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Date Posted: 12:45:36 07/04/00 Tue
Author: Karen Gilmore
Subject: Re: Another sample Mid-term from Hodges
In reply to: Charles Hodges 's message, "Another sample Mid-term from Hodges" on 12:36:16 06/27/00 Tue

> Again, I have no answer key, but will correct any
> student posted answers.
>
>
> Hodges MBA 8622 - Mid-Term Exam - Spring 2000
> Closed Book
>
> Your Name
> Date ____________
>
>
> TRUE/FALSE Questions: Choose the best answer. In
> other words, if the statement usually true, mark
> answer a. for True. If the statement is usually false
> b. for False. Each question is worth 1 1/2 points.
>
> MULTIPLE CHOICE Questions. Circle the single best
> answer. Each question is worth 3 points.
>
> CONCEPT questions: Each numbered question is worth 4
> points each. It should not take more than a few
> sentences to answer each of the concept questions.
>
> 1. All others things being equal, the primary goal of
> a publicly-owned firm interested in serving its
> stockholders should be to
> a. Maximize expected total corporate profit.
> b. Maximize expected EPS.
> c. Minimize the chances of losses.
> d. Maximize the stock price per share.
> e. Maximize expected net income.
> D
> 2. List two reasons why profit maximization may not
> lead to shareholder wealth maximization.
>
> A decision to increase short term profits such as reducing labor cost and decreasing operating purchases. In the long run, the firm will probably lose business & stock price will fall.
>
>
> 3. Which of the following is not generally considered
> a disadvantage of the sole proprietorship?
> a. UNLIMITED LIABILITY.
> b. LIMITED LIFE OF THE ORGANIZATION
> c. DIFFICULTY OF TRANSFERRING OWNERSHIP
> d. DIFFICULTY OF RAISING LARGE AMOUNTS OF CAPITAL.
> e. ALL OF THE ABOVE ARE CONSIDERED TO BE
> DISADVANTAGES.
> E
> 4. What are the three main forms of business
> organizations discussed in chapter 1?
> Sole proprietorship
Partnership
Corporation
>
>
>
>
>
> 5. What is meant by the term "agency relationship"?
>
> When a principal of a firm hires an agent to act on his behalf. For instance, the Board of Directors hires a CEO.
>
>
> 6. Which of the following is least likely to be
> listed as a source of funds in a statement of cash
> flows?
> a. Net Income b. Deprecition expenses
> c. Increase in inventory d. Increase in accounts
> payables.
> e. Decrease in prepaid rent.
> C-increase in inventory is a use of funds
> 7. The annual report contains four basic financial
> statements: the income statement; balance sheet;
> statement of cash flows; and statement of retained
> earnings.
> a. True b. False
> A
>
>
> 8. An unusual firm had no profits and no depreciation
> expense during a given time period. Their cash
> balance was unchanged and their current ratio
> increased from 2 to 3. Given this information, which
> of the following is true?
> a. On their statement of cash flows, cash flows from
> operating activities were negative.
> b. On their statement of cash flows, cash flows from
> operating activities were unchanged.
> c. On their statement of cash flows, cash flows from
> operating activities were postive.
> d. Both A and B are true.
> e. Both B and C are true.
> f. We do not have enough information to answer this
> question.
> C
> 9. In the year after a major supplier changes our
> payment terms from net 30 to net 20, all other things
> being equal, we would expect both our accounts
> receivable and our total liabilities to decrease.
> A. True B. False
> B
> 10. Harmeling Enterprises experienced a decline in net
> operating profit after taxes (NOPAT). Which of the
> following definitely cannot help explain this decline?
>
> a. Sales revenues decreased.
> b. Costs of goods sold increased.
> c. Depreciation increased.
> d. Interest expense increased.
> e. Taxes increased.
> D
> 10. What are five limitations of ratio analysis?
> 1. Mgrs. can perform "window dressing" on figures
2. Companies have different divisions so it's hard to account for the different industries
3. Seasonal cycles of business not reflected in ratios
4. No company wants to be considered "avg" so avg doesn't tell us much
5. Different accounting practices makes it difficult to compare firms, esp. those with overseas operations.

>
>
>
>
>
> 11. As listed in the book (page 546), what are the 6
> steps of the financial planning process?
>
> 1. Projected financial statements
2. Determine funds needed
3. Determine availability of funds
4. Put financial controls in place
5. Determine what to do if forecasts proved incorrect
6. Develop a performance based compensation plan for mgrs.
>
>
>
>
>
>
>
>
> 12. Gross Fixed Assets are always greater than, or
> equal to, net fixed assets.
> A. True B. False
> A
> 13. Pro forma financial statements, as discussed in
> the text, are used primarily to assess a firm's
> historical performance.
> a. True b. False
B
> 14. Place the below Income Statement and Balance
> Sheet in the correct format (4 points). Fill in the
> missing numbers (18 points).
>
> Cash ______ Common Stock (par=$.10) _______
> Depreciation Expense 54 Total Current Assets ______
> Rental Expense ______ Accounts Receivable 84
> Notes Payable (short-term) 41 Pre Paid Insurance 6
> Gross Profit 421 Long Term Debt ______
> Inventory ______ Sales 746
> Cost of Goods Sold ______ Interest Expense 23
> Earnings Before Taxes ______ Income Taxes ______
> Operating Profit 152 Net Property, Plant, and
> Equipment ______
> Other Payables 38 Total Current Liabilities 150
> Other Long Term Assets 110 Additional Paid-In Capital
> 193.5
> Retained Earnings 160 Total Liabilities and Equity
> ______
> Total Assets 590 Selling and Admin Expense 194
> Accounts Payable 56 Accrued Wages ______
> Net Income 77.4
>
>
> Other Information
> Earnings Per Share = $0.12
> Current Ratio = 1.2
> Quick Ratio = 0.8
>
>
>
>
>
>
>
>
>
>
>
>
>
>
>
>
>
>
>
>
>
>
>
>
>
>
> 15. The first, and most critical, step in
> constructing a set of pro forma financial statements
> is the sales forecast.
> a. True b. False
> A
> 16. In the textbook, the nominal interest rate is
> defined as being equal to the real risk-free rate,
> plus an inflation premium, plus a default risk
> premium, plus a liquidity premium, plus a maturity
> risk premium.
> a. True b. False
> A
> 17. Carter Corporation has some money to invest, and
> its treasurer is choosing between City of Chicago
> municipal bonds and U.S. Treasury bonds. Both have the
> same maturity, and they are equally risky and liquid.
> If Treasury bonds yield 6 percent, and Carter's
> marginal income tax rate is 38 percent, what yield (to
> the nearest .1%) on the Chicago municipal bonds would
> make Carter's treasurer indifferent between the two?
> M=.06(1-.38)
M = 3.7%
>
>
>
>
>
>
>
>
>
> 18. A portfolio's standard deviation is always less
> than, or equal to, the standard deviations of the
> individual security with the highest stand-alone risk.
> a. True b. False
> B
> 19. A portfolio's standard deviation is always greater
> than, or equal to, the standard deviations of the
> individual security with the lowest stand-alone risk.
> a. True b. False
> B
> 20 A profitable firm is more likely to need external
> financing during periods of low growth than is a
> similar firm with a much higher growth rate.
> a. True b. False
> B
>
> 21. You are given the following data:
>
> k* = real risk-free rate = 3%
> Constant inflation premium = 6%
> Maturity risk premium = 1%
> Default risk premium for AAA bonds = 5%
> Liquidity premium for long-term T-bonds = 2%
>
> Assume that a highly liquid market does not exist for
> long-term T-bonds, and the expected rate of inflation
> is a constant. Given these conditions, the nominal
> risk-free rate for T-bills is _____, and the rate on
> long-term Treasury bonds is _____.
> 9% and 10%
> 22. Use this information to answer the questions
> below. Assume all sales are credit sales.
>
> Balance Sheet 12/31/96 12/31/97
> Cash $ 315 $ 255
> Accounts Receivable 275 275
> Inventory 600 220
> Total Current Assets 1,190 750
> Plant and Equipment 1,648 2,313
> Less: Acc Depr (500) (730)
> Net plant and equipment 1,148 1,583
> Long Term Investments 52 27
> Total assets $2,390 $2,360
>
> Accounts payable $ 150 $ 315
> Notes payable 125 106
> Total Current liabilities 275 421
> Bonds 500 430
> Common Stock (.05 par) 175 165
> Paid-in-capital 775 644
> Retained earnings 665 700
> Total owners' equity 1,615 1,509
> Total liabilities and
> owners' equity $2,390 $2,360
>
> Income Statement (1996) (1997)
> Sales (100% credit) $1,100 $1,330
> Cost of Goods Sold 600 760
> Gross profit 500 570
> Operating expenses 20 170
> Depreciation 160 230
> Net operating income 320 300
> Interest expense 64 57
> Net income before taxes 256 243
> Taxes 87 96
> Net income $ 169 $ 147
>
> 21a. (6 points) Calculate the following ratios for 1997
>
> Current Ratio Return on Assets
> 750/421=1.78 147/2360=.06
> Fixed Asset Turnover Debt Ratio
> 1330/1583=.84 851/2360=.36
> Profit Margin on Sales
147/1330=.11
Times Interest Earned
300/57=5.26
>
> 21b. (2 points) For this firm, what was the smallest
> source of funds in 1997?
>
> Positive change in A/P of $165
>
> 21c. (2 points) What was the firm's 1997 Net Cash
> Flow?
>
> 147+730=877
>
> Your Name ___________________________________ Date
> ___________________
> This part of the exam is open book, open notes.
>
> 1a. (4 points) You have the following two stocks:
>
> State of Economy Probability of State Stock A's
> Return Stock B's Return
> Great .12 15 -12
> Good .26 18 -2
> OK .28 9 9
> Bad .18 0 19
> Terrible .16 -4 4
>
> What is the expected return and standard deviation of
> Stock A
>
> Expected Return = 8.36% and Std. Dev. = 9.06%
>
>
>
>
>
> 1b. (4 points) Now create a portfolio that is 70%
> stock A and 30% stock B. What is the expected return
> and standard deviation for the portfolio?
>
> Expected Return = 7.24%
>
>
>
>
>
>
>
>
> 2. Last year your company had; sales = $200, Net
> Profit Margin = 12%, Assets = $400, and a
> debt-to-equity ratio=2.5. Calculate the Return on
> Assets (2 points) and Return on Equity (3 points).
> ROA = 24/400=.06

I'm lost on ROE.
CL+Equity = 400
TD = CL+LTD
>
>
>
>
> 3. (3 points) Calvin, Inc. had a current ratio of 7.8,
> an inventory turnover ratio of 17 times per year,
> total current liabilities of $83,000, and cash and
> marketable securities of $230,000 in 1995. The only
> other current asset is inventory. Total Liabilities
> were $1,340,000. What were CALVIN's annual sales for
> that year?
ca/83,000=7.8 so CA = 647,740
Inv = 647740-230,000=417,740
Sales/417,740=17 so Sales =7,101,580

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