FIN 370 FINAL EXAM v.4 and ANSWER KEY
1) The goal of the firm should be
2) An example of a primary market transaction is
3) According to the agency problem, _________ represent the principals of a corporation.
4) Which of the following is a principle of basic financial management?
5) Another name for the acid test ratio is the
6) The accounting rate of return on stockholders’ investments is measured by
7) If you are an investor, which of the following would you prefer?
8) The primary purpose of a cash budget is to
9) Which of the following is a non-cash expense?
10) The break-even model enables the manager of a firm to
11) A zero-coupon bond
12) If you have $20,000 in an account earning 8% annually, what constant amount could you withdraw each year and have nothing remaining at the end of 5 years?
13) At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years?
14) The present value of a single future sum
15) Which of the following is considered to be a spontaneous source of financing?
16) Compute the payback period for a project with the following cash flows, if the company’s discount rate is 12%.
Initial outlay = $450
Cash flows:
Year 1 = $325
Year 2 = $65
Year 3 = $100
17) For the NPV criteria,
a project is acceptable if the NPV is __________, while for the profitability index, a project is acceptable if the profitability index is __________.
18) Which of the following is considered to be a deficiency of the IRR?
19) The firm should accept independent projects if
20) The most expensive source of capital is
21) The cost associated with each additional dollar of financing for investment projects is
22) The XYZ Company is planning a $50 million expansion. The expansion is to be financed by selling $20 million in new debt and $30 million in new common stock. The before-tax required rate of return on debt is 9%, and the required rate of return on equity is 14%. If the company is in the 40% tax bracket, what is the marginal cost of capital?
23) Shawhan Supply plans to maintain its optimal capital structure of 30% debt, 20% preferred stock, and 50% common stock far into the future. The required return on each component is: debt–10%; preferred stock–11%; and common stock–18%. Assuming a 40% marginal tax rate, what after-tax rate of return must Shawhan Supply earn on its investments if the value of the firm is to remain unchanged?
24) Lever Brothers has a debt ratio (debt to assets) of 40%. Management is wondering if its current capital structure is too conservative. Lever Brothers’ present EBIT is $3 million,
and profits available to common shareholders are $1,560,000, with 342,857 shares of common stock outstanding. If the firm were to instead have a debt ratio of 60%, additional interest expense would cause profits available to stockholders to decline to $1,440,000, but only 228,571 common shares would be outstanding. What is the difference in EPS at a debt ratio of 60% versus 40%?
25) Zybeck Corp. projects operating income of $4 million next year. The firm’s income tax rate is 40%. Zybeck presently has 750,000 shares of common stock which have a market value of $10 per share, no preferred stock, and no debt. The firm is considering two alternatives to finance a new product: (a) the issuance of $6 million of 10% bonds, or (b) the issuance of 60,000 new shares of common stock. If Zybeck issues common stock this year, what will be the projected EPS next year?
26) _________ risk is generally considered only a paper gain or loss.
27) Capital markets in foreign countries
28) Buying and selling in more than one market to make a riskless profit is called
29) What keeps foreign exchange quotes in two different countries in line with each other?
30) One reason for international investment is to reduce
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false. (2 points total)
1. Profit maximization stresses the efficient use of timing and risks.
F
2. Financial assets are tangible assets such as houses, equipment, and inventories.
F
3. The sustainable rate of growth represents the rate at which a firm’s sales can grow if it wants to maintain its present financial ratios and does not want to resort to a sale of new equity shares.
T
4. Business risk refers to the relative disperses in the firm’s expected earnings after interest and taxes.
F
5. New capital-budgeting projects are always new products taken to market.
F
6. The stock of cash is a type of inventory.
T
7. If an asset is sold above depreciated value, it may be used to offset gains and thus result in tax savings.
F
8. Free cash flow is the cash flow in excess of that required to fund all projects with positive and negative net present value when discounted at the relevant cost of capital.
F
9. The Euro eliminated exchange costs and exchange rate fluctuations.
T
10. The foreign exchange market is like the New York Stock Exchange because they are both physical entities.
F
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Please provide any back-up of your calculations on a separate worksheet so that credit can be assigned.
(3 points total)
11. Which of the following measure an organization’s liquidity?
a. Acid test ratio
b. debt to equity ratio
c. return on equity
d. Dupont Analysis
12. If I invest $1000 at
an interest rate of 2% what would the future value be after 5 years?
a. 2500
b. 1104
c. 2134
d. 1500
13. Burns Promotions Plus has an annuity that pays $2500 at the beginning of the next 4 years what is the future value of the annuity if the interest rate is 5%?
a. $13,814
b. $15,638
c. $28,780
d. $30,149
14. Grover’s Vinyl Siding has a $2000 loan that needs to be repaid in 3 equal installments at the end of the next three years with an interest rate of 6%; what would the requested payment be?
a. $2,000
b. $2,744
c. $2,244 R=PV*i/(1-1/(1+i)^n)=2000*0.06/(1-1/1.06^3)=748.22
748.22*3=2244.66
d. $2,898
15. Plexus Pictures collects 70% of its sales during the month of sales, 20% one month after the sales and 10% two months after the sale. The company expects sales of $15,000 in August; $25,000 in September; $10,000 in October; and $50,000 in November How much money will they collect in October?
a. $13,500 collection=0.1*15000+0.2*25000+0.7*10000=13500,
b. $15,500
c. $17,500
d. $25,500
16. The significance of a ratio can only be truly appreciated Except when:
a. It is compared with other ratios in the same set of financial statements.
b. It is compared with the same ratio in previous financial statements (trend analysis).
c. It is compared with a standard of performance (industry average)
d. It is compared with other ratios in different sets of financial statement.
17. Which is not a type of ratio?
a. Liquidity
b. Inventory Valuation
c. Profitability
d. Leverage
18. Burns Promotions Plus has a cost of revenue of $219,793 million for the fiscal year ended January 31, 2008. It had an inventory balance of $29,447 million at the end of this fiscal year. Based on this information what is the number of days inventory for the year 2007 (ending January 31, 2008).
a. 23.3 days
b. 35.9 days
c. 42.3 days
d. 48.9 days inventory turnover=cost of goods sale/average inventory=219793/29447=7.46
days of inventory on hand=365/inventory turnover=48.9
19. Burns Promotions Plus has a
cost of revenue of $219,793 million for the fiscal year ended January 31, 2008. It had an inventory balance of $29,447 million at the end of this fiscal year. Based on this information what is the inventory turnover for the year 2007 (ending January 31, 2008).
a. 3.23 times
b. 4.56 times
c. 7.46 times inventory turnover=cost of goods sale/average inventory=219793/29447=7.46
d. 8.75 times
20. What is working capital?
a. An indicator whether the company will be able to meet its current obligations.
b. Tells you the relationship of current assets to current liabilities.
c. Indicates the relationship between amounts of assets that can be quickly be turned into cash versus the amount of current liability.
d. It measures the return to the owners.
21. Euro was introduced because of the following EXCEPT?
a. It made it easier for goods, people, and services to travel across national borders.
b. It helped to eliminate cost differences for goods in different countries.
c. It made it easier to compare prices and eliminate discrepancies.
d. The value of the Euro remains constant.
PROBLEMS. Provide back-up of your work on a separate worksheet so that credit can be assigned. You may provide either a Word document or an Excel spreadsheet.
(2.5 points each= 5 points total)
|Amy’s Widgets Balance Sheet | | | | |
|ASSETS | | | |LIABILITIES | | |
|Current Assets | | |Current Liabilities | |
| |Cash | |$ 2,100 | |Notes Payable |$ 5,000 |
| |Petty Cash |100 | |Accounts Payable |35,900
|
| |Temporary Investments |10,000 | |Wages Payable |8,500 |
| |Accounts Receivable – net |40,500 | |Interest Payable |2,900 |
| |Inventory | |31,000 | |Taxes Payable |6,100 |
| |Supplies | |3,800 | |Warranty Liability |1,100 |
| |Prepaid Insurance | 1,500 | |Unearned Revenues | 1,500 |
| | |Total Current Assets | 89,000 | | |Total Current Liabilities | 61,000 |
|- | | | | | | | |
|Investments | | 36,000 |Long-term Liabilities | |
| | | | | |Notes Payable |20,000 |
|Property, Plant & Equipment | | |Bonds Payable | 400,000 |
| |Land | |5,500 | | |Total Long-term Liabilities | 420,000 |
| |Land Improvements |6,500 | | | | |
| |Buildings | |180,000 | |
| | |
| |Equipment |201,000 |Total Liabilities | 481,000 |
| |Less: Accum Depreciation | (56,000) | | | | |
| | |Prop, Plant & Equip – net | 337,000 | | | | |
|- | | | | | | | |
|Intangible Assets | | |STOCKHOLDERS’ EQUITY | |
| |Goodwill | |105,000 | |Common Stock |110,000 |
| |Trade Names | 200,000 | |Retained Earnings |229,000 |
| | |Total Intangible Assets | 305,000 | |Less: Treasury Stock | (50,000) |
| | | | | | |Total Stockholders’ Equity | 289,000 |
|Other Assets | | 3,000 | | | | |
|- | | | | | | | |
|Total Assets | |$770,000 |Total Liabilities & Stockholders’ Equity |$770,000 |
|Income Statement 2008 For Amy’s Widgets
&
