FIN/331 Final Exam 1

Towson University

Department of Finance

Principles of Financial Management (FIN331)

Exam I



1.             Which of the following statements is CORRECT?

a.     One of the advantages of the corporate form of organization is that it avoids double taxation.

b.     It is easier to transfer one’s ownership interest in a partnership than in a corporation.

c.     One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability.

d.     One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., “one person, one vote.”

e.      Corporations of all types are subject to the corporate income tax.

2.             Which of the following is NOT to address the agency conflict between shareholders and managers?

                a.     Maximize sales

b.     Monitor managers’ activities

c.     Give incentives based on performance                                                            

                d.     Offer stock shares or stock options

                e.     Hostile takeover threat

3.             What is the main advantage of S-corp relative to C-corp?

                a.     Profit margin

b.    Single taxation

c.     Limited liability

d.     Dividend policy

e.     Capital structure

4.             Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?

a.     Decrease the use of restrictive covenants in bond agreements.

b.     Take actions that reduce the possibility of a hostile takeover.

c.     Elect a board of directors that allows managers greater freedom of action.

d.     Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries.

e.     Eliminate a requirement that members of the board of directors have a substantial investment in the firm’s stock.

5.             If the projected net earnings is $5m and the dividend payout ratio is 60%, what is the projected retained earnings at the end of the next year if the retained earnings at the end of this year is $10m?

                a.    $6m

b.    $9m

c.    $10m

d.    $11m

e.    $12m

6.             Which of the following items is NOT normally considered to be a current asset?

a.     Accounts receivable.

b.     Inventory.

c.     Bonds.

d.     Cash.

e.     Short-term, highly-liquid, marketable securities.

7.             The following information for Towsontown, Inc. is provided:

Net Sales:                                $88,000

Operating Costs:                     $72,000 (doesn’t include depreciation)

Depreciation Expense:             $  7,200 (no amortization charges occurred)

Debt:                                       $40,000

Interest Rates:                          10% Annual

Tax Rate:                                 34%

How much net cash flow did Woodley generate over the past year?

a.     $3,168       

b.     $3,268       

c.     $10,168       

d.     $10,368       

e.     $11,368

8.             Houston Pumps recently reported $185,250 of sales, $140,500 of operating costs other than depreciation, and $9,250 of depreciation.  The company had $35,250 of outstanding bonds that carry a 6.75% interest rate, and its income tax rate was 35%.  In order to sustain its operations and thus generate future sales and cash flows, the firm was required to spend $15,250 to buy new capital expenditure and to invest $6,850 in net working capital.  What was the firm’s free cash flow?

a.     $10,225

b.     $10,736

c.     $11,273

d.     $11,837

e.     $12,429

9.             Corporations face the following tax schedule:

                                                                                  Tax on Base                                   Percentage on

                    Taxable Income                                       of Bracket                                 Excess above Base

Up to $50,000                                                                             $0                                        15%

$50,000-$75,000                                                                    7,500                                        25

$75,000-$100,000                                                                13,750                                        34

$100,000-$335,000                                                              22,250                                        39

Company Z has $80,000 of taxable income from its operations, $5,000 of interest income, and $30,000 of dividend income from preferred stock it holds in other corporations.  What is Company Z’s tax liability (For dividend, 70% is excluded from the taxable income. Taxable income for dividend is Dividend income*(1 – Dividend exclusion %))?

a.     $17,328

b.     $18,240

c.     $19,200

d.     $20,210

e.     $21,221

10.           A company expects sales to increase during the coming year, and it is using the AFN equation to forecast the additional capital that it must raise.  Which of the following conditions would cause the AFN to increase?

a.     The company previously thought its fixed assets were being operated at full capacity, but now it learns that it actually has excess capacity.

b.     The company increases its dividend payout ratio.

c.     The company begins to pay employees monthly rather than weekly.

d.     The company’s profit margin increases.

e.     The company decides to stop taking discounts on purchased materials.

11.           Chua Chang & Wu Inc. is planning its operations for next year, and the CEO wants you to forecast the firm’s additional funds needed (AFN).  Data for use in your forecast are shown below.  Based on the AFN equation, what is the AFN for the coming year?

Last year’s sales = S0                                              $200,000        Last year’s accounts payable                               $50,000

Sales growth rate = g                                                       40%        Last year’s notes payable                                    $15,000

Last year’s total assets = A*0                                  $135,000        Last year’s accruals                                             $20,000

Last year’s profit margin = M                                       20.0%        Target payout ratio                                                25.0%

a.     -$14,440

b.     -$15,200

c.     -$16,000

d.     -$16,800

e.     -$17,640

12.           Which of the following statements is NOT CORRECT?

a.     When a corporation’s shares are owned by a few individuals, we say that the firm is “closely, or privately, held.”

b.     “Going public” establishes a firm’s true intrinsic value and ensures that a liquid market will always exist for the firm’s shares.

c.     The stock of publicly owned companies must generally be registered with and reported to a regulatory agency such as the SEC.

d.     When stock in a closely held corporation is offered to the public for the first time, the transaction is called “going public, or an IPO,” and the market for such stock is called the new issue or IPO market.

e.     It is possible for a firm to go public and yet not raise any additional new capital for the firm itself.

13.           Which is a common way to compare financial ratios against other companies in the same industry?

                a.     Time-Trend 

b.     Cross-sectional  

c.     Internal uses 

d.     Benchmark  

e.     None of the above

14.           Considered alone, which of the following would increase a company’s current ratio?

a.     An increase in net fixed assets.

b.     An increase in accrued liabilities.

c.     An increase in notes payable.

d.     An increase in accounts receivable.

e.     An increase in accounts payable.

15.           Towson, Inc. currently has $1,600,000 in accounts receivables and its days sales outstanding (DSO) is 20 days. If accounts receivable comprise 50% of the company’s current assets and Towson has $4,800,000 in net fixed assets, what is its total asset turnover ratio?

a.     2.651x       

b.     3.650x       

c.     3.520x       

d.     2.921x       

e.      3.920x

16.           Dell has an inventory period of 1 month, and an account receivable period of 0 (zero) months. It also has a payable period of 6 months. What are the cash conversion cycle period and the interest expense for Dell if they have annual net total (credit) sales volume of $10 billion? The market interest rate is 6.0%.

a.     -5.0, $-250 m   

b.      6.0, $300m   

c.      1.0, $100m   

d.      3.0, $150m   

e.      0.0, $100m

17.           Ryngard Corp’s sales last year were $38,000, and its total assets were $16,000.  What was its total assets turnover ratio (TAT)?

a.     2.04

b.     2.14

c.     2.26

d.     2.38

e.     2.49

18.           If your mark up ratio is 25%, what is the margin ratio?

a.     15%

b.     20%

c.     25%

d.     28%

e.     30%

19.           Last year Rennie Industries had sales of $305,000, assets of $175,000, a profit margin of 5.3%, and an equity multiplier of 1.2.  The CFO believes that the company could reduce its assets by $51,000 without affecting either sales or costs.  Had it reduced its assets by this amount, and had the debt ratio, sales, and costs remained constant, how much would the ROE have changed?

a.     4.10%

b.     4.56%

c.     5.01%

d.     5.52%

e.     6.07%

20.          Which ratio may be greatly affected by the choice of short-term and long-term debt for a given amount of total debt?

                a.     Debt ratio 

b.     Profit margin 

c.     TIE 

d.     Quick ratio 

e.     TAT

21.           Cook, Inc. has a current ratio of 1.8x on current liabilities of $200,000. The firm has $36,000 of inventories. The firm will issue notes payable and use those funds to buy new inventories to meet the inventory requirement for the expansion. Cook’s debt holders specifies that it must maintain a quick ratio at least 1.20x, or else it is in default. How much new inventory can Cook raise before it violates its bond contracts?

a.     $70,000       

b.     $80,000       

c.     $90,000       

d.     $72,000       

e.     $30,000

22.           Money markets are markets for

a.     Foreign currencies.

b.     Consumer automobile loans.

c.     Common stocks.

d.     Long-term bonds.

e.     Short-term debt securities such as Treasury bills and commercial paper.

23.           Which of the following statements is CORRECT?

a.     If you purchase 100 shares of Disney stock from your brother-in-law, this is an example of a primary market transaction.

b.     If Disney issues additional shares of common stock through an investment banker, this would be a secondary market transaction.

c.     The NYSE is an example of an over-the-counter market.

d.     Only institutions, and not individuals, can engage in derivative market transactions.

e.     As they are generally defined, money market transactions involve debt securities with maturities of less than one year.

24.           Which one has nothing to do with IPO?

                a.     New issues  

b.     Secondary market  

c.     An influx of capital to issuer

                d.     Investment Banks possibly underwriting  

e.     Public offering

25.           Which of the following statements is CORRECT?

a.     The most important difference between spot markets versus futures markets is the maturity of the instruments that are traded.  Spot market transactions involve securities that have maturities of less than one year whereas futures markets transactions involve securities with maturities greater than one year.

b.     Capital market transactions involve only preferred stock or common stock.

c.     If General Electric were to issue new stock this year, this would be considered a secondary market transaction since the company already has stock outstanding.

d.     Both Nasdaq dealers and “specialists” on the NYSE hold inventories of stocks.

e.     Money market transactions do not involve securities denominated in currencies other than the U.S. dollar.

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