Review for Exam 3

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Review for Exam 3
Instructions: Please read carefully
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The Final Exam is on Saturday, May 17, 8:00 AM - 11:00 AM
The exam will have 20 multiple choice questions and 5 work problems.
Questions in the multiple choice section will be either concept or calculation
questions. The calculation questions will be similar to those in the homework and
review. However, the concept questions will be related to any topic we have
covered in the class. The concept questions in the review are only some sample
questions. You should NOT study only topics in the review.
For the work problems, you need to solve the problems without knowing the
possible answers. The questions will be similar to those in the homework and the
review except that the possible solutions are not given.
You can bring a formula sheet to the exam.
Chapter 11
1.
Assume the U.S. government was to decide to increase its budget deficit. This
will cause __________ to increase.
A) interest rates
B) the output of the economy
C) both a and b
D) neither a nor b
2.
A big increase in government spending is an example of __________.
A) a demand shock
B) a supply shock
C) an unsurprising shock
D) none of the above
3.
If you expect a larger interest rate increase than other market participants do, you
would
A) buy long-term bonds
B) buy short-term bonds
C) buy long-term government bonds only
D) buy short-term government bonds only
4.
Which of the following would not be considered a supply shock?
A) a change in the price of imported oil
B) frost damage to the orange crop
C) a change in the level of education of the average worker
D) an increase in the level of government spending
5.
A trough is __________.
A) a transition from an expansion in the business cycle to the start of a
contraction
B) a transition from a contraction in the business cycle to the start of an
expansion
C) only something used by farmers to feed pigs and is not a term in investments
D) none of the above
6.
The ___ stage of the business cycle would be a good time to invest in firms
engaged in natural resource extraction and processing such as minerals and
petroleum.
A) Peak
B) Contraction
C) Trough
D) Expansion
7.
__________ the ratio of the number of people classified as unemployed to the
total labor force.
A) The capacity utilization rate is
B) The participation rate is
C) The unemployment rate is
D) None of the above are
8.
An analyst starts by examining the broad economic environment and then
considers the implications of the outside environment on the industry in which the
firm operates. Finally, the firm's position within the industry is examined. This is
called __________ analysis.
A) bottom-up
B) outside-inside
C) top-down
D) upside-down
Chapter 12
9.
__________ is defined as the present value of all cash proceeds to the investor in
the stock.
A) dividend payout ratio
B) intrinsic value
C) market capitalization rate
D) plow-back ratio
10.
__________ are analysts who use information concerning current and prospective
profitability of a company to assess its fair market value.
A) credit analysts
B) fundamental analysts
C) systems analysts
D) technical analysts
11.
You wish to earn a return of 10% on each of two stocks, A and B. Each of the
stocks is expected to pay a dividend of $4 in the upcoming year. The expected
growth rate of dividends is 6% for stock A and 5% for stock B. Using the
constant growth DDM, the intrinsic value of stock A __________.
A) will be higher than the intrinsic value of stock B
B) will be the same as the intrinsic value of stock B
C) will be less than the intrinsic value of stock B
D) more information is necessary to Answer this question
12.
The market capitalization rate on the stock of Aberdeen Wholesale Company is
10%. Its expected ROE is 12% and its expected EPS is $5.00. If the firm's plowback ratio is 40%, its P/E ratio will be __________.
A) 8.33
B) 11.54
C) 19.23
D) 50.00
13.
Rose Hill Trading Company is expected to have EPS in the upcoming year of
$6.00. The expected ROE is 18.0%. An appropriate required return on the stock
is 14%. If the firm has a plowback ratio of 60%, its growth rate of dividends
should be __________.
A) 2.5%
B) 4.0%
C) 8.4%
D) 10.8%
14.
Grott and Perrin, Inc. has expected earnings of $3 per share for next year. The
firm's ROE is 20% and its earnings retention ratio is 70%. If the firm's market
capitalization rate is 15%, what is the present value of its growth opportunities?
A) $20
B) $70
C) $90
D) $115
15.
Cache Creek Manufacturing Company is expected to pay a dividend of $4.20 in
the upcoming year. Dividends are expected to grow at the rate of 8% per year.
The riskfree rate of return is 4% and the expected return on the market portfolio is
14%. Investors use the CAPM to compute the market capitalization rate on the
stock, and the constant growth DDM to determine the intrinsic value of the stock.
The stock is trading in the market today at $84.00. Using the constant growth
DDM and the CAPM, the beta of the stock is __________.
A) 1.4
B) 0.9
C) 0.8
D) 0.5
16.
Westsyde Tool Company is expected to pay a dividend of $2.00 in the upcoming
year. The risk-free rate of return is 6% and the expected return on the market
portfolio is 12%. Analysts expect the price of Westsyde Tool Company shares to
be $29 a year from now. The beta of Westsyde Tool Company's stock is 1.20.
Using a one-period valuation model, the intrinsic value of Westsyde Tool
Company stock today is __________.
A) $24.29
B) $27.39
C) $31.13
D) $34.52
17.
Ace Frisbee Corporation produces a good that is very mature in their product life
cycles. Ace Frisbee Corporation is expected to pay a dividend in year 1 of $3.00,
a dividend in year 2 of $2.00, and a dividend in year 3 of $1.00. After year 3,
dividends are expected to decline at the rate of 2% per year. An appropriate
required return for the stock is 8%. Using the multistage DDM, the stock should
be worth __________ today.
A) $13.06
B) $13.38
C) $18.25
D) $18.78
18.
A firm is expected to produce $3.00 per share in earnings next year. If the firm
plans to plow back 30% of those earnings at a reinvestment rate of 25%, what will
be the expected growth in dividends?
A) 7.50%
B) 15.0%
C) 25.0%
D) 30.0%
19.
Next year's earnings are estimated to be $5.00. The company plans to reinvest
20% of its earnings at 15%. If the cost of equity is 9%, what is the present value
of growth opportunities?
A) $9.09
B) $10.10
C) $11.11
D) $12,21
Chapter 13
20.
Which of the following balance sheet items is not considered an asset?
A) inventory
B) accounts receivable
C) accrued taxes
D) All of the above are assets
21.
A firm has a ROE of 20% and a market-to-book ratio of 2.38. Its P/E ratio is
__________.
A) 8.40
B) 11.90
C) 17.62
D) 47.60
Use the following to answer questions 32-41:
The financial statements of Shuswap Lake Manufacturing Company are given below.
Note: The common shares are trading in the stock market for $160 each.
22.
The firm's current ratio for 2005 is __________.
A) 0.90
B) 1.44
C) 1.89
D) 2.80
23.
The firm's leverage ratio for 2004 is __________.
A) 0.90
B) 1.56
C) 1.89
D) 3.13
24.
The firm's fixed asset turnover ratio for 2005 is __________. Please keep in mind
that when a ratio involves both income statement and balance sheet numbers, the
balance sheet numbers for the beginning and end of the year must be averaged.
A) 3.39
B) 3.60
C) 6.00
D) 12.00
25.
The firm's asset turnover ratio for 2005 is__________. Please keep in mind that
when a ratio involves both income statement and balance sheet numbers, the
balance sheet numbers for the beginning and end of the year must be averaged.
A) 0.90
B) 1.56
C) 1.92
D) 2.80
26.
The net income of the company is $970. Taxes payable decrease by $120,
depreciation is $85, and fixed assets are sold for $90. If the firm's inventories also
decline by $65, what is the total change in cash for the firm for all activities?
A) Increase of $970
B) Increase of $1090
C) Decrease of $970
D) Decrease of $1090
27.
A firm has an ROE of 3%, a debt/equity ratio of 0.5, a tax rate of 40%, and the
interest rate on its debt is 10%. Its ROA is __________.
A) 4%
B) 6%
C) 6.67%
D) 7.50%
28.
A firm purchases goods on credit worth $150. The same firm pays off $100 in old
credit purchases. An investment is made via the purchase of a new facility and
equity is issued in the amount of $300 to pay for the purchase. What is the change
in net cash provided by operations?
A) $50 increase
B) $100 increase
C) $150 increase
D) $250 increase
29.
What ratio will definitely increase when a firm increases its annual sales with no
corresponding increase in assets?
A) Asset turnover
B) Current ratio
C) Liquidity ratio
D) Quick ratio
30.
Alumbat Corporation has $800,000 of debt outstanding, and it pays an interest
rate of 10 percent annually on its bank loan. Alumbat's annual sales are
$3,200,000; its average tax rate is 40 percent; and its net profit margin on sales is
6 percent. If the company does not maintain a TIE ratio of at least 4 times, its
bank will refuse to renew its loan, and bankruptcy will result. What is Alumbat's
current TIE ratio?
a.
b.
c.
d.
e.
2.4
3.4
3.6
4.0
5.0
Answers
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Answer: C
Answer: A
Answer: B
Answer: D
Answer: B
Answer: A
Answer: C
Answer: C
Answer: B
Answer: B
Answer: A
Answer: B Difficulty: Medium
P
1 − .40
=
= 11.54
E .10 − .12(.40)
13.
Answer: D
g = .18(.60) = .1080
14.
Answer: B
PVGO =
3(1 − .7 )
3
−
= 70
.15 − .2(.7 ) .15
15. Answer: B
k=
4.20
+ .08 = .1300
84.00
β=
.13 − .04
= .90
.14 − .04
16. Answer: B
V0 =
17. Answer: A
V3 =
2.00 + 29.00
= 27.39
1 + .1320
1.00(1 − .02 )
= 9.80
.08 − (− .02 )
V0 = 3.00(.926 ) + 2.00(.857 ) + (1.00 + 9.80 )(.794 ) = 13.06
18. Answer: A
g = 0.30 x 0.25 = .075
19. Answer: C
g = .20 x .15 = .03. P = 4.0 / (.09 - .03) = 66.67. PVGO = 66.67 - (5/.09) = 11.11
20. Answer: C
21. Answer: B
P 2.38
=
= 11.9
E .20
22. Answer: B
CR =
1,150,000
= 1.44
800,000
23. Answer: D
L=
2,500,000
= 3.13
200,000 + 600,000
24. Answer: A
FAT =
5,000,000
= 3.39
1,400,000 + 1,550,000
2
25. Answer: C
AT =
5,000,000
= 1.92
2,500,000 + 2,700,000
2
26. Answer: B
cash flow = 970 - 120 + 85 + 90+ 65 = 1090
27. Answer: C
ROA =
1 ⎛ .03 ⎞ .50
(.10 ) = .0667
⎜
⎟+
1.50 ⎝ 1 − .40 ⎠ 1.50
28. Answer: A
29. Answer: A
30. ANS:
E
TIE = EBIT/I, so find EBIT and I.
Interest = $800,000 × 0.1 = $80,000.
Net income = $3,200,000 × 0.06 = $192,000.
Taxable income = EBT = $192,000/(1 – T) = $192,000/0.6 = $320,000.
EBIT = $320,000 + $80,000 = $400,000.
TIE = $400,000/$80,000 = 5.0 times.
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