BAM 513 Text: Financial Management: Concepts and Applications 1st Edition, 2015 ISBN-13: 978-0-13-293664-4 Author(s): Stephen Foerster Publisher: Pearson 925 North Spurgeon Street, Santa Ana, CA 92701 Phone: 714-547-9625 Fax: 714-547-5777 www.calcoast.edu 06/16 Final Examination Financial Management All rights reserved. No part of this may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system without written permission, except for the inclusion of brief quotation in review. Copyright © 2016 by California Coast University BAM 513 Financial Management Final Examination Multiple Choice Questions (Enter your answers on the enclosed answer sheet) 1. The creation of value is driven by what factors? a. b. c. d. cash flow and growth growth and risk profitability and growth reducing risk 2. The cash flow cycle: a. b. c. d. describes the flow of cash through a company. illustrates that profits and cash flows are the same. reminds a financial manager that profits are important. focuses on financing activities only. 3. Which of the following goals are in the best long-term interest of shareholders? a. b. c. d. profit maximization risk minimization maximizing the market value of the existing shareholders’ common stock maximizing sales revenue 4. Operating activities are concerned with ______. a. b. c. d. determining whether a company’s assets should be financed with debt or equity managing a firm’s cash budgeting procedures managing a firm’s working capital planning sales of a corporation’s equity capital 5. Ensuring that there is adequate cash to pay the firm’s suppliers is an example of which cash-related activity in the cash flow cycle? a. b. c. d. operating activity profitability activity investing activity financing activity 6. Offering discounts to accelerate the collection of accounts receivables in an example of which cash-related activity in the cash flow cycle? a. b. c. d. 5 operating activity profitability activity investing activity financing activity BAM 513 Financial Management Final Examination 7. In general, financial managers are concerned with which of the following? a. b. c. d. creating economic wealth making investment decisions that optimize economic value making business decisions that optimize economic wealth all of the above 8. A corporate financial manager who is trying to create value for its shareholders ______. a. b. c. d. is not concerned with ethics but rather with writing iron-clad contracts can safely ignore ethics as long as no laws are broken must behave ethically to stay out of jail is concerned with ethics because unethical behavior destroys trust, and businesses cannot function without a certain degree of trust 9. The ability to analyze the company’s strengths and weaknesses is a fundamental concept that a nonfinancial manager should understand in order to ______. a. b. c. d. better better better better assess the current environment in which the firm operates assess future financing requirements understand the role of capital markets in raising long-term funds measure and create value for the shareholder 10. Although the firm has many important stakeholders, the ________ are most important because they are essentially the owners of the firm. a. b. c. d. shareholders investment bankers lenders managers 11. Which of the following statements is/are advantages of incorporation? a. b. c. d. 6 access to capital markets limited liability unlimited life all of the above BAM 513 Financial Management Final Examination 12. A comprehensive nonfinancial size-up should be done ______. a. b. c. d. monthly quarterly annually as needed 13. Information for the sizing-up process for publicly traded firms can be obtained from ______. a. b. c. d. the firm’s annual report the firm’s 10-K report filed with the Securities & Exchange Commission industry reports all of the above 14. The economic size-up involves ______. a. the relationship between overall economic activity and the industry’s performance assessment of the economy b. identifying the current business cycle stage c. anticipation of the interest rate change d. all of the above 15. When a country imports more than it exports, it will ______. a. be known b. be known value c. be known d. be known value as a net importing country and this portion of the GDP will have positive value as a net importing country and this portion of its GDP will have a negative as a net exporting country and this portion of its GDP will have a positive value as a net exporting country and this portion of its GDP will have a negative 16. Capital market conditions can affect the timing of a new equity issue because ______. a. b. c. d. 7 issuing new equity may be harder when stock prices are rising issuing new equity may be easier when stock prices are rising issuing new equity may be harder when stock prices are falling b and c BAM 513 Financial Management Final Examination 17. Which of the following is NOT considered to be a factor that affects the industry in which a firm operates? a. b. c. d. technology credit conditions interest rates regulations 18. All of the political factors can give managers further insights into the opportunities and risks facing a particular industry EXCEPT: a. b. c. d. favorable tax changes or incentives in the industry pending and new government relations nature and intensity of competition demographic changes in the population 19. All operating systems involved what is known as the Six P’s of Operations, which include ______. a. b. c. d. product quality, profitability, and people process, plant, and profitability product quality, process, and people product potential, plant, and partners 20. A firm is considering whether to outsource some aspects of the manufacturing of its products. Which one of the Six P’s of Operations is the firm addressing? a. b. c. d. product quality process plant people 21. Sizing-up marketing management involves ______. a. b. c. d. 8 identifying the firm’s strengths and weaknesses related to marketing identifying the target market identifying the appropriate marketing mix all of the above BAM 513 Financial Management Final Examination 22. Marketing analysis involves all of the following EXCEPT: a. b. c. d. distinguishing between who buys the product and who consumes it determining the channel through which the product or service is purchased assessing the firm’s plant capacities determining the unique features of the target market 23. Management seeks to identify individuals who possess capability in these four areas: a. business intelligence, intelligence b. business intelligence, intelligence c. business intelligence, intelligence d. business intelligence, intelligence. marketing intelligence, strategic intelligence, and people organizational intelligence, strategic intelligence, and people marketing intelligence, organizational intelligence, and people emotional intelligence, strategic intelligence, and people 24. Which of the following describes a balance sheet? a. Reports cash receipts and cash disbursements for a specific accounting period. b. Reports the amount and composition of assets and liabilities at a specific accounting period. c. Reports the value of a firm’s assets, liabilities, and net worth at a particular point in time. d. Reports revenues and expenses for a specific accounting period. 25. Which of the following is NOT considered a fixed asset? a. b. c. d. land equipment buildings patents 26. Which of the following balance sheet equations is NOT CORRECT? a. b. c. d. 9 assets assets assets assets - current liabilities = long-term liabilities - liabilities = shareholders’ equity = liabilities + shareholders’ equity - current liabilities = long-term liabilities + shareholders’ equity BAM 513 Financial Management Final Examination 27. Who owns the retained earnings of a public firm? a. b. c. d. common stockholders bondholders management the IRS 28. Stock that is repurchased by the issuing company is called ______. a. b. c. d. paid in capital retained capital treasury stock par value stock 29. Which is NOT an example of current liabilities? a. b. c. d. notes payable accounts receivable current portion of long-term debt taxes payable 30. The statement of financial performance is known as the ______. a. b. c. d. statement of cash flows statement of stockholders’ equity balance sheet income statement 31. Cost of sales is calculated by ______. a. adding the cost of inventory on hand at the start of the period minus the cost of any purchases of materials during the year and then subtract the cost of ending inventory b. adding the cost of the inventory at the start of the period plus the cost of any purchases of materials during the year and then subtract the cost of the ending inventory c. adding the cost of the inventory on hand at the start of the period plus the cost of any purchases of materials during the year and then add the cost of the ending inventory d. adding the cost of the inventory on hand at the end of the period plus the cost of any purchases of materials during the year and then subtract the costs of the beginning inventory 10 BAM 513 Financial Management Final Examination 32. The firm’s revenues and expenses over a period of time are reported on the firm’s ______. a. b. c. d. income statement or statement of financial position income statement or statement of financial performance balance sheet or statement of financial performance balance sheet or statement of financial position 33. Which of the following does NOT represent cash outflows to the firm? a. b. c. d. taxes interest payments dividends depreciation 34. Which of the following represents a source of cash? a. b. c. d. a decrease in accounts payable a decrease in accounts receivable payment of dividends an increase in inventories 35. Which of the following is NOT a source of cash from financing activities? a. b. c. d. repayment of long-term debt proceeds from issuance of common stock proceeds for long-term borrowing both a and c 36. Time series ratio analysis of your own firm over time is an example of: a. b. c. d. external assessment narcissistic assessment cross sectional assessment internal assessment 37. Modern Comics Inc., has sales of $2,500,000, net income of $50,000, assets worth $1,700,000, and total common stockholder equity of $1,500,000. The ROE for the firm is ______. a. b. c. d. 11 68.00% 60.00% 2.94% 3.33% BAM 513 Financial Management Final Examination 38. The firm’s ________ indicates the degree to which effective use of borrowing contributed to the firm’s ROE. a. b. c. d. asset turnover financial leverage profit margin return on assets 39. A firm’s age of accounts receivable ______. a. measures the average time between credit-based sales and the collection of payments for those sales b. is likely to be greater for firms within the same industry with more generous credit terms c. is in part a function of the type of industry in which the firm operates d. all of the above 40. The ________ ratio measures the extent to which a firm is able to cover its short-term obligations (usually defined as obligations due within the next year) with its short-term assets. a. b. c. d. ROE current inventory turnover working capital 41. The simple accounting equation may be written as ______. a. b. c. d. liabilities = assets assets = liabilities equity = liabilities assets = liabilities + equity + equity + assets - equity 42. Which of the following is NOT a potential source of cash for a firm? a. b. c. d. 12 repayment of a short-term loan an increase in equity an increase in long-term debt a decrease in property, plant, or equipment BAM 513 Financial Management Final Examination 43. Which of the following is an example of a type of inventory management activity? a. b. c. d. JIT or just-in-time inventory control system RFI or radio frequency identification systems EOQ or economic order quantity formulas all of the above 44. Which of the following trade credit terms for goods and services purchased would be preferred by a firm? a. b. c. d. 2/10 net 30 3/10 net 45 3/15 net 45 Unless we know the firm’s cost of borrowing we cannot determine which set of terms is preferred. 45. When constructing pro forma income statements which of the following is the last item to be estimated? a. b. c. d. sales the change in retained earnings depreciation expense taxes 46. Cantanna Inc., is developing a pro forma income statement for the coming year. The chief financial officer estimates that fixed assets are $70,000,000 and that sales will be $300,000,000. If depreciation is historically 20% of fixed assets, what is the expected amount of depreciation for the upcoming year (in dollars)? a. b. c. d. $14,000,000 $20,000,000 $60,000,000 this figure cannot be reasonably estimated 47. When developing a pro forma balance sheet which of the following is typically the LAST item to be estimated? a. b. c. d. 13 inventory total assets external financing cash BAM 513 Financial Management Final Examination 48. The ________ is the critical connection between the pro forma income statement and the pro forma balance sheet. a. b. c. d. change change change change in in in in net working capital cost of goods sold dividends retained earnings 49. Managers often begin with an estimate of ________ when beginning to develop pro forma financial statements. a. b. c. d. net income sales assets equity 50. Dynamo Engines Inc., has an ROA of 10%, a profit margin of 6%, an assets to equity ratio of 1.30, and a retention ratio of 0.70. What is the firm’s sustainable growth rate? a. b. c. d. 18.57% 9.10% 5.46% 0.55% 51. The ________ is a two-edged sword in that as its value increases the ROE should increase, but the risk to shareholders also increases. a. b. c. d. profit margin ROA leverage ratio asset turnover ratio 52. Consider the equation for present value. If you wished to increase the present value of a future amount by changing only one variable, which of the following actions should you take? a. b. c. d. 14 increase the time period decrease the future value decrease the interest rate this statement cannot be answered with the information provided BAM 513 Financial Management Final Examination 53. Which choice has a greater present value if we assume a required rate of return of 10%? 1: A lump sum cash flow today of $248.69 2: $100 cash flows occurring one, two, and three years from today 3: a single cash flow of $331 three years from today. a. b. c. d. Choice 1 Choice 2 Choice 3 The choices all have equal present values at a discount rate of 10%. 54. Your parents paid $1,000 for a college fund bond when you were born. Today is your 20th birthday and you are ready to cash the bond which has grown to a value of $3,361.85. What was the average annual rate of return on your college fund bond? a. b. c. d. 5.50% 6.25% 6.73% there is not enough information to answer this question 55. Michael received a professional baseball contract paying $7,000,000 per year for 5 years, Bert received a two-year contract for $16,000,000 per year. For purposes of calculations, treat these contracts as ordinary annuities. Who’s contract has a greater present value if we assume a discount rate of 6%? a. b. c. d. Bert = $29,334,283 Michael = $29,486,547 Bert = $39,459651 Michael = $39, 743,196 56. Your university is running a special offer on tuition. This year’s tuition cost is $18,000. Next year’s tuition cost is scheduled to be $19,080. The university offers to discount next year’s tuition at a rate of 6% if you agree to pay both year’s tuition in full today. How much is the total tuition bill today if you take the offer? a. b. c. d. 15 $34,981.13 $36,000.00 $37,080.00 $38,160.00 BAM 513 Financial Management Final Examination 57. Which of the following could be considered a form of perpetuity? a. the college tuition payments that students make for four years. b. a 20-year corporate bond c. a university scholarship endowment that promises to pay out $10,000 per year for an indefinite time period d. a contract from the winning lottery ticket to receive cash flows for the next 30 years 58. The interest rate used to discount bond cash flows to determine the bond price is known as the ______. a. b. c. d. coupon rate yield to maturity compound rate coupon yield 59. Zero coupon bonds have which of the following features? a. b. c. d. annual interest payments semi-annual interest payments no interest payments any of the above may apply 60. The ________ is used to determine the annual or semi-annual interest cash flow for a bond whereas the ________ is the rate used to determine the price of the bond. a. b. c. d. coupon rate; yield to maturity yield to maturity; coupon rate yield to maturity; discount rate current yield; yield to maturity 61. Most bonds issued in the United States have ________ coupon payments and ________ face values. a. b. c. d. 16 annual; $1,000 annual; $500 semi-annual; $1,000 semi-annual; $500 BAM 513 Financial Management Final Examination 62. After a bond issue if the yield to maturity increases a conventional bond will see the price ______. a. b. c. d. increase decrease stay the same there is not enough information to answer this question 63. Firms attempt to price bonds so that at issue they sell for the ______. a. b. c. d. face value coupon value firm value the same price as shares of preferred stock 64. The maturity of an issue of preferred stock is ______. a. b. c. d. the same as the longest maturity bond issued by the firm variable between 15 and 30 years indefinite, just as the maturity of common shares renewable every five years 65. Suppose a preferred share pays perpetual QUARTERLY dividends of $0.25 and has a per annum dividend yield of 6 percent. What is the fair value of this preferred share? a. b. c. d. $14.67 $15.33 $16.00 $16.67 66. The ________ method is the most intuitive but least sophisticated capital budgeting technique presented by the author. a. b. c. d. 17 net present value internal rate of return payback modified internal rate of return BAM 513 Financial Management Final Examination 67. The ________ method of capital budgeting finds the present value of cash inflows and subtracts the initial cash outflow. a. b. c. d. payback net present value internal rate of return modified internal rate of return 68. The decision rule for net present value declares that a project is acceptable if ______. a. b. c. d. it pays back within a specified time period. the rate of return is greater than the firm’s cost of capital. the present value of the cash inflows exceeds the initial cash outflow. all of the statements above are true 69. A firm’s cost of capital may also be known as ______. a. b. c. d. the cost of financing the internal rate of return modified internal rate of return the prime rate 70. The IRR method of capital budgeting tells us what particular discount rate will result in a ________ NPV project. a. b. c. d. positive negative zero none of the above 71. The decision rule for the profitability index is that any project with ________ is an acceptable project. a. b. c. d. 18 a a a a ratio ratio ratio ratio less than one greater than one greater than zero less than zero BAM 513 Financial Management Final Examination 72. Typically, the rate of return on ________ exceeds the rate of return on ________. a. b. c. d. long-term bonds; short-term bonds government bonds; similar maturity corporate bonds short-term bonds; long-term bonds marketable securities; common stock 73. With ________ bonds a firm can choose to pay back the investor at a pre-specified date prior to the maturity date, usually at a pre-specified price above the face value, representing a premium to the bondholder. a. b. c. d. callable convertible variable rate premium 74. ________ place some restrictions on the firm in such a way as to improve the odds that the bondholders will be repaid. a. b. c. d. Bond Bond Bond Bond ratings covenants rating agencies exchanges 75. Which of the following have payments that are tax deductible for the corporation? a. b. c. d. bond interest payments preferred dividends common dividends retained earnings 76. If a firm does not have publicly traded debt and therefore does not have a yield to maturity as an estimate for its cost of debt, a common practice is to estimate the cost of debt by adding a premium to the rate on: a. b. c. d. 19 the cost of accounts payable. equity. long-term government bonds. collateralized debt obligations. BAM 513 Financial Management Final Examination 77. The market risk premium represents the expected difference between ______. a. b. c. d. the the the the return on AAA bonds and Treasury bonds prime rate and the 3-month Treasury bill rate return on the stock market and the return on preferred shares return on the stock market investment and the risk-free return 78. All else equal, investors “like” ________ and “dislike” ________. a. b. c. d. risk; return return; risk standard deviation; risk diversification; return 79. What is the WACC for Bacon Signs Inc, if the after-tax cost of long-term debt is 6.3% and the before tax cost of equity is 10.4%? a. b. c. d. 8.02% 8.91% 9.58% Without a corporate tax rate, we cannot answer this question as written. 80. For a project to be accepted, the ________ may be greater than or less than the firm’s WACC, but the ________ must be greater than the hurdle rate. a. b. c. d. IRR; NPV hurdle rate; IRR MIRR; NPV NPV; IRR 81. The risk that can be eliminated through the practice of diversification is known as ________ risk. a. b. c. d. unsystematic systematic nondiversifiable speculative 82. A firm’s risk level will fluctuate as its ________ changes. a. b. c. d. 20 financial leverage debt-to-equity degree of financial leverage all of the above BAM 513 Financial Management Final Examination 83. Modigliani-Miller (M-M) Proposition II states ______. a. b. c. d. the the the the cost cost cost cost of of of of equity does not change when a firm takes on a greater proportion of debt equity increases when a firm takes on a greater proportion of debt debt increases when a firm takes on a greater proportion of equity equity decreases when a firm takes on a greater proportion of debt 84. The major real-world benefit of debt is that interest payments are ______. a. b. c. d. made after tax considerations a tax-deductible expense always less than 10% of the firm’s profit smaller than the dividend payments 85. Due primarily to concerns about financial distress, we tend to see very few firms financed with ________ or more of their capital structure as debt. a. b. c. d. 20% 35% 55% 70% 86. Which type of firm is likely to have a high dividend payout ratio policy? a. b. c. d. a younger firm with uncertain income but significant growth opportunities an older firm with steady earnings but few growth opportunities an older firm with irregular income and significant growth opportunities a younger firm with significant income and super normal positive growth opportunities. 87. If a firm were simply concerned with minimizing costs of incremental financing, then the straightforward choice would be ______. a. b. c. d. debt new equity retained earnings half debt and half equity financing 88. Financial managers should consider taking ________ financial risk when operating risk is high, but may consider taking ________ financial risk when operating risk is low. a. b. c. d. 21 less; less less; more more; more more; less BAM 513 Financial Management Final Examination 89. Which of the following lessons from the Great Recession is NOT true? a. The financial crisis really drove home the point that capital structure DOES matter in that firms with too much debt suffered greatly. b. Firms that relied too much on short-term financing were severely affected by the global liquidity crisis. c. Capital markets are indeed almost perfect. d. All of the above are true. 90. If a viable firm is not growing but is expected to continue over time, then we would expect capital expenditures to be equal to ______. a. b. c. d. sales depreciation EBIT taxes payable 91. Legacy Industries Inc. has a historic P/E multiple of 15, a current EPS of $2.50 projected to grow by 4% in the coming year, and a forward looking P/E multiple of 18. With this information please estimate the current price of the firm’s stock. a. b. c. d. $37.50 $46.80 $39.00 $48.20 92. All else equal, the forward-looking price-earnings multiple is ________ related to risk and ________ related to growth. a. b. c. d. indirectly; directly indirectly; indirectly directly; directly directly; indirectly 93. Target firms in a merger or acquisition process realize, on average ______. a. b. c. d. 22 significantly positive per share price premiums significantly negative per share price reductions no significant change in price The return rate is unknown. This is an unanswered research question. BAM 513 Financial Management Final Examination 94. Generally, an economic SWOT analysis will move in this direction: a. the industry outlook to the broad economy individual store sales. b. the broad economy to the industry outlook individual store sales. c. the industry outlook to the broad economy specific information. d. the broad economy to the industry outlook specific information. to firm specific information and finally to firm specific information and finally to individual store sales and finally to firm to individual store sales and finally to firm 95. According to chapter 14, we can anticipate that any long-term growth in retail revenue will tend to occur _________ growth in the overall economy, and the Internet retail revenue is expected to grow _________ the overall economy. a. b. c. d. more rapidly than; less rapidly than less rapidly than; at the same rate as at a similar rate as; at a higher rate than more rapidly than; at a similar rate as 96. Financial theory suggests and empirical evidence supports the idea that firms have a”pecking order” by which they choose to raise funds to finance assets. From the first source of financing to the last this pecking order is ______. a. b. c. d. internally generated funds, debt, and new equity debt, internally generated funds, and equity equity, debt, and internally generated funds None of the above, there is no such preference 97. ________ is a period measure that attempts to capture a firm’s ability to add value for shareholders, after accounting for the requirements of other stakeholders. a. b. c. d. Economic value added Discounted cash flow analysis Price-earnings measure all of the above 98. The ________ is cited by the author as a reason for using just one rate, a long-term yield, as the average cost of debt financing for a firm that has multiple issues of debt with varying maturities. a. b. c. d. 23 efficient markets hypothesis market substitution theory biased expectation theory unbiased expectations theory BAM 513 Financial Management Final Examination 99. Which of the following is NOT a key component of the CAPM? a. b. c. d. beta diversifiable risk the risk-free rate the market risk premium 100. A firm with a beta of 2.0 should ______. a. b. c. d. 24 be forced to stop trading until the market perceives less risk require twice the return on the market portfolio require twice the market risk premium require twice the risk-free rate of return