Finance 3155

Exam 1 – Tuesday,
September 30, 2008

Dr. Dowling Name ___________________

**Instructions: You are to answer all of the following
questions. Where calculation is involved
in obtaining a solution to a question, you are reminded that the award of
credit is dependent upon proper justification.
Good Luck!!!!**

1) Agency costs include which of the
following

A) preferred dividend payments

B) cost of goods sold.

C) monitoring expenditures.

**D) bonding
and structuring expenses**.

Table 2.1

Balance Sheet

Cole Egan Enterprises

December 31, 2005

Cash $4,500 Accounts Payable $12,000

Accounts Receivable Notes Payable

Inventory Accurals $1,000

Total Current Assets Total Current Liabilities

Net Fixed Assets Long-Term Debt

Total Assets Stockholders’ Equity

Total Liabilities and S.E.

Information
(2005 values)

1.
Sales totaled $115,000 5. The average collection period was 65
days.

2.
The gross profit margin was 25 percent. 6.
The current ratio was 2.40.

3.
Inventory turnover was 3.0. 7. The total asset turnover was .93.

4.
There are 360 days in the year. 8.
The debt ratio was 53.8 percent.

2) Total current assets for CEE
in 2005 were ________. (See Table 2.1

1.
(S-COGS)/S = .25 thus (COGS)/S = .75 and
COGS = .75(S) = .75($115,000) = $86,250 2. IT
= 3 = COGS/I, thus I = COGS/3 = $28,750 3. ACP
= 65 days = AR/Average Daily Sales => AR = ADS(65) => AR =
65($115,000/360) => AR = $20,763.89 4.
Current Assets = Cash + AR + I => $4,500
+ $20,763.89 + $28,750 = $54,013.89

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) accurately predict

B) understate

C) have no effect on

**D) overstate**

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 a promise of $2,500 at the end of the 3rd year 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?

1.
Need $10,000 minus the value in year 4 of
the $2,500 received at the end of year 3. 2. =>
$10,000 - $2,500(1.08)1 = $10,000 -
$2,700 = $7,300 need in 4 years. 3. $7,300
is the FV of a 4 year annuity so PMT = FVA\FVIFA = $7,300\4.506 = $1,620.02 4.
So they must raise $1,620.02 each year for
four years to have $10,000.

5) Calculate the present value at the beginning of the 5^{th}
year of $5,800 received at the end of year 1, $6,400 received at the

beginning of year 2, and $8,700 at the end
of year 3, assuming an opportunity cost of 13 percent.

1.
FV at beginning of Y5 of $5,800 received at
end of Y1 = $5,800(1.13) 2. FV
at beginning of Y5 of $6,400 received at beginning of Y2 = $6,400(1.13) 3. FV
at beginning of Y5 of $8,700 received at end of Y3 = $8,700(1.13) 4.
FV = 1 + 2 + 3 = $8,368.80 + $9,234.54 +
$9,386.10 = $27,434.34

^{3} = $5,800(1.443) = $8,368.80^{3}
= $6,400(1.443) = $9,234.54^{1}
= $8,700(1.113) = $9,386.10

6) Ashley owns stock in a company which has
consistently paid a growing dividend over the last five years. In January of the
first year Ashley owned the stock, she received $1.71 per share and for the
remainder of the five year period, she received dividends at the end of the
year. The last dividend received at the end of the fifth year, was $2.89 per
share. What is the growth rate of the dividends over the last five years?

1.
PV 2. FV 3. 1.69
= (1 + g) 4.
Then,
g = 1.111 – 1 => g = .111 => g = 11.1%

_{0} = $1.71, FV_{5} =
$2.89 and N = 5_{5}
= PV_{0}(1 + g)^{5} => $2.89 = $1.71(1 + g)^{5}
=>^{ }$2.89\$1.71 = (1 + g)^{5 }=> $2.89\$1.71 = (1 +
g)^{5}^{5}=> (1.69)^{1/5}= (1 + g) => (1.69)^{.2}=
(1 + g) => 1.111 = 1 + g

7) Find the equal annual end-of-year payment on $50,000, 10 year,
and 15 percent loan.

1.
PV 2. PV 3. $50,000
= PMT (5.019) 4. PMT
= $50,000 \ 5.019 => 5.
PMT = $9,962.60

_{A} = $50,000, N = 10 and i = 15%_{A}
= Pmt PVIFA for I = 15% and N = 10

8. In general, with an amortized loan, the amount
of the payment going to cover interest remains constant over the life of the
loan while the principal portion of each payment grows over the life of the
loan. The total amount of the payment remains constant over the life of the
loan. **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 twelfth
year.

**The
interest paid in the twelfth year is zero ($0) NADA since the loan was paid
off in six years…**

10. What annual rate of return would Natalie need
to earn if she deposits $20,000 per year into an account starting today in
order to have a total of $1,000,000 in 30 years?

1.
FV 2. The
trick to the problem is to recognize that we are dealing with an annuity
due. So, 3. FV 4.
Setting FV = $1,000,000, N = 30, PMT =
$20,000

_{30} = $1,000,000, PMT =
$20,000.00 and N = 30, We are to find the rate of return i _{30Due
}= (PMT FVIFA for unknown i and N = 30)x( 1 + i) => FV_{30Due }=
PMT x FVIFA _{for unknown i and N = 30} x( 1 + i) =>**AND **remembering to set
the display to BEGIN for an annuity due on your calculator, we obtain the
value 3.117% - which is the correct answer…

11. Jason is 21 years old and will retire at age 71.
He will receive retirement benefits but the benefits are not going to be enough

to make a comfortable retirement life for
him. Jason has estimated that an additional $45,000 a year over his retirement

benefits
will allow him to have a satisfactory life. How much should Jason deposit today
in an account paying 6 percent interest to meet his goal? Assume Jason will have
18 years of retirement

1.
First we need to find out how much Jason
will need in the bank when he turns 71 to be able to withdraw $45,000 per
year for 18 years. Thus we have to
find the PV of an annuity where the PMT = $45,000, N = 18 and i = 6%. =>
PV 2. The
question is how much must we deposit today in order for Jason to have his
wish, thus we need to know the PV of the amount he needs in the bank ($487,242.16)
at age 71 => 3. PV

_{A} = PMT PVIFA_{N=30, i = 6% }= $45,000 (10.828) => PV_{A}
= $487,242.16 => this is the amount he needs in the bank in 50 years._{0}
= $487,242.16 PVIF_{N=50 and i=6% }=> $487,242.16 (1.06)^{-50}
=> $487,242.16(.0543) =>**4.
****PV _{0}
= $26,451.58**

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 $1,750,000 today. Choice Y pays
$1,000,000 at the end of five years from now. Which would you choose and why
would you choose it?

13) The effective annual rate (EAR) is the nominal
rate of interest, found by multiplying the periodic rate by the number of

periods in one year. - **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 percent-of-sales 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. **TRUE**

** **

The financial analyst for Sportif, Inc.
has compiled sales and disbursement estimates for the coming months of January
through May. Historically, 65 percent of sales are for cash with the remaining 35
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.

** Table 3.3**

Month |
Sportif, Inc |
Disbursements |

Sales |
||

January |
$5,000 |
$6,000 |

February |
$6,000 |
$7,000 |

March |
$10,000 |
$4,000 |

April |
$10,000 |
$5,000 |

May |
$10,000 |
$5,000 |

16) The ending cash balance for March
is (See Table 3.3

1.
January ECB was $3000 2. Feb
a.
Inflows
i.
35% of January’s Sales = .35x$5,000 = $1,750
ii.
65% of February’s Sales = .65x$6,000 = $3,900 b.
Disbursements
i.
$7,000 c.
FEB ECB
= January’s ECB + a – b = $3,000 + $5,650 - $7,000 = $1,650 3. March a.
Inflows
i.
35% of February’s Sales = .35x$6,000 = $2,100
ii.
65% of March’s Sales = .65x$10,000 = $6,500 b.
Disbursements
i.
$4,000 c.
MARCH ECB
= February’s ECB + a – b = $1,650 + $8,600 - $4,000 =

**$4,750**

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. Given the 2005 income statement in Table 3.6,
estimate retained earnings for 2006.

What we are asked to calculate here is the addition to
retained earnings using a percent- of- sales methodology. Thus we need to find the change in RE = New
Sales Level xProfit Margin on Sales x (1 – the dividend payout ratio). 1.
Profit Margin On Sales for ’05 = NI/Sales =
$252,000/$2,000,000 = .126 2. The
Dividend Payout Ratio = Dividends/Net Income = $100,000\$252,000 = .397 3.
The Change in Retained Earnings = New Sales
Level x Profit Margin on Sales x (1 – the dividend payout ratio) as stated
abive =>$2,400,000 x .126 x (1-.397) => The Change in Retained
Earnings = $2,400,000 x .126 x .603 =

**$182,347.20.**

19) Allocation of the historic costs of fixed
assets against the annual revenue they generate is called

A) depletion

B) operating income.

C) appreciation

**D) depreciation.**

1.
NOPAT =( EBIT – I) x (1-t) = ($140,000 -
$50,000) x (1 - .4) => $90,000 x .6 =>

20) Calculate net operating
profit after taxes (NOPAT) if a firm has sales of $1,000,000, operating profit
(EBIT) of $100,000, cost-of-goods sold of $65,000, depreciation of $69,000 and interest
expense of $50,000. The tax rate is 40%.

**$54,000**

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

22) A firm plans to retire outstanding bonds in the
next planning period. The statements that will be affected are the pro forma
income statement, pro forma balance sheet, cash budget, and statement of
retained earnings. **True**

23) The statement of cash flows may also be called
the

A) 10K

B) amortization
table

C) statement
of retained earnings

**D) sources and uses
statement**

24) The financial leverage multiplier is an
indicator of how much ________ a corporation is utilizing.

A) operating leverage

B) short-term debt

C) long-term debt

**D) total debt**

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

26) Current accounting standards are such that the
use of differing accounting treatment (especially relative to inventory and
depreciation) generally does not distort the results of either cross-sectional
or time-series ratio analysis. **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 = 12% Total Asset Turnover = 1.05

Cost
of Goods Sold = $125,000 Gross Profit Margin = 0.25

1.
Gross Profit Margin = (S – COGS\Sales) = .25
=> (COGS\Sales) = .75 => S = (COGS\ .75) => S = ($125,000 \.75) =>
S = $166,666.67 2. TAT
= 1.05 = (S\TA) => TA = (S\1.05) => TA = ($166,666.67 \ 1.05) =>
TA = $158,730.16 3.
Return on Total Assets = .12 => (NI \ TA)
= .12 => NI = .12(TA) => NI =

**$19,047.62**

**Table 2.2 Income
Statement**

**Dana Dairy
Products Key Ratios Dana
Dairy Products **

** For the Year Ended 12/31/2005**

** Balance
Sheet**

** Dana Dairy
Products**

** December
31, 2005**

28) The return on equity for Dana Dairy Products for 2004 was (See Table
2.2)

**Referring to Table 2.2, ROE _{2004} = 4%**

29) Publicly-owned
corporations are not required by the Securities and Exchange Commission (SEC)
and individual state securities commissions to provide their stockholders with
an annual stockholders' report.
**FALSE**

30) The modified DuPont formula does not relate the firm's return on
equity to the

A) net profit margin.

B) financial leverage multiplier.

**C) return on equity (ROE)**.

D) fixed asset turnover.

31) Time-series
analysis evaluates performance of firms over time using financial ratios. **TRUE**

32) Financial analysis and planning is not
concerned with analyzing the mix of assets and liabilities. **FALSE**

33) Higher cash flow and less 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 primary emphasis of the financial manager
is the use of

**A) cash flow.**

B) accrued earnings

C) organization
charts.

D) profit incentives.

35) Money is created by a financial relationship between suppliers and
demanders of short-term funds. **FALSE**

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

A) Partnership.

**B) Corporation.**

C) Professional
partnership.

D) Sole proprietorship.

37) Capital markets involve the trading of
securities with maturities of one year or less while money markets involve the
buying and selling of securities with maturities of more than one year. **FALSE**