True/False
Indicate whether the statement is
true or false.
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____ |
1. |
There are three primary disadvantages of a regular |
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organization, and (3) |
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to attract large amounts of capital and thus to |
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____ |
2. |
One of the functions of NYSE specialists is to |
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stocks in which they |
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change the bid and ask prices of the securities so |
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____ |
3. |
Suppose an investor plans to |
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Security A, while Security B |
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compounded value of Security B |
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and assume |
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____ |
4. |
When a loan is amortized, a |
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principal in the early years, |
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____ |
5. |
Consider the balance sheet of |
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earnings, the company would be |
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Cash |
$ |
50,000 |
Accounts payable |
$ |
100,000 |
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Inventory |
200,000 |
Accruals |
100,000 |
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Accounts receivable |
250,000 |
Total CL |
$ |
200,000 |
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Total CA |
$ |
500,000 |
Debt |
200,000 |
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Net fixed assets |
$ |
900,000 |
Common stock |
200,000 |
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Retained earnings |
800,000 |
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Total assets |
$ |
1,400,000 |
Total L & E |
$ |
1,400,000 |
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____ |
6. |
To estimate the cash flow from operations, |
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non-cash charge that has been |
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____ |
7. |
The first, and most critical, |
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____ |
8. |
Two firms |
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operating at full capacity, |
in sales during the next period,
then Firm A is likely to need more additional funds than Firm B, other things
held constant.
Multiple Choice
Identify the choice that best
completes the statement or answers the question.
____ 9. Which of the following statements is CORRECT?
a.
One
of the disadvantages of a sole proprietorship is that the proprietor is exposed
to unlimited liability.
b.
It
is generally easier to transfer one’s ownership interest in a partnership than
in a corporation.
c.
One
of the advantages of the corporate form of organization is that it avoids
double taxation.
d.
One
of the advantages of a corporation from a social standpoint is that every
stockholder has equal voting rights, i.e., “one person, one vote.”
e. Corporations of all types are
subject to the corporate income tax.
____
10. Which of the following could explain why a business might choose to operate
as a corporation rather than as a sole proprietorship or a partnership?
a. Corporations generally find it
relatively difficult to raise large amounts of capital.
b.
Less
of a corporation’s income is generally subjected to taxes than would be true if
the firm were a partnership.
c.
Corporate
shareholders escape liability for the firm’s debts, but this factor may be
offset by the tax disadvantages of the corporate form of organization.
d. Corporate investors are exposed
to unlimited liability.
e. Corporations generally face
relatively few regulations.
____ 11. Which of the following statements is CORRECT?
a.
In
a regular partnership, liability for other partners’ misdeeds is limited to the
amount of a particular partner’s investment in the business.
b.
Partnerships
have more difficulty attracting large amounts of capital than corporations
because of such factors as unlimited liability, the need to reorganize when a
partner dies, and the illiquidity (difficulty buying and selling) of
partnership interests.
c.
A
slow-growth company, with little need for new capital, would be more likely to
organize as a corporation than would a faster growing company.
d.
In
a limited partnership, the limited partners have voting control, while the
general partner has operating control over the business. Also, the limited
partners are individually responsible, on a pro rata basis, for the firm’s
debts in the event of bankruptcy.
e. A major disadvantage of all
partnerships relative to all corporations is the fact that federal income taxes
must be paid by the partners rather than by the firm itself.
____ 12. Which of the following statements is CORRECT?
a.
The
proper goal of the financial manager should be to attempt to maximize the
firm’s expected cash flows, because this will add the most to the wealth of the
individual shareholders.
b.
The
financial manager should seek that combination of assets, liabilities, and
capital that will generate the largest expected projected after-tax income over
the relevant time horizon, generally the coming year.
c.
The
riskiness inherent in a firm’s earnings per share (EPS) depends on the
characteristics of the projects the firm selects, and thus on the firm’s
assets. However, EPS is not affected by the manner in which those assets are
financed.
d.
Potential
agency problems can arise between stockholders and managers, because managers
hired as agents to act on behalf of the owners may instead make decisions
favorable to themselves rather than the stockholders.
e.
Large,
publicly-owned firms like AT&T and GM are controlled by their management
teams. Ownership is generally widely dispersed, hence managers have great
freedom in how they manage the firm. Managers may operate in stockholders’ best
interests, but they may also operate in their own personal best interests. As
long as managers stay within the law, there is no way to either force or
motivate them to act in the stockholders’ best interests.
____
13. You are analyzing the value of a potential investment by calculating the
sum of the present values of its expected cash flows. Which of the following
would lower the calculated value of the investment?
a.
The
cash flows are in the form of a deferred annuity, and they total to $100,000.
You learn that the annuity lasts for only 5 rather than 10 years, hence that
each payment is for $20,000 rather than for $10,000.
b. The discount rate increases.
c. The riskiness of the investment’s
cash flows decreases.
d.
The
total amount of cash flows remains the same, but more of the cash flows are
received in the earlier years and less are received in the later years.
e. The discount rate decreases.
____
14. Last year Toto Corporation’s sales were $225 million. If sales grow at 6%
per year, how large (in millions) will they be 5 years later?
a. $271.74
b. $286.05
c. $301.10
d. $316.16
e. $331.96
____
15. Last year Mason Corp’s earnings per share were $2.50, and its growth rate
during the prior 5 years was 9.0% per year. If that growth rate were
maintained, how many years would it take for Mason’s EPS to double?
a. 5.86
b. 6.52
c. 7.24
d. 8.04
e. 8.85
____
16. Your aunt is about to retire, and she wants to buy an annuity that will
provide her with $65,000 of income a year for 25 years, with the first payment
coming immediately. The going rate on such annuities is 6.25%. How much
would it cost her to buy the annuity today?
a. $739,281.38
b. $778,190.93
c. $819,148.35
d. $862,261.42
e. $905,374.49
____
17. What is the present value of the following cash flow stream at an interest
rate of 12.0% per year? $0 at Time 0; $1,500 at the end of Year 1; $3,000 at
the end of Year 2; $4,500 at the end of Year 3; and $6,000 at the end of Year
4.
a. $9,699.16
b. $10,209.64
c. $10,746.99
d. $11,284.34
e. $11,848.55
____
18. An investment costs $1,000 (CF at t = 0) and is expected to produce cash
flows of $75 at the end of each of the next 5 years, then an additional lump
sum payment of $1,000 at the end of the 5th year. What is the expected rate of
return on this investment?
a. 6.77%
b. 7.13%
c. 7.50%
d. 7.88%
e. 8.27%
____
19. Suppose a bank offers to lend you $10,000 for 1 year on a loan contract
that calls for you to make interest payments of $250.00 at the end of each quarter
and then pay off the principal amount at the end of the year. What is the
effective annual rate on the loan?
a. 8.46%
b.
8.90%
c. 9.37%
d. 9.86%
e. 10.38%
____
20. Other things held constant, which of the following actions would increase
the amount of cash on a company’s balance sheet?
a. The company repurchases common
stock.
b. The company pays a dividend.
c. The company issues new common
stock.
d. The company gives customers more
time to pay their bills.
e. The company purchases a new piece
of equipment.
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____ 21. |
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Assets: |
2006 |
2005 |
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Cash |
$ |
200,000 |
$ |
170,000 |
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Accounts receivable |
864,000 |
700,000 |
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Inventories |
2,000,000 |
1,400,000 |
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Total current assets |
$ |
3,064,000 |
$ |
2,270,000 |
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Net fixed assets |
6,000,000 |
5,600,000 |
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Total assets |
$ |
9,064,000 |
$ |
7,870,000 |
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Liabilities and equity: |
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Accounts payable |
$ |
1,400,000 |
$ |
1,090,000 |
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Notes payable |
1,600,000 |
1,800,000 |
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Total current liabilities |
$ |
3,000,000 |
$ |
2,890,000 |
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Long-term debt |
2,400,000 |
2,400,000 |
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Common stock |
3,000,000 |
2,000,000 |
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Retained earnings |
664,000 |
580,000 |
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Total common equity |
$ |
3,664,000 |
$ |
2,580,000 |
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|
Total liabilities and equity |
$ |
9,064,000 |
$ |
7,870,000 |
Wolken has never paid a dividend
on its common stock, and it issued $2,400,000 of 10-year non-callable,
long-term debt in 2005. As of the end of 2006, none of the principal on this
debt had been repaid. Assume that the company’s sales in 2005 and 2006 were the
same. Which of the following statements must be CORRECT?
a. Wolken increased its short-term
bank debt in 2006.
b. Wolken issued long-term debt in
2006.
c. Wolken issued new common stock in
2006.
d. Wolken repurchased some common
stock in 2006.
e. Wolken had negative net income in
2006.
____
22. Hunter Manufacturing Inc.’s December 31, 2006, balance sheet showed total
common equity of $2,050,000 and 100,000 shares of stock outstanding. During
2007, Hunter had $250,000 of net income, and it paid out $100,000 as dividends.
What was the book value per share at 12/31/07, assuming that Hunter neither
issued nor retired any common stock during 2007?
a. $20.90
b. $22.00
c. $23.10
d. $24.26
e. $25.47
____
23. Companies generate income from their “regular” operations and
from other sources like interest earned on the securities they hold, which is
called non-operating income. Lindley Textiles recently reported $12,500 of
sales, $7,250 of operating costs other than depreciation, and $1,000 of
depreciation. The company had no amortization charges and no non-operating
income. It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and
its federal-plus-state income tax rate was 40%. How much was Lindley’s
operating income, or EBIT?
a. $3,462
b. $3,644
c. $3,836
d. $4,038
e. $4,250
____
24. Meric Mining Inc. recently reported $15,000 of sales, $7,500 of operating
costs other than depreciation, and $1,200 of depreciation. The company had no
amortization charges, it had outstanding $6,500 of bonds that carry a 6.25%
interest rate, and its federal-plus-state income tax rate was 35%. How much was
the firm’s net income after taxes? Meric uses the same depreciation expense for
tax and stockholder reporting purposes.
a. $3,284.55
b. $3,457.42
c. $3,639.39
d. $3,830.94
e. $4,022.48
____ 25. EP Enterprises has the following income
statement. How much net operating profit after taxes (NOPAT) does
|
the |
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Sales |
$ |
1,800.00 |
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Costs |
1,400.00 |
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Depreciation |
250.00 |
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EBIT |
$ |
150.00 |
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Interest |
70.00 |
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EBT |
$ |
80.00 |
|
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Taxes |
32.00 |
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Net |
$ |
48.00 |
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a. $81.23
b. $85.50
c. $90.00
d. $94.50
e. $99.23
____ 26. Tibbs Inc. had the following data for the
year ending 12/31/06: Net income = $300; Net operating profit after taxes
(NOPAT) = $400; Total assets = $2,500; Short-term investments = $200;
Stockholders’ equity = $1,800; Total debt = $700; and Total operating capital =
$2,300. What was its return on invested capital (ROIC)?
a. 14.91%
b. 15.70%
c. 16.52%
d. 17.39%
e. 18.26%
____
27. Jefferson City Computers has developed a forecasting model to estimate its
AFN for the upcoming year. All else being equal, which of the following factors
is most likely to lead to an increase of the additional funds needed
(AFN)?
a. A sharp increase in its
forecasted sales.
b. A sharp reduction in its
forecasted sales.
c.
The
company reduces its dividend payout ratio.
d.
The
company switches its materials purchases to a supplier that sells on terms of
1/5, net 90, from a supplier whose terms are 3/15, net 35.
e. The company discovers that it has
excess capacity in its fixed assets.
____ 28. The capital intensity ratio is generally
defined as follows:
a. Sales divided by total assets,
i.e., the total assets turnover ratio.
b. The percentage of liabilities
that increase spontaneously as a percentage of sales.
c. The ratio of sales to current
assets.
d. The ratio of current assets to
sales.
e. The amount of assets required per
dollar of sales, or A*/S0.
____ 29. Spontaneously generated funds are generally
defined as follows:
a. The amount of assets required per
dollar of sales.
b.
A
forecasting approach in which the forecasted percentage of sales for each item
is held constant.
c.
Funds
that a firm must raise externally through borrowing or by selling new common or
preferred stock.
d.
Funds
that are obtained automatically from normal operations, and they include
spontaneous increases in accounts payable and accruals, plus additions to
retained earnings.
e. The
amount of cash raised in a given year minus the amount of cash needed to
finance the additional capital expenditures and working capital needed to
support the firm’s growth.
____ 30. Which of the following statements is CORRECT?
a. Since
accounts payable and accrued liabilities must eventually be paid off, as these
accounts increase, AFN as calculated by the AFN equation must also increase.
b.
Suppose
a firm is operating its fixed assets at below 100% of capacity, but it has no
excess current assets. Based on the AFN equation, its AFN will be larger than
if it had been operating with excess capacity in both fixed and current assets.
c.
If
a firm retains all of its earnings, then it cannot require any additional funds
to support sales growth.
d.
Additional
funds needed (AFN) are typically raised using a combination of notes payable,
long-term debt, and common stock. Such funds are non-spontaneous in the sense
that they require explicit financing decisions to obtain them.
e. If a firm has a positive free
cash flow, then it must have either a zero or a negative AFN.
____
31. Kamath-Meier Corporation’s CFO uses this equation, which was developed by
regressing inventories on sales over the past 5 years, to forecast inventory
requirements: Inventories = $22.0 + 0.125(Sales). The company expects sales of
$400 million during the current year, and it expects sales to grow by 30% next
year. What is the inventory forecast for next year? All dollars are in
millions.
a. $74.6
b. $78.5
c. $82.7
d. $87.0
e. $91.4
____ 32. Last year Wei Guan Inc. had $350 million of
sales, and it had $270 million of fixed assets that were used at 65% of
capacity. In millions, by how much could Wei Guan’s sales increase before it is
required to increase its fixed assets?
a. $170.1
b. $179.0
c. $188.5
d. $197.9
e. $207.8
____
33. Clayton Industries is planning its operations for next year, and Ronnie
Clayton, the CEO, wants you to forecast the firm’s additional funds needed
(AFN). Data for use in your forecast are shown below. Based on the AFN
equation, what is the AFN for the coming year? Dollars are in millions.
|
Last |
$350 |
|
|
Sales |
30% |
|
|
Last |
$500 |
|
|
Last |
5% |
|
|
a. |
$102.8 |
|
|
b. |
$108.2 |
|
|
c. |
$113.9 |
|
|
d. |
$119.9 |
|
|
e. |
$125.9 |
