Docstoc

Final Exam - DOC

Document Sample
Final Exam - DOC Powered By Docstoc
					Final Exam

Please provide your answers as follows in the Assignment newsgroup (Excel spreadsheet
is preferred):
1. A
2. B
3. B, etc


Chapter 1 The Goals and Functions of Financial Management


Multiple Choice Questions

1. What is the primary goal of financial management?
A) Increased earnings
B) Maximizing cash flow
C) Maximizing shareholder wealth
D) Minimizing risk of the firm

Answer: C Difficulty: Easy Type: Memorization


2. The partnership form of organization
A) avoids the double taxation of earnings and dividends found in the corporate form of
organization.
B) usually provides limited liability to the partners.
C) has unlimited life.
D) simplifies decision making.

Answer: A Difficulty: Easy Type: Memorization


3. Increased productivity due to technology has
A) increased corporations' reliance on debt for capital expansion needs.
B) created larger asset values on the firm's historical balance sheet.
C) made it cheaper (in terms of interest costs) for firms to borrow money.
D) helped to keep corporate costs in check.

Answer: D Difficulty: Medium Type: Conceptual



4. Insider trading occurs when
A) someone has information not available to the public which they use to profit from
trading in stocks.
B) corporate officers buy stock in their company.
C) lawyers, investment bankers, and others buy common stock in companies represented
by their firms.
D) any stock transactions occur in violation of the Federal Trade Commissions
restrictions on monopolies.

Answer: A Difficulty: Medium Type: Memorization




Chapter 2 Review of Accounting



5. When a firm's earnings are falling more rapidly than its stock price, its P/E ratio will:
A) remain the same
B) go up
C) go down
D) could go either up or down

Answer: B Difficulty: Medium Type: Conceptual

6. The net worth of a firm
A) is usually the same as the firm's market value.
B) is based on current asset costs.
C) is based on current liabilities.
D) none of the above.

Answer: D Difficulty: Medium Type: Application


7. A statement of cash flows allows a financial analyst to determine
A) whether a cash dividend is affordable.
B) how increases in asset accounts have been financed.
C) whether long-term assets are being financed with long-term or short-term financing.
D) all of the above

Answer: D Difficulty: Medium Type: Conceptual


8. A firm has $200,000 in current assets, $400,000 in long-term assets, $80,000 in current
liabilities, and $200,000 in long-term liabilities. What is its net working capital?
A) $120,000
B) $320,000
C) $520,000
D) none of the above

Answer: A Difficulty: Medium Type: Application



Chapter 3 Financial Analysis


Multiple Choice Questions



9. The ______________ method of inventory costing is least likely to lead to inflation-
induced profits.
A) FIFO
B) LIFO
C) Weighted average
D) Lower of cost or market

Answer: B Difficulty: Medium Type: Conceptual


10. The Bubba Corp. had net income before taxes of $200,000 and sales of $2,000,000. If
it is in the 50% tax bracket its after-tax profit margin is:
A) 5%
B) 12%
C) 20%
D) 25%

Answer: A Difficulty: Medium Type: Application


11. XYZ's receivables turnover is 10x. The accounts receivable at year-end are $600,000.
The average collection period is 90 days (3 months). What was the sales figure for the
year?
A) $60,000
B) $6,000,000
C) $24,000,000
D) none of the above

Answer: B Difficulty: Hard Type: Application


12. A firm has total assets of $2,000,000. It has $900,000 in long-term debt. The
stockholders equity is $900,000. What is the total debt to asset ratio?
A) 45%
B) 40%
C) 55%
D) none of the above

Answer: C Difficulty: Hard Type: Application



Chapter 4 Financial Forecasting


13. Required production during a planning period will depend on the
A) beginning inventory of products.
B) sales during the period.
C) desired level of ending inventory.
D) all of the above

Answer: D Difficulty: Medium Type: Conceptual

14. XYZ Co. has forecasted June sales of 600 units and July sales of 1000 units. The
company maintains ending inventory equal to 125% of next month's sales. June
beginning inventory reflects this policy. What is June's required production?
A) 1100 units
B) -0- units
C) 500 units
D) 400 units

Answer: A Difficulty: Medium Type: Application


15. The difference between total receipts and total payments referred to as
A) cumulative cash flow.
B) beginning cash flow.
C) net cash flow.
D) cash balance.

Answer: C Difficulty: Easy Type: Conceptual

16. In developing the pro forma income statement we follow four important steps:
1) compute other expenses,
2) determine a production schedule,
3) establish a sales projection,
4) determine profit by completing the actual pro forma statement.

What is the correct order for these four steps?
A) 1,2,3,4
B) 4,3,2,1
C) 2,1,3,4
D) 3,2,1,4

Answer: D Difficulty: Medium Type: Conceptual

Chapter 5 Operating and Financial Leverage


17. In break-even analysis the contribution margin is defined as
A) sales minus variable costs.
B) sales minus fixed costs.
C) variable costs minus fixed costs.
D) fixed costs minus variable costs.

Answer: A Difficulty: Easy Type: Memorization

18. Firm A employs a high degree of operating leverage; Firm B takes a more
conservative approach. Which of the following comparative statements about firms A and
B is true?
A) A has a lower break-even point than B, but A's profit grows faster after the break-
even.
B) A has a higher break-even point than B, but A's profit grows slower after the break-
even.
C) B has a lower break-even point than A, but A's profit grows faster after break-even.
D) B has a lower break-even point than A, and profit grows the same rate for both
companies after the breakeven point.

Answer: C Difficulty: Hard Type: Application

19. Heavy use of long-term debt may be beneficial in an inflationary economy because
A) the debt may be repaid in more "expensive" dollars.
B) nominal interest rates exceed real interest rates.
C) inflation is associated with the peak of a business cycle.
D) the debt may be repaid in "cheaper" dollars.

Answer: D Difficulty: Medium Type: Conceptual

20. Under which of the following conditions could the overuse of financial leverage be
detrimental to the firm?
A) Stable industry
B) Cyclical demand for the firm's products.
C) Upswing of business cycle.
D) Low interest cost compared to return on assets
Answer: B Difficulty: Medium Type: Application

Chapter 6 Working Capital and the Financial Decision


21. Risk exposure due to heavy short-term borrowing can be compensated for by
A) carrying highly liquid assets.
B) carrying illiquid assets.
C) carrying longer term, more profitable current assets.
D) carrying more receivables to increase cash flow.

Answer: A Difficulty: Medium Type: Conceptual


22. When actual sales are greater than forecasted sales
A) inventory will decline.
B) production schedules might have to be revised upward.
C) accounts receivable will rise.
D) all of the above

Answer: D Difficulty: Medium Type: Application


23. Yield curves change daily to reflect
A) changing conditions in the money and capital markets.
B) new inflation expectations.
C) changing conditions in the overall economy.
D) all of the above.

Answer: D Difficulty: Medium Type: Conceptual

24. Retail companies like Target and Limited Brands are more likely to have
A) stable sales and earnings per share.
B) cyclical sales but less volatile earnings per share.
C) cyclical sales and more volatile earnings per share.
D) cyclical sales but stable accounts receivable and inventory.

Answer: C Difficulty: Easy Type: Conceptual


Chapter 7 Current Asset Management


25. When using the economic order quantity model
A) ordering costs increase as the level of inventory increases.
B) carrying costs decrease as the level of inventory increases.
C) costs are minimized when total carrying costs and total ordering costs are equal.
D) none of the above

Answer: C Difficulty: Medium Type: Conceptual


26. Hedging
A) is a way to protect your accounts receivable position.
B) increases risk.
C) is a legal agreement to buy or sell a financial futures contract.
D) can be carried out with a futures contract.

Answer: D Difficulty: Medium Type: Conceptual

27. Which of the following is not a true statement about commercial paper?
A) Finance paper is sold directly to the lender by the finance company.
B) Finance paper is also referred to as direct paper.
C) Dealer paper is sold directly to the lender by a finance company.
D) Industrial companies, utility firms or finance companies too small to sell direct paper
sell dealer paper.

Answer: C Difficulty: Medium Type: Memorization


28. Which of the following best describes the benefits to the borrower of selling asset
backed securities?
A) Due to the portfolio effect, the borrower can package up low quality accounts
receivable and sell them for a premium price.
B) The borrower trades future cash flows for current cash flows.
C) The asset-backed security is likely to carry a high credit rating of AA or better.
D) b and c are correct.

Answer: D Difficulty: Easy Type: Conceptual



29. Price Corp. is considering selling to a group of new customers and creating new
annual sales of $70,000. 5% will be uncollectible. The collection cost on these accounts
is 3.5% of new sales, the cost of producing and selling is 80% of sales and the firm is in
the 31% tax bracket. What is the profit on new sales?
A) $5,554.50
B) $9,660.00
C) $7,245.00
D) none of the above.

Answer: A Difficulty: Hard Type: Application
Chapter 8 Sources of Short-Term Financing

30. Mr. Jones borrows $2,000 for 90 days and pays $35 interest. What is his effective rate
of interest?
A) 9.3%
B) 7.0%
C) 11.7%
D) None of the above

Answer: B Difficulty: Medium Type: Application


31. The prime rate
A) is the effective rate of interest for banks' best customers.
B) has been quite volatile during the past two decades, moving as much as 8 percentage
points in a 12-month period.
C) is usually lower than treasury bill rates.
D) none of the above

Answer: B Difficulty: Medium Type: Memorization


32. Accounts receivable may be used as a source of financing by
A) pledging the receivables as loan collateral.
B) factoring the receivables to a finance company.
C) selling securities backed by the receivables.
D) all of the above

Answer: D Difficulty: Medium Type: Conceptual

33. The required compensating balance is usually computed as a
A) percentage of customer loans outstanding.
B) factor of accounts receivable.
C) percentage of the bank's commitments toward future loans.
D) a and c are correct

Answer: D Difficulty: Medium Type: Conceptual



Chapter 9 The Time Value of Money


34. The concept of time value of money is important to financial decision making
because
A) it emphasizes earning a return on invested capital.
B) it recognizes that earning a return makes $1 worth more today than $1 received in the
future.
C) it can be applied to future cash flows in order to compare different streams of income.
D) all of the above

Answer: D Difficulty: Medium Type: Conceptual


35. Mr. Nailor invests $5,000 in a certificate of deposit at his local bank. He receives
annual interest of 8% for 7 years. How much interest will his investment earn during this
time period?
A) $2,915
B) $3,570
C) $6,254
D) $8,570

Answer: B Difficulty: Medium Type: Application

36. Mr. Fish wants to build a house in 10 years. He estimates that the total cost will be
$170,000. If he can put aside $10,000 at the end of each year, what rate of return must he
earn in order to have the amount needed?
A) Between 11% and 12%
B) Between 8% and 9%
C) 17%
D) None of the above

Answer: A Difficulty: Medium Type: Application


Chapter 10 Valuation and Rates of Return


37. A 20-year bond pays 12% on a face value of $1,000. If similar bonds are currently
yielding 9%, What is the market value of the bond? Use annual analysis.
A) over $1,000
B) under $1,000
C) over $1,200
D) not enough information given to tell

Answer: C Difficulty: Easy Type: Application

38. An issue of preferred stock is paying an annual dividend of $5. The growth rate for
the firm's common stock is 14%. What is the preferred stock price if the required rate of
return is 11%?
A) $45.45
B) $41.67
C) $35.71
D) none of the above

Answer: A Difficulty: Easy Type: Application

39. Which of the following does not influence the yield to maturity for a security?
A) required real rate of return
B) risk free rate
C) business risk
D) yields of similar securities

Answer: D Difficulty: Medium Type: Conceptual


40. The cost of common stock is usually greater than the simple dividend yield because
A) investors perceive risk in common stock.
B) investors expect both a current dividend and future growth.
C) dividends are not tax-deductible.
D) the company must make profits before it can pay dividends.

Answer: B Difficulty: Easy Type: Memorization


41. The dividend valuation model stresses the
A) importance of earnings per share.
B) importance of dividends and legal rules for maximum payment.
C) relationship of dividends to market prices.
D) relationship of dividends to earnings per share.

Answer: C Difficulty: Easy Type: Memorization


Chapter 11 Cost of Capital


42. Although debt financing is usually the cheapest component of capital, it cannot be
used to excess because
A) interest rates may change.
B) the firm's stock price will increase and raise the cost of equity financing.
C) the financial risk of the firm may increase and thus drive up the cost of all sources of
financing.
D) underwriting costs may change.

Answer: C Difficulty: Medium Type: Conceptual
43. Each project should be judged against
A) the specific means of financing used to support its implementation.
B) the going interest rate at that point in time.
C) the cost of new common stock equity.
D) none of the above.

Answer: D Difficulty: Medium Type: Conceptual



44. The cost of debt is determined by taking the
A) present value of the interest payments and principal times one minus the tax rate.
B) historical yield on bonds times one minus the tax rate
C) estimated yield on new bond issues of the same risk times one minus the shareholder
marginal tax rate.
D) none of the above

Answer: D Difficulty: Medium Type: Conceptual

45. The pre-tax cost of debt for a new issue of debt is determined by
A) the investor's required rate of return on issued stock.
B) the coupon rate of existing debt.
C) the yield to maturity of outstanding bonds.
D) all of the above.

Answer: C Difficulty: Medium Type: Conceptual



Chapter 14 Capital Markets


46. During the next ten years, the major threat to the dominance of the U.S. money and
capital markets will come from
A) Russia's difficulty in transforming its economy into a capitalistic one.
B) Japan's prolonged recession and banking crisis.
C) The Euro-zone countries comprising the European Monetary Union and a single
currency.
D) The huge Chinese economy and its billion plus people.

Answer: C Difficulty: Medium Type: Conceptual

47. With respect to the United States and its relationship with the rest of the world, it can
be said that
A) the U.S. has invested more dollars in the rest of the world than foreign countries have
invested in the U.S.
B) the U.S. has actively helped foreign countries finance the government deficits.
C) foreign investors hold large positions in U.S. government securities.
D) All of the above.

Answer: C Difficulty: Medium Type: Memorization


48. Financial instruments in the capital markets generally fall under what category in the
Balance Sheet?
A) Short-term liabilities and equities.
B) Long-term liabilities and equities.
C) Near cash assets.
D) None of the above.

Answer: B Difficulty: Easy Type: Conceptual


Chapter 16 Long-Term Debt and Lease Financing


49. With regard to interest rates and bond prices it can be said that
A) a 1% change in interest rates will cause a greater change in long-term bond prices than
short-term prices.
B) a 1% change in interest rates will cause a greater change in short-term bond prices
than long-term prices.
C) long-term rates are more volatile than short-term rates.
D) a decrease in interest rates will cause bond prices to fall.

Answer: A Difficulty: Medium Type: Conceptual

50. Which one of these conditions must be met for a lease to qualify as a capital lease?
A) The lease contains a bargain purchase price at the end of the lease.
B) The lease must have a value of at least $10 million.
C) The lease must have a life of 10 years.
D) All of the above.

Answer: A Difficulty: Medium Type: Memorization


Chapter 17 Common and Preferred Stock Financing


51. Which of the following is not a true statement?
A) Common stockholders have a residual claim to income.
B) Bondholders may force a corporation into bankruptcy for failure to make interest
payments.
C) Common stockholders are legally entitled to some dividend.
D) A minority interest can still elect members to the Board of Directors under cumulative
voting even though someone else owns 51% of the stock.

Answer: C Difficulty: Medium Type: Memorization


52. Kuhns Corp. has 200,000 shares of preferred stock outstanding that is cumulative.
The dividend is $6.50 per share and has not been paid for 3 years. If Kuhns earned $3
million this year, what could be the maximum payment to the preferred stockholders on a
per share basis?
A) $19.50 per share
B) $15.00 per share
C) $13.00 per share
D) $6.50 per share

Answer: B Difficulty: Easy Type: Application

53. When comparing common stock of the same company it is fair to say that
A) all shares, no matter how many classes, are all created with the same equal rights.
B) companies sometimes have two different classes of shares with unequal rights to
dividends and votes.
C) the Securities and Exchange Commission allows only one class of common stock.
D) investors are indifferent between class A and class B shares.

Answer: B Difficulty: Easy Type: Memorization



54. Dr. J. wants to buy an IBM personal computer which will cost $2,788 four years from
today. He would like to set aside an equal amount at the end of each year in order to
accumulate the amount needed. He can earn 7% annual return. How much should he set
aside?
A) $697.00
B) $627.93
C) $823.15
D) $531.81

Answer: B Difficulty: Medium Type: Application


Problems to be solved-Chapter 2
55. The following is the December 31, 2003 balance sheet for the Epics Corporation.

Assets Liabilities
Cash $ 70,000 Accounts Payable $ 100,000
Accounts Receivable 150,000 Notes Payable 120,000
Inventory 280,000 Bonds Payable 300,000
Total Current Assets $ 500,000 Total Liabilities $ 520,000
Plant and Equipment $1,250,000 Equity
Less: Accum. Deprec. 250,000 Common Stock 300,000
Net plant and Equipment $1,000,000 Paid In Capital 200,000
Retained Earnings 480,000
Total Assets $1,500,000 Total Equity $ 980,000
Total Liab. & Equity $1,500,000

Sales for 2003 were $2,000,000, with the cost of goods sold being 55% of sales.
Depreciation expense was 10% of the gross plant and equipment at the beginning of the
year. Interest expense was 9% on the notes payable and 11% on the bonds payable.
Selling and administrative expenses were $200,000 and the firm's tax rate is 40%.

Prepare an income statement.

Difficulty: Medium
Answer:

Income Statement
Sales $2,000,000
Less: Cost of Goods Sold 1,100,000
Gross Profit 900,000
Less: Selling and Administrative Expense 200,000
Depreciation expense 125,000
EBIT 575,000
Less: Interest Expense (10,800 + 33,000) 43,800
EBT 531,200
Less: Taxes (40%) 212,480
Net Earnings $ 318,720



56. Given the financial information for the A.E. Neuman Corporation,

a) Prepare a Statement of Cash Flows for the year ended December 31, 2002.
b) What is the dividend payout ratio for 2003?
c) If we increased the dividend payout ratio to 100%, what would happen to retained
earnings?
Difficulty: Medium to Hard

Answer:

a) Cash Flows from Operating Activities:
Net Income (earnings after taxes) $400,000
Adjustments:
Add back depreciation 150,000
Decrease in marketable securities 15,000
Decrease in accounts receivable 20,000
Increase in inventories (45,000)
Decrease in accounts payable (25,000)
Decrease in notes payable (55,000)
Decrease in accrued expenses (25,000)
Increase in incomes taxes payable 5,000
Total Adjustments 40,000
Net Cash Flows from Operating Activities $440,000
Cash Flows from Investing Activities
Decrease in Investments 15,000
Increase in Plant & Equipment (250,000)
Net Cash Flows from Investing Activities (235,000)
Cash Flows from Financing Activities
Increase in Bonds Payable 100,000
Dividends Paid (300,000)
Net Cash Flows from Financing Activities (200,000)
Net Increase (Decrease) in Cash Flows 5,000
b)
c) The 2003 value for retained earnings would decrease by $100,000 to $400,000. In
addition, Assets would have to decrease by $100,000 or other liabilities would have to
increase by the same amount.

				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:18417
posted:7/12/2011
language:English
pages:15