Practice Exam I-Finance 301

  1. Financial management decisions have three important questions that need to be answered. Please provide the question that concerns with the following item:
  2. Capital budgeting- What long-term investments or projects should the business take on?
  3. Capital structure-How should we pay for our assets?

Should we use debt or equity?

  1. Working capital management- How do we manage the day-to-day finances of the firm?
  1. Provide one advantage and one disadvantage concerning the different forms of business:
  2. Sole Proprietorship- single owner keeps all profits, easy to start, least regulated, taxed only once as personal income, - limited to life of owner, unlimited liability, difficult to sell ownership interest, equity capital limited to owner’s personal wealth
  3. Partnership- two or more owners, more capital available, relatively easy to start, income taxed once as personal income – unlimited liability, partnership dissolves when one partner dies or wishes to sell, difficult to transfer ownership
  4. Corporation- Limited liability, Unlimited life, Separation of ownership and management, Transfer of ownership is easy, Easier to raise capital- Separation of ownership and management, Double taxation (income taxed at the corporate rate and then dividends taxed at personal rate)
  1. What is the main goal of financial management?

Maximize value to shareholders

  1. If you want to hire somebody to complete your tax return next year. Who would be the principal and the agent in this situation?

Principal = you Agent = CPA

  1. If you take your company public which market would you be utilizing, primary or secondary?

Primary- IPO (initial public offering) secondary market would then be the market pre-existing stock would trade in

  1. The New York Stock Exchange is an example of what type of market, dealer or auction?

NYSE = auction NASDAQ = dealer

  1. Compute the average and marginal tax rate using the following table on taxable income of 240,000:

Taxable Income / Tax Rate
$0-50,000 / 15% $7,500
50,001-75,000 / 25% $6,250
75,001-100,000 / 34% $8,500
100,001-335,000 / 39% 54,600 marginal = $93,600

Marginal – 39%Average – 32% $76,850/ $240,000

  1. For the following items, recognize whether it’s a use or source of cash
  2. Increase to Accounts Receivable - use
  3. Decrease in Notes Payable - use
  4. Decrease in Long-Term Debt note - use
  5. Decrease in Accounts Receivable – source
  6. Increase in Notes Payable – source
  7. Decrease in PP&E – source
  1. Define the following two terms
  2. Planning horizon - divide decisions into short-run decisions (usually next 12 months) and long-run decisions (usually 2 – 5 years)
  1. Aggregation - combine capital budgeting decisions into one big project
  1. From the following income statement information, calculate the net income and operating cash flow.

Net Sales
Cost of goods sold
Operating exp
Depreciation
Interest Expense
Tax rate
Dividend payout ration / 16,500
$10350
3118
1120
900
34%
50%

NI = 668 16500-10350-3118-1120-900= 1012 -344 = 668

OCF = 1912EBIT + 1120 – 344(taxes) = 2688

Now suppose in the previous problem, there are 650 shares outstanding, what is the EPS? What is the DPS?

NI/No of shares outstanding 668/650 = $1.03

DPS; Div. Paid/ NO. of shares outstanding

Dividends paid = 668 *.5 = 334

DPS = 334/650 = .5138

  1. Net fixed assets (NFA) of ABC corp. as of Dec. 2002 is 6.5 million and NFA showed an asset balance of 3 million last year. ABC corp’s income statement for the year 2002 showed depreciation expense of $650,000. What was the Net Capital Spending of 2002

NCS = End FA- Beg FA + Dep

6.5 -3 + .65 = 4.15 million

13. Company M has a current ratio of 2, quick ratio of 1.8, net income of $180,000, profit margin of 10% and account receivable balance of $150,000. What is the firm’s Average Collection period?

ACP = 365/ A/R turnover

AR turnover = Sales/ Avg. accounts receivable

X / 150,000

PM = NI/Sales

.1 = 180,000/X X = 1,800,000 for sales

SO… 1,800,000/150,000 = 12 AR turnover

ACP = 365/12= 30.4 days it takes about 30 days on average to collect back from customers

14. External Financing and Growth:

The most recent financial statements for Last in Line, Inc., are shown here:

Income Statement / Balance Sheet
Sales $3,400 / Current Assets $4,400 / Current Liabilities $880
Costs 2,800 / Fixed Assets 5,700 / Long-term debt 3,580
Taxable income $600 / Equity 5,640
Taxes (34%) 204 / Total $10,100 / Total $10,100
Net Income $396

Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 50 percent dividend payout ratio. As with every other firm in its industry, next year’s sales are projected to increase by exactly 15 percent. What is the external financing needed?

Next Year:

Sales = 3,910

Costs = 3,220

Taxable Income = 690

Taxes (34%) = 234.6

Net Income = 455.4

Current Assets = 5060

Fixes Assets = 6,555

TA = 11,615

Current Liabilities = 1,012

Long-term debt = 3,580

Equity = 5,640 + 227.7 = 5867.7

Total = 10,459.7

External Financing needed = 11,615- 10,459.7 = $1,155.3

15. If ABC Corp. has Profit margin of 12% debt equity ratio of 2.1, debt ratio of .60 and total asset $35,000 and sales of $22,000. The dividend payout has remained constant as 40% What is the SGR?

SGR = ROE * b / 1- (ROE * b) ROE = NI/TE Debt Ratio = TD/TA PM = NI/Sales

B= 1-.4= .6 .12 = NI/22,000 NI = 2640 .6 = TD/35000 TD = 21000 35000 = 21000 + TE TE=14000

ROE = 2640/14000 = .1886 or 18.86% SO: SGR = .1886 * .6/ 1- (.1886 * .6) = .1132/1-.1132 = .1276 or 12.76%