Finance 3130 Sample Exam 1B Spring 2012

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1 Finance 3130 Sample Exam 1B Spring 2012 True/False Indicate whether the statement is true or false. 1. A firm s income statement provides information as of a point in time, and represents how management allocated funding resources to determine its current net worth position.. 2. Depreciation is a noncash item on the income statement and therefore is not a source of cash to the firm. 3. Suppose an investor plans to invest a given sum of money. She can earn an effective annual rate of 5% on Security A, while Security B will provide an effective annual rate of 10%. Within 11 years' time, the compounded value of Security B will be more than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs daily.) 4. The present value of a future sum decreases as either the discount rate or the number of periods per year increases. 5. Your benevolent father has decided to give you an annual allowance. However, since he has been paying your supplemental business tuition, he has decided to test what you ve learned for your high priced education.. He has given you the choice of receiving (A) $500 at the end of each year for 5 years or (B) receiving $500 at the beginning of each year for 5 years. You both agree that you can make 5% return on these funds. Given your knowledge of finance you select B, which is the best possible choice, making your father proud. Multiple Choice Identify the choice that best completes the statement or answers the question. 6. Which of the following items is NOT included in current assets? a. Accounts receivable. b. Inventory. c. Goodwill d. Cash. e. Short-term, highly liquid, marketable securities. 7. Which of the following items cannot be found on a firm's balance sheet under current liabilities? a. Accounts payable. b. Short-term notes payable to the bank. c. Accrued wages. d. Retained Earnings e. Accrued payroll taxes. 8. The TREX Company has daily sales outstanding of 20 days. Annual sales are $5,475,000. The company uses a 365 day year to determine average daily sales. How much does TREX have tied up in accounts recieveable financing? a. $400,000 b. $456,250 c. 300,000 d. $375,000 e. $325,000

2 9. Eastern Digital Landrover has a profit margin on sales of 4%, with an equity multiplier of 2.0. It has annual sales of $100 million on a total asset base of $75 million. What can shareholders expect to receive on terms of a return on equity (ROE)? [round to the nearest percent] a. 8% b. 11% c. 12% d. 16% e. 18% 10. Mandolay Real Estate Investment Trust [REIT] has an equity multiplier of 3. The company s assets are financed with some combination of equity and long term debt. Given your UNI degree in Real Estate, you ve decided to investigate whether to buy shares in this company. What is the debt ratio of Mandolay REIT? a. 10% b. 40% c % d. 75% e. 93% the same as GM 11. Hostess Twinkies Inc. has a return on assets (ROA) of 10%, a profit margin of 2%, and a return on equity (ROE) of 15%. What is its total asset turnover ratio [TATO]? a. 1.5 b. 2.5 c. 3.0 d. 4.5 e Suppose you have $2,500 and plan to purchase a 5-year certificate of deposit (CD) that pays 3.75% interest, compounded annually. How much will you have when the CD matures? a. $3, b. $2, c. $1, d. $2, e. $2, Suppose you are going to invest in a zero coupon U.S. government bond that promises to pay $5,000 ten years from now, but pay no coupon income.. If the going interest rate on this 10-year government bond is 8.5%, how much should you be willing to pay for the bond today? a. $1, b. $2, c. $2, d. $ e. $ You and your wife are talking about sending your young son to I Love Football University for an undergraduate business degree. Currently tuition along with room and board is $10,000. If the cost of a I Love Football business school education continues to rise 10% a year, how long will it take for the annual cost to quadruple? [round to the nearest year] a. 7 years b. 10 years c. 15 years d. 16 years e. 12 years

3 15. You want to go to Australia 5 years from now. You plan is to save for this vacation and put $4,100 into an investment account at the end of each year for 5 years. After taking this class you decide to deposit the funds in a mutual fund which you expect to return 8.5% per year. Under these conditions, how much will you have just after you make the 5th deposit, 5 years from now? [assuming that you pay no tax on the gain in your account] a. $18, b. $19, c. $20, d. $21, e. $24, You want to buy a new sports car 5 years from now, and you plan to save $4,200 per year, beginning immediately. You will make 5 deposits in an account that pays 6% in dividend income. Under these assumptions, how much will you have 5 years from today? a. $23, b. $25, c. $15, d. $16, e. $16, What is the present value of the following cash flow stream if the interest rate is 6.0% per year? Year Cash Flow Amount $1,000 2 $2,000 3 $2,000 4 $4,000 a. $5, b. $6, c. $6, d. $6, e. $7,571.00

4 Finance 3130 Sample Exam 1B Spring 2012 Answer Section TRUE/FALSE 1. ANS: F PTS: 1 DIF: Easy TOP: (3.1) Annual report and expectations 2. ANS: T PTS: 1 DIF: Easy TOP: (3.2) Balance sheet 3. ANS: F Work out the numbers with a calculator: PV 1000 FV A = $1, Rate on A 5% 2*FV A = $3, Rate on B 10% FV B = $2, Years 11 FV B < 2*FV A, so False PTS: 1 DIF: Medium TOP: (2.2) Comparative compounding 4. ANS: T PTS: 1 DIF: Medium TOP: (2.3) PV of a sum 5. ANS: T PTS: 1 DIF: Medium TOP: (2.15) Effective and nominal rates MULTIPLE CHOICE 6. ANS: C PTS: 1 DIF: Easy OBJ: TYPE: Conceptual TOP: (3.2) Current assets 7. ANS: D PTS: 1 DIF: Easy OBJ: TYPE: Conceptual TOP: (3.2) Current liabilities 8. ANS: C PTS: 1 DIF: Hard OBJ: TYPE: Conceptual TOP: (2.15) Effective annual rates 9. ANS: B Use Du Pont Equation: ROE = PMOS x TATO x EM PTS: 1 DIF: Easy OBJ: TYPE: Conceptual TOP: (1.7) Money markets 10. ANS: C PTS: 1 DIF: Easy OBJ: TYPE: Conceptual TOP: (1.4) Financial transactions 11. ANS: E ROA == NI/TA; PMOS = NI/Sales; Therefore ROA/PMOS = Sales/TA 10%/2% = 5 PTS: 1 DIF: Medium OBJ: TYPE: Conceptual TOP: (1.5) Interest rates 12. ANS: A N 5 I/YR 3.75% PV $2,500 PMT $0 FV $3,005.25

5 TOP: (2.2) FV of a lump sum 13. ANS: C N 10 I/YR 8.5% PMT $0 FV $5, PV $2, TOP: (2.3) PV of a lump sum 14. ANS: D I/YR 10.0% PV -$10000 PMT $0 FV $40000 N or 15 years TOP: (2.5) Number of periods 15. ANS: E N 5 I/YR 8.5% PV $0.00 PMT $4,100 FV $24, TOP: (2.7) FV of an ordinary annuity 16. ANS: B N 5 I/YR 6% PV $0.00 PMT $4,200 FV $25, Remember you need to put the calculator into the begin mode. TOP: (2.8) FV of an annuity due 17. ANS: E CF(0) ===> 0; CF(1)====> 1000 CF(2)====> 2000 CF(3) =====> 2000 CF(4) ====> 4000 I/YR = 6 Gold PRC [NPV] = $7, PTS: 1 DIF: Easy/Medium OBJ: TYPE: Problems

6 TOP: (2.12) PV of an uneven cash flow stream

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