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FIN 330 Managerial Finance Independent Study Spring, 2012 Anthony Mongelluzzo Name___________________________________ Select the answer that

BEST answers the question and write the corresding letter in the space provided. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) A competitive market that allocates funds to their most productive use is called A) a middleman's market. B) an investor's market. C) an efficient market. D) a liquid market. TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 2) The income statement is a financial summary of the firm's operating results during a specified period, while the balance sheet is a summary statement of the firm's financial position at a given point in time. 3) A firm's net cash flow is the mathematical difference between the firm's beginning cash and its cash disbursements in each period. 4) The use of a dollar break-even point is important when a firm has more than one product, especially when each product is selling at a different price. 5) The breakeven point in dollars can be computed by dividing the contribution margin into the fixed operating costs. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 6) After satisfying obligations to creditors, the government, and preferred stockholders, any remaining earnings will most likely be allocated to any of the following EXCEPT A) common shareholders as stock dividends. B) common shareholders as cash dividends. C) retention by the firm for future investment. D) a combination of retained earnings and cash dividends. 7) One function of break-even analysis is to A) evaluate the profitability of various sales levels. B) describe leverage. C) create profits. D) determine the amount of financing needed by the firm. TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 8) Operating leverage results from the existence of operating costs in the firm's income stream. 9) Operating leverage is present when a firm has fixed operating cost.

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MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 10) The basic shortcoming of the EBIT-EPS approach to capital structure is A) its disregard for the firm's dividend policy. B) its disregard for the presence of preferred stock in the capital structure. C) that the optimal capital structure is difficult to compute. D) that it concentrates on the maximization of EPS rather than the maximization of owner's wealth. TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 11) A shift toward more fixed costs increases business risk, which in turn causes earnings before interest and taxes to increase by less for a given increase in sales. 12) For sales levels below the operating break-even point, sales revenue exceeds total operating costs, and earnings before interest and taxes is greater than zero. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 13) The __________ approach to capital structure proposes that an optimal capital structure be selected which __________. A) residual theory; minimizes dividends B) EBIT-EPS; maximizes the EPS C) traditional; minimizes the cost of debt D) M and M; maximizes the weighted average cost of capital TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 14) The contribution margin is defined as the percent of each sales dollar that remains after satisfying fixed operating costs. 15) As financial leverage increases, the cost of debt remains constant and then rises, while the cost of equity always rises. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 16) Key inputs to short-term financial planning are A) economic forecasts. B) operating budgets. C) leverage analysis. D) sales forecasts, and operating and financial data. 17) All of the following are financing cash flows EXCEPT A) payment of stock dividends. B) sale of stock. C) increasing debt. D) repurchasing stock. TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 18) The best way to adjust for the presence of fixed costs when using a simplified approach for pro forma income statement preparation is to break the firm's historical costs into fixed, semivariable, and variable components and make the forecast using this relationship. 18) 16) 14) 13) 11) 10)

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MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 19) Of the following, generally the easiest to estimate are A) cash sales. B) cash disbursements. C) cash receipts. D) month-to-month short-term borrowing.
FIGURE 3.4 Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2004, for Hennesaw Lumber, Inc. Hennesaw Lumber, Inc. estimates that its sales in 2000 will be $4,500,000. Interest expense is to remain unchanged at $105,000 and the firm plans to pay cash dividends of $150,000 during 2004. Hennesaw Lumber, Inc.'s income statement for the year ended December 31, 2003 is shown below. Income Statement Hennesaw Lumber, Inc. For the Year Ended December 31, 2003 Sales Revenue Less: Cost of goods sold Gross profits Less: Operating expenses Operating profits Less: Interest expense Net profits before taxes Less: Taxes (40%) Net profits after taxes Less: Cash dividends To: Retained earnings $4,200,000 3,570,000 -------$ 630,000 210,000 -------$ 420,000 105,000 -------$ 315,000 126,000 -------$ 189,000 120,000 -------$ 69,000

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From your preparation of the pro forma income statement, answer the following multiple choice questions.

20) The pro forma operating expenses for 2004 are __________. (See Figure 3.4.) A) $225,000 B) $150,000 C) $200,000 21) All of the following are operating cash flows EXCEPT A) an increase or decrease in current liabilities. B) an increase or decrease in fixed assets. C) depreciation expense. D) net profit/earnings after taxes.

D) $210,000

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22) __________ consider proposed fixed-asset outlays, research and development activities, marketing and product development actions, and both the mix and major sources of financing. A) Short-term financial plans B) Cash budgeting C) Long-term financial plans D) Pro-forma statements

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TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 23) Cash planning involves the preparation of the firm's cash budget. Without adequate cash regardless of the level of profitsany firm could fail. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 24) Utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to A) understate profits when sales are decreasing. B) overstate profits when sales are increasing. C) understate profits when sales are increasing. D) neither understate nor overstate profits. 25) The __________ method of developing a pro forma balance sheet estimates values of certain balance sheet accounts while others are calculated. In this method, the firm's external financing is used as a balancing, or plug, figure. A) percent-of-sales B) accrual C) cash D) judgmental 26) Financial and legal flows through the firm include A) salaries. C) labor expense. 24) 23)

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B) rent. D) interest expense.

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TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 27) Cash flow from operations is equal to the firm's net profits after taxes minus all noncash charges. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 28) The two categories of ratios that should be utilized to assess a firm's true liquidity are the A) liquidity and debt ratios. B) liquidity and profitability ratios. C) current and quick ratios. D) liquidity and activity ratios. 29) The __________ measures the overall effectiveness of management in generating profits with its available assets. A) price/earnings ratio B) return on total assets C) net profit margin D) return on equity TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 30) Present and prospective shareholders and lenders pay close attention to the firm's degree of indebtedness and ability to repay debt. Shareholders are concerned since the claims of creditors must be satisfied prior to the distribution of earnings to them. Lenders are concerned since the more indebted the firm, the higher the probability that the firm will be unable to satisfy the claims of all its creditors. 31) Both present and prospective shareholders are interested in the firm's current and future level of risk and return. These two dimensions directly affect share price. 32) As a rule, the necessary inputs to an effective financial analysis include, at minimum, the income statement and the statement of cash flow. 4 30) 28) 27)

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33) If an analysis is concerned only with certain specific aspects of a firm's financial position, one or two ratios may provide sufficient information from which to make a reasonable judgement. 34) Retained earnings represents the cumulative total of all earnings retained and reinvested in the firm since its inception. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 35) The stockholder's annual report must include A) a statement of cash flows. B) a statement of retained earnings. C) an income statement. D) a balance sheet. E) all of the above. TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 36) The Financial Accounting Standards Board (FASB) Standard No. 52 mandates that U.S.-based companies translate their foreign-currency-denominated assets and liabilities into dollars using the current rate (translation) method. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 37) A firm has the following accounts and financial data for 2002:
Sales Revenue Accounts Receivable Interest expense Total oper. expenses Accounts payable $ 3,060 500 126 600 240 Cost of goods sold $1,800 Preferred stock dividends 18 Tax rate 40% Number of shares of common stocks outstanding 1,000

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The firm's net profits after taxes for 2002 is __________. A) $213 B) $206 C) -$206
FIGURE 2.2

D) $320

Dana Dairy Products Key Ratio Industry Actual Actual Average 2001 2002 Current Ratio 1.3 1.0 Quick Ratio 0.8 0.75 Average collection Period 23 days 30 days Inventory Turnover 21.7 19 Debt Ratio 64.7% 50% Times Interest Earned 4.8 5.5 Gross Profit Margin 13.6% 12.0% Net Profit Margin 1.0% 0.5% Return on total assets 2.9% 2.0% Return on Equity 8.2% 4.0% Income Statement

Dana Dairy Products For the Year Ended December 31, 2002 Sales Revenue Less: Cost of Goods Sold Gross Profits Less: Operating Expenses Operating Profits Less: Interest Expense Net Profits Before Taxes Less: Taxes (40%) Net Profits After Taxes Balance Sheet Dana Dairy Products December 31, 2002 $ 1,000 8,900 4,350 ------$14,250 $100,000 87,000 ------$1 3,000 11,000 ------$ 2,000 500 ------$ 1,500 600 ------$ 900

ASSETS Cash Accounts Receivable Inventories

Total Current Assets Gross Fixed Assets Less: Accumulated Depreciation Net Fixed Assets Total Assets Liabilities & Stockholders' Equity Accounts Payable Accruals Total Current Liabilities Long-term Debts Total Liabilities Common Stock Retained Earnings Total Stockholders' Equity Total Liab. & S.E.

$35,000 13,250

21,750 ------$36,000

$ 9,000 6,675 ------$15,675 4,125 ------$19,800 1,000 15,200 ------$16,200 ------$36,000

38) The return on total assets for Dana Dairy Products for 2002 is (See Figure 2.2.) A) 0.9 percent. B) 2.5 percent. C) 25 percent.

D) 5.5 percent.

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39) A corporation had an operating loss in 2002. All prior years had positive earnings. In utilizing the tax laws on carrybacks and carryforwards on operating losses a corporation A) must first carryback the loss to 2000, then to 2001. B) has the option of selecting whether to carryforward or carryback the loss. C) must first carryback the loss to 2001, then to 2000, then to 1999. D) must carryback the operating loss for at least one year before it can carryforward. 40) All of the following are functions of security exchanges EXCEPT A) holding demand deposits. B) allocating scarce capital. C) aiding in new financing. D) creating continuous markets. 41) Financial service A) is concerned with the duties of the financial manager. B) provides guidelines for the efficient operation of the business. C) involves the design and delivery of advice and financial products. D) handles accounting activities related to data processing. TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 42) The capital expenditures analyst/manager is responsible for the evaluation and recommendation of proposed asset investments and may be involved in the financial aspects of implementation of approved investments. 43) Primary and secondary markets are markets for short-term and long-term securities, respectively. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 44) Return and risk are the key determinants in share price. Increased return results in __________, other things remaining the same. A) an undetermined share price. B) a higher share price. C) an unchanged share price. D) a lower share price. 45) Corporations experiencing operating losses are allowed to A) carryback the losses for 2 years and carryforward for 2 years. B) only carryforward the losses 20 years. C) carryback the losses for 2 years and carryforward for 20 years. D) carryback the losses for 5 years and carryforward for 2 years. TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 46) The financial manager prepares financial statements that recognize revenue at the point of sale and expenses when incurred. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 47) Managerial finance A) devotes the majority of its attention to the collection and presentation of financial data. B) recognizes funds on an accrual basis. C) involves tasks such as budgeting, financial forecasting, cash management, and funds procurement. D) involves the design and delivery of advice and financial products.

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48) The treasurer is commonly responsible for A) making capital expenditures. C) cost accounting.

B) taxes. D) data processing.

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49) A __________ is similar to a commercial bank except that it may not hold demand deposits. A) credit union B) mutual fund C) savings bank D) insurance company TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 50) Financial markets are intermediaries that channel the savings of individuals, businesses and government into loans or investments.

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