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Assets:
Cash and marketable securities $300,000
Accounts receivable 2,215,000
Inventories 1,837,500
Prepaid expenses 24,000
Total current assets $3,286,500
Fixed assets 2,700,000
Less: accumulated depreciation 1,087,500
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Net fixed assets $1,612,500
Total assets $4,899,000
Liabilities:
Accounts payable $240,000
Notes payable 825,000
Accrued taxes 42,500
Total current liabilities $1,107,000
Long-term debt 975,000
Owners equity 2,817,000
Total liabilities and owners equity $4,899,000
Net sales (all credit) $6,375,000
Less: Cost of goods sold 4,312,500
Selling and administrative expense 1,387,500
Depreciation expense 135,000
Interest expense 127,000
Earnings before taxes $412,500
Income taxes 225,000
Net income $187,500
Common stock dividends $97,500
Change in retained earnings $90,000
9. Marshall Networks, Inc. has a total asset turnover of 2.5 and a net profit margin of 3.5%.
The firm has a return on equity of 17.5%. Calculate Marshalls debt ratio.
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a. 30%
b. 40%
c. 50%
d. 60%
Use the following information and the percent-of-sales method to Answer questions 10 -12.
Below is the 2004 year-end balance sheet for Banner, Inc. Sales for 2004 were $1,600,000 and
are expected to be $2,000,000 during 2005. In addition, we know that Banner plans to pay
$90,000 in 2005 dividends and expects projected net income of 4% of sales. (For consistency
with the Answer selections provided, round your forecast percentages to two decimals.)
Banner, Inc. Balance Sheet
December 31, 2004
Assets
Current assets $890,000
Net fixed assets 1,000,000
Total $1,890,000
Liabilities and Owners Equity
Accounts payable $160,000
Accrued expenses 100,000
Notes payable 700,000
Long-term debt 300,000
Total liabilities 1,260,000
Common stock (plus paid-in capital) 360,000
Retained earnings 270,000
Common equity 630,000
Total $1,890,000
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13. What is the present value of $1,000 to be received 10 years from today? Assume that the
investment pays 8.5% and it is compounded monthly (round to the nearest $1).
a. $893
b. $3,106
c. $429
d. $833
14. What is the present value of $12,500 to be received 10 years from today? Assume a
discount rate of 8% compounded annually and round to the nearest $10.
a. $5,790
b. $11,574
c. $9,210
d. $17,010
16. If the IRR is greater than the required rate of return, the:
a. present value of all the cash inflows will be greater than the initial outlay.
b. payback will be less than the life of the investment.
c. project should be rejected.
d. both a and b.
17. ABC Service can purchase a new assembler for $15,052 that will provide an annual net
cash flow of $6,000 per year for five years. Calculate the NPV of the assembler if the
required rate of return is 12%. (Round your answer to the nearest $1.)
a. $1,056
b. $4,568
c. $7,621
d. $6,577
18. Suppose you determine that the NPV of a project is $1,525,855. What does that mean?
a. In all cases, investing in this project would be better than investing in a project that
has an NPV of $850,000.
b. The project would add value to the firm.
c. Under all conditions, the projects payback would be less than the profitability index.
d. The projects IRR would have to be less that the firms discount rate.
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a. the discount rate that makes the NPV positive.
b. the discount rate that equates the present value of the cash inflows with the cost of
the project.
c. the discount rate that makes the NPV negative and the profitability index greater than
one.
d. the rate of return that makes the NPV positive.
20. Crawfish Kitchen Inc. is planning to invest in one of three mutually exclusive projects.
Projected cash flows for these ventures are as follows:
Which project is the most profitable according to the NPV Criteria if the discount rate for
the firm is 14%?
a. Plan A
b. Plan B
c. Plan C
21. You are in charge of one division of Bigfella Conglomerate Inc. Your division is subject to
capital rationing. Your division has four indivisible projects available, detailed as follows:
Project Initial Outlay IRR NPV
1 2 million 18% 2,500,000
3 1 million 10% 600,000
2 1 million 15% 950,000
4 3 million 9% 2,000,000
If you must select projects subject to a budget constraint of 5 million dollars, which set of
projects should be accepted so as to maximize firm value?
a. Projects 1, 2, and 3
b. Project 1 only
c. Projects 1 and 4
d. Projects 2, 3, and 4
22. J & B, Inc. has $5 million of debt outstanding with a coupon rate of 12%. Currently, the
yield to maturity on these bonds is 14%. If the firms tax rate is 40%, what is the cost of
debt to J & B?
a. 12.0%
b. 14.0%
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c. 8.4%
d. 5.6%
23. Shawhan Supply plans to maintain its optimal capital structure of 30% debt, 20%
preferred stock, and 50% common stock far into the future. The required return on each
component is: debt10%; preferred stock11%; and common stock18%. Assuming a 40%
marginal tax rate, what after-tax rate of return must Shawhan Supply earn on its
investments if the value of the firm is to remain unchanged?
a. 18.0%
b. 13.0%
c. 10.0%
d. 14.2%
24. Bender and Co. is issuing a $1,000 par value bond that pays 9% interest annually.
Investors are expected to pay $918 for the 10-year bond. Bender will have to pay $33 per
bond in flotation costs. What is the cost of debt if the firm is in the 34% tax bracket?
a. 7.23%
b. 9.01%
c. 9.23%
d. 11.95%
25. Armadillo Mfg. Co. has a target capital structure of 50% debt and 50% equity. They are
planning to invest in a project which will necessitate raising new capital. New debt will be
issued at a before-tax yield of 12%, with a coupon rate of 10%. The equity will be provided
by internally generated funds. No new outside equity will be issued. If the required rate of
return on the firms stock is 15% and its marginal tax rate is 40%, compute the firms cost
of capital.
a. 13.5%
b. 12.5%
c. 7.2%
d. 11.1%
26. Which of the following relationships is true, regarding the costs of issuing the below
securities?
a. Common stock > bonds > preferred stock
b. Preferred stock > common stock > bonds
c. Bonds > common stock > preferred stock
d. Common stock > preferred stock > bonds
27. The _______ is the federal agency primarily responsible for regulating the securities
industry.
a. FTC
b. SEC
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c. FRB
d. SCC
31. Which of the following relationships is true, regarding the costs of issuing the below
securities?
a. Common stock > bonds > preferred stock
b. Preferred stock > common stock > bonds
c. Bonds > common stock > preferred stock
d. Common stock > preferred stock > bonds
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32. Based on the data in Table 1, what is the break-even point in units produced and sold?
a. $130,000
b. $140,000
c. $150,000
d. $160,000
33. Based on the data contained in Table 1, what is the degree of operating leverage?
a. 1.00 times
b. 2.00 times
c. 3.00 times
d. 4.00 times
e. 5.00 times
34. Based on the data contained in Table 1, what is the contribution margin?
a. $5.00
b. $4.00
c. $3.00
d. $2.00
35. Based on the data contained in Table 1, what is the degree of financial leverage?
a. 3.33 times
b. 2.50 times
c. 1.50 times
d. 1.33 times
36. Based on the data contained in Table 1, what is the degree of combined leverage?
a. 6.33
b. 6.67
c. 7.33
d. 7.67
38. A toy manufacturer following the hedging principle will generally finance seasonal
inventory build-up prior to the Christmas season with:
a. common stock.
b. selling equipment.
c. trade credit.
d. preferred stock.
39. Accounts receivable and inventory self-liquidate through the __________ cycle.
a. spontaneous account
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b. net working capital
c. cash conversion
d. sales-to-receivables collection
40. Given that short-term interest rates typically fluctuate more than long-term rates, interest
rate risk is least for:
a. Treasury bills.
b. common stock.
c. long-term government bonds.
d. medium-term corporate bonds.
41. If you compare the yield of a municipal bond with that of a Treasury bond, what is the
equivalent before-tax yield of a municipal bond yielding 6% per year for an investor in the
36% tax bracket (round to nearest .1%)?
a. 9.4%
b. 8.1%
c. 7.7%
d. 6.3%
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b. applies only to certain types of international businesses.
c. has been phased out due to recent international legislation.
d. both a and b.
Use the following information to answer questions 46-47. Below is an excerpt from Table 22-1,
The Globalization of Product and Financial Markets, that appears in your text. Values are
foreign exchange rates reported in The Wall Street Journal.
U.S. $ equivalent Currency per U.S. $
Country Mon. Mon.
India (Rupee) 0.03137 31.88
Britain (Pound) 1.5615
30-day Forward 1.5609
90-day Forward 1.5605
180-day Forward 1.5603
Canada (Dollar) 0.7265 1.3765
30-day Forward 0.7256 1.3782
90-day Forward 0.7236 1.3820
180-day Forward 0.7196 1.3896
Sweden (Koruna) 0.18848 5.3055
30-day Forward 0.18829 5.3110
90-day Forward 0.18809 5.3167
180-day Forward 0.18795 5.3205
47. The number of pounds you can purchase per U.S. dollar is:
a. 1.5609.
b. 0.6207.
c. 0.6404.
d. 1.5615.
48. Which of the following statements about a financial lease is generally true?
a. The entire lease payment is used as an income tax deduction.
b. Only the portion of the lease payment that reduces the principal may be used as an
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income tax deduction.
c. It has no income tax deductibility.
d. Only the portion of the lease payment that is applied to interest is tax-deductible.
49. Which of the following most likely would cause a lease to be classified as a capital lease?
a. The lease is for five or more years.
b. The lease is for $1 million or more.
c. The lease permits the lessee to purchase the equipment at the end of the lease for its
fair market value.
d. The present value of the lease payments, calculated at the lessees typical rate of
interest for a similar purchase loan, is more than the original purchase price of the
equipment.
50. What price must a company typically pay to buy another company? The price will:
a. include some premium over the current market value of the targets equity.
b. be the market value of the targets equity.
c. be the book value of the targets equity.
d. include some discount relative to the current market value of the targets equity.
This is the end of the exam. Please make sure you have answered all 50 questions with a bold
and highlight of the answer you want for each question.
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