BUS 330 Corporate Finance
Spring 2015
Practice Exam 1
Part I: Multiple Choice: Select the best answer for each of the questions below:
1.
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)
sole proprietorship
partnership
corporation
a.
b.
c.
d.
e.
only (i) is true.
only (ii) is true.
only (iii) is true.
both (i) and (ii) are true.
both (ii) and (iii) are true.
2.
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.
3.
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.
4.
If frequent trading among well-informed buyers and sellers of an asset ensures that the market
price of the asset is close to its intrinsic value, then we have:
a.
b.
c.
d.
e.
an efficient market.
a primary market.
a futures market
a spot market
none of the above.
5.
The advantage to the owner of forming a corporation instead of a sole proprietorship is:
a.
b.
c.
d.
e.
the corporation has a limited lifespan.
ownership shares of a corporation are more difficult to transfer.
corporations find it more difficult than proprietorships to raise large amounts of capital.
income to the owners of the corporation will be taxed twice.
the corporation’s liabilities are not the liabilities of the owner of the corporation.
6.
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.
7.
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
8.
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
9.
Lenders must carefully select borrowers, then design contracts that protect their rights against
possible mishaps or abuses on the part of the borrower, and then ensure that the terms of the contract
are being fulfilled. If there are many lenders, they must also ensure that the costs of the contract design
and supervision are being shared by all lenders proportionately. When the lenders accomplish this by
“hiring” a firm to do this on their behalf – they are using a:
a.
financial intermediary
b.
c.
d.
e.
investment bank
stock broker
stock exchange
derivative contract
10.
Some financial 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),
potential lenders, other financial ratios are more useful to a lender who wants to evaluate the ability of
a company to meet its debts as they come due. The ____ ratio is an example of the first type of ratio,
and the ____ ratio is an example of the second.
a.
b.
c.
d.
e.
current
basic earning power
total assets turnover
operating margin
inventory turnover
price/earnings
inventory turnover
debt
days sales outstanding
quick (acid test)
11.
The _____ describes how much (and why) a firm’s equity changed during a year. 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.
income statement
statement of stockholders’ equity
statement of cash flows
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.
12.
If a corporation pays 40% of its income as tax (typical in the USA), the amount of pre-tax income
needed to fund $6 of dividend payments to shareholders is:
a.
b.
c.
d.
e.
$6
$8
$1.60
$10
$40
Part II: Below are 2 sets of financial statements. One is Target (TGT) which is a US-based retail clothing
chain. The other is Kohl’s (KSS), another clothing retailer operating in the same market segment. Answer
the following questions, using ratio analysis when and where appropriate to support your analysis:
Balance Sheet
Target (TGT)
Current Assets
Cash And Cash
Equivalents
Short Term Investments
Net Receivables
Kohls (KSS)
695,000
971,000
-
-
-
142,000
Inventory
8,766,000
3,874,000
Other Current Assets
2,112,000
305,000
11,573,000
5,292,000
-
64,000
31,378,000
8,745,000
Goodwill
-
-
Intangible Assets
-
-
Accumulated Amortization
-
-
Other Assets
Deferred Long Term Asset
Charges
1,602,000
277,000
-
-
44,553,000
14,378,000
11,617,000
2,597,000
1,160,000
139,000
-
-
Total Current Liabilities
12,777,000
2,736,000
Long Term Debt
12,622,000
4,722,000
1,490,000
560,000
1,433,000
382,000
-
-
-
-
28,322,000
8,400,000
-
-
Total Current Assets
Long Term Investments
Property Plant and Equipment
Total Assets
Liabilities
Current Liabilities
Accounts Payable
Short/Current Long Term
Debt
Other Current Liabilities
Other Liabilities
Deferred Long Term Liability
Charges
Minority Interest
Negative Goodwill
Total Liabilities
Stockholders' Equity
Misc Stocks Options Warrants
Redeemable Preferred Stock
-
-
Preferred Stock
-
-
Common Stock
53,000
4,000
12,599,000
11,462,000
Retained Earnings
Treasury Stock
-
Capital Surplus
4,470,000
Other Stockholder Equity
-891,000
-8,052,000
2,598,000
-34,000
Total Stockholder Equity
16,231,000
5,978,000
Net Tangible Assets
16,231,000
5,978,000
Income Statement
Period Ending
Total Revenue
72,596,000
19,031,000
Cost of Revenue
51,160,000
12,087,000
Gross Profit
21,436,000
6,944,000
-
-
15,375,000
4,313,000
Operating Expenses
Research Development
Selling General and
Administrative
Non Recurring
Others
Total Operating Expenses
Operating Income or Loss
1-Feb-14
-391,000
1-Feb-14
-
2,223,000
889,000
-
-
4,229,000
1,742,000
Income from Continuing Operations
Total Other
Income/Expenses Net
Earnings Before Interest
4,229,000
And Taxes
Interest Expense
1,126,000
1,742,000
338,000
Income Before Tax
3,103,000
1,404,000
Income Tax Expense
1,132,000
515,000
-
-
1,971,000
889,000
Minority Interest
Net Income From
Continuing Ops
Non-recurring Events
Discontinued Operations
Extraordinary Items
Effect Of Accounting
Changes
Other Items
Net Income
Preferred Stock And Other
Adjustments
Net Income Applicable To
Common Shares
-
-
-
-
-
-
1,971,000
889,000
1,971,000
889,000
1. If you are commercial lending officer for Citicorp and both of these chains proposes to negotiate
an additional $6 billion in borrowing from your bank in order to finance an expansion, which
would you rather lend to (and why).
2. You are a management consultant for McKinsey specializing in retail businesses. The
management of Kohl’s corporation hires you to recommend to them areas in which their
performance can be improved that will generate greater shareholder value. What would you
recommend?
3. The P/E (ttm) ratio for Target is 32.1, the forward P/E for Target is 16.8. If earnings per share is
$2.38 and the number of shares outstanding is not expected to change, what earnings per share
are projected for next year?
4. What would you examine to see if you think the earnings projection (above) for Target is
achievable? Is it? (Explain).