5
BUSINESS FINANCE NAME ______
EXAMINATION ONE
SUMMER 2000
Select the best answer for each of the following questions.
3 points each
1. Today, a larger portion of society’s savings flow makes its way to the ultimate user of funds in our economic system. Thus, we can say that our economic system has greater ______efficiency than it did twenty years ago.
A. Pricing
B. Allocational
C. Policy
D. Liquidity
E. Operational
2. A mutual fund sells shares to investors and also invests in common stocks. These transactions would be correctly classified as:
A. Semi-direct finance
B. Indirect finance
C. Pseudo finance
D. Personal finance
E. Direct finance
3. Due to increasing competition, Fastback Inc. has recently experienced a drop in its profit margin. If Fastback wants to keep its return on equity (ROE) constant, it must:
A. increase its current ratio.
B. increase its total asset turnover.
C. decrease its debt to total assets.
D. reduce its average collection period.
E. none of the above will keep ROE constant.
4. A firm's current ratio has remained constant at 2.2 over the past five years. However, the firm’s quick ratio has steadily increased over the same period, from 1.4 at the end of December 1994 to 1.8 at the end of 1999. What would a financial analyst be justified in concluding?
A. The firm's liquidity position has declined.
B. The firm has reduced its inventory.
C. The firm's return on assets has declined.
D. The firm may have too much invested in current assets.
E. The firm will be unable to pay its current obligations.
5. A firm's average collection period (ACP) has steadily decreased over the past 5 years, from 55 days at the end of December 1994 to 35 days at the end of 1999. What would a financial analyst be MOST justified in concluding?
A. The firm has reduced its level of accounts receivable.
B. The firm has a lower level of credit sales today than it did 5 years ago.
C. The firm collects it credit sales more quickly than it did five years ago.
D. The firm has relaxed its credit policy.
E. The firm's amount of total assets has decreased.
6. An upward sloped yield curve suggest that securities with longer maturities should have higher yields that shorter term securities. This is the basic premise of the ______
A. Liquidity Preference Theory
B. Classical Theory of Interest
C. Market Segmentation Theory
D. Expectations Theory
E. Preferred Maturity Theory
7. A firm has an inventory turnover of 42.1; the industry average is 32.0. As a financial analyst, what conclusions could you draw from this situation?
A. The firm may have too much inventory.
B. The firm has too many current assets.
C. The firm’s cost of goods sold exceeds the industry's on average.
D. The firm is using its inventory very effectively.
E. The firm will be unable to pay its current obligations.
8. Given the current annualized yields on the following securities:
20-year Treasury Bonds 6.5 percent
20-year AAA-rated Corporate Bonds 7.4 percent
20-year BBB-rated Corporate Bonds 9.1 percent
To what can the differences between these rates be primarily attributed?
A. Tax effects
B. Default risk differences
C. Maturity risk differences
D. Inflation differences
E. Differences in the real interest rate
9. A firm's fixed charge coverage has steadily decreased over the past 5 years, from 15 times at the end of December 1994 to 5 times at the end of 1999. What would a financial analyst be MOST justified in concluding?
A. The firm’s profitability have increased.
B.. The firm has become safer for its creditors.
C. The firm's margin of safety has declined.
D. The firm’s interest charges have increased.
E. The firm’s sales have increased.
10. In normal or average market circumstances, which of the following securities should have the highest yield (or current market interest rate)?
A. AAA-rated corporate bonds with 5 years remaining until maturity
B. 30 year US Treasury bonds
C. 90-day US Treasury bills
D. BBB-rated corporate bonds with 25 years remaining until maturity
8 points
11. If a firm has total interest charges of $150,000 per year, sales of $2,000,000, a tax rate of 40%, and a net profit margin of 18%, what is the firm's times interest earned ratio?
A. 2.8 times F. 5.0 times
B. 3.0 times G. 5.5 times
C. 3.4 times H. 6.0 times
D. 4.0 times
E. 4.5 times
8 points
12. Lowe & Company has a debt ratio of 0.40, a capital intensity ratio of 5, and a profit margin of 8 percent. The Board of Directors is unhappy with the current return on equity (ROE), and they think it could be doubled. This could be accomplished (1) by increasing the profit margin to 10% and (2) by increasing debt utilization. Total asset turnover will not change. What new debt ratio, along with the 10% profit margin, is required to double the ROE? Hint: The capital intensity ratio is the reciprocal of the TATO.
A. 0.44 F. 0.40
B. 0.56 G. 0.60
C. 0.50 H. 0.75
D. 0.63
E. 0.38
8 points
13. If $5000 is placed in an account that earns a nominal 8 percent, compounded quarterly, for 6 years, what will it be worth in 6 years?
A. $ 7,934.37 F. $ 9,650.62
B. $ 6,802.44 G. $ 8,236.71
C. $ 6,863.93 H. $ 8,162.93
D. $ 8,042.19
E. $ 9,521.25
8 points
14. Twenty years ago you bought stock for $1,000 which is now worth $10,000. Assuming that the stock paid no dividends, the rate of return on your investment was:
A. 11.20 percent F. 15.33 percent
B. 10.80 percent G. 20.00 percent
C. 8.38 percent H. 24.22 percent
D. 9.24 percent
E. 12.20 percent
8 points
15 You want to set up a trust fund. If you make a payment at the end of each year for twenty years and earn 6 percent per year, how large must your annual payments be so that the trust is worth $500,000 at the end of the twentieth year?
A. $16,660.49 F. $14,158.92
B. $14,372.79 G. $11,940.40
C. $13,592.28 H. $10,914.80
D. $10,884.54
E. $15,121.29
10 points
16. Find the present value for the following income stream if the interest rate is 10 percent.
YEARS CASHFLOW
1-4 $ 100
5-10 $ 200
11-15 $ 300
A. $1,090 F. $1,269
B. $1,439 G. $1,566
C. $1,840 H. $1,780
D. $1,194
E. $1,350
10 points
17. You have been saving money for the last two years. You made deposits of $200 on January 1, 1991, and July 1, 1991, in a savings account paying 10 percent compounded semi-annually. On January 1, 1992, the bank increased the interest rate paid on savings accounts to 11 percent, annual compounding. You made a third $200 deposit on April 1, 1992. How much will be in your account on January 1, 1993?
A. $667.67 F. $705.79
B. $694.14 G. $711.51
C. $689.39 H. $700.35
D. $682.24
E. $605.76
10 points
18. Starting on January 1, 1991, and then on each January 1 until 2000 (10 payments), you will make payments of $1,000 into an investment which yields 12 percent. How much will your investment be worth on December 31 in the year 2010?
A. $63,337.57 F. $61,044.15
B. $57,275.00 G. $54,503.71
C. $62,687.87 H. $48,052.44
D. $63,777.43
E. $60,023.98
FORMULA SHEET
PM = Net Income Current Ratio = Current Assets
Sales Current Liabilities
TATO = Sales Quick Ratio = Current Assets - Inventory
Assets Current Liabilities
ROA = Net Income EM = Assets = 1/(1-D/A)
Total Assets Equity
ROE = Net Income ACP = Accounts Receivable
Total Equity Credit Sales/360
Inventory Turnover = Sales Times Interest Earned = EBIT
Inventory Interest Charges
Capital Intensity ratio = Assets/Sales = 1 / TATO
PV(1 + k)n = FV PV(1 + k/m)mn = FV Pvekn = FV
EAR = (1 + k/m)m - 1 EAR = ek - 1
PV = Pmt(PVIFAk,n) PVIFAk,n = 1 - (1/(1+k)n)
k
FV = Pmt(FVIFAk,n) FVIFAk,n = (1+k)n - 1
k
1. ______11. ______
2. ______12. ______
3. ______13. ______
4. ______14. ______
5. ______15. ______
6. ______16. ______
7. ______17. ______
8. ______18. ______
9. ______
10. ______