FIN 500 TEST # 1 (CHAPTER 2-3-4)

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. Companies generate income from their "regular" operations and from other sources like
interest earned on the securities they hold, which is called non-operating income. Lindley Textiles recently
reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,000 of depreciation. The
company had no amortization charges and no non-operating income. It had $8,000 of bonds outstanding that
carry a 7.5% interest rate, and its federal-plus-state income tax rate was 40%. How much was Lindley's
operating income, or EBIT?

____ 2. Frederickson Office Supplies recently reported $12,500 of sales, $7,250 of operating costs
other than depreciation, and $1,250 of depreciation. The company had no amortization charges and no non-
operating income. It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federal-plus-state
income tax rate was 40%. How much was the firm's taxable income, or earnings before taxes (EBT)?

____ 3. Over the years, Janjigian Corporation's stockholders have provided $15,250 of capital, part
when they purchased new issues of stock and part when they allowed management to retain some of the firm's
earnings. The firm now has 1,000 shares of common stock outstanding, and it sells at a price of $42.00 per
share. How much value has Janjigian's management added to stockholder wealth over the years, i.e., what is
Janjigian's MVA?

a. $3,462
b. $3,644
c. $3,836
d. $4,038
e
.
$4,250 <-
a. $3,230.00
b
.
$3,400.00 <-
c. $3,570.00
d. $3,748.50
e. $3,935.93
a. $21,788
b. $22,935
c. $24,142
d. $25,413
e. $26,750 <-
____ 4. NNR Inc.'s balance sheet showed total current assets of $1,875,000 plus $4,225,000 of net
fixed assets. All of these assets were required in operations. The firm's current liabilities consisted of
$475,000 of accounts payable, $375,000 of 6% short-term notes payable to the bank, and $150,000 of accrued
wages and taxes. Its remaining capital consisted of long-term debt and common equity. What was NNR's total
investor-provided operating capital?

____ 5. Last year Tiemann Technologies reported $10,500 of sales, $6,250 of operating costs other
than depreciation, and $1,300 of depreciation. The company had no amortization charges, it had $5,000 of
bonds that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 35%. This year's data are
expected to remain unchanged except for one item, depreciation, which is expected to increase by $750. By
how much will net after-tax income change as a result of the change in depreciation? The company uses the
same depreciation calculations for tax and stockholder reporting purposes.

____ 6. Bae Inc. has the following income statement. How much net operating profit after taxes
(NOPAT) does the firm have?


a. $4,694,128
b. $4,941,188
c. $5,201,250
d. $5,475,000
e. $5,748,750 <-
a. !463.13
b
.
!487.50 <-
c. !511.88
d. !537.47
e. !564.34
Sales $2,000.00
Costs 1,200.00
Depreciation 100.00
EBIT $ 700.00
Interest expense 200.00
EBT $ 500.00
Taxes (35%) 175.00
Net income $ 325.00
a. $370.60
b. $390.11
c. $410.64

____ 7. HHH Inc. reported $12,500 of sales and $7,025 of operating costs (including depreciation).
The company had $18,750 of investor-supplied operating assets (or capital), the weighted average cost of that
capital (the WACC) was 9.5%, and the federal-plus-state income tax rate was 40%. What was HHH's
Economic Value Added (EVA), i.e., how much value did management add to stockholders' wealth during the
year?

____ 8. Last year, Michelson Manufacturing reported $10,250 of sales, $3,500 of operating costs
other than depreciation, and $1,250 of depreciation. The company had no amortization charges, it had $3,500
of bonds outstanding that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 35%. This
year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase
by $725. By how much will the depreciation change cause the firm's net after-tax income and its net cash flow
to change? Note that the company uses the same depreciation calculations for tax and stockholder reporting
purposes.

____ 9. Bartling Energy Systems recently reported $9,250 of sales, $5,750 of operating costs other
than depreciation, and $700 of depreciation. The company had no amortization charges, it had $3,200 of
outstanding bonds that carry a 5% interest rate, and its federal-plus-state income tax rate was 35%. In order to
sustain its operations and thus generate sales and cash flows in the future, the firm was required to make
$1,250 of capital expenditures on new fixed assets and to invest $300 in net operating working capital. By
how much did the firm's net income exceed its free cash flow?

d. $432.25
e
.
$455.00 <-
a. $1,357.13
b. $1,428.56
c. $1,503.75
d. $1,578.94
e. $1,657.88
a. !$383.84; $206.68
b. !$404.04; $217.56
c. !$425.30; $229.01
d. !$447.69; $241.06
e
.
!$471.25; $253.75
a. $673.27
b. $708.70
c. $746.00 <-
d. $783.30
e. $822.47
____ 10. Last year Altman Corp. had $205,000 of assets, $303,500 of sales, $18,250 of net income,
and a debt-to-total-assets ratio of 41%. The new CFO believes the firm has excessive fixed assets and
inventory that could be sold, enabling it to reduce its total assets to $152,500. Sales, costs, and net income
would not be affected, and the firm would maintain the 41% debt ratio. By how much would the reduction in
assets improve the ROE?

____ 11. Muscarella Inc. has the following balance sheet and income statement data:


The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio
to equal the industry average, 2.70, without affecting either sales or net income. Assuming that inventories are
sold off and not replaced to get the current ratio to the target level, and that the funds generated are used to
buy back common stock at book value, by how much would the ROE change?

____ 12. Quigley Inc. is considering two financial plans for the coming year. Management expects
sales to be $301,770, operating costs to be $266,545, assets to be $200,000, and its tax rate to be 35%. Under
Plan A it would use 25% debt and 75% common equity. The interest rate on the debt would be 8.8%, but the
TIE ratio would have to be kept at 4.00 or more. Under Plan B the maximum debt that met the TIE constraint
would be employed. Assuming that sales, operating costs, assets, the interest rate, and the tax rate would all
remain constant, by how much would the ROE change in response to the change in the capital structure?
a. 4.69%
b. 4.93%
c. 5.19% <-
d. 5.45%
e. 5.73%
Cash $ 14,000 Accounts payable $ 42,000
Receivables 70,000 Other current
liabilities
28,000
Inventories 210,000 Total CL $ 70,000
Total CA $294,000 Long-term debt 70,000
Net fixed assets 126,000 Common equity 280,000
Total assets $420,000 Total liab. and
equity
$420,000
Sales $280,000
Net income $ 21,000
a. 4.28%
b
.
4.50% <-
c. 4.73%
d. 4.96%
e. 5.21%

Exhibit 4-1
(The following data apply to the problem(s) below.)

The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no
amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and
the notes payable will be rolled over.

a. 3.83%
b. 4.02%
c. 4.22%
d
.
4.43% <-
e. 4.65%
Balance Sheet (Millions of $)
Assets 2007
Cash and securities $ 1,554.0
Accounts receivable 9,660.0
Inventories 13,440.0
Total current assets $24,654.0
Net plant and equipment 17,346.0
Total assets $42,000.0
Liabilities and Equity
Accounts payable $ 7,980.0
Notes payable 5,880.0
Accruals 4,620.0
Total current liabilities $18,480.0
Long-term bonds 10,920.0
Total debt $29,400.0
Common stock 3,360.0
Retained earnings 9,240.0
Total common equity $12,600.0
Total liabilities and equity $42,000.0
Income Statement (Millions of $) 2007
Net sales $58,800.0

____ 13. Refer to Exhibit 4-1. What is the firm's days sales outstanding? Assume a 360-day year for
this calculation.

____ 14. Refer to Exhibit 4-1. What is the firm's TIE?

____ 15. Refer to Exhibit 4-1. What is the firm's EBITDA coverage?
Operating costs except depr'n $54,978.0
Depreciation $ 1,029.0
Earnings bef int and taxes (EBIT) $ 2,793.0
Less interest 1,050.0
Earnings before taxes (EBT) $ 1,743.0
Taxes $ 610.1
Net income $ 1,133.0
Other data:
Shares outstanding (millions) 175.00
Common dividends $509.83
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $77.69
a. 48.17
b. 50.71
c. 53.38
d. 56.19
e
.
59.14 <-
a. 1.94
b. 2.15
c. 2.39
d
.
2.66 <-
e. 2.93
a. 3.29
b. 3.46
c. 3.64 <-
d. 3.82

____ 16. Refer to Exhibit 4-1. What is the firm's debt ratio?

____ 17. Refer to Exhibit 4-1. What is the firm's BEP?

____ 18. Refer to Exhibit 4-1. What is the firm's cash flow per share?

____ 19. Refer to Exhibit 4-1. What is the firm's market-to-book ratio?

____ 20. Your uncle has $300,000 invested at 7.5%, and he now wants to retire. He wants to withdraw
$35,000 at the end of each year, beginning at the end of this year. He also wants to have $25,000 left to give
you when he ceases to withdraw funds from the account. For how many years can he make the $35,000
withdrawals and still have $25,000 left in the end?
e. 4.01
a. 45.93%
b. 51.03%
c. 56.70%
d
.
63.00% <-
e. 70.00%
a. 6.00%
b. 6.32%
c. 6.65% <-
d. 6.98%
e. 7.33%
a. $10.06
b. $10.59
c. $11.15
d. $11.74
e
.
$12.35 <-
a. 0.56
b. 0.66
c. 0.78
d
.
0.92 <-
e. 1.08
a. 14.21

____ 21. East Coast Bank offers to lend you $25,000 at a nominal rate of 7.5%, compounded monthly.
The loan (principal plus interest) must be repaid at the end of the year. Midwest Bank also offers to lend you
the $25,000, but it will charge an annual rate of 8.3%, with no interest due until the end of the year. What is
the difference in the effective annual rates charged by the two banks?

____ 22. Suppose you take out a $10,000 loan at a 6% nominal annual rate. The terms of the loan
require you to make 12 equal end-of-month payments each year for 4 years, and then an additional final
(balloon) payment of $4,000 at the end of the last month. What will your equal monthly payments be?

____ 23. Merchants Bank offers to lend you $30,000 at a nominal rate of 6.0%, simple interest, with
interest paid quarterly. Gold Coast Bank offers to lend you the $30,000, but it will charge 7.0%, simple
interest, with interest paid at the end of the year. What's the difference in the effective annual rates charged by
the two banks?

b
.
14.96 <-
c. 15.71
d. 16.49
e. 17.32
a. 0.93%
b. 0.77%
c. 0.64%
d
.
0.54% <-
e. 0.43%
a. $131.06
b. $137.96
c. $145.22
d. $152.86
e
.
$160.91 <-
a. 1.49%
b. 1.24%
c. 1.04%
d
.
0.86% <-
e. 0.69%
____ 24. Your sister turned 35 today, and she is planning to save $5,000 per year for retirement, with
the first deposit to be made one year from today. She will invest in a mutual fund that will provide a return of
8% per year. She plans to retire 30 years from today, when she turns 65, and she expects to live for 25 years
after retirement, to age 90. Under these assumptions, how much can she spend in each year after she retires?
Her first withdrawal will be made at the end of her first retirement year.

____ 25. Your company has just taken out a 1-year installment loan for $72,500. The nominal rate is
12.0%, but with equal end-of-month payments. What percentage of the 2nd monthly payment will go toward
the repayment of principal?

____ 26. A homeowner just obtained a 30-year amortized mortgage loan for $150,000 at a nominal
annual rate of 6.5%, with 360 end-of-month payments. What percentage of the total payments made during
the first 3 months will go toward payment of interest?

____ 27. After graduation, you plan to work for Dynamo Corporation for 12 years and then start your
own business. You expect to save and deposit $7,500 a year for the first 6 years and $15,000 annually for the
following 6 years, with the first deposit being made a year from today. In addition, your grandfather just gave
you a $25,000 graduation gift which you will deposit immediately. If the account earns 9% compounded
annually, how much will you have when you start your business 12 years from now?
a. $47,888
b. $50,408
c. $53,061 <-
d. $55,714
e. $58,500
a. 73.01%
b. 76.85%
c. 80.89%
d. 85.15%
e
.
89.63% <-
a. 81.34%
b
.
85.62% <-
c. 89.90%
d. 94.40%
e. 99.12%
a. $238,176
b. $250,712
c. $263,907
d
.
$277,797 <-

e. $291,687