Weinstock & Rives ID: S Business Finance 620 SAMPLE Exam 1 INSTRUCTIONS: This sample exam contains questions representative of those used on Exam 1. An answer key follows the questions; chapter references in the key are based on the 5th edition of the text. To take full advantage of this exam, do not take the exam until you have completed your study for Exam 1. A. Take the entire sample exam at one time; allow yourself up to 100 minutes to finish the exam. B. Answer the 27 sample questions in the order shown; DO NOT skip around, DO NOT regroup questions by chapter. C. You may use your calculator and the Exam 1 Formula Sheet (on the website). D. When you finish, grade your exam using the answer key. E. Among the questions you miss, note whether each miss is a mistake (math error, misread question, etc) or the result of simply not knowing the answer. F. For the questions you miss because you made a mistake, note the types of mistakes you made. When you work problems in the future (including exam problems), be careful to avoid these mistakes. G. For the questions you miss because you simply did not know the answer, check the topic and review the text section covering that topic. _________________________________________ 1. Unlimited liability is faced by the owners of A. corporations. B. partnerships and corporations. C. sole proprietorships and partnerships. D. corporations and sole proprietorships. 2. Tuttle Products had $16.460 million in sales last year, $8.257 million in cost of goods sold, depreciation expense of $2.097 million, interest payments on outstanding debt of $929,400, and cash dividends paid of $382,150. The company?s marginal income tax rate is 35%. What would happen to the company?s net income and cash flow were depreciation expense to decrease by $500,000? A. Net income would increase by $325,000, and cash flow would decrease by $175,000. B. Both net income and cash flow would decrease by $175,000. C. Net income would decrease by $378,398, and cash flow would increase by $121,602. D. Net income would increase by $175,000, and cash flow would increase by $325,000. 3. NET Corporation has an ROE of 24% and would like to see earnings grow at an 18% annual rate. Under these circumstances, what percent of earnings can they afford to pay as dividends? A. 35.00% B. 13.33% C. 75.00% D. 25.00% Business Finance 620 SAMPLE Exam 1 / Page 2 ID: S Weinstock & Rives 4. Which of the following transactions represents a capital budgeting decision? A. Repurchasing shares of common stock B. Issuing debt in the form of long-term bonds sold to the public C. Expanding into a new line of consumer products, at a cost of $45 million D. Declaring a dividend of $2.25 per share on common stock 5. If a firm?s profit margin is 5.65% on sales of $4.135 million, and interest expense totals $194,800, by how much must the firm reduce its assets in order to increase its ROA from 10.5% to 12.75%? A. $676,038 B. $392,651 C. $720,046 D. $333,333 6. What happens to a firm?s net worth as it uses cash to repay accounts payable? A. Net worth remains constant. B. Net worth increases by the amount of cash used to repay payables. C. Net worth decreases by the amount of cash used to repay payables. D. Net worth decreases by less than the amount of cash used to repay payables. 7. Corporate securities represent claims against A. the firm's officers and directors. B. the firm's financial assets. C. the stakeholders of the firm. D. the assets and future earnings of the firm. 8. ABC Products has an ROE of 20% and a current dividend-payout ratio of 40%. Which of the following changes will allow ABC?s earnings to grow annually at a rate of 15%? A. A two-percentage-point decrease in ROE while holding the dividend-payout ratio constant. B. An increase in the dividend-payout ratio to 50% and an increase in ROE to 25%. C. A decrease in the dividend-payout ratio to 35% while holding ROE constant. D. A decrease in the dividend-payout ratio to 25% while holding ROE constant. 9. Which of the following actions represents a source of cash to the firm? A. Increase in accounts payable B. Increase in inventories C. Repurchase of common stock D. Increase in accounts receivable 10. What is the inventory turnover ratio for MEGA Products if cost of goods sold is $5,000, the current ratio equals 3.0, the quick ratio equals 1.5, and the firm has $1,800 in current assets? A. 5.56 B. 4.17 C. 2.78 D. 8.33 Business Finance 620 SAMPLE Exam 1 / Page 3 ID: S Weinstock & Rives 11. Securities sold in the secondary market A. usually pose less risk than securities sold in the primary market. B. usually are less expensive than securities sold in the primary market. C. generate funds only for the sellers of the securities. D. generate funds only for the issuing companies. 12. An increase in depreciation expense will (other things equal): A. decrease the market value of assets. B. increase taxable income. C. decrease net income. D. increase the book value of assets. 13. What is the market price of a firm?s common stock if 100,000 shares are outstanding, the firm?s book value of equity is $3.0 million, and the firm?s market-to-book ratio is 3.50? A. $30.00 B. $105.00 C. $8.57 D. $85.70 14. Which of the following statements is true for a firm whose market value of equity is $1.0 million, whose market value of total assets is $2.0 million, and which has 1,000 shares of common stock outstanding. A. Market value per share is $2,000. B. The market value of liabilities exceeds the book value of liabilities. C. The market value of liabilities is $1.0 million. D. The firm has high asset turnover. 15. What is the ROE for a firm with a times interest earned ratio of 2.5, a total tax liability of $1.68 million, interest expense of $1.45 million, and average equity over the last year of $1.85 million? A. 33.3% B. 21.5% C. 26.8% D. 30.4% 16. Which of the following statements is true for a corporation whose market value of equity is $1.75 million, whose market value of assets is $2.35 million, and which has 15,000 shares of stock outstanding? A. The market value of liabilities exceeds the book value of liabilities. B. The firm has no financial leverage. C. The market value of liabilities is $600,000. D. The market value per share of stock is $40. Business Finance 620 SAMPLE Exam 1 / Page 4 ID: S Weinstock & Rives 17. When a corporation fails, its shareholders A. could lose part of their personal wealth, in addition to the amount they invested in the business. B. do not have to worry about losing any money; they are fully protected by law from any financial loss. C. must repay the full amount of all outstanding debt, even if they have to use some or all of their personal wealth to satisfy this obligation. D. cannot lose more than the amount they invested in the business. 18. What must happen to asset turnover to leave ROE unchanged from its original 16% level if the profit margin is reduced from 8% to 6%, and the leverage ratio increases from 1.20 to 1.60? A. Asset turnover will increase from 1.46 to 2.33. B. Asset turnover will increase from 4.76 to 9.60. C. Asset turnover will remain constant. D. Asset turnover will decrease from 14.58 to 2.33. 19. What is the marginal impact on income taxes for a profitable corporation in the 35% marginal income tax bracket that incurs an additional dollar of depreciation expense? A. A decrease of 35 cents B. A decrease of 65 cents C. An increase of 65 cents D. A change in depreciation expense does not affect income taxes due. 20. Last year, a firm?s asset turnover ratio was 2.0. Since then, sales have grown by 25%, and average total assets have increased by 10%. What is the firm?s current asset turnover ratio? A. 2.27 B. 2.15 C. 1.82 D. 2.05 21. Which of the following forms of management compensation is most likely to bring the interests of managers more in line with those of shareholders? A. A salary paid partly in shares of the company?s common stock B. A fixed-dollar salary C. A salary linked to the company?s revenue growth D. A salary linked to the company?s quarterly profits 22. A firm has $600,000 in current assets and $150,000 in current liabilities. Which of the following statements is correct if cash is used to pay $50,000 in accounts payable? A. Net working capital will increase to $500,000. B. The current ratio will decrease. C. Net working capital will not change. D. The current ratio will increase to 5.0. Business Finance 620 SAMPLE Exam 1 / Page 5 ID: S Weinstock & Rives 23. Which of the following actions represents a use of cash by the firm? A. Sale of common stock B. Increase in inventories C. Increase in accounts payable D. Decrease in accounts receivable 24. A times interest earned ratio of 5.0 indicates the firm: A. has a relatively low income tax liability. B. pays five times its EBIT in interest expense. C. earns significantly more than its interest obligations. D. has less than fives dollars of cash coverage for each dollar of interest expense. 25. If a firm uses cash to pay some of its accounts payable, what will happen to its current ratio and its quick ratio if both ratios were greater than 1.0 before the payments? A. Both the current ratio and the quick ratio will increase. B. Both the current ratio and the quick ratio will decrease. C. The current ratio will increase, but the quick ratio will remain unchanged. D. The quick ratio will increase, but the current ratio will remain unchanged. 26. Which of the following transactions represents a financing decision? A. A decision to borrow $1.375 million short-term from a local bank B. A decision to purchase a new computer system C. A decision to invest $1,625,000 in the common stock of another company D. A decision to pay $1.015 million of accounts payable 27. You have the following information from a firm?s financial statements: > The firm?s net income is $2.662 million. > The firm?s net sales is $28.267 million. > Depreciation (the only non-cash expense) is $1.082 million. > Cash used by investments is $1.784 million. > Cash provided by the sale of common stock is $358,000. > Cash provided by changes in working capital is $96,750. > Cash dividends paid equal $859,000. Judging solely from this information, what entry would you expect to find for cash flow from operations in the firm?s statement of cash flows? A. $3,744,000 B. $3,840,750 C. $2,758,750 D. The answer cannot be determined from the information provided. ID: S Business Finance 620 SAMPLE Exam 1 Answer Section MULTIPLE CHOICE 1. ANS: C Chapter 1+2 2. ANS: A Chapter 3 3. ANS: D Chapter 17 4. ANS: C Chapter 1+2 5. ANS: C Chapter 17 6. ANS: A Chapter 3 7. ANS: D Chapter 1+2 8. ANS: D Chapter 17 9. ANS: A Chapter 3 10. ANS: A Chapter 17 11. ANS: C Chapter 1+2 12. ANS: C Chapter 3 13. ANS: B Chapter 17 14. ANS: C Chapter 3 15. ANS: C Chapter 17 16. ANS: C Chapter 3 17. ANS: D Chapter 1+2 18. ANS: C Chapter 17 19. ANS: A Chapter 3 20. ANS: A Chapter 17 21. ANS: A Chapter 1+2 ID: S 22. ANS: C Chapter 17 23. ANS: B Chapter 3 24. ANS: C Chapter 17 25. ANS: A Chapter 17 26. ANS: A Chapter 1+2 27. ANS: B Chapter 3 Bill ExamView Pro - BFIN 620 Exam 1 SAMPLE AU2006.tst
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