NAME SS # TEST ONE FINANCE 333 SUMMER II 2003 You have 15 hours

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NAME SS # TEST ONE FINANCE 333 SUMMER II 2003 You have 15 hours

     NAME _____________________________

     SS # _____________________________



You have 1.5 hours to finish this test. You must show all of your work, in clearly legible handwriting to receive

    credit for problems worked. Either use a scantron or on the test circle the letter of the correct answer for each

    multiple choice question.

Multiple Choice (3 points each)

    1. The true owners of a corporation is/are the ______.

    a. Board of directors

    b. Chief executive officer

    c. Common stockholders

    d. Creditors

    e. Preferred stockholders

2. ABC Corp. extends credit terms of 45 days to its customers. Its credit collection would be considered poor if its

    average collection period was

    a. 30 days

    b. 36 days

    c. 47 days

    d. 57 days

3. Profit maximization does not adequately describe the goal of the firm because:

    a. Profit maximization does not require the consideration of risk

    b. Profit maximization ignores the timing of cash flows generated by a firm

    c. Profit maximization uses accounting profits rather than actual cash flows

    d. All of the above

    e. None of the above

4. A firm with a Gross Profit Margin that meets industry standards and an Operating Profit Margin that is below

    industry standards must have excessive

    a. General and administrative expenses

    b. Cost of goods sold

    c. Dividend payments

    d. Tax payments

    e. Level of total debt

5. Which of the following would constitute a cash inflow?

    a. An increase in accounts receivable

    b. A decrease in depreciation

    c. An increase in common stock dividend payments

    d. An increase in accounts payable

    e. None of the above

    6. If a corporation sells some land that it previously owned, then

    a. Cash flow from operating activities will increase

    b. Cash flow from financing activities will decrease

    c. Cash flow from financing activities will increase

    d. Cash flow from investing activities will increase

    e. None of the above are true

    7. Which of the following would not be considered a Capital Market security?

a. A corporate bond

    b. Preferred stock

    c. Common stock

    d. A U.S. Treasury Bill

    e. A Municipal Revenue Bond

    8. Which of the following would not be considered a tax deductible expense for income tax purposes? a. Interest paid to bondholders

    b. Dividends paid to common stockholders

    c. Depreciation

    d. Cost of goods sold

    e. Both "B" and "D" are not deductible

9. When an investment banking firm "underwrites" an issue of securities, it is performing which of the following?

a. Agreeing to market the securities to investors for a fee.

    b. Giving legal advice to the firm than is issuing the securities

    c. Offering to purchase the securities from the firm, thereby assuming the risk of resale to investors d. Agreeing to provide insurance that the firm's securities will sell for a price that is established by the firm.

    e. Trying to gain a majority of shares in the issuing company in order to take over the company

10. A common-size income statement shows a firm’s income and expenses as a percentage of _______.

    a. Total assets

    b. Net income

    c. Sales

    d. EBIT

    e. Common equity

    11. Advantages of the corporate form of business organization include all but which of the following? a. Unlimited life

    b. Unlimited liability

    c. Flexibility in ownership change

    d. Ability to raise capital

    e. All of the above represent advantages of the corporate business structure

12. The proper income tax rate to use for financial decision making is the:

    a. Average tax rate

    b. Excise tax rate

    c. Marginal tax rate

    d. Carry-back rate

    e. Surtax rate

    13. _______ indicate the ability of a firm to meet its short-term financial obligations. a. Asset management ratios

    b. Liquidity ratios

    c. Leverage ratios

    d. Profitability ratios

    e. Market ratios

    14. The primary goal of a publicly-owned firm interested in serving its stockholders should be to a. Maximize expected net income

    b. Maximize expected EPS

    c. Minimize the chance of losses

    d. Maximize the stock price per share

    e. Maximize total corporate profit

15. Which of the following statements is most correct?

    a. Compensating managers with stock can reduce the agency problem between stockholders and managers

    b. Restrictions are included in credit agreements to protect bondholders from the agency problem that exists

    between bondholders and stockholders

    c. The threat of a takeover can reduce the agency problem between bondholders and stockholders d. Statements A and B are correct

    e. All of the statements are correct

Problems (4 points per part unless otherwise stated)

    1. The Mason Gift Co. had sales of $440,000 in the past year, with operating expenses of $82,500 and cost of goods sold of $137,500. Interest expenses amounted to $32,500, and $8,800 in common stock dividends were received. Common stock, originally purchased in the preceding year for $22,000, was sold for $27,500. Using the tax rate schedule below or the one at the back of the test answer the following questions:

a. Compute the taxable income for Mason Gift Co.

    b. Compute the tax liability.

    c. What is Mason's average tax rate?

    d. What is Mason's marginal tax rate?

    Earnings Marginal Tax Rate

    $0 - 50,000 15%

    $50,001 - 75,000 25%

    $75,001 - 10 million 34%

    Over $10 million 35%


    Income between $100,000 to $335,000 5%

    Income between $15 million to 18,333,333 3%

2. Central City Construction Co. has $10 million of total assets. Sales are $15 million. The firm's debt ratio is 60%,

    and its net profit margin is 10%.

    a. Compute Central City Construction's Return on Assets (ROA).

    b. Compute the Return on Equity (ROE)

    3. (5 points) Construct a common size balance sheet for Allied Food Products from the balance sheet data given below:

    Allied Food Products

    Balance Sheet as of 12/31/2002

    (millions of dollars)

Cash $ 25 Accounts payable $ 30

    Accounts receivable 375 Notes payable 110

    Inventories 600 Accruals 110

    Total current assets $1,000 Total current liabilities $ 250

    Net fixed assets 1,000 Long-term debt 700

     Preferred stock 50

     Common stock 240

     Retained earnings 760

Total Assets $2,000 Total Liabilities & Equity $2,000

    4. Strack Houseware Supplies Inc. has $2 billion in total assets, $200 million in current liabilities, $600 million in long-term debt, and no preferred stock. The company has 300 million shares of common stock outstanding, and its stock price is $20 per share.

    a. What is Strack's Book Value per share?

    b. What is Strack's market-to-book ratio?

    5. Using the following financial statements for J.B. Chavez Corporation

    a. Compute the firm's Cash Flow from Operations for the year ended 12/31/00.

    b. Compute the firm's Operating Cash Flow (OCF) for the year ended 12/31/00.

    c. Compute the Free Cash Flow (FCF) for the year ended 12/31/00.

     J.B. Chavez Corporation, Balance Sheet

     at 12/31/99 and 12/31/00 ($000)


     12/31/99 12/31/00

    Cash $225 $175

    Accounts receivable 450 430

    Inventory 575 625

    Current assets $1250 $1230

    Plant and equipment $2200 $2500

    Less: Accumulated depreciation (1000) (1200)

    Net plant and equipment $1200 $1300

    Total assets $2450 $2530

     Liabilities and Owners’ Equity

     12/31/99 12/31/00

    Account payable $250 $115

    Notes payable-current (9%) 0 115

    Current liabilities $250 $230

    Bonds $600 $600

    Owners’ equity

    Common stock $900 $900

    Retained earnings 700 800

    Total owners’ equity $1600 $1700

    Total liabilities and owners’ equity $2450 $2530

     J.B. Chavez Corporation, Income Statement

     for the year ending 12/31/99 and 12/31/00

     1999 2000

    Sales $1250 $1450

    Cost of goods sold 700 875

    Gross profit $550 $575

    Operating expenses 30 45

    Depreciation 220 200

    Net operating income $300 $330

    Interest expense 50 60

    Net income before taxes $250 $270 Taxes (40%) 100 108

    Net income $150 $162

    (BONUS - 5 points) Construct a Statement of Cash Flows for Chavez Corp. using the financial statements from

    problem #5.

    6. (Use the Financial Statements from Problem # 5 (Chavez Corp) to answer this problem). For the date 12/31/00

    (the period covered by the second balance sheet) compute the missing ratios in the following table:

     Chavez (as of 12/31/00) Industry (as of 12/31/00)

Current Ratio 5.0

    Quick Ratio 3.5

    Average Collection Period 120 days

    Accounts Receivable Turnover 3.0 x

    Inventory Turnover 4.0 x

    Net Profit Margin 7.14%

    Fixed Asset Turnover 1.05

    Debt Ratio 40%

    Times Interest Earned 2.0x

    Return on Equity 12.5%

    a. Fill-in the missing ratios for Chavez in the table above (1 point per correct ratio = 10 points total).

    b. Given the financial ratios, how would you assess the level of financial risk at Chavez versus the average

    firm in its industry?

    c. (BONUS - 3 points) What one item looks to be the most problematic for Chavez, and how could it be


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