BUS 330Name:______

Fall 2016

Exam 1ID #:______

Part I: Multiple Choice

Select the one best answer directly on the exam.

  1. A bond that ____ is more attractive to investors than it would otherwise be. A bond that _____ is less attractive to investors than it would otherwise be.
  1. Contains a call provision or warrants; is convertible or is an income bond.
  2. Contains warrants or is convertible; contains a call provision or is an income bond.
  3. Contains warrants or a call provision or is an income bond; is convertible.
  4. Is an income bond or is convertible; contains a call provision or warrants.
  5. Contains warrants; contains a call provision, or is convertible or is an income bond.
  1. The abbreviation EBIT stands for:
  1. Earnings Beyond Immediate Target
  2. Earnings Before Interest and Taxes
  3. Everyone Believes in Trump
  4. Earnings Before Internal Transfers
  5. Equity Balanced Income Taxes
  1. Despite the noble and public-spirited statements on companies' websites and mission statements, the ultimate goal of the managers of publicly-owned companies is to maximize:
  1. Short-term profit.
  2. Shareholder wealth.
  3. Market share.
  4. The debt-to-equity ratio.
  5. Earnings per share.
  1. Your analysis of a company’s financial statements shows that the company’s Free Cash Flow (FCF) is negative. This is would be especially worrisome if:
  1. The company is growing rapidly and has large capital expenditures.
  2. The company operates in a mature market with stable income, and has depreciation greater than its new investment.
  3. The company made an especially large acquisition in the past year.
  4. The company pays most of its net income as dividends to shareholders.
  5. The company has unusually large increase in accounts receivable.
  1. The S Corporation, the Limited Liability Company (LLC), and the Limited Liability Partnership (LLP) are business forms that combine (1) the main advantage of partnerships with (2) the main advantage of corporations. (1) is _____, while (2) is _____.
  1. Limited liability for ownersdouble taxation of income
  2. Unlimited liability for ownerssingle taxation of income
  3. Single taxation of incomelimited liability for owners
  4. Double taxation of incomelimited liability for owners
  5. Limited liability for ownerssingle taxation of income
  1. The reason that hostile takeover offers are opposed by the management of a company is that if the takeover succeeds, then:
  1. The managers of the company being taken over lose their jobs.
  2. The creditors of the company being taken over will not be repaid.
  3. The share price of the company being taken over will fall.
  4. The company being taken over will suffer damage to its reputation.
  5. The shareholders of the company that is making the takeover offer will lose money.
  1. Of the instruments below, ____, _____, and _____ are traded in the money market; while _____, _____, and _____ are traded in the capital market.

(1)Bankers Acceptances

(2)Mortgages

(3)Preferred Stocks

(4)Eurodollar Market Time Deposits

(5)US Treasury Bills

(6)Common Stocks

  1. (1), (2), (3)(4), (5), (6)
  2. (1), (4),(5)(2), (3), (6)
  3. (1), (3),(5)(2), (4), (6)
  4. (3), (4),(6)(1), (2), (5)
  5. (1), (4),(6)(2), (3), (5)
  1. In which case are you buying a financial asset in a private market?
  1. You buy shares of MCD on the stock exchange.
  2. You purchase US Treasury bonds from your broker.
  3. You purchase a mix of different shares through a mutual fund.
  4. You arrange to purchase shares in a company directly from another person without using an organized exchange.
  5. none of the above.
  1. Some financial ratios are useful to analysts or managers who wish to evaluate the operational performance of the company (compared to another company or the industry average). Other ratios are especially useful to a lender who wants to evaluate the ability of a company to meet its debts as they come due. The ____ ratio is an example of the first type of ratio, and the ____ is an example of the second.
  1. debt ratioinventory turnover ratio
  2. basic earning powerprice/earnings ratio
  3. total assets turnoverdebt ratio
  4. operating margindays sales outstanding ratio
  5. quick (acid test)operating margin
  1. The type of financial institution that specializes in helping companies raise capital by (1) helping their clients design securities that will be attractive to investors, (2) buying the entire issue of securities at a fixed price, and then (3) re-selling them – is:
  1. A commercial bank.
  2. A hedge fund.
  3. A mutual fund.
  4. An investment bank.
  5. An exchange-traded fund.
  1. The “pure expectations theory” of the term structure of interest rates states that:

(i)current long-term interest rates depend on investors' expectations of future short-term rates.

(ii)it is possible to infer what investors expect future short-term interest rates to be from comparing current long-term interest rates to current short-term interest rates.

(iii)the liquidity premium that is added to the interest rate of a security rises as the amount of inflation that is expected rises.

  1. Only (i) is true.
  2. Only (ii) is true.
  3. Only (iii) is true.
  4. Only (i) and (ii) are true.
  5. Only (ii) and (iii) are true.
  1. Assume that the corporate tax rate is 40%, the tax rate for individuals who receive dividend income is 20%, and the tax rate for individuals who receive interest income is 35%. If a company has $100 of EBIT that it uses to make dividend payments, the investor receives (after all taxes) _____. If the company uses the $100 of EBIT to make interest payments on debt, the investor receives (after all taxes) _____.
  1. $60$39
  2. $48$65
  3. $65$80
  4. $65$39
  5. $80$48
  1. In a bankruptcy reorganization, there is not enough asset value (or discounted cash flow) to pay all claim holders everything they are owed. Not everyone gets the same percentage of what they hoped to get. The priority of claims is given by (from highest priority to lowest priority):
  1. stock holders, secured creditors, unsecured creditors
  2. secured creditors, unsecured creditors, stockholders
  3. unsecured creditors, secured creditors, stock holders
  4. secured creditors, stock holders, unsecured creditors
  5. unsecured creditors, secured creditors, stock holders
  1. The difference between unsecured credit and secured credit is the right to reclaim ownership of some specific asset of the debtor if the debtor defaults. Debt contracts that provide the lender with this right is ____, and the right to the asset is called _____.
  1. unsecuredebenture
  2. securecollateral
  3. unsecurea warrant
  4. secureconvertibility
  5. None of the above
  1. The _____ is the financial statement that describes the company’s financial position at a particular date. The _____ describes what the firm did during the year to increase or decrease its cash. The _____ is the financial statement that describes the firm’s operating performance.
  1. statement of cash flowsincome statementbalance sheet
  2. balance sheetincome statementstatement of stockholders’ equity
  3. statement of stockholders’ equity balance sheetincome statement
  4. statement of stockholders’ equity income statement balance sheet
  5. none of the above.
  1. The _____ is an example of an over-the-counter market. The _____ is an example of a physical location exchange.
  1. New York Stock ExchangeSecurities and Exchange Commission
  2. NASDAQNew York Stock Exchange
  3. New York Stock ExchangeNASDAQ
  4. NASDAQSecurities and Exchange Commission
  5. Federal Reserve BoardFederal Deposit Insurance Corporation
  1. _____ is an example of a market value ratio. _____ is an example of a profitability ratio. _____ is an example of a liquidity ratio.
  1. the current ratio, the fixed assets turnover ratio, the operating margin
  2. market to book ratio, the Basic Earning Power ratio, the quick ratio
  3. the inventory turnover ratio, the times-interest-earned ratio, the price/earnings ratio
  4. the return on common equity ratio, the debt ratio, the Days Sales Outstanding ratio
  5. the total assets turnover ratio, the profit margin, the market/book ratio
  1. Correctly match the terms in the left column with the definitions in the right column:
  1. Money MarketA. A market in which participants agree today to buy or sell an asset at some future date.
  1. Futures marketB.Financial markets in which funds are borrowed or loaned for short periods (less than a year).
  2. Private marketC.A market in which transactions are worked out directly between two parties.
  3. Secondary marketD.A market in which assets are bought and sold for instant delivery.
  4. Spot marketE.A market in which assets are traded among buyers and sellers after the assets have been originally issued.
  5. 1 + B; 2 + A; 3 + C; 4 + E; 5 + D
  6. 1 + C; 2 + A; 3 + D; 4 + B; 5 + E
  7. 1 + E; 2 + C; 3 + A; 4 + D; 5 + B
  8. 1 + D; 2 + E; 3 + B; 4 + C; 5 + A
  9. none of the above is correct.
  1. The graph that shows the relationship between the yield-to-maturity of bonds with different maturities is called:
  1. The yield curve.
  2. The inflation premium.
  3. The market risk premium.
  4. The par value curve.
  5. The time preference graph.
  1. A stock’s intrinsic value is:
  1. the total assets divided by the number of shares outstanding.
  2. the total fixed assets minus liabilities, divided by the number of shares outstanding.
  3. total owners’ equity, divided by shares outstanding.
  4. the discounted sum of the firm’s free cash flow, divided by the number of shares outstanding.
  5. none of the above.

Part II: Below are the income statements and balance sheets of two companies -- KSS Kohls and TGT Target – both operate chains of stores selling similar merchandise (mostly clothes). For the following questions, it is better to give me the numerator and denominator (for example: 62/2000) instead of the numerical result (for example: 3.1%). This makes it easier for me to see what you are doing.

For KSS – the price per share last weekend was $43.75. The P/E ratio (trailing twelve months) is 11.3. The forward P/E is 11.3.

For TGT -- the price per share last weekend was $68.68. The P/E ratio (trailing twelve months) is 14.0. The forward P/E is 13.9.

  1. What is the ROE (return on equity) of KSS?
  1. Compare the quick ratios of the two companies. What does the comparison tell you?
  1. Which firm has a better total assets turnover ratio?
  1. Compare the Operating Margin of the two companies. Which company has stronger Operating Margin?

HINT: Recall the excel commands have the formats:

= PV(rate, nper, pmt, [fv]))

= FV(rate, nper, pmt, [pv]))

=RATE(nper, pmt, pv, [fv])

=NPER(rate, pmt, pv, [fv])

Suppose a bond matures in 10 years and has a 5% annual coupon with a par value of $1000.

6. Write down the excel commands that would provide the answers to the following:

a. What price for the bond would generate a yield-to-maturity of 5.3%?

b. What would the yield-to-maturity be if the price of the bond today is $1120?

c. Suppose the bond could be called after 3 years with a 10% call premium. Assuming that the borrower intends to call the bond, what would be the yield-to-call?


Income Statements
/ KSS / TGT
1/31/2016 / 1/31/2016
Sales / 19,204 / 73,785
Cost Of Goods / 12,265 / 51,997
Gross Profit / 6,939 / 21,788
Selling & AdminstrativeDepr. & Amort Expenses / 5,386 / 16,258
Income After Depreciation & Amortization / 1,553 / 5,530
Non-Operating Income / -169 / 0
Interest Expense / 327 / 607
Pretax Income / 1,057 / 4,923
Income Taxes / 384 / 1,602
Income From Cont. Operations / 673 / 3,321
Extras & Discontinued Operations / 0 / 42
Net Income / 673 / 3,363
Depreciation Footnote / 1/31/2016 / 1/31/2016
Income Before Depreciation & Amortization / 2,487 / 7,743
Depreciation & Amortization (Cash Flow) / 934 / 2,213
Income After Depreciation & Amortization / 1,553 / 5,530
Earnings Per Share Data / 1/31/2016 / 1/31/2016
Average Shares / 195 / 632.9

Diluted EPS Before Non-Recurring Items
/ 4.01 / 4.69

Diluted Net EPS
/ 3.46 / 5.31

Balance Sheets
/ KSS / TGT
1/31/2016 / 1/31/2016
Assets
Cash & Equivalents / 707 / 4,046
Inventories / 4,038 / 8,601
Other Current Assets / 331 / 1,483
Total Current Assets / 5,076 / 14,130
Net Property & Equipment / 8,308 / 25,217
Other Non-Current Assets / 0 / 75
Deposits & Other Assets / 222 / 840
Total Assets / 13,606 / 40,262
Liabilities & Shareholders Equity / 1/31/2016 / 1/31/2016
Notes Payable / 0 / 0
Accounts Payable / 1,251 / 7,418
Current Portion Long-Term Debt / 0 / 815
Current Portion Capital Leases / 127 / 0
Accrued Expenses / 1,206 / 4,236
Income Taxes Payable / 130 / 0
Other Current Liabilities / 0 / 153
Total Current Liabilities / 2,714 / 12,622
Deferred Taxes/Income / 257 / 823
Long-Term Debt / 2,792 / 11,945
Non-Current Capital Leases / 1,789 / 0
Other Non-Current Liabilities / 563 / 1,915
Total Liabilities / 8,115 / 27,305
Shareholders Equity / 1/31/2016 / 1/31/2016
Common Stock (Par) / 4 / 50
Capital Surplus / 2,944 / 5,348
Retained Earnings / 12,329 / 8,188
Other Equity / -17 / -629
Treasury Stock / 9,769 / 0
Total Shareholder's Equity / 5,491 / 12,957
Total Liabilities & Shareholder's Equity / 13,606 / 40,262
Total Common Equity / 5,491 / 12,957
Shares Outstanding / 189.8 / 602.2
Book Value Per Share / 28.93 / 21.52

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