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2nd Long Exam Questions

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20 views9 pages

2nd Long Exam Questions

Uploaded by

zosbhsjxbdbdbnxjs
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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17/10/2023

1. The payment made each period on an amortized


loan is constant, and it consists of some interest and
some principal. The closer we are to the end of the
loan's life, the smaller the percentage of the
payment that will be a repayment of principal.

FALSE

2. As a result of compounding, the effective annual


rate on a bank deposit (or a loan) is always equal to
or greater than the nominal rate on the deposit (or
loan).

TRUE

3. Other things held constant, the more debt a firm


uses, the lower its return on total assets will be.

TRUE

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17/10/2023

4. All other things held constant, the present value


of a given annual annuity decreases as the number
of periods per year increases.

TRUE

5. Other things held constant, the higher a firm's


total debt to total capital ratio [measured as (Short-
term debt + Long-term debt)/(Debt + Preferred
stock + common equity)], the higher its TIE ratio
will be.

FALSE

6. A rapid build-up of inventories normally


requires additional financing, unless the increase is
matched by an equally large decrease in some other
asset.

TRUE

2
17/10/2023

7. Since the ROA measures the firm's effective


utilization of assets without considering how these
assets are financed, two firms with the same EBIT
must have the same ROA.

FALSE

8. Significant variations in accounting methods


among firms make meaningful ratio comparisons
between firms more difficult than if all firms used
the same or similar accounting methods.

TRUE

9. Errors in the sales forecast can be offset by


similar errors in costs and income forecasts. Thus,
as long as the errors are not large, sales forecast
accuracy is not critical to the firm.

FALSE

3
17/10/2023

10. The return on common equity (ROE) is


generally regarded as being less significant, from a
stockholder's viewpoint, than the return on total
assets (ROA).

FALSE

10

1-3. Based on the AFN equation, what are the


firm’s primary capital sources?
1. SPONTEANOUSLY GENERATED FUNDS
2. ADDITION TO RETAINED EARNINGS
3. ADDITIONAL FUNDS NEEDED

11

4-5. Give two variables found in TVM formula.


1. PRESENT VALUE
2. FUTURE VALUE
3. INTERET RATE
4. NUMBER OF PERIODS
5. NUMBER OF YEARS

12

4
17/10/2023

1. In finance, window dressing refers to the efforts


taken to make the financial statements of a business
look better before they are publicly released.

WINDOW DRESSING
TECHNIQUE

13

2. A cost that is a forgone benefit that would have


been derived from an option not chosen.

OPPORTUNITY COST

14

3. It is the portion of earnings kept back in a firm


to grow the business as opposed to being paid out
as dividends to shareholders.

RETENTION RATIO

15

5
17/10/2023

4. It is the maximum rate of growth that a company


can sustain without having to finance growth with
additional equity or debt.

SUSTAINABLE GROWTH RATE

16

5. The ratio of earnings before interest and taxes to


interest charges; a measure of the firm’s ability to
meet its annual interest payments.

TIMES INTEREST EARNED


RATIO

17

1. (2pts) Last year Hair Force


One Corp. had $250 million
of sales, and it had $75
million of fixed assets that
were being operated at 80%
of capacity. In millions, how
large could sales have been
if the company had
operated at full capacity?

18

6
17/10/2023

2. (2pts) Last year Tindahan


Store Inc. had $350 million
of sales, and it had $270
million of fixed assets that
were used at 65% of
capacity. In millions, by how
much could Tindahan Store
Inc's sales increase before it
is required to increase its
fixed assets?

19

3. (2pts) Mango Goolat's


total common equity at the
end of last year was
$405,000 and its net income
was $70,000. What was its
ROE?

20

4. (2pts) Bread Pit 's stock


price at the end of last year
was $33.50, and its book
value per share was $25.00.
What was it's market/book
ratio?

21

7
17/10/2023

5. (3pts) Tealor Swift has sales of


$200,000 and accounts receivable
of $18,500, and it gives its
customers 25 days to pay. The
industry average DSO is 27 days,
based on a 365-day year. If the
company changes its credit and
collection policy sufficiently to
cause its DSO to fall to the industry
average, and if it earns 8.0% on any
cash freed-up by this change, how
would that affect its net income,
assuming other things are held
constant?

22

6. (3pts) Last year Starbuhoks


Salon & Spa. had sales of
$325,000 and a net income of
$19,000, and its year-end
assets were $250,000. The
firm's total-debt-to-total-capital
ratio was 45.0%. The firm
finances using only debt and
common equity and its total
assets equal total invested
capital. Based on the DuPont
equation, what was the ROE?

23

7. (2pts) You want to go to


Europe 5 years from now, and
you can save $3,100 per year,
beginning one year from today.
You plan to deposit the funds in
a mutual fund that you think
will return 8.5% per year. Under
these conditions, how much
would you have just after you
make the 5th deposit, 5 years
from now?

24

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17/10/2023

8. (2pts) Suppose you


inherited $275,000 and
invested it at 8.25% per
year. How much could you
withdraw at the end of each
of the next 20 years?

25

9. (2pts) Suppose the 7-


Evelyn Company offers to
sell you a bond for $3,000.
No payments will be made
until the bond matures 10
years from now, at which
time it will be redeemed for
$5,000. What interest rate
would you earn if you
bought this bond at the
offer price?

26

1. (5pts) If a firm’s ROE is low and management wants to improve it, explain
how using more debt might help.

2. (5pts) Why is it sometimes misleading to compare a company’s financial


ratios with those of other firms that operate in the same industry?

3. (5pts) Over the past year, M.D. Ryngaert & Co. had an increase in its
current ratio and a decline in its total assets turnover ratio. However, the
company’s sales, cash and cash equivalents, DSO, and fixed assets turnover ratio
remained constant. What balance sheet accounts must have changed to produce
the indicated changes?

4. (5pts) What is an Opportunity Cost? How is this concept used in TVM


analysis?

27

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