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Date Posted: 09:44:19 07/01/00 Sat
Author: Karen Gilmore
Subject: Sample Mid Term from Hodges
In reply to: Charles Hodges 's message, "Sample Mid-Term from Hodges" on 12:32:31 06/27/00 Tue

>
>
> 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.
> D

> 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?
> 1. Tie mgr. compensation to stock performance
2. The threat of a takeover
3. Threat of firing
>
>
>
>
>
> 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.

> C

> 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
> B

> 5. List the four required financial statements for
> external reporting purposes.
>
> Balance Sheet, Income Stmt., Stmt of Cash Flows, Stmt of Retained Earnings
>
>
>
>
>
>
> 6. NOPAT is generally greater than, or equal to, Net
> Income.
> A. True B. False
> A

> 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
B
>
> 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.
> B
>
> 9. List three different items that might cause a
> firm's cash flows to be greater than its net income.
>
> Depreciation
Sales on credit
Bad Debts not written off quickly

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

> 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
>
Better than avg
Worse than avg
Better than avg
Better than avg

> 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
>
There isn't room to answer each of these blanks, but I think it's fairly straightforward. I had trouble with finding Net Income and 12/31 retained earnings for C & D. There are two unknowns so I can't solve the equation. What am I not seeing?


> 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?
> I don't understand what you're asking for.
Total Assets = 15.62, Sales = 31.25, Total Debt = 6.24
>
>
>
> 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 ____________%.
> 5.7% and 6%
>
> 16. List at least five limitations of ratio analysis
> as given in the text.
>
> 1. Avg. doesn't mean anything. Most cos. want to be above average.
2. Window dressing of figures could occur
3. Inflation distorts some figures
4. Some firms have different divisions in different countries so their measurements could distort parent co figures.
5. Seasonal sales and activity distorts figures
>
>
> 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.
>
> A
>
>
>
>
> 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.
>
> C
>
>
>
>
>
> 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.
>
> A
>
>
>
>
>
>
> 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?
>
> 2.6/X=2.0 x=1.3
1.3-1=.3
STD can increase by $300,000
>
>
>
> 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.
>
C
>
> 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%
>
D

> 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.
>
E

> 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

B

> 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
A

> 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
> A
> 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
> A
>
> 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
> A
> 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
> A
> 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
> A
> 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
> A
> 32. Portfolio diversification reduces the variability
> of the returns on each security held in the portfolio.
> a. True b. False
> B
>
> 33. Diversifiable risk, which is measured by beta, can
> be lowered by adding more stocks to a portfolio.
> a. True b. False
>
> A
>
>
> BRING YOUR FINANCIAL CALCULATOR TO THE NEXT CLASS.

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