FIN 340 Review
Current assets and current liabilities refer to those balance sheet items that can be converted to cash or due within a year. A) True B) False
A) True
Which of the following balance sheet items is not considered a non-operating asset? Please choose the best answer. A. Fixed assets B. Short-term investment C. Investment D. Marketable securities
A. Fixed assets
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. A) True B) False
B) False
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? A) 30.00% B) None of the rest is correct C) 33.33% D) 25.00% E) 50.00% F) The given information is insufficient to find the answer
C) 33.33%
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. A) Firm A paid $251 in dividend in 2035 B) Firm A paid a cash dividend of $500 in 2035 C) Firm A paid a dividend of $249 in 2035 D) Firm A may have paid nothing in 2035 E) Firm A paid a dividend more than $500 in 2035. F) None of the rest is correct
C) Firm A paid a dividend of $249 in 2035
Firm C has the following forecasted FCFs. Year (now) 1 2 3 4 5 ...... FCF $100 $100 $100 $100 $100 ...... Notice, the FCF stream is a regular perpetuity, or it is a regular growing perpetuity with a constant growth rate g = 0%. Assume WACC = 8%, and Firm C has $127 non-operating assets. Question: What should be Firm C's total firm value? A. $1,123 B. $1,127 C. $1,377 D. $1,000 E. $1,250 F. None of the rest is correct
C. $1,377
Firm A has following information: 2030 2031 Sales $1,000 $1,500 EBIT $400 $700 Cash $50 $80 Inventories $90 $120 Short-term investment $100 $200 Accounts receivable (AR) $360 $400 Notes payable (NP) $20 $0 Accounts payable (AP) $320 $440 Accruals $20 $30 Net fixed assets (NFA) $1,200 $1,500 Tax rate 20% 20% A) None of the rest is correct B) $400 C) $560 D) $320 E) $700 F) The given information is insufficient to find the answer
D) $320
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. A) Firm A has invested $100 in a bank B) Firm A's bank debt is $100 C) Firm A has sold $100 worth of long-term bonds D) Firm A has increased its outstanding short-term loans (typically bank loans) by the amount of $100 E) Firm A will most likely pay more debt interest F) None of the rest is correct
D) Firm A has increased its outstanding short-term loans (typically bank loans) by the amount of $100
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. True False
False
Dividend payout policy can directly affect equity value even if the firm's net income does not change. True False
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 False
True
Which of the following statements is most likely to be correct? Please choose the best answer. A. Pro forma forecasting is a powerful tool for making sound financial planning B. None of the rest is correct C. Financial planning is pro forma forecasting D. Financial planning is ratio analysis E. Financial planning is more important than financial ratio analysis
A. Pro forma forecasting is a powerful tool for making sound financial planning
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. A. The forecasting method we have learned can be used even without any knowledge about prior sales B. Exponential forecast of sales assumes that the increments are likely bigger as sales increase C. Linear forecast assumes the increments are more or less constant every year D. None of the rest is correct E. Forecasting sales assumes that future sales have certain similarities to the past sales
A. The forecasting method we have learned can be used even without any knowledge about prior sales
Firm E has the following financial information: Year 2040 2041 2040 2041 (From balance Sheet) Income Statement LIABILITIES & EQUITY Sales $7,200 $8,100 Accounts Payable (A/P) $800 $900 Cost of Goods Sold (COGS) $5,600 $6,300 Notes Payable (N/P) $500 $500 Depreciation and Amortization $500 $500 Accruals $420 $456 Other Expenses $420 $420 Long-term Debt (bonds) $1,609 $1,609 EBIT $680 $880 Common Stock $533 $533 Interest Expense $400 $400 Retained Earnings $6,162 $6,301 Tax Rate 25% 25% Taxes @ 25% $70 $120 Total L&E $10,024 $10,299 Net Income $210 $360 Question: What is Firm E's (total) dividend in year 2040? Please choose the best answer. A. $71 B. None of the rest is correct C. $221 D. $130 E. $139 F. $150 G. The given information is not enough
C. $221
FCFs are affected by how much debt the firm borrows. Specifically, the more debt the firm borrows, the less are the FCFs. True False
False
Notes Payable belongs to financing activities. It is not considered an operating item in balance sheet. True False
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 False
True
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. A) True B) False
B) False
Firm E has the following financial information: Year 2040 2041 2040 2041 (From balance Sheet) Income Statement LIABILITIES & EQUITY Sales $6,200 $6,902 Accounts Payable (A/P) $622 $650 Cost of Goods Sold (COGS) $4,500 $4,750 Notes Payable (N/P) $515 $515 Depreciation and Amortization $350 $350 Accruals $400 $415 Other Expenses $420 $450 Long-term Debt (bonds) $1,239 $1,239 EBIT $930 $1,110 Common Stock $204 $204 Interest Expense $230 $230 Retained Earnings $1,905 $2,300 Tax Rate 25% 25% Taxes @ 25% $175 $220 Total L&E $4,885 $5,323 Net Income $525 $660 Question: What is Firm E's (total) dividend in year 2041? Please choose the best answer. A. The given information is not enough B. $395 C. $130 D. $135 E. None of the rest is correct F. $265
F. $265
Corporate valuation model allows us to find the value of a firm. It cannot be applied to project valuation. True False
False
Short-term operating assets normally include Cash, Short-term investment, Accounts Receivable and Inventories. True False
False
The accuracy of pro forma forecasting increases in the number of previous years whose data are used. True False
False
We cannot use the corporate valuation model to find the value of equity because it only gives the total firm value. True False
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. True False
False
Business plans can be assessed through an implementation of pro forma forecasting. True False
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 False
True
Trend analysis allows us to analyze a firm's financial health and management by comparing itself at different points in time. True False
True
Firm A has following information: 2030 2031 Sales $1,000 $1,500 EBIT $400 $700 Cash $50 $80 Inventories $90 $120 Short-term investment $100 $200 Accounts receivable (AR) $360 $400 Notes payable (NP) $20 $0 Accounts payable (AP) $320 $440 Accruals $20 $30 Net fixed assets (NFA) $1,200 $1,500 Tax rate 20% 20% Question: What is Firm A's FCF in 2031? A) $50 B) $290 C) None of the rest is correct D) $830 E) $560 F) The given information is insufficient to find the answer
B) $290
All items that carry the unit of USD ($) 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. A) True B) False
B) False
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 False
True
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. A) None of the rest is correct B) Firm A's customers are owing Firm A $100 C) Firm A's customers have owed Firm A $100 more D) Firm A's customers have owed Firm A $80 more E) Firm A owes its suppliers $100 more F) Its sales have increased by $120 G) Its sales have increased by $100
C) Firm A's customers have owed Firm A $100 more
Which of the following statements is most likely to be correct? Please choose the best answer. A. ROE is based on (historical) book values hence it is useless for predicting future price B. Positive dividend growth is always rewarded by market C. None of the rest is correct D. As long as we can generate growth, the stock price would be higher than without growth E. Positive dividend growth may or may not help increase stock price, which has a lot to do with ROE and payout policy as well
E. Positive dividend growth may or may not help increase stock price, which has a lot to do with ROE and payout policy as well
Firm C has the following forecasted FCFs. Year (now) 1 2 3 4 5 ...... FCF $100 $150 $200 $200*(1+g) $200*(1 + g)2 ...... The first two year's FCFs are irregular. But starting from Year-3, Firm C's FCFs become a regular growing perpetuity with a constant growth rate g = 3%. Assume WACC = 7%, and Firm C has $321 non-operating assets. Question: What should be Firm C's total firm value? Please choose the best answer. A. $3,041.01 B. None of the rest is correct C. $4,591.67 D. $2,000.00 E. $4,626.96 F. $4,912.67
F. $4,912.67
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. True False
False
Firm B has the following financial information: Balance Sheet Income Statement ASSETS LIABILITIES & EQUITY Sales $5,800 Cash $120 Accounts Payable (A/P) $607 Cost of Goods Sold (COGS) $4,670 Short-term investment $7 Notes Payable (N/P) $130 Depreciation and Amortization $300 Accounts Receivable $650 Accruals $198 Other Expenses $200 Inventories $860 Long-term Debt (bonds) $1,200 EBIT $630 Gross fixed assets (FA) $3,507 Common Stock $200 Interest Expense $108 Less: Depreciation $1,200 Retained Earnings $1,609 Tax Rate 25% Net Fixed Assets (NFA) $2,307 Taxes @ 25% $130.5 Total Assets $3,944 Total L&E $3,944 Net Income $391.5 Question: What is Firm B's quick ratio? A. None of the rest is correct B. 0.38 C. 1.75 D. 2.20 E. 1.12
A. None of the rest is correct
Which of the following is most likely to be WRONG about Excel's functions or commands? Please choose the best answer. A. None of the rest is correct B. LINEST does exponential fitting C. TREND can do a linear forecast D. GROWTH does linear forecasting E. FORECAST can do a linear forecast
D. GROWTH does linear forecasting
Which of the following is most likely to be correct about financial ratio analysis? Please choose the best answer. A. It converts all important financial ratios to dollar amounts hence making it easier to understand B. It converts financial ratios to dollar amounts so we can compare firms of different sizes C. None of the rest is correct D. It allows us to assess financial health and management of a firm by comparing firms of different sizes E. It is more useful for analyzing large firms
D. 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 financial planning? Please choose the best answer. A. It helps managers to foresee the potential surplus and capital shortage and thereby making good decisions B. The SEC requires all publicly traded firms to file quarterly report of financial planning C. It is about making plans for financial investment D. It helps investors to identify the best investment opportunities E. None of the rest is correct
A. It helps managers to foresee the potential surplus and capital shortage and thereby making good decisions
Firm C has the following financial information: Balance Sheet Income Statement ASSETS LIABILITIES & EQUITY Sales $6,200 Cash $125 Accounts Payable (A/P) $622 Cost of Goods Sold (COGS) $4,500 Short-term investment $10 Notes Payable (N/P) $515 Depreciation and Amortization $350 Accounts Receivable $750 Accruals $400 Other Expenses $420 Inventories $900 Long-term Debt (bonds) $1,239 EBIT $930 Gross fixed assets (FA) $4,500 Common Stock $204 Interest Expense $230 Less: Depreciation $1,400 Retained Earnings $1,905 Tax Rate 25% Net Fixed Assets (NFA) $3,100 Taxes @ 25% $175 Total Assets $4,885 Total L&E $4,885 Net Income $525 Question: What is Firm C's total operating capital? A. $5,253 B. None of the rest is correct C. $3,853 D. $3,335 E. $3,863 F. $3,348
C. $3,853
Firm B has the following financial information: Balance Sheet Income Statement ASSETS LIABILITIES & EQUITY Sales $5,800 Cash $120 Accounts Payable (A/P) $607 Cost of Goods Sold (COGS) $4,670 Short-term investment $7 Notes Payable (N/P) $130 Depreciation and Amortization $300 Accounts Receivable $650 Accruals $198 Other Expenses $200 Inventories $860 Long-term Debt (bonds) $1,200 EBIT $630 Gross fixed assets (FA) $3,507 Common Stock $200 Interest Expense $108 Less: Depreciation $1,200 Retained Earnings $1,609 Tax Rate 25% Net Fixed Assets (NFA) $2,307 Taxes @ 25% $130.5 Total Assets $3,944 Total L&E $3,944 Net Income $391.5 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. A. None of the rest is correct B. Firm B is similar to its competitors in terms of inventory management C. Firm B is doing much worse in managing its inventories compared to its industry peers D. Firm B is doing much better than its industry peers E. Firm B has a slightly higher inventory turnover ratio than industry average, therefore it's not too bad but still it should improve to catch up with its industry peers F. Firm B's managers should not worry about it
C. Firm B is doing much worse in managing its inventories compared to its industry peers
Which of the following statements is most likely to be correct about the GROWTH function in Excel? Please choose the best answer. A. GROWTH performs the same forecasting as FORECAST does B. None of the rest is correct C. GROWTH does forecasting based on exponential fitting D. GROWTH and LOGEST do the same thing - both tell us the constant exponential growth rate E. GROWTH can forecast for up to the next three years
C. GROWTH does forecasting based on exponential fitting
Which of the following statements is most likely to be correct about pro forma forecast? Please choose the best answer. A. Most financing items tend to change in proportion to sales change B. Retained earnings tend to change in proportion to sales change C. Some items on balance sheet and income statement change in proportion to sales change and some don't D. None of the rest is correct E. All items on balance sheet and income statement change in proportion to sales change
C. Some items on balance sheet and income statement change in proportion to sales change and some don't
Firm B has the following financial information: Balance Sheet Income Statement ASSETS LIABILITIES & EQUITY Sales $5,800 Cash $120 Accounts Payable (A/P) $607 Cost of Goods Sold (COGS) $4,670 Short-term investment $7 Notes Payable (N/P) $130 Depreciation and Amortization $300 Accounts Receivable $650 Accruals $198 Other Expenses $200 Inventories $860 Long-term Debt (bonds) $1,200 EBIT $630 Gross fixed assets (FA) $3,507 Common Stock $200 Interest Expense $108 Less: Depreciation $1,200 Retained Earnings $1,609 Tax Rate 25% Net Fixed Assets (NFA) $2,307 Taxes @ 25% $130.5 Total Assets $3,944 Total L&E $3,944 Net Income $391.5 Question: What is Firm B's operating profit margin? A. None of the rest is correct B. 6.75% C. 15.78 D. 10.86%
D. 10.86%
Firm D's dividends are forecasted be constant forever as follows 2035 (Now) 2036 2037 2038 2039 ... ... $15 $15 $15 $15 $15 ... 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. A. None of the rest is correct B. Infinitely large C. $165 D. $150 E. $100 F. $115 G. $315 H. $300
E. $100
Firm D's dividends are forecasted to follow the following pattern, 2035 (Now) 2036 2037 2038 ...... 2035 + t ...... $36 $36*(1+g) $36*(1+g)2 ...... $36*(1+g)t ...... 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. A. $300.0 B. $374.5 C. None of the rest is correct D. $360.0 E. $367.2
E. $367.2
Firm C has the following forecasted FCFs. Year (now) 1 2 3 4 5 ...... FCF $220 $330 $400 $400*(1+g) $400*(1 + g)2 ...... The first two year's FCFs are irregular. But starting from Year-3, Firm C's FCFs become a regular growing perpetuity with a constant growth rate g = 3%. Assume WACC = 8%, and Firm C has $624 non-operating assets. Question: What should be Firm C's value of operations? Please choose the best answer. A. $6,837.28 B. $6,721.34 C. $7,969.34 D. None of the rest is correct E. $7,345.34 F. $7,461.28
E. $7,345.34
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. A. None of the rest is correct B. It can only be applied to valuing corporations C. It should always give the same value as total assets in balance sheet D. It finds the PV of the Net Income that a firm is expected to generate E. It finds the value of operations by using forecasted free cash flows and the weighted average cost of capital
E. It finds the value of operations by using forecasted free cash flows and the weighted average cost of capital
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. True False
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. True False
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. True False
False
Firm A has following information: 2030 2031 Sales $1,000 $1,500 EBIT $400 $700 Cash $50 $80 Inventories $90 $120 Short-term investment $100 $200 Accounts receivable (AR) $360 $400 Notes payable (NP) $20 $0 Accounts payable (AP) $320 $440 Accruals $20 $30 Net fixed assets (NFA) $1,200 $1,500 Tax rate 20% 20% Question: What is Firm A's Return on Invested Capital (ROIC) in 2031? A) 108.67% B) 34.36% C) 8.67% D) None of the rest is correct E) 4.31 F) The given information is insufficient to find the answer
B) 34.36%
Firm B has the following financial information: Balance Sheet Income Statement ASSETS LIABILITIES & EQUITY Sales $5,800 Cash $120 Accounts Payable (A/P) $607 Cost of Goods Sold (COGS) $4,670 Short-term investment $7 Notes Payable (N/P) $130 Depreciation and Amortization $300 Accounts Receivable $650 Accruals $198 Other Expenses $200 Inventories $860 Long-term Debt (bonds) $1,200 EBIT $630 Gross fixed assets (FA) $3,507 Common Stock $200 Interest Expense $108 Less: Depreciation $1,200 Retained Earnings $1,609 Tax Rate 25% Net Fixed Assets (NFA) $2,307 Taxes @ 25% $130.5 Total Assets $3,944 Total L&E $3,944 Net Income $391.5 Question: What is Firm B's current ratio? A. 1.12 B. 1.75 C. None of the rest is correct D. 2.20 E. 0.38
B. 1.75
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 correct? Please choose the best answer. A. None of the rest is correct B. If Firm B's total assets remain unchanged, then its EBIT will remain the same as well C. If Firm B's fixed assets double, then its net income will double too D. If Firm B's total assets remain unchanged, then its net income will remain the same as well E. If Firm B's total assets remain unchanged, then its EBIT will increase by 10% F. If Firm B's fixed assets remain unchanged, then its net income will increase by 10%
B. 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 equity valuation? Please choose the best answer. A. None of the rest is correct B. There are different equity valuation models based on different information, such as sales, FCFs, dividend, etc. C. Equity value is the present value of all the future net incomes D. Equity valuation is about the equity value in the past E. Equity cash flows should be discounted by the weighted average of the cost of capital to determine equity value
B. There are different equity valuation models based on different information, such as sales, FCFs, dividend, etc.
Firm A has following information: 2030 2031 Sales $1,000 $1,500 EBIT $400 $700 Cash $50 $80 Inventories $90 $120 Short-term investment $100 $200 Accounts receivable (AR) $360 $400 Notes payable (NP) $20 $0 Accounts payable (AP) $320 $440 Accruals $20 $30 Net fixed assets (NFA) $1,200 $1,500 Tax rate 20% 20% Question: What is Firm A's Operating Profitability Ratio in 2030? A) The given information is insufficient to find the answer B) None of the rest is correct C) $50 D) 50% E) 40% F) 32%
F) 32%
