1. Which of
the following statements is CORRECT?
a. One of the advantages of
the corporate form of organization is that it avoids double taxation.
b. It is
easier to transfer one’s ownership interest in a partnership than in a
corporation.
C. One of the
disadvantages of a sole
proprietorship is that the proprietor is exposed to unlimited liability.
d. One of the
advantages of a corporation from a social standpoint is that every
stockholder has
equal voting rights, i.e., “one person, one vote.”
e. Corporations
of all types are subject to the corporate income tax.
2. Which
of the following actions would tend to reduce conflicts of
interest between stockholders and bondholders?
A. Including
restrictive covenants in the company’s bond indenture (which is the
contract
between the company and its bondholders).
b. Compensating
managers with more stock options
and less cash income.
c. The
passage of laws that make it harder for hostile takeovers to succeed.
d. A government
regulation that banned the use of
convertible bonds.
e. Have the
firm use only long-term debt, e.g.,
debt that matures in 30 years or more rather than in less than one year.
3.
Which of the following
statements is
CORRECT?
a. Bond
covenants are a good way to resolve agency conflicts between
stockholders and
managers.
B. The bid
price in a hostile takeover is generally above the price before
the
takeover attempt is announced because otherwise the takeover attempt
would
probably fail.
c. The bid
price in a hostile takeover is
generally below the price before the takeover attempt is
announced
because takeover targets are generally not very well managed companies.
d. Takeovers
are more likely to be attempted if the
target firm’s stock price is above its intrinsic value.
e. The
efficiency of the
a. Maximize its
expected total
corporate income.
b. Maximize its
expected EPS.
c. Minimize the
chances of losses.
D.Maximize
the stock price per
share over the long run, which is the stock’s intrinsic value.
e. Maximize the
stock price on a
specific target date.
a. While the distinctions are becoming
blurred,
investment banks generally specialize in lending money, whereas
commercial
banks generally help companies raise capital from other parties.
B.
The NYSE operates as an auction market, whereas Nasdaq is an example of
a dealer
market.
c. Money market mutual funds usually
invest their money in a
well-diversified portfolio
of liquid common stocks.
d. Money markets are markets for
long-term debt and common
stocks.
e. A liquid security is a security
whose value is derived
from the price of some
other "underlying" asset.
a. When a corporation's shares are
owned by a few
individuals, we say that the firm is "closely, or privately, held."
B. "Going public" establishes a firm's
true intrinsic value and
ensures that
a liquid market will always exist for the firm's shares.
c. The stock of publicly owned
companies must generally
be registered with and reported
to a regulatory agency such as the SEC.
d. When stock in a closely held
corporation is
offered to the public for the first time, the transaction is called
"going
public, or an IPO," and the market for such stock is called the new
issue
or IPO market.
e. It is possible for a firm to go
public and yet
not raise any additional new capital for the firm itself.
a. The four most important financial
statements
provided in the annual report are the balance sheet, income statement,
cash
budget, and the statement of stockholders' equity.
B.The
balance sheet gives us a picture of the
firm’s financial position at a point in time.
c. The income statement gives us a
picture of the
firm’s financial position at a point in time.
d. The statement of cash flows tells
us how much
cash the firm must pay out in interest during the year.
e. The statement of cash needs tells
us how much
cash the firm will require during some future period, generally a month
or a
year.
a. Accounts payable.
b. Short-term notes payable to the
bank.
c. Accrued wages.
D.Cost
of goods sold.
e. Accrued payroll taxes.
a. If the company lost money in 2008,
it must have
paid dividends.
b. The company must have had zero net
income in
2008.
c. The company must have paid out half
of its 2008
earnings as dividends.
d. The company must have paid no
dividends in
2008.
E.Dividends
could have been paid in 2008, but they
would have had to equal the earnings for the year.
a. Typically, a firm’s DPS should
exceed its EPS.
b. Typically, a firm’s net income
should exceed
its EBIT.
C. If a firm is more profitable than average
(e.g., Google), we would normally expect to see its stock price exceed
its book
value per share.
d. If a firm is more profitable than
most other
firms, we would normally expect to see its book value per share exceed
its
stock price, especially after several years of high inflation.
e. The more depreciation a firm has in
a given
year, the higher its EPS, other things held constant.
11. Superior
Medical
System's 2005 balance sheet showed total common equity of $2,050,000. The company had 100,000 shares of stock
outstanding which sold at a price of $57.25 per share.
By how much did the firm's market value and
book value per share differ?
A. $36.75
b. $38.25
c. $39.50
d. $40.25
e. $51.00
Market Value = 100,000 * 57.25 = $5,725,000 less book value of 2,050,000 = 3,675,000 / 100,000 = $36.75 per share
12. Companies
generate income from their "regular" operations and from things like
interest
on securities they hold, which is called non-operating income. Mitel
Metals
recently reported $9,000 of sales, $6,000 of operating costs other than
depreciation, and $1,500 of depreciation.
The company had no amortization charges and no non-operating
income. It had issued $4,000 of bonds
that carry a 7% interest rate, and its federal-plus-state income tax
rate was
40%. What was the firm's operating
income, or EBIT?
a. $1,100
b. $1,200
c. $1,300
d. $1,400
E. $1,500
9,000 – 6,000 – 1,500 = $1,500 EBIT
13. Fine
Breads Inc. paid out $26,000 common dividends during 2005, and it ended
the
year with $150,000 of retained earnings.
The prior year’s retained earnings were $145,000.
What was the firm's 2005 net income?
a. $30,000
B. $31,000
c. $32,000
d. $33,000
e. $34,000
$26,000 + (150,000 – 145,000) = $31,000
14. Miller
Metals recently reported $9,000 of sales, $6,000 of operating costs
other than
depreciation, and $1,500 of depreciation.
The company had no amortization charges, it had $4,000 of bonds
that
carry a 7% interest rate, and its federal-plus-state income tax rate
was
40%. What was its net cash flow?
A. $2,232
b. $2,380
c. $2,471
d. $2,545
e. $2,618
9,000 – 6,000 – 1,500
= $1,500 EBIT
$1,500 EBIT - $280 Interest =
$1,220 Profit Before Tax
$1,220 Profit Before Tax -
$488 Tax = $732 Profit After Tax
$732 Profit After Tax plus $1500 Depreciation = $2,232 Cash Flow
15. Which of
the following items is NOT included in
current assets?
A. Accounts
payable.
b. Inventory.
c. Accounts
receivable.
d. Cash.
e. Short-term,
highly liquid, marketable securities.
16. Rutland
Corp's stock price at the end of last year was $30.25 and its earnings
per
share for the year were $2.45. What was
its P/E ratio?
a. 11.65
b. 12.00
C. 12.35
d. 12.70
e. 13.05
$30.25 / $2.45 =
12.347 times
17. Collins
Inc's latest net income was $1 million, and it had 200,000 shares
outstanding. The company wants to pay
out 40% of its income. What dividend per
share should the company declare?
a. $1.60
b. $1.70
c. $1.80
d. $1.90
E. $2.00
$1,000,000 * 40% =
$400,000 / 200,000 =
$2.00 per share
18. Regan
Corp's sales last year were $450,000, and its year-end receivables were
$45,000. On average, Regan's customers pay
10 days late (and thus they are charged a penalty).
How many days of "free" credit does
Regan give its customers before they are late and thus assessed a
penalty? Base your answer on this equation: DSO - Average days late = Days of free
credit, use a 365-day year when calculating the DSO, and round to the
closest
whole number.
a. 23 days
b. 25 days
C. 27 days
d. 29 days
e. 31 days
$450,000 / 365 = $
1,232.88 sales per day
$45,000 / $1232.88 = 36.5 days less 10 days = 27 days rounded
19. Which of
the following statements is correct?
a. “Window
dressing” is any action that improves a firm’s fundamental long-run
position
and thus increases its intrinsic value.
b. Using some
of the firm’s cash to reduce long-term debt is an example of “window
dressing.”
c. Borrowing
using short-term notes payable and using the proceeds to retire
long-term debt
is an example of “window dressing.” Offering discounts to customers who
pay
with cash rather than buy on credit and then using the funds that come
in
quicker to purchase additional inventories is an example of “window
dressing.”
d. Offering
discounts to customers who pay with cash rather than buy on credit and
then
using the funds that come in quicker to purchase additional inventories
is an
example of “window dressing.”
E. Borrowing on a
long-term basis and
using the proceeds to retire short-term debt could be an example of
window
dressing.
20. Van
Buren
Company’s current ratio is 1.9.
Considered alone, which of the following actions would REDUCE
the
company’s current ratio?
a. Use cash
to reduce short-term notes payable.
b. Use cash
to reduce accounts payable.
C. Borrow using
short-term notes payable
and use the proceeds to reduce long-term debt.
d. Borrow
using short-term notes payable and use the proceeds to reduce accruals.
e. Use cash
to reduce accruals.
21. If the CEO of a
large, diversified, firm were filling out a fitness report on a
division
manager (i.e., “grading” the manager), which of the following
situations would
be likely to cause the manager to receive a better grade? In all cases, assume that other things are
held constant.
A. The division’s basic
earning power ratio is above the average of other firms in
its industry.
b. The division’s total assets
turnover ratio is
below the average for other firms in its industry.
c. The division’s debt ratio is above
the average
for other firms in the industry.
d. The division’s inventory turnover
is 6, whereas
the average for its competitors is 8.
e. The division’s DSO (days’ sales
outstanding) is
40, whereas the average for its competitors is 30.
A. Its total assets turnover must be above the industry
average.
b. Its return on assets must equal the industry average.
c. Its TIE ratio must be below the industry average.
d. Its total assets turnover must be below the industry
average.
e. Its total assets turnover must equal the industry average.
a. $273,600
B. $288,000
c. $302,400
d. $317,520
e. $333,396
Total assets
$720,000
Target debt ratio
40%
Debt to
achieve
target ratio = Amount borrowed = Target % × Assets =
$288,000
a. $241.45
b. $254.16
c. $267.54
d. $281.62
E.$296.44
Rate of return on cash
generated
8.0%
Sales
$200,000
A/R
$18,500
Days in Year
365
Sales/day = Sales/365 =
$547.95
Company DSO =
Receivables/Sales per day =
33.8
Industry DSO
27.0
Difference = Company DSO –
Industry DSO =
6.8
Cash flow from reducing the
DSO =
Difference × Sales/day =
$3,705.48
Additional Net
Income = Return on cash × Added cash flow =
$296.44
Alternative Calculation:
A/R at industry DSO
$14,794.52
Change in A/R
$3,705.48
Additional Net
Income
$296.44
A. 9.45%
b. 9.93%
c. 10.42%
d. 10.94%
e. 11.49%
Total assets
= Equity because zero debt
$375,000
Sales
$595,000
Net income
$25,000
Target ROE
15.00%
Net income req'd to achieve
target ROE =
Target ROE × Equity =
$56,250
Profit margin needed to achieve target ROE = NI/Sales =
Total assets
= Equity because zero debt
$375,000
Sales
$595,000
Net income
$25,000
Target ROE
15.00%
Net income req'd to achieve
target ROE =
Target ROE × Equity =
$56,250
Profit
margin
needed to achieve target ROE = NI/Sales =
9.45%