BASFIN1

QUIZ # 1
ND
2 TERM AY 2015-2016
True/False
1.

For the risk-averse financial manager, the more risky a given course of action, the higher the expected
return must be.

2.

In a general partnership, all partners have unlimited liability for the actions of any one partner when that
partner is conducting business for the firm.

3.

Limited partners may actively manage the business.

4.

Shareholder wealth is measured by the market value of the firms common stock.

5.

The agency problem arises due to the separation of ownership and control in a firm.

6.

Total equity on the balance sheet increases as dividends paid increases.

7.

The income statement describes the financial position of a firm on a given date.

8.

Under current accounting rules, plant and equipment appear on a companys balance sheet valued at
replacement value.

9.

Dividends paid to a firms stockholders, both preferred and common stockholders, are tax-deductible to
the paying company.

10.

The interest payments on corporate bonds are tax-deductible.

11.

When the present financial ratios of a firm are compared with similar ratios for another firm in the same
industry it is called trend analysis.

12.

Ratios that examine profit relative to investment are useful in evaluating the overall effectiveness of the
firm's management.

13.

According to the DuPont Analysis, an increase in net profit margin will decrease return on assets.

14.

Financial ratios comprise the principal tool of financial analysis since they can be used to answer a variety
of questions regarding a firm's financial condition.

15.

The lower the average collection period ratio, the more efficient is the firm in managing its investment in
accounts receivable.

Multiple Choice
1.

The future value of a single sum:

A. increases as the compound rate decreases.
B. decreases as the compound rate increases.
C. increases as the number of compound periods decreases.
D. increases as the compound rate increases.

2.

The present value of a single sum:

A. increases as the discount rate decreases.
B. decreases as the discount rate decreases.
C. increases as the number of discount periods increases.
D. increases as the discount rate increases.

3.

If you are an investor, which of the following would you prefer?

A. Earnings on funds invested would compound annually.
B. Earnings on funds invested would compound daily.
C. Earnings on funds invested would compound monthly.
D. Earnings on funds invested would compound quarterly.

4.

Discounting is the opposite of:

A. compounding.
B. future value.

C. opportunity costs.
D. both A and C.

5.

Assuming two investments have equal lives, a high discount rate tends to favor:
A. the investment with large cash flow early.
B. the investment with large cash flow late.
C. the investment with even cash flow.
D. neither investment since they have equal lives.

6.

The effective annual rate increases when the _______ increases.

A. number of compounding periods in a year
B. number of years invested
C. quoted rate
D. both A and C

7.

When comparing annuity due to ordinary annuities, annuity due will have higher:
A. present values.
B. annuity payments.
C. future values.
D. both A and C.
E. all of the above.

8.

As time increases for an amortized loan, the ___________ decreases.

A. interest paid per payment
B. principal paid per payment
C. the outstanding loan balance
D. both A and C

9.

The present value of a perpetuity decreases when the _______ decreases.

A. number of investment periods
C. perpetuity payment
B. annual discount rate
D. both B and C

10.

Which of the following provides the greatest annual interest?

A. 10% compounded annually
C. 9% compounded quarterly
B. 9.5% compounded monthly
D. 8.5% compounded daily

Problems
1.

Your firm has the following income statement items: sales of $50,250,000; income tax of $1,744,000;
operating expenses of $10,115,000; cost of goods sold of $35,025,000; and interest expense of $750,000.
What is the amount of the firms EBIT?
A. $15,552,000
B. $58,000,000
C. $5,110,000
D.$4,630,000

2.

Your firm has the following balance sheet statement items: total current liabilities of $805,000; total
assets of $2,655,000; fixed and other assets of $1,770,000; and long-term debt of $200,000. What is the
amount of the firms total current assets?
A. $885,000
B. $1,550,000
C. $600,000
D.$325,000

3.

Your firm has the following balance sheet statement items: total liabilities of $1,005,000; total assets of
$2,655,000; fixed and other assets of $1,770,000; and long-term debt of $200,000. What is the amount of
the firms total stockholders equity?
A. $3,650,885
B. $550,000
C. $1,650,000
D. $833,000

4.

In 2015, A & K, Inc. expects operating income (earnings before interest and taxes) of $18,000,000. In
addition, the corporation has $20,000,000 of debt outstanding with a 10 percent interest rate and will pay
$1,000,000 in dividends to its common stockholders. Assume that A & K will receive no other sources of
income during 2015. A & Ks taxable income for 2015 will be:
A. $18,000,000.
B. $17,000,000.
C. $16,000,000.
D. $15,000,000.

5.

Using the information provided, calculate net income for 2015. Assume a tax rate of 40 percent.
Year
2012
Inventory
$5,000
Revenues
200,000
Cost of goods sold
100,000
Interest expense
10,000
Operating expenses
35,000
A. $33,000
B. $44,000
C. $55,000
D. $66,000
Table 1
Smith Company Balance Sheet

Assets:
Cash and marketable securities
Accounts receivable
Inventories
Prepaid expenses
Total current assets
Fixed assets
Less: accumulated depreciation
Net fixed assets
Total assets
Liabilities:
Accounts payable
Notes payable
Accrued taxes
Total current liabilities
Long-term debt
Owners equity

$300,000
2,215,000
1,837,500
24,000
$3,286,500
2,700,000
1,087,500
$1,612,500
$4,899,000
$240,000
825,000
42,500
$1,107,000
975,000
2,817,000

Total liabilities and owners equity

Net sales (all credit)
Less: Cost of goods sold
Selling and administrative expense
Depreciation expense
Interest expense
Earnings before taxes
Income taxes
Net income
Common stock dividends
Change in retained earnings
6.

$4,899,000
$6,375,000
4,312,500
1,387,500
135,000
127,000
$412,500
225,000
$187,500
$97,500
$90,000

Based on the information in Table 1, the current ratio is:

A. 2.97.
B. 1.46.
C. 2.11.

D. 2.23.

7.

Based on the information in Table 1, and using a 360-day year, the average collection period is:
A. 71 days.
B. 84 days.
C. 64 days.
D. 125 days.

8.

Based on the information in Table 1, the debt ratio is:

A. 0.70.
B. 0.20.
C. 0.74.

D. 0.42.

Based on the information in Table 1, the net profit margin is:

A. 4.61%.
B. 2.94%.
C. 1.97%.

D. 5.33%.

Based on the information in Table 1, the inventory turnover ratio is:

A. 0.29 times.
B. 2.35 times.
C. 0.43 times.

D. 3.47 times.

9.

10.

11.

At 8% compounded annually, how long will it take $750 to double?

A. 6.5 years
B. 4 years
C. 9 years
D. 12 years

12.

At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years?
A. 6%
B. 5%
C. 7%
D. 8%

13.

You wish to borrow $2,000 to be repaid in 12 monthly installments of $189.12. The annual
interest rate is:
A. 24%.
B. 8%.
C. 18%.
D. 12%.

14.

If you have $20,000 in an account earning 8% annually, what constant amount could you
withdraw each year for five years?
A. $3,525.62
B. $5,008.76
C. $3,408.88
D. $2,465.78

15.

If you invest $750 every six months at 8% per year compounded semi-annually, how much
would you accumulate at the end of 10 years?
A. $10,065
B. $10,193
C. $22,334
D. $21,731

16.

You have just purchased a share of preferred stock for $50.00. The preferred stock pays an
annual dividend of $5.50 per share forever. What is the rate of return on your investment?
A. .055
B. .010
C. .110
D. .220

17.

If you place $50 in a savings account with an interest rate of 7% per year compounded weekly,
what will the investment be worth at the end of five years (round to the nearest dollar)?
A. $72
B. $70
C. $71
D. $57

18.

What is the present value of $300 received at the beginning of each year for five years? Assume
that the first payment is not received until the beginning of the third year (thus the last payment
is received at the beginning of the seventh year). Use a 10% discount rate, and round your
answer to the nearest $100.
A. $1,100
B. $1,000
C. $900
D. $1,200

19.

You are going to pay $800 into an account at the beginning of each of 20 years. The account will
then be left to compound for an additional 20 years. At the end of the 41st year you will begin
receiving a perpetuity from the account. If the account pays 14%, how much will you receive
each year from the perpetuity (round to nearest $1,000)?
A. $140,000
B. $150,000
C. $160,000
D. $170,000

20.

What is the present value of an investment that pays $400 at the end of three years and $700 at
the end of 10 years if the discount rate is 5%?
A. $1,100.00
B. $675.30
C. $775.40
D. $424.60