FIN 571 Final Exam.
Chapter 1 The Goals and Functions of Financial ManagementMultiple Choice Questions1. What is the primary goal of financial management?A) Increased earningsB) Maximizing cash flowC) Maximizing shareholder wealthD) Minimizing risk of the firmAnswer:2. The partnership form of organizationA) 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: 3. Increased productivity due to technology hasA) 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:4. Insider trading occurs whenA) 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:Chapter 2 Review of Accounting5. When a firm’s earnings are falling more rapidly than its stock price its P/E ratio will:A) remain the sameB) go upC) go downD) could go either up or downAnswer:6. The net worth of a firmA) 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:7. A statement of cash flows allows a financial analyst to determineA) 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 aboveAnswer:8. A firm has $200000 in current assets $400000 in long-term assets $80000 in current liabilities and $200000 in long-term liabilities. What is its net working capital?A) $120000B) $320000C) $520000D) none of the aboveAnswerChapter 3 Financial AnalysisMultiple Choice Questions9. The ______________ method of inventory costing is least likely to lead to inflation-induced profits.A) FIFOB) LIFOC) Weighted averageD) Lower of cost or marketAnswer:10. The Bubba Corp. had net income before taxes of $200000 and sales of $2000000. If it is in the 50% tax bracket its after-tax profit margin is:A) 5%B) 12%C) 20%D) 25%Answer:11. XYZ’s receivables turnover is 10x. The accounts receivable at year-end are $600000. The average collection period is 90 days (3 months). What was the sales figure for the year?A) $60000B) $6000000C) $24000000D) none of the aboveAnswer:12. A firm has total assets of $2000000. It has $900000 in long-term debt. The stockholders equity is $900000. What is the total debt to asset ratio?A) 45%B) 40%C) 55%D) none of the aboveAnswer:Chapter 4 Financial Forecasting13. Required production during a planning period will depend on theA) beginning inventory of products.B) sales during the period.C) desired level of ending inventory.D) all of the aboveAnswer: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 unitsB) -0- unitsC) 500 unitsD) 400 unitsAnswer:15. The difference between total receipts and total payments referred to asA) cumulative cash flow.B) beginning cash flow.C) net cash flow.D) cash balance.Answer:
16. In developing the pro forma income statement we follow four important steps:1) compute other expenses2) determine a production schedule3) establish a sales projection4) determine profit by completing the actual pro forma statement.What is the correct order for these four steps?A) 1234B) 4321C) 2134D) 3214Answer:Chapter 5 Operating and Financial Leverage17. In break-even analysis the contribution margin is defined asA) sales minus variable costs.B) sales minus fixed costs.C) variable costs minus fixed costs.D) fixed costs minus variable costs.Answer: 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:19. Heavy use of long-term debt may be beneficial in an inflationary economy becauseA) 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:20. Under which of the following conditions could the overuse of financial leverage be detrimental to the firm?A) Stable industryB) Cyclical demand for the firm’s products.C) Upswing of business cycle.D) Low interest cost compared to return on assetsAnswer:Chapter 6 Working Capital and the Financial Decision21. Risk exposure due to heavy short-term borrowing can be compensated for byA) 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:22. When actual sales are greater than forecasted salesA) inventory will decline.B) production schedules might have to be revised upward.C) accounts receivable will rise.D) all of the aboveAnswer:23. Yield curves change daily to reflectA) 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:24. Retail companies like Target and Limited Brands are more likely to haveA) 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:Chapter 7 Current Asset Management25. When using the economic order quantity modelA) 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 aboveAnswer:26. HedgingA) 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: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: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:29. Price Corp. is considering selling to a group of new customers and creating new annual sales of $70000. 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) $5554.50B) $9660.00C) $7245.00D) none of the above.Answer:Chapter 8 Sources of Short-Term Financing30. Mr. Jones borrows $2000 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 aboveAnswer:31. The prime rateA) 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 aboveAnswer:32. Accounts receivable may be used as a source of financing byA) 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 aboveAnswer:33. The required compensating balance is usually computed as aA) 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 correctAnswer:Chapter 9 The Time Value of Money34. The concept of time value of money is important to financial decision making becauseA) 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 aboveAnswer:35. Mr. Nailor invests $5000 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) $2915B) $3570C) $6254D) $8570Answer:36. Mr. Fish wants to build a house in 10 years. He estimates that the total cost will be $170000. If he can put aside $10000 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 aboveAnswer:Chapter 10 Valuation and Rates of Return37. A 20-year bond pays 12% on a face value of $1000. If similar bonds are currently yielding 9% What is the market value of the bond? Use annual analysis.A) over $1000B) under $1000C) over $1200D) not enough information given to tellAnswer: 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) $45.45B) $41.67C) $35.71D) none of the aboveAnswer:39. Which of the following does not influence the yield to maturity for a security?A) required real rate of returnB) risk free rateC) business riskD) yields of similar securitiesAnswer:40. The cost of common stock is usually greater than the simple dividend yield becauseA) 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:41. The dividend valuation model stresses theA) 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:Chapter 11 Cost of Capital42. Although debt financing is usually the cheapest component of capital it cannot be used to excess becauseA) 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:43. Each project should be judged againstA) 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:44. The cost of debt is determined by taking theA) present value of the interest payments and principal times one minus the tax rate.B) historical yield on bonds times one minus the tax rateC) estimated yield on new bond issues of the same risk times one minus the shareholder marginal tax rate.D) none of the aboveAnswer:45. The pre-tax cost of debt for a new issue of debt is determined byA) 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:Chapter 14 Capital Markets46. During the next ten years the major threat to the dominance of the U.S. money and capital markets will come fromA) 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:47. With respect to the United States and its relationship with the rest of the world it can be said thatA) 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: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: ConceptualChapter 16 Long-Term Debt and Lease Financing49. With regard to interest rates and bond prices it can be said thatA) 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: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:Chapter 17 Common and Preferred Stock Financing51. 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:52. Kuhns Corp. has 200000 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 shareB) $15.00 per shareC) $13.00 per shareD) $6.50 per shareAnswer:53. When comparing common stock of the same company it is fair to say thatA) 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:54. Dr. J. wants to buy an IBM personal computer which will cost $2788 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) $697.00B) $627.93C) $823.15D) $531.81Answer:Problems to be solved-Chapter 255. The following is the December 31 2003 balance sheet for the Epics Corporation.Assets LiabilitiesCash $ 70000 Accounts Payable $ 100000Accounts Receivable 150000 Notes Payable 120000Inventory 280000 Bonds Payable 300000Total Current Assets $ 500000 Total Liabilities $ 520000Plant and Equipment $1250000 EquityLess: Accum. Deprec. 250000 Common Stock 300000Net plant and Equipment $1000000 Paid In Capital 200000Retained Earnings 480000Total Assets $1500000 Total Equity $ 980000Total Liab. & Equity $1500000Sales for 2003 were $2000000 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 $200000 and the firm’s tax rate is 40%.Prepare an income statement.Difficulty: MediumAnswer:Income StatementSales $2000000Less: Cost of Goods Sold 1100000Gross Profit 900000Less: Selling and Administrative Expense 200000Depreciation expense 125000EBIT 575000Less: Interest Expense (10800 + 33000) 43800EBT 531200Less: Taxes (40%) 212480Net Earnings $ 31872056. Given the financial information for the A.E. Neuman Corporationa) 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?