Project #63044 - MGMT

You must submit a completed answer sheet with your answers.  Note that you are not required to

submit your working.  However, complete working in MS Excel, showing formulas and calculations

may be considered for partial credit for incorrect answers.

 

Identify the letter of the choice that best completes the statement or answers the question.

 

______ 1. Borland Associates prepared its financial statements for 2014 based on the information below.

The company had cash of $1,234, inventory of $13,480, and accounts receivables

of $7,789.  The company’s net fixed assets are $42,331, and other assets are $1,822. 

It has accounts payable of $9,558, notes payable of $2,756, common stock of $22,000,

and retained earnings of $14,008.  How much long-term debt does the firm have? 

a.

$12,314

b.

$16,344

c.

$18,334

d.

$36,342

 

______ 2.  Vortex Electronics reported the following information at its annual meeting.  The company

                  had cash and marketable securities of $1,235,455, accounts payables of $4,069,266, inventory

                  of $7,121,599, accounts receivables $3,625,121, notes payables of $1,321,663, and other

                  current assets of $121,455.  What is Vortex’s net working capital?

a.

$  4,324,680

b.

$  5,390,929

c.

$  6,655,610

d.

$  6,712,701

 

______ 3. The Centennial Chemical Corporation announced that for the period ending December 31, 2014, it has sales of $640,000 and costs of goods of $480,000.  Interest expense was $40,000 and depreciation was $60,000.  The tax rate was 34%.  What is Centennial’s net income? 

a.

$20,400

b.

$39,600

c.

$50,400

d.

$79,600

 

______ 4. Ship-to-Shore had earnings after tax (EAT) of $300,000 last year. Its expenses included

depreciation of $20,000, and interest of $40,000. It sold new stock for which it received

$10,000.   The company also purchased a new fishing boat for $50,000.  What is Ship-to-Shore’s

net cash flow for last year?

a.

$320,000

c.

$355,000

b.

$280,000

d.

$315,000

 

______ 5. Ferma Systems had total assets of $38.50 billion, total debt of $10.726 billion, and net sales

of $24.05 billion.  Their profit margin for the year was 18 percent, while the operating

profit margin was 28 percent.  What was the firm’s ROA and ROE?

a.

11%; 16%

c.

12%; 18%

b.

14%; 20%

d.

10%; 15%

 

______ 6. Arantes Pharmaceuticals has reported the following information:

                  Sales/Total Assets = 2.89

ROA = 10.74%

ROE = 20.36%.

What is the firm’s profit margin and debt ratio?

 

a.

7.1%; 1.90

c.

3.7%; 0.47

b.

7.1%; 0.53

d.

3.7%; 1.90

______ 7. The principal difference between a stockholder and a bondholder is:

a.

the stockholder receives interest and the bondholder receives dividends

b.

The stockholder has an ownership interest in a company and the bondholder is a creditor

c.

The bondholder has an ownership interest in a company and the stockholder is a creditor

d.

only the bondholder can attend annual meetings

______8. Assume the pre-tax profit of $50,000 has been earned by a business, and the owner/proprietor

wants to withdraw all of the after-tax profit for personal use.  Assume the tax rate for a

C corporation is 34%, while the rate for a person is 27%.  The after-tax earnings available

under the corporate and proprietorship forms of business are:

a.

for either a corporation or a proprietorship, $24,090

b.

for either a corporation or a proprietorship, $36,500.

c.

for a corporation, $24,090; for a proprietorship, $36,500.

d.

for a corporation, $36,500; for a proprietorship, $24,090

______ 9.  You are comparing two investment options.  The cost to invest in either option is the same today.  Both options provide you with $20,000 of income.  Option A pays five annual payments of $4,000 each.  Option B pays five annual payments starting with $8,000 the first year followed by four annual payments of $3,000 each.  Option B pays five annual payments of $4,000 each.  Which one of the following statements is correct given these two investment options?

a.

Both options are of equal value given that they both provide $20,000 of income.

b.

Option A has a higher present value than option B given any positive rate of return.

c.

Option B has a higher present value than option A given any positive rate of return.

d.

Option B has a lower future value at year 5 than option A given a zero rate of return.

 

____ 10. Rex Corp has just decided to save $10,000 each quarter for the next five years as a safety net for economic downturns.  The money will be set aside in a separate savings account that pays 5.25 percent annual rate, with interest compounded quarterly.  The first deposit will be made today.

If the company wanted to deposit an equivalent lump sum today, how much would it have to deposit?     

a.

$229,995.21

c.

$227,015.63

b.

$174,902.14

d.

$177,197.73

 

_____ 11. You are comparing two annuities which offer monthly payments for ten years. Both annuities are identical with the exception of the payment dates. Annuity A pays on the first of each month while annuity B pays on the last day of each month. Which one of the following statements is correct concerning these two annuities? 

a.

Both annuities are of equal value today.

b.

Annuity B is an annuity due.

c.

Annuity B has a higher present value than annuity A.

d.

Annuity A has a higher future value than annuity B.

 

____ 12. Abigail Linden currently has $7,750 in a money market account paying 7.25% compounded

semi-annually.  She plans to use this amount and her savings over the next 5 years to make a

down payment on a townhouse.  She estimates that he will need $20,000 in 5 years.  How much should Abigail invest in the money market account semi-annually over the next 5 years to

achieve this target?

a.

$   886.28

b.

$   650.97

c.

$   757.25

d.

$   610.79

 

_____ 13. You want to buy a car for $25,650.  The finance company will charge you 6.6% annual rate compounded monthly on a 4-year loan.  If you can afford $485 monthly payments, how much do you need to borrow?  How much do you need for a down payment?   

a.

$18,441; $7,209

b.

$25,650; $0

c.

$22,590; $3,060

d.

$20,412; $5,238

 

____ 14. BioMax Inc. offers a 10% coupon bond that has a $1,000 par value, semiannual coupon payments and 20 years of its original 25 years left to maturity.  Which of the following statements is true if the market return on similar bonds is 8%?

a.

The bond will sell at a premium of $1,198 because the coupon rate is greater than the market interest rate.

b.

The bond will sell at a discount of $828 because the coupon rate is less than the market interest rate. 

c.

The bond will sell at a premium of $1,198 because the coupon rate is less than market interest rate.

d.

The bond will sell at a discount of $828 because the coupon rate is greater than the market interest rate.

 

____    15. If a stock portfolio is well diversified, then the portfolio variance

a.

will equal the variance of the most volatile stock in the portfolio.

b.

may be less than the variance of the least risky stock in the portfolio.

c.

must be equal to or greater than the variance of the least risky stock in the portfolio.

d.

will be a weighted average of the variances of the individual securities in the portfolio.

 

____ 16. Aquarian stock has exhibited a standard deviation in returns of 0.7, whereas Sobex

stock has exhibited a standard deviation of 0.8.  The correlation coefficient between the

stock returns is 0.1.  What is the standard deviation of a portfolio composed of 30%

Aquarian and 70% Sobex?

a.

0.75000

b.

0.32122

c.

0.61743

d.

0.56676

 

_____ 17. With respect to the probability distribution of stock returns:

 a.              

a risky stock has a higher probability of producing a return that is closer to the mean of the distribution and a less risky stock has a higher probability of producing a return that is substantially different from the mean of the distribution.

b.

high risk implies variability in return such that returns in successive years are likely to be insignificantly different from one another.

c.

a less risky stock is likely to produce a return that is close to the mean of the distribution while a more risky stock has a higher probability of producing a return that is substantially different from the mean of the distribution.

d.

low risk implies variability in return such that returns in successive years are likely to be considerably different from one another.

 

_____ 18. Star Solutions, Inc. paid a dividend last year of $3.55, which is expected to grow at a constant

rate of 6%.  Star Solutions has a beta of 1.5 and their stock is currently selling for $51.66.  If the market interest rate is 11% and the risk-free rate is 3%, would you purchase Star Solution’s stock?

a.

No, because it is overvalued $9.85

c.

No, because it is overvalued $23.79

b.

Yes, because it is undervalued $9.85

d.

Yes, because it is undervalued $23.79

 

_____ 19. You are comparing stock A to stock B. Given the following information, which one of these two

                  Stocks should you prefer and why?

 

   

Rate of Return if State Occurs

State of the Economy

Probability of State of the Economy

 

 

Stock A

 

 

Stock B

Boom

60%

9%

15%

Recession

40%

4%

-6%

 

a.              

Stock A; because it has a lower expected return but appears to be less risky than stock B.

b.

Stock A; because it has a higher expected return and appears to be less risky than stock B.

c.

Stock B; because it has a higher expected return and appears to be more risky than stock A.

d.

Stock B; because it has a higher expected return and appears to be less risky than stock A.

 

_____ 20. Carmen Electronics bought a new machine for $5 million.  This is expected to result in

additional cash flows of $1.2 million over the next seven years.  What is the payback

period for this project?  If their acceptance period is 5 years, will this project be accepted?

a.

3.83 years; no

c.

4.17 years; no

b.

3.83 years, yes

d.

4.17 years; yes

 

_____ 21. An investment has the following cash flows.  Should the project be accepted if the required rate of return is 9.5%?

Year

Cash Flow

0

-$24,000

1

$8,000

2

$12,000

3

$9,000

 

a.

Yes; the required rate is greater than IRR

c.

No; the required rate is greater than IRR

b.

Yes; IRR is greater than the required rate

d.

No; the IRR is greater than required rate.

 

____ 22. The projected cash flows for two mutually exclusive projects are as follows:

Year

Project A

Project B

0

($150,000)

($150,000)

1

0

50,000

2

0

50,000

3

0

50,000

4

0

50,000

5

250,000

50,000

 

If the cost of capital is 10%, the decidedly more favorable project is:

a.

project B with an NPV of $39,539 and an IRR of 19.9%.

b.

project A with an NPV of $5,230 and an IRR of 10.8%.

c.

project A with an NPV of $39,539 and an IRR of 10.8%.

d.

project B with an NPV of $5,230 and an IRR of 19.9%.

The following information should be used for Questions 23-24.

Turnbull Corp. is in the process of constructing a new plant at a cost of $30 million. It expects the project to generate cash flows of $13,000,000, $23,000,000, and 29,000,000 over the next three years. The cost of capital is 20 percent.

 

23.      What is the payback period for this project?

 

    1. 1.2 years
    2. 1.7 years
    3. 2.2 years
    4. 2.7 years

 

24.  What is the internal rate of return that Turnbull can earn on this project? (Round to the nearest percent.)

 

  a.  44%

b.  43%

c.  42%

  d.  41%

 

25. Capital budgeting analysis of mutually exclusive projects A and B yields the following:

 

 

Project A

Project B

IRR

18%

22%

NPV

$270,000

$255,000

Payback Period

2.5 yrs

  1. yrs

 

Management should choose:

a.

project B because two out of three methods choose it.

b.

project B because most executives prefer the IRR method.

c.

project A because NPV is the best of the three methods.

d.

either project because the results aren’t consistent.

 

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