Response to the following multiple choice questions:
1. Lost Inc. had sales of $14 million, operating expenses of $4.75 million, COGS of $7.7 million, depreciation expense of $3.75 million, and interest expense of $0.87 million. Calculate the firm's EBIT.
$1,550,000
($2,200,000)
($1,550,000)
$3,750,000
2. Which of the following is true with respect to accrual accounting?
Cash-based accounting is much better when analyzing the operations of the firm.
Amounts reported on the financial statements can be managed or manipulated without violating GAAP.
Net income is the amount of cash a company receives from customers less cash payments to vendors and employees.
Accrual accounting yields easily interpreted financial statements.
3. Current assets are normally listed on the balance sheet in the order of
There is no specific order for current assets.
the most liquid to the least liquid.
the most commonly used to the least commonly used.
the largest dollar amount to the smallest dollar amount.
4. In the basic framework, a firm can allocate net income to one of two items. These two items are
dividends and common stock.
dividends and retained earnings.
inventory and retained earnings.
additional paid in capital and retained earnings.
5. The MBJ Company has fixed assets of $509 million, total equity of $218 million, current liabilities of $ 128 million, and long-term debt of $390 million. Given this information, MBJ has current assets that equal
$262 million.
$119 million.
$128 million.
$227 million.
none of these
6. What is sales revenue minus cost of goods sold?
dividends
EBIT
gross income
net income
7. Which of the following is not one of the ways that firms can manipulate their earnings?
relaxing of credit standards
switching between LIFO and FIFO
decreasing R&D on the books
using a sale-leaseback arrangement
hiring more sales force
8. Holding all else equal, higher levels of depreciation on an income statement will lead to
higher tax expense.
higher EBIT.
higher net income.
lower costs of the good sold.
lower tax expenses.
9. Accounts payable represent money that a firm
owes to suppliers for purchases made on credit.
owes to a lender under a borrowing arrangement with an explicit interest rate.
owes to a landlord or leasing agent for rental costs.
owes to its employees.
10. The balance sheet equation states that assets = liabilities + owners' equity. Which of the following best describes the logic behind this equation?
A firm must use assets to pay back debt and equity.
Assets have to be financed by either other people's money or the owner's money.
Assets must generate revenues equal to the firm's liabilities and owners' equity.
Assets are financial resources used to obtain debt and equity.
11. Firms A and B operate in the same industry. Firm A has a fixed asset turnover ratio of 1.22 while firm B has a fixed asset turnover ratio of 0.88. Holding all else constant, given this information, which of the following conclusions can be made? (Select all that apply)
Firm B is considered more efficient than firm A with the use of its fixed assets.
Firm A is considered more efficient than firm B with the use of its fixed assets.
Firm A is generating sales with its fixed assets at a greater rate than firm B.
12. What is eBuy's total asset turnover in 20x1?
0.45
2.24
1.93
0.52
13. If the WACC of eBuy is 10%, what is the EVA for eBuy in 20x1?
$105.00
$79.50
-$60.50
$173.90
14. Which one of the following is not true with respect to the usefulness of ratios?
Ratios are useful in the comparison of firms with different size or strategy.
Ratio creation/analysis is not governed by GAAP
Ratio analysis help identify key areas for further investigation.
Ratios provide definitive answers to company performance questions.
15. If the average debt ratio in the industry is 65%, then in 20x1
eBuy is more conservatively financed than the industry average.
eBuy is more aggressively financed than the industry.
eBuy has more debt financing than the industry norm.
eBuy cannot compete well in its industry.
16. Which one of the following is not a factor impacting the DuPont decomposition?
earnings as a percentage of sales
sales as a percentage of total assets
dividends as a percent of net income
portion of assets financed by debt
17. (Computing ratios) Solve for the return on equity with the given income statement and balance sheet (assume all sales are made on credit). Assume that there are 365 days in a year.
328.65%
766.78%
429.57%
399.58%
18. New York Pizza Kitchen has an leverage multiplier of 2.00, total asset turnover of 1.50, and an ROE 18.00%. What is New York Pizza Kitchen's net profit margin?
5.60%
6.00%
7.20%
8.00%
19. OIROI is a ratio measures not only efficiency, but also
leverage.
profitability.
liquidity.
only efficiency.
20. What is eBuy's current ratio in 20x1?
0.05
2.01
2.28
1.15
21. A firm has projected current assets to be $32 million, fixed assets to be $55 million, total liabilities to be $49 million, and owner's equity to be $7 million. Given this information, what is the discretionary financing need?
$6 million
$27 million
$31 million
$45 million
$7 million
22. A firm has projected current assets to be $205 million, fixed assets to be $605 million, current liabilities to be $188 million, long-term debt to be $461 million, and owner's equity to be $106 million. Given this information, what is the discretionary financing need?
$38 million
$9 million
$94 million
$17 million
$55 million
23. A company currently has $50 million in sales, $23 million in current assets, $39 million in fixed assets, $15 million in accounts payable. The fixed assets are currently operated with fully capacity and will change proportionally with the sales growth. If sales are projected to $70 million, then current assets are projected to be ________, fixed assets are projected to be ________, and accounts payable are projected to be ________.
$40.1 million; $74.1 million; $18.7 million
$22.1 million; $41.4 million; $14.5 million
$36.3 million; $58.6 million; $21.0 million
$19.4 million; $45.8 million; $11.2 million
none of these
24. Suppose a firm has a net profit margin of 15%, sales of $155 million, assets of $312 million, and owner's equity of $223. If the dividend payout ratio is 10%, what is the firm's sustainable growth rate?
11.55%
10.43%
12.88%
9.38%
cannot be determined
25. A spontaneous account refers to
an account on the balance sheet and income statement that is calculated using the time value of money.
an account on the balance sheet and income statement that varies automatically when sales are changed.
an account on the income statement that cyclically appears.
an account on the balance sheet that changes when net income is changed.
none of these
26. The purpose of financial forecasting can best be described as an answer to which of the following questions?
What product will produce the most in sales during the next year?
How much financing will the firm need in the future?
How will an increase in the firm's tax rate affect the firm's net income?
What is the firm's current market share?
27. What is the main goal of financial forecasting?
to understand the implications of today's decisions on tomorrow's performance
to project net income and dividends for the firm
to project sales so investors can adjust stock prices
to provide a detailed map of a firm's future
28. Which of the following steps is not used to calculate the firm's future discretionary financing needed (DFN)?
Project sales and expenses.
Calculate retained earnings.
Calculate cash flows from operations.
Identify the discretionary accounts that will be held constant with an increase in sales.
29. Which of the following elements on a balance sheet is not a spontaneous account?
notes payable
accounts payable
accounts receivable
cash
inventory
30. Which of the following ways can a firm decrease it DFN?
Reduce the dividend payout.
Reduce sales growth.
Recheck existing capital constraints.
Improve net margin.
all of these
31. Which of the following best describes the difference between an annuity due and an ordinary annuity?
An ordinary annuity pays at the beginning of the period, but an annuity due pays at the end.
An ordinary annuity has a limited life, but an annuity due goes on forever.
An ordinary annuity pays at the end of the period, but an annuity due pays at the beginning.
An ordinary annuity goes on forever, but an annuity due has a limited life.
32. Which of the following gives the smallest effective yield? Assume that one year is 365 days.
18.60% APR compounded daily
19.00% APR compounded quarterly
20.40% APR compounded annually
18.65% APR compounded monthly
33. In order to determine the future value of some lump sum, we must use the process of
compounding.
discounting.
risk analysis.
annuity analysis.
none of the above
34. You bought a new car today which cost you $20,000. You financed the entire cost with a 5-year loan at 4.00%. If you make payments at the end of each month starting a month from now, how much is your monthly payment?
$374.38
$884.04
$850.04
$368.33
35. Suppose you want to establish a fund that will pay $5,000 a year forever to your favorite charity. If the discount rate is 8%, how much do you have to set a side today?
$65,000
$70,000
$67,500
$62,500
36. If you deposit $10,000 in an account with annual rate of 9% compounded semiannually, how long will it take for you to have $2,000,000 in the account?
120.37 years
60.18 years
61.48 years
53.43 years
37. You want $15,000 fifteen years from now. If you can earn 8% per year in your savings account, how much do you have to deposit in today?
$6,818
$7,128
$5,261
$4,729
38. You are planning to retire 40 years from now. If your retirement account pays an annual rate of 6% compounded monthly and you start making a monthly contribution of $400 a month today, how much will you have when you retire in 40 years?
$742,857
$800,579
$796,596
$787,429
39. How does a perpetuity differ from an ordinary annuity?
A perpetuity is another name for an ordinary annuity.
A perpetuity has only a limited numbers of cash flows while an ordinary annuity has payments that continue forever.
A perpetuity is another name for an annuity due.
A perpetuity has payments that go on forever while an ordinary annuity has a limited numbers of cash flows.
40. Today, a round-trip plane ticket from Los Angeles to New York costs $350. If the average annual inflation rate is 2.5%, who much will the ticket cost 30 years from now?
$763.81
$658.24
$612.50
$734.15
41. What are bonds issued by cities, counties, or states called?
municipal bonds
samurai bonds
treasury bonds
junk bonds
42. The required rate of return on a bond is called the
yield to maturity.
liquidity premium.
call yield.
current yield.
risk premium.
43. The period of time for which a bond remains outstanding is called the
face value.
maturity.
issue date.
coupon date.
expiration date.
44. Another Co. expects to issue a $1,000 face-value bond that matures in 10 years. The annual coupon rate is 8.25% and interest payments are expected to be paid annually. Similar bonds are currently priced at 98.4% of face value. Given this information, what is the required return by bond holders?
8.49%
8.77%
9.08%
9.26%
none of the above
45. In the bond market, firms raise debt financing directly from
investors.
government agencies.
consumer banks.
loan officers.
46. A zero-coupon bond is currently priced at $456, has a face value of $1,000, and matures in 10 years. What is the yield to maturity of this bond?
4.00%
6.54%
8.17%
9.25%
47. If interest rates increase, then bond prices will also increase.
false
true
48. What is the value of a bond?
the face value of the bond
the coupon payments of the bond
the future value of its cash flows
the face value of the bond plus coupon payments
the present value of its cash flows
49. What is the price of a bond with a $1,000 face value, a coupon rate of 13% paid annually, and matures in 25 years? Your required rate of return is 7.5%.
$1,613.08
$1,198.32
$1,316.80
$1,459.75
$1,255.21
50. Which of the following statements about a bond are true?
i. A bond is a fixed-income security.
ii. The bond's interest payments vary each year with the market.
iii. A bond acts like an interest-only loan.
only i
ii and iii
i and iii
i, ii, and iii
i and ii
51. A preferred stock pays a dividend of $3.50 in perpetuity. If the return required by shareholders is 11%, then the price per share for this preferred stock is
$35.08.
$31.82.
$38.50.
$41.21.
none of the above
52. If a company called Fin201 Inc. went out of business and was liquidated, which of the following is the correct order that the following stakeholders and owners would be paid? (paid first, paid second, paid third)
common stock, debt holders, preferred stock
TAs, Professor Cardell, students, bugs, dirt
preferred stock, debt holders, common stock
debt holders, preferred stock, common stock
53. If a company skips a dividend payment to preferred shareholders, then the company
must pay the dividend to common shareholders.
must repurchase shares from both common and preferred shareholders.
cannot pay any dividends to common shareholders until the preferred dividend is paid.
all of the above
none of the above
54. A firm just issued new shares of preferred stock that will pay a dividend of $4.60. If the return required by shareholders is 10%, then the price of the preferred stock is
$5.06.
$0.46.
$74.54.
$460.00.
$46.00.
55. Which of the following securities is considered a hybrid security?
common stock
preferred stock
bond
annuity
none of the above
56. Some Co. is planning to pay a dividend of $5.60 in the next year and expects to grow the dividend at a constant rate of 4% per year, indefinitely. If the required rate of return by shareholders is 13%, then the price of this stock should be
$43.10.
$52.66.
$63.72.
$67.10.
none of the above
57. Which of the following securities represents ownership in the firm?
annuity
bond
preferred stock
all of the above
none of the above
58. Which of the following statements correctly defines the difference between preferred stock and common stock?
Preferred shareholders have more of a claim to dividends than common stockholders.
Preferred shareholders do not have the voting rights that common stockholders have.
Common shareholders have more exposure to variable share prices than preferred shareholders.
all of the above
none of the above
59. Stockholders have a ________ claim on firm earnings and assets.
fixed
guaranteed
residual
contracted
60. Which of the following is not a characteristic of common stock?
has the lowest priority to claim the asset in case of bankruptcy
has voting rights
pays fixed dividends
has no maturity
61. Which of the following is an ideal criteria for the methods used to evaluate a capital investment project?
All cash flows should be included, which might consist of opportunity costs, sunk costs, and cannibalization costs.
The method must account for the success of previous projects
The method should set required risk to be constant for all projects that will be considered
The method should consider the timing of the project's cash flows
None of the above
62. Some company is considering a project with an initial cost of $46,000. The project will produce cash inflows of $18,000 a year for the first 2 years and $19,000 a year for the following 2 years. What is the net present value if the discount rate is 14%?
$7,713.87
$53,713.87
$99,713.87
$28,000.00
63. The Net Present Value is a measure of:
How much value is added to the firm as a result of undertaking the project.
Which projects should be accepted and rejected.
The value of a project to the firm.
All of the above.
64. What is the profitability index of the following stream of cash flows if the discount rate is 11%?
|
Year 0
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
|
-$21.4 Million
|
$7.8 Million
|
$8.1 million
|
$7.1 million
|
$6.4 million
|
1.05
1.01
0.99
1.03
1.08
65. The net present value of a project is smaller when:
The required rate is lower
Cash inflows are pushed farther into the future
The initial outlay is decreased
None of the above
66. Use the following information on Project Michelle to answer the question.
|
Initial Outlay
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
|
$50 million
|
$10 million
|
$20 million
|
$20 million
|
$10 million
|
$5 million
|
The required rate of return is 15%.What is the internal rate of return of the Project Michelle?
5.50%
30.00%
11.25%
10.50%
67. The decision rule for using the NPV states that when the NPV is greater than ______________ the project should be accepted.
The initial outlay
Zero
The IRR
One
None of the above
68. Which of the statements correctly identifies the disadvantages of the payback period method?
The payback period does not identify the varying levels of risk in a project
The payback period does not account for the timing of the project's cash flows
The payback period does not account for the varying levels of risk in a project
All of the above
None of the above
69. What is the payback period for the following stream of cash flows if the discount rate is 16%?
|
Year 0
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
Year 6
|
|
-$102.4M
|
$37.4M
|
$33.1M
|
$28.4M
|
$24.9M
|
$17.1M
|
$15.9M
|
2.84 years
3.05 years
2.96 years
3.55 years
3.14 years
70. Internal rate of return is calculated by:
Finding the discount rate that forces the NPV of the project to zero.
Adjusting the initial outlay of the project so that it is equal to the discounted cash flows.
Adjusting the inflows until the NPV is zero.
None of the above.