Part 1.

1) If your goal is determine how effectively a firm is managing its assets, which of the following sets of ratios would you examine? (Points : 5)

(a) profit margin, current ratio, fixed charge coverage ratio

(b) quick ratio, debt ratio, time interest earned

(c) inventory turnover ratio, days sales outstanding, fixed asset turnover ratio

(d) total assets turnover ratio, price earnings ratio, return on total assets

(e) time interest earned, profit margin, fixed asset turnover ratio

2. An analysis of a firm's financial ratios over time that is used to determine the improvement or deterioration in its financial situation is called (Points : 5)

(a) sensitivity analysis

(b) DuPont chart

(c) ratio analysis

(d) progress chart

(e) trend analysis

3. Which of the following financial statements shows a firm's financing activities (how funds were generated) and investment activities (how funds were used) over a particular period of time? (Points : 5)

(a) balance sheet

(b) income statement

(c) statement of retained earnings

(d) statement of cash flows

(e) proxy statement

4. Harvey Supplies Inc. has a current ratio of 3.0, a quick ratio of 2.4, and an inventory turnover ratio of 6. Harvey's total assets are $1 million and its debt ratio is 0.20. The firm has no long-term debt. What is Harvey's sales figure if the total cost of goods sold is 75% of sales? (Points : 5)

(a) $960,000

(b) $720,000

(c) $1,620,000

(d) $120,000

(e) $540,000

5. Which of the following actions will cause an increase in the quick ratio in the short run? (Points : 5)

(a) $1,000 worth of inventory is sold, and an account receivable is created. The receivable exceeds the inventory by the amount of profit of the sale, which is added to retained earnings.

(b) A small subsidiary which was acquired for $100,000 two years ago and which was generating profits at the rate of 10 percent is sold for $100,000 cash. (Average company profits are 15 percent of assets.)

(c) Marketable securities are sold at cost.

All of the above.

(d) Both the first and second actions listed above will cause an increase in the quick ratio in the short run.

6. Aurillo Equipment Company (AEC) projected that its ROE for next year would be just 6%. However, the financial staff has determined that the firm can increase its ROE by refinancing some high interest bonds currently outstanding. The firm's total debt will remain at $200,000 and the debt ratio will hold constant at 80%, but the interest rate on the refinanced debt will be 10%. The rate on the old debt is 14%. Refinancing will not affect sales which are projected to be $300,000. EBIT will be 11% of sales, and the firm's tax rate is 40%. If AEC refinances its high interest bonds, what will be its projected new ROE? (Points : 5)

(a) 3.0%

(b) 8.2%

(c) 10.0%

(d) 15.6%

(e) 18.7%

7. At an effective annual interest rate of 20 percent, how many years will it take a given amount to triple in value? (Round to the closest year.) (Points : 5)

(a) 5

(b) 8

(c) 6

(d) 10

(e) 9

8. You have determined the profitability of a planned project by finding the present value of all the cash flows form that project. Which of the following would cause the project to look more appealing in terms of the present value of those cash flows? (Points : 5)

(a) The discount rate decreases.

(b) The cash flows are extended over a longer period of time, but the total amount of the cash flows remains the same.

(c) The discount rate increases.

(d) Both the second and third choices.

(e) Both the first and second choices.

9. You deposited $1,000 in a savings account that pays 8 percent interest, compounded quarterly, planning to use it to finish last year in college. Eighteen months later, you decide to go to the Rocky Mountains to become a ski instructor rather than continue in school, so you close out your account. How much money will you receive? (Points : 5)

(a) $1,171

(b) $1,126

(c) $1,082

(d) $1,163

(e) $1,008

10. You want to borrow $1,000 from a friend for one year, and you propose to pay her $1,120 at the end of the year. She agrees to lend you the $1,000, but she wants you to pay her $10 of interest at the end of each of the first 11 months plus $1,010 at the end of the 12th month. How much higher is the effective annual rate under your friend's proposal than under your proposal? (Points : 5)

(a) 0.00%

(b) 0.45%

(c) 0.68%

(d) 0.89%

(e) 1.00%

11. Suppose someone offered you your choice of two equally risky annuities, each paying $5,000 per year for 5 years. One is an annuity due, while the other is a regular (or deferred) annuity. If you are a rational wealth-maximizing investor which annuity would you choose? (Points : 5)

(a) The annuity due.

(b) The deferred annuity.

(c) Either one, because as the problem is set up, they have the same present value.

(d) Without information about the appropriate interest rate, we cannot find the values of the two annuities, hence we cannot tell which is better.

(e) The annuity due; however, if the payments on both were doubled to $10,000, the deferred annuity would be preferred.

12. You have a 30-year mortgage with a simple annual interest rate of 8.5 percent. The monthly payment is $1,000. What percentage of your total payments over the first three years goes toward the repayment of principal? (Points : 5)

(a) 1.50%

(b) 3.42%

(c) 5.23%

(d) 6.75%

(e) 8.94%

13. A project with a 3-year life has the following probability distributions for possible end of year cash flows in each of the next three years:

(a)Year 1

(b) Year 2

(c) Year 3

Prob

Cash Flow

Prob

Cash Flow

Prob

Cash Flow

0.30

$300

0.15

$100

0.25

$200

0.40

500

0.35

200

0.75

800

0.30

700

0.35

600

0.15

900

Using an interest rate of 8 percent, find the expected present value of these uncertain cash flows. (Hint: Find the expected cash flow in each year, then evaluate those cash flows.) (Points : 5)

(a) $1,204.95

(b) $835.42

(c) $1,519.21

(d) $1,580.00

(e) $1,347.61

14. All else equal, if you expect to receive a certain amount in the future, say, $500 in ten (10) years, the present value of that future amount will be lowest if the interest earned on such investments is compounded (Points : 5)

(a) daily

(b) weekly

(c) monthly

(d) quarterly

(e) annually

15. Your uncle would like to restrict his interest rate risk and his default risk, but he still would like to invest in corporate bonds. Which of the possible bonds listed below best satisfies your uncle's criteria? (Points : 5)

(a) AAA bond with 10 years to maturity.

(b) BBB perpetual bond.

(c) BBB bond with 10 years to maturity.

(d) AAA bond with 5 years to maturity.

(e) BBB bond with 5 years to maturity.

16. Your corporation has the following cash flows:

(a)Operating income $250,000

(b)Interest received 10,000

(c)Interest paid 45,000

(d)Dividends received 20,000

(e) Dividends paid 50,000

If the applicable income tax rate is 40 percent, and if 70 percent of dividends received are exempt from taxes, what is the corporation's tax liability? (Points : 5)

(a) $74,000

(b) $88,400

(c) $91,600

(d) $100,000

(e) $106,500

17. If the expectations theory of the term structure of interest rates is correct, and if the other term structure theories are invalid, and we observe a downward sloping yield curve, which of the following is a true statement? (Points : 5)

(A) Investors expect short-term rates to be constant over time.

(B) Investors expect short-term rates to increase in the future.

(C) Investors expect short-term rates to decrease in the future.

(D) It is impossible to say unless we know whether investors require a positive or negative maturity risk premium.

(E) The maturity risk premium must be positive.

18. Assume that the current interest rate on a 1-year bond is 8 percent, the current rate on a 2-year bond is 10 percent, and the current rate on a 3-year bond is 12 percent. If the expectations theory of the term structure is correct, what is the 1-year interest rate expected during Year 3? (Base your answer on an arithmetic rather than geometric average.) (Points : 5)

(a) 12.0%

(b) 16.0%

(c) 13.5%

(D) 10.5%

(E) 14.0%

19. Solarcell Corporation has $20,000 which it plans to invest in marketable securities. It is choosing between AT&T bonds which yield 11%, State of Florida municipal bonds which yield 8%, and AT&T preferred stock with a dividend yield of 9%. Solarcell's corporate tax rate is 40%, and 70% of the preferred stock dividends it receives are tax exempt. Assuming that the investments are equally risky and that Solarcell chooses strictly on the basis of after-tax returns, which security should be selected? Answer by giving the after-tax rate of return on the highest yielding security. (Points : 5)

(a) 8.46%

(b) 8.00%

(C) 7.92%

(d) 9.00%

(E) 9.16%

20. The normal yield curve is upward sloping implying that (Points : 5)

(a) the return on short-term securities are higher than the return on long-term securities of similar risk.

(b) the return on long-term securities are equal to the return on short-term securities of similar risk.

(c) the return on short-term securities are lower than the return on long-term securities of similar risk.

(d) the return on bonds with a higher default risk is higher than the returns on bonds with lower default risk.

(e) the return on bonds with a lower default risk is higher than the returns on bonds with higher default risk.

Part ii

Testbank Question 39 In a rules-based approach (such as U.S. GAAP), compared to a principles-based approach (such as Canadian GAAP), O companies frequently do not interpret the rules literally. the body of knowledge is smaller. O the importance of communicating the best information to users is emphasized. O since it is more prescriptive, it may be easier to defend how to account for a particular item.QUESTION 12 Entity E had the following information available: Accounts payable 110,000 Accounts receivable 80,000 Accumulated depreciation, buildings 40,000 Buildings 220,000 Cash 100,000 Common stock Inventory 140,000 Land (underneath buildings) 310,000 Mortgage payable (due 2031) 180,000 Prepaid insurance 60,000 Salaries payable 20,000 Trademarks 180,000 Retained earnings (ending) 500,000 On the classified balance sheet, what is the amount for total current assets? O $870,000 O $1,050,000 O $130,000 O $380,000 QUESTION 13 Entity C had the following information available. Accounts payable 110,000 Accounts receivable 80,000 Accumulated depreciation, buildings 40,000 Buildings 220,000 Cash 100,000 Common stock 240,000 Inventory 140,00 Land (underneath buildings) 310,000 Mortgage payable (due 2031) 180,000 Prepaid insurance 60,000 Salaries payable 20,000 Trademarks 180,000 Retained earnings (ending) 500,000 On the classified balance sheet, what is the amount for total property, plant, and equipment? O $630,000 $310,000 $380,000 O $490,00013.23 Advanced: Calculation of NPV and IRR, a discussion of the Inconsistency In ranking and a calculation of the cost of capital at which the ranking changes. A company is considering which of two mutually exclusive projects it should undertake. The finance director thinks that the project with the higher NPV should be chosen, whereas the managing director thinks that the one with the higher IRR should be undertaken, especially as both projects have the same initial outlay and length of life. The company anticipates a cost of capital of 10 per cent and the net after tax cash flows of the projects are as follows: Project X Project Y (EOOO) (1000) Year 0 -200 200 35 218 80 10 UI AWNP 90 10 75 20 here to search O 1 2 X