Finance 3155

Exam 1 (Early Version)  - September 24, 2008

Name   

 

1.Agency costs include all of the following EXCEPT

                        A)  opportunity costs.

B)  cost of goods sold.

C) monitoring expenditures.

D) bonding and structuring expenses.

 

Table 2.1

 

 

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)

A) $ 58,603
B) $ 97,345
C) $124,300
D) $ 45,895

 

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.

A) overstate
B) have no effect on

C) understate
D) accurately predict

 

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 five years?
 

A) 5 percent
B) 12 percent

C) 7 percent
D) 14 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.
 

A. True

B. False

 

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?
 

A) 4.3%
B) 1.3%
C) 2.3%
D) 3.3%

 

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.
 

A. True

B. False

 


14) In the statement of cash flows, retained earnings are handled through the adjustment of which two accounts?

A) Revenue and cost.
B) Assets and liabilities.

C) Net profits and dividends.
D) Depreciation and purchases.

 

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 plug, figure.
 

A) percent-of-sales
B) cash

C) accrual
D) judgmental


 

Table 3.3

 

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.
         B) $ 500.
         C) $6,750.
         D) $2,500.


 

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.


 

Table 3.6

 

Income Statement

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
 

A) depreciation.
B) net profits.

C) gross profits.
D) amortization.

 

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%.

A) $70,000.
B) $35,000.

C) $700,000.
D) none of the above.

 

21) Operating cash flow (OCF) is equal to the firm's net operating profits after taxes minus all non-cash charges.
 

A. True

B. False

 


 

22) A firm plans to retire outstanding bonds in the next planning period. The statements that will be affected are the

A) pro forma balance sheet and cash budget.

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
B) operating leverage

C) total assets
D) total debt

 

25) Due to inflationary effects, inventory costs and depreciation write-offs can differ from their true values, thereby distorting profits.
 

A. True

B. False

 

26) The use of differing accounting treatments,especially relative to inventory and depreciation, can distort the results of ratio analysis, regardless of whether cross-sectional or time-series analysis is used.
 

A. True

B. False

 

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.

Return on total assets = 2%

Total Asset Turnover = 0.5

Cost of Goods Sold = $105,000

Gross Profit Margin = 0.30

Table 2.2

 

Dana Dairy Products Key Ratios

 

 

Income Statement

Dana Dairy Products

For the Year Ended December 31, 2005

 

 

Balance Sheet

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.
B) 5.6 percent.

C) 0.6 percent.
D) 0.9 percent.

 

29) Publicly-owned corporations are required by the Securities and Exchange Commission (SEC) and individual state securities commissions to provide their stockholders with an annual stockholders' report.
 

A. True

B. False

 

30) The modified DuPont formula relates the firm's return on total assets (ROA) to the
 

A) net profit margin.
B) financial leverage multiplier.

C) return on equity (ROE).
D) total asset turnover.

 

31) Time-series analysis evaluates performance of firms at the same point in time using financial ratios.
 

A. True

B. False

 

32) Financial analysis and planning is concerned with analyzing the mix of assets and liabilities.
 

A. True

B. False

 

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.
B) Managerial Finance.

C) Financial Services.
D) none of the above.

 

35) Career opportunities in financial services include all of the following EXCEPT
 

A) personal financial planning.

B) investments.

C) capital expenditures management.

D) real estate and insurance.

 

36) The primary emphasis of the financial manager is the use of
 

A) cash flow.
B) accrued earnings.

C) organization charts.
D) profit incentives.

 

37) The ________ is created by a financial relationship between suppliers and demanders of short-term funds.
 

A) stock market
B) financial market

C) money market
D) capital market

 

       38) The financial manager places primary emphasis on cash flows, the inflow and outflow of cash.
 

A. True

B. False

 

 

       39) Which of the following legal forms of organization is characterized by limited liability?
 

      A) Partnership.
      B) Corporation.

      C) Professional partnership.
      D) Sole proprietorship.

 

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.
 

A. True

B. False

 

 

 


KEY

 

1) B

2) B

3) C

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

6) D

7) PMT = PVA/PVIFA = 50,000/7.606 = $6,573.76

8) FALSE

9)
PMT = 15,000/4.355 = $3,444.32

 

 

 

The interest paid in the second year is $1,305.57

 

10) D

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.

 

13) TRUE

14) C

15) D

16) C

17) C

18) (a)

Pro forma income statement: December 31, 2006

 

 

(b)          

 

 

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.

 

19) A

20) A

21) FALSE

22) C

23) A

24) D

25) TRUE

26) TRUE

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

 

28) B

29) TRUE

30) C

31) FALSE

32) FALSE

33) B

34) C

35) C

36) A

37) C

38) TRUE

39) B

40)

TRUE