MANAGERIAL FINANCE: FIN 350
Instructions: You may complete it by typing in the answers of your choice into the Microsoft Word file containing
the questions. Then, save this file. Thank you!
A. TRUE / FALSE QUESTIONS
Enter “True” or “False” on the blank preceding each question.
______ 1. Finance can be defined as the art and science of managing money.
______ 2. The field of Finance is an outgrowth of philosophy, which dates back to the 16 th century.
______ 3. The primary principal used by financial managers when making decisions is “marginal
cost / benefit analysis.
______ 4. The Sarbanes-Oxley Act of 2002 established an oversight board to monitor the accounting
industry.
______ 5. A disadvantage of the sole proprietorship form of business organization is that it is more
expensive to organize a business in this way vs. the other forms of business organization.
______ 6. Among all of the firms in the U.S., nearly three-fourths of them are organized as corporations.
______ 7. Earnings of corporations in the U.S. are now taxed at a flat 21% rate.
______ 8. A “capital gain” results when a firm sells an investment for less than its original purchase price.
______ 9. For corporations only, 10% of the dividend income received from investment in the stock of
another corporation is excluded from taxation.
______ 10. A corporation’s financial statements are prepared according to the requirements of the Generally
Accepted Accounting Principles (GAAP).
______ 11. Both the “Current Ratio” and the “Quick Ratio” measure a firm’s liquidity.
______ 12. For both the firm’s “Inventory” and its “Accounts Receivable,” it is desirable for the turnover rates
of these accounts to have low values.
______ 13. The less debt a corporation uses to finance its “Total Assets,” the greater its financial leverage.
______ 14. Most managers are “risk-averse,” as for a given increase in risk, they require an increase in
return.
______ 15. The standard deviation can be used to measure the risk associated with a given asset. It
measures the dispersion of the asset’s possible returns around the asset’s expected return.
______ 16. In general, the higher the positive correlation between the returns for a given set of assets, the
greater the reduction In risk that the investor can achieve by investing in these assets.
B. MULTIPLE CHOICE QUESTIONS
For each question, enter the letter of the best response on the blank preceding the question.
______ 17. Per the information in Chapter One, _________________ is(are) important skill(s) to develop
for a career in the finance area.
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A.
B.
C.
D.
E.
F.
critical thinking.
communication.
collaboration.
financial computing skills.
A and B and C.
A and B and C and D.
______ 18. The overall goal of a corporation can be summarized as
A.
B.
C.
D.
maximizing shareholder wealth.
maximizing the firm’s “Net Income.”
maximizing the firm’s “Earnings Per Share” (EPS).
maximizing the number of common stock shares outstanding.
______ 19. The “stakeholders” of a toy manufacturing corporation headquartered in Boston and doing business
domestically within the U.S. may include the following EXCEPT
A.
B.
C.
D.
the firm’s shareholders.
vendors of the firm’s packaging materials.
members of the Board of Directors of the Bank of England.
residents of Boston, the community in which the firm’s corporate headquarters is located.
______ 20. The system of rules, processes, and laws that is used to direct and control a corporation is
known as
A.
B.
C.
D.
the “agency” issue.
corporate governance.
the Board of Directors.
the prospectus.
______ 21. Corporate ethics programs seek to
A.
B.
C.
D.
E.
F.
reduce litigation and judgment costs.
maintain a positive corporate image.
build shareholder confidence.
gain the loyalty and respect of stakeholders.
A and B and C and D.
A and B and D.
______ 22. Each of the following is a strength or benefit of the sole proprietorship form of business organization
EXCEPT
A.
B.
C.
D.
the unlimited liability that applies to the business’s owner.
the owner receives all profits that the business generates.
ease of dissolution when the business ends.
the owner has independence in decision-making for the firm.
______ 23. A corporation’s Balance Sheet presents a summary of the firm’s financial position as of a specific
date and includes each of the following sections EXCEPT
A.
B.
C.
D.
Assets.
Liabilities.
Equity.
Operating Expenses.
______ 24. Trend or time-series analysis is used to evaluate the performance
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A.
B.
C.
D.
E.
of one firm.
over a period of two or more years.
of the firm vs. the top three firms in the industry.
A and B.
A and B and C.
______ 25. Common-size Income Statements
A.
B.
C.
D.
E.
F.
are a tool for analyzing profitability in relation to the firm’s “Sales.”
consist of each item on the statement expressed as a “% of Sales.”
are especially useful in comparing the firm’s performance across years.
cannot be calculated using Excel.
A and B and C and D.
A and B and C.
______ 26. An “efficient” portfolio
A.
B.
C.
D.
provides the maximum level of return for a given level of risk.
provides the minimum level of return for a given level of risk.
generally is not diversified across industries.
only rarely contains common stock shares issued by firms in the oil industry.
______ 27. Risk(s) of diversifying an investment portfolio internationally may include each of the
following EXCEPT
A.
B.
C.
D.
possible fluctuations in the currency exchange rates.
political risk associated with actions the governments in other countries may take.
an increase in the number and variety of holdings within the investor’s portfolio.
the possibility that a foreign government may be overthrown.
______ 28. Each of the following is a “systematic” risk factor that cannot be eliminated by
diversifying a portfolio EXCEPT
A. the level of interest rates in the economy.
B. a labor strike at the General Motors’ production facilities.
C. the unemployment level.
D. the annual inflation rate.
______ 29. With regard to beta in the Security Market Line (SML) equation,
A.
B.
C.
D.
E.
the beta coefficient for the entire market equals 1.0.
beta values higher than 1.0 are more risky than the market average.
beta values less than 1.0 are less risky than the market average.
A and B and C.
B and C.
______ 30. In the Security Market Line (SML) equation, the return on the ________________
can be used as an approximation of the risk-free rate of return (RF).
A.
B.
C.
D.
U.S. Treasury Bill (T-Bill).
Dow Jones’ Industrial Average.
Standard & Poor’s 500 Index.
Moody’s Bond Index.
______ 31. Assume that inflation is expected to increase by 2% during the coming year. This will
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A. cause the entire Security Market Line (SML) equation, when graphed, to shift downward
by 2%.
B. cause the entire Security Market Line (SML) equation, when graphed, to shift upward by 2%.
C. have no impact on the graph of the Security Market Line (SML) equation.
______ 32. Assume that investor risk aversion decreases due to the very favorable economy. This will
A. have no impact on the graph of the Security Market Line (SML) equation.
B. cause the Y-axis intercept of the Security Market Line (SML) equation to remain constant,
when graphed, but increase the slope of the SML.
C. cause the Y-axis intercept of the SML equation to remain constant, when graphed, but
decrease the slope of the SML.
D. cause the entire SML, when graphed, to shift downward, parallel to the original SML graph.
C. CALCULATION SECTION
Instructions: In this section, please show all calculations. Partial credit will be given wherever possible,
when your calculations are shown and they are completed correctly.
33. – 34. Income Taxes for a Sole Proprietorship Business
Taxable Income Brackets
$ 0 to $ 9,525
Base Tax
+
$
+
(10% × amount over $ 0)
+
(12% × amount over $ 9,525)
+
(22% × amount over $ 38,700)
9,525 to 38,700
38,700 to 82,500
0
$
$
953
4,454
4
(Marginal Rate X Amount Over Lower
Bracket Amount)
82,500 to 157,500
$ 14,090
+
(24% × amount over $ 82,500)
157,500 to 200,000
$ 32,090
+
(32% × amount over $157,500)
200,000 to 500,000
$ 45,690
+
(35% × amount over $200,000)
Over 500,000
$150,690
+
(37% × amount over $500,000)
a. Assume that Dan Smith owns a lawn care service and operates this business as a sole proprietorship.
During the current year, Dan’s business realized a “Pre-Tax Income” of $250,000.
1. Using the tax schedule for sole proprietorship businesses shown above, calculate the tax liability for
Dan’s business during the current year.
2. What is the average income tax rate applicable to Dan’s business?
3. What was the marginal income tax rate applicable to Dan’s business?
35. Trenton Industries, Inc. produces paper products and is organized as a corporation. During its most recent fiscal
year, Trenton Industries realized $1,500,000 of “Pre-Tax Earnings.” Given the revision to the tax code that
established a 21% flat corporate income tax rate, calculate the tax liability for Trenton Industries during the most
recent year.
36.—44. Ratio Analysis
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Please see the Balance Sheet and Income Statement for Fenway Fertilizer and Farm Products, Inc. for the fiscal
Year ended December 31, 2018. These financial statements can be found in the Excel file under the
“Exam One” heading at the “Materials” “Content” link sequence at our course Web site.
Calculate the following ratios for 2018 for Fenway Fertilizer and Farm Products, Inc.:
Industry Average
45 days
a. Average Collection Period:
b. Debt Ratio:
64.7%
c. Return on Equity (ROE):
8.2%
d. Current Ratio:
1.3
Industry Average
e. Inventory Turnover:
5.7
f. Times Interest Earned (TIE):
2.3
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g. Net Profit Margin:
3.6%
h. Return On Total Assets (ROA):
2.9%
e. Based on the ratios you have calculated above, does Fenway Fertilizer and Farm Products, Inc. appear to
be stronger or weaker than the industry average data? Which specific ratios led you to this conclusion?
45.—47. Portfolio Analysis
Assume that you have just received information from your investment advisor that your portfolio has
reached a value of $750,000. Your portfolio consists of three stocks, as follows:
Stock
B
D
F
Total:
Amount Invested
$125,000
$200,000
$425,000
$750,000
Beta
1.05
2.00
.65
a. Calculate the beta of this investment portfolio.
b. Assume that the expected market return ( r m ) is 8 percent and the expected risk-free rate
( RF ) is 2 percent. What is the expected return ( r j ) for this investment portfolio?
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48.—50. Statistical Analysis:
Assume that you have obtained the following information for Asset A:
Rate of Return
7%
10%
13%
Probability
20%
45%
35%
a. Compute the expected rate of return for Asset A, using the information provided in the chart above.
b. Given that the standard deviation for Asset A is 2.18%, compute the coefficient of variation.
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FENWAY FERTILIZER AND FARM PRODUCTS, INC.
Income Statement for Year Ended December 31, 2018
-------------2018---------------Sales Revenue
Cost of Goods Sold
Gross Profit
Depreciation Expense
Operating Profits (EBIT)
Interest Expense
Profit Before Taxes
Less: Taxes @ 21%
Net Profit After Taxes
DOLLARS
% OF SALES
3,750,000
2,600,000
1,150,000
695,000
455,000
255,000
200,000
42,000
158,000
100.00%
69.33%
30.67%
18.53%
12.13%
6.80%
5.33%
1.12%
4.21%
FENWAY FERTILIZER AND FARM PRODUCTS, INC.
Balance Sheet As of December 31, 2018
-------------2018---------------DOLLARS % OF ASSETS
ASSETS:
Cash
Accounts Receivable
Inventories
Total Current Assets
35,000
775,000
900,000
1,710,000
0.65%
14.46%
16.79%
31.90%
Net Fixed Assets
TOTAL ASSETS
3,650,000
5,360,000
68.10%
100.00%
135,000
450,000
275,000
860,000
2.52%
8.40%
5.13%
16.04%
Long-Term Debt
TOTAL LIABILITIES
3,250,000
4,110,000
60.63%
76.68%
Common Stock
Retained Earnings
TOTAL STOCKHOLDERS' EQUITY
250,000
1,000,000
1,250,000
4.66%
18.66%
23.32%
TOTAL LIABILITIES AND EQUITY
5,360,000
100.00%
LIABILITIES AND EQUITY:
Accounts Payable
Notes Payable
Accruals
Total Current Liabilities
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