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Date Posted: 21:09:12 07/02/00 Sun
Author: Bob
Subject: Re: Sample Mid Term from Hodges
In reply to: Karen Gilmore 's message, "Sample Mid Term from Hodges" on 09:44:19 07/01/00 Sat

I've deleted all questions that appreared to have the correct answer and noted any questions where I disagree with the posted answer.

Anyone with different answers should post them.


>
> > 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

I think the answer is E, none of the above. With accrual accouting, interest paid may not match interest accrued. For example, most bonds pay interst semi-annually, but firms put out financial statements with interest expense quarterly.

> > 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

I'm not sure about the bad debt answer. I think anything that could be a source of funds on the balance sheet would satisfy this question.

> > 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?

On C, use the equation Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings to get Net Income.

On D, Use Total Equity - Paid In Capital = Ending Retained Earnings to get Ending Retained Earnings, then use the above equation to get Net Income.


> > 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

This looks correct to me.
>
>
> > 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
The answer should be A, since corporates are always higher risk and therefore return than treasuries. C would be incorrect if the yield curve were downward sloping.


>
> > 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
I think the answer is D not E.


> > 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

According to the graph in the book, a postive intercept is economies of scale. Constant ratio, which I think is the same as percent of sales, has an intercept of 0.

> > 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

I didn't undersand this question.

> > 33. Diversifiable risk, which is measured by beta,
> can
> > be lowered by adding more stocks to a portfolio.
> > a. True b. False
> >
> > A
This is false, as beta measures systematic risk. I don't think there is a measure for diversifiable risk, since standard deviation measures total risk.

ANYONE WHO HAS OTHER ANSWERS THAN THESE SHOULD POST THEIR IDEAS, LET'S WORK TOGETHER AND WE ALL CAN DO WELL.

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