accounting questions

| October 22, 2018

1.Which of the following is/are true?
I. When the times interest earned ratio falls below 1.0, the viability
of the firm is threatened because the firm does not generate
sufficient earnings to make interest payments when due.
II. If a firm’s quick ratio is 3.0, it is possible for its current ratio to
be larger than 3.0.
III. Positive earnings always indicate positive EVA (economic value added).
IV. If a firm’s total asset turnover ratio is 1.0, its annual sales are less
than its total assets. (Points : 3.5)

III & IV
II
II and III
I and II

2.Which of the following is/are false?
I. The EBITDA multiple is useful in determining an acquisition price when a
firm is considering buying another firm.
II. The bid quote on a security from a dealer is always greater
than the ask quote on a security.
III. Trading on the NYSE is conducted by members of the exchange. The
members that execute orders and act as agents on behalf of their clients
are floor brokers.
IV. The difference between the bid price and the ask price on a security is
the asset factor. (Points : 3.5)

All of the above
II and IV
II, III and IV
None of the above

Question
3. 3.Which of the following is/are false?
I. A common-size balance sheet shows the firm’s assets and liabilities as a
percentage of total assets.
II. The average collection period is the average number of days an accounts
receivable remains outstanding.
III. If a firm wishes to retain the same return on equity when its net
profit margin and total asset turnover has declined, it must increase its
equity multiplier.
IV. An average collection period substantially below the industry
norm may indicate that the firm’s credit policy is hurting sales by
restricting credit to the very best customer. (Points : 3.5)

I, II and IV
II
II and III
None of the above

4.Which of the following is/are true?
I. In an efficient capital market, all security investments will have a positive
NPV.
II. In an efficient capital market, corporate diversification is inexpensive
and necessary.
III. The fact that no investor can expect to earn excess returns based on
an investment strategy using only historical stock price or return
information is an example of weak-form market efficiency.
(Points : 3.5)

I and II
I and III
III
II and III
All of the above

Question
5. 5.Which of the following is/are false?
I. The shareholder wealth maximization goal states that management should
seek to maximize the compound value of the expected future returns
to the owners of the firm.
II. The primary reason for the agency problem between the stockholders
and managers is because of the separation of ownership and
management.
III. Protective covenants in a company’s bond
indentures are used in agency relationships involving creditors and
managers.
IV. Altman’s bankruptcy prediction model identifies five financial ratios
to predict bankruptcy of firms.
(Points : 3.5)

I, III and IV
I and II
II and IV
I and III

6.Which of the following is/are true?
I. Liquidity ratios indicate the firm’s capacity to meet its short-term
financial obligations and long-term financial obligations.
II. Financial leverage ratios indicate the firm’s capacity to meet its
short-term financial obligations, but not its long-term financial
obligations.
III. Asset management ratios indicate how efficiently a firm is using its
assets to generate sales.
IV. Profitability ratio indicates how effectively a firm generates profits
on sales, assets and stockholder’s equity. (Points : 3.5)

II, III and IV
I, II and III
III and IV
I and II

Question
7. 7.Which of the following is true? (Points : 3.5)

If you’re a financial manager of a MNC (U.S. based) and you anticipate that
your company will receive C$3 million 3 months later, to hedge
your currency risk, you’d probably BUY 3-month forward/futures
contracts for C$3 million or BUY call options for C$3 million
expired 3 months later.
If the present value of a given sum is
equal to its future value, then the discount rate must be equal to one.
The nominal annual rate of interest is
always equal to or less than the effective annual rate of
interest.
An exchange rate quoted as USD 0.99 per
Japanese Yen in Japan is known as a direct
quote.

Question
8. 8.Which of the following is true? (Points : 3.5)

When a loan is amortized over a ten-year term, the amount of interest
paid increases each year.
In preparing a statement of cash flows,
the indirect method involves adjusting net income to reconcile
it to net cash flows from operating activities.
An ordinary annuity is the
annuity in which the payments or receipts occur at the beginning
of each period.
All of the above

9.After-tax cash flow equals:
(Points : 3.5)

earnings after taxes plus non-cash charges
net earnings plus deferred
expenses
net earnings plus depreciation
earnings after taxes

Question
10. 10.Which of the following is defined as the systematic
allocation of the cost of an asset over a specified period of time? (Points
: 3.5)

Expensing
Depreciation
Optimizing
Deferred Taxes

11.Mac Inc. is considering issuing
additional long-term debt to finance an investment opportunity. Currently,
Mac has $180 million in 14% debt outstanding. Its after-tax net income is
$63 million, and the company is in 30 percent tax bracket. What is Mac’s
current times interest earned ratio? (Points : 3.5)

5.18 times
3.92 times
4.57 times
3.33 times

Question
12. 12.Continued from Q11, Mac Inc. is required by debt holders to
maintain its times earned interest ratio at 3.2 or greater. How much
additional 14% debt can Mac issue now to maintain its time interest earned
ratio at 3.2? Assume for this calculation that earnings before
interest and taxes remains at its present level. (Points : 3.5)

$47.62 million
$77.14 million
$19.05 million
$24.63 million

Question
13. 13.Mr. Moore wants to purchase a new car. He knows that he can
afford to pay $4,720 per year and that his bank will charge him 8% interest
on the car loan. He intends to pay off the car in 8 years. Interest will be
compounded annually. Of the following, which is the most
expensive vehicle in his price range that he could consider?
(Points : 3.5)

A Mercedes-Benz for $29,900
A Regal selling for $29,015
Prius selling for $26,750
A Malibu selling for $22,140

14.Andy just won an $80,000,000
lottery in Washington. Instead of receiving a lump sum, he found that he
would receive $3,200,000 annually (end of year) for 25 years. Andy is 65
years old and wants his money now. He has been offered $25,778,500 to sell
his ticket. What rate of return is the buyer expecting to make if
Andy accepts the offer? (Points : 3.5)

less than 10%
13.64%
15.43%
11.62%

Question
15. 15.German Motors exports cars to the U.S. Market. On January
20, 2008, its most popular model was selling (wholesale) to U.S. dealers
for $45,500 (US dollars). What price must German Motors charge for
the same model on January 29, 2013 to realize the same amount of euro (€)
as it did in 2008. ($0.9150/€ on 1/20/08 and $0.9950/€ on 1/29/2013)
(Points : 3.5)

$43,111.11
$53,443.30
$41,841.71
$49,478.14

16.You are given the information of
firm A and B for their performance evaluation.
Firm A
B
Sales 25
22
EAT 6 6
Total Assets 50
40
Stockholder’s Equity 25 25
Suppose the industry average of net profit margin ratio, total asset
turnover and equity multiplier is around 20%, 0.53 times and 1.6
respectively.
Which of the following is true? (Points : 3.5)

Firm A shall restructure its capital structure to achieve a higher financial
leverage since it appears to be lower than the industry average.
Firm B shall improve its total asset
turnover ratio since it is higher than the industry average and thus
indicates an inefficient utilization of assets.
Firm A shall improve its total asset
turnover ratio since it is lower than the industry average and thus indicates
an inefficient utilization of assets.

Question
17. 17.A firm with an equity multiplier of 2.5, will have a debt
ratio of (Points : 3.5)

2.5
0.6
0.75
4.0

Question
18. 18.If the spot rate for the Japanese yen is $0.0092 per
Japanese yen and the 2-month forward rate is $0.0093 per Japanese yen, what
is the annualized premium (discount) for the 2-month forward quote on the
Japanese Yen, i.e., the annualized Japanese Yen forward premium (discount)
relative to dollars? (Points : 3.5)

discount of 6.52%
discount of 4.35%
premium of 6.52%
premium of 4.35%

19.Three years ago you bought 100
shares of Pike Company’s convertible preferred stock at $40 per share. The
preferred stock had an annual dividend of $3.50 per share, and a total of
$8.25 in dividends per share have been paid so far. Today the company
announced that the stock is redeemable for $45.25 plus accrued and unpaid
dividends, for a total of $47.50. Alternatively, holders may convert their
shares of preferred stock at a conversion rate of 1.03 shares of Pike
Company’s common stock for each share of preferred stock. If the closing
price of Pike Company’s common stock is $47.00, what is your holding
period return based on your optimal decision? (Points : 3.5)

39.375%
41.650%
21.025%
18.750%

Question
20. 20.You would like to endow a chair at Indiana University for
$178,500 per year. At 12% interest, how much do you need to donate? (Points
: 3.5)

$1,785,000
$1,487,500
$1,599,750
$14,875,000

Question
21. 21.What is the return on stockholders’ equityfor
a firm with a net profit margin of 3.2 percent, sales of $525,000, an
equity multiplier of 3.0, and total assets of $375,000? (Points : 3.5)

9.93%
12.75%
13.44%
6.86%

22.Sees Inc. has an agreement with
it banks that allow Sees to borrow money on a short term basis to finance
its inventories and accounts receivable. The agreement requires Sees to
maintain a current ratio of 4.0 or higher and a debt ratio of 60% or lower.
From the balance sheet, Sees has total assets of $1,375,000, current assets
of $875,000, and total debts of $800,000 (consist of current liabilities of
$198,750 and long-term debt of $601,250). Determine how much Sees
could borrow this time to invest in inventory and accounts receivable
without violating the terms of its borrowing agreement. (Points :
3.5)

$62,500.00
$26,666.67
$23,000.00
$41,666.67

Question
23. 23.Your monthly statement from your bank credit card shows that
the monthly rate of interest is 4.8%. What is the annual effective rate of
interest you are being charged on your credit card if it’s compounded
monthly? (Points : 3.5)

14.40%
75.52%
15.39%
8.09%

24.Over the past 10 years, your
$15,000 in gold coins has increased value by 280 percent. You plan to sell
these coins today. You have paid annual storage and insurance costs of
$1520 per year. Assay expenses at the time of sales are expected to total
$1450. What is your 10-year holding period return to this investment?
(Points : 3.5)

230.20%
139.00%
160.20%
169.00%

Question
25. 25.In 2012, the JCrew Company’s sales were $15.0 million. Its
balance sheet at year end 2012 is shown below. JCrew’s 2013 sales are
expected to be $21 million. Earnings after tax is expected to be 10.0% of
sales, and annual dividends of $800,000 are expected to be paid in 2013.
The company presently has excess plant and equipment capacity. As a result,
assume that the net fixed asset figure on the balance sheet will remain
constant for 2013. Assuming that the ratios of assets (except fixed assets,
net) to sales and accounts payable to sales in 2012 remain the same in
2013, calculate the total amount, i.e., one number, of external
financing required for 2013, using the percentage of sales method.

JCrew Co. Balance Sheet
(December 31, 2012)($ millions)
Current assets:
Current
liabilities:
Cash $0.5 Accts.
payable $0.7
Accts. Rec. 1.5 Notes payable

0.8
Inventory
2.5
Long-term
debt
2.3
Fixed assets, net 1.5 Stockholders’
equity
2.2
Total Assets
$6.0 Total Liabilities and Equity
$6.0 (Points : 3.5)

$750,000
$220,000
$835,000
None of the above

26.Tim borrowed $3,000 to purchase
a computer. The loan is to be repaid in 3 equal annual end of year
installments. The interest on loan is 10%, compounded annually. What is the
loan payment per year? (Points : 3.5)

$1000.00
$1,206.34
$1,987.10
None of the above

Question
27. 27.The Podrasky Corporation is considering an $80 million
expansion (capital expenditure) program next year. The company wants
to determine approximately how much additional financing will be needed if
the expansion program is undertaken. Next year the company expects
to earn $55 million after interest and taxes. The company also plans to
increase its dividends from $10 million to $15 million. If the expansion
program is accepted, the company expects its current assets needs to
increase by approximately $25 million next year. Long-term debt retirement
obligations total $2 million next year and depreciation is expected to be
$20 million. No fixed assets are expected to be sold next year. (Points :
3.5)

$28 million
$33 million
$47 million
$38 million

Question
28. 28.Neiman Company has revenues of $120,000, general &
administrative expenses of $37,500, interest expense of $54,500 and
depreciation expense of $25,500. The company also purchased a new equipment
for $35,000 –This belongs to investment in fixed assets. The firm is in the
40% tax bracket. What would be the firm’s cash flow from operations?
(Points : 3.5)

$1,500
$27,000
$2,500
None of the above

29.TTT Inc has current sales of $40
million. Sales are expected to grow to $65 million next year. TTT currently
has accounts receivable of $25 million, inventories of $10 million, and the
net fixed assets of $30 million. These assets are expected to grow at the
same rate as sales over the next year. Accounts payable are expected to
increase from their current level of $15 million to a new level of $22
million next year. TTT wants to increase its cash balance at the end of
next year by $5 million. Earnings after taxes next year are forecasted to
be $12 million. Next year, TTT plans to pay dividends of $1.5 million.
How much external financing is required by TTT next year?
(Points : 3.5)

$28.125 million
$18.125 million
$16.375 million
$8.375 million

Question
30. 30.Chase Bank has granted you a ten year loan for $210,000. If
your ten annual end of the year payments are $35,500, what is the rate of
interest Chase Bank is charging (the interest is compounded annually)?
(Points : 3.5)

10.89%
6.90%
8.25%
None of the above

31.The stock of UCD has just been
sold in an initial public offering at a price of $165 per share. One week
after this offering, the stock has risen to $195. You believe the stock will
rise to $245 over the coming year. You expect UCD to pay a $15 dividend
during the coming year. If you require a rate of return of 30%, do you
believe this is a good investment at the current price of $195? (Points :
3.5)

Yes, the holding period return is 33.33% greater than 30%.
No, the holding period return is 25.64%
less than 30%.
No, the holding period return is 23.08%
less than 30%.
No, the holding period return is 15.38%
less than 30%.

32.
You are preparing a cash
budget for A&M Inc. for the first quarter of 2012. You have
summarized the following information.
A&M Inc.
Cash Budget Worksheet
First Quarter, 2012
December January
Estimated Sales

$825,000 $610,000
Estimated Credit
Sales
750,000 550,000
Estimated Receipts:
Cash sales

60,000
Collections of Accounts Receivable
75% of last month’s credit
sales
562,500
25% of current month credit
sales

137,500
Total Accounts Receivable collections
700,000
Estimated purchases
$538,000 304,210
Estimated payments of accounts payable
538,000
304,210
Other
estimated disbursements for January 2012, include
____________________________
Wages and Salaries $187,500
Rent
37,000
Other Expenses
25,000
Tax
Payments 108,000

A&M’s projected cash balance at the beginning of January is
$85,000 and the company desires to maintain a balance of $75,000 at the
end of each month. What is the amount of short-term loan required
to meet the desired level of cash balance at the end of January?
(Points
: 3.5)

$75,000.
$125,500.
$24,500
None of the above

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