BUS 330
Spring 2015
Exam 1
Part I: Multiple Choice
Name:____________________________
ID #:______________________________
Select the one best answer directly on the exam.
1.
When a firm “goes public”, this means that:
a.
b.
c.
d.
e.
Its shares are held by more than one person.
It admits its mistakes to its shareholders.
Shares of the company are made available through an initial public offering.
It announces its intention to acquire another company.
None of the above.
2.
The _____ is an example of a physical location exchange. The _____ is an example of an overthe-counter market.
a.
b.
c.
d.
e.
3.
New York Stock Exchange
NASDAQ
New York Stock Exchange
NASDAQ
Federal Reserve Board
Securities and Exchange Commission
Federal Reserve Board
NASDAQ
Securities and Exchange Commission
Federal Deposit Insurance Corporation
The sum of a firm’s paid-in-capital and retained earnings is:
a.
b.
c.
d.
e.
4.
The firm’s market value
The firm’s market value per share.
The firm’s Net Operating Working Capital
The firm’s Working Capital
The firm’s book value.
The abbreviation NOPAT stands for:
a.
b.
c.
d.
e.
Net Operating Profit After Taxes
Non-Operational Principal Adjusted for Time
Never Oppose People Against Taxes
Non-Original Priority Allowance Trust
Nominal Option Pool Annuity Tender
5.
Corporations pay income tax on their income after interest expense is deducted but before
dividends are distributed to shareholders. This means that the firm’s choice of financing (debt or equity)
affects the total amount of tax paid by the firm and the investors. A firm that wants to please its
investors by reducing total tax payments will:
a.
b.
c.
d.
e.
Pay more dividends than it otherwise would.
Use more debt finance and less equity finance than it otherwise would.
Pay off its debts earlier than it otherwise would.
Hold more cash than it otherwise would.
Earn less operating income than it otherwise would.
6.
Your analysis of a company’s financial statements shows that the company’s Free Cash Flow
(FCF) is negative. This is not unusual when:
a. The company is growing rapidly and has large capital expenditures.
b. The company operates in a mature market with stable income.
c. The company operates in a capital-intensive industry, so depreciation is a large part of the
annual expenses.
d. The company pays most of its net income as dividends to shareholders.
e. The company has a high turnover of inventory.
7.
The recent law in the USA that (among other requirements) requires a corporation’s CEO and
CFO to certify the accuracy of the firm’s financial statements is the:
a.
b.
c.
d.
e.
Sarbanes-Oxley Act
Dodd-Frank Act.
Buckley Act.
Glass-Steagall Act
Smoot-Hawley Act
8.
Which of the following forms of business organization are created to try to combine the tax
advantages of a sole proprietorship with the limited liability advantages of a corporation?
(i)
(ii)
(iii)
a.
b.
c.
d.
e.
The S-corporation
The limited liability company
The limited liability partnership
Only (i) is true.
Only (ii) is true.
Only (iii) is true.
Both (i) and (ii) are true.
(i), (ii), and (iii) are all true.
9.
The difference between a “friendly acquisition” and a “hostile takeover” is that the second is
opposed by:
a.
b.
c.
d.
e.
10.
The government.
The customers of the company that is being acquired.
The shareholders of the company that is being acquired.
The managers and directors of the company that is being acquired.
The shareholders of the company that is making the acquisition.
Correctly match the terms in the left column with the definitions in the right column:
1. Spot market
A.
2. Futures market
B.
3. Private market
C.
4. Secondary market
D.
5. Money market
E.
a.
1 + B; 2 + D; 3 + E; 4 + A; 5 + C
b.
1 + C; 2 + A; 3 + D; 4 + B; 5 + E
c.
1 + E; 2 + C; 3 + A; 4 + D; 5 + B
d.
1 + D; 2 + E; 3 + B; 4 + C; 5 + A
e.
none of the above is correct.
A market in which participants agree today to buy or sell an
asset at some future date.
Financial markets in which funds are borrowed or loaned for
short periods (less than a year).
A market in which transactions are worked out directly between
two parties.
A market in which assets are bought and sold for instant
delivery.
A market in which assets are traded among buyers and sellers
after the assets have been originally issued.
11.
The form(s) of business organization that is regarded as a legal “person” distinct from the
owner(s) of the business is:
(i)
(ii)
(iii)
a.
b.
c.
d.
e.
sole proprietorship
partnership
corporation
only (i) is true.
only (ii) is true.
only (iii) is true.
both (i) and (ii) are true.
both (ii) and (iii) are true.
12.
Correctly match the terms in the left column with the definitions in the right column:
1. Mutual fund
A.
2. Money Market Fund
B.
3. Investment Bank
C.
4. Financial Services Corp. D.
5. Commercial bank
E.
A financial intermediary that collects funds from savers (offering
checking and savings accounts) and making loans to borrowers.
An organization that underwrites and distributes new
investment securities.
A firm that offers a wide variety of financial services – including
banking, investment banking, brokerage operations, and
insurance.
An organization that pools investor funds to purchase financial
instruments and reduce risk through diversification.
An organization that pools investor funds to purchase shortterm, low-risk securities.
a.
1 + B; 2 + D; 3 + E; 4 + A; 5 + C
b.
1 + C; 2 + A; 3 + D; 4 + B; 5 + E
c.
1 + E; 2 + C; 3 + A; 4 + D; 5 + B
d.
1 + D; 2 + E; 3 + B; 4 + C; 5 + A
e.
none of the above is correct.
13.
The a stock’s intrinsic value is:
a.
b.
c.
d.
e.
the total assets divided by the number of shares outstanding.
the total fixed assets minus liabilities, divided by the number of shares outstanding.
total owners’ equity, divided by shares outstanding.
the discounted sum of the firm’s free cash flow, divided by the number of shares outstanding.
none of the above.
14.
In which case are you buying a financial asset in the primary market?
a.
you buy shares of MCD on the stock exchange.
b.
you purchase US Treasury bonds from your broker.
c.
you purchase a mix of different shares through a mutual fund.
d.
you are already an owner of WEN, and choose to purchase additional shares from WEN when
WEN issues new shares to finance overseas expansion.
e.
none of the above.
15.
The senior executives of a corporation are hired (or fired) by the corporation’s:
a.
b.
c.
d.
e.
bondholders.
employees.
shareholders.
customers.
none of the above.
16.
The obligation of a firm’s managers to respond to the interests of the firm’s creditors is based on
_____. The obligation of the firm’s managers to respond to the interests of the shareholders is _____.
a.
professional ethics;
the managers’ employment contracts
b.
industry standards;
the company’s articles of incorporation
c.
the terms of the debt contract;
the managers’ duty to advance the shareholders’
interests.
d.
the managers’ duty to honor the spirit of all contracts; the managers’ responsibility to assure
reasonable profits.
e.
the managers’ legal duty to society’s well-being; the managers’ contract with shareholders
17.
In a bankruptcy reorganization, there is not enough asset value (or discounted cash flow) to pay
all claim holders everything they are owed. Not everyone gets the same percentage of what they hoped
to get. The priority of claims is given by (from highest priority to lowest priority):
a.
b.
c.
d.
e.
stock holders, secured creditors, unsecured creditors
secured creditors, unsecured creditors, stockholders
unsecured creditors, secured creditors, stock holders
secured creditors, stock holders, unsecured creditors
unsecured creditors, secured creditors, stock holders
18.
Some financial ratios are useful to a lender who wants to evaluate the ability of a company to
meet its debts as they come due. Other ratios are especially useful to analysts or managers who wish to
evaluate the operational performance of the company (compared to another company or the industry
average). The ____ ratio is an example of the first type of ratio, and the ____ is an example of the
second.
a.
b.
c.
d.
e.
fixed asset turnover
basic earning power
total assets turnover
operating margin
quick (acid test)
price/earnings ratio
inventory turnover ratio
debt ratio
days sales outstanding ratio
operating margin
19.
The _____ describes what the firm did during the year to increase or decrease its cash. The
_____ is the financial statement that describes the firm’s operating performance. The _____ is the
financial statement that describes the company’s financial position at a particular date.
a.
b.
c.
d.
e.
statement of cash flows
income statement
balance sheet
balance sheet
income statement
statement of stockholders’ equity
statement of stockholders’ equity
balance sheet
income statement
statement of stockholders’ equity
income statement
balance sheet
none of the above.
20.
If a corporation pays 40% of its income as tax (typical in the USA), the amount of pre-tax income
needed to fund $3 of dividend payments to shareholders is:
a.
b.
c.
d.
e.
$5
$1.20
$1.80
$10
$8
Part II: Below are the income statements and balance sheets of two companies DNKN Dunkin Donuts
and KKD Krispy Kreme Donuts – both dedicated to the mission of making the world a fatter place. (That
was a joke – they both make donuts.)
For DNKN – the price per share on Monday morning is $46.70. The P/E ratio (trailing twelve months) is
28.3. The forward P/E is 21.3.
For KKD -- the price per share on Monday morning is $21.06. The P/E ratio (trailing twelve months) is
38.2. The forward P/E is 25.1.
1. What is the ROE (return on equity) of KKD?
2. Compare the quick ratios of the two companies. What does the comparison tell you?
3. Which firm has a better return on total assets?
4. Compare the Basic Earning Power of the two companies. Which company has stronger Basic
Earning Power?
5. If earnings per share of DNKN is $1.65, what is the estimate of earnings per share for next year?
6. Compare the “Times Interest Earned” of the 2 companies. Which company is in better shape to
take on more debt?