MGMT 640 Midterm Exam

Ques. 1) Which of the following is not an advantage of the corporate form of business organization?

a. Sell debt or equity in public capital markets

b. Owners have limited liability

c. Owners are subject to double taxation

d. May continue in business in perpetuity

Ques. 2) Working capital management involves decisions related to the following:

a. Purchase of production machines

b. Extending credit to customers

c. Signing a 3 year lease for an office building

d. Negotiating with city officials a 2-year tax abatement plan for a new factory

Ques. 3) Which of the following statements is correct:

a. Market forces provide sufficient incentives for ethical behavior

b. It would be easier to do business if there were no ethical norms

c. Government regulations are necessary to ensure ethical behavior

d. An ethical culture with good internal controls promotes ethical behavior

Ques. 4) In 2010, Jack’s Art Gallery sold 200 original works of art for $1,240,520. The gallery acquired the works sold for $530,000. Each painting was framed using predesigned framing kits in the gallery’s own workshop. The firm bought 100 kits in January for $50,000, 100 kits in March for $60,000.,100 kits in May for $40,000 and 100 kits in August for $30,000. Other costs of operation, including salaries, supplies, rent, etc., totaled $200,000. The company depreciated its assets by $120,000 and paid interest on loans totaling $55,000. Assuming no other costs and that Jack’s Art Gallery used FIFO in its inventory management, the firm’s EBITDA for 2010 was:

a. $280,520

b. $230,520

c. $400,520

d. $440,520

Ques. 5) Jake Smith opened his Balinese coffee shop business in downtown Boise on January 1st 2010. On December 31st, 2010, he sat down with his accountant to figure out how his business had done in its first year and heaved a sigh of relief when his accountant reported that his EBT came to $20,000. Revenues, at $1,050,000 looked good. His expenses were as follows:

Salaries and benefits paid to employees $210,000

Jake’s own salary $100,000

Supplies (coffee, tea, milk, pastries, etc.) $620,000

Cost of Restaurant grade coffee machine $30,000

Miscellaneous operating costs $44,000

Interest on loan $12,000

How much did Jake’s accountant allocate for depreciation and amortization?

a. $44,000

b. $14,000

c. $4,000

d. $0.00

Ques. 6) Timber firewood company reported the following numbers in its 2010 income statement:

EBIT $520,000

Depreciation $35,000

Interest expenses $24,000

General expenses $110,000

If it’s marginal tax rate was 30%, what were Timber’s cash flows from operating activities for 2010?

a. $347,200

b. $382,200

c. $496,000

d. $520,000

Ques. 7) For the year ending June 30, 2008, the Austin Corporation has current assets of $ 275,000 and total assets of $ 900,000. It also has current liabilities of $ 150,000, equity of $ 200,000, and retained earnings of $ 100,000. The marginal tax rate for the firm is 30%. How much long-term debt does the firm have?

a) $ 250,000

b) $ 350,000

c) $ 315,000

d) $ 450,000

Ques. 8) The Johnson and Baker Company increased investments in foreign securities by $ 120,000, funded fixed asset acquisitions by $ 1,500,000, and sold $ 90,000 of long-term debt. Also, the firm had a net inflow of $ 300,000 from the sale of assets. What is the net cash used in investing activities?

a) $ 1,320,000

b) $ 1,230,000

c) $ 1,410,000

d) $ 1,800,000

Ques. 9) Net working capital is:

a) equal to the expenses on the income statement

b) a traditional measure of a firm’s liquidity

c) reduced by the firm’s outstanding treasury stock to determine profits

d) equal to total assets plus total liabilities

Ques. 10) Intangible Assets include all the following except:

a. Trademarks

b. Goodwill

c. Patents

d. Capital leases

e. All of the above

Ques. 11) Owners Equity consists of all the following except:

a. Additional paid in capital.

b. Par value stock

c. Debentures outstanding

d. Retained earnings

Ques. 12) On the statement of cash flows an increase in accounts receivables is considered:

a. A cash inflow

b. A use of cash

c. A source of cash

d. None of the above

Ques. 13) Which of the following best describes how corporations are taxed on dividend income?

a. Like individuals, corporations are taxed on all dividends received.

b. Seventy percent of dividend income received by corporations is tax exempt.

c. Varying amounts of dividend income received by corporations are tax-exempt, depending on the percent of the paying corporation that the receiving corporation owns.

d. In order to avoid triple taxation of earnings, dividend income received by one corporation from another in which it owns stock is 100% tax-exempt.

Ques. 14) Kleaner Kars has a return on assets of 6.75 percent, a total asset turnover rate of 1.3, and an equity multiplier of 1.6. Using the Dupont Identity, what is the return on equity?

a. 8.30 percent

b. 8.78 percent

c. 10.80 percent

d. 14.04 percent

e. 14.33 percent

Ques. 15) Jefferson and Sons has total assets of $807,200, total equity of $509,500, total sales of $945,300, and net income of $25,600. What is the profit margin?

a. 1.17 percent

b. 1.86 percent

c. 2.71 percent

d. 3.17 percent

e. 5.02 percent

Ques. 16) A firm has a debt-to-equity ratio of 0.5. What is the firm’s equity multiplier?

a. 0.33

b. 1.50

c. 0.50

d. 2.00

e. 5.00

Ques. 17) Knox Corp. plans to sell 1,000 units in 2011 at an average sale price of $40 each. Cost of goods sold will be 40% of the sale price. Depreciation expense will be $2,500, interest expense $1,500, and other expenses will be $3,000. Wessel’s tax rate is 35%. What will Knox Corp.’s net income be for 2011?

a. $ 9,500

b. $ 6,875

c. $14,200

d. $11,050

e. $28,430

Ques. 18) What is the return on stockholders’ equity for a firm with a net profit margin of 4.9 percent, sales of $350,000, an equity multiplier of 1.6, and total assets of $215,000?

a. 12.76%

b. 15.24%

c. 12.57%

d. 8.88%

Ques. 19) Assume a firm has an average inventory of $50,000, sales of $250,000, gross profit of $100,000, and net income of $25,000. The preferred formulation for an inventory turnover results in an inventory turnover of:

a. 1 time

b. 3 times

c. 4 times

d. 5.5 times

Ques. 20) The higher the rate of interest:

a. the smaller the future value of an amount invested to-day

b. the smaller the present value of a future sum of money

c. the larger the present value of a future sum of money

d. all of the above

Ques. 21) Holding all other variables constant, an increase in the interest rate will cause ________ to decrease.

a. Future values

b. Annuity payments

c. Present values

d. Growth rates

Ques. 22) You have just calculated the present value of the expected cash flows of a potential investment. Management thinks your figures are too low. Which of the following actions would increase the present value of your cash flows?

a. assume a longer stream of cash flows of the same amount

b. decrease the discount rate

c. increase the discount rate

d. a and b

Ques. 23) Ed Sloan wants to withdraw $25,000 (including principal) from an investment fund at the end of each year for five years. How should he compute his required initial investment at the beginning of the first year if the fund earns 10% compounded annually?

a. $25,000 times the future value of a 5-year, 10% ordinary annuity

of 1.

b. $25,000 divided by the future value of a 5-year, 10% ordinary

annuity of 1.

c. $25,000 times the present value of a 5-year, 10% ordinary annuity

of 1.

d. $25,000 divided by the present value of a 5-year,10% ordinary

annuity of 1.

Ques. 24) What amount will be in a bank account three years from now if $5,000 is invested each year for four years with the first investment to be made today?

a. ($5,000 x 1.260) + ($5,000 x 1.166) + ($5,000 x 1.080) + $5,000

b. $5,000 x 1.360 x 4

c. ($5,000 x 1.080) + ($5,000 x 1.166) +($5,000 x 1.260) +

d. ($5,000 x 1.360)

e. $5,000 x 1.080 x 4

Ques. 25) On January 1, 2004, Carly Company decided to begin accumulating a fund for asset replacement five years later. The company plans to make five annual deposits of $30,000 at 9% each January 1 beginning in 2004. What will be the balance in the fund, within $10, on January 1, 2009 ( one year after the last deposit)? The following 9% Interest factors may be used.

Present Value of Ordinary Annuity Future Value of Ordinary Annuity

4 periods 3.2397 4.5731

5 periods 3.8897 5.9847

6 periods 4.4859 7.5233

a. $195,699

b. $179,541

c. $163,500

d. $150,000

Ques. 26) Your uncle promises to give you $550 per quarter for the next five years starting today. How much is his promise worth right now if the interest rate is 8% compounded quarterly?

a. $9,173.14

b. $13,363.57

c. $13,630.84

d. $8,993.27

Ques. 27) Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

a. The periodic rate of interest is 1.5% and the effective rate of interest is 3%.

b. The periodic rate of interest is 6% and the effective rate of interest is greater than 6%.

c. The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%.

d. The periodic rate of interest is 3% and the effective rate of interest is 6%.

e. The periodic rate of interest is 6% and the effective rate of interest is also 6%.

Ques. 28) Suppose an ExxonMobil Corporation bond will pay $4,500 ten years from now. If the going interest rate on safe 10-year bonds is 4.25%, how much is the bond worth today?

a. $2,819.52

b. $2,967.92

c. $3,116.31

d. $3,272.13

e. $3,435.74

Ques. 29) You want to go to Europe 5 years from now, and you can save $3,100 per year, beginning one year from today. You plan to deposit the funds in a mutual fund that you think will return 8.5% per year. Under these conditions, how much would you have just after you make the 5th deposit, 5 years from now?

a. $18,369

b. $19,287

c. $20,251

d. $21,264

e. $22,327

Ques. 30) A portfolio with a level of systematic risk the same as that of the market has a beta that is:

a. equal to zero

b. equal to one

c. less than the beta of the risk-free asset

d. less than zero

Ques. 31) The expected return on KarolCo. stock is 16.5 percent. If the risk-free rate is 5 percent and the beta of KarolCo is 2.3, then what is the risk premium on the market assuming CAPM is true?

a. 2.5%

b. 5.0%

c. 7.5%

d. 10.0%

Ques. 32) Using the above information, what is the rate of return on the market?

a. 2.5%

b. 5.0%

c. 7.5%

d. 10.0%

Ques. 33) The expected return for Stock Z is 30 percent. If we know the following information about Stock Z:

Return Probability

Poor 0.2 0.25

Lukewarm ? 0.5

Dynamite! 0.4 0.25

What return will stock Z produce in the Lukewarm state of the world?

A) 20%

B) 30%

C) 40%

D) It is impossible to determine.

Ques. 34) The risks that diversification cannot eliminate are:

a. Interest rate risk.

b. risk due to a recession.

c. inflation risk.

d. systematic risk.

e. all of the above

Ques. 35) Kevin purchased a stock a year ago that pays a dividend. He has earned a 50%. The stock was purchased for $16 and is now worth $21. What is the amount of dividends received during the year?

a. $5

b. $4

c. $3

d. $2

Ques. 36) John is investing in the S&P 500. His expected return on the S&P 500 is 10% with a standard deviation of 4%. If John is investing $200,000, then what is the dollar range of returns that John can have with 90 percent confidence at the end of the year?

a. $212,000 – $228,000

b. $206,840 – $233,160

c. $204,320 – $235,680

d. $199,400 – $240,600

Ques. 37) Microsoft’s beta is 1. The risk free rate of return is 2%. If the expected return on the market is 12 percent, then the expected return on Microsoft is:

a. 12 percent

b. 15 percent

c. 8 percent

d. 10 percent

Ques. 38) What is the relationship between present value and future value interest factors?

A. The present value and future value factors are equal to each other.

B. The present value factor is the exponent of the future value factor.

C. The future value factor is the exponent of the present value factor.

D. The factors are reciprocals of each other.

E. There is no relationship between these two factors.

Ques. 39) An investment that costs $50,000 will return $15,000 operating cash flows per year for five years. Determine the net present value of the investment if the required rate of return is 14 percent. Should the investment be undertaken? ( Your answer might be slightly different due to rounding. Select the best answer from those available.)

A. Yes, the profit is $25,000.

B. No, the accounting return is less than 14%.

C. No, the net present value is negative at $11,045.

D. Yes, the net present value is positive at $1,496.50.

Ques. 40) What is the net present value of a project with the following cash flows if the required rate of return is 15 percent?

Year Cash Flow

0 -$42,398

1 13,407

2 21,219

3 17,800

A. -$1,574.41

B. -$1,208.19

C. -$842.12

D. -$2,991.34

E. $1,311.16