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Date Posted: 12:36:16 06/27/00 Tue
Author: Charles Hodges
Subject: Another sample Mid-term from Hodges

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.

2. List two reasons why profit maximization may not lead to shareholder wealth maximization.




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.

4. What are the three main forms of business organizations discussed in chapter 1?






5. What is meant by the term "agency relationship"?




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.

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



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.

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

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.

10. What are five limitations of ratio analysis?







11. As listed in the book (page 546), what are the 6 steps of the financial planning process?










12. Gross Fixed Assets are always greater than, or equal to, net fixed assets.
A. True B. False

13. Pro forma financial statements, as discussed in the text, are used primarily to assess a firm's historical performance.
a. True b. False
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

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

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?










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

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

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


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 _____.

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

Fixed Asset Turnover Debt Ratio

Profit Margin on Sales Times Interest Earned


21b. (2 points) For this firm, what was the smallest source of funds in 1997?



21c. (2 points) What was the firm's 1997 Net Cash Flow?



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







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?










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).





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?

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