INSTRUCTIONS: Choose the BEST answer. Please write neatly. Please show all work (use CLEARLY labeled and written attachments if necessary). With answers requiring a written numerical response, please make sure you round appropriately. Show at least 3 digits in any numerical response (e.g. 123, 34.5, 6.78). Unless specified, assume annuities are ?ordinary?.

1. Homer and Marge own 80% of a Jimmy John?s franchise. Bart is their operating partner and owns the remaining 20% of the company. Bart is charged with managing the day-to-day operations of the company. In this role, Bart receives a salary, a company car and a bonus. Bart also stands to gain from future dividends and the growth in the value of the company. Homer and Marge derive all of their value from the company from future dividends and the growth in the value of the company. Since bonuses are earned immediately and dividends are earned in the future, this relationship is vulnerable to what kind of problem common with corporations where managers do not own the (entire) company?

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2. In market bubbles (such as the technology boom of the late 1990s and the real estate/mortgage boom of the mid-2000?s), managers come under intense pressure to maximize the market price of their company (e.g. its stock price). This can result in a short-term focus for many managers resulting in decisions to try to maximize near-term earnings. Sometimes this focus results in poor management decisions. Many times, it even leads to earnings-manipulation and, in the worse cases, fraud. This is why, in the instructor?s opinion, so many financial frauds are discovered shortly after market bubbles. If not, maximizing market price, what should manager?s primary objective be?

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3. A firm?s (or any financial asset?s) value is determined by its future cash flows. To estimate what a firm is worth today, you must discount those future cash flows by the firm?s weighted average cost of capital (WACC). The WACC is determined by a firm?s cost of debt and its cost of equity. In turn, the general level of interest rates in the overall economy affects these costs. Thus,

a. What happens to the value of a financial asset in a rising interest rate environment (all else equal)?

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b. What happens to the value of a financial asset in a declining interest rate environment (all else equal)?

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4. Assume the most recent nominal GDP growth was 3% (and up strongly from its prior reading), the unemployment rate is at 4% (down from 6% in the prior period) and CPI is growing at 5% (up from just 3% in the prior month). What do you think the Federal Reserve is likely to do?

a. Lower rates to further increase GDP growth and further lower unemployment.

b. Lower rates to slow GDP growth and reduce inflation.

c. Raise rates to further increase GDP growth and further lower unemployment.

d. Raise rates to slow GDP growth and reduce inflation.

5. In addition to raising interest rates on funds it loans to banks, the Federal Reserve can stimulate the economy how?

a. By purchasing treasury securities in the ?open market?, thus enabling the banks to lend more money at lower interest rates.

b. By selling treasury securities to banks, thus raising money for more government programs.

6. A federal budget deficit:

a. Generally slows economic growth due to higher interest rates.

b. Generally increases economic growth due to higher demand for goods and services.

7. Banks are highly regulated because...?

a. They are highly leveraged

b. They are important to the overall economy

c. The CEO?s cannot be trusted

d. All of the above

e. A & B only

8. The best way to maximize a firm?s value is to maximize its Earnings Per Share (EPS).

a. True

b. False

9. What is the YTM on a 10-year bond with 9% annual coupon that is selling at $887? (Assume par value = $1,000 as we usually do in this class)

a. 9.15%

b. 9.91%

c. 10.15%

d. 10.91%

Use the following information about Cartman Enterprises for questions 15-23.

Sales $1,000,000

Cost of Goods Sold $500,000

Operating Expenses $250,000

Interest Expense $100,000

Taxes $50,000

Depreciation & Amortization $50,000

10. What Cartman?s Gross Profit?

11. What is Cartman?s Operating Income or EBIT?

12. What is Cartman?s Earnings Before Tax?

13. What is Cartman?s Earnings After Tax or Net Income?

14. What is Cartman?s EBITDA?

15. Using the text?s definition, what is ?Net Cash Flow? for this firm?

16. Warren Buffett likes to incorporate required capital spending in his cash flow estimate from the income statement. If required capital spending for Cartman Enterprises was $75,000, what would Buffett?s estimate of Cash Flow be based upon this income statement data?

17. What is Cartman?s effective tax rate?

18. What is Cartman?s NOPAT?

19. An increase in operating current assets causes an increase in cash.

a. True

b. False

Use the following information about Kenny Company to answer questions 24-28.

Cash $50,000

Short term investments $150,000

Accounts Receivable $250,000

Inventories $500,000

Net PP&E $2,000,000

Other Long Term Assets $300,000

Accounts Payable $300,000

Notes Payable $100,000

Accruals $100,000

Long-term Debt $500,000

Please answer the following questions to determine the missing pieces of this balance sheet:

20. Kenny?s Total Current Assets?

21. Kenny?s Total Assets?

22. Kenny?s Total Current Liabilities?

23. Kenny?s Total Liabilities?

24. Kenny?s Shareholder?s (Common) Equity?

Use the following Cash Flow Statement for Stanley?s Store for questions 29-32:

Net Income $200

Depreciation Expense $200

Increase in accounts receivable $100

Increase in inventories $200

Increase in accounts payable $50

Increase in accruals $50

Capital Spending (or cash used to buy fixed assets) of $500

Sale of short-term investments $50

Increase in debt $300

Dividends Paid $100

Based on this information, answer the following questions:

25. What were cash from operations?

26. How much cash was (used) or generated from investing activities?

27. How much cash was (used) or generated from financing activities?

28. What was the net change in cash for Stanley?s Store?

29. The value of a company depends upon all of its future expected free cash flows (FCF) defined as NOPAT minus increases in operating working capital and operating fixed assets.

a. True

b. False

30. Operating Current Assets consists of all of the following EXCEPT

a. A/R

b. Inventories

c. Short-term investments

d. Accruals

e. Cash

31. Is an investment in machinery an investment in operating capital?

a. Yes

b. No

32. High FCF can cause waste if:

a. Interest expense is too high

b. Bonds are called in at a premium

c. Managers fail to act in the best interests of shareholders

d. Managers buy more assets that generate returns above the cost of capital

33. At its core, what is FCF?

a. The cash available for distribution to investors.

b. A driver of the fundamental value of the firm.

c. All of the above

d. None of the above

34. A financial metric used to determine if growth is adding value is

a. ROE

b. ROA

c. ROIC

d. NOPAT

35. Economic Value Added (EVA) measures how effective managerial actions in a given period.

a. True

b. False

36. EVA = NOPAT - (WACC)(Capital). In this form of the EVA question, (WACC)(Capital) represents, what?

a. An opportunity cost, but nevertheless a real cost

b. The cost of debt

c. The cost of equity

d. None of the above.

37. An inverted yield curve doesn?t happen much. When it does, short-term bonds yield more than long-term bonds, all else equal.

a. True

b. False

38. Market Value Added (MVA) = Market Value of the firm - Book value of the firm. This metric, represents what?

a. The value added by management since the inception of the firm.

b. The value added by management since last year.

c. The value added by management since last quarter.

d. None of the above.

39. YTM = Current Yield for a coupon bond selling at par.

a. True

b. False

40. What affects an investment?s value?

a. The amount of expected cash flows

b. The timing of cash flows

c. The risk of cash flows

d. All of the above

e. None of the above

41. The WACC is the weighted average cost of capital and is affected by what?

a. The capital structure of the firm

b. The current interest rate environment

c. The risk of the firm

d. All of the above

e. None of the above

42. A California Muni Bond yielding 5% or a corporate bond yielding 7%. Assuming all other factors are equal, which bond should you prefer if your marginal tax rate is 30%?

a. The muni bond

b. The corporate bond

c. Either. You would be indifferent to the two.

43. Dilbert Enterprises has issued $1 billion of bonds with a sinking fund provision. With 5 years left until maturity, Dilbert Enterprises does not retire bonds as provided for in the sinking fund provision. What is the consequence of this action on the company?

a. Nothing as long as it still pays interest on the bonds and pays them off at maturity.

b. The bonds are in default as a result of violating the sinking fund covenant.

c. It depends on the payment history of Dilbert Enterprises.

d. None of the above.

44. A bond that currently trades at a premium will see its price do what until maturity (assuming nothing else changes except the passage of time)?

a. Rise to par

b. Fall to par

c. Remain the same since prevailing interest rates have not changed

d. None of the above

45. You put $2,000 in a CD paying 6% for 10 years. How much money do you have at the end of 10 years?

46. What is the Current Yield on a 10-year bond with 9% annual coupon that is selling at $887? (Assume par value = $1,000 as we usually do in this class)?

a. 9.15%

b. 9.91%

c. 10.15%

d. 10.91%

47. You are considering purchasing a 10% coupon bond that matures in 11 years. YTM on similar bonds with like risk characteristics currently yield 11%. What price should you consider paying for this bond?

48. You put $10,000 in a company 401K each year. The company matches this investment. You expect to earn 8% each year on this money and you work for the company for 25 years before you retire. How much money do you have at retirement?

49. You have decided that you need $3 million to retire in 35 years. How much money should you save each month if you can earn 9% on this money?

50. You purchase a rental house for $100,000 with 20% down. The rental income pays for all expenses and the mortgage for the entire time you own it. You sell it 18 years after you purchase it. Assuming real estate prices increase 3.5% per year, at what price did you sell this rental house?

51. Assuming you owe $45,000 on this house when you sell it, what is your gain on the house above?

52. What is your rate of return on your equity investment given this gain?

53. Your company is evaluating a project. The project is expected to cost $500,000 and generate the following cash flows: 100,000 in year one, 300,000 in years two and three, & -50,000 in year four (end of life). If your cost of capital (WACC) is 10%, should you undertake this project?

a. Yes

b. No

c. Not enough information

54. What is the value of a bond with 10 years to maturity and a 10% coupon rate if current interest rates for similar bonds are currently 13%?

55. What is the value of a bond with 10 years to maturity and a 10% coupon rate if current interest rates for similar bonds are currently 7%?

56. At maturity a bond?s value always equals its par value.

a. True

b. False

57. A ?normal? yield curve is?

a. Sloping upward

b. Flat

c. Sloping downward

58. Given what you know about intrinsic value, please calculate the intrinsic value of one ounce of gold.

59. The shape of the yield curve is drive by

a. Expectations about future inflation

b. Expectations about future cash flow

c. Perceptions about the relative risk of securities with different maturities

d. All of the above

e. A & C only.

60. Meacham Enterprises' bonds currently sell for $1,280 and have a par value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050. What is their yield to call (YTC)?

61. What is the YTM in #89?

62. What is the Current Yield in #89?

63. Based upon your answers to question 89-91, do you think the corporation will call this bond?

a. Yes

b. No

64. There are several advantages of a sole proprietorship business organization. What is its chief disadvantage?

a. It is expensive to form

b. Unlimited liability

c. It is heavily regulated

65. There are several advantages of a partnership business organization. What is its chief disadvantage?

a. It is expensive to form

b. Unlimited liability

c. It is heavily regulated

d. Double taxation

66. There are several advantages of a corporate business organization. What is its chief disadvantage?

a. It is expensive to form

b. Unlimited liability

c. It is heavily regulated

d. Double taxation

67. Figure 1-3 in the text illustrates that the Federal budget deficit reached a peak in 2009. Why might this be?

a. Obamacare.

b. A weak economy resulted in lower tax revenues for the government.

c. Poor fiscal policy.

d. Poor monetary policy.

68. Interest rates have steadily fallen since 1980. How might this have affected asset prices in that time frame?

a. Interest rates have nothing to do with asset prices.

b. Declining rates likely helped inflate asset prices.

c. Declining rates likely slowed the rate of asset price increases.

d. None of the above.

69. Money markets are the markets for?

a. Markets for securities with maturities less than a year.

b. Markets for securities with maturities more than a year.

c. Markets for debt securities with maturities less than a year.

d. Markets for debt securities with maturities less than a year.

Please put your name here: _____________________________________________________ INSTRUCTIONS: Choose the BEST answer. Please write neatly. Please show all work (use CLEARLY labeled and written attachments if necessary). With answers requiring a written numerical response, please make sure you round appropriately. Show at least 3 digits in any numerical response (e.g. 123, 34.5, 6.78). Unless specified, assume annuities are \"ordinary\". 1. Homer and Marge own 80% of a Jimmy John's franchise. Bart is their operating partner and owns the remaining 20% of the company. Bart is charged with managing the day-to-day operations of the company. In this role, Bart receives a salary, a company car and a bonus. Bart also stands to gain from future dividends and the growth in the value of the company. Homer and Marge derive all of their value from the company from future dividends and the growth in the value of the company. Since bonuses are earned immediately and dividends are earned in the future, this relationship is vulnerable to what kind of problem common with corporations where managers do not own the (entire) company? ______________________________________________________________________ 2. In market bubbles (such as the technology boom of the late 1990s and the real estate/mortgage boom of the mid-2000's), managers come under intense pressure to maximize the market price of their company (e.g. its stock price). This can result in a short-term focus for many managers resulting in decisions to try to maximize near-term earnings. Sometimes this focus results in poor management decisions. Many times, it even leads to earnings-manipulation and, in the worse cases, fraud. This is why, in the instructor's opinion, so many financial frauds are discovered shortly after market bubbles. If not, maximizing market price, what should manager's primary objective be? ______________________________________________________________________ 3. A firm's (or any financial asset's) value is determined by its future cash flows. To estimate what a firm is worth today, you must discount those future cash flows by the firm's weighted average cost of capital (WACC). The WACC is determined by a firm's cost of debt and its cost of equity. In turn, the general level of interest rates in the overall economy affects these costs. Thus, a. What happens to the value of a financial asset in a rising interest rate environment (all else equal)? ________________________________________________________________ b. What happens to the value of a financial asset in a declining interest rate environment (all else equal)? ________________________________________________________________ 4. Assume the most recent nominal GDP growth was 3% (and up strongly from its prior reading), the unemployment rate is at 4% (down from 6% in the prior period) and CPI is growing at 5% (up from just 3% in the prior month). What do you think the Federal Reserve is likely to do? a. Lower rates to further increase GDP growth and further lower unemployment. b. Lower rates to slow GDP growth and reduce inflation. c. Raise rates to further increase GDP growth and further lower unemployment. d. Raise rates to slow GDP growth and reduce inflation. 5. In addition to raising interest rates on funds it loans to banks, the Federal Reserve can stimulate the economy how? a. By purchasing treasury securities in the \"open market\