Exam 1_ Spring 2010 by wuzhenguang


									                               FINC 311
                                Exam I
                             Spring 2010


1.   Prepare a balance sheet and income statement in good form
     for ABC Corporation based on the following information.
     (20 points)

    Sales                 $6,250       Accounts Receivable $ 515
    Cash                      15       Total Operating Exp. 5,450
    Long-term Debt         1,520       Inventories            880
    Plant & Equipment      2,590       Interest Expense       180
    Accounts Payable         120       Preferred Dividend       8
    Income Tax Expense       248       Notes Payable          220
    Preferred Stock           80       Accruals               280
    Retained Earnings          ?       Common stock           260
    Salaries               2,500       Office expenses        800
    Rent                     950       Depreciation exp.    1,200

                             Check Figures
Total Assets = $4,000
Retained earnings = $1,520
Operating Income = $800
Net Income = $372
Earnings Available to the Common Stockholders (EACS) = $364
2.   Given the information in problem 1, compute the amount of
     the dividend paid to the common stockholders for the year
     if retained earnings at the beginning of the year was
     $1,302. (10 points)

Dividends paid to common stockholders = $146
3.   Use the percent of sales method to prepare a pro forma
     income statement for Turner Enterprises, Inc. Projected
     sales for next year equal $4 million. Cost of goods sold
     equals 70% of sales. The firm plans to spend $200,000
     during the period to renovate its office facility and will
     pay back $150,000 in notes payable during the year. Other
     projected expenses include:
     ∙Administrative expense --       $500,000
     ∙Depreciation expense    –-       300,000
     ∙Interest expense        --        50,000
     ∙Selling expense         --   5% of sales

     The company has a 40% tax rate and plans to pay $30,000 in
     dividends to the common stockholders. (15 points)

4.   Lindsey Insurance Co. has current sales of $10 million and
     predicts next year's sales will grow to $14 million.
     Current assets are $3 million and fixed assets are $4
     million. The firm's net profit margin is 7 percent after
     taxes. Presently, Lindsey has $900,000 in accounts
     payable, $1.1 million in long-term debt, and $5 million
     (including $2.5 million in retained earnings) in common
     equity. Next year, Lindsey projects that current assets
     will rise in direct proportion to the forecasted sales, and
     that fixed assets will rise by $500,000. Lindsey also
     plans to pay dividends of $400,000 to common shareholders.
     What are Lindsey's discretionary financing needs for the
     upcoming year? (15 pts.)

Part II:   Multiple Choice (2 points each)

1.   Byron, Inc. has total current assets of $800,000; total
     current liabilities of $450,000; long-term assets of
     $300,000; and long-term debt of $200,000. How much is the
     firm's total equity?
     A.   $1,150,000
     B.   $150,000
     C.   $450,000
     D.   $750,000

2.   The percent of sales method can be used to forecast:
     A.   expenses.
     B.   assets.
     C.   liabilities.
     D.   all of the above.

3.   Wheeler Corporation had retained earnings as of 12/31/03 of
     $10 million. During 2004, Wheeler's net income was $ 2
     million. The retained earnings balance at the end of 2004
     was equal to $9 million. Therefore:
     A.   Wheeler paid a dividend in 2004 of $1 million.
     B.   Wheeler paid a dividend in 2004 of $3 million.
     C.   Wheeler sold common stock during 2004 for $3 million.
     D.   Wheeler increased its long-term debt by $1 million
          during 2004.

4.   When forecasting fixed asset requirements, the projected
     fixed asset balance will:
     A.   not increase proportionally with sales if the existing
          level of fixed assets is sufficient to support current
     B.   not increase proportionally if excess capacity exists.
     C.   remain the same since the balance is fixed.
     D.   always increase proportionally with sales.

5.   An example of a primary market transaction is:
     A.   a new issue of common stock by AT&T
     B.   a sale of some outstanding common stock of A&T by an
     C.   AT&T repurchasing its own stock from a stockholder.
     D.   all of the above.

6.   The two principal sources of financing for a corporation
     A.   debt and accounts payable.
     B.   debt and equity.
     C.   common equity and preferred equity.
     D.   cash and common equity.
7.    Using the percentage of sales method, forecasted retained
      earnings balance is equal to:
      A.   prior year retained earnings plus projected net
           income less projected dividends.
      B.   the ratio of retained earnings to sales for the
           current year multiplied by projected sales for
           next year.
      C.   the retained earnings balance for the current
           year as no changes are made to this financing
           account when using the percent of sales method.
      D.   the ratio of retained earnings to sales for the
           current year multiplied by projected sales for
           next year, minus dividends paid.

8.    Using the percentage of sales method of forecasting:
      A.   all asset and liability accounts increase or decrease
           proportionally with sales.
      B.   only asset accounts increase or decrease
           proportionally with sales.
      C.   accounts payable and accrued expenses are the only
           liabilities that increase or decrease proportionally
           with sales.
      D.   all balance sheet accounts increase or decrease
           proportionally with sales.

9.    Global.Com has cash of $75,000; short-term notes payable of
      $100,000; accounts receivables of $275,000; accounts
      payable of $135,000: inventories of $350,000; and accrued
      expenses of $75,000. What is Global's net working capital?
      A.   $390,000
      B.   $175,000
      C.   $700,000
      D.   $210,000

10.   The primary goal of a publicly owned corporation is to:
      A.   maximize dividends per share.
      B.   maximize shareholder wealth.
      C.   maximize earnings per share after taxes.
      D.   minimize shareholder risk.
11.   ABC Corp. is required by a debt agreement to maintain a
      current ratio of at least 1.5, and ABC’s current ratio now
      is 2.0. ABC wants to purchase additional inventory for its
      upcoming Christmas season, and will pay for the inventory
      with short-term debt. How much inventory can ABC purchase
      without violating its debt agreement if their total current
      assets equal $20 million?
      a.   $13.33 million
      b.   $10.00 million
      c.   $25.00 million
      d.   $6.67 million

12.   Corporations are allowed to deduct specific items for
      income tax purposes. Which of the following is true with
      respect to tax deductibility?
      A.   Dividends on common stock are deductible while
           dividends on preferred stock are not.
      B.   Dividends on preferred stock are deductible while
           dividends on common stock are not.
      C.   Depreciation expense is deductible while dividends (on
           both common and preferred stock) are not.
      D.   Dividends (on both common and preferred stock) are
           deductible while depreciation expense is not.

13.   Jones Finance Company had a cash balance of $1 million at
      the beginning of 2004. During 2004, Sales were $5 million
      and expenses were $3 million. Therefore:
      A.   the cash balance at the end of 2004 is $3 million.
      B.   the cash balance at the end of 2004 must be greater
           than $1 million.
      C.   the cash balance at the end of 2004 must be less than
           $5 million.
      D.   the cash balance at the end of 2004 cannot be
           determined from the information given.

14.   The current ratio of a firm would be increased by
      which of the following?
      a.   land held for investment is sold for cash
      b.   equipment is purchased, financed by a long-term debt
      c.   inventories are sold for cash
      d.   inventories are sold on a credit basis

15.   The true owners of the corporation are the:
      A.   holders of debt issues of the firm.
      B.   preferred stockholders.
      C.   board of directors of the firm.
      D.   common stockholders.
16.   Which of the following statements concerning net income is
      most correct?
      A.   Net income represents cash available to pay dividends.
      B.   Net income represents sales minus operating expenses
           at a specific point in time.
      C.   Negative net income reduces a company's cash balance.
      D.   Net income represents income that may be reinvested in
           the firm or distributed to its owners.

17.   John calls his stockbroker and instructs him to purchase
      100 shares of Microsoft Corporation common stock. This
      transaction occurs in the:
      A.   secondary market.
      B.   primary market.
      C.   credit market.
      D.   futures market.

18.   In order to increase its operating profit margin, a company
      a.    reduce expenses while maintaining its sales level
      b.    replace debt with equity financing to lower interest
      c.    increase sales while maintaining its current product
      d.    sell more shares of common stock

19.   Financial analysis
      a.   uses historical financial statements and is thus
           useful only to assess past performance.
      b.   relies on generally accepted accounting principles to
           make comparisons between companies valid.
      c.   uses historical financial statements to measure a
           company’s performance and in making financial
           projections of future performance.
      d.   is accounting record-keeping using generally accepted
           accounting principles.

20.   Fixed assets are often estimated incorrectly by the percent
      of sales method because:
      A.   fixed assets remain constant and the percent of sales
           method assumes all assets increase proportionally with
      B.   fixed asset are very expensive.
      C.   fixed assets are typically purchased in "lumps" and
           therefore do not increase proportionally with sales.
      D.   fixed assets are part of the capital budgeting

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