Midterm 1
MGT 3040C
Part I: Each question is worth 2 point, 20 points total
1- In general, the role of the financial manager is to maximize the value of the firm.
a. True
b. False
2- Two key disadvantages of the proprietorship form of business are difficulty in raising
capital and the presence of unlimited personal liability for business debts.
a. True
b. False
3- On the balance sheet, total assets must always equal total liabilities. The amount
remaining is what is used to finance the firm and includes equity and long-term
debt.
a. True
b. False
4- The income statement measures revenue and expenses of the firm over a certain time
period. It is always based on accounting data.
a. True
b. False
5- Interest paid by a corporation is a tax deduction for the paying corporation, but
dividends paid are not deductible. This treatment, other things held constant,
tends to encourage the use of debt financing by corporations.
a. True
b. False
6- Determining whether a firm’s financial position is improving or deteriorating requires
analysis of more than one set of financial statements. Cross sectional analysis is
one method of measuring a firm’s performance over time.
a. True
b. False
7- The current ratio and inventory turnover ratio measure the liquidity of a firm. The
current ratio measures the relationship of a firm’s current assets to its current
liabilities and the inventory turnover ratio measures how rapidly a firm turns its
inventory back into a “quick” asset or cash.
a. True
b. False
8- If a firm has high current and quick ratios, this is always a good indication that a firm
is managing its liquidity position well.
a. True
b. False
9- Generally, firms with high profit margins have high asset turnover rates, and firms
with low profit margins have low turnover rates; this result is exactly as predicted
by the extended Du Pont equation.
a. True
b. False
10- The greater the number of compounding periods within a year, the greater the future
value of a lump sum invested today, and the greater the present value of a given
lump sum to be received in the future.
a. True
b. False
Part II: Each question is worth 2 points, 20 points total.
11- The management of the firm’s short-term assets and liabilities is called:
a.
b.
c.
d.
e.
Capital budgeting.
Capital structure.
Agency cost analysis.
Financial depreciation.
Working capital management.
12- Which of the following is an advantage of ownership of a corporation compared to
that of a sole proprietorship?
a.
b.
c.
d.
e.
The owners of the corporation have unlimited liability for the firm’s debts.
It is the simplest to start.
The corporation has an unlimited life.
Dividends received by the corporation’s shareholders are tax-exempt.
It is more difficult to transfer ownership in a corporation.
13- The purchase and sale of securities after the original issuance occurs in the:
a.
b.
c.
d.
e.
Dealer market.
Auction market.
Primary market.
Secondary market.
Liquidation market.
14- Balance sheet assets ___________________________.
I. are always equal to total liabilities minus shareholders’ equity
II. represent items acquired with the use of the firm’s assumed liabilities and
equity
III. are listed in order of increasing liquidity
a.
b.
c.
d.
e.
I only
II only
III only
I and III only
II and III only
15- Which of the following financial statement items is generally considered the most
liquid?
a.
b.
c.
d.
e.
Inventory
Net fixed assets
Long-term debt
Patents and trademarks
Accounts receivable
16- In 2005, Sensicon Inc. experienced negative cash flow from assets. It must be the
case that:
a.
b.
c.
d.
e.
The company is in financial distress.
Cash flow to creditors and cash flow to shareholders are both negative.
Sensicon’s interest payments were greater than its dividend payments.
Sensicon’s dividend payments were greater than its interest payments.
Operating cash flow was less than the combination of additions to net working
capital and net new capital expenditures.
17- Ratios that measure the firm’s financial leverage are known as:
a.
b.
c.
d.
e.
Asset management ratios.
Short-term solvency ratios.
Debt management ratios.
Profitability ratios.
Market value ratios.
18- All else constant, return on equity will increase if the ______________________.
a.
b.
c.
d.
e.
profit margin decreases
return on assets increases
debt-equity ratio decreases
accounts receivable turnover increases
total asset turnover decreases
19- In words, what does an equity multiplier of 2 mean?
a.
b.
c.
d.
e.
Each dollar in equity the firm has supports $2 in assets.
Each dollar in assets the firm owns is supported by $2 in equity.
Each dollar in assets the firm owns is supported by $4 in equity.
Each dollar in equity the firm has supports fifty cents in assets.
Each dollar in assets the firm owns is supported by $2 in debt.
20- The amount an investment is worth after one or more periods of time is the
____________.
a.
b.
c.
d.
e.
principal value
present value
future value
compound interest rate
simple interest rate
Part III: Each question is worth 5 points, 60 points total.
Use the following information to answer questions 21 through 24
During the year 2005, the Yung.com had sales of $3000, cost of goods sold of $1000,
depreciation of $300, and interest paid of $850. The tax rate is 34% and all taxes are paid
currently.
Assume Yung.com has 100 shares of common stock outstanding at the end of 2005. Total
dividends paid were $250.
At year-end 2004, Yung.com had notes payable of $4200, accounts payable of $2000,
long-term debt of $8000, and equity of $7500. Corresponding entries for 2005 are
$5000, $2500, $9000, and $9500. Asset values are below.
2004
2005
Current Assets
Cash
Marketable securities
Accounts receivable
Inventory
$ 800
1200
2200
5500
$ 700
1400
3000
6900
Fixed Assets
Net plant & equipment
$12000
$14000
During the year 2005 Yung.com sold $1689 worth of stock.
21- What is Yung.com’s EPS and dividends per share for 2005?
22- What is Yung.com’s operating cash flow and net capital spending for 2005?
23- What is Yung.com’s cash flow to shareholders for 2005?
24- What is Yung.com’s cash flow from assets for 2005?
Use the following information to answer questions 25 & 26
COOGAN DEVELOPMENT CO., INC.
Balance Sheet as of December 31, 2005
2005
Assets
Current Assets
Cash
Accounts Receivable
Inventory
Total
Fixed Assets
Net plant and equipment
Total assets
Liabilities and Owners’ Equity
Current liabilities
Accounts payable
Notes payable
Total
Long-term debt
Owners’ equity
Common stock and
paid-in surplus
Retained earnings
Total
Total liabilities and equity
$ 3,000
6,000
14,500
$23,500
51,500
$75,000
$ 3,600
6,400
$10,000
$27,000
16,500
21,500
$38,000
$75,000
25- Compute the total debt ratio, debt/equity ratio, and equity multiplier from the 2005
financial statement data.
26- Compute the current ratio, quick ratio, and cash ratio from the 2005 financial
statement data.
27- A firm has an ROA of 8%, sales of $100, and total assets of $75. What is its profit
margin?
28- A firm has sales of $500, total assets of $300, and a debt/equity ratio of 2. If its return on
equity is 15%, what is its net income?
29- You are offered an investment that requires you to put up $5,000 today in exchange for
$12,000 15 years from now. What is the annual rate of return on this investment?
30- What is the future value of $25,000 received today if it is invested at 6.5% compounded
annually for six years?
31- How much would you have to invest today at 8% compounded annually to have $25,000
available for the purchase of a car four years from now?
32- You can earn 4.8% annually at your bank. If you deposit $1,200 today, how long must
you wait until your account has grown to $2,500?