Exam 1 (Early Version) - September 24, 2008
1.Agency costs include
all of the following EXCEPT
B) cost of goods sold.
C) monitoring expenditures.
D) bonding and structuring expenses.
Information (2005 values)
1. Sales totaled $110,000
2. The gross profit margin was 25 percent.
3. Inventory turnover was 3.0.
4. There are 360 days in the year.
5. The average collection period was 65 days.
6. The current ratio was 2.40.
7. The total asset turnover was 1.13.
8. The debt ratio was 53.8 percent.
2) Total assets
for CEE in 2005 were ________. (See Table 2.1)
3) The strict
application of the percent-of-sales method to prepare a pro forma
income statement assumes the firm has no fixed costs. Therefore, the
use of the past cost and expense ratios generally tends to ________
profits when sales are increasing.
4) The New York Soccer Association would like to accumulate $10,000 by the end of 4 years from now to finance a big soccer weekend for its members. The Association currently has $2,500 and wishes to raise the balance by arranging annual fund-raising events. How much money should they raise at each annual fund-raising event assuming 8 percent rate of interest?
5) Calculate the present value of $5,800 received at the end of year 1, $6,400 received at the end of year 2, and $8,700 at the end of year 3, assuming an opportunity cost of 13 percent.
6) Ashley owns
stock in a company which has consistently paid a growing dividend
over the last five years. The first year Ashley owned the stock, she
received $1.71 per share and in the fifth year, she received $2.89
per share. What is the growth rate of the dividends over the last
A) 5 percent
C) 7 percent
7) Find the equal annual end-of-year payment on $50,000, 15 year, and 10 percent loan.
8) In general, with an
amortized loan, the payment amount remains constant over the life of
the loan, the principal portion of each payment grows over the life
of the loan, and the interest portion of each payment grows over the
life of the loan.
9) Ken borrows $15,000 from a bank at 10 percent annually compounded interest to be repaid in six equal installments. Calculate the interest paid in the second year.
10) What annual rate
of return would Jia need to earn if she deposits $20,000 per year
into an account beginning one year from today in order to have a
total of $1,000,000 in 30 years?
11) Nico is 30 years old and will retire at age 65. He will receive retirement benefits but the benefits are not going to be enough to make a comfortable retirement life for him. Nico has estimated that an additional $25,000 a year over his retirement benefits will allow him to have a satisfactory life. How much should Nico deposit today in an account paying 6 percent interest to meet his goal? Assume Nico will have 15 years of retirement.
12) Congratulations! You have just won the lottery! However, the lottery bureau has just informed you that you can take your winnings in one of two ways. Choice X pays $1,000,000. Choice Y pays $1,750,000 at the end of five years from now. Using a discount rate of 5 percent, based on present values, which would you choose? Using the same discount rate of 5 percent, based on future values, which would you choose? What do your results suggest as a general rule for approaching such problems? (Make your choices based purely on the time value of money.)
13) The annual
percentage rate (APR) is the nominal rate of interest, found by
multiplying the periodic rate by the number of periods in one year.
C) Net profits and
15) The ________
method of developing a pro forma balance sheet estimates values of
certain balance sheet accounts while others are calculated. In this
method, the firm's external financing is used as a balancing, or
The financial analyst for Sportif, Inc. has compiled sales and disbursement estimates for the coming months of January through May. Historically, 75 percent of sales are for cash with the remaining 25 percent collected in the following month. The ending cash balance in January is $3,000. Prepare a cash budget for the months of February through May to answer the following multiple choice questions.
16) The ending cash balance for March is (See Table 3.3)
A) $ 250.
17) Key inputs to
short-term financial planning are
A) operating budgets.
B) leverage analysis.
C) sales forecasts, and operating and financial data.
D) economic forecasts.
Ace Manufacturing, Inc.
For the Year Ended December 31, 2005
18) Ace Manufacturing, Inc., is preparing pro forma financial statements for 2006. The firm utilized the percent-of-sales method to estimate costs for the next year. Sales in 2005 were $2 million and are expected to increase to $2.4 million in 2006. The firm has a 40 percent tax rate.
(a) Given the 2005 income statement in Table 3.6, estimate net profit and retained earnings for 2006.
(b) If $200,000 of the cost of goods sold and $40,000 of selling expense are fixed costs; and the interest expense and dividends are not expected to change, what is he dollar
effect on net income and retained earnings? What is the significance of this effect?
19) Allocation of the
historic costs of fixed assets against the annual revenue they
generate is called
C) gross profits.
20) Calculate net
operating profit after taxes (NOPAT) if a firm has sales of
$1,000,000, operating profit (EBIT) of $100,000, interest expense of
$50,000, and a tax rate of 30%.
21) Operating cash
flow (OCF) is equal to the firm's net operating profits after taxes
minus all non-cash charges.
22) A firm plans to
retire outstanding bonds in the next planning period. The statements
that will be affected are the
B) cash budget and statement of retained earnings.
C) pro forma income statement, pro forma balance sheet, cash budget, and statement of retained earnings.
D) pro forma income statement and pro forma balance sheet.
23) The statement of
cash flows may also be called the
A) sources and uses statement.
B) funds statement.
C) statement of retained earnings.
D) bank statement.
24) The financial
leverage multiplier is an indicator of how much ________ a
corporation is utilizing.
A) long-term debt
C) total assets
25) Due to
inflationary effects, inventory costs and depreciation write-offs
can differ from their true values, thereby distorting profits.
26) The use of
differing accounting treatments,especially
relative to inventory and depreciation,
distort the results of ratio analysis, regardless of whether
cross-sectional or time-series analysis is used.
27) In an effort to analyze Clockwork Company finances, Jim realized that he was missing the company's net profits after taxes for the current year. Find the company's net profits
after taxes using the following information.
Dana Dairy Products Key Ratios
Dana Dairy Products
For the Year Ended December 31, 2005
Dana Dairy Products
December 31, 2005
28) The return on
equity for Dana Dairy Products for 2005 was (See Table 2.2)
A) 50 percent.
C) 0.6 percent.
corporations are required by the Securities and Exchange Commission
(SEC) and individual state securities commissions to provide their
stockholders with an annual stockholders' report.
30) The modified
DuPont formula relates the firm's return on total assets (ROA) to
A) net profit margin.
C) return on equity
analysis evaluates performance of firms at the same point in time
using financial ratios.
32) Financial analysis
and planning is concerned with analyzing the mix of assets and
33) Higher cash flow
and greater risk
A) have the same effect on share price.
B) have an inverse effect on share price.
C) adversely affect share price.
D) have no effect on share price.
34) The part of
finance concerned with design and delivery of advice and financial
products to individuals, business, and government is called
A) Financial Manager.
C) Financial Services.
opportunities in financial services include all of the following
A) personal financial planning.
C) capital expenditures management.
D) real estate and insurance.
36) The primary
emphasis of the financial manager is the use of
A) cash flow.
37) The ________ is
created by a financial relationship between suppliers and demanders
of short-term funds.
A) stock market
C) money market
38) The financial manager places primary emphasis on cash flows, the
inflow and outflow of cash.
39) Which of the following legal forms of organization is
characterized by limited liability?
C) Professional partnership.
40) Money markets
involve the trading of securities with maturities of one year or
less while capital market involve the buying and selling of
securities with maturities of more than one year.
4) Future value of $2,500 at the end of fourth year:
FV = 2,500(1.360) = $3,400
Balance = 10,000 - 3,400 = $6,600
PMT = FVA/FVIFA = 6,600/4.506 = $1,464.71
5) PV = 5,800(0.885) + 6,400(0.783) + 8,700(0.693) = $16,173.30
7) PMT = PVA/PVIFA = 50,000/7.606 = $6,573.76
The interest paid in the second year is $1,305.57
11) PMT = $25,000, n = 15, i = 6%
P(65) = 25,000(PVIFA) = 25,000(9.712) = $242,800
FV = $242,800, n = 35, i = 6%
P(30) = 242,800(PVIF) = 242,800(0.130) = $31,564
12) The PV of A = $1,000,000; The PV of B = $1,371,000; The FV of A = $1,276,000; The FV of B = $1,500,000. Based on both present values and future values, B is the better choice. The student should recognize that finding present values and finding future values are simply reverse processes of one another, and that choosing between two lump sums based on PV will always give the same result as choosing between the same two lump sums based on FV.
Pro forma income statement: December 31, 2006
Net profit after tax is understated by $38,400 and retained earnings by $58,400, using the percent-of-sales method. In planning the addition of assets (current or fixed) and the financing of those assets, the straight percent-of-sales method understates net profit and retained earnings. This, therefore, overstates additional financing needed to add those assets. The judgmental approach allows the firm to obtain a more accurate estimate of the line of credit or long-term financing that will be necessary in the next planning period.
27) Sales = CGS/(1 - GPM) = 105,000/(1 - 0.30) = $150,000
Total Assets = Sales/(Total Asset Turnover)
= 150,000/0.50 = $300,000
Net Profits After Taxes = (ROA) × (Total Assets)
= (0.02) × (300,000) = $6,000