Finance Test

!”#$%&$'()*#+,( ! 1. Question : Which of the following is/are true?

I. Asset management ratio indicates how effectively a firm generates profits on sales, assets and stockholder’s equity. II. Liquidity ratios indicate the firm’s capacity to meet its short-term financial obligations, but not its long-term financial obligations. III. Profitability ratios indicate how efficiently a firm is using its assets to generate sales. IV. Financial leverage ratios indicate the firm’s capacity to meet its financial obligations, both short-term and long-term.

 

Student Answer: II and IV

I and II

I, II, and IV

I and III

 

Question 2. Question : Which of the following is/are true? I. When a loan is amortized over a five year term, the amount of interest paid is decreased each year. II. The effective annual rate of interest will always be equal to or less than the nominal annual rate of interest. III. An annuity due is the annuity in which the payments or receipts occur at the beginning of each period. IV. If the present value of a given sum is equal to its future value, then the discount rate must be zero.

 

Student Answer: IV only

III & IV

II, III & IV

I, III & IV

 

 

Question 3. Question : If a firm’s current ratio is 3.0,

Student Answer: it is possible for its quick ratio to be larger than 3.0.

its current liabilities exceed its current assets.

it is possible for its quick ratio to be smaller than 3.0.

its current liabilities equal its current assets.

 

Ch 3

Ch 5

Ch 3

 

 

Question 4. Question : Which of the following is/are true? I. The shareholder wealth maximization goal states that management should seek to maximize the present value of the expected future returns to the owners of the firm. II. The primary reason for the agency problem between the stockholders and managers is because of the separation of ownership and management. III. Protective covenants in a company’s bond indentures are used in agency relationships involving stockholders and creditors. IV. The fact that no investor can expect to earn excess returns based on an investment strategy using only historical stock price or return information is an example of semistrong-form market efficiency.

 

Student Answer: I and IV

I, II and IV

I, II and III

All of the above

 

Question 5. Question : If you’re a financial manager of a MNC (U.S. based) and you anticipate that your company will need to pay C$2 million 6 months later. If you would like to make use of either forward or futures or options contracts to fix your exchange rate today, what is your strategy?

 

Student Answer:

BUY forward/futures contracts for C$2 million or BUY call options for C$2 million.

 

SELL forward/futures contracts for C$2 million or BUY call options for C$2 million.

 

BUY forward/futures contracts for C$2 million or BUY put options for C$2 million.

 

SELL forward/futures contracts for C$2 million or BUY put options for C$2 million.

 

Question 6. Question : If a firm’s total asset turnover ratio is 2.0, which of the

following is true?

Student Answer: Its annual sales are less than its total assets.

It is possible that its fixed asset turnover ratio is 1.5.

Its annual sales are two times its total assets.

Ch1 and Ch2

Ch 2

Ch 3

 

 

None of the above is true.

 

Question 7. Question : After-tax cash flow equals:

Student Answer: earnings after tax plus non-cash charges

net earnings plus deferred expenses

net earnings plus depreciation

earnings after tax

 

Question 8. Question : You would like to endow a chair at UTC for $188,000 per year. At 20% interest, how much do you need to donate?

 

Student Answer: $1,880,000

$37,600

$940,000

 

$2,685,714

 

Question 9. Question : Clair wants to purchase a new car. She knows that she can afford to pay $3588 per year and that her bank will charge her 13% interest on the car loan. She intends to pay off the car in 4 years. Interest will be compounded annually. Of the following, which is the most expensive vehicle in her price range that she could consider?

 

Student Answer: A Taurus selling for $10,274

A Malibu selling for $17,510

A Civic selling for $13,274

A Celica selling for $12,596

 

Question 10. Question : UT Inc. is considering issuing additional long-term debt to finance an investment opportunity. Currently, UT has $100 million in 15% debt outstanding. Its after-tax net income is $30 million, and the company is in 40 percent tax bracket. What is UT’s current times interest earned ratio.

 

Student Answer: 5.15 times

4.33 times

Ch 4

Ch 5

Ch 5

Ch 3

 

 

5.00 times

4.00 times

 

Question 11. Question : Continued from question 10, how much additional 18% debt

can UT issue now to maintain its times interest earned ratio at 4? Assume for this calculation that earnings before interest and taxes remains at its present level.

 

Student Answer: $7.81 million

$6.94 million

$18.75 million

$15.625 million

 

Question 12. Question : The UCD Company is considering a $70 million expansion

(capital expenditure) program next year. The company wants to determine approximately how much additional financing will be needed if the expansion program is undertaken. Next year the company expects to earn $45 million after interest and taxes. The company also plans to increase its dividends from $5 million to $10 million. If the expansion program is accepted, the company expects its current assets needs to increase by approximately $15 million next year. Long-term debt retirement obligations total $3 million next year and depreciation is expected to be $25 million. No fixed assets are expected to be sold next year.

 

Student Answer: $28 million

$24 million

$34 million

$25 million

 

Question 13. Question : Which of the following is/are true?

I. When the times interest earned ratio falls below 1.0, the viability of the firm is not threatened because the firm generates sufficient earnings to make interest payments when due. II. The price-to-earnings is a market-based ratio.

Ch 3

Ch 3

Ch 3

 

 

III. Positive earnings always indicate positive EVA (economic value added).

 

Student Answer: III

II

II & III

I & III

 

Question 14. Question : You are given the information of firm A and B for their

performance evaluation.

Firm A B Sales 15 20 EAT 2 2 Total Assets 25 40 Stockholder’s Equity 10 10 Suppose the industry average of net profit margin ratio, total asset turnover and equity multiplier is around 10%, 0.58 times and 2.5 respectively. Which firm appears to have problems?

 

Student Answer: Firm A has problems.

Firm B has problems

None of them presents problems

Both of them have problems

 

 

Question 15. Question : Continued from question 14, what is the debt ratio of firm A?

Student Answer: 2.5

0.4

0.6

none of the above

 

 

Ch 3

Ch 3

 

 

Question 16. Question : Continued from question 14, which of the following is true?

Student Answer:

Firm A shall restructure its capital structure to achieve a

higher financial leverage since it appears to be lower than the industry average.

 

Firm B shall improve its total asset turnover ratio since it is lower than the industry average and thus indicates an inefficient utilization of assets.

 

Firm A shall improve its total asset turnover ratio since

it is higher than the industry average and thus indicates an inefficient utilization of assets.

 

Question 17. Question : George plans to open his own furniture store in 12 years. To

do so, he has committed $50,000 in a bank certificate of deposit for 12 years. In addition, he plans to save $10,000 per year (end of year) for the next 4 years and $5,000 per year (end of year) for the following 8 years. How much money will George have in 12 years if the investments (i.e., CD and savings) earn 13 percent per year compounded annually?

 

Student Answer:

$761,329.20

 

$299,392.37

$409,441.62

 

$521,926.01

 

Question 18. Question : If a firm wishes to retain the same return on equity when its

net profit margin and total asset turnover has declined, it must

 

Student Answer: decrease its equity multiplier.

reduce sales and increase assets.

increase its equity multiplier.

none of the above.

 

 

Ch 3

Ch 5

Ch 3

 

 

Question 19. Question : In 2011, the Deluxe Company’s sales were $12.0 million. Its

balance sheet at year end 2011 is shown below. Deluxe’s 2012 sales are expected to be $18 million. Earnings after tax is expected to be 8.0% of sales, and annual dividends of $200,000 are expected to be paid in 2012. The company presently has excess plant and equipment capacity. As a result, assume that the net fixed asset figure on the balance sheet will remain constant for 2012. Assuming that the ratios of assets (except fixed assets, net) to sales and accounts payable to sales in 2011 remain the same in 2012, calculate the total amount, i.e., one number, of external financing required for 2012, using the percentage of sales method.

Deluxe Co. Balance Sheet

(December 31, 2011)

($ millions) Current assets: Current liabilities: Cash $0.2 Accts. payable $0.6 Accts. Rec. 1.2 Notes payable 0.7 Inventory 2.0 Long-term debt 2.5 Fixed assets, net 2.6

Stockholders’ equity 2.2

Total Assets $6.0 Total Liabilities and Equity $6.0

 

Student Answer: $160,000

$250,000

$750,000

None of the above

 

Question 20. Question : Continued from question 19, assuming Deluxe plans to raise

its external financing exclusively from notes payable, what is the number of notes payable in the pro forma Balance Sheet for 2012?

 

Student Answer: $1,450,000

$850,000

$860,000

None of the above

 

Ch 4

Ch 4

 

 

Question 21. Question : P&G Company has revenues of $80,000, general &

administrative expenses of $25,000, interest expense of $4,200 and depreciation expense of $2,000. The firm is in the 35% tax bracket. What would be the firm’s cash flow from operations?

 

Student Answer: $33,720

$23,792

$18,416

$26,800

 

Question 22. Question : Last year A&M’s net cash provided by operating activities

was $13.6 million and its net cash used by investing activities was $19.7 million. If net cash provided by financing activities was $9.3 million, what was the net increase (or decrease) in cash and cash equivalents during the year? A&M started the year with $2.1 million in cash.

 

Student Answer: $9.2 million

$3.2 million

$11.3 million

$5.3 million

 

Question 23. Question : You are preparing a cash budget for A&M Inc. for the first quarter of

2012. You have summarized the following information. A&M Inc. Cash Budget Worksheet First Quarter, 2012 December January Estimated Sales $825,000 $730,000 Estimated Credit Sales 770,000 690,000 Estimated Receipts: Cash sales 40,000 Collections of Accounts Receivable 75% of last month’s credit sales 577,500 25% of current month credit sales 172,500 Total Accounts Receivable

Ch 4

Ch 4

Ch 4

 

 

collections 750,000 Estimated purchases $438,000 504,000 Estimated payments of accounts payable 438,000 504,000

Other estimated disbursements for January 2012, include ____________________________ Wages and Salaries $250,000 Rent 27,000 Other Expenses 10,000 Tax Payments 115,000 A&M’s projected cash balance at the beginning of January is $120,000 and the company desires to maintain a balance of $120,000 at the end of each month. Will A&M need to have a short-term loan in January?

 

Student Answer: Yes.

No.

 

Question 24. Question : Continued from question 23, what is the amount of short-

term loan required to meet the desired level of cash balance at the end of January?

 

Student Answer: $0

$50000

$55000

 

 

Question 25. Question : Your monthly statement from your bank credit card shows that the monthly rate of interest is 1.5%. What is the annual effective rate of interest you are being charged on your credit card?

 

Student Answer: 19.56%

1.50%

18.00%

29.56%

 

 

Ch 4

Ch 5

 

 

Question 26. Question : If the spot rate for the Japanese yen is $0.009204 and the one-year forward rate is $0.009227, what is the annualized premium (discount) for Japanese yen?

 

Student Answer: premium of 1.00%

premium of 0.50%

discount of -0.99%

premium of 0.25%

 

 

Question 27. Question : Which of the following is/are true? I. In an efficient capital market, all security investments will have a zero NPV. II. In an efficient capital market, corporate diversification is inexpensive. III. In an efficient capital market, corporate diversification is unnecessary.

 

Student Answer: I and II

I and III

II and III

All of the above

 

 

Question 28. Question : Sandy just won a $6,000,000 lottery in Maryland. Instead of receiving a lump sum, she found that she would receive $240,000 annually (end of year) for 25 years. Sandy is 75 years old and wants her money now. She has been offered $1,778,500 to sell her ticket. What rate of return is the buyer expecting to make if Sandy accepts the offer? HINT: This is a present value of an ordinary annuity problem, and you would like to solve for I. The buyer would get the end-of-year annual payment for 25 years. The PV is the offered price.

 

Student Answer: less than 10%

13.82%

14.67%

12.84%

 

Ch 2

Ch 2

Ch 5

 

 

Question 29. Question : What is the value in 3 years of $21,500 deposited in an

account earning 3% compounded monthly?

Student Answer:

$23,493.63

 

$23,522.11

 

$21,661.65

 

$62,312.98

 

Question 30. Question : Over the past 3 years, your $15,000 in gold coins has

increased value by 250 percent. You plan to sell these coins today. You have paid annual storage and insurance costs of $520 per year. Assay expenses at the time of sales are expected to total $450. What is your 3-year holding period return to this investment?

 

Student Answer: 236.60%

 

243.53%

 

143.53%

 

136.60%

 

Question 31. Question : Two years ago you bought 100 shares of UCD convertible

preferred stock at $45 per share. The preferred stock had an annual dividend of $4.50 per share, and a total of $8.25 in dividends per share have been paid so far. Today the company announced that the stock is redeemable for $47.25 plus accrued and unpaid dividends, for a total of $48.00. Alternatively, holders may convert their shares of preferred stock at a conversion rate of 1.20 shares of UCD common stock for each share of preferred stock. If the closing price of UCD common stock is $47.50, what is your holding period return?

 

Ch 5

Ch 2

Ch 2

 

 

Student Answer: 27.84%

36.25%

25.00%

45.00%

 

Question 32. Question : Canadian Motors exports cars to the U.S. Market. On

January 20, 2008, its most popular model was selling (wholesale) to U.S. dealers for $48,000 (US dollars). What price must Canadian Motors charge for the same model on January 29, 2012 to realize the same amount of Canadian dollar as it did in 2008? ($0.9350/C$ on 1/20/08 and $1.10/C$ on 1/29/2012)

 

Student Answer:

$56,470.59.

 

$39,927.27.

 

$53,443.30.

 

$43,111.11.

 

Question 33. Question : M&M Inc. has an agreement with it banks that allow M&M

to borrow money on a short term basis to finance its inventories and accounts receivable. The agreement requires M&M to maintain a current ratio of 2.2 or higher and a debt ratio of 45% or lower. From the balance sheet, M&M has total assets of $1,750,000, current assets of $975,000, and total debts of $550,000 (consist of current liabilities of $125,000 and long-term debt of $425,000). Determine how much M&M could borrow this time to invest in inventory and accounts receivable without violating the terms of its borrowing agreement.

 

Student Answer:

$87,211.08

 

$431,818.18

Ch 2

Ch 3

 

 

 

$498,095.27

 

$96,153.85

 

Question 34. Question : What is the return on stockholders’ equity for a firm with a

net profit margin of 5.5 percent, sales of $375,000, an equity multiplier of 3.5, and total assets of $175,000?

 

Student Answer: 24.11%

29.27%

41.25%

21.59%

 

 

Question 35. Question : Which of the following is/are true? I. A common-size balance sheet shows the firm’s assets and liabilities as a percentage of net sales. II. The average collection period is the average number of days an accounts receivable remains outstanding. III. If a firm wishes to retain the same return on equity when its net profit margin and total asset turnover has declined, it must decrease its equity multiplier. IV. An average collection period far above the industry norm may indicate that the firm’s credit policy is hurting sales by restricting credit to the very best customer

 

Student Answer: I and III

III

II

II and III

III and IV

 

 

Ch 3

Ch 3

 

 

Question 36. Question : The ____ ratio, sometimes called the “acid test,” is a more stringent measure of ____ than the ____ ratio.

 

Student Answer: current; financial leverage; quick

quick; liquidity; current

current; liquidity; quick quick; financial leverage; current

 

 

Question 37. Question : Nancy bought 100 shares of Risky Venture stock six months ago for $14 per share and sold it yesterday for $12. The company paid a total of $0.24 per share in dividends to Nancy during the time you held the stock. What was Nancy’s holding period return?

 

Student Answer:

-12.57%

-25.14% -16.67%

16.00%

 

Question 38. Question : An exchange rate quoted as $0.88 per Australian dollar in the

U.S. is known as a(n) ____ quote.

Student Answer: hedge

indirect

direct

value

 

 

Question 39. Question : The difference between the bid price and the ask price on a security is the:

 

Student Answer: asset factor commission

value

spread

 

Question 40. Question : A treasury bond can be purchased for $8,820 today and the

bond holder will receive $950 in interest and the $10,000

Ch 3

Ch3

Ch 2

Ch 2

Ch 2

 

 

face value at maturity. If you require a holding period rate of return of 23%, do you believe this is a good invest at today’s price of $8,820?

 

Student Answer:

Yes, the holding period return is greater than 23%.

No, the holding period return is less than 23%. Yes, the holding period return is equal to 23%.

 

Question 41. Question : Which of the following statements is true?

I. Securities not listed on exchanges are said to be traded over the counter. II. The bid quote on a security from a dealer is always smaller than the ask quote on a security. III. Trading on the NYSE is conducted by members of the exchange. The members that execute orders and act as agents on behalf of their clients are floor brokers. IV. The Dow Jones Industrial Average is calculated using the total market value of 30 stocks.

 

Student Answer: All of the above. II and IV only

 

I, II and III I,II, and IV

None of the above

 

Points Received: 0 of 4.2

 

Question 42. Question : A&M Stores, a U.S. department store chain, annually

negotiates a contract with UT watch company, located in France, to purchase a large shipment of watches. On July 8, 2013, A&M purchased 2,500 watches for 850,000 euros. The exchange rate on July 28, 2013 was $1.15/!. What is the cost per watch in U.S. dollars for A&M Stores?

 

Student Answer: $977,500

$739,130.44 $295.65

 

$391

 

Ch 2

Ch 2

 

 

Question 43. Question : Which of the following is/are false?

I. If a firm’s current ratio is 2.5, it is possible for its quick ratio to be 2.0. II. If a firm’s current ratio is greater than 1, it means that the firm’s current liabilities exceed its current assets.

 

Student Answer: I

II

I and II Neither I nor II

 

 

44. Question : Bank of America has granted you a ten year loan for $65,000. If your ten annual end of the year payments are $13,380.50, what is the rate of interest Bank of America is charging?

 

Student Answer: 14.76%

15.86%

20.21% 19.24%

 

Question 45. Question : Which of the following is/are true?

I. In preparing a statement of cash flows, the indirect method involves adjusting net income to reconcile it to net cash flows from operating activities. II. The balance sheet shows the effects of a company’s operating, investing, and financing activities on its cash flows.

 

Student Answer:

I II

All of the above None of the above

 

 

Ch 3

Ch 5

Ch 3

 

 

 

Question 46. Question : The stock of A&M, Inc. has just been sold in an initial public offering at a price of $280 per share. One week after this offering, the stock has risen to $290. You believe the stock will rise to $300 over the coming year. You expect A&M to pay a $10 dividend during the coming year. If you require your one-year holding period return to be 10%, is A&M stock a good investment at the current price of $290?

 

Student Answer:

Yes, the expected one-year holding period return is 10.71%, greater than the required return, 10%.

 

 

No, the expected one-year holding period return is 7.14%, smaller than the required return, 10%.

 

 

No, the expected one-year holding period return is 3.45%, smaller than the required return, 10%.

 

No, the expected one-year holding period return is 6.90%, greater than the required return, 10%.

 

Question 47. Question : A firm with an equity multiplier of 2.5, will have a debt ratio

of

 

Student Answer: 2.50 0.75

4.00

 

0.60

 

 

Ch 2

Ch 3