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Which of the following statements is CORRECT? a. One of the disadvantages of incorporating your business is that you could become subject to the firm's liabilities in the event of bankruptcy. b. Sole proprietorships are subject to more regulations than corporations. c. In any partnership, every partner has the same rights, privileges, and liability exposure as every other partner. d. Corporations of all types are subject to the corporate income tax. e. Sole proprietorships and partnerships generally have a tax advantage over corporations. Answer: e Some corporations (S corporations) are able to avoid the corporate income tax. Sole proprietorships and partnerships pay personal income tax, but they avoid the corporate income tax.

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What is the sequential approach? a. Profit maximization b. Agency conflict c. Efficient management d. Satisfying stakeholders to maximize shareholder wealth maximization e. e. None f the above Answer: d The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to a. Maximize its expected total corporate income. b. Maximize its expected EPS. c. Minimize the chances of losses. d. Maximize the stock price per share over the long run e. Maximize the stock price on a specific target date. Answer: d The primary operating goal should be to maximize the long-run stock price, or the intrinsic value. Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers? a. Pay managers large cash salaries and give them no stock options. b. Change the corporation's formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover. c. Beef up the restrictive covenants in the firms debt agreements. d. Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firms stock. e. For a firm that compensates managers with stock options, reduce the time before options are vested, i.e., the time before options can be exercised and the shares that are received can be sold. Answer: b Corporate takeovers are most likely to occur when a firm is underperforming. Managers who fear losing their jobs will try to maximize shareholder wealth. Which of the following statements is CORRECT? a. The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholders' equity. b. The balance sheet gives us a picture of the firms financial position at a point in time. c. The income statement gives us a picture of the firms financial position at a point in time. d. The statement of cash flows tells us how much cash the firm must pay out in interest during the year. e. The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year. Answer: b Other things held constant, which of the following actions would increase the amount of cash on a companys balance sheet? a. The company repurchases common stock. b. The company pays a dividend. c. The company issues new common stock. d. The company gives customers more time to pay their bills.

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e. The company purchases a new piece of equipment. Answer: c 7. While preparing a pro forma B/S, you have realized that A > L+E, you want to balance the B/S with increased short-term debt. What is (are) the problem(s) you may run into? a. Increased debt b. Increased liquidity c. Decreased profit d. Liquidity problem e. Both increased debt and liquidity problem Answer: e Increasing short-term debt will worsen current ratio (CA/CL), which might cause liquidity problem. Also, increase in short-term debt means increase in total debt (short-term debt is a part of total debt). On 12/31/08, Hite Industries reported retained earnings of $525,000 on its balance sheet, and it reported that it had $135,000 of net income during the year. On its previous balance sheet, at 12/31/07, the company had reported $445,000 of retained earnings. No shares were repurchased during 2008. How much in dividends did the firm pay during 2008? a. $49,638 b. $52,250 c. $55,000 d. $57,750 e. $60,638 Answer: c 12/31/08 RE $525,000 12/31/07 RE 445,000 Change in RE $ 80,000 Net income for 2008 $135,000 Dividends = Net income Change $ 55,000 or BEG RE + NE - DIV END RE Dividends = 9. $445,000 135,000 x $525,000 $ 55,000

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Shrives Publishing recently reported $10,750 of sales, $5,500 of operating costs other than depreciation, and $1,250 of depreciation. The company had $3,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 35%. During the year, the firm had expenditures on capital expenditure and net working capital that totaled $1,550. These expenditures were necessary for it to sustain operations and generate future sales and cash flows. What was its free cash flow? a. $1,873 b. $1,972 c. $2,076 d. $2,185 e. $2,300 Answer: e Bonds $3,500.00 Interest rate 6.25% Tax rate 35.00% Sales Operating costs excluding depreciation Depreciation Operating income (EBIT) Capex + NWC = Tax rate = FCF = EBIT * (1 - T) - NFA - CA + CL $10,750.00 5,500.00 1,250.00 $ 4,000.00 $1,550.00 35%

 NFA = Capex - Deprec, NWC = ( CA - CL) FCF = EBIT * (1-T) - ( Capex - Deprec) - ( CA - CL) = EBIT * (1-T) - Capex + Deprec - NWC FCF = EBIT*(1 T) + Deprec. Capex - NWC FCF = EBIT(1 T) + Deprec. ( Capex + NWC) FCF = $2,600 + $1,250 $1,550 Free cash flow = $2,300 or FCF = EBIT(1 T) + Deprec. ( Capex + NWC) FCF = $2,600 + $1,250 $1,550 Free cash flow = $2,300 10. Moose Industries faces the following tax schedule: Taxable Income Up to $50,000 $50,000-$75,000 $75,000-$100,000 $100,000-$335,000 $335,000-$10,000,000 $10,000,000-$15,000,000 Tax on Base of Bracket $0 7,500 13,750 22,250 113,900 3,400,000 Percentage on Excess above Base 15% 25 34 39 34 35

Last year the company realized $10,000,000 in operating income (EBIT). Its annual interest expense is $1,500,000. What was the companys net income for the year? a. $4,809,874 b. $5,063,025 c. $5,329,500 d. $5,610,000 e. $5,890,500 Answer: d Operating income $10,000,000 Interest expense $1,500,000 Taxable income = Operating income Interest expense Taxable income = Operating income Interest expense Taxable income = $8,500,000 Taxable Income $0 $50,000 $75,000 $100,000 $335,000 $10,000,000 $15,000,000 $18,333,333 Tax on base = $113,900 Tax on excess base = $2,776,100 Tax liability = $2,890,000 Net income = Taxable income Taxes Net income = $5,610,000 11. The term additional funds needed (AFN) is generally defined as follows: a. Funds that are obtained automatically from routine business transactions. b. Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock, to support operations. c. The amount of assets required per dollar of sales. Tax on Base of Bracket $0 7,500 13,750 22,250 113,900 3,400,000 5,150,000 6,416,667 % on Excess above Base 15% 25% 34% 39% 34% 35% 38% 35%

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The amount of internally generated cash in a given year minus the amount of cash needed to acquire the new assets needed to support growth. e. A forecasting approach in which the forecasted percentage of sales for each balance sheet account is held constant. Answer: b 12. Spontaneously generated funds are generally defined as follows: a. Assets required per dollar of sales. b. A forecasting approach in which the forecasted percentage of sales for each item is held constant. c. Funds that a firm must raise externally through borrowing or by selling new common or preferred stock. d. Funds that arise out of normal business operations from its suppliers, employees, and the government, and they include spontaneous increases in accounts payable and accruals. e. The amount of cash raised in a given year minus the amount of cash needed to finance the additional capital expenditures and working capital needed to support the firms growth. Answer: d Clayton Industries is planning its operations for next year, and the CEO wants you to forecast the firm's additional funds needed (AFN). Data for use in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year? Dollars are in millions. Last years sales = S0 $350 Last years accounts payable $40 Sales growth rate = g 30% Last years notes payable $50 Last years total assets = A*0 $500 Last years accruals $30 Last years profit margin = M 5% Target payout ratio 60% a. $102.8 b. $108.2 c. $113.9 d. $119.9 e. $125.9 Answer: d Last year's sales = S0 $350 Sales growth rate = g 30% Forecasted sales = S0 (1 + g) $455 S = change in sales = S1 S0 = S0 g $105 Last year's total assets = A*0 = A*0 since full capacity $500 Forecasted total assets = A*1 = A*0 (1 + g) $650 Last year's accounts payable $40 Last year's notes payable. Not spontaneous, so does not enter AFN calculation $50 Last year's accruals $30 L*0 = payables + accruals $70 Profit margin = M 5.0% Target payout ratio 60.0% Retention ratio = (1 Payout) 40.0% AFN = (A*0/S0)S (L*0/S0)S Margin S1 (1 Payout) AFN = $150.0 $21.0 $9.1 = $119.9 14. Which of the following would, generally, indicate an improvement in a companys financial position, holding other things constant? a. The TIE declines. b. The DSO increases. c. The quick ratio increases. d. The current ratio declines. e. The total assets turnover decreases. Answer: c Casey Communications recently issued new common stock and used the proceeds to pay off some of its short-term notes payable. This action had no effect on the companys total assets or operating income. Which of the following effects would occur as a result of this action? a. The companys current ratio increased. b. The companys times interest earned ratio decreased. c. The companys basic earning power ratio increased. d. The companys equity multiplier increased.

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e. The companys debt ratio increased. Answer: a 16. Ajax Corp's sales last year were $435,000, its operating costs were $362,500, and its interest charges were $12,500. What was the firm's times-interest-earned (TIE) ratio? a. 4.72 b. 4.97 c. 5.23 d. 5.51 e. 5.80 Answer: e Sales $435,000 Operating costs $362,500 Operating income (EBIT) $72,500 Interest charges $12,500 IE ratio = EBIT/Interest = 5.80

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Last year Harrington Inc. 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-assets ratio was 45.0%. Based on the DuPont equation, what was the ROE? a. 13.82% b. 14.51% c. 15.23% d. 16.00% e. 16.80% Answer: a Sales $325,000 Assets $250,000 Net income $19,000 Debt ratio 45.0% Debt = Debt % Assets = $112,500 Equity = Assets Debt = $137,500 Profit margin = NI/Sales = 5.85% TATO 1.30 Equity multiplier = Assets/Equity = 1.82 ROE 13.82%

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Wie Corp's sales last year were $315,000, and its year-end total assets were $355,000. The average firm in the industry has a total assets turnover ratio (TAT) of 2.4. The firm's new CFO believes the firm has excess assets that can be sold so as to bring the TAT down to the industry average without affecting sales. By how much must the assets be reduced to bring the TAT to the industry average, holding sales constant? a. $201,934 b. $212,563 c. $223,750 d. $234,938 e. $246,684 Answer: c Sales $315,000 Actual total assets $355,000 Target TATO = Sales/Total assets = 2.40 Target assets = Sales/Target TATO = $131,250 Asset reduction = Actual assets Target assets = $223,750

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Towson, Inc. currently has $1,600,000 in accounts receivables and its days sales outstanding (DSO) is 20 days. If accounts receivable comprise 50% of the companys current assets and Towson has $4,800,000 in net fixed assets, what is its total asset turnover ratio? a. 2.651x b. 3.650x c. 3.520x

d. 2.921x e. 3.920x Answer: b DSO = (A/R)/(Annual Sales/365), 20 = $1,600,000/(Annual Sales/365), Annual Sales = $29,200,000. Assets=CA+(Net) Fixed Assets, TAT = Sales/Assets = $29,200,000/($1,600,000*2 + $4,800,000) = 3.650x 20. Which of the following is a primary market transaction? a. You sell 200 shares of IBM stock on the NYSE through your broker. b. You buy 200 shares of IBM stock from your brother. The trade is not made through a broker--you just give him cash and he gives you the stock. c. IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker. d. One financial institution buys 200,000 shares of IBM stock from another institution. An investment banker arranges the transaction. e. IBM sells 2,000,000 shares of treasury stock to its employees when they exercise options that were granted in prior years. Answer: c What is the opportunity cost of Project A if it is expected to yield 10%, while the yields from other projects range from 6.5% to 11.5% with the mean 9% and 5% standard deviation? a. 10% b. 6.5% c. 11.5% d. 9% e. 9.3% Answer: c The opportunities forgone in the choice of one expenditure over others You recently sold 200 shares of Disney stock, and the transfer was made through a broker. This is an example of: a. A money market transaction. b. A primary market transaction. c. A secondary market transaction. d. A futures market transaction. e. An over-the-counter market transaction. Answer: c Which of the following statements is CORRECT? a. Hedge funds are legal in Europe and Asia, but they are not permitted to operate in the United States. b. Hedge funds are legal in the United States, but they are not permitted to operate in Europe or Asia. c. Hedge funds have more in common with investment banks than with any other type of financial institution. d. Hedge funds have more in common with commercial banks than with any other type of financial institution. e. Hedge funds are not as highly regulated as most other types of financial institutions. The justification for this light regulation is that only "sophisticated" investors (i.e., those with high net worths and high incomes) are permitted to invest in these funds, and such investors supposedly can do any necessary "due diligence" on their own rather than have it done by the SEC or some other regulator. Answer: e Which of the following statements is CORRECT? a. While the distinctions are becoming blurred, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties. b. The NYSE operates as an auction market, whereas Nasdaq is an example of a dealer market. c. Money market mutual funds usually invest their money in a well-diversified portfolio of liquid common stocks. d. Money markets are markets for long-term debt and common stocks. e. A liquid security is a security whose value is derived from the price of some other "underlying" asset. Answer: b Dell has an inventory period of 1 month, and an account receivable period of 0 (zero) months. It also has a payable period of 6 months. What are the cash conversion cycle period and the interest expense for Dell if they have annual net total (credit) sales volume of $10 billion? The market interest rate is 6.0%. a. -5.0, $-250 m b. 6.0, $300m c. 1.0, $100m

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d. 3.0, $150m e. 0.0, $100m Answer: a Cash conversion Cycle = inventory period + account receivable period account payable period = 1 + 0 6 = -5.0. Interest expense = $10 billion * 0.06 * (5/12) = $250 million