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Date Posted: 13:42:40 02/04/00 Fri
Author: Charles Hodges
Subject: Sample Mid-Term From Hodges

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 ˝ 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

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?





3. (Fill in the blanks) Finance would suggest that ____________(Historical/Future) ______________ (Earnings/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?



5. What are Debt, or Leverage, ratios intended to measure? List one example of an Debt ratio.


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.

7. From the book, what are five limitations of ratio analysis?







8. Net Fixed Assets are always less than, or equal to, Gross fixed assets.
A. True B. False

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.

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 _____ if it is to be held in isolation and Stock _____ 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

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

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
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

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

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

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

18. The term structure may be defined as the relationship between interest rates and maturities of similar securities.
a. True b. False

19. The expectations theory postulates that the term structure of interest rates is based on expectations regarding future interest rates.
a. True b. False

20. Which of the following statements is most correct?
a. A good goal for a corporate manager is maximization of expected EPS.
b. Corporations conduct most business in the U.S.; corporations' popularity results primarily from their favorable tax treatment.
c. A good example of an agency relationship is the one between stockholders and managers.
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.
e. Firms in highly competitive industries find it easier to exercise "social responsibility" than do firms in oligopolistic industries.
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.

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.

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.

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%

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



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 $________
Depreciation $90 Income tax $ ________
Net income $ ________(3 points) Total current liabilities$ __________
Long term debt $ 205 Net sales $ 907
Total liabilities and owner's equity $_____ Beginning Retained Earnings $132
Additional Paid-in Capital $94 Common stock ($.03 par) $ 24
Ending retained earnings $ 143 Cost of goods sold ________
Beginning Net Fixed Assets $351 Cash $ ____________
Accounts payable $ 193 Accounts receivable $230
Inventories $ 95
Gross profit $ 467 Rent $70
Total Assets $ ___________ Research and Development Expense $7
Advertising $110 Operating Profit $ _________
Interest expense $8 Total Current assets $ 421
Ending Net fixed assets $ 397 Dividends $74
Dividends per Share ________(3 points) Gross Profit Margin _____________
Inventory Turnover Ratio ___________ Current Ratio ________________








EXAM 1 BA 8622 SPRING 1999 NAME ________________________

YOU HAVE 1 ˝ 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).





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?

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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