1)
Please refer to Oscar’s financial statements. Assume a constant debt-equity ratio, net
profit margin and dividend payout ratio, and further assume all of Oscar’s costs, assets
and current liabilities vary directly with sales. What is the pro forma net fixed asset
value for next year if sales are projected to increase by 7.5 percent?
A.$10,857.50
B.$10,931.38
C.$11,663.75
D.$15,587.50
E.$18,987.50
F.None of the above
2) Individuals who continually monitor the financial markets seeking mispriced
securities:
A.earn excess profits over the long-term
B.make the markets increasingly more efficient
C.are never able to find a security that is temporarily mispriced
D.are overwhelmingly successful in earning abnormal profits
E.are always quite successful using only historical price information as their basis of
evaluation
F.None of the above
3) In general, the capital structures used by non-financial U.S. firms:
A.typically result in debt-to-asset ratios between 60 and 80 percent
B.tend to converge to the same proportions of debt and equity
C.tend to be those that maximize the use of the firm’s available tax shelters
D.vary significantly across industries
E.None of the above
4) The most popular yardstick of financial performance among investors and senior
managers is the:
A.profit margin
B.return on equity
C.return on assets
D.times burden covered ratio
E.earnings yield
5) The capital structure weights used in computing the weighted average cost of capital:
A.are based on the book values of total debt and total equity
B.are based on the market value of the firm’s debt and equity securities
C.are computed using the book value of the long-term debt and the book value of equity
D.remain constant over time unless the firm issues new securities
E.are restricted to the firm’s debt and common stock
F.None of the above
6) Figure 9.1
In March of 2011, Macklemore Corp. considered an acquisition of Blue Scholar
Learning, Inc. (BSL), a privately-held educational software firm. As a first step in
deciding what price to bid for BSL, Macklemore’s CFO, Ryan Lewis, has prepared a
five-year financial projection for the company assuming the acquisition takes place.
Use this projection and BSL’s 2010 actual financial figures to answer the questions
below.
Assume that in the years after 2015 the company’s free cash flow grows 4 percent per
year in perpetuity. Macklemore’s WACC is 8.0 percent. BSL’s WACC is 11.5 percent,
and the average of the two companies’ WACCs, weighted by sales, is 8.2 percent. What
is the maximum acquisition price (in $ millions) Macklemore should pay to acquire
BSL’s equity at the end of 2010?
A.$1,976.09
B.$2,501.09
C.$2,877.09
D.$4,195.09
E.$4,571.09
F.None of the above
7) Figure 9.1
In March of 2011, Macklemore Corp. considered an acquisition of Blue Scholar
Learning, Inc. (BSL), a privately-held educational software firm. As a first step in
deciding what price to bid for BSL, Macklemore’s CFO, Ryan Lewis, has prepared a
five-year financial projection for the company assuming the acquisition takes place.
Use this projection and BSL’s 2010 actual financial figures to answer the questions
below.
What is BSL’s free cash flow (in $ millions) for 2011?
A.- $938
B.- $792
C.- $7
D.$122
E.$1,091
F.None of the above
8) Selected information about South, Inc., a restaurant chain, follows.
Assuming the company neither sold nor salvaged any assets during the year, what were
the company’s capital expenditures during 2011?
A.482
B.78
C.421
D.61
E.139
F.None of the above
9) Key facts and assumptions concerning FM Foods, Inc. at December 31, 2011, appear
below.
Estimate the appropriate weight of debt to be used when calculating FM’s weighted
average cost of capital.
A.11.5%
B.19.3%
C.80.7%
D.88.5%
E.100.0%
F.None of the above
10) Pro forma free cash flows for a proposed project should:
I. exclude the cost of employing existing assets that could be sold anyway.
II. exclude interest expense.
III. include the depreciation tax shield related to the project.
IV. exclude any required increase in operating current assets.
A.I and II only
B.II and III only
C.II and IV only
D.I, III, and IV only
E.I, II, III, and IV
F.None of the above
11) Your brother will borrow $17,800 to buy a car. The terms of the loan call for
monthly payments for 5 years at an 8.6 percent annual interest rate, compounded
monthly. What is the amount of each payment?
A.$287.71
B.$296.67
C.$301.12
D.$342.76
E.$366.05
F.None of the above
12) Preston Fencing Company’s sales, half of which are for cash and the other half sold
on credit, over the past three months were:
a. Estimate Preston’s cash receipts in October if the company’s collection period is 30
days.
b. Estimate Preston’s cash receipts in October if the company’s collection period is 45
days.
c. What would be the October balance of accounts receivable for Preston Fencing if the
company’s collection period is 30 days? 45 days?
13) Which of the following statements related to market efficiency tends to be
supported by current evidence?
I. Markets tend to respond quickly to new information.
II. It is difficult for the typical investor to earn above-average returns without taking
above-average risks.
III. Short-run prices are difficult to predict accurately based on public information.
IV. Markets are most likely weak form efficient.
A.I and III only
B.II and IV only
C.I and IV only
D.I, III, and IV only
E.I, II, and III only
F.None of the above
14) Wax Music expects sales of $437,500 next year. The profit margin is 4.8 percent
and the firm has a 30 percent dividend payout ratio. What is the projected increase in
retained earnings?
A.$14,700
B.$17,500
C.$18,300
D.$20,600
E.$21,000
F.None of the above
15) Selected financial data for Link, Inc. follows: ($ in thousands)
The gross margin for 2012 is:
A.-94%
B.13%
C.26%
D.31%
E.None of the above
16) Which one of the following statements is true?
A.Debt instruments offer residual claims to future cash payouts
B.Bonds with call provisions will have lower coupon rates than otherwise identical
bonds
C.Bondholders enjoy a direct voice in company decisions
D.Bonds are low-risk investments that do well in inflationary periods
E.Preferred shareholders are the first investors to be repaid in bankruptcy liquidation
F.None of the above
17) Selected information about South, Inc., a restaurant chain, follows.
Assuming that there were no financing cash flows during 2011 and basing your answer
solely on the information provided, what were the cash flows from operations (in $
millions) for 2011?
A.45
B.106
C.15
D.76
E.31
F.None of the above
18) What is the benefit-cost ratio for an investment with the following cash flows at a
14.5 percent required return?
A.0.94
B.0.98
C.1.02
D.1.06
E.1.11
F.None of the above
19) Selected financial data for Link, Inc. follows: ($ in thousands)
Assume a 365-day year for your calculations. The collection period in days, based on
sales, at the end of 2012 is:
A.24.3
B.219.6
C.35.7
D.28.8
E.None of the above
20) Your grandmother invested a lump sum 26 years ago at 4.25 percent interest. Today,
she gave you the proceeds of that investment which totaled $51,480.79. How much did
she originally invest?
A.$15,929.47
B.$16,500.00
C.$17,444.86
D.$17,500.00
E.$17,999.45
F.None of the above
21) Answer the questions below based on the following information. Taxes are 35% and
all dollars are in millions.
a) Calculate each company’s ROE, ROA, and ROIC.
b) Why is Runrun’s ROE so much higher than Suunto’s? Does this mean Runrun is a
better company? Why or why not?
c) Why is Suunto’s ROA higher than Runrun’s? What does this tell you about the two
companies?
d) How do the two companies’ ROICs compare? What does this suggest about the two
companies?
22) Key facts and assumptions concerning FM Foods, Inc. at December 31, 2011,
appear below.
Estimate FM’s after-tax cost of debt capital.
A.2.21%
B.4.10%
C.4.55%
D.6.30%
E.7.00%
F.None of the above
23) Which one of the following is a source of cash?
A.increase in accounts receivable
B.decrease in notes payable
C.decrease in common stock
D.increase in inventory
E.increase in accounts payable
24) You plan to buy a new Mercedes four years from now. Today, a comparable car
costs $82,500. You expect the price of the car to increase by an average of 4.8 percent
per year over the next four years. How much will your dream car cost by the time you
are ready to buy it?
A.$98,340.00
B.$98,666.67
C.$99,517.41
D.$99,818.02
E.$100,023.16
F.None of the above
25) Which of the following is not an important step in the financial evaluation of an
investment opportunity?
A.Calculate a figure of merit for the investment
B.Estimate the accounting rate of return for the investment
C.Estimate the relevant cash flows
D.Compare the figure of merit to an acceptance criterion
E.All of the above are important steps
26) At the end of fiscal year 2011, Crane Industries, Inc.’s stock price was $30.75. A
year later it was $34.88. Per share dividends over the year were $0.55, while earnings
per share were $1.33. What was the dividend yield in fiscal year 2012?
A.1.79%
B.4.33%
C.13.43%
D.15.22%
E.17.76%
F.None of the above
27) Which of the following statements concerning a firm’s cash flows and profits is
false?
A.Managers must be at least as concerned with cash flows as with profits.
B.A company that sells merchandise at a profit will generate cash soon enough to
replenish cash flows required for continued production
C.The cash flows generated in a given time period can differ from the profits reported
D.Profits are no assurance that cash flow will be sufficient to maintain solvency
E.Due to required cash investments in current assets, fast-growing and profitable
companies can literally “grow broke”
28) Financial planning:
A.focuses solely on the short-term outlook for a firm
B.is a process that firms employ only when major changes to a firm’s operations are
anticipated
C.is a process that firms undergo once every five years
D.considers multiple options and scenarios for the next two to five years
E.provides minimal benefits for firms that are highly responsive to economic changes
29) On May 1, Vaya Corp. had a beginning cash balance of $175. Vaya’s sales for April
were $430 and May sales were $480. During May, the firm had cash expenses of $110
and made payments on accounts payable of $290. Vaya’s accounts receivable period is
30 days. What is the firm’s beginning cash balance on June 1?
A.$145
B.$155
C.$205
D.$215
E.$265
30) The following table presents a four-year forecast for Kenmore Air, Inc.:
Estimate the fair market value of Kenmore Air’s equity per share at the end of 2012
under the following assumptions:
a. EBIT in year 2016 will be $200 million.
b. At year-end 2016, Kenmore Air has reached maturity, and analysts expect its equity
will sell for 12 times year 2016 net income.
c. At year-end 2016, Kenmore Air has $250 million of interest-bearing liabilities
outstanding at an average interest rate of 10 percent.
31) “A firm can’t use interest tax shields unless it has (taxable) income to shield.” What
does this statement imply for capital structure? Explain briefly, comparing the following
two examples: a start-up biotech firm and an electric utility company.
32) Given the following information about a possible average-risk, new product
investment, calculate the investment’s net present value.
33) Why do financial managers need to understand the implications of the sustainable
rate of growth?
34) During 2011, Lele Design earned net income of $250,000. The firm neither bought
nor sold any capital assets. The book value of its assets declined by the year’s
depreciation charge of $200,000. The firm’s operating cash flow for the year was
$450,000. The market value of its assets increased by $300,000. What was Lele
Design’s economic income for the year? Why is this figure different from its accounting
income? Please ignore taxes for this problem.
35) Playdough Products earned net income of $400,000 in 2011. The firm increased its
accounts receivable during the year by $250,000. The book value of its assets declined
by the year’s depreciation charge, which was $180,000, and the market value of its
assets increased by $20,000. Based only on this information, how much cash did
Playdough Products generate during the year? Please ignore taxes for this problem.
36) Selected financial information for Hard Knock Doors is presented below:
Is the increase in dividends a good idea for Hard Knock?
37) Ten years ago you invested $1,000 for 10 shares of Steeze, Inc. common stock. You
sold the shares recently for $2,000. While you owned the stock it paid $10.08 per share
in annual dividends. What was your rate of return on Steeze stock?