EXAM 1
FINA 3309 Winter 2008-09
Dr. Gim
Name: .
Please turn in by December 18, 6:30 PM.
True-False Questions (2.5 points each)
1. C-corporation is created to avoid the double taxation of corporations.TRUE
2. On the balance sheet, total assets must always equal total liabilities. The short-term
debt and equity must be excluded. FALSE
3. Interest paid by a corporation is a tax deductible for the paying corporation, but
dividends paid are not deductible. Other things held constant, this tends to encourage
the use of debt financing by corporations. TRUE
4. Retained earning is a part of net income of the firm that set aside by the firm for the
future uses. So, the retained earning should be always available for share holders on
their requests.FALSE
5. If the interest rate is positive, the present value of an expected series of payments will
always exceed the future value of the same series.FALSE
6. All other factors held constant, the present value of a given annual annuity decreases
as the number of discounting periods per year decreases.FALSE
7. A premium bond’s YTM is higher than itscurrent yield rate. FALSE
8. The yield to maturity for a coupon bond that sells at its par value consists entirely
of an interest yield; it has a zero expected capital gains yield. TRUE
9. With the same number of payments and the equal periodic payments immediate
annuity should have higher PV and higher FV than the ordinary annuity.TRUE
10. Preferred stock dividends are paid out before income taxes. FALSE
Multiple Choice Questions (2.5 points each)
1. Increasing interest expense will have what effect on EBIT?
A)increase it
B)decrease it
C)no effect
D)not enough information to tell
2. The firm's price-earnings (P/E) ratio is influenced by its
A)capital structure.
B)earnings volatility.
C)sales, profit margins, and earnings.
D)all of the above
3. Ratio analysis can be useful for
A)historical trend analysis within a firm.
B)comparison of ratios within a single industry.
C)measuring the effects of financing.
D)All of the above are true.
4. In examining the liquidity ratios, the primary emphasis is the firm's
A)ability to effectively employ its resources.
B)overall debt position.
C)ability to pay short-term obligations on time.
D)ability to earn an adequate return.
5. A decreasing average collection period could be associated with (select the one best answer)
A)increasing sales.
B)decreasing sales.
C)decreasing account receivable.
D)a and c.
6. As the interest rate increases, the present value of an amount to be received at the end of a fixed period
A)increases.
B)decreases.
C)remains the same.
D)Not enough information to tell.
7. Mr. Fish wants to build a house in 10 years. He estimates that the total cost will be $170,000. If he can put aside $10,000 at the end of each year, what rate of return must he earn in order to have the amount needed?
A)Between 11% and 12%
B)Between 8% and 9%
C)17%
D)None of the above
8. The future value of a $1000 investment today at 8 percent annual interest compounded semiannually for 5 years is
A)$1,469
B)$1,480
C)$1,520
D)$1,555
9. A bond which has a yield to maturity greater than its coupon interest rate will sell for a price
A)below par.
B)at par.
C)above par.
D)what is equal to the face value of the bond plus the value of all interest payments.
10. A higher interest rate (discount rate) would
A)reduce the price of corporate bonds.
B)reduce the price of T-bonds.
C)reduce the price of municipal bonds.
D)all of the above.
Answerthe following questions. (10 points each)
Please show all of your works.
1. Complete the following balance sheet for the Range Company using the following information:
Debt to Assets = 60 percent
Quick Ratio = 1.1
Asset Turnover = 5x
Fixed Asset Turnover = 12.037x
Current Ratio = 2
Average Collection Period = 16.837 days
Cash / 28,500 / Current Liabilities / $ 95,000Receivables / 76,000 / Bonds Payable / 100,000
Inventory / 85,500 / Total Liabilities / 195,000
Total Current Assets / 190,000 / Net Worth / 130,000
Plant and Equipment / 135,000 / Total Liabilities and Net Worth / $325,000
Total Assets / $325,000
Assume all sales are on credit and a 360-day year.
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Debt to Asset = 60%
Total Liabilities / Total Assets = 60%
Total Liabilities / $325,000 = 60%
Total Liabilities = $195,000
Asset Turnover = 5x
Sales / Total Assets = 5x
Sales / $325,000 = 5x
Sales = $1,625,000
Average Collection Period = 16.837
Receivable x 365/ Sales = 16.837
Receivables x 365 / $1,625,000 = 16.837
Receivables = $76,000
Fixed Asset Turnover = 12.037x
Sales / Plant and Equipment = 12.037x
$1,625,000 / Plant and Equipment = 12.037x
Plant and Equipment = $135,000
Current Assets = Total Assets – Plant and Equipment
Current Assets = $325,000 – 135,000
Current Assets = $190,000
Current Ratio = 2
Current Assets / Current Liabilities = 2
190,000 / Current Liabilities = 2
Current Liabilities = $95,000
Bonds Payable = Total Liab. – Current Liab.
Bonds Payable = $195,000 – 95,000
Bonds Payable = $100,000
Total Liabilities and Net Worth = Total Assets
Total Liabilities and Net Worth = $325,000
Net Worth = Total Liab and Net Worth – Total Liab
Net Worth = $325,000 – 195,000
Net Worth = $130,000
Quick Ratio = 1.1
(Cash + Receivables) / Current Liabilities = 1.1
(Cash +76,000) / $95,000 = 1.1
Cash = 28,500
Inventory = Total Current Assets – Receivables – Cash
Inventory = $190,000 – 76,000 – 28,500
Inventory = $85,500
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2. Your plan for your retirement is to contribute $7,000 per year for an investment
account. Your first contribution will be made today, 26th birthday. Your 30th,
the final contribution will be made on your 55th birthday. If you earn 7% a year
compounding on your investment, how much money will you have in the account on
your 55th birthday, immediately after making your final contribution?
Future Value = $7,000 x FV of Annuity Due Factor, 7% for 30 periods
Future Value = $7,000 x 94.461
Future Value = $661,227
3. You are supposed to make $500 monthly payment for 50 months to pay off an
amortized automobile loan. If the interest rate is 12% compounding, what’s the
initial amount of the loan?
Present Value = $500 x PV of Annuity Factor, 1% for 50 periods
Present Value = $500 x 39.196
Present Value = $19,598
4. A ten-year bond, with par value equals $1000, pays 10% annually. If similar bonds are currently yielding 6% annually (= current interest rate is 6%), what is the market value of the bond using semi-annual analysis?
5. Price of bond and interest rates have a negative relationship. When bond price goes
up, interest rate goes down. Please explain why.
The price of bond goes up when interest rate goes down because the price of bond is an output of the principle of present value. The principle states that, as the interest goes up, the present value of a sum decreases, and as the interest goes down, the present value of the sum increases (holding other factors constant). The price of the bond is the present value of future inflows we are expecting from bonds.
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