Financial Management

| September 28, 2018

1)
Which of the following is NOT an example of an agency cost?
A)
Paying an accounting firm to audit your financial statements
B)
Paying an insurance company to assure that building codes have been met for new
construction
C)
Paying a landscaping firm to maintain your firm’s grounds
D)
All of the above are agency costs.

2)
Which of the statements below is FALSE?
A)
Officers of a company or others who have a fiduciary responsibility to the
owners can trade on their acquired private information about the company prior
to the information being made public.
B)
One potential problem in the world of finance can arise when some owners or
potential owners have access to more information about a company than do
others.
C)
Regulation Fair Disclosure (or Reg FD) requires companies to release all
material information to all investors at the same time.
D)
The 10-K must be filed within sixty days after the end of the company’s fiscal
year.

3)
Dan Preston made $18,000 in the first movie he ever starred in. Dan soon made
more and more movies and more and more money. At a 46.18% rate of salary
increase per movie, how many movies did Dan make in order to earn $5,350,000 in
a single movie?
A)
84 movies
B)
34 movies
C)
22 movies
D)
15 movies

4)
A wealthy woman just died and left her pet cats the following estate: $50,000
per year for the next 15 years with the first cash flow today. At a discount
rate of 3.2%, what is the feline estate worth in today’s dollars?
A)
$588,352.84
B)
$607,180.14
C)
$750,000.00
D)
$774,000.00

5)
James is a rational investor wishing to maximize his return over a
20-year period. The current yield curve is inverted with one-year rates at
5.00% and 20-year rates at 3.50%. James will invest in the lower-rate 20-year
bonds if:
A)
he thinks rates will fall in the future and locking in long-term rates today
may provide the highest long-run average return.
B)
he thinks rates will rise in the future and locking in long-term rates today
may provide the lowest long-run average return.
C)
he thinks rates will remain flat at 5% in the future and locking in long-term
rates today will prevent him from appearing greedy to those without this
investment opportunity.
D)
James has no idea what to do and should just skip this question.

6)
Which of the choices below is FALSE?
A)
When issuing a putable bond, the firm anticipates that interest rates will rise
over the life of the bond.
B)
When issuing a callable bond, the firm anticipates that interest rates will
fall over the life of the bond.
C)
When issuing a callable bond, the firm anticipates that interest rates will
rise over the life of the bond.
D)
A putable bond is essentially the reverse of a callable bond.

7)
In ________ , current prices reflect the price history and trading volume of
the stock. It is of no use to chart historical stock prices to predict future
stock prices such that you can identify mispriced stocks and routinely
outperform the market.
A)
weak-form efficient markets
B)
strong-form efficient markets
C)
semi-strong-form efficient markets
D)
operational efficient markets

8)
Both assets A and B plot on the SML. Asset A has an expected return of 15% and
a beta of 1.7. Asset B has an expected return of 12% and a beta of 1.1. What is
the risk-free rate of return?
A)
5.0%
B)
6.5%
C)
11.5%
D)
It cannot be determined from this information.

9)
Lennon, Inc. is considering a five-year project that has an initial after-tax
outlay or after-tax cost of $80,000. The respective future cash inflows from
its project for years 1, 2, 3, 4 and 5 are: $15,000, $25,000, $35,000, $45,000
and $55,000. Lennon uses the net present value method and has a discount rate
of 9%. Will Lennon accept the project?
A)
Lennon accepts the project because the NPV is $129,455.25.
B)
Lennon accepts the project because the NPV is 79,455.25.
C)
Lennon accepts the project because the NPV is $49,455.25.
D)
Lennon accepts the project because the NPV is less than zero

10)
At the end of a project’s life, we will recover any initial increases in
________ from the beginning of the project.
A)
working capital
B)
depreciation
C)
taxes
D)
start-up costs

11)
Your firm has $2,000,000 available for investment in capital projects. Which
combination of projects is the best, given this budget constraint?

Project

Initial Investment

NPV

A

$750,000

$100,000

B

$1,500,000

$125,000

C

$500,000

$75,000

D

$500,000

$35,000

A)
B,C
B)
A,B,C
C)
A,B,C,D
D)
A,C,D

12)
An adjustment in the pro forma statement may be necessary for ________ expenses
in line with known changes to these expenses that may not correspond directly
with sales or production.
A)
cash
B)
credit
C)
selling, general, and administrative
D)
cash and credit

13)
Managing the relationship between current assets and current liabilities of the
firm in order to improve the flow of funds is called ________.
A)
the business operating cycle
B)
the cash conversion cycle
C)
working capital management
D)
the production cycle

14)
Ready Tees, an on line retailer of t-shirts, orders 100,000 t-shirts per year
from its manufacturer. The carrying cost is $0.10 per shirt per year. The order
cost is $500 per order. What is the optimal order quantity for the t-shirt
inventory (rounded to the nearest dollar)?
A)
1,581
B)
8,333
C)
15,841
D)
31,623

15)
The debt-to-equity ratios for Firm 1, Firm 2, Firm 3, and Firm 4 are 0.25,
0.35, 0.35, and 0.45, respectively. The earnings per share for Firm 1, Firm 2,
Firm 3, and Firm 4 are $4.5, $3.5, $3, and $2.5, respectively. Generally
speaking,which firm is placing fewer burdens on its borrowing?
A)
Firm 1
B)
Firm 2
C)
Firm 3
D)
Firm 4

16)
________ help us analyze whether a company is moving toward financial stress or
is using debt to benefit the company and ultimately, the owners of the company.
A)
Financial leverage ratios
B)
Asset management ratios
C)
Days’ sales in inventory
D)
Total asset turnover

17) Skiffertons
, an investment banking firm has proposed two types of payment plans for the IPO
being considered by Dakota Drilling, a manufacturer of oil drilling equipment.
The first is a firm commitment of $5,000,000. The second is a best effort in
which Skiffertons will receive $4.00 for every share sold up to a maximum of
$2,000,000 for the 500,000 shares being offered. How much money will BB earn
under the best efforts method if it is able to sell only 80% of the offering at
a price of $30.00 per share?
A)
$2,000,000
B)
$1,800,000
C)
$1,600,000
D)
$1,400,000

18)
Which of the statements below is FALSE?
A)
External lenders generally require the company to provide private information
about the company, its plans, current operations, and past performance.
B)
Corporate financing problems are really not all that different from personal
financing ones.
C)
If information is proprietary and the company feels that it could be helpful to
a competitor if it was to become public knowledge through lending, then the
company’s logical choice is to use internal funds if they are sufficient for
funding a new project.
D)
None of the above statements is false.

19)
John is in a high income-tax bracket and wishes to minimize current taxes
payable. He also has a sizeable current income and prefers high growth rates to
significant annual cash flow from his equity investments. Which of the
following dividend polices would John most likely prefer if we assume that the
dividend policy has no impact on the value of the firm and that the capital
gains tax rate is lower than the ordinary tax rate?
A)
High-dividend-payout policy
B)
No-dividend-payout policy
C)
Low-dividend-payout policy
D)
John would be indifferent to all of the dividend policies

20)
The difficulties of managing international business operations stem from three
special issues. Which of the choices below is NOT one of these?
A)
Political risk
B)
Differences in business practices
C)
Social fads
D)
Cultural differences

21)
Describe some of the items often disclosed in the financial notes. Please
provide at least 4 items.

22)
Consider the information below from a firm’s balance sheet for 2007 and 2008.

Current
Assets 2008 2007 Change
Cash
and Equivalents $1,561 $1,800 -$ 239
Short-Term
Investments $1,052 $3,010 -$1,958
Accounts
Receivable $3,616 $3,129 $ 487
Inventories $1,816 $1,543 $ 273
Other
Current Assets $ 707 $ 601 $ 106

Total
Current Assets $8,752 $10,083 -$1,331
Current
Liabilities
Accounts
Payable $5,173 $5,111 $ 62
Short-Term
Debt $ 288 $ 277 $
11
Other
Current Liabilities $1,401 $1,098 $ 303
Total
Current Liabilities $6,862 $6,486 $ 376

a)
What is the Net Working Capital for
2008?
b)
What is it for 2007?
c)
What is the Change in Net Working
Capital (NWC)?
d)
Assuming the Operating Cash Flows (OCF)
are $7,155 and the Net Capital Spending (NCS) is $2,372, what is the Cash Flow
from Assets?

23)
You need $32,000 at the end of 6 years. If you can earn 0.625% per month, how
much would you need to invest today to meet your objective?

24)
In January of 1997, the U.S. Consumer Price Index (CPI) stood at 159.1. By
January of 2011, the level had risen to 220.2. What was the average annual rate
of inflation over this time period as measured by the CPI? Please go out 2 decimal places.

25)
At what interest rate would you be indifferent to a lottery payout today of
$2,229,389.17, or 25 equal annual end-of-the-year payouts of $200,000? Please go out 2 decimal places.

26)
Willis has won the $4,700,000 state lottery and intends to save all of the
money for his retirement. He chooses to receive an annual cash flow of $235,000
for twenty years, with the first payment to be received one year from today.
How much money will be in his retirement account in twenty years if he can
reinvest his money at an annual rate of 6.75%?

27)
Why are there different interest rates on loans and securities? Please provide
at least 2 reasons.

28)
You pay down 10% on a home with a purchase price of $280,000. The bank will
loan you the remaining balance of $252,000 at 8.23% APR. You have an option to
make annual payments or monthly payments on the loan. Both options have a
30-year payment schedule.
a) What are the annuity payments under the
annual plan?
b) What are the annuity payments under the monthly
plan?
c) In terms of the total cash outflows and the
effective cost of borrowing, briefly compare both plans.

29)
Callable and putable bonds add options to an ordinary bond. These options may
be exercised at the discretion of the bondholder in one type, or the bond
issuer in the other. Describe callable and putable bonds. In your description,
be sure to include which party has the option to exercise, and the impact of
the option on the price of the bond.

30)
Jayhawk Corp. is selling for $30 a share. In looking at the stream of dividends
over the past ten years, you find out that the first dividend was $1.00 and the
last dividend was $2.00. Please go out 2 decimal places.
a) What is its growth rate?
b) What is its expected return?

31)
Richard owns the following portfolio of securities. What is the beta for the
portfolio? Please go out 2 decimals.

Company

Beta

Percent of Portfolio

Apple

2.50

25%

Wells Fargo

0.65

50%

Ebay

1.70

25%

32)
Describe four of the six decision models used in capital budgeting
decision-making and briefly evaluate their effectiveness.

33)
Winston Co. purchases an asset for $60,000. This asset qualifies as a
seven-year recovery asset under MACRS. Winston has a tax rate of 30%. The
seven-year fixed depreciation percentages for years 1, 2, 3, 4, 5, and 6 are
14.29%, 24.49%, 17.49%, 12.49%, 8.93%, and 8.93%, respectively. If the asset is
sold at the end of six years for $10,000, what is the cash flow from disposal?

34)
Garson Corp. is looking at two possible capital structures. Currently, the firm
is an all-equity firm with $1.2 million dollars in assets and 200,000 shares
outstanding. The market value of each share of stock is $6.00. The CEO of
Garson is thinking of leveraging the firm by selling $600,000 of debt financing
and retiring 100,000 shares, leaving 100,000 outstanding. The cost of debt is
10% annually, and the current corporate tax rate for Garson is 30%. If the CEO
believes that Garson will earn $100,000 per year before interest and taxes,
should she leverage the firm? Explain.
Answer
Hint: Find the EPS under the two financing structures with an EBIT of $100,000:

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