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FINANCE 341 — Fali 2009 e Name: EXAM#1 - Form A ’ Directions: Choose the best answer. (Keep 4 decimals unless told otherwise.) i Which of the following statements is most FALSE? . - _g The intrinsic value is an estimate of a stock’s <rrue” value based on accurate risk and return data. T _b— When a stock’s market value is equal to its intrinsic value, the stock is in equilibrium. T e~ Corporate executives are motivated to keep the company’s stock price high to make sure the . company is not taken over, making their jobs insecure. . i 4) A corporation’s primary goal is to maximize all future earnings of the company. (M= Shes f‘““ -T"_e- A corporate raider is an individual who targets a corporation for takeover because it is undervalued. 2. Which of the following statements is most FALSE? “T" & An S corporafion is taxed as a partnership but has the limited liability of a corporation. b Large companies find it advantageous to be C corporations because of the ability to raise capital to support growth. ' ) : T —e~ Partnerships can be formed easily and inexpensively- T —d— LLPs are used for professional firms in the fields of accounting, law, and architecture. ) A sole proprietorship has a number of government regulations to protect the liability of the owner. . . (fecd pombec o) 3+ Which of the following statements is most CORRECT? : ’ ' t ~& AnIPO is sold onthe secondary market. ¥ _b. The efficient market hypothesis states that stocks are not always in equilibrium. ¥ e Thousands of dealers service the few brokers that take in the orders. — (& The New York Stock Exchange has higher dollar volume than the Nasdag. 1 e The New York Stock Exchange is an example of a private market. 4 Which of the following statements is most FALSE? - a. - Spot markets are markets in which assets are bought or sold for delivery within a few days. ¢ () Once a stock has been issued and is now being traded among investors, it is said to be on the primary market. (Seconc}ur ) ’ C ’ ¢. Money markets deal with financial securities that have a maturity of less than one year. d. An investment bank distributes new stock or bond issues. ¢. Hedge funds have largely been unregulated compared to rutual funds. 5 Which of the following statements is most FALSE? T According to the semistrong form of the efficient markets hypothesis (EMH), studying annual reports of less-known companies cannot result in finding opportunities to make returns in the stock market.! . , @_According fo the weak form of the efficient markets hypothesis (EMH), past movement of the stock’s price is the only element that affects the current and future prices of the stock. 1 /c./ According to the strong form of the efficient markets hypothesis (EMH), a person with insider . information would be unable to make a profit trading a stock based on that information. T .-d. The strong form of the EMH states that all public and private information is already reflected in the stock’s price. : " e~ TheSEC’s disclosure rules along with electronic information networks help the market to be more efficient. ) .

6 Which of the following statements is most FALSE? L —&~ Financial intermediaries literally create new products to facilitate the movement of capital. 7" b Therepeal of the Glass Steagall Act of 1933 under President Clinton’s administration has been - blamed for part of the economic crisis this past year. : [c) Stocks are considered to be in the money market. ‘ s T ~d" A mutual fund would be a product of a financial intermediary. —e:~ The mininum'investment in a hedge fund has decreased in recent months. Strong & Associates was incorporated in 2002. It had taxable income (or loss) through 2008 as follows: Year Taxable Income To<x . L Ceedlk 2002 $1},600’~§/,ooo' W&mo, ; Li/OOO 2003 $46,000 @ eSO g e 2004 ($10,000) & Z 2005 ($50:600) LiH o P 2006 $20,000" 1y e 2007 o 845000 0K geeogoco 2008 - ($35000) (35) V7 ZHo00 . . . 7 Assuming year 2008 has been completed and the tax rate is 40%, calculate the total of all tax credits received for the years 2002 through 2008. C : i (2.>$34,000 : ~b7" $38,000 e~ $95,000 ~d- $24,000 ~€. none of the above Hidalgo Corporation had 2008 taxable income of $424,000 from operations after all operating costs but before (1) dividends received 36,000, (2) interest charges. of 75,000, (3) interest income of 12,000, 4) income taxes, and (5) dividends paid of $31,000. What is the company’s average tax rate on taxable income? (assume the company owns 40% of the firm issuing dividends) @ 34 percent CD YAy, 000 g)‘ %54:“’39 =2y b. 33.92 percent + o0 (SS/WC) oA e ¢. 39 percent — 7300 d. 3542 percent G0 - f'_fififi?_o— . ® 113,900 j&@ugc o e. none of the above i BET A t,p00 (B3eed - 2H) WE / o 12512 Last year, Harding & Co. had $10 million in operating income. The company had interest expense of $4 million and net depreciation expense of $2 million. " Its corporate tax rate was 40 percent. The company has $43 million in current assets and $11 million in non-interest-bearing current liabilities; it has $30 million in net plant and equipment. It estimates that it has an after-tax cost of capital of 9 percent. Assume that the company’s only noncash item was depreciation. What was the company’s net cash flow for the year? ) . a. $6.2 million o NeE= NI 4D » @ $5.6 million CNCF = B/EOO/OOO 7‘_97(010{3/@@»1) c. $4.4million T T d. $80million NLF = feog 000 e. $7.4 million v v | ~D 9006000 , . ; FOYT 0,000,002 . wtfi]‘: - {Hjooo/')o 2 ERT G 000000 QTN o oS N 3600,000 2

10 11 12 13 4 - EBIT = $420,000 Given the information Below,- calculate the FCF. NI = $240,000 SR - . : : Change in FA = +$30,000 FCEZERITG-1370 - [ debFpd 7y ~DCh 4 D (NP 4 Boojuals) Change in CA = +$10,000 : : ) Change in Accounts Payable = +$24,000 Change in Accruals =+3$3,000 Change in Notes Payable = +$4,000 Depreciation = $15,000 Fel= L/{QTOJooo (1= Y+ |S000 = QBO/OUU‘ 4 lf/aou) (0,000 + Tax Rate=0.4 ‘ - (QLyOO() "{0'3().(}0\ a. $214,000 o - _ b. $227,000 FLFz BE000 415000 ~ Qs"ooo 16,000 427,05 (& $239,000° S Epn y ey 4 ’ o R P E R d. $243,000 : hos -e. None of the above. Which of the following is most CORRECT? a. If a corporation receives dividend income, it is taxed as ordinary income. @ In order for a 25 percent federal-plus-state tax bracket corporation to be able to pay $1.00 in dividends, it must earn approximately $1.33 in pre-tax income. c. Fora corporation, in order to get the 15% cap on the tax rate, the corporation must own the capital - asset at least a year before selling it. . ' 'd. The tax rate on an individual’s long-term capital gains is the same as for ordinary incorme. e. Ifacorporation owns 75 percent or more of another corporation's stock, it can combine profits and losses and file a consolidated tax return. Bufkin Corporation has $20,000 that it wans to invest. It is choosing between AT&T corporate bonds that yield 6.75 percent, state of California municipal bonds that yield 4.30 percent, and AT&T preferred stock with a dividend yield of 4.80 percent. The corporation’s tax rate is 40 percent. Which security has the highest after-tax yield? &;6175 (1—.4)=.4.05 L Cocple : @;) State of California municipal 1 b%lfiETVlmi Yof430percent. ‘b. AT&T corporate bonds with an ATY of 4.05 percent. Mmone= 4. 30 (1—-0) = .2 c. AT&T preferred stock with an ATY of 4.22 percent. e d. AT&T corporate bonds with an ATY of 4.40 percent. [ fefotos Steae — 1y 0g [ - (LB ) e. AT&T preferred stock with an ATY of 4.36 percent.. w Johnson, Inc. has an equity multiplier of 1.33. The company’s assets are financed with some combination of long-term debt and common equity. What is the company’s debt ratio? a. 75.19% - i : S b. 62.45% [T S c. 28.97% DK”.I 1.3 @ 24.81% e. 41.54% Ph= 4Gl The Du Pont equations for a company named company public, Inc. and its industry are shown below: 3

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_ROE = PM x AT x EM Company: 2064% = 65% x 24 x 19 - Industry: 23.44% = 62% x 27 x 14 Which of the following statements is most FALSE? —a: The industry is more productive with its assets, : ! b7 The company’s equity to assets ratio is 52.63% __c~ The company’s shareholders have a higher return on the equity capital. " _d7 The industry’s debt ratio 28.57% (& The ROA for the company is 16.74% 15 Pappu, Inc.’s ROE last year was only 6 percent, but its management has developed a new operating procedure. The new plan calls for a debt ratio of 30 percent, which will result in interest charges of $120,000 per year. EBIT is projected to be $1.6 million on sales of $10 million, the total assets turnover ratio is expected to be 1.80, and the tax rate will be 40 percent. What return on equity does the company expect to earn? a. 18.67 percent b. 19.89 percent c. 20.77 percent d. 21.24 percent é; 22.83 percent s 1 {;J”q‘: - SR = - Jo,000 0 et N P . CCET @.4g I £ 16 Henry Wholesale has a 5% profit margin, an ROE of 17%, and an ROA of 12%. What is its total assets turnover? C? 2.40 . 2.80 c. 3.10 d. 3.40 e D e. 3.60 ‘ A 17 Which of the following shows the math to calculate what $1,000 would grow to be after 10 years-of : earning 20% per year? a. 1000 (1.02)° b. 1000/1.02° : ’ ' P ' ¢. 1000 (1.20) . d. 1000/1.20" (& 1000 (1.20)"° 18 What would be the table factor to solve the future value of an annuity of $100 per year for 16 years ( earning 8% per year? o : ) a. 28.280

. b. 18.062 e 30324 - d. 14.240 e. None of the above. 19 Which of the following shows the math to calculate the PV of an ordinary annuity of $100 per year for3 - years, invested at 8% (i.e. each $100 is at =1, =2, £=3). (® PV=100/1.08' +100/1.08" + 100/1.08’ b. PV =100/1.08 +100/1.08' + 100/1.08" c. PV=100(1.08) + 100 (1.08)* + 100 (1.08)’ d. PV =100 (1.08)>+ 100 (1.08)" + 100 (1.08)" e. None of the above. 20 Miss Guyton wants to buy a yacht that sells for $610,000 today. Tis price is increasing at an annual rate of 2 percent. - If she has already saved $150,000 as of today, what annual rate of return would she need to earn on those savings to be able to afford the yacht 9 years from today, assuming she saves no more money? a. 16.87 percent b.. 20.56 percent /8.) 19.20 percent . 16.78 percent e. 1533 percent Cu = TAAp0h. A7 21 A Treasury bond that matures in 7 years has a yield of 5.60 percent. A 7-year corporate bond has a yield of 6.30 percent. Assume that the liquidity premium on the corporate bond is 0.2 percent. What is the default risk premium on the corporate bond? - i ' . a. 0.9 percent P e b. - 0.8 percent T = & K TP Feos ot c. 0.7 percent ’ PR P d. 0.6 percent £.20 = S.e0 4.0 T 0.5 percent 22 Which of the following is most CORRECT? - : . a. The spread between yield curves of corporate bonds and Treasury bonds is smaller the longer the maturity because both have increased liquidity prémiums. o b. If expected inflation increases more within some foreign country than in the United States, the value of that country’s currency is likely to increase compared to U.S. currency. c. The higher the U. S. trade deficit, other things held constant, the lower the level of U. 8. interest rates. . @’ If the Federal Reserve wants to stimulate the economy, one of its options is to buy government securities on the open market. ‘ e. Ifthe yield curve for Treasury secusities is flat, then inflation is expected to stdy the same in the future. . 123 An analyst is evaluating securities in a developing nation where the inflation rate is very high. Asa result, the analyst has been warned not to ignore the cross product between the real rate and inflation. If

24 25 the real risk-free rate is 5% and inflation is expected to be 16% each of the next 4 years, what is the yield on a 4-year security with no maturity,’ default, or hqmdxty risk? <3) 21.8 percent ) B b. 22.3 percent - ~ =05 1% + (oS % e c. 22.9 percent . ” - d. 23.1 percent Ay g e. 23.7 percent - x= A E The real risk-free rate is 2%. Inflation is expected to be 1% this year, 2.5% next year, and 3% per year thereafter. The maturity risk premium is estimated to be 0.05% x (t- 1), wheret = number of years to maturity. What is the yield on a 6-year Treasury note? a. 4.13 percent oL+ X FLBIEDL, ae b. 4.38 percent ’ [ c. 4.62 percent ] _ : (@ 4.83 percent ] L0 L oA SE - Lo s ~e. 5.19 percent The Wall Street Journal states that 30-day T-bills are currently yielding 6.2%. A broker at Northwest Securities has given you the following estimates of current interest rate premiums: 4% Inflation Premium, 1.2% Liquidity Premium, 2.1% Maturity Risk Premium, and 3.8% Default Risk Premium. Based on this data, what is the real risk-free rate of return? a. 102% B 22% gga = x+ o4 c. 1% = . ( d. 11.1% N, L9 .. e. 62%

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FINC 341 O 00~ O\ L W N WOPUTNAQPQEPTIOUPrTAT > AT E T HY

FINANCE 341 —Spring 20186 Print Name: EXAM #1 — Form A Directions: Choose the best answer. (Keep 4 decimals anless told otherwise.) 1 During the latest vear, Jonathan Sterlting Corp. had sales of $500,000 and 2 net income of $40,000, and its year-end usscts were $300,000. The firm's total debt to total assets ratio was 40%. Based on the (extended) Du Pont equation, what was the firm's ROE? a4 o~ . o {ah 22.22% . . S W - B * 22.75% PR AT e = ROE v o . 23.25% £ N . 23.50%. e. 24.24% SN N 2 The Nathan Barrett Company has 2 current ratio of 3.0. Current liabilities are $500,000. His initial inventory level is $400,000, and it will raise funds as additional notes payable and use theim to increase inventory. How much can its short-term debt (notes payable) increase without pushing its current ratio below 2.0? a. 3450,00() [ ~ LB Qe =5 A SITS b 3480000 oL =00 M TR ENE (¢ $500,000 Ca d. $525000 oo =RO e $350,000 S0000 =2.0- 900,000 + ANP (500,000 - ANP = so5000 + zfixw 3 Harding, Incorporated has the following data: Assets: $615,000 Interest rate: 8% Debt ratio: 25.0% Total Assets umover: - 1.46 Tax rate: 40.0% Profit margin: 7.40% What is the company’s ERIT? i a. 8122119 s@yrT ® $123,041 - T ¢ $124976 ..l= d. $125842 EBT e. $126333 ¢ (-1

4 Given the information below, caleuluie the FCF. ERIT = $400,060 M= 250,060 Change in Net FA =-+540,000 - Change in CA = -$5,600 “hange in Accounts Payable = +§27,060 &0 '\;3 T in Accruals = +56.000 o i e . i Cixange in Accruals VAEC.C% = PHOMD 40,05 - B0 + B3 ren Change in Notes Payable = +88,00C LR Eepf@c_iatlo{ij $19,000 = Phe o0o Tax Rate =04 i Fais 3 () $23_8900{) b, $257,000 o $228,000 & $234,000 e. MNone of the above. 5 The Houghten Corporation had a 2009 taxable income of $300,600 from operations after all operating costs but before (1) dividends received of $40,000, (2) interest charges of $44,000, (3) interest income of $33,000, (4) income taxes, and (5) dividends paid of $50,000. What is the company's average fax rate on taxable income? (Assume the company owns 23% of the firm issuing dividends.) GO0, 000 33.36 percent .94 percent c. 32.18 percent d. 31.82 percent ¢. None of the above, ™ nae ;OB w250 Sl —— DY - He B T i DfeBiy -y THe (B =" 22 | SIR— s 5 Due o a rooession, the inflation tate expected for the coming year is only 0.8 percent. However, the inflation Tate in Year 2 and thercafler is expected to be constant-at some lovel above 0.8 peroent. Assume that the real tisk-free rate is 3.00% for all matirities and that the cxpeetations theory fully explains the yield curve. If 3-year Treasury bonds yield 1.6 percentage poinis more than -year Treasury bonds, what inflation rate is expected afler Year 17 P Lpn TP % P 3 percent "E 38 a. 3.75 p b. 3.45 percent 19 ¢. 3.30 percent “2‘3:, 320 percent 3 3% e. - Mone of the above N 3. 5 3. 3.

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~1 Interest rates on 28-year Treasury securiiies dre eurrently 5%, while 30« year Treasury securities yield 5.4%. If the pure expectations theory is correct, what does the market 4y 11.16 percent c. 11.32 percent d. 11.48 percent e. 11.64 percent Last year Chemry Incorporated had: sales revenue of $700,000. Costs other than depreciation and interest expense were 48 percent of sales. Depreciation expense was $125,000, interest cxpense was $60,000, and dividends paid were $50,000. Which of the following statements is most FALSE? (Use the corporate tax table.) : a. The firm's taxable income was $179,000 T ek e N b. The firm's average tax rate was 29.64 percent’?” ¢. The firm's marginal tax rate was 39 percent. v d. The firm's tax for the year was $53060.5~ N e. None of the above 1,000 = " a bl ooz - LB C O Treeen {8 Fyaols - 50 B0 PRSI Boyd Wholesale recently reported an ERITDA of $27.0 million and $8.25 million of net income. The cormpany has $3 million interest expense and the corporate tax rate is 40 percent.. What was the company’s depreciation and amortization expense in millions of dollars? ERTTIG L O Y a. $3.375 million M”’g%i ! 1o gf} T IO~ {0 b. $10.00 million o £e $10.25 million d. $10.50 million (oo 10w [R5 10

6 Strong & Associates was ineorporated in 2002, ¥t had taxable income {or loss) through ol 2 008 as follows: cresht Vear axable Income JERS— $15,800 & $40400 58 Lo ¥ (s (320,000 h {315,680y o - . $45.000 15 W o = (340,000) O - e o Assuming year 2008 has been completed and the tax rats is 40%, calculate the total of all tax credits received for the years 2002 through 2008, & $32,000 B $30.000 c. $28,000 d. $26,000 e. none of the above 11 The Du Pont equations for a company named Coulter Corporation and its industry are shown below: ROE = PM x AT x EM B Coulter: 2145% = 15% x. 136 x 1.10 Qo= T Industry: 262% = 13% x 145 ¥ 120 Ros= iB.95 Which of the following statements Is most FALSE? a. The ROA for the industry is 18.35% T b. For each dollar of assets owned, the industry generates $0.15 more in sales revenue than the company doesT LS =L%0 = 1% i:c:,} Since the company has a lowes returm on equity, it needs 1o increase its use of debt. £ d. Out of sales yevenue gemerated, the company mafaageé o lose only 85% io expenses compared 16 the indusiry losing 87% to expenses. | fi’?i“é o . The industry has an 16.67% debt vatio. T B =G [ - B4 ] L i Vhln e i~ g:“mfi %%«%’E%}g 12 Which of the following is most FALSE? a. Conflicts can arise between the stoskholders and company managers when the managers are not effectively motivated. T b, Firms wiil relatively bigh debt satios typically have higher expected retums when the economy is normal but fower returns and possibly bankruptey if the economy goes into a recession T . Hostile takeovers are raost likely to occur when a firm’s stock is undervalued relative to its potential because of poor management T @? A firm’s stock price is highest when future earnings are maximized. ¥ e. The primary objective of the firm is to maximize the value of the firm. ™7 11

13 14 15 16 ' @ Not enough information. ‘Which of the following is most CORRECT? a. Al dividend income received by a corporation is taxed at ordinary income fax rates. B . b. " In order for a 34 percent federal-plus-state tax bracket corpofation to be able to pay e $1.00 in dividends, it must eamn approximately $1.33 in pre-tax income. g L $%{ 1~ 1ly= BTH ¢. Fora corporation, in order 1o, éet the 15% cap on the tax rate, the corporation must own Phidnut the capital asset af least six-iatnths before selling it. B {: (.} The tax rate on an individual’s short-term capital gains is the same as for ordinary income, “F gt - e. If a corporation owns 50 percent or more of another corporation's stock, it can combine profits and losses and file a consolidated tax return. £~ Which of the following is most CORRECT? a An increase in &nerg:st rates will encourage investors to transfer funds from the bend market to the stoek Tharket. ¥ i b. The Federal Reserve n%%iggg uggem‘ces_in the short-term sector. This is part of the reason why short-term rates4aerease more sharply than do long-term rates during recessions. ¥ ¢. Ifexpected inflation increases more within some foreign country than in the United States, the value of that country’s currency is likely to4nerease compared to U.S. . cumency. ¥ e @ 1f inflation is expected to decrease, the yield curve can still be flat. 7~ e. If the Federal Reserve buys government securities on the open market, the money supply will be %@m@d and the cconomy will most likely be stimulated. ¥ A Treasury bond that matures in 4 years has a yield of 4.2 percent. A 7-year corporate ‘ bond has a yield of 6.8 percent. Assume that the liquidity premium on the corporate bond is 1.4 percent. What is the defanlt risk premitam on the corporate bond? a. 1.1 percent . 1.2 it . - oavin diFFerent mctorities ! d. 1.4 percent ” (. s oonpart, Punmcls waé Which of the following statements is most CORRECT? . a. Tax on capital gains is deferred until the stock is actually sold on the market, thus allowing the stock owner to use the IRS’s money to earn even more on stocks, T b. If the tax laws stated that $0.50 out of every $1.00 of interest paid by a corporation was * allowed as a tax-deductible expense, this wonld probably encolrage companies to use N . \ less debt financing than they presently do, other things held constant™ T~ ‘ %tfi;f‘?@jiamxfi ¢. Inorder to avoid double taxation, stockholders generally prefer to have corporations * pay dividends rather than to retain their earnings and reinves! the money in the business. & Yreder do Radunan. d. The fact that a percentage of the interest received by orie corporation, which is paid by another corporation, 18 excluded from takable income has encouraged firms to use more .. debt financing relative to equity financin giséi whvest Inuwee s oadl Taclvsed {c; Bothaandb. -

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17 Runyon, Inc.’s ROE last year was only 5 percent, but its management has developed a new operating procedure. The new plan calls for a total debt ratio of 30 percent, which will result in interest charges of $120,000 per year. EBIT is p;s]ected to be $1.2 million on sales of $4 niiilion, the total assets furnover ratio is expected to be 1.0, and the tax rate will be 40 pcuem What ramm on Emp*y does the company expect to éam? X ¥ EM =20k v £ c. 27, H pere cent \ww:;;;‘a K !\;.'2;3 ;\Qt%g%_; d. 39.82 percent i3 ‘RS Y ; . Ny {cy 41.66 percent g%’ IR By MALHLED) = s‘w{-j s B2 1.0 o ;,: fi}:r ; Q&i} LR .,»«f i8 Wilson Motors recently reported the following information: ® I‘{et inccme =$300,000. . ; » Int 1,200,000, e Total 1,nvc510;~sapphcfi operating capiial employed = $6 million. e Afier-tax cost of capital = 12%. What is the company’s EVA? a. $1,428336 - b. $1,491, 605 ¢, $1.519%9 s d 3 1,376,0(36 A {& Noue of the gbove.

Which of the foliowing is most FALSE? “ad Short-term interest rates hit a low two months ago and the Federal Reserve has increased short-term interest rates only once since then in order to combat inflation. b. When a stock is less volatile, the dealer's bid-ask spread is normally narrower. c. The American Exchange was originally calted the Curb Exchange. and trading fook place under a sycamore tree. d. The New York Stock Exchange is currently considering a merger with the American Stack Exchange. e The NASDAQ and the Al X merped in 1998 but sphit in 2005, Which of the folfowing is most FALSE? a. When you compare your company’s ratios 1o those of the leading companies in your industry, you are benchmarking. It is a positive signal for a firm’s current ratio to be higher than the average current ratio for the industry. ¢. Municipal bonds are particularly attractive to investors in higher tax brackets. d. Ifafir’s inventory fwmover increases, the fivn is becoming more Hiquid. e. A high P/E ratio indicates that the firm’s future is promising. Which of the following is most CORRECT? a. EVA provides a good cumulmtive measuwre of whether the firm b valge. added to shareholder MVA is an estimate of a business' true economic profit for the year. EVA can be determined for divisions as well as for the company as a whole, so It provides a uselul basis for determining manugerial compensation at all levels. d. Security analysts have found that stock prices track MVA far more closely than other factors such as earnings per share, e. The difference herween a company’s EVA and its NI is the cost of debt. Which of the Tollowing shows the math to calculate what $1.600 would grow to be after 5 years uf earning 12% per year. compounded annually? a. 1600 (1.02y b. 1600/ 10 @ 1600 (1.12Y T 1600/ 1017 e, 1600 (1.01) What would be the table factor w sotve the luture value of an annuity of $200 per year for years earning 12% per year? c. d. e. None of the above.

24 Which of the following shows the math to calculate the PV ofan ordinary anpuity of $100 per year for 3 years; invested at 8% (i.e. each Sl 00 is at =1, =2, +=3). a. b. C. PV =100 (1.08) 5 160 (1. 08 + 100 (1.08Y° PV =100 (1.08) + 100 (1.08)’ + 100 (1.08)"* PV =100/1.08" + 100/1.08" + 10071.08> - € PV =100/1.08' + 100/1.08% + 100/1.08° <. () w MNone of the above. Nathan Joyner wants to buy a Range Rover that sells for $60,000 today. Its price is increasing at an annual rate of 4 percent. If he has already saved 24,000 as of today, what annual rale of return would he need to earn on those savings to be able to afford the car 3 lsars trom foday, assuming he saves no more money? g&a 4 41.15 percent b. C. d. e. None of the above. 39.64 percent 24, 0000 e 37.26 percent 35.78 percent 14

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Form A @ Oomo< £ 0O MW O ®m D000 WW gm0 < B S o I SRR S £ o IR S S 5o SR S v SRS S S =i - e = 0N M = W W e~ 0 O R e A B o B o S o 24 15

[} () o <. \\’ Print Nave: }f the Fe«lemfi Res government s cuwrities o the open market. Stock prices tend to decrease when interest raies are lower. An increase in interest rates will encourage investors to transfer funds from the stock market to the bond market. If expecied inflation increases more within some foreign country than in the United States. the value of that country™s currency is likely todecrease compared to LS. currency. Increasing the meney supply and thus decreasing short-ferm interest raies stimulates the economy. hich of the following statements is most CORRECT? When a stock is in equilibrium. there is no pressure for the stock”s price 1o change. The intrinsic value of a sto ed on perceived but possibly incorrect information as seen by the marginal investor.f =< FlC an ot veRn ofata S corporations have limited lability and are taxed ag corpﬂralionf, £ A corporation’s primary geal is to maximize the f"?’é of the firm. £ (herehoisler’ igalh A corporate raider targets a corporation for takeover becavse the firm is oyervalued and the raider can make a profit off of that. ¥ Lanotes ok 18 Which of the following statements is most FALSE? W a. = ) a (B [y larpe companies find it advantageous to support growth. Partnerships can be formed easily and inexpensively. LLPs are used for professional firms in the fields of accounting, law. and architecture. The personal assets of the owner of 2 sole p »puctm\hxp are volnerable in a lawsuit against the firm. An S corporation sells its stock on the public market. o be C corporations because of the ability 1o raise capital hich of the following statements is most FALS According to the semistrong form of the efficient markets hypothesis (EMH). studying annual reports of less-known companies cannot result in finding opportunities to wake returns in the stock market. According to the weak form of the efficient markets hypothesis (EMH), technical analysis is immaterial, According to the strong form -of the efficient markeis Lypothesis (EMH), only a person with insider information would be able to make a profit trading stocks. The strong form of the EMH states that all public and private information is already reflected in the stock’s pri Hindsizht bias is the tendency of people to believe, after an event -has occurred. that they predicted it before it happened. 23

5 Which of the following statements is most FALSE? a. Spot markets are markets in which assets are bought or sold for delivery within a few days. b. Money markets deal with financial securities that have a mé&urity of léss than ope year. ¢. Aninvestment bank distributes new stock orbond issues. d. Hedge funds have largely been unregulated compared to mutual funds. ) @ Once a stock has been issued and is now being traded aniong investors, if is said to be on the primary market. ‘ [ Calculate the fiee cash flow for 2010 given the following information: ' o , ' 2009 R . 2010 Tax Rate . . 4024 4076 Sales ) ; 43,600,000 . $4,800,000 Depreciation 83,000 ' 120,000 T EBIT 1,560,000 1,740,600 Net income 720,000 1,250,000 Current Assets 7 4,200,000 o 4,600,000 Net Fixed Assets i : . 5,000,000 o 5,400,000 Accounts Payable 1,4C0,000 1,200,000 Notes Payable 500,600 520,000 ‘Accruals ) 450,000 450,000 E 4 } X b, iififgfis Fee TO-TI4 B — (AN Fa+ 08— ACA + A(AIP+Acr) £} 584,000 4. $484.000 e. None of the above y, e ool :, + 120,800 — HGg,ec0 +1Le, fvo - Liao, 000 e}’{-«”fi@a,@a@ o T j 7 Last year, Charney Incorporated had sales revenue of $250,000. Costs other than depreciation and interest expense were 42 percent of sales. Depreciation expense was $70,000, interest expense was $30,000, interest income was $80.000 and dividends paid were $25,000: - Which of the following statenients is most TRUE? {Lise the corporate tax table.) a. The firm's taxable income was $45,000. b. The finn's average tax rate was 33,40 percent. ¢. The finm's marginal tax rate was 34.00 percent. £ i @} The firm's tax for the year was $32,000 - - Tto,00 T €. Nouoe of the above ’ v 750, 0w ~ for,oon (U7 §S, 00w - N

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F#an 9 Wortman & Associates was incorporated i 2004. " it had taxable income (or tdss) through 2010 as follows: B . Taxable Income Tax Credi $30,000 - = 104000 © + i 5,000 O - ?; O ) ( 40:600) ¢ A&'@J i, 36600 Py 36600 e o 2009 (15800 rwrs ot = o — 2010 50800 145, o on | i et Assuming year 2010 has been completed and the tax rate is 40%. calculate the total of all tax credits received for the years 2004 through 2010 a $22,000 . b $4.000 I T Ve W e $6,000 @) $8,000 &. None of the above Miss Guyton wants to.buy a boat to taxi tourists mong the British Virgin Islands. She needs a really zood dead so she’s looking at one that sells for $26,000. Its price is increasing. at an annual rate of 1.50 percent. If she has already saved $17.000 as of today. what annual rate of return would she need to earn on those savings to be able to atford the boat 3 years from today. assuming she saves no more monay? a. 32.30 percent b, 25.00 percent ¢. 1521 percent d. 10.05 percent ~ ki €} 16.94 percent , . ' A 7 - 7 o o e =2y = LG Papas, Inc.’s ROE last year was only 31 percent, but its management:has developed a new operating procedure. The new plan calls for a debt ratio of 20 percent, which will resultin interest charges of $50,000 per year. EBRIT is projected to be $2.6 million on sales of $6 miliion, the total assets turnover ratio is expected 1o be 1,40, and the tax rate will be 40 percent. What return on equify does the company expect to earn? 7 - a. 7.1 percent Zog = Pm ¥ P b. 75.8 percent [SES e T .00, 0 O c. 35.7 pereent . . ¥ e d. 45.5 percent s Lo, o D . :\Q; 44.6 pereent Lox “1 FET T ST, e T i i & (i ) 4 k ? P dm ! IR Een i Y‘ % 4 ! : = | L RO TN Ea 1 H = T 5 ! P 30,000 | : Evae T8 H jvel tho-

The real risk-free rate is 2:2%. inflation is expected to be 0.7% this yeuar, 1.5% next year, and 3% per vear thereafler. The maturity risk premium is estimated to be 0.06% x {t- 1), where t = number of vears to matwrity, What is the yield on a 3-year Treasury note? a. 2.44 percent ';b’t 4.68 percent Joa . el S*i} <. 4.44 percent : d. 4.50 percent o Nene of the above . AT + . 2 The Du Pont equations for a company and iis industry are shown below: ROE = PM x AT x EM Company: 24.96% = 12% x 160 x 1.30 Industry: 22.50% = 10% x 130 x 150 Whicl of the following statemeénis is most FALSE? a. The ROA for the company is 19.20% T 1% b 130 b. For each dollar of assets owned. the industry generates $0.10 less in sales revenue than the company does.- T The company’s ROFE is helped by its more than average use of debt. The company managed its expenses better than the industry. The industry has 33.33% debt in its capital strueture. |- o g Daobbins, Incorporated has the following data: Diebt: - 150,000 Total Assets turnover: 145 Tax rate: —~40.0% - Profit margin: 13% Inventory furnover: 4.2 Acid test ratio: 1.80 Assets: $600,006 Interest rate: 7% What is the coimpany’s Operating Income? . &3 $199.000 Salef - b. $100,156 . - . AT 5 A ¢, $250,000 : i d. §50.1%0 - forlg s e. $321,180 . Selrs T Fio, pog

16 Which of the following is most CORRECT? a. Due to fims like Microsoft staying on the Nasdaq rather than s the Nasdaq trade a higher dollar volume than the NYSE now. ¢ b, When a company reports higher then expected EPS for the quarter. the dealer’s spread on the stock gets narrower from the certainty of information. £ o . Stocks that used to be listed on the NYSE are now listed on the AMEX. F o pen & The NYSE-Euronext exchange is the second largest transocean exchange in ex ce today. F £ If you fooked at the graphs of the $&P300 and the DIIA over time, they would have very similar movement. : iching to the NYSFE has made Boza. Inc. has a total assets turpover of 0.79. a profit margin of 9 percent, and a debt ratio of 0.24. The CFO wans to double the current return on equity by making some changes. if she thinks that the total assets turnover can be boosted to 0.90, and is comfortable with increasing the debt ratio 1¢ 0.30, what profit margin would be necessary to double the return on equity? a. 12.7% o S_— sy | . 13 R A L&t i Few ~ P Fo s f. 37 - 17/ - o e - Lo T "; W .Tha A P 3T - a za s A% Lo L ¥ o7 e i ot . o —c = Peq w3 ol Een = l‘u_;} [ e ./)f’1 S 1o M Pra~ 14,4, If you invest $2,500 in a Cirrus Logic today and it eamns 20 percent per year for 4 years. how much will you bave? o “ «(L 28 v -7 .50 Y Which of the following statements is most CORRECT? a. In a f-month futures contract, the q;pnfiity is set now, but the pi% ~ . B PRy o maonths from now. § Foie s for the commodity is set 6 f { b} Overall, it is better to have an efficicnt 1narket even though-investors would like to find inefficiency and make money off of it. ) ¢. Hedge funds bave done well in the past two years because they bet against the market. F 4. The Glass Steagall Act allows commercial and investment banks to do stmilar ‘activities so that the greater competition makes the banking industry more efficient. I e. The broker's profit is the bid-ask spread. §

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18 Which of the following 1s most FALSE? a. A'company would like (o maximize its stock prlge T b. A company does not want to maximize its current-ratio. 7 . ¢. A conmany would like for ifs operating mcome to-cover the interest expense w ell, but be using ax* optimal level of debt in its capital structure. 1 . ‘d.:’ A company would like to maximize its return on equity for the-stockholders. .. Ifa company maximized it earnings per share, its stock price would probably not be maximized. = 19 Which of the following is most CORRECT? {g} The tax rate on a corporation’s long-term capital gains is the same as for ordinary income. b, For an individual to have a long-term capital gain. he must own the capital asset for at least siety daws before selling it. P ' ¢. If an individual is in the 10% or 15% tax brackets, any long-term capital gains made by that individual will have a 5% tax rate. ¥ O fay Fete d. Anindividual is allowed to use §3:500 per year of excess capital gains to offset ordinary income from being taxed. F T e. If a corporation owns 0 percent or more of another corporation's stock, only 28%% of the dividends received will be taxed. & 20 What would Aakash. Singh be willing to pay today to receive $2000 in 3 years if he can eam 12 percent per year, compounded annually? a 2000 (1.12) 2000 /1.12 e} 2000/ ¢1.12) ’ = c. 2000 (1.36) L 2000/ 1.36 { 21 Kirchhoff & Co. had earnings per share of $2.70. and il paid a $1.10 dividend. Total retained earnings increased by $1.920.000 during the year. while boek value per share at year-cnd was §22. The company has no preferred stock, and no new common stock was issued during the year. If the firm’s year-end debt (which equals its total liabilities) was $23 million, what was the company’s year-end debl ratio? V a. 3525 percent b. 87.12 percent 65.75 percent df 46.56 porcent e. None of the above.

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Use the following information for the next 2 questions. Last year Stockman & Co. had $18 ‘miliion in operating income (EBIT). The company had interest expense of $2.1 million and net depreciation expense of $4 mullien. Hts corporate tax rate was 48 percent. The company has $32 million in cwvent assets and $6 million in non-infere st-bearing current liabilities; it has $28 million in net plam and equipment. {f estimates that it has an after-tax cost of capital of 11 percent. - Assume that the company’s only noncash item was depreciation. ‘ 22 What was the company’s net cash flow for the year? a. $12.86 million ) b. ‘f» 22 million ALCE - A IO, million . s . . $‘12;Uo million caiT L7 - NS e. None of the above. o o4z 54 EE T (1= 23 What was the company’s Eco a. $7.08 million s . saro 7 s retel capidad = (E18 3 Aoce ] fuac b, $5.84 million Lofeiel Laprin P ATEes) LAk $6.72 million . . $4.86 million 18 (ty — L2993~k ] ‘\//.,i'j} e.. None of the above. o Fh 24 Genevieve Nava's wmpan‘ has an equity multiplier of 1.3145. Tl‘c company's assets. are financed with some combination of long-term debt and common equity. What is the company's capital structure? i i 2. 17.66% Deht and 82.34% Equity {7 Ena h. 18.24% Debtand 81. 6“/’0 Equity _ A ¢. 20.47% Debt and 79.53% Equity B et d. 21.67% Debt and 78.33% Equity ’ , (&) 23.93% Debt and 76.07% Fauity O = gz -/ F oz T ol 25 Polizopoulos & Co. has $1.400,000 in current assets and $610,000 in current liabilities. ls initial inventory level is $225.000. and it will raise funds as additional notes paydblc and use them to increase inventory. How much can its short-term debt (notes payable) increase without pushing ifs quick ratio below {.807 #81 $27,500 b, $78.900 c. $46.200 d. $96.250 e. MNone of the shove. e = i Loos — we f e pg P Gleieo® 3 aF 29

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