C214 Practice Questions
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C214 Financial Management
Study Guide Problems
09/06/19
The following questions are for practicing both calculations and concepts for C214 – Financial
Management. Some of the questions have been used in Topic Reviews in the Financial
Management e-text. This list of questions does not cover everything you may encounter in an
assessment. They are in the same order as the topics presented in the e-text. There is a
companion answer sheet available. For solutions, please see your Course Instructor.
Overview of Finance
1. Trading on the NYSE is executed without a specialist (i.e. a market maker).
True/False
2. Stocks and bonds are two types of financial instruments
True/False
3. The matching principle in accrual accounting requires that:
a.
Revenues be recognized when the earnings process is complete and
matches expenses to revenues recognized.
b. Expenses are matched to the year in which they are incurred
c. Revenues are matched to the year in which they are booked
d. Revenues should be large enough to match expenses
4.
A high-quality customer just purchased $500,000 worth of product from
your company. The contract calls for immediate delivery of the product
with a cash payment of $300,000 today and $200,000 to be paid 60
days.
The expense associated with the product is $300,000, of which
$100,000 has not been paid to your supplier. Under accrual based
accounting system, you will most likely report:
a. revenues of $300,000 and expenses of $300,000.
b. revenues of $300,000 and expenses of $200,000.
c. revenues of $500,000 and expenses of $300,000.
d. revenues of $500,000 and expenses of $200,000.
Income Statement/Balance Sheet
5. A firm reported retained earnings of $300 in 12/31/20x2. For 12/31/20x3,
the firm reports retained earnings of $400 and pays dividends of $25.
What was net income in 20x3?
a. 300
b. 400
c. 125
d. 100
6.
A basic equation for the balance sheet is:
a. Equity = Assets – Liabilities
b.
Liabilities = Equity + Assets
c. Assets = Liabilities – Equity
d. Assets = Equity – Liabilities
7. Why is the Balance Sheet known as a permanent statement?
a. Because the statement is sent to the SEC.
b. Because the other statements are reset at the end of the fiscal year
c. Because it is printed out and archived
d. Because it persists in the minds of the shareholders.
8. How do you calculate the change in Retained Earnings?
a. Ending Retained Earnings – Change in Cash
b. EBIT divided by Total Assets + Dividends
c. EBIT – Change in Cash – Dividends
d. Net Income – Dividends
9. Which of the following is generally true?
a. Gross Profit and Operating Income are the same
b. Cost of Goods Sold + Operating Expenses = Net Income
c. Operating Income and EBIT are the same
d. EBIT + Income Taxes = Net income
10. Which components are part of total assets?
a. Cash, Accounts Receivable, Short Term Debt
b. Cash Accounts Receivable, Inventory, Long Term Assets
c. Accounts Payable, Long Term Assets, Long Term Debt
d. Accounts Payable, Net Income, Equity
11. Which components are part of current assets?
a. Cash, Accounts Receivable, Property Plant & Equipment
b. Accounts Receivable, Accounts Payable, Inventory
c. Long Term Debt, Property Plant & Equipment, Common Stock
d. Inventory, Cash, Accounts Receivable, Short Term Investments
12. Which components are part of Total Liabilities?
a. Accounts Payable, Accounts Receivable, Short Term Debt
b. Long Term Debt, Common Stock, Retained Earnings
c. Bonds, Accounts Payable, Mortgage
d. Common Stock, Long Term Debt, Short Term Investments
Statement of Cash Flows
13. Intel reported the following for 2014:
Net Income 100,000
Depreciation 20,000
Change in A/R 10,000
What is the cash flow from operating activities?
a. 100,000
b. 110,000
c. 120,000
d. (130,000)
14. Which of the following accounts are only included in Cash Flow from
Financing (CFF)?
a.
Accounts Receivable, Accrued Expenses, Net Income
b.
Dividends Paid, Property Plant and Equipment,
Cash
c.
Net Income, Common Stock, Accrued Expenses
d.
Common Stock, Dividends Paid, Bonds Payable
15. The Statement of Cash Flows is:
a.
Calculated for the same period of time as the Income Statement
b.
Is calculated based on the Income Statement and the changes in the
Balance Sheet
c.
Is one of the three basic accounting statements
d. All the above.
16. Intel reported the following for 2014:
Gross Equipment (1/1/14) 50,000
Gross Equipment (12/31/14) 65,000
Net income 100,000
Depreciation 20,000
What is the cash flow from investing activities for 2014?
a. 100,000
b.
80,000
c. (15,000)
d.
15,000
17.
What is the Cash Flow from Operations given the following information?
Net Income
450,000
Change in Accounts Receivable
120,000
Change in Inventory
- 90,000
Change in PP&E
60,000
Depreciation Expense
110,000
Change in Accounts Payable
50,000
Change in Accrued Expenses
- 75,000
Change in Common Stock
300,000
a. $570,000
b. $410,000
c. $505,000
d. $375,000
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18. What is the Cash Flow from Investing?
Increase in Gross PP&E
125,000
Beginning Net PP&E
750,000
Ending Net PP&E
850,000
Depreciation Expense
25,000
a.
(850,000)
b. (125,000)
c.
150,000
d. (
75,000)
19. What is the Cash Flow from Investing?
Beginning Net PP&E
250,000
Ending Net PP&E
300,000
Depreciation Expense
40,000
Change in Long Term Investments
100,000
Change in Short Term Investments
50,000
a. 190,000 outflow
b. 150,000 inflow
c. 340,000 outflow
d.
90,000 inflow
20. What is the Cash Flow from Financing?
Accounts Payable
100,000
Accrued Expenses
50,000
Increase in Mortgage Payable
300,000
Decrease in Bonds Payable
75,000
Dividends Paid
80,000
a. 505,000
b. 225,000
c. 230,000
d. 145,000
21. When Fixed Assets increase what happens to Cash?
a. Cash stays the same
b. Cash increases
c. Cash decreases
d. Assets decrease
22.
Last year a firm recorded Net PP&E of $4,600 while this year the same
firm recorded Net PP&E of $4,500. If the depreciation expense for last
year and this year are $500 and $800 respectively, what is the CFI of the
company? (assume no asset disposals)
a. 100 outflow
b. 900 outflow
c. 100 inflow
d. 700 outflow
23. Which is the purpose of the statement of cash flows?
a. serves as the replacement for the income statement and balance sheet
b. explains the change in cash balance at one point in time
c. explains the change in cash over the course of the specified timeframe
d. both (a) and (b) above
24. Financial data for Intel is given below for 2014:
EBIT
1,000,000
Depreciation 30,000
Change in working capital (10,000)
Net capital expenditures 15,000
Tax rate 40%
Compute the Free Cash Flow for 2014
a. 610,000
b. 675,000
c. 625,000
d. 600,000
Financial Ratios
25.
Suppose the inventory turnover of a company is higher than the
industry.
Based on this observation, which of the following is most
likely?
a. The firm has lower liquidity than the industry average.
b.
The firm has too much inventory thus impairing overall liquidity.
c. The firm has too little inventory resulting in lost sales or stock-outs.
d. The firm has low sales volume.
26. Intel provides the following data for 2014:
A/R 600
Inventory 800
Fixed Assets 1,000
A/P 500
Long term debt 900
Common Stock 400
What is the current ratio?
a. 1.2
b. 1.5
c. 2.0
d. 2.8
27. If a company wishes to obtain a bank loan, will it want to have a higher
current ratio or a lower current ratio?
a. higher
b. lower
c. the same
d. it doesn’t matter
28. A company has cash of 100, accounts receivable of 250, inventory of 300,
and accounts payable of 300. What is the quick ratio?
a. 0.33
b. 2.17
c. 1.00
d. 1.17
29.
A company has cash sales of 200 and credit sales of 750. It’s average
accounts receivable is 90. What is the A/R turnover?
a. Turnover: 2.22
b. Turnover: 10.56
c. Turnover 8.33
d. Turnover 3.75
30. The OIROI (Operating Income Return on Investment) uses what elements
on the income statement?
a. Operating Income, EBIT, Total Liabilities
b. EBIT, Total Assets
c. Sales, Total Assets, Equity
d. Net Margin, Total Current Assets
31. Why would a company be interested in the TAT (Total Asset Turnover)
ratio?
a.
How efficient assets are at producing income
b.
What the turnover of sales is to liabilities
c. How efficient assets are at producing sales
d. How efficient assets are to liabilities and equity
32. If a company has current assets of 80 and fixed assets of 120, if Sales are
150 and EBIT is 35, what is the Fixed Asset Turnover?
a. 5.71
b. 2.29
c. 0.80
d. 1.25
33. If a company has current assets of 90 and fixed assets of 140, if it has
debt of 125, what is its debt ratio?
a. 1.12
b. 0.54
c. 1.36
d. 1.84
34. A company has sales of 300, expenses of 200 and interest expense of 25,
what is its Times Interest Earned ratio?
a. 2.00
b. 4.00
c. 1.75
d. 3.00
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35. Suppose a firm has a financial leverage ratio of 2.50 which indicates the
ratio that the firm’s assets are financed by debt.
What is percentage of
the firm’s assets is financed by equity?
a. 40%
b. 70%
c. 50%
d. 60%
Time Value of Money – Perpetuities
36. What is the present value of a stream of cash flows of $125,000 at a
discount rate of 7%?
a.
875,000
b.
1,552,667
c.
1,785,714
d.
1,250,000
37. What is the discount rate of a stream of cash flows of 50,000 that have a
present value of 450,000?
a. .11
b. .10
c.
.12
d. .75
38. What is the cash flow stream for a present value 1,000,000 at 5% paid in
equal installments in the future?
a.
35,000
b.
50,000
c.
500,000
d.
20,000
39. A woman has just found out that a rich great-aunt has bequeathed a
trust fund that pays $50,000 to her and to her descendants forever. If
the trust fund earns 3.5% interest, what is the amount of the trust fund?
a.
1,782,425
b.
5,000,000
c.
1,428,571
d.
2,529,123
Time Value of Money
40. A couple wants to save up for a down payment on a house. They think
they need to save 100,000 in five years. If the interest rate is 4% and
they start at the end of the year when they both get bonuses from their
employers, what do they have to put aside annually?
a. 22,096.37
b. 17,752.61
c. 15,962.84
d. 18,462.71
41. A person wants to put aside $500 at the beginning of each month for 10
years. If she estimates an interest rate of 5.5%, what will she have in her
savings account at the end?
Hint: Make the calculator inputs consistent.
a. 86,437.68
b. 70,154.99
c. 80,119.33
d. 76,905.66
42. A ten-year-old girl can put aside $45 at the end of each month for her
college education. If she has eight years before she starts higher
education, how much will she have in her savings if she can get 5%
interest?
a.
5,298.32
b.
4,929.71
c.
716.00
d.
4,321.00
43. A mother wants to help her child’s higher education fund. She wishes to
have $15,000 available each year for six years.
Her child starts college in
15 years and she can save 6% before school starts if she puts her end-of-
year bonus into a trust fund and figures that the fund will earn 4% after
her child begins her college education. What does she have to put aside
annually if the money is withdrawn for college at the beginning of each
year attending college? Hint: Two-Step problem.
a. 5,802.74
b. 3,346.19
c. 4,159.87
d. 3,513.38
44. A man has just inherited $250,000. If he invests the money at 4.5%, what
can he expect to have at the end of 15 years when he retires?
a.
120,254.27
b. 483,820.61
c.
519,732.04
d. 477,862.41
Debt Valuation
45.
What annual interest will be paid for a zero coupon bond?
a.
5%
b.
3%
c.
25%
d.
0%
46.
What is the most significant characteristic of subordinated debt?
a.
Senior debt is paid off first
b.
Principal and interest are paid off simultaneously
c.
The interest is not tax deductible
d.
All the above
47.
If a company wants to increase its debt capital, how will they raise the
funds?
a.
sell common stock
b.
sell preferred stock
c.
improve profitability
d.
sell bonds
48.
What is the lowest level of investment- grade bonds?
a.
AAA
b.
BBB
c.
AA
d.
C
49. A company wishes to issue 10 year bonds with a face value of $1,000 and
a coupon rate of 5.5%. The market has shifted before the issuance and
the bonds will sell at 94% of face value. What is the YTM of the bonds
when they are sold?
a.
6.71%
b.
5.50%
c.
6.00%
d.
6.33%
50. You want to buy a semiannual bond that has 4 years left before maturity.
It has a 6% coupon rate and the market yield is currently 5.2%. What is
the price you are willing to pay?
a.
1,253.89
b.
1,028.56
c.
1,034.13
d.
868.95
51. What is the price of a 1- year $1,000 bond with a 3% coupon rate if the
YTM is 5.2%?
a.
952.48
b.
1,068.17
c.
899.42
d.
979.09
52. A 5% semiannual $1,000 bond matures in 4 years. What is the YTM if the
price is $1,069?
a.
1.58
b.
2.92
c.
1.75
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d.
3.15
53. What can cause the bond price to fluctuate?
a.
A change in the coupon rate
b. A change in the face value
c. A change in the bond rating
d. None of the above.
54. You want to sell a bond for over $1,000. Can you do that if the coupon
rate is 6.5% and the bond yield is 6.8%?
a. Yes
b. No
55. A $1000 3% bond with a yield of 2.4% matures in 6 years. What is the
price if the interest payments are made semiannually?
a.
1,033.34
b.
950.26
c.
1,056.20
d.
981.29
56. What is the price of a six-year $1,000 bond with a coupon rate of 7.4%
and a YTM of 6.2%?
a.
1,425.70
b.
1,058.64
c.
1,003.20
d.
1,023.48
57. What does a company use as security for a bond?
a. Fixed assets
b. Future earnings
c.
Credit worthiness
d. Common stock
58. A bond issued with a face value of $1,000 pays a 3% coupon rate and
matures in seven years. If an investor wants a yield of 4%, what is the
investor willing to pay for the bond?
a.
939.46
b. 1,067.04
c. 1,033.32
d.
939.98
59. An investor wants to know what the yield to maturity is for a $1,000
bond with a 5.5% coupon rate that matures in 5 years if the current
market price is $955?
a. 7.23
b. 6.59
c. 6.33
d. 6.62
Debt Valuation – APR vs. APY
60.
Which of the following gives the largest effective rate (APY)
a. 18.6% compounded monthly
b. 18.6% compounded daily
c. 18.6% compounded weekly
d. 18.6% compounded yearly
61.
Suppose that an investment will pay 24% APR for a year and the interest
will be compounded monthly.
What is the expected APY for the
investment?
a. 24.50%
b. 26.82%
c. 25.41%
d. 28.00%
Equity Valuation – Single Holding Period
62. A stock sells for 87.00 one year from now giving a total return of 8%.
What is the dividend if the stock was originally purchased for 82.00.
a.
5.00
b.
3.12
c.
8.06
d.
1.56
63. What does a stock have to sell for one year in the future, if it currently
sells for $75, has a planned dividend of $1.87 a share and an expected
return of 14%?
a.
71.00
b.
76.87
c.
83.63
d.
85.42
64. What would a dividend have to be if the investor buys a stock for $110,
expects to sell the stock in a year for $120 and expects an annual return
of 13%?
a.
4.30
b. 10.00
c.
3.40
d.
3.30
65. What would an investor be willing to pay for a stock today, if the value in
a year would be $55 with a dividend of $2.24 per share and the investor
wants to make 9% on the investment?
a. 52.51
b. 52.76
c. 53.10
d. 57.24
66. What is the rate of return for a stock purchased for $89, sold in a year for
$100, paying a dividend during that time period of $2.75?
a.
11.00%
b.
13.75%
c.
15.45%
d.
14.25%
Equity Valuation – Gordon Growth Model
67. A company just paid a dividend of 2.30 to its shareholder. It estimates
that future growth will be at 2%. What is the value of the stock if you are
looking for an 8% return on your investment?
a.
28.75
b.
38.33
c.
41.67
d.
39.10
68. If you are looking for a return of at least 10%, what would you invest in a
company given that it just paid a dividend of 1.80, and estimates a
growth rate of 3%?
a.
25.49
b.
26.49
c.
25.71
d.
28.28
69. You are interested in buying a preferred stock and want to know what
the rate of return is. The stock is selling for $85.00 and pays a dividend
today of $2.25. What is the rate of return?
a.
.0265
b.
.3176
c.
.2650
d.
.2250
70. The company expected to pay a dividend of $13.85 at the end of the
year. Management has estimated growth at 2.75% and the stock is
currently selling for $290.00. What is the expected rate of the return for
this investment?
a.
.0411
b.
.0375
c.
.0753
d. .0408
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71. One of your friends is recommending a stock if it sells for more than
$165.00 per share. The growth rate is 4% and the latest dividend was
$6.00. You are expecting an 11% return. Why should you buy or not buy
the stock?
a. Buy - The dividend is higher than the return
b. Not Buy - The return is higher than growth
c.
Not Buy - The calculated price is too low
d. Buy – The calculated price is higher
72. An investor wishes to know what the value of a common stock is if it pays
a dividend of $6.00 today.
The company’s growth rate is 4.5% and the
investor wants expects the stock to earn 7%. What is the value?
a. 179.14
b. 240.00
c. 85.71
d. 250.80
73. If a common stock is worth $75 and the growth rate is 5% with a
dividend expected to pay $2.00 in a year’s time, what is the expected
rate of return?
a. .0267
b. .0550
c. .0750
d. .0767
74. An investor wishes to know what the value of preferred stock, when the
dividend is $3.00 per share and the expected rate of return is 6.5%?
a.
72.63
b.
46.15
c. 191.45
d.
56.15
CAPM – Expected Rate of Return in different Economic States
75. What is the expected rate of return for a stock where there is a 60%
chance of a recession and a 40% chance of an expansion?
The stock
would return 2% during a recession and 8% in an expansionary period.
Cycle
Prob
Stock
Recession
60%
.02
Expansion
40%
.08
a. .050
b. .100
c. .044
d. .056
76.
There are two economic states, expansion and recession.
The
probability of an expansion is 70%, the probability of a recession is 30%.
What is the expected return of Alpha Company’s stock, if it has an
expected return of 2% in a recession and 10% in an expansion?
Cycle
Prob
Stock
Recession
30%
.02
Expansion
70%
.10
a.
.4218
b.
.0314
c.
.0760
d.
.6000
Capital Asset Pricing Model and Risk
77.
Under the Efficient Market Hypothesis, what will companies endeavor to
do?
a. Maximize sales to reduce profit risk
b. Maximize liquidity to match competitors liquidity
c.
Maximize profits for a given level of risk
d. Minimize expenses to reduce use of cash
78.
What does the beta coefficient represent?
a. It is a statistically-derived measure of volatility
b. It is the Expected Return minus the Growth Rate
c. It is the volatility of the Risk Free Return
d. It is the expected return for a basket of preferred stocks
79.
A stock has a beta of 2.1, a market premium of .14 where the market
rate is .17. What is the expected rate of return?
a. .2949
b. .3571
c. .1703
d. .3240
80. The market rate is .14, Treasury bonds are returning .025. A stock has a
beta of .75. What is that stock’s expected return?
a. .3007
b. .1113
c. .1052
d. .2491
81. A stock has a beta of 1.42. The stock market is returning .11 and treasury
bills are trading at a rate of .014. What is the expected return?
a. .1503
b. .1562
c. .1085
d. .1240
82. The market rate is .09 and the risk-free rate is .015. If a stock has a beta
of 1.92, what is the expected rate of return?
a. .1590
b. .1728
c. .1500
d. .1275
83. What is the Expected Rate of Return for a stock where treasury bills are
returning 2.5% and the market as a whole, is returning 15%.
The stock
has a beta of 1.25?
a. .125
b. .156
c. .181
d. .100
84. If an investor knows the idiosyncratic risk, the investor knows the:
a. Profit Margin percentage
b. Beta Coefficient
c. Operating Leverage
d. Free Cash Flow
Weighted Average Cost of Capital
85. Common stock is valued at 400,000, Long-term debt is valued at 250,000,
and preferred stock is valued at 50,000. What is the WACC where
common stock costs .16, long-term debt costs .08, and preferred stock
costs .07?
The tax rate is 40%.
a.
.1275
b.
.1495
c.
.0942
d.
.1135
86. Common stock is valued at 1,000,000 and costs .20. Bonds are valued at
850,000 and costs .04, Preferred stock is valued at 500,000 and costs .06.
The tax rate is 40%. What is the
pre-tax
WACC?
a.
.1229
b.
.1124
c.
.1404
d.
.1015
87. Capital is valued at 3,000,000 consisting of 1,600,000 of common stock,
1,000,000 of bonds, 400,000 of short-term debt.
Cost of common stock
is .135. Bonds before tax are .045. Short term debt costs .065. What is
the after- tax WACC if the tax rate is 35%?
a.
.0784
b.
.1007
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c.
.0991
d.
.0874
88. If a company has a capital structure of $100,000 common stock, $50,000
bonds and $10,000 preferred stock and the respective rates are 15%
common stock, 3% bonds and 4% preferred stock, what is the Weighted
Average Cost of Capital if the tax rate is 30%?
a.
.1029
b.
.2200
c.
.0733
d.
.1128
89. If a company has a capital structure of $5 million common stock with a
cost of 17%, $2 million bonds at 4%, $1 million of Short Term Debt with a
cost of 7%, and $2 million preferred stock with a cost of 3%, what is the
Weighted Average Cost of Capital? The company has a 40% tax rate.
a.
.1322
b. .1196
c. .1000
d. .0899
Capital Budgeting
90. What is the initial outlay given the following information:
Equipment Price
375,000
Installation
10,000
Power Survey
30,000
Shipping
8,000
Working Capital
100,000
Project Marketing Report
15,000
a.
538,000
b.
503,000
c.
493,000
d.
488,000
91. What is the initial
outlay given the following when a new piece of
equipment replaces an old one:
Old equipment sells for
125,000
Book value of old equipment
22,000
Tax rate
40%
New equipment cost
800,000
Site survey
18,000
Installation cost
20,000
a. 820,000
b. 736,200
c. 717,000
d. 695,000
92. What is the initial outlay from the following information?
Old equipment sells for (net of taxes)
55,000
New equipment at cost
190,000
Installation and shipping
18,000
Working Capital
62,000
a. 208,000
b. 270,000
c. 215,000
d. 197,000
93. A project has sales of 300,000, general expenses of 195,000 and
depreciation expense of 25,000. The tax rate is 35%. What is the
differential cash flow?
a.
52,000
b. 105,000
c.
80,000
d.
77,000
94. Why is depreciation expense taken out of the net income calculation, yet
added back at the end?
a. Because fixed assets should remain on the balance sheet
b. Because depreciation is not a current asset
c. Because depreciation is a non-cash liability
d. Because depreciation expense is tax deductible
95. A project has net income of 750,000 including depreciation expense of
42,000. What is the differential cash flow?
a. 750,000
b. 708,000
c.
42,000
d. 792,000
96. A piece of equipment is to be sold at the end of the project. Its appraised
value is 420,000. A company makes an offer for 350,000. The equipment
has a book value of 75,000. The tax rate is 40%. What is the salvage
value if the company accepts the offer?
a.
252,000
b.
207,000
c.
240,000
d.
350,000
97. A piece of equipment was sold at the end of the project. The project
received 85,000 for the equipment that carried a book value of 75,000.
The tax rate is 35%. What is the salvage value?
a. 10,000
b. 26,250
c.
85,000
d.
81,500
98. A project is closing. Equipment is sold for 50,000 even though the book
value was 75,000. The tax rate is 30%.
The project started with 100,000
in working capital. What is the terminal cash flow?
a. 127,500
b.
75,000
c.
152,500
d. 157,500
99. Equipment is scrapped at the end of the project and has a book value of
20,000. The tax rate is 35%. The projected started with 75,000 of
working capital. What is the terminal cash flow?
a. -20,000
b.
82,000
c.
55,000
d. 75,000
100. Equipment is sold for 30,000 at the end of a project. The working capital
return is 50,000. The tax rate is 40%. What is the terminal cash flow?
a. 68,000
b. 50,000
c. 80,000
d. 18,000
101. Why would we reject project based on NPV?
a. The NPV is lower than the IRR
b. The NPV is lower than investment
c. The NPV is a negative number
d. The IRR is positive.
102. Why would we reject this project based on the IRR?
a. The IRR is higher than the sum of the cash flows
b. The discount rate is lower than the IRR
c. The IRR is higher than the NPV
d. The discount rate is higher than the IRR
103. What are the key elements of differential cash flow (pick two):
a.
Depreciation expense
b.
Terminal cash flow
c.
Net Income
d.
Sunk costs
e.
Installation cost
104. From the following information, calculate the terminal cash flow.
Proceeds from sale of equipment
100,000
Book Value of equipment sold
50,000
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Year 3 Diff Cash Flow
225,000
Tax rate
40%
Depreciation Yrs 1 to 5
125,000
Working Capital Return
75,000
a.
485,000
b.
175,000
c.
125,000
d.
155,000
105. If the Investment is 140,000, then what is the Net Present Value, given a
Total Present Value of 154,606?
a.
140,000
b.
-71,448
c.
14,606
d.
-123,420
106. Why is the NPV preferred over the IRR? Pick Two:
a. It has a higher dollar value
b. It measures the dollar value
c. It is more reliable
d. It is harder to calculate
107. What is the IRR given the following:
Investment is $250,000, Yr 1:
50,000, Yr 2 is 60,000, Yr 3 is 80,000, Yr 4 is 100,000, Yr 5 is 90,000, the
terminal cash flow is 45,000?
Note: Make sure to add the TCF to Yr5
a. 15.949%
b. 13.997%
c. 11.549%
d. 17.213%
108. If a WACC of 15.00% is used to compute the NPV, what does the IRR
computed in previous question above tell us about the project?
a. The NPV is too large
b. The project is acceptable
c. We can’t make a decision based on the data
d. The project is unacceptable
Financial Forecasting - Discretionary Financing Needed
109. If Sales are $1,000,000, then what are the total
current assets given the
following:
Cash 25% of Sales
Accounts Receivable 13% of Sales
Accounts Payable 10% of Sales
Accrued Payroll 5% of Sales
Cost of Goods Sold 50% of Sales
Inventory 15% of Cost of Goods Sold
a. 1,030,000
b.
380,000
c.
338,000
d.
455,000
110.
Mountain Inc. forecasts sales of 450 million. It has established the
following percentages of spontaneous accounts:
5% of Cash, 17% of
A/R, 11% of Inventory, 48% of PP&E, 18% of A/P. A mortgage of 30
million, bonds of 50 million, equity of 150 million and earnings of 35
million. What is the DFN?
a. -16.5 million
b. 18.5 million
c.
33 million
d. 15.5 million
111.
Dishwasher Heaven, Inc. forecasts sales of 750,000. Their financial
department has developed the following forecast percentages based on
historical averages: Cash 11%, A/R 8%, 13% for inventory and accounts
payable of 14%. Property Plant and Equipment is 210,000. The company
has long term debt of 120,000 and equity of 85,000. It estimates profits
at 55,000.
What is the DFN?
a.
30,000
b.
25,000
c.
85,000
d. 110,000
Financial Forecasting
– Sustainable Growth Rate
112.
Dinosaur Chicken Co. had sales of 70,000,000, expenses of 50,000,000
and paid 40% in taxes. It has equity of 42,000,000. The board approved
dividends totaling 4,500,000. What is the company’s Sustainable Growth
Rate?
a. .1786
b. .1667
c. .6015
d. .1429
113. UltraGrunge, Inc. earned 25 million after tax in the last year. The
company has 100 million in assets and 85 million in equity. It has a policy
of paying 12% of earnings as dividends. What is the SGR of UltraGrunge?
a. .2200
b. .1285
c.
.0353
d. .2588
114. What is the increase in Retained Earnings given the following:
Sales are $10 million
Net Earnings pre-tax are $1 million
Dividend payout ratio is .12
Tax rate is 40%
a. 400,000
b. 726,000
c. 880,000
d. 528,000
115. What is the Sustained Growth Rate given the following:
Sales are 2.5 million
Total Expenses (including cost of goods sold through taxes) 2.0 million
Total Assets are 3.0 million
Equity is 1.3 million
Dividend payout ratio is .25
a. .2552
b. .2885
c. .7500
d. .3846
Capital Structure
116. When a company uses more leverage as evidenced by a higher degree
of either financial or operating leverage, what effect does it have on
changes in profitability?
a. When leverage goes up liquidity goes down.
b. Higher leverage leads to lower risk.
c. Higher leverage leads to higher profitability for a given sales level
d. Lower leverage results in higher income to shareholders.
117. A company has an EBIT of 700,000 and interest expense of 30,000. B
company has EBIT of 1,500,000 and interest expense of 30,000. Which
company has a higher degree of financial leverage?
a. Company A
b. Company B
c. Company A and B have the same leverage
d. Insufficient data to make a determination
118. What is the operating leverage of the Company Y? How will that affect
profits compared with Company Z that has an operating leverage of
5.25?
Company Y has an EBIT of 3,000,000, Sales of 25,000,000 and
variable expenses of 18,000,000
a. Operating leverage of 2.33
As sales increases, the profits of both
companies will stay the same.
b.
Operating leverage of .43
As sales increases Y’s profits will rise faster than
Z’s
c.
Operating leverage of 2.33
As sales increases, Y’s profits will rise slower
than Z’s
d.
Operating leverage of .43
As sales increases Y’s profits will rise slower
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than Z’s
119. What is the financial leverage of Company A? How will that leverage
affect profits compared to Company B if sales decrease?
For Company A,
EBIT is 500,000, interest expense is 50,000, Sales are 4,500,000, and
variable costs are 3,000,000.
a. Degree of Financial leverage: 1.11
Interest costs rise as sales decreases.
b.
Degree of Financial leverage: 3.00
Profits increase as sales decreases.
c.
Degree of Financial leverage: 1.11
Profits decrease with higher
leverage
d.
Degree of Financial leverage: 3.33
Profits increase as interest expense
increases
120.
What is the degree of combined leverage when EBIT is 700,000,
interest expense is 100,000, Sales is 3,500,000 and variable costs are
1,200,000?
a.
5.000
b.
2.917
c.
0.462
d.
3.833
121. What is the Degree of Operating Leverage given Sales of 100,000.
Variable Costs of 75,000 and EBIT of 10,000?
a.
1.00
b.
2.50
c.
10.00
d.
2.05
122. What does the Degree of Financial Leverage indicate?
a. The firms cash balance
b. The cost of financed assets
c. The reliance on debt
d. The reliance on assets
123. If a company has a high degree of financial leverage, what does that tell
us about the firm’s risk profile?
a. Low Risk
b. Appropriate Risk
c. Higher ability to pay debt
d. Higher profits to shareholders
Working Capital Management
124. What is the cash cycle?
a. The speed of collecting cash from customers
b. The amount of cash kept in banks
c. The comparison of debt to cash
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d. The amount of time to regenerate cash
125. Why is float important to understand?
a. To know how to keep the company profitable
b. To know why the company needs cash
c. To determine when to buy fixed assets
d. To time cash expenditures
e. None of the above
126. What should a company do to manage its working capital?
a. Collect quickly and pay slowly
b. Keep a large cash balance
c. Maximize the use of long term investment
d. Depreciate assets more slowly
127. Company A wishes to keep 20% of its assets as cash. Company B keeps
its cash balance at 5% of assets. Which of the following statements
apply?
a. Company A is less liquid than Company B
b. Company B invests in more working current assets
c. Company A uses better working capital management
d. Company B has a more conservative cash policy
128. Company A offers trade credit of 2% 10 / net 30 and Company B offers
trade credit at net 30. What can be said about the credit policies of each
company?
a. Company B has a looser credit policy
b. Company A keeps more of its Accounts Receivable
c. Company A can attract more customers
d. Company B can attract more customer
129. Which of the following characterizes collection float
a. Longer float indicates good financial practices
b. Increased float indicates slower processing time
c. Accounts receivable increase with shorter float
d. Liquidity is enhanced with longer float
130. Company A’s inventory is larger than Company B. Both companies are
competitors and are about the same size. What does this difference
mean from a working capital management standpoint?
a. Company B has lower inventory float
b. Company A has more cash in hand
c. Company B might have higher inventory turnover
d. Company A has tighter credit.
131. In regards to Accounts Payable balances, which of the following is true:
a. Higher Accounts Payable is better than a lower balance
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b. Paying off A/P as soon as possible is good policy
c. Increased Accounts Payable means faster collections
d. Paying off A/P on the last day due is good policy
Firm Valuation
132. Ajax, Inc. is seeking to sell the company, but it is a private company with
no sales of stock to determine its market value. It has Earnings of
$1,200,000 on 350,000 shares. Epsilon Manufacturing is a direct
competitor and of equal size and profitability. Its stock sells for $21 per
share and has earnings per share of $3.80. What is value of Ajax?
a. 7,350,000
b. 1,330,000
c.
6,632,000
d.
7,000,000
133. Ham Corp. is seeking to buy Eggs, Inc. Eggs is a private company. Eggs
had an EPS of 2.80 last year and has 125,000 shares outstanding. Ham
Corp. stock sells for $43.00 and has an EPS of 5.00. Ham is larger than
Eggs, but sees both companies as operating in similar markets. What is
the value of Eggs?
a. 1,920,000
b. 3,010,000
c. 2,800,000
d. 5,375,000
134. What would be a source of information to determine Replacement
Cost?
a. Building Appraisal
b. Accumulated Depreciation Expense
c.
Stock price
d.
Statement of Cash Flows
135. What is the company valuation given the following:
Cash Flows:
Yr 1 $80,000, Yr 2 $100,000, Yr 3 $95,000, Yr 4 $80,000
Discount Rate 7%
a.
300,690
b.
61,032
c.
355,000
d
242,090
136. What is the Discounted Cash Flow of the company with the following
Cash Flows:
Cash Flows:
Yr 1 $100,000, Yr 2 $150,000, Yr 3 $150,000, Future Forecasted
Annual Cash Flows $100,000. Discount Rate 5%
Hint: the forecasted
annual cash flows is a perpetuity.
a. 2,400,000
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b. 2,360,868
c. 1,727675
d. 2,088,543
137. If two companies have earnings of $2,000,000, and Company X has a
multiple of 1.2 and Company Z has a multiple of 2.0, what can we
estimate about the value of each company?
a. The value is the same
b. The value of Company X is higher
c. The value of Company Z is higher
d. The relative value can’t be determined
138. Calculate the Free Cash Flow given the following information:
Net Working Capital increases by 20,000
Tax Rate is .40
EBIT is 250,000
Capital Expenditures are 10,000
Depreciation is 15,000
a. 175,000
b. 200,000
c. 115,000
d. 135,000
139. If a company has a constant growth rate estimated at 5% and a Free
Cash Flow of 150,000, what is its estimated valuation (terminal value)?
a. 3,000,000
b.
7,500
c. 2,500,000
d. 1,500,000
Government Regulation
140. Dodd-Frank regulates which segment of the U.S. Economy?
a. Fannie Mae and Freddie Mac (Housing financing)
b. Banking Industry
c. Multi-level Marketing Industry
d. Automobile Industry
141.
What is the regulatory body that oversees the systematic risk in
banking?
a. Wildcat Banking Act
b. Financial Stability Oversight Council
c.
Capital Asset Pricing Administration
d.
Sarbanes Oxley Act
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142. The SEC Securities & Exchange Commission requires companies to do
the following: (pick two)
a. Register all public offerings
b. Change CEOs on a regular basis
c. Regulates stock sales
d. Prohibits foreign bribery
e. Regulates the Money Supply
143.
What does the Sarbanes-Oxley Act require companies to do?
a. Have a board of directors
b. Register all foreign sales
c. Make estimated tax payments
d. Have internal control audits
144. FINRA (Financial Industry Regulatory Authority) does the following:
(pick one)
a. No foreign bribery by corporations
b. Regulates bond prices
c. Establishes Credit Unions
d. Prosecutes naughty stock brokers
e. Regulates Hedge Funds
Global Financing
145. If a product is made 100% domestically, what can affect its domestic
market?
a. International exchange rates
b. International competition
c. Product tariffs
d. International political regulations
146. If a company makes its product in a foreign country where labor costs
are much lower, what happens?
a. Profits and domestic employment goes up
b. Costs go up and domestic employment goes down
c. Costs stay the same and domestic employment increases
d. Profits go up and domestic employment decreases.
147. If the value of a dollar increases, the price of imports:
a.
Increases
b. Decreases
c. Stays the same
d. Fluctuates
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148. Why would a farmer buy a hedge when he signs a contract to sell
produce overseas?
a. To avoid tariffs
b.
To reduce currency risk
c.
To increase profits
d.
To avoid competition
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Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:Cengage Learning
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Pkg Acc Infor Systems MS VISIO CD
Finance
ISBN:9781133935940
Author:Ulric J. Gelinas
Publisher:CENGAGE L