Lawrence Gitman - Principles of Managerial Finance (9th) Finance 301 (Chapters 1 through 6) First Examination Sample (Excluding the

Final Examination, my exams normally have 30 questions, extra questions are given here for your benefit) A. B. C. 1. Choose the one best answer. All computations based on 360 days. If the correct answer is not listed and "none of the above" is not a choice, select the closest answer. Asset Z has a beta ($z) of .7. The risk-free rate of return (RF) is .05 or 5 percent, while the return on the market portfolio of assets (km) is .12 or 12 percent. Asset Z's required rate of return (kZ) is: kz = RF + (km - RF) A. .049 B. .050 C. .070 (D.) .099 E. .120 In the capital asset pricing model (CAPM), the equation given in problem # 1, the beta coefficient is a measure of _______ risk and index of the degree of movement of an asset's return in response to a change in ________. A. diversifiable; the prime rate. B. market risk; the Treasury Bill rate. C. diversifiable; the bond index rate. (D.) market risk; the market risk premium (RPm). The Cleveland Indians Corporation has a year end 1998 retained earnings balance of $ 220,000. The firm reported net profits after taxes of $ 50,000 in 1999 and paid dividends in 1999 of $ 30,000. The firm's retained earnings balance at year end 1999 is _______. (A.) $ 240,000 B. $ 250,000 C. $ 270,000 D. $ 300,000 E. $ 324,000 The less certain a cash flow, the _______ the risk, and the _______ the present value of the cash of the cash flow. A. Lower; higher B. Lower; lower (C.) Higher; lower

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D. Higher; higher E. Nothing can be said here First Examination Finance 301 Page Two 5. For this course the goal of the corporation or the firm is assumed to be: A. Maximize earnings per share. B. Maximize the cash balance of the firm in the current period. C. Maximize the amount of net working capital that the firm has. (D.) Maximize shareholder's wealth (common stock price). E. Minimize risk. Which of the following set of balance sheet account changes contain changes that all USE FUNDS? A. Increased assets, increased liabilities, increased retained earnings. (B.) Increased assets, decreased liabilities, decreased retained earnings. C. Decreased assets, decreased liabilities, decreased retained earnings. D. Increased assets, increased liabilities, decreased retained earnings. E. Decreased assets, increased liabilities, increased retained earnings. The David Justis Corporation is considering a project that will yield cash flows for only one year: PROBABILITY OF OCCURRENCE .10 .15 .35 .10 .30 1.00 Calculate the expected net cash inflow for that one year. A. $ 30.00 B. $ 56.25 C. $ 64.50 D. $ 237.75 (E.) $ 431.75 POSSIBLE NET CASH INFLOWS $ 300 $ 375 $ 420 $ 455 $ 510

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First Examination Finance 301 Page Three 8. You are given the following investments: INVESTMENTS EXPECTED RETURN(MEAN) STANDARD DEVIATION(RISK) Security A $ 1,200 $ 240 Security B $ 2,400 $ 400 Calculate the COEFFICIENT OF VARIATION (not the coefficient of correlation) for both investments to determine which security has the greatest relative risk. (A.) Security A is riskier than Security B. B. Security B is riskier than Security A. C. With the information that is given you cannot make a relative comparison of risk between the two securities. D. Security A has the same relative risk as Security B. E. None of the above. 9. Under the current corporate tax law what is the relationship between the marginal federal income tax rate (mtr) and the average federal income tax rate (atr) for a corporation? A. These tax rates move inversely with each other (ie. as the mtr increases, the atr decreases or as the atr increases, the mtr decreases). B. These tax rates are equal to each other, as long as the corporation is earning more than $ 50,000 and less than $ 335,000. (C.) The marginal income tax rate is higher than the average income tax rate when taxable income exceeds $ 50,000 and is less than $ 335,000. The marginal income tax rate is also higher than the average income tax rate when income is over $10,000,000 and less than $18,333,333. D. The marginal income tax rate is always greater than the average tax rate over ALL INCOME LEVELS. E. None of the above are true. The Kenny Lofton Corporation purchased a machine two years ago for $ 100,000. The machine's current book value is $ 63,000. The Kenny Lofton Corporation is selling this machine for $ 85,000. If the Kenny Lofton Corporation's marginal ordinary tax rate is 34 percent, determine the tax

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on the sale of this machine. A. $ 6,160 (B.) $ 7,480 C. $ 10,120 D. $ 22,000 E. $ 35,140 First Examination Finance 301 Page Four 11. The Dwight Goodin Corporation had operating income of $ 800,000 (EBIT). This Corporation has a $ 60,000 operating carry back-carry forward loss that can be used to offset profits, the Dwight Goodin Corporation received an additional $ 22,000 of interest income that is not included in the $ 800,000 figure given above. The Corporation needs to pay $ 240,000 of interest on its bond liabilities and the Corporation also needs to pay $ 100,000 in dividends on its common stock. What is this Corporation's taxable income? (NOTE YOU ARE NOT BEING ASKED TO DETERMINE THE TAXES PAID, ONLY THE TAXABLE INCOME). A. $ 412,000 B. $ 582,000 C. $ 503,000 D. $ 762,000 (E.) $ 522,000 following for Problem #12: up to $ 50,000 from $ 50,000 to $ 75,000 from $ 75,000 to $ 100,000 from $ 100,000 to $ 335,000 at and above $ 335,000 to $10,000,000 from $10,000,000 to $15,000,000 from $15,000,000 to $18,333,333 at and above $18,333,333 .15 .25 .34 .39 Flat .34 .35 .38 Flat .35

Use the Income Income Income Income Income Income Income Income 12.

Determine the tax for the Sandy Alomar Corporation that earns $ 13,500,000. A. $ 1,225,000 B. $ 3,400,000 C. $ 4,590,000 (D.) $ 4,625,000 E. $ 4,725,000 Money market are market for

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(A.) B. C. D. E.

Short-term debt securities. Long-term bonds. Corporate stocks. Consumer automobile loans. Foreign currency exchange.

First Examination Finance 301 Page Five 14. Assume the following data for the Jim Thome Corporation which was organized in 19X2. 19X2 19X3 19X4 19X5 19X6 TAXABLE INC. $50,000 $100,000 ($300,000) $100,000 $100,000 Assume a straight or flat 40 percent tax rate (ie. for this problem ignore the tax schedule that was previously given), what is the tax liability for the Jim Thome Corporation in 19X6? A. $40,000 B. $25,000 (C.) $20,000 D. $ 0 E. None of the above. 15. The Jose Mesa Corporation owns 15,000 shares of the Albert Bell Corporation's shares outstanding. Assume that the Jose Mesa Corporation owns between 20% and 80% of the shares outstanding of the Albert Bell Corporation. The stock is held by the Jose Mesa Corporation as an investment and the Jose Mesa Corporation receives $ 12,000 in dividends from the Albert Bell Corporation. How much of this dividend payment will the Jose Mesa Corporation report as taxable income? A. $ 12,000 B. $ 10,200 C. $ 9,600 (D.) $ 2,400 E. $ 1,800 16. A corporation raises $ 500,000 in long-term debt (first cash flow) to acquire additional plant capacity (second cash flow). This question is designed to see if you know what operating, financing and investment cash flows are. A. Both are considered investment cash flows.

B. Both are considered (C.) The first cash flow and the second cash cash flow. D. The first cash flow flow and the second cash flow. E. The first cash flow and the second cash flow.

financing cash flows. is considered a financing cash flow flow is considered an investment is considered an investment cash cash flow is considered a financing is considered a financing cash flow flow is considered an operating cash

First Examination Finance 301 Page Six 17. Which of the following statements is most correct? A. An agency relationship exists when one or more persons hire another person to perform some service but withhold decision-making authority from that person (B.) The agency conflicts between bondholders and stockholders can be reduced with the use of bond covenants. C. Managers may operate in the stockholders' best interests, or managers may operate in their own personal best interests. As long as managers stay within the law, there are no effective controls that stockholders can implement to control managerial decision making. D. Agency conflicts between stockholders and managers are not really a problem when outsiders (ie., non-managers) own shares in a corporation. E. All of the statements above are false. The Bob Ojeda Corporation has 2,000,000 shares of stock outstanding. On the balance sheet the company has $45,000,000 worth of common equity. The company's stock price is currently $25 a share. What is the Bob Ojeda Corporation's Market Value Added (MVA)? A. ($10,000,000) B. ($ 5,000,000) (C.) $ 5,000,000 D. $45,000,000 E. $50,000,000 You know that a given firm's Total Asset Turnover (S/TA) is 12.0X and you also know its net profit margin (NPAT/S) is

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.005. What is this firm=s rate of return on assets (ROA)? A. .005 B. .042 (C.) .060 D. .196 E. 240.000 20. Paid-in-capital in excess of par represents the amount of proceeds A. From the original sale of stock. B. At the current market value of common stock. C. At the current book value of common stock. D. That are in retained earnings. (E.) In excess of the par value from the original sale of common stock. Finance 301 First Examination Page Seven 21. A yield curve that reflects relatively similar borrowing costs for both short-term and long-term loans is called: (A.) A Flat Yield Curve B. A Humped Yield Curve C. An Inverted Yield Curve D. A Normal Yield Curve E. Upward sloping Yield Curve The Mike Hargrove Corporation has an average collection period of 62 days. What is the accounts receivable turnover ratio for the Mike Hargrove Corporation? Assume a 360 day year. A. 1.50 B. 2.47 C. 2.66 D. 4.86 (E.) 5.81

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Use the following data for questions: #23, #24 and #25 Jackson Corporation BALANCE SHEET 12/31/99 (assume 360 day year) Cash Marketable Securities(short-term) Accounts Receivable Inventories $ 44,000 10,000 110,000 100,000

Prepaid Expenses TOTAL CURRENT ASSETS Gross Fixed Assets $260,000 Less: Accumulated Depreciation 60,000 Construction in Progress TOTAL ASSETS Notes Payable Accounts Payable Accrued Expenses Income Taxes Payable TOTAL CURRENT LIABILITIES TOTAL LONG TERM DEBT Preferred Stock(8%)* Common Stock(40,000 shares)** Retained Earnings TOTAL LIABILITIES AND EQUITY Finance 301 First Examination Page Eight

$ $ $ $

16,000 280,000 200,000 35,000 515,000 35,000 90,000 50,000 25,000 200,000 120,000 50,000 120,000 25,000 515,000

*Preferred Dividends Equal $ 4,000 **Total Common Stock Shares Outstanding is 40,000 ***Jackson Corporation is paying $.75 a share on common shares outstanding. Jackson Corporation INCOME STATEMENT Sales $ Cost (CGS and Selling & Admin Expenses) EBIT (Operating Profit) $ Interest Net Profit Before Taxes $ Taxes(.40) Net Profit After Taxes $ Preferred Dividends $ Earnings Available for Common Stockholders$ 23. 330,000 231,000 99,000 19,000 80,000 32,000 48,000 4,000 44,000

In 1999 the rate of return on common equity is: A. .2462 (B.) .3034 C. .3667 D. .5500 E. .6000

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In 1999 the times interest earned (TIE) ratio is: A. .1919 B. 2.5263 C. 3.0938 D. 4.2105 (E.) 5.2105 If the Jackson Corporation=s common stock is currently selling for $7.15 per share, what is the price earnings ratio or the P/E ratio? A. 5.21X B. 5.96X (C.) 6.5X D. 7.91X E. 8.21X

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Finance 301 First Examination Page Nine 26. of The legal contract setting forth the terms and provisions a corporate bond is A. A denture B. A debenture (C.) An indenture D. A loan document E. A promissory note 27. How much money will you have in a savings account at the end of ten years if you deposit $ 2,000 at the end of each year and your money earns 6 percent interest compounded annually? (Compound Value of an ordinary or straight annuity) A. $ 3,582 B. $ 14,720 C. $ 25,156 (D.) $ 26,362 E. None of the above is within $ 25 of the correct answer. The Jacobs Field Corp. has found a fantastic investment that will pay an annual rate of interest of 8 percent. Interest on this investment will be compounded quarterly. The Corp.

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has $ 2,100 to invest, what total dollar amount of money will the Jacobs Field Corporation have at the end of three years? A. $2,640.21 B. $2,645.40 C. $2,657.17 (D.) $2,663.31 E. $2,669.62 29. Accounting practices and procedures used to prepare financial statements are called: (A.) FASB B. GAAP C. IRS D. Federal Reserve Board E. SEC Shares of stock currently owned by the firm's shareholders are called; A. Authorized B. Issued (C.) Outstanding D. Treasury Shares E. Winners

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Finance 301 First Examination Page Ten 31. Cleveland has $ 1,500 to invest now. He can invest this money at a stated rate of 3.5%. He plans to invest this money for a period of six years. Interest will be compounded continuously. What total dollar amount of money will Cleveland have at the end of the sixth year? For those that do not have an ex but do have a yx, e is equal to 2.7183. A. $1,825.00 B. $1,843.88 C. $1,847.16 (D.) $1,850.52 E. $1,851.34 A firm has the following accounts and financial data for 1999. DOLLARS $3,060 ACCOUNT CGS DOLLARS,%,SH. $1,800

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ACCOUNT Sales

Accts. Rec. Int Expense Total Oper Exp Accts. Pay. The for A. B. C. D. (E.) 33.

$ $ $ $

500 126 600 240

Pref Div Tax Rate No of Com. Sh.

18 .40 1,000 Shares

firm's earnings per share, rounded to the nearest cent, 1999 is __________. $ .67 $ .53 $ .51 $ .32 $ .30

The Larry Doby Corporation has the opportunity to borrow $5,000 for 4 years at a stated annual rate of 12%. Interest is compounded on a semi-annual basis. What is the EFFECTIVE RATE OF INTEREST(EAR or EFF) for the Larry Doby Corporation? A. .1200 (B.) .1236 C. .1255 D. .1268 E. .1275

Finance 301 First Examination Page Eleven 34. What is the present value of the following uneven stream of cashflows: End of Year One End of Year Two End of Year Three $ 6,000 $ 2,550 $ 4,450 You feel that these cashflows should be discounted with a 4 percent discount rate. A. $11,871.29 D. $12,301.24 B. $11,970.44 E. $13,000.00 (C.) $12,082.88 35. Using the "Rule of 72", how many years will it take for a sum of money to double if this sum is growing at the annual rate of twelve percent? (A.) 6 years.

B. 7.2 years. C. 8 years. D. 9 years. E. 12 years. 36. Under MACRS, an asset which originally cost $100,000, incurred installation costs of $10,000, and has an estimated salvage value of $25,000, is being depreciated using a 5-year normal recovery period. What is the depreciation expense in year 1? A. $ 8,350 B. $11,250 C. $12,750 D. $15,000 (E.) $22,000 Gateway has found an investment that will pay $ 5.50 from now until infinity. Gateway feels that these cashflows should be discounted at 10 percent. What is the present value of this investment (perpetuity)? A $ .55 B. $ 5.50 (C.) $ 55.00 D. $ 550.00 E. $ 1,000.00

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Finance 301 First Examination Page Twelve 38. Jim Brown has just obtained a $ 110,000 mortgage loan from Key Corporation. The interest rate on the mortgage is 6% and the maturity is ten years. The year-end mortgage payment for each year is $14,945.48. At the end of year two, the second mortgage payment of $14,945.48 will be made. Of the amount paid in this 2nd year, what dollar amount will be paid interest? A. $ 5,568.50 (B.) $ 6,099.27 C. $ 6,600.00 D. $ 8,345.48 E. $ 8,846.21

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A ten year investment has a present value of $ 8,000. This investment will pay a year-end cashflow of $ 1,232.88 for ten years. What is the rate of return, the discount rate, on this investment? A. Between 7% and 8%. (B.) Between 8% and 9%. C. Between 9% and 10%. D. Between 10% and 11%. E. None of the above intervals are correct. In period of rising costs, the LIFO(last in,first out) inventory method would result in: A. Lower cost inventory items in cost of goods sold, lower taxable income, and lower taxes. (B.) Higher cost inventory items in cost of goods sold, lower taxable income, and lower taxes. C. Higher cost inventory items in cost of goods sold, higher taxable income, and higher taxes. D. Lower cost inventory itmes in cost of goods sold, higher taxable income, and lower taxes. E. None of the above.

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Bob Feller Corporation is going to invest $ 500 each year for five years. These cashflows will be invested at the beginning of each period and will earn interest at the annual rate of 5%. Interest compounds yearly. What dollar sum will be accumulated at the end of five years? (Sum of an annuity due) A. $2,250.25 B. $2,272.98 C. $2,500.00 D. $2,762.82 (E.) $2,900.96 Finance 301 First Examination Page Thirteen 42. Tom is evaluating the growth rate in dividends of a company over the past 6 years. What is the annual compound growth rate of dividends from 1994 to 1999? Year Dividends 1994 $ 1.25 1995 $ 1.52 1996 $ 1.85 1997 $ 1.80 1998 $ 1.95

1999 A. B. C. D. (E.) 43. .040 .077 .093 .132 .162

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Which of the following statements is most correct? A. Ratio analysis facilitates comparisons by standardizing numbers. B. Financial ratios should be interpreted with caution because it may be difficult to say with certainty what is a "good" value. For example in the case of the current ratio, a "good" value is neither high nor low. C. Financial ratios should be interpreted with caution because there exist seasonal and accounting differences that can reduce their comparability. D. Many large firms operate different divisions in different industries, and this makes it hard to develop a meaningful set of industry benchmarks for these types of firms. (E.) All of the statements above are correct.

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Last year Mike bought 100 shares of the Browns Corporation common stock for $53 per share. During the year he received dividends of $1.45 per share. The stock is currently selling for $60 per share. What rate of return did Mike earn over the year? A. .117 B. .132 C. .141 (D.) .159 E. .167

Finance 301 First Examination Page Fourteen 45. An efficient portfolio is one that A. Maximizes risk for a given level of return. (B.) Maximizes return for a given level of risk. C. Minimizes return for a given level of risk. D. Maximizes return at all risk levels.

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None of the above.

Perfectly _________ correlated series move exactly together and have a correlation coefficient of _______, while perfectly __________ correlated series move exactly in opposite directs and have a correlation coefficent. A. Negatively; -1; Postively; +1 B. Negatively; +1; Postively; -1 C. Positively; -1; Negatively; +1 (D.) Positively; +1; Negatively; -1 E. None of the above. Choose the most correct answer for the following: (1) Which is the best measure of risk for choosing an asset which is to be held in isolation? (2) Which is the best measure for choosing an asset to be held as part of a diversified portfolio? A. Beta (); Beta () B. Standard deviation (); correlation coefficient () 2 C. Beta (); variance ( ) (D.) Coefficient of variation (CV); Beta () 2 E. Variance ( ); correlation coefficient () What affect would the following have on the Security Market Line (SML), all else constant: (1) if the expected inflation rate increases, and (2) investors become less risk averse? A. The line would shift down and have a steeper slope. (B.) The line would shift up and have a lessor slope. C. The line would shift down and keep the same slope. D. The line would shift up and keep the same slope. E. The line would shift down and have a lessor slope.

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In general, the lower (less positive and more negative) the correlation between asset returns, A. The less the potential diversification of risk. (B.) The greater the potential diversification of risk. C. The lower the potential profit. D. The greater is the amount of time that you have to spend monitoring the returns of these assets. E. None of the above. Finance 301 First Examination Page Fourteen 50. Most businesss raise money by selling their securities in A. A Direct Placement

B. (C.) D. E.

A Private Placement A Public Offering The Over the Counter Market A Stock Exchange