FIN 301 practice exam

For a stock to be in equilibrium as the book defines it, its market price should exceed its intrinsic value.

True

Howton & Howton Worldwide (HHW) is planning its operations for the coming year, and the CEO wants you to forecast the firm's additional funds needed (AFN). Data for use in the forecast are shown below. However, the CEO is concerned about the impact of a change in the payout ratio from the 10% that was used in the past to 50%, which the firm's investment bankers have recommended. Based on the AFN equation, by how much would the AFN for the coming year change if HHW increased the payout from 10% to the new and higher level? All dollars are in millions. Last year's sales = S0 $300 Last year's accounts payable $50 Sales growth rate = g 40% Last year's notes payable $15 Last year's total assets = A0* $500 Last year's accruals $20 Last year's profit margin = PM 20% Initial payout ratio 10% New payout ratio50 %

AFN = (A0*/S0)ΔS - (L0*/S0) ΔS - Profit margin × S1 × (1 - Payout) Old AFN = $200.0 - $28.0 - $75.6 = $96.4 New AFN = $200.0 - $28.0 - $42 = $130,000 Change in AFN = $33.6

Which one of the following terms is defined as the mixture of a firm's debt and equity financing?

Capital Budgeting

Which of the following could explain why a business might choose to operate as a corporation rather than as a proprietorship or a partnership?

Corporations generally find it easier to raise large amounts of capital.

Which of the following statements is CORRECT? - Most businesses (by number and total dollar sales) are organized as proprietorships or partnerships because it is easier to set up and operate one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, primarily because corporations have important tax advantages over proprietorships and partnerships. - Due to legal considerations related to ownership transfers and limited liability, which affect the ability to attract capital, most business (measured by dollar sales) is conducted by corporations in spite of large corporations' less favorable tax treatment. - Large corporations are taxed more favorably than proprietorships. - Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S. businesses (in terms of number of businesses) are organized as corporations. - Corporate stockholders are exposed to unlimited liability

Due to legal considerations related to ownership transfers and limited liability, which affect the ability to attract capital, most business (measured by dollar sales) is conducted by corporations in spite of large corporations' less favorable tax treatment.

On 12/31/21, Hite Industries reported retained earnings of $472,500 on its balance sheet, and it reported that it had $135,000 of net income during the year. On its previous balance sheet, at 12/31/20, the company had reported $445,000 of retained earnings. No shares were repurchased during 2021. How much in dividends did the firm pay during 2021?

$107,500

Scranton Shipyards has $8.5 million in total invested operating capital, and its WACC is 10%. Scranton has the following income statement: Sales$10.0 millionOperating costs6.0 millionOperating income (EBIT)$ 4.0 millionInterest expense2.0 millionEarnings before taxes (EBT)$ 2.0 millionTaxes (25%)0.5 millionNet income$ 1.5 million What is Scranton's EVA? Answer options are provided in whole dollar

$2,150,000

Vasudevan Inc. recently reported operating income of $2.3 million, depreciation of $1.20 million, and had a tax rate of 25%. The firm's expenditures on fixed assets and net operating working capital totaled $0.60 million. How much was its free cash flow, in millions?

$2.325

Faldo Corp sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $395,000, and its year-end receivables were $60,000. If its DSO is less than the 45-day credit period, then customers are paying on time. Otherwise, they are paying late. By how much are customers paying early or late? Base your answer on this equation: DSO - Credit Period = Days early or late, and use a 365-day year when calculating the DSO. A positive answer indicates late payments, while a negative answer indicates early payments. Assume all sales to be on credit. Do not round your intermediate calculations.

10.44

Chang Corp. has $375,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $645,000, and its net income was $25,000. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%. What profit margin would the firm need to achieve the 15% ROE, holding everything else constant? Do not round your intermediate calculations.

8.72%

Which of the following statements is CORRECT? -Any forecast of financial requirements involves determining how much money the firm will need, and this need is determined by adding together increases in assets and spontaneous liabilities and then subtracting operating income. - The AFN equation for forecasting funds requirements requires only a forecast of the firm's balance sheet. Although a forecasted income statement may help clarify the results, income statement data are not essential because funds needed relate only to the balance sheet. - A negative AFN indicates that retained earnings and spontaneous capital are far more than sufficient to finance the additional assets needed. -If assets and spontaneously generated liabilities are not projected to grow at the same rate as sales, then the AFN method will provide more accurate forecasts than the projected financial statement method. -Dividends are paid with cash taken from the accumulated retained earnings account, hence dividend policy does not affect the AFN forecast.

A negative AFN indicates that retained earnings and spontaneous capital are far more than sufficient to finance the additional assets needed.

Which of the following statements is CORRECT? -An increase in a firm's total debt to total capital ratio, with no changes in its sales or operating costs, could be expected to lower its profit margin. -If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE. -The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio. -An increase in the DSO, other things held constant, could be expected to increase the ROE. -An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio.

An increase in a firm's total debt to total capital ratio, with no changes in its sales or operating costs, could be expected to lower its profit margin.

Alan and Sara Winthrop are a married couple who file a joint income tax return. They have two children, and they have legitimate itemized deductions totaling $25,750. Their total income from wages is $169,100. Assume the following tax table is applicable: What is the Tax Rate?

Average tax rate = Tax paid/Taxable incomeAverage tax rate = $23,416.00/$143,350Average tax rate = 16.33%

Kamath-Meier Corporation's CFO uses this equation, which was developed by regressing inventories on sales over the past 5 years, to forecast inventory requirements: Inventories = $22.0 + 0.125(Sales). The company expects sales of $125.0 million during the current year, and it expects sales to grow by 35% next year. What is the inventory forecast for next year? All dollars are in millions.

Current year's sales $125 Growth rate 35% Projected Sales $168.75 Required inventories = $22.0 + 0.125 × 168.75 = $43.1

Which of the following statements is CORRECT?

Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.

Which of the following actions would be most likely to reduce potential conflicts between stockholders and bondholders?

Including restrictive covenants in the company's bond indenture (which is the contract between the company and its bondholders).

Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?

Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries.

Assume that Congress recently passed a provision that will enable Bev's Beverages Inc. (BBI) to double its depreciation expense for the upcoming year but will have no effect on its sales revenue or the tax rate. Prior to the new provision, BBI's net income was forecasted to be $4 million. Which of the following best describes the impact of the new provision on BBI's financial statements versus the statements without the provision? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.

Net fixed assets on the balance sheet will decrease.

A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio?

Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable.

Which of the following statements is CORRECT? -Once a firm has defined its purpose, scope, and objectives, it must develop a strategy or strategies for achieving its goals. The statement of corporate strategies sets forth detailed plans rather than broad approaches for achieving a firm's goals. -Operating plans provide management with detailed implementation guidance, consistent with the corporate strategy, to help meet the corporate objectives. These operating plans can be developed for any time horizon, but many companies use a 5-year horizon. -A firm's mission statement defines its lines of business and geographic area of operations. -A firm's corporate purpose states the general philosophy of the business and provides managers with specific operational objectives. -The corporate scope is a condensed version of the entire set of strategic plans

Operating plans provide management with detailed implementation guidance, consistent with the corporate strategy, to help meet the corporate objectives. These operating plans can be developed for any time horizon, but many companies use a 5-year horizon.

Last year Godinho Corp. had $450 million of sales, and it had $75 million of fixed assets that were being operated at 80% of capacity. In millions, how large could sales have been if the company had operated at full capacity?

Sales $450 Fixed assets $75 % of capacity utilized 80% ​ Full capacity sales = Actual sales / % of capacity used = $562.5

Which of the following statements is CORRECT? -Stockholders in general would be better off if managers never disclosed favorable events and therefore caused the price of the firm's stock to sell at a price below its intrinsic value. -Relative to proprietorships, corporations generally face fewer regulations, and they also find it easier to raise capital. -Stockholders should generally be happier than bondholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns. - One disadvantage of operating as a corporation rather than as a partnership is that corporate shareholders are exposed to more personal liability than are partners. -There is no good reason to expect a firm's stockholders and bondholders to react differently to the types of assets in which it invests.

Stockholders should generally be happier than bondholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns.

Which of the following statements is CORRECT? -The basic earning power ratio (BEP) reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects. -The market/book (M/B) ratio tells us how much investors are willing to pay for a dollar of accounting book value. In general, investors regard companies with higher M/B ratios as more risky and/or less likely to enjoy higher future growth. -In general, if investors regard a company as relatively risky and/or having relatively poor growth prospects, then it will have relatively high P/E and M/B ratios. -It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets. -The "apparent," but not necessarily the "true," financial position of a company whose sales are seasonal can change dramatically during a given year, depending on the time of year when the financial statements are constructed.

The "apparent," but not necessarily the "true," financial position of a company whose sales are seasonal can change dramatically during a given year, depending on the time of year when the financial statements are constructed.

Which of the following statements is CORRECT? - The price/earnings (P/E) ratio tells us how much investors are willing to pay for a dollar of current earnings. In general, investors regard companies with higher P/E ratios as more risky and/or less likely to enjoy higher future growth. - The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company's operating efficiency is that the BEP does not reflect the effects of debt and taxes. -Suppose you are analyzing two firms in the same industry. Firm A has a profit margin of 10% versus a margin of 8% for Firm B. Firm A's total debt to total capital ratio is 70% versus 20% for Firm B. Based only on these two facts, you cannot reach a conclusion as to which firm is better managed, because the difference in debt, not better management, could be the cause of Firm A's higher profit margin. -Other things held constant, the less debt a firm uses, the lower its return on total assets will be. -The return on common equity (ROE) is generally considered less significant, from a stockholder's viewpoint, than the return on total assets (ROA).

The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company's operating efficiency is that the BEP does not reflect the effects of debt and taxes.

Last year, Delip Industries had (1) negative cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet. Which of the following factors could explain this situation?

The company sold a new issue of common stock.

Austin Financial recently announced that its net income increased sharply from the previous year, yet its net cash provided from operations declined. Which of the following could explain this performance?

The company's depreciation expense declined.

If a bank loan officer were considering a company's loan request, which of the following statements would be CORRECT, other things held constant?

The lower the total debt to total capital ratio, the lower the interest rate the bank should charge.

Which of the following actions would be likely to encourage a firm's managers to make decisions that are in the best interests of shareholders?

The percentage of the firm's stock that is held by institutional investors such as mutual funds, pension funds, and hedge funds rather than by small individual investors rises from 10% to 80%.

Corporate social responsibility may provide benefits to the firm such as product differentiation

True

The Sarbanes-Oxley Act of 2002 is a governmental response to:

management greed and abuses.