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Date Posted: 18:46:02 02/27/00 Sun
Author: Donald Herbert
Subject: Spring 1999 MT attempt
In reply to: Charles Hodges 's message, "Sample Mid-Term From Hodges" on 13:42:40 02/04/00 Fri

> Here is a sample mid-term without answers. Please
> post your answers and I will correct any errors made.
> If you post no answers, I post no answers. Have fun.
> This sample applies to both of my classes.
>
>
> EXAM 1 BA 8622 SPRING 1999 NAME
> ________________________
>
> YOU HAVE 1 ½ HOURS TO COMPLETE BOTH PARTS OF THIS THIS
> EXAM
> Instructions:
> 1) The part of the exam is closed book and closed
> notes. No scrap paper is allowed, use the back of the
> exam if necessary.
> 2) Read the entire exam before starting. The best
> strategy is generally to “cherry pick”. In other
> words, solve the easiest (and/or most familiar)
> problems first. This will save time (and energy) that
> can be expended on the more difficult problems.
> 3) Partial points are based on readily observable
> evidence that you know at least part of the solution
> concept. The more evidence presented (and the clearer
> the evidence), the better the chance for partial
> points. In other words, SHOW ALL WORK!
> 4) If you have additional time remaining, give your
> work one last check.
> 5) True/False questions are worth 1 1/2 points.
> Multiple choice questions are worth 3 points. Number
> one is b. Short answer questions usually take less
> than three sentences and are worth 4 points. Problems
> are worth the number of points listed in the question.
>
> PART I. CONCEPT QUESTIONS
>
> 1. The goal of the financial manager should be to
> maximize earnings per share.
> A. True B. False
>
B(False)

> 2. In which financial statement does one find the
> account “Additional Paid-in Capital” ? What would
> cause the amount listed in “Additional Paid-in
> Capital” to change from year to year?
>
> Balance sheet--Changes caused by issuing stock or purchasing treasury stock.
>
>
>
> 3. (Fill in the blanks) Finance would suggest that
> Future Cash Flows are most important when valuing
> any investment.
>
> 4. What is the purpose of the Income Statement?
> Does the Income Statement cover a period of time or a
> point in time?
> To show what happened between balance sheets (period of time)
>
>
> 5. What are Debt, or Leverage, ratios intended to
> measure? List one example of an Debt ratio.

How much debt are we using (how leveraged are we)?
Dow we have the ability to meet our long-term obligations?
Example: Debt ratio = total liabilities/total assets
>
>
> 6. For firms using accrual accounting, the financial
> statement that lists a firm’s investing cash flows and
> operating expenses over a period of time is the:
> A. Income Statement.
> B. Balance Sheet.
> C. Statement of Cash Flows.
> D. Sources and Uses of Funds statement.
> E. None of the above.

E. None of the above -- investing cash flows shown on statement of cash flows, operating expenses shown on IS.1.
>
> 7. From the book, what are five limitations of ratio
> analysis?
>
> 1. Seasonal Factors
2. Window dressing
3. Different accounting practices
4. A company may have some ratios that look "good" and some that look "bad," making it difficult to make general conclusions about the company's overall strength/weakness.
5. Difficult for multidivisional companies to come up with a meaningful set of industry averages for comparative purposes.
>
>
>
>
>
> 8. Net Fixed Assets are always less than, or equal
> to, Gross fixed assets.
> A. True B. False
True (any "net" term should be <= any "gross" term)

> 9. A profitable firm that wants to know if it has
> enough cash to meet its bills would be most likely to
> use which kind of ratio?
> (a) liquidity.
> (b) leverage.
> (c) efficiency.
> (d) profitability.
> (e) none of the above.
> A (liquidity)

> 10. You have developed the following data on three
> stocks:
> Stock Standard Deviation Beta
>
> A 0.15 0.79
> B 0.25 0.61
> C 0.20 1.29
> If you are a risk minimizer, you should choose Stock
> __A___ if it is to be held in isolation and Stock __B___
> if it is to be held as part of a well-diversified
> portfolio.
> a. A; A b. A; B c. B; A d. C; A e. C; B
>
B(A; B)

> 11. Three of the disadvantages of a partnership, (1)
> unlimited liability, (2) limited life of the
> organization, and (3) difficulty of transferring
> ownership, result in another significant disadvantage,
> difficulty in attracting large amounts of capital.
> a. True b. False
> A(True)

> 12. One key result of applying the Capital Asset
> Pricing Model is that the risk and return of an
> individual security should be analyzed by how that
> security affects the risk and return of the portfolio
> in which it is held.
> a. True b. False
A(True)

> 13. When adding new securities to an existing
> portfolio, the higher or more positive the degree of
> correlation between the new securities and those
> already in the portfolio, the greater the benefits of
> the additional portfolio diversification.
> A. True B. False
> B(False - i.e. a perfect correlation between stocks would add no advantage)

> 14. Risk aversion is a general dislike for risk and a
> preference for certainty. That is, rational investors
> would be willing to give up a risk premium of return
> in order to obtain a lower return with certainty.
> a. True b. False

A(True)
>
> 15. When a firm makes bad managerial judgments or has
> unforeseen negative events happen to it that affect
> its returns, these random events are unpredictable and
> therefore cannot be diversified away by the investor.
> a. True b. False
B(False - diversification does not control the actual events, but rather manages the possibility of events occurring)
>
> 16. The nominal rate of interest is defined as the
> sum of the nominal risk-free rate of return and the
> expected inflation rate.
> a. True b. False
>
> 17. Long-term interest rates reflect expectations
> about future inflation. Inflation has varied
> significantly from year to year in the past, and as a
> result, long-term rates can be expected to fluctuate
> more than short-term rates.
> a. True b. False
> B(False)

> 18. The term structure may be defined as the
> relationship between interest rates and maturities of
> similar securities.
> a. True b. False
A(True)
>
> 19. The expectations theory postulates that the term
> structure of interest rates is based on expectations
> regarding future interest rates.
> a. True b. False
A(True)

> 20. Which of the following statements is most correct?
> a. A good goal for a corporate manager is maximization
> of expected EPS.
(should be to maximize stockholders' wealth)
> b. Corporations conduct most business in the U.S.;
> corporations' popularity results primarily from their
> favorable tax treatment.
(popularity from favorable stock price?)
> c. A good example of an agency relationship is the one
> between stockholders and managers.
(This is the best answer)
> d. Corporations and partnerships have an advantage
> over proprietorships because a sole proprietor is
> subject to unlimited liability, but investors in the
> other types of businesses are not.
(partnerships have unlimited liability as well)
> e. Firms in highly competitive industries find it
> easier to exercise "social responsibility" than do
> firms in oligopolistic industries.
(vice-versa-- must have above "normal profits" to exercise social responsibility)


> 21. Which of the following statements is most
> correct?
> a. Risk refers to the chance that some unfavorable
> event will occur, and a probability distribution is
> completely described by a listing of the likelihood of
> unfavorable events.
> b. Portfolio diversification reduces the variability
> of returns on an individual stock.
> c. When company-specific risk has been diversified,
> the inherent risk that remains is market risk which is
> constant for all securities in the market.
> d. A stock with a beta of -1.0 has zero market risk.
> e. The SML relates required returns to firms' market
> risk. The slope and intercept of this line cannot be
> controlled by the financial manager.
(E is the best answer)
>
> 22. Stock A has a beta of 1.5 and Stock B has a beta
> of 0.5. Which of the following statements must be true
> about these securities? (Assume the market is in
> equilibrium.)
> a. When held in isolation, Stock A has greater risk
> than Stock B.
> b. Stock B would be a more desirable addition to a
> portfolio than Stock A.
> c. Stock A would be a more desirable addition to a
> portfolio than Stock B.
> d. The expected return on Stock A will be greater than
> that on Stock B.
> e. The expected return on Stock B will be greater than
> that on Stock A.
D(expected return on stock A will be > stock B)
>
> 23. The New York Stock Exchange is primarily
> a. A secondary market.
> b. An organized auction market.
> c. An over-the-counter market.
> d. Answers a and b are correct.
> e. Answers b and c are correct.

D(A & B)
>
> 24. Given the following data, find the expected rate
> of inflation during the next year.
> k* = real risk-free rate = 3%.
> Maturity risk premium on 10-year T-bonds = 2%. It is
> zero on 1-year bonds, and a linear relationship exists.
> Default risk premium on 10-year, A-rated bonds = 1.5%.
> Liquidity premium = 0%.
> Going interest rate on 1-year T-bonds = 8.5%.
> a. 3.5% b. 4.5% c. 5.5% d. 6.5% e. 7.5%

C(5.5%)
>
> 25. (4 points) Indicate how the following ratios
> match up to industry averages. (Interpret them in
> relation to the category in which they would be
> classified.)
> AAAAA Company Industry Interpretation
> Current ratio 2.0 2.7
> Return on Assets 4% 8%
> Inventory turnover 17.5 9.9
> Times interest
> earned 13.2 15.4
>
> Below, below, above, below (higher is better)
>
> PART II. PROBLEMS
> 1. Fill in the missing numbers for the Aboutt, Inc.
> 1997 annual financial statements. Assume all balance
> sheet accounts are 1997 ending balances unless other
> wise noted. Missing numbers are worth 1 1/2 points
> unless otherwise noted.
>
Profit before taxes 162
Accrued wages 69
Depreciation 90
Income tax 69
Net Income 85
Total current liabilities 262
Long-term debt 205
Net sales 907
Total liabilities and owner's equity 818
Begin RE 132
Additional paid-in capital 94
Common stock ($0.03 par) 24
End RE 143
COGS 628
Begin net fixed assets 351
Cash 96
Accounts payable 193
Accounts receivable 230
Inventories 95
Gross profit 467
Rent 70
Total Assets 818
R&D Expense 7
Advertising 110
Operating Profit 162
Interest expense 8
Total current assets 421
End Net fixed assets 397
Dividends 74
Dividends per share 9%
Gross profit margin 9.40%
Inventory turnover ratio 9.5x
Current ratio 1.6

>
>
>
>
>
>
>
>
> EXAM 1 BA 8622 SPRING 1999 NAME
> ________________________
>
> YOU HAVE 1 ½ HOURS TO COMPLETE BOTH PARTS OF THIS THIS
> EXAM
> Instructions:
> 1) The part of the exam is open book and open notes.
> 2) Point values are listed with the question.
>
> 1. (4 points) You hold a diversified portfolio
> consisting of a $10,000 investment in each of 20
> different common stocks (i.e., your total investment
> is $200,000). The portfolio beta is equal to 1.2. You
> have decided to sell one of your stocks which has a
> beta equal to 0.7 for $10,000. You plan to use the
> proceeds to purchase another stock, which has a beta
> equal to 1.4. What will be the beta of the new
> portfolio?
>
>
>
>
>
>
> 2. (4 points) An investor is forming a portfolio by
> investing $50,000 in stock, A which has a beta of
> 1.50, and $25,000 in stock B which has a beta of 0.90.
> The return on the market is equal to 6 percent and
> Treasury bonds have a yield of 4 percent. What is the
> required rate of return on the investor's portfolio?
>
>
>
>
>
>
>
>
> 3. Last year your company had; sales = $150, Net
> Profit Margin = 12%, Assets = $80, and a
> debt-to-equity ratio=3. Calculate the Return on
> Assets (2 points) and Return on Equity (2 points).
>
>
> ROA = 22.5%
ROE = 90%
>
>
> 4. (3 points) The Atlanta Company has determined that
> it return on equity is 15%. You have the following
> information, debt ratio = 45% and Total Asset Turnover
> = 2.8. What is the firm’s profit margin?
>
Profit Margin = 2.95%

> 5. (2 points) Assume two bonds of the same risk, the
> taxable bond has a yield of 11%, and the municipal
> bond has a yield of 8%. What is the tax rate of the
> margianl investor in bonds?

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