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Date Posted: 12:32:31 06/27/00 Tue
Author: Charles Hodges
Subject: Sample Mid-Term from Hodges

Here is a sample mid-term. I don't have an answer key. If you post your answers, I will review and (if needed) correct them. If no one posts their answers, neither will I.


EXAM 1 BA 8622 FALL 1999 NAME ________________________

Instructions:
1) The part of the exam is closed book and closed notes. Calculators are allowed. No scrap paper is allowed, use the back of the exam if necessary.
2) 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!
3) 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 d. 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.

1. 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 sales.
c. Minimize the chances of losses.
d. Maximize the stock price per share.
e. Maximize expected net income.

2. List three ways, discussed in the text as solutions to the "agency problem," in which managers are "encouraged" to act in the best interests of owners?






3. In which form of business organization does ownership have limited liability?
a. sole proprieitorship b. general partnership
c. corporation d. all of the above have limited liability for owners
e. none of the above have limited liability for owners.

4. Finance consists of three interrelated areas: (1) capital markets and financial institutions, (2) financial management/corporate finance, and (3) derivatives.
A. True B. False

5. List the four required financial statements for external reporting purposes.








6. NOPAT is generally greater than, or equal to, Net Income.
A. True B. False

7. On the Statement of Cash Flows, we would expect to find both interest income/expense and dividends in the Investing Activities section.
A. True B. False

8. For a firm using accrual accounting, Corporate taxes are reducted when the firm:
a. pays dividends b. pays interest.
c. pays payables. d. pays receivables.
e. none of the above.


9. List three different items that might cause a firm's cash flows to be greater than its net income.





10. Common size financial statements show components as a percentage instead of dollars.
A. True B. False

11. Fylnt Enterprises sells common stock and uses all of the proceeds to reduce short-term debt. This should ______________ the current ratio and _______________ the debt ratio.
a. increase, increase b. increase, decrease
c. increase, not change d. decrease, increase
e. decrease, not change f. not change, not change

12. (4 points) Indicate how the following ratios compare to industry averages. Interpret the ratio in relation to the category in which they would be classified (i.e., better than average, worse than average).
AA Company Industry Interpretation
Inventory Turnover 3.1 2.2
Market/ Book 1.9 2.7
Return on equity 37.5% 23.9%
Current Ratio 15.7 12.8

13. (20 points) Fill in the missing amounts for the each of the independent cases:

You will find the following relationship helpful:

Retained earnings, Jan 1 + Net Income - Dividends = Retained earnings, Dec 31



Case A Case B Case C Case D

Revenue $100,000 $200,000 _________ ________

Expenses ________ ________ $50,000 $70,000

Net income 40,000 _________ 60,000 ________

Retain earnings, Jan1 _________ 300,000 180,000 120,000

Dividends 50,000 70,000 ________ 30,000

Retain earnings, Dec31 120,000 310,000 _________ _________

Current assets _________ 60,000 100,000 _________

Long Term assets 420,000 ________ 580,000 300,000

Total assets 500,000 ________ _________ 410,000

Current liabilities _________ 30,000 _________ 20,000

Noncurrent liabilities 270,000 _________ 170,000 ________

Total liabilities ________ 140,000 ________ _________

Paid-in capital _________ 520,000 210,000 100,000

Total equity 200,000 _________ 410,000 210,000


14. (4 points) Net Income is $2.50, the net profit margin is 8%, the total asset turnover is 2.0, and the debt ratio is 40%. What is the book value of owner's equity?




15. (4 points) Assume you buy a corporate bond with an 8% yield and a municipal bond with a 6% yield. Both are bought at par (i.e., there are no capital gains with either bond). If you are in the 28% margianl tax bracket, your after-tax return on the corporate bond is ___________% and your after-tax return on the municipal bond is ____________%.


16. List at least five limitations of ratio analysis as given in the text.














17. Profit Margin = 5%, Net income = $200,000, Inventory turnover ratio = 8 times. Inventories = ?
a. $500,000 b. $4 million c. $32 million d. none of the above.






18. Net Income = $12,000, Tax rate = 40%, Total revenues = $40,000, Total operating costs = $14,000. Interest expenses =
a. 0 b. $26,000 c. $20,000
d. $6,000 e. none of the above.







19. If a company's stock price increases by 10% (everything else remaining constant), the effect on the company's price/earnings-ratio (P/E) is:
a. P/E increases by 10% b. P/E remains unchanged c. P/E decreases by 10%
d. Not enough information to answer the question.








20. (4 points) The Arpad Company has $2,600,000 in current assets and $1,000,000 in current liabilities. Its initial inventory level is $750,000, and it will raise funds as additional notes payable and use them to increase inventory. How much can Arpad's short-term debt (notes payable) increase without pushing its current ratio below 2.0?





21. Which of the following statements is most correct?
a. The yield on a 2-year corporate bond will always exceed the yield on a 2-year Treasury bond.
b. The yield on a 3-year corporate bond will always exceed the yield on a 2-year corporate bond.
c. The yield on a 3-year Treasury bond will always exceed the yield on a 2-year Treasury bond.
d. All of the answers above are correct.
e. Statements a and c are correct.


22. You read in The Wall Street Journal that 30-day T-bills are currently yielding 8 percent. Your brother-in-law, a broker at Kyoto Securities, has given you the following estimates of current interest rate premiums:

Inflation premium 5%
Liquidity premium 1%
Maturity risk premium 2%
Default risk premium 2%

Based on these data, the real risk-free rate of return is
a. 0% b. 1% c. 2% d. 3% e. 4%

23. The percentage of sales method produces accurate results unless which of the following conditions is (are) present?
a. Fixed assets are "lumpy."
b. Strong economies of scale are present.
c. Excess capacity exists because of a temporary recession.
d. Answers a, b, and c all make the percentage of sales method inaccurate.
e. Answers a and c make the percentage of sales method inaccurate, but, as the text explains, the assumption of increasing economies of scale is built into the percentage of sales method.

24. Errors in the sales forecast can be offset by similar errors in costs and income forecasts. Thus, as long as the errors are not large, sales forecast accuracy is not critical to the firm.
a. True b. False

25. As a firm's sales grow its current asset accounts tend to increase. For instance, as sales increase the firm's inventories increase and its level of accounts payable will increase. Thus, spontaneously generated funds will arise from transaction accounts that increase as sales increase.
a. True b. False

26. The percentage of sales method assumes that all financial ratios are constant, which means, for example, that if you plotted a graph of inventories versus sales, the regression line would be linear and would have a positive Y-intercept.
a. True b. False

27. If any firm with a positive net worth is operating its fixed assets at full capacity, if its dividend payout ratio is 100 percent, and if it wants to hold all financial ratios constant, then for any positive growth rate in sales, the firm will require external financing.
a. True b. False


EXAM 1 BA 8622 FALL 1999 NAME ________________________

Instructions:
1) The part of the exam is open book and open notes.
2) Each question is worth 1 1/2 points.

28. The tighter the probability distribution of expected future returns, the smaller the risk of a given investment as measured by the standard deviation.
a. True b. False

29. Companies should deliberately increase their risk relative to the market only if the actions that increase the risk also increase the expected rate of return on the firm's assets by enough to completely compensate for the higher risk.
a. True b. False

30. When investors require higher rates of return for investments that demonstrate higher variability of returns, this is evidence of risk aversion.
a. True b. False

31. 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

32. Portfolio diversification reduces the variability of the returns on each security held in the portfolio.
a. True b. False


33. Diversifiable risk, which is measured by beta, can be lowered by adding more stocks to a portfolio.
a. True b. False




BRING YOUR FINANCIAL CALCULATOR TO THE NEXT CLASS.

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