FIN 335 Test 1
Summer 2011
Clay M. Moffett
Name: _______________________________________
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1.
Which one of the following is a capital structure decision?
a. Should a new machine be purchased this year?
b. Should the credit terms offered to customers be revised?
c. Should debt or equity financing be used to purchase a building?
d. Should the level of inventory be increased?
2.
Which one of the following functions is generally under the control of the corporate treasurer?
a. cost accounting
b. tax management
c. financial/cash planning
d. financial accounting
3.
Which one of the following best describes the liability a general partner has for the partnership
debts?
a. none
b. liability limited to amount invested in the firm
c. liability limited based on percentage ownership
d. unlimited
4.
Which one of the following provides you with the greatest control over a firm’s daily operations?
a. limited partner
b. major stockholder in a corporation
c. minor stockholder in a joint stock company
d. sole proprietor
5. All stocks that trade on the New York Stock Exchange are:
a. over-the-counter securities.
b. Primary market securities
c. AMEX securities
d. Listed securities
e. Privately placed securities
6. Which of the following statements regarding agency problems and costs are correct?
a) An agency problem exists when there is a conflict of interest between the stockholders and
the shareholders of a firm.
b) An agency problem exists when there is a conflict of interest between a principal and an
agency of the Federal government.
c) An agency cost occurs when firm management avoids risky projects that would favorably
affect the stock price because the managers are worried about keeping their jobs.
d) An agency cost occurs when management chooses an action that benefits the shareholders but
reduces management compensation.
e) None of the above.
7.
8.
An asset that can be converted into cash quickly by greatly reducing the selling price is:
a. Marketable but not liquid
b. Liquid and marketable,
c. Liquid but not marketable
d. Liquid only
e. none of the above
Which one of the following is a primary market transaction?
a. Theo, the president of ABC, sells some of his shares in ABC on the NYSE
b. ABC offers newly issued shares to the general public
c. Tom instructs his broker to sell all of his shares in ABC, Inc.
d. Mary gifts shares of ABC stock to her son
Use these financial statements to answer questions 9 through 13.
Balance Sheet
2007
2008
Cash
$1,700
$1,600
Accounts receivable 14,300
17,400
Inventory
22,500
23,700
Net fixed assets
82,900
81,600
Total assets
$121,400 $124,300
2007
Accounts payable
$13,800
Long-term debt
47,500
Common stock
17,000
Retained earnings
43,100
Total liabilities and equity $121,400
Income Statement
Net Sales
$163,700
Costs
108,200
Depreciation
14,100
EBIT
41,400
Interest
3,800
Taxable income
37,600
Taxes
13,200
Net Income
$ 24,400
9.
10
What is the amount of the operating cash flow?
a. $24,400
b. $30,500
c. $38,500
What is the cash flow to stockholders for 2008?
a. $5,000
b. $19,400
c. $21,700
11. What is the net new borrowing for 2008?
a. -$2,700
b. $200
c. $1,100
d. $42,300
d. $29,400
d. $4,900
12. What is the change in net working capital for 2008?
a. $5,100
b. $6,300
c. $24,700
d. $25,200
13. What is the cash flow to creditors for 2008?
a. -$2,700
b. -$1,100
c. $1,100
d. $2,700
2008
$12,900
48,600
22,000
40,800
$124,300
14. A firm currently has an average tax rate of 20 percent and a marginal tax rate of 25 percent based on
its current taxable income of $36,600. What will the firm’s average tax rate be if it increases its taxable
income by $1,100?
a. 20 percent
b. 20.05 percent
c. 20.09 percent
d. 20.15 percent
15. Redding Industrial Supply had common stock of $6,800 and retained earnings of $4,925 at the
beginning of the year. At the end of the year, the common stock balance is $7,000 and the retained
earnings account balance is $5,498. The net income for the year is $938. What is the retention ratio?
a. 17.59 percent b. 38.91 percent
c. 61.09 percent
d. 82.41 percent
16. Ann is interested in purchasing Ted's factory. Since Ann is a poor negotiator, she hires Mary to
negotiate a purchase price. Identify the parties to this transaction.
a. Mary is the principal and Ann is the agent.
b. Ted is the principal and Ann is the agent.
c. Ted is the agent and Ann is the principal.
d. Ann is the principal and Mary is the agent.
17. If a firm uses cash to purchase inventory, its quick ratio will increase.
a.
True
b.
False
18. Use the following tax table to answer this question.
Taxable Income
$0-50,000
$50,001-75,000
$75,001-100,000
$100,001-335,000
Tax Rate
15%
25%
34%
39%
Pools, Inc., has taxable income of $77,000 for the year. Which one of the following statements is
correct concerning Pools' tax situation?
a. Pools' average tax rate is 18.74 percent.
b. Pools' average tax rate is 34.00 percent.
c. Pools' marginal tax rate is 15.00 percent.
d. Pools' marginal tax rate is 18.74 percent.
19. You currently have $7,200 in your investment account. You can earn an average rate of return of 11.7
percent per year. How long will you have to wait until your account is worth $50,000?
a. 9.47 years
b. 11.28 years
c. 14.67 years
d. 17.51 years
20. Your savings account is currently worth $1,200. The account pays 4.5 percent interest compounded
annually. How much will your account be worth 6 years from now?
a. $1,524.00
b. $1,562.71
c. $1,611.18
d. $1,627.19
21. You purchased a new 1972 Plymouth Barracuda Ragtop with a 426-Hemi 36 years ago at a cost of
$3,900. You took care of this car, realizing its divine nature. Today in 2010, you sold that car for
$1,750,000 in order to afford tuition and meals and buy a little gas for your moped. What annual rate
of return did you earn on this vehicle?
a. 1.42 percent b. 18.48 percent
c. 8.48 percent
d. 8.38 percent
22. The corporate officer responsible for the accounting function is the ___________?
a. Treasurer
b. Controller
c. Grand Poohbah
d. Marketing dude.
23. The cost of capital for a firm…
a. should approximate 0.
b. equals the interest rate
c. rate demanded by the market on shares
d. is irrelevant
24. Over the past 30 years your parents saved money each month for their retirement. They retired this
week and expect to live another 28 years. Their investment account is currently valued at $487,300
and is expected to earn 7 percent annually in the future. How much money can they withdraw
annually if they wish to spend all of their money during their lifetime?
a. $5,158.75
b. $6,038.59
c. $39,269.75
d. $40,149.59
25. Suzie has $16,000 in her investment account today. She saves $500 a quarter and earns 8 percent
interest, compounded quarterly. How much money will she have in her account three years from
now?
a. $16,821.87
b. $18,509.53
c. $22,300.16
d. $26,997.91
26. Tom invested $150 at the beginning of each month for the last 14 years and earned 6 percent interest,
compounded monthly. Julia invested $300 at the end of each month for the past 7 years and earned 6
percent interest, compounded monthly. Today, Tom has ______ than Julia.
a. $8,164.15 less
b. $8,320.26 less
c. $8,164.15 more
d. $8,320.26 more
27. A series of equal cash flows that occur at the beginning of each time period for a limited number of
time periods is called a(n):
a. ordinary annuity.
b. beginning annuity.
c. annuity due.
d. perpetuity.
e. perpetuity due.
28. In Canada and the United Kingdom, a perpetuity is also called a(n):
a. consul.
b. infinite bond.
c. infinity flow.
d. dowry.
e. forever bond.
29. Suppose KLM, Inc., just received a patent on a new anti-cholesterol drug. This patent is an:
a. intangible fixed asset.
b. Can be depreciated
c. Is a R&D Liability
d. Is worthless to me b/c I use Metamucil
e. This answer shouldn’t be selected.
30. Which one of the following is a breakdown of the ROE into its three component parts?
a. equity analysis
b. efficiency breakout
c. Du Pont identity
d. sustainable growth
e. profitability ratios
32. Suppose given NI= $132,186, Sales = $2,678,461, TA = $784,596 and Debt/Asset = 0.48062. Calc
ROE.
a. 32.44
b. 44.32
c. nope
d. not this one either.
33. Depreciation:
a. allocates the expense incurred by use of a new asset based on it’s market value
b. Was invented by Pee Wee Herman
c. Affects the liquidity ratio
d. is a type of humble humor in Finance
e. is mythical
Formula Sheet.
Cash Flow From Assets = Operating Cash Flow – Net Capital Spending – Changes in NWC
ROE = PM * AT * EM
Internal Growth Rate 
t = ln(FV / PV) / ln(1 + r)
ROA  b
1 - ROA  b
Sustainabl e Growth Rate 
r = (FV / PV)1/t – 1
ROE  b
1 - ROE  b
FIN 335 Test 1
Summer 2014
Answer Sheet
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
Name: _______________________________________
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
D
D
D
D
D
D
D
D
D
D
D
D
D
D
D
D
D
D
D
D
D
D
D
D
D
D
D
D
D
D
D
D
D
E
E
E
E
E
E
E
E
E
E
E
E
E
E
E
E
E
E
E
E
E
E
E
E
E
E
E
E
E
E
E
E
E
Answer Sheet:
1. c
2. c
3. d
4. d
5. d
6. e
7. a
8. b
9. d
10. c
11. c
12. a
13. d
14. d
15. c
16. d
17. b
18. a
19. d
Operating cash flow $41,400 + $14,100 − $13,200 = $42,300
Dividends paid = $24,400 − ($40,800 − $43,100) = $26,700
Cash flow to stockholders = $26,700 − ($22,000 − $17,000) = $21,700
Net new borrowing = $48,600 − $47,500 = $1,100
Change in net working capital = ($1,600 + $17,400 + $23,700 − $12,900) − ($1,700 + $14,300 + $22,500
− $13,800) = $5,100
Cash flow to creditors = $3,800 − ($48,600 − $47,500) = $2,700
Average tax = [($36,600 × .20) + ($1,100 × .25)] / ($36,600 + $1,100) = 20.15 percent
Retention ratio = ($5,498 − $4,925) / $938 = .61087 = 61.09 percent
$50,000 = $7,200 × (1 + .117)t
6.94444 = 1.117t
ln6.94444= t × ln1.117
1.93794 = .11065t
t = 17.51
Enter
N
Solve for
20.. b
11.7
I/Y
-7,200
PV
PMT
4.5
I/Y
-1,200
PV
PMT
50,000
FV
17.51
FV = $1,200 × (1 + .045)6
FV = $1,562.71
Enter
6
N
Solve for
FV
1,562.71
21. b
22. b
23. c
24. d


1  1 / 1  .07 28 
$487 ,300  x  
 ; $487,300 = x  12.137111; APV = $40,149.59
.07


Enter
28
N
7
I/Y
487,300
PV
3×4
N
8/4
I/Y
-16,000
PV
Solve for
25. d
Enter
Solve for
PMT
FV
40,149.59
-500
PMT
FV
26,997.91
26.. d
 .06 1412 
 1

1 
12 


  1  .06  ; A FV = $150 × 263.616290; A FV =
Tom: A dueFV  $150 

 due
due
.06
12 

12
$39,542.44
Enter
14×12
N
6/12
I/Y
PV
Solve for
-150BGN
PMT
FV
39,542.44
 .06  712 
  1
1 
 12 

Julia: AFV  $300 
; AFV = $300 × 104.073927; A FV = $31,222.18
.06
12
Enter
7×12
N
6/12
I/Y
PV
Solve for
-300
PMT
FV
31,222.18
Difference: $39,542.44 − $31,222.18 = $8,320.26; Tom has $8,320.26 more than Julia.
27.
28.
29.
30.
31.
32.
c
a
a
c
c
A/A – D/A = E/A =>> .51937. 1/(E/A) = A/E = 1.9254.
Using the Du Pont identity to calculate ROE, we get:
ROE = (Profit margin)(Total asset turnover)(Equity multiplier)
ROE = (Net income / Sales)(Sales / Total assets)(Total asset / Total equity)
ROE = ($132,186 / $2,678,461)($2,678,461 / $784,596)($784,596 / $407,490)
ROE = 0.3244 or 32.44%
33. e