Financial Management Exam 1 Prep

Over the years, O'Brien Corporation's stockholders have provided $20,000,000 of capital, when they purchased new issues of stock and allowed management to retain some of the firm's earnings. The firm now has 1,000,000 shares of common stock outstanding, and it sells at a price of $38.50 per share. How much value has O'Brien's management added to stockholder wealth over the years, i.e., what is O'Brien's MVA? a. $18,500,000 b. $18,870,000 c. $19,247,400 d. $19,632,348 e. $20,024,995

a

Refer to Exhibit 4.1. What is the firm's ROA? a. 3.62% b. 3.98% c. 4.37% d. 4.81% e. 5.29%

a

Refer to Exhibit 4.1. What is the firm's equity multiplier? a. 3.85 b. 4.04 c. 4.24 d. 4.45 e. 4.68

a

Refer to Exhibit 4.1. What is the firm's inventory turnover ratio? a. 5.47 b. 5.74 c. 6.03 d. 6.33 e. 6.65

a

Scranton Shipyards has $20 million in total invested operating capital, and its WACC is 10%. Scranton has the following income statement: Sales $10.0 million Operating costs 6.0 million Operating income (EBIT)$ 4.0 million Interest expense 2.0 million Earnings before taxes (EBT)$ 2.0 million Taxes (40%) 0.8 million Net income$ 1.2 million What is Scranton's EVA? a. $400,000 b. $420,000 c. $441,000 d. $463,050 e. $486,203

a

The "over-the-counter" market received its name years ago because brokerage firms would hold inventories of stocks and then sell them by literally passing them over the counter to the buyer. a. True b. False

a

The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows. a. True b. False

a

Typically, the statement of stockholders' equity starts with total stockholders' equity at the beginning of the year, adds net income, subtracts dividends paid, and ends up with total stockholders' equity at the end of the year. Over time, a profitable company will have earnings in excess of the dividends it pays out, and will result in a substantial amount of retained earnings shown on the balance sheet. a. True b. False

a

Which of the following statements is CORRECT? a. Hostile takeovers are most likely to occur when a firm's stock is selling below its intrinsic value as a result of poor management. b. The efficiency of the U.S. economy would probably be increased if hostile takeovers were absolutely forbidden. c. The managers of established, stable companies sometimes attempt to get their state legislatures to remove rules that make it more difficult for raiders to succeed with hostile takeovers. d. In general, it is more in bondholders' interests than stockholders' interests for a firm to shift its investment focus away from safe, stable investments and into risky investments, especially those that primarily involve research and development. e. 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.

a

Which of the following statements is CORRECT? a. One advantage of forming a corporation is that equity investors are usually exposed to less liability than they would be in a partnership. b. Corporations face fewer regulations than proprietorships. c. One disadvantage of operating a business as a proprietor is that the firm is subject to double taxation, because taxes are levied at both the firm level and the owner level. d. It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required. e. If a partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business.

a

Which of the following statements is CORRECT? a. One drawback of forming a corporation is that it generally subjects the firm to additional regulations b. One drawback of forming a corporation is that it subjects the firm's investors to increased personal liabilities. c. One drawback of forming a corporation is that it makes it more difficult for the firm to raise capital. d. One advantage of forming a corporation is that it subjects the firm's investors to fewer taxes. e. One disadvantage of forming a corporation is that it is more difficult for the firm's investors to transfer their ownership interests.

a

Which of the following statements is CORRECT? a. The New York Stock Exchange is an auction market, and it has a physical location. b. Home mortgage loans are traded in the money market. c. If an investor sells shares of stock through a broker, then it would be a primary market transaction. d. Capital markets deal only with common stocks and other equity securities. e. While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.

a

Beranek Corp has $720,000 of assets (which equal total invested capital), and it uses no debt—it is financed only with common equity. The new CFO wants to employ enough debt to raise the total debt to total capital ratio to 40%, using the proceeds from borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio? a. $273,600 b. $288,000 c. $302,400 d. $317,520 e. $333,396

b

Hartzell Inc. had the following data for 2013, in millions: Net income = $600; after-tax operating income [EBIT(1 - T)] = $700; and Total assets = $2,000. Information for 2014 is as follows: Net income = $825; after-tax operating income [EBIT(1 - T)] = $925; and Total assets = $2,500. How much free cash flow did the firm generate during 2014? a. $383 b. $425 c. $468 d. $514 e. $566

b

Private markets are those like the NYSE, where transactions are handled by members of the organization, while public markets are those like the NASDAQ, where anyone can make transactions. a. True b. False

b

Refer to Exhibit 4.1. What is the firm's ROE? a. 13.21% b. 13.91% c. 14.60% d. 15.33% e. 16.10%

b

Refer to Exhibit 4.1. What is the firm's dividends per share? a. $1.14 b. $1.27 c. $1.39 d. $1.53 e. $1.68

b

Refer to Exhibit 4.1. What is the firm's quick ratio? a. 0.51 b. 0.64 c. 0.76 d. 0.92 e. 1.10

b

The balance sheet measures the flow of funds into and out of various accounts over time, while the income statement measures the firm's financial position at a point in time. a. True b. False

b

Carter Corporation has some money to invest, and its treasurer is choosing between City of Chicago municipal bonds and U.S. Treasury bonds. Both have the same maturity, and they are equally risky and liquid. If Treasury bonds yield 6%, and Carter's marginal income tax rate is 40%, what yield on the Chicago municipal bonds would make Carter's treasurer indifferent between the two? a. 3.42% b. 3.60% c. 3.78% d. 3.97% e. 4.17%

b (1-.4) x .06

The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to a. Maximize its expected total corporate income. b. Maximize its expected EPS. c. Minimize the chances of losses. d. Maximize the stock price per share over the long run, which is the stock's intrinsic value. e. Maximize the stock price on a specific target date.

d

Refer to Exhibit 4.1. What is the firm's EPS? a. $3.26 b. $3.43 c. $3.62 d. $3.80 e. $3.99

c

Refer to Exhibit 4.1. What is the firm's total assets turnover? a. 1.12 b. 1.40 c. 1.75 d. 2.10 e. 2.52

c

Royce Corp's sales last year were $280,000, and its net income was $23,000. What was its profit margin? a. 7.41% b. 7.80% c. 8.21% d. 8.63% e. 9.06%

c

Refer to Exhibit 4.1. What is the firm's total debt to total capital ratio? a. 48.55% b. 53.95% c. 59.94% d. 62.80% e. 68.11%

d

Hayes Corporation has $300 million of common equity, with 6 million shares of common stock outstanding. If Hayes' Market Value Added (MVA) is $162 million, what is the company's stock price? a. $66.02 b. $69.49 c. $73.15 d. $77.00 e. $80.85

d

Refer to Exhibit 4.1. What is the firm's TIE? a. 2.20 b. 2.45 c. 2.72 d. 3.02 e. 3.33

d

Refer to Exhibit 4.1. What is the firm's book value per share? a. $22.29 b. $23.47 c. $24.70 d. $26.00 e. $27.30

d

Refer to Exhibit 4.1. What is the firm's current ratio? a. 0.99 b. 1.10 c. 1.23 d. 1.36 e. 1.50

d

Refer to Exhibit 4.1. What is the firm's profit margin? a. 1.51% b. 1.67% c. 1.86% d. 2.07% e. 2.27%

d

Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders? a. Decrease the use of restrictive covenants in bond agreements. b. Take actions that reduce the possibility of a hostile takeover. c. Elect a board of directors that allows managers greater freedom of action. d. Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries. e. Eliminate a requirement that members of the board of directors have a substantial investment in the firm's stock.

d

Ajax Corp's sales last year were $435,000, its operating costs were $362,500, and its interest charges were $12,500. What was the firm's times-interest-earned (TIE) ratio? a. 4.72 b. 4.97 c. 5.23 d. 5.51 e. 5.80

e

Refer to Exhibit 4.1. What is the firm's days sales outstanding? Assume a 365-day year for this calculation. a. 39.07 b. 41.13 c. 43.29 d. 45.57 e. 47.97

e

Refer to Exhibit 4.1. What is the firm's market-to-book ratio? a. 0.87 b. 1.02 c. 1.21 d. 1.42 e. 1.67

e