MINISTRY OF EDUCATION AND TRAINING CORPORATE FINANCE 1

NATIONAL ECONOMICS UNIVERSITY

Mid-term Test 1
Mode of study: Full time. Intake: 64
Exam place: A2; NEU
School of Advanced Education Programs Exam date: Mar 22nd, 2024 Exam time: 13.30
Version: 01 Allowed time: 90 minutes

Choose the best answer for each of the following questions. Please give a brief explanation if
possible.

1. Which one of the following will increase the value of a firm's net working capital?
A. using cash to pay a supplier
B. depreciating an asset
C. collecting an accounts receivable
D. purchasing inventory on credit
E. selling inventory at a profit

2. Which one of the following statements concerning net working capital is correct?
A. Net working capital increases when inventory is purchased with cash.
B. Net working capital must be a positive value.
C. Total assets must increase if net working capital increases.
D. A decrease in the cash balance may or may not decrease net working capital.
E. Net working capital is the amount of cash a firm currently has available for spending.

3. Which one of the following statements related to liquidity is correct?

A. Liquid assets tend to earn a high rate of return.
B. Liquid assets are valuable to a firm.
C. Liquid assets are defined as assets that can be sold quickly regardless of the price obtained.
D. Inventory is more liquid than accounts receivable because inventory is tangible.
E. Any asset that can be sold within the next year is considered liquid.

4. Which of the following is (are) included in the market value of a firm but are excluded from the firm's
book value: I. value of management skills; II. value of a copyright; III. value of the firm's reputation; IV.
value of employee's experience?
A. I only
B. II only
C. III and IV only
D. I, II, and III only
E. I, III, and IV only

5. Which one of the following statements related to an income statement is correct? Assume accrual
accounting is used.
A. The addition to retained earnings is equal to net income plus dividends paid.
B. Credit sales are recorded on the income statement when the cash from the sale is collected.
C. The labor costs for producing a product are expensed when the product is sold.
D. Interest is a non-cash expense.
E. Depreciation increases the marginal tax rate.

6. Four years ago, Velvet Purses purchased a mailing machine at a cost of $176,000. This equipment is
currently valued at $64,500 on today's balance sheet but could actually be sold for $58,900. This is the
only fixed asset the firm owns. Net working capital is $57,200 and long-term debt is $111,300. What is
the book value of shareholders' equity?
A. $4,800
B. $7,700
C. $10,400
D. $222,600
E. $233,000

7. Winston Industries had sales of $843,800 and costs of $609,900. The firm paid $38,200 in interest and
$18,000 in dividends. It also increased retained earnings by $62,138 for the year. The depreciation was
$76,400. What is the average tax rate?

A. 32.83 percent D. 43.39 percent

B. 33.33 percent E. 48.87 percent
C. 38.17 percent

8. The Lakeside Inn had operating cash flow of $48,450. Depreciation was $6,700 and interest paid was
$2,480. A net total of $2,620 was paid on long-term debt. The firm spent $24,000 on fixed assets and
decreased net working capital by $1,330. What is the amount of the cash flow to stockholders?
A. $5,100 D. $19,998
B. $7,830 E. $20,680
C. $18,020

9.
2011
Cost of Goods Sold $4,878
Interest $238
Dividends $420
Depreciation $789
Change in Retained Earnings $631
Tax rate 34%
What is the operating cash flow for 2011?
A. $2,078.00
B. $2,122.42
C. $2,462.58
D. $2,662.00
E. $2,741.42

10. Boyer Enterprises had $200,000 in 2011 taxable income. What is the firm's average tax rate based on
the rates shown in the following table?
Taxable Income Tax rate
$0 – 50,000 15%
50,001 – 75,000 25%
 75,001 – 100,000 34%
100,001 – 335,000 39%
A. 28.25 percent
B. 30.63 percent
C. 32.48 percent
D. 36.50 percent
E. 39.00 percent

11. The price-sales ratio is especially useful when analyzing firms that have which one of the following?
A. volatile market prices
B. negative earnings
C. positive PEG ratios
D. a negative Tobin's Q
E. increasing sales

12. Shareholders probably have the most interest in which one of the following sets of ratios?
A. return on assets and profit margin
B. long-term debt and times interest earned
C. price-earnings and debt-equity
D. market-to-book and times interest earned
E. return on equity and price-earnings

13. An increase in which of the following will increase the return on equity, all else constant: I. sales; II.
net income; III. Depreciation; IV. total equity?
A. I only
B. I and II only
C. II and IV only
D. II and III only
E. I, II, and III only

14. Which of the following can be used to compute the return on equity: I. Profit margin × Return on
assets; II. Return on assets × Equity multiplier; III. Net income/Total equity; IV. Return on assets × Total
asset turnover?
A. I and III only
B. II and III only
C. II and IV only
D. I, II, and III only
E. I, II, III, and IV

15. Which of the following represent problems encountered when comparing the financial statements of
two separate entities: I. Either one, or both, of the firms may be conglomerates and thus have unrelated
lines of business; II. The operations of the two firms may vary geographically; III. The firms may use
differing accounting methods; IV. The two firms may be seasonal in nature and have different fiscal year
ends?
A. I and II only
B. II and III only
C. I, III, and IV only
D. I, II, and III only
E. I, II, III, and IV

16. During the year, Kitchen Supply increased its accounts receivable by $130, decreased its inventory by
$75, and decreased its accounts payable by $40. How did these three accounts affect the firm's cash flows
for the year?
A. $245 use of cash
B. $165 use of cash
C. $95 use of cash
D. $95 source of cash
E. $165 source of cash

17. A firm generated net income of $862. The depreciation expense was $47 and dividends were paid in
the amount of $25. Accounts payables decreased by $13, accounts receivables increased by $28,
inventory decreased by $14, and net fixed assets decreased by $8. There was no interest expense. What
was the net cash flow from operating activity?
A. $776 D. $922
B. $802 E. $930
C. $882

18. A firm has sales of $2,190, net income of $174, net fixed assets of $1,600, and current assets of $720.
The firm has $310 in inventory. What is the common-size statement value of inventory?
A. 13.36 percent D. 30.42 percent
B. 14.16 percent E. 43.06 percent
C. 19.38 percent

19. A firm has total debt of $4,850 and a debt-equity ratio of 0.57. What is the value of the total assets?
A. $6,128.05
B. $7,253.40
C. $9,571.95
D. $11,034.00
E. $13,358.77

20. The Flower Shoppe has accounts receivable of $3,506, inventory of $4,407, sales of $218,640, and
cost of goods sold of $169,290. How many days does it take the firm to sell its inventory and collect the
payment on the sale assuming that all sales are on credit?
A. 14.67 days
B. 15.35 days
C. 16.23 days
D. 17.18 days
E. 17.47 days

21. The Burger Hut has sales of $29 million, total assets of $43 million, and total debt of $13 million. The
profit margin is 11 percent. What is the return on equity?
A. 7.42 percent
B. 10.63 percent
C. 11.08 percent
D. 13.31 percent
E. 14.28 percent

22. Charlie's Chicken has a debt-equity ratio of 2.05. Return on assets is 9.2 percent, and total equity is
$560,000. What is the net income?
A. $105,616
B. $148,309
C. $157,136
D. $161,008
E. $164,909

23. Canine Supply has sales of $2,200, total assets of $1,400, and a debt-equity ratio of 0.5. Its return on
equity is 15 percent. What is the net income?
A. $128.16
B. $131.41
C. $132.09
D. $136.67
E. $140.00

24. Billings, Inc. has net income of $161,000, a profit margin of 7.6 percent, and an accounts receivable
balance of $127,100. Assume that 66 percent of sales are on credit. What is the days' sales in receivables?
A. 21.90 days
B. 27.56 days
C. 33.18 days
D. 35.04 days
E. 36.19 days

25. Gladstone Pavers has a long-term debt ratio of 0.6 and a current ratio of 1.6. Current liabilities are
$700, sales are $4,440, the profit margin is 9.5 percent, and the return on equity is 19.5 percent. How
much does the firm have in net fixed assets?
A. $4,880.18
B. $4,987.69
C. $5,666.67
D. $5,848.15
E. $6,107.70

26. Silverago Incorporated, an international metals company, reported a loss on the sale of equipment of
$2 million in 2010. In addition, the company’s income statement shows depreciation expense of $8
million and the cash flow statement shows capital expenditure of $10 million, all of which was for the
purchase of new equipment. Using the following information from the comparative balance sheets, how
much cash did the company receive from the equipment sale?
Balance Sheet Item 12/31/2009 12/31/2010 Change
Equipment $100 million $105 million $5 million
Accumulated depreciation of $40 million $46 million $6 million
Equipment
A. $0 million
B. $1 million
C. $2 million
D. $3 million
E. $4 million

27. Jaderong Plinkett Stores reported net income of $25 million. The company has no outstanding debt.
Using the following information from the comparative balance sheets (in millions), what should the
company report in the financing section of the statement of cash flows in 2010?
Balance Sheet Item 12/31/2009 12/31/2010 Change
Common Stock $100 $102 $2
Additional paid-in capital $100 $140 $40
common stock
Retained earnings $100 $115 $15
Total Stockholders’ equity $300 $357 $57
A. Issuance of common stock of $42 million; Dividends paid of $10 million.
B. Issuance of common stock of $38 million; Dividends paid of $10 million.
C. Issuance of common stock of $42 million; Dividends paid of $40 million.
D. Issuance of common stock of $38 million; Dividends paid of $40 million.
E. Issuance of common stock of $10 million; Dividends paid of $10 million.

28. CC Corporation reported the following inventory transactions (in chronological order) for the year:
Purchase Sales
40 units at $30 13 units at $35
20 units at $40 35 units at $45
90 units at $50 60 units at $60
Assuming inventory at the beginning of the year was zero, calculate the year-end inventory using FIFO
and LIFO.
FIFO LIFO
A. $5,220 $1,040
B. $2,100 $1,280
C. $2,100 $1,040
D. $4,400 $1,280
E. $5,220 $1,280

29. Purple Fleur S.A., a retailer of floral products, reported cost of goods sold for the year of $75 million.
Total assets increased by $55 million, but inventory declined by $6 million. Total liabilities increased by
$45 million, and accounts payable increased by $2 million. The cash paid by the company to its suppliers
is most likely closest to:
A. $67 million D. $89 million
B. $79 million E. $96 million
C. $83 million

30. For 2009, Flamingo Products had net income of $1,000,000. At 1 January 2009, there were 1,000,000
shares outstanding. On 1 July 2009, the company issued 100,000 new shares for $20 per share. The
company paid $200,000 in dividends to common shareholders. What is Flamingo’s basic earnings per
share for 2009?
A. $0.80 D. $1.00
B. $0.91 E. $1.05
C. $0.95
Note: Open-book exam - No cell phones, tablets and laptops – No discussion among students