FINANCIAL MANAGEMENT 1

Reviewer

MULTIPLE CHOICE
1. Which of the following is/are true regarding contingent convertible bonds:
a. The holder has the right to put these bonds back to the issuer if the bonds don’t
perform well.
b. The holder can convert these bonds into an equal number of new bonds if they
choose to do so.
c. These bonds are convertible into common stock of the issuing firm.
d. All of the above are true.

2. Market efficiency implies which of the following?

a. book value = intrinsic value
b. market value = intrinsic value
c. book value = market value
d. liquidation value = book value

3. Which of the following affect an asset's value to an investor?

I. Amount of an asset's expected cash flow
II. The riskiness of the cash flows
III. Timing of an asset's cash flows
IV. Investor's required rate of return

a. I, II, III
b. I, III, IV
c. I, II, IV
d. I, II, III, IV

4. In terms of the costs to organize each, which of the following sequences is correct,
moving from highest to lowest cost?
a. general partnership, sole proprietorship, limited partnership, corporation
b. sole proprietorship, general partnership, limited partnership, corporation
c. corporation, limited partnership, general partnership, sole proprietorship
d. sole proprietorship, general partnership, corporation, limited partnership

5. Revenues are taxed:

a. for economic stabilization
b. to achieve socially desirable goals
c. to provide revenues for government expenditures
d. all of the above

6. Money market instruments include:

a. common stock
b. preferred stock
c. T-bonds
d. T-bills

7. Capital market instruments include:

a. negotiable certificates of deposit
b. corporate equities
c. commercial paper
d. Treasury bills

8. Benefits of an organized security exchange include:

a. helping companies raise new capital
 b. establishing and publicizing fair security prices
c. providing a continuous market
d. all of the above

9. Activities of the investment banker include:

a. assuming the risk of selling a security issue
b. selling new securities to the ultimate investors
c. providing advice to firms issuing securities
d. all of the above

10. All of the following affect the value of a share of common stock except:
a. the par value of stock
b. investors’ required rate of return
c. the future growth in dividends
d. the future dividends

11. Genny, Inc. bonds have a 9% coupon rate with semi-annual coupon payments. They
have 9 1/2 years to maturity and a par value of $1,000. Compute the value of Genny’s
bonds if investors' required rate of return is 7%.
a. $1,135.47
b. $973.33
c. $1,137.10
d. $950.00

12. Cabell Corp. bonds pay an annual coupon rate of 10%. If investors' required rate of
return is now 8% on these bonds, they will be priced at:
a. Par value
b. A premium to par value
c. A discount to par value
d. Cannot be determined from information given

13. Cary’s Carry-all Company bonds have a 12% coupon rate. Interest is paid semi-
annually. The bonds have a par value of $1,000 and will mature 8 years from now.
Compute the value of Terminator Bonds if investors' required rate of return is 8%.
a. $1,114.70
b. $1,233.05
c. $894.06
d. $941.27

14. Soledad Company preferred stock has a market price of $20. If it has a yearly dividend
of $1.50, what is your expected rate of return if you purchase the stock at its market
price?
a. .075%
b. 7.5%
c. 13.31%
d. 21.33%

15. Bell Corp. has a preferred stock that pays a dividend of $2.40. If you are willing to
purchase the stock at $11, what is your required rate of return (round your answer to
the nearest .1% and assume that there are no transaction costs)?
a. 21.8%
b. 11.0%
c. 9.1%
d. 20.1%

16. Yakey Corporation's ROE is 14%. Their dividend payout ratio is 40%. The last
dividend, just paid, was $2.58. If dividends are expected to grow by the company's
sustainable growth rate indefinitely, what is the current value of Yakey common stock if
 its required return is 18%?
a. $20.81
b. $21.97
c. $26.87
d. $29.13

17-22
Lesli Corporation

Balance Sheet Income Statement

Assets:
Cash $ 150,000 Sales (all credit) $6,000,000
Accounts receivable 350,000 Cost of goods sold (3,000,000)
Inventory 600,000 Operating expenses (900,000)
Net fixed assets 1,900,000 Interest expense (750,000)
Total assets 3,000,000 Income taxes (500,000)
Net income 850,000
Liabilities and owners’ equity:
Accounts payable $ 150,000
Notes payable 250,000
Long-term debt 1,200,000

Owners’ Equity 1,400,000

Total L. + O.E. 3,000,000

17. Based on the information, the average collection period is:

a. 36.0 days
b. 21.3 days
c. 13.2 days
d. 27.4 days

18. The return on total assets is:

a. 12%
b. 15%
c. 25%
d. 28%

19. The total asset turnover is:

a. 2.0 times
b. 3.0 times
c. 1.8 times
d. 5.0 times

20. The debt ratio is:

a. 0.18
b. 0.40
c. 0.50
d. 0.53

21. The current and quick ratios are, respectively:

a. .37 and .17
b. .37 and .20
c. 2.75 and 1.25
d. 2.75 and 1.50

22. Assuming that the firm has no preferred stock, and paid $250,000 in common dividends,
the firm’s return on equity was:
 a. 79%
b. 61%
c. 43%
d. 32%

23. If you want to have $90 in four years, how much money must you put in a savings
account today? Assume that the savings account pays 8.5% and it is compounded
monthly (round to the nearest $1).
a. $64
b. $87
c. $66
d. $71

24. What is the present value of $10,000 to be received 20 years from today? Assume that
the discount rate is 6.5% and it is compounded monthly (round to the nearest $1).
a. $8,980
b. $9,665
c. $2,840
d. $2,735

25. What is the present value of $12,500 to be received 10 years from today? Assume a
discount rate of 8% compounded annually and round to the nearest $10.
a. $5,790
b. $11,574
c. $9,210
d. $17,010

26. How much money must be put into a bank account yielding 3.5% (compounded
annually) in order to have $1,250 at the end of 10 years (round to nearest $1)?
a. $921
b. $886
c. $843
d. $798

27. If you want to have $1,200 in 27 months, how much money must you put in a savings
account today? Assume that the savings account pays 14% and it is compounded
monthly (round to nearest $10).
a. $910
b. $890
c. $880
d. $860

28-31
Wes Donnell, Inc.
Balance Sheet
2010 2011

Cash $ 1,000 $?
Accounts receivable 5,000 6,000
Inventories 6,500 6,000
Land 10,000 12,000
Other fixed assets 8,000 9,000
Accumulated depreciation (1,000) (1,600)
Total Assets $29,500 $ ?????

Accounts payable $ 3,200 $ 6,800

Bonds 4,000 4,000
Common stock 17,000 16,000
Retained earnings 5,300 5,000
 Liabilities & Equity $29,500 $ ?????

Wes Donnell, Inc.

Income Statement
For the year ended December 31, 2011

Sales $84,000
Cost of goods sold (66,400)
Gross profit 17,600
Operating expenses 13,000)
Depreciation (600)
EBIT 4,000
Interest expense (500)
EBT 3,500
Taxes (1,500)
Net Income $ 2,000

28. Based on the information contained in Table 4-4, what was the total amount of Wes
Donnell's common stock dividend for 2011?
a. $800
b. $2,300
c. $2,000
d. cannot be determined with available information

29. Based on the perspective of the finance officer, what was Wes Donnell’s inventory
turnover for 2011?
a. 14.0
b. 11.1
c. 8.3
d. 6.4

30. What was Wes Donnell’s total assets on December 31, 2011?
a. $31,400
b. $31,500
c. $31,800
d. Cannot be determined from the information given

31. What was Wes Donnell’s cash balance on December 31, 2011?
a. $400
b. $500
c. $800
d. $3,000

32. You are considering investing in Ford Motor Company. Which of the following are
examples of diversifiable risk?

I. Risk resulting from possibility of a stock market crash.

II. Risk resulting from uncertainty regarding a possible
strike against Ford.
III. Risk resulting from an expensive recall of a Ford
product.
IV. Risk resulting from interest rates decreasing.

a. I only
b. I and IV
 c. I, II, III, IV
d. II, III

33. PDQ Company's common stock has a beta of 1.2. If the expected risk free return is 4%
and the market offers a risk premium of 7% over the risk free rate, what is the expected
return on PDQ's common stock?
a. 7.8%
b. 12.4%
c. 13.2%
d. 17.2%

34. If a firm with credit terms of 1/10 net 30 were to change its terms to 3/10 net 30, the
result would probably be:
a. increased bank loans
b. increased accounts receivable turnover
c. an increase in the average level of accounts receivable
d. a decrease in accounts payable

35. Podunk Communications bonds mature in 6 1/2 years with a par value of $1,000. They
pay a coupon rate of 9% with semi-annual payments. If the required rate of return on
these bonds is 11% what is the bond's value?
a. $1,026.73
b. $973.76
c. $1,022.74
d. $908.83

36. A bond maturing in 10 years pays $80 each year (including year 10) and $1,000 upon
maturity. Assuming 10 percent to be the appropriate discount rate, the present value of
the bond is:
a. $877.11
b. $1,000.00
c. $416.39
d. $1,785.67
37. If you have $20,000 in an account earning 8 percent annually, what constant amount
could you withdraw each year and have nothing remaining at the end of 5 years?
a. $5,009
b. $4,755
c. $3,409
d. $2,466

38-39
The management FERDZ INC. provided the following data for your analysis:
Budgeted sales for 2020 P162,520
Total variable costs in 2019 is 7.5 times higher than in the company’s profit for the same year
Total fixed costs in 2019 P40,000
Profit on the budgeted income statement for 2020 P15,000.
Profit on 2019 operation was 8% of Sales.

38. What is the degree of operating leverage for 2019? __________

a. 3 c. 2
b.5 d. 4
39. What is the projected percentage increase in 2020 sales? ______________
a. 30% c.10%
b. b. 20% d. 40%

40. GUTZY CO. is planning to invest in the new product that will increase its profit by 10%.
The VP-Finance said that retained earnings will be used which is more favorable in
analysing the capital structure of the company. At present the company has an
investment in T-Bills with a risk free rate of 3%. The CAPM showed 7.5%. The beta
 used was .9

What was the market rate used by the company in determining its CAPM? ___________
a. 7% c. 6%
b.10% d. 8%