FNA2004

Midterm

FNA2004 MIDTERM

INSTRUCTIONS: 1. This is a complete open-book examination, consisting of 30 Multiple Choice Questions. You are given 80 minutes to complete the examination. 2. Use a pencil to shade the most appropriate answer for each question in the answer sheet provided. 3. Remember to write your matriculation number and shade the appropriate bubbles on the answer sheet. Ignore the preceding letters of your matriculation number when you are shading the bubbles. 4. ANSWER ALL QUESTIONS. There are no penalties for wrong answers.

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Midterm

1. The NYSE and SGX are both A. primary markets. B. dealer markets. C. secondary markets. D. All of the above. E. None of the above. 2. Dann Corp. had an ROA of 12%. Its net profit margin was 4% on sales of $2500. How much would total assets be? A. $ 12 B. $83 C. $120 D. $300 E. None of the above.

Note: The correct answer is $833.

3. In accounting, liquidity is defined as

A. the amount of cash the firm has. B. the turnover ratio. C. the ability of the assets to generate income. D. the ease and quickness with which assets can be converted to cash. E. None of the above. In accounting, D is often used. However, in finance, the complete definition would include without a significant loss in value. I shall accept both answers D and E. . 4. The standard deviations of individual stocks are generally higher than the standard deviation of the market portfolio because individual stocks: A. Are of market disequilibrium. B. Offer higher returns. C. Have more systematic risk. D. Have no diversification of risk. E. Do no have unique risk.
5. A credit card account that charges interest at an annual effective rate of 16.08%,

would have an APR of _______. A. 14.55% B. 15% The Correct Answer C. 15.44% D. 16.08% E. Indeterminable. Acceptable. Note: During the exam, I realized that some of you and/or your parents may not have owned a credit card. So I have decided to award full credit to both Answers B and E. Credit card companies issue monthly statements and hence interests are compounded monthly.
6. Which of the following is excluded in the computation of operating cash flow? A. Earnings before interest and taxes B. Interest paid C. Amortization D. Current taxes E. All of the above are included.
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7. Calculate the EBIT for a firm with $6 million total revenues, $3.5 million cost of

goods sold, $500,000 depreciation expense, and $200,000 interest expense. The tax rate is 20%. There are no other expenses. A. $1.44 million B. $1.8 million C. $1.94 million D. $2 million E. $2.5 million
8. Companies HD and LD have the same total assets, sales, and operating costs, and they

pay the same interest rate on their debt. However, company HD has a lower debt ratio. Which of the following statements is CORRECT? A. Company LD has a higher basic earning power ratio (BEP). B. Company HD has a higher basic earning power ratio (BEP). C. If the interest rate the companies pay on their debt is LESS than their basic earning power (BEP), then Company HD will have the lower ROE. D. If the interest rate the companies pay on their debt is MORE than their basic earning power (BEP), then Company HD will have the lower ROE. E. None of the above. When interest rate is lower than BEP, this means that the returns generated from the funds borrowed is more than enough to pay the interest expense, the remain returns will benefit the stockholders which results in a higher BEP. HD has lower debt ratio, hence it loses out to LD which has a higher debt ratio.
9. If the balance sheet of a firm indicates that total assets exceed current liabilities plus

shareholders' equity, then the firm has: A. Accumulated losses. B. Current assets C. An increase in net fixed assets. D. Accumulated depreciation. E. Long-term debt.
10. What is the future value of investing $8,000 for 3/4 year at a quoted interest rate of

10% with quarterly compounding? A. $8,593 B. $8,615 C. $8,620 D. $9,991 E. None of the above.
11. Your favorite uncle has accumulated savings of $ 250,000 over his working lifetime

and now plans to retire. Assuming that he wishes to withdraw equal installments from these savings for the next 25 years of this life, how much will each installment amount be if he is earning 5% on his savings? A. $16,893 B. $16,983 C. $17,738 D. $17,783 E. None of the above.

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12. The Trilby Company has an equity multiplier of 4. What is their debt ratio? A. 0.25 B. 0.75 C. 1 D. 3 E. It is indeterminable without the values for debt or equity. 13. The term capital structure refers to:

Midterm

A. B. C. D. E.

The manner in which a firm obtains its long-term sources of funding. The length of time needed to repay debt. The firms capital budgeting activities. Which specific assets the firm should invest in. The mix of current and fixed assets.

14. A company is planning to set aside money to repay $100 million in bonds that will

be coming due in 10 years. If the appropriate discount rate is 9%., how much money would the company need to set aside at the beginning of each year for the next 10 years to be able to repay the bonds when they come due? A. $6.04m B. $6.40m C. $6.58m D. 7.65m E. $10m Use the following to answer questions 15-16: MadLabs has been a hot stock the last few years, but is risky. The expected returns for MadLabs are highly dependent on the state of the economy as follows: State of Economy Depression Recession Mild Slowdown Normal Broad Expansion Probability MadLabs Returns .05 -50% .10 -15% .20 5% .30 15% .35 40%

15. The expected return on MadLabs is: A. 15.50% B. 17.75% C. 20.50% D. 21.25% E. 23.50% 16. The standard deviation of MadLabs returns is

A. B. C. D. E.

0.053975 0.059535 0.243998 0.232325 None of the above.

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17. According to the CAPM A. the expected return on a security is negatively and non-linearly related to the

security's beta.
B. the expected return on a security is negatively and linearly related to the

security's beta. C. the expected return on a security is positively and linearly related to the security's variance. D. the expected return on a security is positively and non-linearly related to the security's beta. E. the expected return on a security is positively and linearly related to the security's beta
18. Your favorite aunt has decided to save $12,000 at the start of each year, starting

now for the next 10 years. At the end of ten years, she will withdraw equal installments from this accumulated savings for the next 15 years of her life. Assume withdraw occurs at the end of each year, how much will each installment amount be if she is earning 8% on her savings? A. $11,589 B. $12,516 C. $18,775 D. $20,309 E. $21,934
19. Which of the following would be considered a capital budgeting decision?

A. B. C. D. E.

Planning to issue common stock rather than issuing preferred stock. Tightening credit requirements for credit sales. A decision to expand into a new line of products, at a cost of $5 million. Repurchasing shares of common stock. Increasing the inventory level.

20. The need to manage net working capital arises because

A. financial management is naturally broken into those areas. B. shareholders want to ensure they receive dividend payments. C. there is a mismatch between the timing of cash inflows and cash outflows. D. the sum of current assets and current liabilities usually is zero. E. the capital structure pie is limited in size.
21. An investor was expecting an18% return on his portfolio with beta of 1.25 before

the market risk premium increased from 8% to 10%. Based on this change, what return will now be expected on the portfolio? A. 20.0% B. 20.5% C. 22.5% D. 26.0% E. 28.5%

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22. The benefits of portfolio diversification are highest when individual securities have

returns that A. Vary directly with the rest of the portfolio. B. Vary indirectly with the rest of the portfolio. C. Are uncorrelated with the rest of the portfolio. D. Are counter cyclical. E. Are much higher than the average return of the rest of the portfolio. Note: Vary indirectly is different from negative correlation. Counter Cyclical means the stock have a negative beta (hence negative correlated with the rest of the portfolio).

23. You bought a house for $250,000, borrowing $200,000 on a 30-year term loan

(with monthly payments occurring at the beginning of each month starting immediately). The loan is quoted at a rate of 9% and your expected returns from renting the house is 10%. Your monthly loan payments would be A. $1,489 B. $1,598 C. $1,610 D. $1,622 E. $1,755 Note: The periodic rate (hinted by the monthly payments) is 9%/12 = 0.75%. N = 30 X 12 = 360. The PV is $200,000. This is an annuity due (so set your calculator to BEG). Solving for PMT = $1,598. (Closest)
24. Poor John Doe. When he offered a new contract by his football club, the

newspapers claim that he is making $5.7 million a year. He claims that this is not true in a present value sense and that he would really be making the following amounts under this contract for the next 5 years: Year Amount 0 $ 5.5 million (Sign up (now) Bonus) 1 $ 4 million 2 $ 4 million 3 $ 4 million 4 $ 4 million 5 $ 7 million Assuming that John Doe can make 7% on his investments, what is the present value of his contract? A. $18.54m B. $23.00m C. $24.04m D. $28.50 m E. None of the above.

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25. For a diversified portfolio including a large number of stocks, the

A. B. C. D. E.

weighted average expected return goes to zero. weighted average of the betas goes to zero. weighted average of the unsystematic risk goes to zero. return of the portfolio goes to zero. return on the portfolio equals the risk-free rate.

26. The efficient set of portfolios A. contains the portfolio combinations with the highest return for a given level of risk. B. contains the portfolio combinations with the lowest risk for a given level of return. C. is the lowest overall risk portfolio. D. Both A and B E. Both A and C. 27. A manager's compensation plan that offers financial incentives for increases in

quarterly profitability may create agency problems in that: A. The managers are not motivated by personal gain. B. The board of directors may claim the credit. C. Short-term, not long-term profits become the focus. D. Investors desire stable profits. E. Investors desire high dividends.
28. You are provided an investment opportunity of investing $6,000 for 3.5 years at an effective annual interest rate of 13.36%. Interest is compounded semiannually. How much can you expect to receive at the end of the 3.5 years? A. $ 7,531 B. $ 8,423 C. $ 9,306 ( My apologies to those who got it right the first time. Early Christmas present to the rest.) D. $ 9,466 E. $10,037 29. Which of the following is most likely to result in a lower P/E ratio for a firm, other

things equal? A. Higher growth rate in dividends. B. Decrease in earnings. C. An increase in the stocks required rate of return. D. Higher dividend yield. E. Higher stock price.

30. Shield Inc. had total operating revenues of $720, all of which were credit sales, over the past year. During that time, average receivables were $90. Given a 365-day year, how long does it take Speedy to collect its accounts receivables? A. 4.56 days B. 8.00 days C. 30.42 days D. 40.97 days E. 45.63 days