340 MIDTERM EXAM

Question: Suppose its WACC = 10%, expected rate of return on equity RE = 15%, cost of debt RD = 5%. What is Firm D's share price most likely to be at the end of Year 2036? Please choose the best answer

$100 ($15/RE)

Question: What should be Firm C's total firm value?

$1377 (100/.08) +127

Question: What is Firm E's (total) dividend in year 2041? Please choose the best answer.

$265

What is Firm A's FCF in 2031

$290 Subtract NFA from 2031-2030

What is NOPAT in 2030?

$320 320 is the accounts payable value

Question: What is Firm C's total operating capital?

$3853 = (Total Assets) - (AP + Accruals + ST Investment)

What is Firm A's Operating Profitability Ratio in 2030?

32% Accounts Payable/Sales

What is Firm A's Return on Invested Capital (ROIC) in 2031?

34.36%

Corporate valuation model allows us to find the value of a firm. It cannot be applied to project valuation.

False

We cannot use the corporate valuation model to find the value of equity because it only gives the total firm value.

False

Question: What is Firm B's quick ratio?

None of the rest is correct

Which of the following statements is most likely to be correct? Please choose the best answer.

Positive dividend growth may or may not help increase stock price, which has a lot to do with ROE and payout policy as well

Current assets and current liabilities refer to those balance sheet items that can be converted to cash or due within a year.

True

Dividend payout policy can directly affect equity value even if the firm's net income does not change

True

For sales forecasting, we may use linear fitting as well as exponential fitting. Exponential fitting normally works better if larger firms tend to have larger sales and vice versus. Linear fitting would be better if changes in sales are expected to be independent.

True

A firm's assets must be equal to the sum of all its liabilities and equity at most points in time but not necessarily so at all points in time.

False

All items that carry the unit of USD ($) such as depreciation in Balance Sheet (BS) and Income Statement (IS) are truly cash flows. All items that carry the percentage sign (%) in BS and IS are percentages such as tax rates.

False

Corporations are required to provide financial statements including balance sheet, income statement, and cash flow statement. This is because cash flow statement is important to business, but we are not able to get it if we only have balance sheet and income statement.

False

Dividends and capital gains received by an individual are subject to federal taxation. In most situations, a flat rate of 21% will be applied to all individuals and corporations for dividends and capital gains they have received.

False

If a firm will have a positive AFN (additional fund needed), the firm actually does not have to worry because it is positive which means the firm will have an extra dollar amount in its account with the bank.

False

Short-term operating assets normally include Cash, Short-term investment, Accounts Receivable and Inventories.

False

The accuracy of pro forma forecasting increases in the number of previous years whose data are used.

False

We have studied a few financial ratios that measure a firm's debt management, i.e., the use of leverage, such Debt Ratio, Debt-to-Equity Ratio, Liabilities-to-Asset Ratio, and Equity Multiplier. They are defined differently, but it is true that when one increases, the other will always increase too.

False

If Firm A's notes payable (N/P) increase by $100, which of the following is most likely to be correct? Please choose the best answer.

Firm A has increased its outstanding short-term loans (typically bank loans) by the amount of $100

Firm A is in the 20% income tax bracket. If its accounts payable (AP) increases by $100, which of the following is most likely to be correct? Please choose the best answer.

Firm A owes its suppliers $100 more

Notes Payable belongs to financing activities. It is not considered an operating item in balance sheet.

True

Sales and FCFs are approximately proportional to each other. This approximation is less accurate if fixed assets remain fixed all the time. The opposite would be true if fixed assets tend to change as the scale of operations changes.

True

Trend analysis allows us to analyze a firm's financial health and management by comparing itself at different points in time.

True

Question: Suppose the appropriate discount rate for dividends is 12%, growth rate is g = 2%. What is Firm D's share price P2036 most likely to be? Hint: 2036 would be one year from now (2035). Please choose the best answer.

$367.2

Question: What should be Firm C's total firm value? Please choose the best answer.

$4912.67

Question: What should be Firm C's value of operations? Please choose the best answer.

$7345.34

Which of the following is most likely to be correct about financial planning? Please choose the best answer.

. It helps managers to foresee the potential surplus and capital shortage and thereby making good decisions

Question: What is Firm B's operating profit margin?

10.86% EBIT/Sales

You are an individual who is considering where to invest your $50,000. Suppose we have the following relevant information: (1) Your personal income tax rate is 25.0%, (2) $50,000 to invest, (3) 12% interest rate (or yield) on corporate bond, and (4) 8% interest rate (or yield) on muni Question: At what tax rate would you be indifferent between the muni and the corporate bonds?

33.33%

DSO (days sales outstanding) measures the number of days a firm has to wait to receive cash payments for the credit sales it has made. It is better for the firm to have a longer DSO for a variety of reasons including enhanced customer satisfaction.

False

Firm A's 2035 Net Income is $500. Its Retained Earnings (RE) have increased from $50,678 in 2034 to $50,929 in 2035. Which of the following statements is most likely to be correct? Please choose the best answer.

Firm A paid a dividend of $249 in 2035

Question: If industry average of inventory turnover ratio is 12, which of the following statements is most likely to be correct? Please choose the best answer.

Firm B is doing much worse in managing its inventories compared to its industry peers

Which of the following balance sheet items is not considered a non-operating asset? Please choose the best answer.

Fixed Assets

Which of the following statements is most likely to be correct about the GROWTH function in Excel? Please choose the best answer.

GROWTH does forecasting based on exponential fitting

Which of the following is most likely to be WRONG about Excel's functions or commands? Please choose the best answer.

GROWTH does linear forecasting

Firm B's basic earning power (BEP) is 10% and is expected to remain the same over time. Which of the following statements is most likely to be correct? Please choose the best answer.

If Firm B's total assets remain unchanged, then its EBIT will remain the same as well

Which of the following is most likely to be correct about financial ratio analysis? Please choose the best answer.

It allows us to assess financial health and management of a firm by comparing firms of different sizes

Which of the following is most likely to be correct about the corporate valuation model we have learned in this class? Please choose the best answer.

It finds the value of operations by using forecasted free cash flows and the weighted average cost of capital

Which of the following statements is most likely to be correct about pro forma forecast? Please choose the best answer.

Some items on balance sheet and income statement change in proportion to sales change and some don't

Question: What is Firm E's (total) dividend in year 2040? Please choose the best answer.

The Given Information Is not Enough

Which of the following statements is most likely to be WRONG about the forecasting methods we have learned in this course? Please choose the best answer.

The forecasting method we have learned can be used even without any knowledge about prior sales

Which of the following is most likely to be correct about equity valuation? Please choose the best answer.

There are different equity valuation models based on different information, such as sales, FCFs, dividend, etc.

Business plans can be assessed through an implementation of pro forma forecasting

True

Given the same forecasted net income, a higher payout policy may increase stock price or decrease stock price, depending on the comparison between ROE and the required rate of return on equity.

True

Pro forma forecasting is a process of using the information about the firm's previous operations to estimate future financials, which normally involving creating the pro forma balance sheet and pro forma income statement.

True

Question: What is Firm B's current ratio

1.75 (Cash + ST investment + AR + Inv)/(Ap +NP+Accruals)

FCFs are affected by how much debt the firm borrows. Specifically, the more debt the firm borrows, the less are the FCFs.

False

If dividend policy is "constant dividend" every year, then forecasted net income will be constant as well. This is a known flaw of the pro forma forecast method.

False

P/E ratio tends to remain stationary over time, therefore once we know the forecasted EBIT and P/E ratio, we can predict equity value.

False

Which of the following statements is most likely to be correct? Please choose the best answer.

Pro forma forecasting is a powerful tool for making sound financial planning