FIN331.101Fall 2010 Exam #1Dr. RheeNAME__________________ ID#__________________1. Identify which financial statements are appropriate to use for each event listed below.Event 1: Can the firm meet all its short-term obligations?Event 2: How much of the firm’s earnings are put back into the company for reinvestment and how much is paid out as dividend?a) Balance Sheet, Income Statement b) Balance Sheet, Statement of Cash Flowc) Balance Sheet, Statement of Stockholders’ Equity d) Income Statement, Statement of Cash Flowse) Income Statement, Statement of Stockholder’s EquityAnswer: c2. If the ROAs are the same, but the ROEs are different between the two firms, what is causing a higher ROE?a) Larger profits b) Larger revenues c) More debt d) Increased dividends e) Smaller taxesAnswer: c3. I checked the Microsoft stock price at 9:12am this morning. It was $24.88. The last 12 month trailing (ttm) net earnings is $14.58 billion with 9 billion shares. What is the 12 month trailing EPS and P/E ratio?a) 15.36 b) 13.31 c) 17.88 d) 12.21 e) 20.33 Answer: aEPS = NE / Shares Outstanding = $14.58 billion / 9 billion = $1.62P/E ratio = Price per Share / EPS = $24.88 / $1.62 = 15.364. ABC, Inc., had the amount of ending retained earnings balance increased this year by the amount of this year’s net earnings. Which of the following statement is true?a) If the firm paid a dividend, then the dividend must have equaled net income b) The firm paid no dividends this year c) The firm had zero net income this year d) The firm has a cash flow problem e) The firm had negative net income this yearAnswer: b5. The following information for Towson, Inc. is provided:Net Sales: $88,000Operating Costs: $72,000 (doesn’t include depreciation)Depreciation Expense: $ 7,200 Debt: $40,000Interest Rates: 10% AnnualTax Rate: 34%How much net (operating) cash flow did Woodley generate over the past year?a) $3,168 b) $3,268 c) $10,168 d) $10,368 e) $11,368Answer: d6. Given EBIT = $800, Tax Rate = 40%, NFA2009=120, NFA2010=370, Change in Net Working Capital = $150, how much free cash flow did Johnny Unitas Corporation have?a) $90 b) $50 c) $60 d) $70 e) $80Answer: eFCF = EBIT*(1 – T) - ∆NFA - ∆NWC = $800*(1-0.4) - $(370 – 120) – $150 = $80 7. Hawkins Corp. has a taxable income of $350,000, and the firm faces the corporate tax rates described in the table below:Taxable Income Marginal Tax Rate$0 - $300,000 25%$300,000 - $10,000,000 33%Over $10,000,000 38% What is Hawkins Corp.’s marginal and approximate average tax rates?a) 25%, 25% b) 33%, 26% c) 25%, 34% d) 33%, 33% e) 33%, 38%Answer: bMarginal tax rate = 33%Average tax rate = {($300,000* 0.25) + (50,000*0.33)} / $350,000 = 26.14%8. What is the sequential approach? a) Profit maximization b) Agency conflict c) Efficient management d) Satisfying stakeholders to achieve shareholder wealth maximization e) None of the above Answer: d9. Which of the following is the reason that the management may fail to try to achieve the objective of the firm? a) Maximize sales b) Maximize profits c) Avoid financial distress d) Agency conflict e) Maximize the current stock priceAnswer: d10. Cook, Inc. has a current ratio of 1.8x on current liabilities of $200,000. The firm has $36,000 of inventories. Cook, Inc is considering an expansion which would require a rapid increase in its inventories. The firm will issue notes payable and use those funds to buy new inventories to meet the inventory requirement for the expansion. Cook’s debt holders specifies that it must maintain a quick ratio at least 1.20x, or else it may default. How much new inventory can Cook raise before it violates its bond contracts?a) $70,000 b) $80,000 c) $90,000 d) 72,000 e) $30,000Answer: aCR = 1.8 = CA / CL = CA / $200,000 ⇨ CA = $360,000QR = 1.20 = [(CA+X) - (INV+X)] / (CL+X) = ($360,000 - $36,000) / ($200,000 + x) ⇨ x = $70,00011. If you have too much short-term debt (current liability), what is (are) the problem(s) you may run into?a) increased debt b) increased liquidity c) decreased profitability d) liquidity problem e) both increased debt and liquidity problemsAnswer: e12. If the total asset turnover ratio is 0.9, the equity multiplier is 4.96, and the profit margin is 8.8%, what the return on equity? a) 12% b) 20% c) 30% d) 39% e) 45%Answer: dROE = PM * TAT * m = 8.8% * 0.9 * 4.96 = 39.28%(m is equity multiplier)13. Queens of Leon, Inc.’s currently has $1.6 million in accounts receivables and its days sales outstanding is 20 days. If accountsreceivable comprise 50% of the company’s current assets and the firm has $4.8 million in net fixed assets, what is its total asset turnover ratio?a) 2.65x b) 3.65x c) 3.52x d) 2.92x e) 3.92xAnswer: bDSO = AR / (Sales / 365) = 20 ⇨ $1.6 million / (Sales / 365) = 20 ⇨ Sales = $29.2 millionTAT = Sales / TA = $29.2 million / ($3.2 million + $4.8 million) = 3.65x14. Fergie Inc, has a total asset turnover ratio of 4.0x and net annual revenue of $48.5 million. It also has $4.85 million of total debt. Find out the firm’s times-interest-earned if the firm’s total operating costs including depreciation and amortization is $33.95million and it pays 15% annual interest on its outstanding debt.a) 20.33x b) 16.67x c) 43.00x d) 10.33x e) 20.00xAnswer: eTIE = EBIT / INT Expense15. What is the opportunity cost of Project A if it is expected to yield 10%, while the yields from other projects range from 6.5% to 11.5% with the mean 9% and 5% standard deviation?a) 10% b) 6.5% c) 11.5% d) 9% e) 9.3%Answer: c16. If your mark-up ratio is 25%, what is the margin ratio? a) 15% b) 20% c) 25% d) 28% e) 30%Answer: b1) MathematicallyMark-up ratio: how much you raise sales price from you CGSIf mark-up is 25%, (Sales – CGS) / CGS = Sales / CGS – 1 = 0.25 ⇨ Sales / CGS = 1.25 ⇨ Sales = 1.25*CGSGM = Gross Margin / Sales = (Sales – CGS) / Sales = (1.25*CGS – CGS) / 1.25*CGS = 0.25CGS / 1.25CGS = 20%2) If CGS=$100. 25% mark up ⇨ Sales=$125. The gross margin ratio = 25/125=20%17. Which one is a money market instrument? a) common stock b) long-term bonds c) 30 year mortgage loan d) money market account e) preferred stockAnswer: dAll others are capital market
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