Practice Exam I-Finance 301
1. Financial management decisions have three important questions that need to be
answered. Please provide the question that concerns with the following item:
a. Capital budgeting- What long-term investments or projects should the
business take on?
b. Capital structure- How should we pay for our assets?
Should we use debt or equity?
c. Working capital management- How do we manage the day-to-day
finances of the firm?
2. Provide one advantage and one disadvantage concerning the different forms of
business:
a. Sole Proprietorship- single owner keeps all profits, easy to start, least
regulated, taxed only once as personal income, - limited to life of owner,
unlimited liability, difficult to sell ownership interest, equity capital limited
to owner’s personal wealth
b. Partnership- two or more owners, more capital available, relatively easy
to start, income taxed once as personal income – unlimited liability,
partnership dissolves when one partner dies or wishes to sell, difficult to
transfer ownership
c. Corporation- Limited liability, Unlimited life, Separation of ownership and
management, Transfer of ownership is easy, Easier to raise capitalSeparation of ownership and management, Double taxation (income
taxed at the corporate rate and then dividends taxed at personal rate)
3. What is the main goal of financial management?
Maximize value to shareholders
4. If you want to hire somebody to complete your tax return next year. Who would
be the principal and the agent in this situation?
Principal = you Agent = CPA
5. If you take your company public which market would you be utilizing, primary or
secondary?
Primary- IPO (initial public offering) secondary market would then be the market preexisting stock would trade in
6. The New York Stock Exchange is an example of what type of market, dealer or
auction?
NYSE = auction NASDAQ = dealer
8. Compute the average and marginal tax rate using the following table on taxable
income of 240,000:
Taxable Income
Tax Rate
$0-50,000
15%
$7,500
50,001-75,000
25%
$6,250
75,001-100,000
34%
$8,500
100,001-335,000
Marginal – 39%
39%
54,600
Average – 32% $76,850/ $240,000
marginal = $93,600
9. For the following items, recognize whether it’s a use or source of cash
a. Increase to Accounts Receivable - use
b. Decrease in Notes Payable - use
c. Decrease in Long-Term Debt note - use
d. Decrease in Accounts Receivable – source
e. Increase in Notes Payable – source
f. Decrease in PP&E – source
10. Define the following two terms
a. Planning horizon - divide decisions into short-run decisions (usually next
12 months) and long-run decisions (usually 2 – 5 years)
b. Aggregation - combine capital budgeting decisions into one big project
11. From the following income statement information, calculate the net income and
operating cash flow.
Net Sales
Cost of goods sold
Operating exp
Depreciation
Interest Expense
Tax rate
Dividend payout ration
16,500
$10350
3118
1120
900
34%
50%
NI = 668 16500-10350-3118-1120-900= 1012 -344 = 668
OCF = 1912EBIT + 1120 – 344(taxes) = 2688
Now suppose in the previous problem, there are 650 shares outstanding, what is the
EPS? What is the DPS?
NI/No of shares outstanding 668/650 = $1.03
DPS; Div. Paid/ NO. of shares outstanding
Dividends paid = 668 *.5 = 334
DPS = 334/650 = .5138
12. Net fixed assets (NFA) of ABC corp. as of Dec. 2002 is 6.5 million and NFA
showed an asset balance of 3 million last year. ABC corp’s income statement for
the year 2002 showed depreciation expense of $650,000. What was the Net
Capital Spending of 2002
NCS = End FA- Beg FA + Dep
6.5 -3 + .65 = 4.15 million
13. Company M has a current ratio of 2, quick ratio of 1.8, net income of $180,000,
profit margin of 10% and account receivable balance of $150,000. What is the firm’s
Average Collection period?
ACP = 365/ A/R turnover
AR turnover = Sales/ Avg. accounts receivable
X / 150,000
PM = NI/Sales
.1 = 180,000/X X = 1,800,000 for sales
SO… 1,800,000/150,000 = 12 AR turnover
ACP = 365/12= 30.4 days it takes about 30 days on average to collect back from
customers
14. External Financing and Growth:
The most recent financial statements for Last in Line, Inc., are shown here:
Income Statement
Balance Sheet
Sales $3,400
Current Assets $4,400
Current Liabilities $880
Costs 2,800
Fixed Assets 5,700
Long-term debt 3,580
Taxable income $600
Equity 5,640
Taxes (34%) 204
Total $10,100
Total $10,100
Net Income $396
Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity
are not. The company maintains a constant 50 percent dividend payout ratio. As with
every other firm in its industry, next year’s sales are projected to increase by exactly 15
percent. What is the external financing needed?
Next Year:
Sales = 3,910
Costs = 3,220
Taxable Income = 690
Taxes (34%) = 234.6
Net Income = 455.4
Current Assets = 5060
Fixes Assets = 6,555
TA = 11,615
Current Liabilities = 1,012
Long-term debt = 3,580
Equity = 5,640 + 227.7 = 5867.7
Total = 10,459.7
External Financing needed = 11,615- 10,459.7 = $1,155.3
15. If ABC Corp. has Profit margin of 12% debt equity ratio of 2.1, debt ratio of .60 and
total asset $35,000 and sales of $22,000. The dividend payout has remained constant
as 40% What is the SGR?
SGR = ROE * b / 1- (ROE * b) ROE = NI/TE Debt Ratio = TD/TA PM = NI/Sales
B= 1-.4= .6 .12 = NI/22,000 NI = 2640 .6 = TD/35000 TD = 21000 35000 = 21000 + TE
TE=14000
ROE = 2640/14000 = .1886 or 18.86% SO: SGR = .1886 * .6/ 1- (.1886 * .6) = .1132/1-.1132 =
.1276 or 12.76%