Financial Economics Practice Midterm 1 Spring 2013 Prof Farshid Mojaver There are 22 MC questions 2 points each please mark the best answer in your scantron 1 Book value A is equivalent to market value for firms with fixed assets B is based on historical cost C generally tends to exceed market value when fixed assets are included D is more of a financial than an accounting valuation E is adjusted to market value whenever the market value exceeds the stated book value 2 Which of the following statements concerning the income statement is true A It measures performance over a specific period of time B It determines after tax income of the firm C It includes deferred taxes D It treats interest as an expense E All of the above 3 Financial ratios that measure a firm s ability to pay its bills over the short run without undue stress are known as ratios A asset management B long term solvency C short term solvency D profitability E market value 4 Ratios that measure a firm s financial leverage are known as ratios A asset management B long term solvency C short term solvency D profitability E market value 5 Ratios that measure how efficiently a firm uses its assets to generate sales are known as ratios A asset management B long term solvency C short term solvency D profitability E market value 6 Ratios that measure how efficiently a firm s management uses its assets and equity to generate bottom line net income are known as ratios A asset management B long term solvency C short term solvency D profitability E market value 7 A total asset turnover measure of 1 03 means that a firm has 1 03 in A total assets for every 1 in cash B total assets for every 1 in total debt C total assets for every 1 in equity D sales for every 1 in total assets E long term assets for every 1 in short term assets 8 If a firm produces a 10 return on assets and also a 10 return on equity then the firm A has no debt of any kind B is using its assets as efficiently as possible C has no net working capital D also has a current ratio of 10 E has an equity multiplier of 2 9 What is the net working capital for 2008 A 345 B 405 C 805 D 812 E 1 005 10 What is the change in net working capital from 2007 to 2008 A 93 B 7 C 7 D 85 E 97 11 What is net capital spending for 2008 A 250 B 57 C 0 D 57 E 477 12 What is the operating cash flow for 2008 A 143 B 297 C 325 D 353 E 367 13 What is net new borrowing for 2008 A 70 B 35 C 35 D 70 E 105 14 What is the cash flow of the firm for 2008 A 50 B 247 C 297 D 447 E 517 15 What is the cash flow to stockholders for 2008 A 408 B 417 C 452 D 482 E 503 16 What is the cash flow to creditors for 2008 A 170 B 35 C 135 D 170 E 205 17 The financial ratio measured as net income divided by total equity is known as the firm s A profit margin B return on assets C return on equity D asset turnover E earnings before interest and taxes 18 The long term debt ratio is probably of most interest to a firm s A credit customers B employees C suppliers D mortgage holder E shareholders 19 If shareholders want to know how much profit a firm is making on their entire investment in the firm the shareholders should look at the A profit margin B return on assets C return on equity D equity multiplier E earnings per share 20 A firm has a market capitalization of 2 million market value of interest bearing debt of 1 million book value of interest bearing debt of 500 000 and cash of 100 000 What is the enterprise value A 2 5 million B 2 9 million C 3 0 million D 3 5 million E 3 6 million 21 Frederico s has a profit margin of 6 a return on assets of 8 and an equity multiplier of 1 4 What is the return on equity A 6 7 B 8 4 C 11 2 D 14 6 E 19 6 22 A firm has a return on equity of 15 The debt equity ratio is 50 The total asset turnover is 1 25 and the profit margin is 8 The total equity is 3 200 What is the amount of the net income A 480 B 500 C 540 D 600 E 620 Please write the answers in your Blue Book Show your work 12 pts 1 Some Financial Terms and Ideas please be very concise a What are financial derivatives b What is Mortgage Backed Securities MBS c What is Credit Default Swap CDS 10 pts 2 Pro Forma The most recent financial statement for Bradley Inc are shown here assuming no income taxes Income Statement Sales Costs Net income Balance Sheet 5 700 3 820 1 880 Assets 14 100 Total 14 100 Debt Equity Total 6 300 7 800 14 100 Assets and costs are proportional to sales but debt and equity are not No dividends are paid Next year s sales are projected to increase by 20 Write Bradley s pro forma income statement and pro forma balance sheet Answer Assuming costs and assets increase proportionally the pro forma financial statements will look like this Pro forma income statement Sales Costs Net income 6 840 4 584 2 256 Pro forma balance sheet Assets 16 920 Total 16 920 Debt Equity Total 6 300 10 056 16 356 15 pts 3 Calculating Total Cash Flows Schwert Corp shows the following information on its 2010 income statement sales 167 000 costs 91 000 other expenses 5 400 depreciation expense 8 000 interest expense 11 000 taxes 18 060 dividends 9 500 In addition you re told that the firm issued 7 250 in new equity during 2010 and redeemed 7 100 in outstanding long term debt a What is the 2010 operating cash flow b What is the 2010 cash flow to creditors c What is the 2010 cash flow to stockholders d If net fixed assets increased by 22 400 during the year what was addition to net working capital NWC Answer To find the OCF we first calculate net income Income Statement Sales 167 000 Costs 91 000 Depreciation 8 000 Other expenses 5 400 EBIT 62 600 Interest 11 000 Taxable income 51 600 Taxes 18 060 Net income 33 540 Dividends Additions to RE 9 500 24 040 a OCF EBIT Depreciation Taxes 62 600 8 000 18 060 52 540 b CFC Interest Net new LTD 11 000 7 100 18 100 Note that the net new long term debt is negative because the company repaid part of its longterm …