2525) of 2.7, a net profit margin (= net income ÷ sales) of 5.80%, and a dividend
payout ratio (=dividends÷net income) of 40%. There are 250 shares outstanding and, at
year-end 2525, the price-to-earnings ratio is 17.6. If no additional shares are issued,
and the price-to-earnings ratio remains unchanged, what is the shareprice at year-end
2526?
a. $45.20
b. $49.39
c. $46.56
d. $47.95
e. $43.88
7.
Find below the Company’s balance sheet for year-end 2525.
Balance Sheet, 12/31/2525
$1,200 Debt
$4,700 Stockholders Equity
$5,900 Total Assets
$5,900
For 400 common shares outstanding, the equity price-to-book ratio is 1.3. During 2526,
they expect sales equal to $25,400 and a gross margin (=operating income before
depreciation ÷ sales) of 26%. Depreciation is expected to equal $1,770 and interest
charges will equal 9% of Debt. Corporate taxes equal 34% of taxable income, and the
dividend payout ratio (=dividends ÷ net income) is 62%. Suppose the company has no
intention of borrowing more money or buying more assets.
What is net income for 2526?
a. $3,774
b. $3,119
c. $2,836
d. $3,431
e. $4,152
8. (3 points)
Which one statement about the New York Stock Exchange is most accurate.
a. average daily volume is about $12 million to $17 million
b. small trades execute on the floor through a system of open outcry
c. total market capitalization is about $20 trillion to $25 trillion
d. the NYSE is a government sponsored arm of the Federal government
e. stocks for about 2,700 to 3,000 companies trade on the NYSE
9.
The Company had quite a few changes during the past year. On the balance sheet, for
example, Current Assets was listed as $4,700 at year-end 2525, and $4,100 at yearend 2526. Which statement about this change is most accurate?
a. The change represented a $200 use of financing
b. The change represented a $600 source of financing
c. The change represented a $1,200 use of financing
d. The change represented a $200 source of financing
e. The change represented a $1,200 source of financing
10.
The Company has Stockholders Equity equal to $8,300 and there are 2200 shares
outstanding. The market shareprice for their stock is $3.28 . The price-to-book ratio for
this company’s peer group equals 0.67. How does the company’s price-to-book ratio
compare to its peer group.
a. the company’s price-to-book ratio is .96 and the company stock compared to its peer
group is relatively cheap
b. the company’s price-to-book ratio is .96 and the company stock compared to its
peer group is relatively expensive
c. the company’s price-to-book ratio is .79 and the company stock compared to its
peer group is relatively cheap
d. the company’s price-to-book ratio is .87 and the company stock compared to its
peer group is relatively expensive
e. the company’s price-to-book ratio is .87 and the company stock compared to its
peer group is relatively cheap
11.
The DuPont formula relates return on equity (= net income ÷ Stockholders equity) to the
company's net profit margin (= net income ÷ sales), asset turnover (= sales ÷ total
assets), and equity multiplier (= total assets ÷ common equity). This Company is in an
industry where the average net profit margin is 5.56%, the debt-to-asset ratio (= total
debt ÷ total assets) is 40.7%, and return on equity is 48.79%. For the company, the
numbers are
Balance Sheet, 12/31/2525
Income, 1/1 - 12/31/2525
$1,700 Curr. assets
$2,600 Debt
sales
$24,700
$4,800 PP&E
$3,900 Stockholders Equity
total costs $23,340
$6,500 Total Assets
$6,500
net income $1,360
For the company relative to the industry, select the one statement most consistent with
the DuPont analysis.
a. the company’s profit margin indicates revenues are very large when compared to
costs.
b. the company’s equity multiplier indicates the firm has a very large debt burden
c. the company’s asset turnover indicates very inferior resource utilization.
d. the company’s profit margin indicates revenues are very small when compared to
costs.
e. the company’s equity multiplier indicates the firm has a very small debt burden
12.
The return on equity (= net income ÷ Stockholders equity) is one of the more important
measures of company performance. Suppose a company's net profit margin (= net
income ÷ sales) is 7.4%, asset turnover (= sales ÷ total assets) is 7.6, and debt-to-total
assets ratio is 60%. What is this company’s return on equity?
a. 186% b. 162% c. 122% d. 141% e. 214%
13. (3 points)
By how many basis points does 4.2% differ from 8.0%?
a. 330 b. 380 c. 440 d. 500 e. 580
14.
At year-end 2525, Stockholder’s Equity is $3,700 and there are 220 common shares
outstanding. For 2526, sales should equal $15,910 , the net profit margin (= net income
÷ sales) is 7.30%, the payout ratio (=dividends ÷ net income) is 45%, and no shares are
issued or repurchased. If the equity price-to-book ratio at year-end 2525 is 1.33, and it
moves to 1.17 at year-end 2526, what is the shareholder’s annual rate of return for
2526?
a. 18.3% b. 12.5% c. 16.7% d. 15.1% e. 13.8%
15.
Find below the Company’s financial statements for year 2525.
Balance Sheet, 12/31/2525
Income, 1/1 - 12/31/2525
$525 Curr. assets
$925 Debt
sales
$12,700
$2,300 PP&E
$1,900 Stockholders Equity
all costs
$12,500
$2,825 Total Assets
$2,825
net income
$200
dividends
$90
For 2526 the asset turnover (sales÷total assets), net profit margin (=net income ÷
sales), payout ratio (=dividends÷net income) and price-to-earnings ratio (now 22.9) will
be constant. The number of shares outstanding is 100. The firm seeks maximum
growth by relying exclusively on retained earnings; external financing will be zero. What
is the sales growth rate?
a. 4.5% b. 5.1% c. 3.6% d. 4.1% e. 3.2%
16.
Find below the Company’s financial statements for year 2525.
Balance Sheet, 12/31/2525
Income, 1/1 - 12/31/2525
$4,950 Curr. assets
$19,150 Debt
sales $231,700
$35,000 PP&E
$20,800 Stockholders Equity
all costs $226,500
$39,950 Total Assets
$39,950
net income
$5,200
dividends
$1,980
For 2526 the asset turnover (sales÷total assets), net profit margin (=net income ÷
sales), and payout ratio (=dividends÷net income) will be constant. The price-toearnings ratio, 16.6 at year-end 2525, is expected to equal 21.6 at year-end 2526. The
number of shares outstanding is 10400. The firm seeks maximum growth by relying on
internal and external financing such that the debt-to-equity ratio remains constant. For
the shareholder that buys a share at year-end 2525 and holds the stock through yearend 2526, what is the rate of return?
a. 56.7% b. 68.7% c. 83.1% d. 75.5% e. 62.4%
17.
Company sales equal $5,900 for the year ending December 31, the costs-of-goods
sold (cgs) equal 80% of sales, and the inventory was replaced about every 67 days
(inventory turnover in days = 365 ÷ inventory turnover ratio; inventory turnover ratio =
annual cgs ÷ Inventory balance). The Company is considering a change in their
customer credit policy. As a result, they believe that sales would remain constant in the
forthcoming year, yet the length of time that inventory stays on the shelf would change
by 30 days (shelf time increases). If the financing rate for inventories is 10% per year,
what is the effect on their annual inventory financing costs?
a. The policy change results in additional annual costs of $39
b. The policy change results in additional annual savings of $39
c. The policy change results in additional annual costs of $35
d. The policy change results in additional annual savings of $35
e. The policy change results in additional annual costs of $32
18.
The Company balance sheet on 12/31/2525 contains the following:
$1,700
Current Assets
$1,500
Current Liabilities
$4,200
PP&E
$1,400
Long Term Debt
______
$3,000
Stockholders Equity
$5,900
Total
$5,900
Total
From the income statement for 2525, Sales equal $30,680 , Net Income is $1,565 , and
Dividends equal $861 . The Company expects sales growth during year 2526 of 6.0%.
They expect Current Assets and Current Liabilities will increase spontaneously and
proportionately with sales. They believe, however, that they can better utilize existing
PP&E. Consequently, they expect PP&E to remain constant. Also expected to remain
constant are the net profit margin (= Net Income ÷ Sales) and the payout ratio (=
Dividends ÷ Net Income). The company anticipates running a surplus during year 2526.
given that Long Term Debt is unchanged, how large is the forecast surplus?
a. $889 b. $808 c. $607 d. $668 e. $734
19.
Find below the Company’s balance sheet for year 2525.
Balance Sheet, 12/31/2525
$600 Cash
$330 Curr. Liabilities
$630 Inventory
$500 Long Term Debt
$1,700 PP&E
$2,100 Stockholders Equity
$2,930 Total Assets
$2,930
For 2525 the Company’s asset turnover ratio (sales ÷ total assets) is 3.7. Depreciation
equals 19% of PP&E, and the gross profit margin (= earnings before interest and taxes
÷ sales) is 7.90%. Interest expense equals 10.30% of Long Term Debt. Taxes equal
33% of taxable income, and the payout ratio (=dividends÷net income) is 50%. There
are no other items on the income statement for 2525. There are 110 shares
outstanding.
As a prospective investor in the Company’s shares, you are especially interested in
their ability to generate cash flow. How much is their operating cash flow for year 2525?
a. $897
b. $715
c. $801
d. $570
e. $638
20. (3 points)
Xerox reported this morning that their earnings per share (“eps”) for the most recent
quarter is $1.60 ; this represents a profit. Which statement about the probable
shareprice reaction is most accurate?
a. The shareprice probably rises if the eps that analysts expected was $1.79
b. The shareprice probably rises if eps that analysts expected was $1.20
c. The shareprice probably falls if the eps that analysts expected was $1.44
d. The shareprice probably rises whenever the company announces a profit
e. The shareprice probably falls whenever the actual and expected eps differ