Exam 1 BCOR 2200 Sec 003

Spring 2013 Key

1. Johnston, Inc., paid $23,000 in dividends and $39,700 in interest over the past year. Sales totaled
$188,900 with costs of $99,300. The depreciation expense was $13,200. The applicable tax rate is 35
percent. What is the amount of the operating cash flow?
A. $30,555
B. $47,255
C. $61,655
D. $76,755
E. $80,255
OCF = EBIT + DEP TAX
EBIT = S C D = 188,900 99,300 13,200 = 76,400
TAX = .35 (EBIT I) = .35 (76,400 39,700) = 12,845
OCF = 76,400 + 13,200 12,845 = 76,755

2. Use the following tax table to answer this question:

Rider, Inc. earned $154,320 in taxable income for the year. What is the average tax rate?
A.
B.
C.
D.
E.

25%
26%
28%
29%
39%

Tax = (.15)(50,000) + (.25)(25,000) + (.34)(25,000) + (.39)(154,320 100,000) = 43,435

Average Tax = Total tax paid / Taxable income = 43,435 / 154,320 = .281 = 28%

3. Shareholders' equity includes which of the following accounts?

I. paid in surplus
II. bonds payable
III. common stock par
IV. retained earnings
A. II and III only
B. I and IV only
C. III and IV only
D. I, III, and IV only
E. I, II, III, and IV

4. The December 31, 2009, balance sheet of Schism, Inc., showed $145,000 in the common stock account
and $2.70 million in the additional paid-in surplus account. The December 31, 2010, balance sheet showed
$155,000 and $3.00 million in the same two accounts, respectively. The company paid out $150,000 in cash
dividends during 2010. What was cash flow to stockholders?
A.
B.
C.
D.
E.

-10,000
-250,000
-160,000
-440,000
-5,850,000

The cash flow to stockholders is the dividends paid minus any new equity raised. So, the cash
flow to stockholders is: (Note that APIS is the additional paid-in surplus.)
Cash flow to stockholders = Dividends paid Net new equity
Cash flow to stockholders = Dividends paid (Commonend + APISend) (Commonbeg + APISbeg)
Cash flow to stockholders = $150,000 [($155,000 + 3,000,000) ($145,000 + 2,700,000)]
Cash flow to stockholders = $160,000

5. The sustainable growth rate is best described as the __________ growth rate
achievable: _____________ .
a. minimum; if the firm does not pay out any dividends.
b. minimum; if the firm maintains a constant equity multiplier.
c. maximum; without external financing of any kind.
D. maximum; without using any external equity financing, while maintaining a constant
debt-equity ratio.
e. maximum; without any limits on the amount of debt financing used by the firm.

6. A firm has inventory of $700, current liabilities of $500, cash of $100, net fixed assets of
$1,600, long-term liabilities of $1,400, and net working capital of $800. What is the commonsize percentage for the accounts receivable?
A. 10.3 percent
B. 12.1 percent
C. 13.8 percent
D. 15.3 percent
E. 17.2 percent
Common size = AR / Total Assets
Total assets = (NWC + CL) + NFA = (800 +500) + 1,600 = 2,900
AR = Total Assets cash inv NFA = 2,900 100 700 1,600 = 500
CS = 500 / 2,900 = .17241 = 17.2%

7. Which one of the following statements is correct, all else constant?

a. Increasing the inventory level will increase the inventory turnover rate.
B. Increasing the inventory level will increase the days' sales in inventory.
c. Increasing the receivables turnover rate will increase the days' sales in receivables.
d. Increasing sales will lower the total asset turnover.
e. Increasing sales will increase the capital intensity ratio.

8. Winners, Inc., has net income of $126,800. The market value of equity is $3,840,000 and the stock is
currently selling for $32 a share. What is the price-earnings ratio?
a. 24.75
b. 25.15
c. 28.78
d. 29.28
e. 30.28
PE Ratio = share price / EPS
EPS = NI / shares outstanding
Shares outstanding = MVE / share price = 3,840,000 / 32 = 120,000
EPS = 126,800 / 120,000 = 1.05667
PE Ratio = 32 / 1.05667 = 30.28

9. Financial leverage:
I. decreases the potential returns to shareholders.
II. increases the potential returns to shareholders.
III. decreases the likelihood the firm will face financial distress.
IV. increases the likelihood the firm will face financial distress.
a. I only
b. IV only
c. I and III only
d. I and IV only
E. II and IV only

10. Jamie deposits $1,000 into an account paying 6 percent interest, compounded annually. At the same
time, Amy deposits $1,000 into an account paying 3 percent interest, compounded annually. Over a 5 year
period,
a. both Jamie and Amy will earn the same amount of interest.
b. Jamie will earn exactly twice the amount of interest that Amy earns.
c. Amy will earn exactly twice the amount of interest that Jamie earns.
d. Jamie will earn somewhere between 1 and 2 times the amount of interest that Amy earns.
E. Jamie will earn more than twice the amount of interest that Amy earns.

11. The High Price Insurance Company will pay you $1,350 a month for twenty years, starting today, in
exchange for $230,000 today. What annual interest rate are they paying on this annuity?
A.
B.
C.
D.
E.

.306 percent
3.060 percent
3.670 percent
4.859 percent
4.907 percent

Set Begin
N = 20 x 12 = 240; I = ? x 12 = .3059 x 12 = 3.670 ; PV = -230,000; PMT = 1,350; FV = 0

12. A saver makes a $1,000 deposit in an account that earns 5% compounded annually for 10 years. How
much interest on interest will the saver earn at the end of 10 years?
A.
B.
C.
D.
E.

$ 92.50
$ 128.89
$ 500.00
$1,000.00
$1,628.89

Int on Int = FV of deposit principle simple interest

FV of deposit: N = 10; I = 5; PV = -1,000; PMT = 0; FV = ? = 1,628.89
Simple interest = 1,000 x .05 x 10 = 500
Int on Int = 1628.89 1000 500 = 128.89

13. How long will it take to quadruple (4 times) your savings at 8 percent annual rate, compounded
quarterly?
A. 8.00 years
B. 12.50 years
C. 17.50 years
D. 18.01 years
E. 70.01 years
N = ? / 4 = 70.01 / 4 = 17.50; I = 8 / 4 = 2; PV = -1; PMT = 0; FV = 4

14. You are comparing two separate investments. Each one is for a period of 10 years and pays $2,500 a
year. You require a 10 percent return on these investments. Investment A pays at the beginning of each year
and investment B pays at the end of each year. Given this situation, which one of the following statements is
accurate?
A. Both investments are equally valuable today.
B. Investment B is worth more today because of the timing of its cash flows.
C. Investment A is worth more today because you will receive ten payments whereas investment B only
pays nine payments.
D. Investment A has both a higher present value and a higher future value than investment B.
E. Investment A has a higher present value and a lower future value than investment B.

15. Which of the following can you calculate?

I. present value of an ordinary annuity
II. present value of a perpetuity
III. future value of an annuity due
IV. future value of a perpetuity
A. I and II only
B. I and III only
C. I, II, and III only
D. I, II, and IV only
E. I, II, III, and IV

16. Bills Pawn Shop charges an interest rate of 19 percent per month on loans to its customers. Like all
lenders, Ricky must report an APR to consumers. Indicate the APR and EAR on these loans.
A.
B.
C.
D.
E.

19.00; 19.00
19.00; 20.75
228.00; 216.97
228.00; 328.31
228.00; 706.42

APR = .19 x 12 = 2.28 = 228.00%

EAR = [(1.19)^(12)] 1 = 8.0642 1 = 7.0642 = 706.42%

17. The Caulkins Co. is considering a project that will produce cash inflows (end of period) of $36,000 in
year one, $54,800 in year two, and $72,900 in year three. What is the future value of these cash inflows if
the company assigns the project an interest rate of 15 percent?
A. $106,713.06
B. $122,951.19
C. $131,333.33
D. $183,530.00
E. $211,059.50
Step 1Present Value: CF0 = 0; CF1 = 36,000; CF2 = 54,800; CF3 = 72,900; I = 15; NPV = ? =
120,673.95
Step 2convert to FV: N = 3; I = 15; PV = -120,673.95; PMT = 0; FV = ? = 183,530.00

18. Which of the following will increase the present value of an annuity, all else held constant?
I. Increase in the number of payments
II. Increase in the interest rate
III. Decrease in the interest rate
IV. Decrease in the payment amount
A.
B.
C.
D.
E.

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

19. You can afford car payments of $225 a month for 48 months. The bank will lend you this money at 5.9
percent annual interest, compounded monthly. How much can you borrow?
A.
B.
C.
D.
E.

$9,599.30
$9,466.12
$9,210.50
$8,928.89
$8,777.78

N = 48; I = 5.9/12 = .49167; PV = ? = 9,599.30; PMT = -225; FV = 0

20. Dustin is considering an investment that will pay $3,000 a year for 10 years, starting now. How much
should Dustin pay for this investment if he wishes to earn a 9 percent rate of return?
a. $17,985.74
b. $18,349.81
c. $19,252.97
D. $20,985.74
e. $21,213.24
set begin; N = 10; I = 9; PV = ? = -20,985.74; PMT = 3000; FV = 0

21. Global Enterprises has just signed a $3 million contract. The contract calls for a payment of $.5 million
today, $.9 million one year from today, and $1.6 million two years from today. What is this contract really
worth if Global Enterprises can earn 12 percent on its money?
a. $2.21 million
b. $2.30 million
c. $2.39 million
d. $2.49 million
E. $2.58 million
CF0 = .5; CF1 = .9; CF2 = 1.6; I = 12; NPV = 2.58

22. According to the text, the primary goal of financial management is to maximize the:
a. current net income.
b. net working capital.
c. the number of shares outstanding.
d. capital structure.
e. market value of the existing stock.

23. The control of a corporation ultimately lies with the:

a. chief financial officer.
b. company president.
C. company stockholders.
d. chairman of the board.
e. chief executive officer.

24. Which of the following are the key methods of aligning management goals with shareholder interests?
I. increasing management salaries based on a nationally recognized inflation measure
II. replacing management if shareholders' interests are not given top priority
III. basing management salaries on the total revenues of the firm
IV. tying management compensation to the market value of the firm's stock
A. I and III only
B. I and IV only
C. II and IV only
D. I, II, and III only
E. II, III, and IV only

25. George and Sons, Inc., has an operating cash flow of $135,200, depreciation expense of 89,300, and
taxes paid of $76,100. A partial listing of their balance sheet accounts is as follows:

Current assets
Net fixed assets
Current liabilities
Long-term debt

Beginning Balance
$146,800
$989,400
$121,600
$888,000

Ending Balance
$132,700
$909,400
$138,700
$862,500

What is the amount of Winston and Sons' cash flow from assets (free cash flow)?
A. $ 17,500
B. $ 94,700
C. $144,500
D. $157,100
E. $167,100
FCF = OCF NCS CNWC
OCF = 135.2
NCS = NFA1 NFA0 + D = 909.4 989.4 + 89.3 = 9.3
CNWC = (132.7 138.7) (146.8 121.6) = (-6) (25.2) = -31.2
FCF = 135.2 9.3 (-31.2) = 157.1