Fin 486 Final Exam

Fin 486 Final Exam

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) The primary emphasis of the financial manager is the use of
A) cash flow.
B) profit incentives.
C) organization charts.
D) accrued earnings.

1) _______

2) All of the following are key strengths of a corporation EXCEPT
A) low organization costs.
B) readily transferable ownership.
C) limited liability.
D) access to capital markets.

2) _______

3) The ________ is a measure of liquidity which excludes ________, generally the least liquid asset.
A) quick ratio; accounts receivable
B) current ratio; accounts receivable
C) current ratio; inventory
D) quick ratio; inventory

3) _______

4) FASB Standard No. 52 mandates that U.S. based companies must translate their
foreign-currency-denominated assets and liabilities into dollars using the
A) average rate.
B) historical rate.
C) current rate.
D) none of the above.

4) _______

Table 3.5
A financial manager at General Talc Mines has gathered the financial data essential to prepare a pro forma balance sheet
for cash and profit planning purposes for the coming year ended December 31, 2004. Using the percent-of-sales method
and the following financial data, prepare the pro forma balance sheet in order to answer the following multiple choice
(a) The firm estimates sales of $1,000,000.
(b) The firm maintains a cash balance of $25,000.
(c) Accounts receivable represents 15 percent of sales.
(d) Inventory represents 35 percent of sales.
(e) A new piece of mining equipment costing $150,000 will be purchased in 2004.
Total depreciation for 2004 will be $75,000.
(f) Accounts payable represents 10 percent of sales.
(g) There will be no change in notes payable, accruals, and common stock.
(h) The firm plans to retire a long term note of $100,000.
(i) Dividends of $45,000 will be paid in 2004.
(j) The firm predicts a 4 percent net profit margin.
Balance Sheet
General Talc Mines
December 31, 2003

5) The pro forma total liabilities amount is (See Table 3.5)
A) $650,000.
B) $700,000.
C) $500,000.

5) _______
D) $550,000.

6) If a United States Savings bond can be purchased for $29.50 and has a maturity value at the end
of 25 years of $100, what is the annual rate of return on the bond?
A) 6 percent
B) 5 percent
C) 7 percent
D) 8 percent

6) _______

7) If a person’s required return decreases for an increase in risk, that person is said to be
A) risk-indifferent.
B) risk-seeking.
C) risk-averse.
D) risk-aware.

7) _______

Table 8.5
Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The
proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a five-year recovery
schedule. The existing equipment, which originally cost $25,000 and will be sold for $10,000, has been depreciated using
an MACRS five-year recovery schedule and three years of depreciation has already been taken. The new equipment is
expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate.
8) The initial outlay equals ________. (See Table 8.5)
A) $44,100
B) $41,100

8) _______
C) $38,800

D) $38,960

Table 9.6
Nuff Folding Box Company, Inc. is considering purchasing a new gluing machine. The gluing machine costs $50,000 and
requires installation costs of $2,500. This outlay would be partially offset by the sale of an existing gluer. The existing
gluer originally cost $10,000 and is four years old. It is being depreciated under MACRS using a five-year recovery
schedule and can currently be sold for $15,000. The existing gluer has a remaining useful life of five years. If held until
year 5, the existing machine’s market value would be zero. Over its five-year life, the new machine should reduce
operating costs (excluding depreciation) by $17,000 per year. Training costs of employees who will operate the new
machine will be a one-time cost of $5,000 which should be included in the initial outlay. The new machine will be
depreciated under MACRS using a five-year recovery period. The firm has a 12 percent cost of capital and a 40 percent tax
on ordinary income and capital gains.

9) The payback period for the project is (See Table 9.6)
A) between 4 and 5 years.
B) 2 years.
C) 3 years.
D) between 3 and 4 years.

9) _______

Table 10.1
A corporation is assessing the risk of two capital budgeting proposals. The financial analysts have developed pessimistic,
most likely, and optimistic estimates of the annual cash inflows which are given in the following table. The firm’s cost of
capital is 10 percent.

10) If the projects have five-year lives, the range of the net present value for Project B is
approximately ________. (See Table 10.1.)
A) $201,000.
B) $255,410.
C) $303,280.
D) $80,560.

10) ______

11) The ________ is the firm’s desired optimal mix of debt and equity financing.
A) target capital structure
B) book value
C) cost of capital
D) market value

11) ______

Table 14.5
Caren’s Canoes is considering relaxing its credit standards to encourage more sales. As a result, sales are expected to
increase 15 percent from 300 canoes per year to 345 canoes per year. The average collection period is expected to increase
to 40 days from 30 days and bad debts are expected to double the current 1 percent level. The price per canoe is $850, the
variable cost per canoe is $650 and the average cost per unit at the 300 unit level is $700. The firm’s required return on
investment is 20 percent.
12) What is the cost of marginal bad debts under the proposed plan? (See Table 14.5)
A) $765
B) $5,100
C) $383
D) $3,315

12) ______

13) Much of the commercial paper is issued by
A) venture capitalists.
C) small businesses.

13) ______
B) commercial finance companies.
D) small manufacturing firms.

14) The part of finance concerned with design and delivery of advice and financial products to
individuals, business, and government is called
A) Financial Manager.
B) Financial Services.
C) Managerial Finance.
D) none of the above.
Table 2.1

14) ______

Information (2005 values)
1. Sales totaled $110,000
2. The gross profit margin was 25 percent.
3. Inventory turnover was 3.0.
4. There are 360 days in the year.
5. The average collection period was 65 days.
6. The current ratio was 2.40.
7. The total asset turnover was 1.13.
8. The debt ratio was 53.8 percent.
15) Inventory for CEE in 2005 was ________. (See Table 2.1)
A) $32,448
B) $ 9,167
C) $36,667