Fall 2008

FIN 3250 Exam 1

Dr. Tufte

Part 1: Conceptual Questions (no partial credit) Chapter 1 1. When considering a capital budgeting project the financial manager should consider the: I. Size of the project II. Timing of the projects cash flows III. Risk associated with the projects cash flows a. I only b. II only c. I and III only d. II and III only e. I, II, and III 2. Which of the following are advantages of the corporate form of business ownership? I. limited liability for firm debt II. double taxation III. ability to raise capital IV. unlimited firm life a. I and II only b .III and IV only c. I, II, and III only d. II, III, and IV only e. I, III, and IV only 3. A firm which opts to go dark in response to the Sarbanes-Oxley Act: a. must continue to provide audited financial statements which have been signed by the corporate officers. b. must continue to provide a detailed list of internal control deficiencies on an annual basis. c. can, and mostly likely will, provide less information to its shareholders than if did prior to the act. d. can continue trading their stock on the stock exchanges. e. will rarely experience any resulting change in the price of their stock. 4. Which one of the following actions by a financial manager creates an agency problem? a. refusing to borrow money when doing so will create losses for the firm b. refusing to lower selling prices if doing so will reduce the net profits c. agreeing to expand the company at the expense of stockholders value d. agreeing to pay bonuses based on the market value of the company stock e. increasing current costs in order to increase the market value of the stockholders equity

Fall 2008

FIN 3250 Exam 1

Dr. Tufte

5. Which of the following represent cash outflows from a firm? I. issuance of securities II. payment of dividends III. new loan proceeds IV. payment of government taxes a. I and III only b. II and IV only c. I and IV only d. I, and II, and IV only e. II, III, and IV only Chapter 2 6. Liquidity is: a. equal to net working capital b. another term for current assets c. equal to the market value of a firms total assets minus its current liabilities d. valuable to a firm even though holding liquid assets is not very profitable. e. generally associated with intangible assets. 7. Depreciation: a. reduces both taxes and net income b. increases the net fixed assets as shown on the balance sheet c. reduces both the net fixed assets and the costs of a firm d. is a noncash expense which increases the net operating income e. decreases net fixed assets, net income, and operating cash flows Chapter 3 8. Which one of the following is a source of cash? a. an increase in accounts receivable b. a decrease in common stock c. an increase in long-term debt d. a decrease in accounts payable e. a dividend distribution

Fall 2008

FIN 3250 Exam 1

Dr. Tufte

9. Which of the following represent problems encountered when comparing the financial statements of one firm with those of another firm? I. either one, or both, of the firms may be conglomerates and thus have unrelated lines of business II. the operations of the two firms may vary geographically III. the firms may use differing accounting methods for inventory purposes IV. the two firms may be seasonal in nature and have different fiscal year ends. a. I and II only b. II and III only c. I, III, and IV only d. I, II, and III only e. I, II, III, and IV Chapter 4 10. You are comparing the current income statement of a firm along with a pro forma income statement for next year. The pro forma is based on a five percent increase in sales. The firm is currently operating at 82 percent of capacity. Net working capital and all costs vary directly with sales. The tax rate and the dividend payout ratio are fixed. Given this,: a. the net income shown on both statements is identical b. the tax rate is assumed to increase at the same rate as the sales c. the common size income statements for both years will be identical d. next years increase in retained earnings will equal this years increase in retained earnings e. total assets are required to also increase at a rate equal to the rate of sales growth 11. The sustainable growth rate will be equivalent to the internal growth rate when: a. a firm has no debt b. the projected growth rate is equal to the internal growth rate c. the plowback ratio is positive but less than one d. a firm has a debt-ratio exactly equal to one e. the dividend payout ratio is zero

Fall 2008

FIN 3250 Exam 1

Dr. Tufte

12. Which of the following can affect a firms sustainable rate of growth? I. total asset turnover II. profit margin III. dividend policy IV. equity multiplier a. III only b. I and III only c. II, III, and IV only d. I, II, and IV only e. I, II, III, and IV Part 2: Problem Solving Questions (partial credit is possible based on the work you show) Chapter 2 13. Given the tax rate as shown, what is the average tax rate for a firm with taxable income of $218,740? Taxable income $ 0 50,000 50,000 - 75,000 75,000 100,000 100,001- 335,000 a. 25.38 percent b. 28.43 percent c. 30.67 percent d. 31.34 percent e. 39.00 percent Tax Rate 15% 25% 34% 39%

Fall 2008

FIN 3250 Exam 1

Dr. Tufte

Hilltop Industries 2007 Income Statement ($in millions) Net Sales Less: Cost of goods sold Less: Depreciation Earnings before interest and taxes Less: Interest paid Taxable Income Less: Taxes Net Income $11,407 7,871 1,509 2,027 210 $ 1,817 636 $ 1,181 Hilltop Industries 2006 and 2007 Balance Sheets ($in millions) 2006 $ 276 1,415 2,104 $3,795 5,613 $9,408 2007 $ 316 1,068 2,690 $4,074 6,342 $10,416 2006 Accounts payable $1,818 Notes payable 250 Total $2,068 Long-term debt 3,400 Common stock 2,500 Retained earnings 1,440 Total liab. & equity $9,408 2007 $1,719 75 $1,794 3,100 3,250 2,272 $10,416

Cash Accounts rec. Inventory Total Net fixed assets Total assets

14. What is the amount of dividends paid in 2007? a. $0 b. $217 c. $349 d. $2.013 e. $2,357

Fall 2008

FIN 3250 Exam 1

Dr. Tufte

Chapter 3

15. Margos Dress Shoppe had the following values as of the end of last year and the end of this year. Which of the following are sources of cash for the year? Last year $890 216 101 922 This year $917 209 108 892

Accounts payable Accounts receivable Cash Inventory

a. cash and accounts receivable b. cash and accounts payable c. accounts receivable and inventory d. cash, accounts payable, and inventory e. accounts payable, accounts receivable, and inventory

16. Last year, which is used as the base year, a firm had cash of $46, accounts receivable of $132, inventory of $319, and net fixed assets of $640. This year, the firm has cash of $52, accounts receivable of $147, inventory of $312, and net fixed assets of $576. What is the common-base year value of accounts receivable? a. 88 b. 90 c. 1.11 d. 1.13 e. 1.18

Fall 2008

FIN 3250 Exam 1

Dr. Tufte

Chapter 4 Creative Analysis 2006 Income Statement Net Sales Cost of goods sold Depreciation Earnings before interest and taxes Interest paid Taxable Income Less: Taxes Net Income $ 8,500 7,210 400 890 40 $ 850 310 $ 540

Creative Analysis 2006 Balance Sheet 2006 $ 1,600 975 2,425 $5,000 2,200 $7,200 2006 $2,075 425 $3,000 1,700

Cash Accounts rec. Inventory Total Net fixed assets Total assets

Accounts payable Long-term debt Common stock Retained earnings

Total liab. & equity $7,200

17. Creative Analysis, Inc. does not want to incur any additional external financing. The dividend payout ratio is constant. What is their maximum rate of growth? a. 3.09 percent b. 3.16 percent c. 3.84 percent d. 4.71 percent e. 4.82 percent

Fall 2008

FIN 3250 Exam 1

Dr. Tufte

Part 3: Short Answer Questions (limit your answers to 50 words, partial credit is possible)

Chapter 2 18. Discuss the differences between book values and market values on the balance sheet and explain which is more important to the financial manager and why. Book value is the purchase price of an asset or the face value of a liability. Market value is the current value of an asset or liability on the open market. For financial managers, the market value is more important because it gives an up-to-date picture of what is going on with the firm.

Chapter 3 19. Assume your firm has a positive cash balance which is increasing annually. Why then is it important to analyze a statement of cash flows? Cash balances have to come from somewhere. If your balances are increasing without more operating cash flow, you must be running down some other item on the asset side, or running up some item on the liability side. This is a problem because cash has a low rate of return, and the items that you are running up or down may look bad to external suppliers of funds.

Chapter 4 20. Suppose a firm calculates its external funding needs and finds that it is negative. What are the firms options in this case? This means that the firm is generating net income faster than it needs to use it (probably because it has slack in fixed assets, or else it does not need to increase assets in proportion to sales). This money should be used to o Pay down debt o Reduce current liabilities o Buy back stock o Distributed to shareholders according to the dividend payout rate