Eng 111 – Winter 2014 Midterm Solutions

Eng 111 – Winter 2014 Midterm Solutions

Multiple Choice Questions (3 points each)

1. Which of the following is NOT a mechanism that helps aligning management and owner

interests?

a) Possibility of a hostile takeover

b) Possibility of a proxy fight

c) Manager’s reputation within the financial community

d) Tying managerial pay to the stock price of the company

e) Buying back company’s stocks

2. _____ refers to the firm's interest payments less any net new borrowing.

a) Operating Cash Flow

b) Capital Spending

c) Net working capital

d) Cash flow to creditors

e) Cash flow from shareholders

3. According to the guest lecturer, Tamra Johnson, which of the following was not a justification

for becoming an entrepreneur right out of college?

a) Having fewer responsibilities

b) Being cheaper by the hour

c) Being ready to try things that would be found too adventurous by the establishment

d) Availability of resources for the young entrepreneurs

e) Statistically proven scientific result indicating high success rate of young entrepreneurs

4. Which of the following is NOT a reasonable action for a company that is trying to introduce a

new product to the market (e.g. Tesla)?

a) Get ahead of the competition by borrowing.

b) Until making positive profit, rely on internal funds.

c) Increase the financial leverage as the market demand and the production process require.

d) Keep a high equity multiplier according to the needs of the company.

e) Allow borrowing a long as it helps boost company’s market share.

5. If the dividend payout ratio is 1, you can say for sure that

a) Sustainable growth rate is at its maximum.

b) Internal growth rate is at its maximum.

c) External financing need is zero.

d) Internal growth rate is zero

e) Debt to Equity ratio cannot stay the same.

6. Given the tax rates as shown, what is the average tax rate for a firm with taxable income of

$126,500?

a) 21.38%

b) 23.88%

c) 25.76%

d) 34.64%

e) 39.99%

7. Thompson's Jet Skis has operating cash flow of $218. Depreciation is $45 and interest paid is

$35. A net total of $69 was paid on long-term debt. The firm spent $180 on fixed assets and

increased net working capital by $38. What is the amount of the cash flow to stockholders?

a) -$104

b) -$28

c) $28

d) $114

e) $142

8. Occasionally, companies buy back their own stocks. Which of the following is the least likely

reason for a stock buyback?

a) Trying to hit earnings per share target

b) Not having a better investment opportunity

c) Sending a signal to the market that company is undervalued

d) Increase the value of the remaining shares

e) Increase growth rate

9. Which of the following is least likely to happen?

a) A big difference between the current ratio and quick ratio for a retailer

b) A high capital intensity ratio for a traditional oil producer

c) A high financial leverage for a startup

d) Stabilization of the growth rate for a well-established company

e) A low price to earnings ratio for a technology company having high growth potential

10. As seen on an income statement:

a) interest is deducted from income and increases the total taxes incurred.

b) the tax rate is applied to the earnings before interest and taxes when the firm has both

depreciation and interest expenses.

c) depreciation is shown as an expense but does not affect the taxes payable.

d) depreciation reduces both the pretax income and the net income.

e) interest expense is added to earnings before interest and taxes to get pretax income.

11. Which two of the following represent the most effective methods of directly evaluating the

financial performance of a firm?

I. comparing the current financial ratios to those of the same firm from prior time periods

II. comparing a firm's financial ratios to those of other firms in the firm's peer group who have

similar operations

III. comparing the financial statements of the firm to the financial statements of similar firms

operating in other countries

IV. comparing the financial ratios of the firm to the average ratios of all firms located in the same

geographic area

a) I and II only

b) II and III only

c) III and IV only

d) I and IV only

e) I and III only

12. Which one of the following assets is generally the most liquid?

a) inventory

b) buildings

c) accounts receivables

d) equipment

e) patents

Short Answer Questions:

13. Income Statement for 2014 and Balance Sheets for 2013 and 2014 for Alsu Corporation are

given below:

                 Alsu       Corp.,     Balance  Sheet                    

Current  Assets     2013      2014      CurrentLiabilities               2013      2014     

Cash        160        180        Accounts              Payable  300        192       

Accounts               Receivable            440        560        Notes     Payable  100        200       

Inventory               600        700        Total      Current  Liabilities               400        392       

Total       Current  Assets     1,200     1,440     Long-Term            Debt       800        ?            

Net          Fixed      Assets     1,800     ?             Owners’                Equity                                   

                                                 Stock     800        840       

                                                 Retained               Earnings 1,000     ?            

Total       Assets     3,000     ?             Total      Liabilities               and         Owners’Equity     3,000     ?            

 a) (3 points) What is the Cash Flow from Operations?

b) (4 points) If the Cash Flow from Assets is $284, has the firm acquired or sold any fixed

assets from 2013 to 2014? By how much?  

c) (4 points) Has the company reduced or increased its long-term debt from 2013 to 2014?

By how much?

d) (2 points) What is the Retained Earnings number for 2014?

14. (5 points) A company is expecting to get $10,000 a year from today if it invests $8,600 now

on project A. Alternatively, project B asks for twice the cost of A now and promises twice what A

provides, but two years from today.

Should the company take any of these projects if the best return that can be obtained in the market

is 15%?

15. You are analyzing a consumer technology company with the following 2013 financial

statements and want to determine the company’s EFN for 2014. In 2013, sales were $150M,

assets $100M, debt $75M, and total costs $100M. In 2014, sales are projected to be $225M.

Assume assets and costs are proportional to sales. Assume debt will not change and dividend

payout ratio is 1/3. (assume no interest, taxes or depreciation)

 a) (4 points) Construct the company’s pro forma balance sheet and income statement for

2014.  

b) (2 points) What is the external financing needed (EFN)?

16. a) (4 points) Frederico's has a profit margin of 6%, a return on assets of 8%, and an equity

multiplier of 1.4. What is the return on equity?

 b) (3 points) The company has renegotiated the terms of its long-term debt payment plan.

According to this, Frederico’s interest payments will be lower per year but the time to pay off the

debt will be extended. What kind of a short term and long term effect will this have on ROE?

17. (3 points) Apple Inc. shareholders are not in favor of company’s holding a big cash account.

What may be the shareholders’ concern?

 18. (1 point) You are the financial manager of ALCU Corporation. Company has a 9% ROE, and

12% sustainable growth rate when Debt to Equity ratio is kept at 2/3. What is the maximum

growth rate ACLU can achieve if, going forward, ACLU wants to use only its internal funds?

 19. The following graph showsthe difference between the increase in assets minus the increase in

spontaneous liabilities as well as the addition to retained earnings for Corporation X.

  a) (3 points) What is the internal growth rate for Corporation X?

 b) (4 points) If the sustainable growth rate is 18%, projected total stockholders’ equity is

$800 Million, and projected total debt is $400 Million, what is the total debt now (before

the growth occurs)?

 c) (3 points) If, instead, the Corporation X management decides to keep the business as

before and not to grow over the course of coming year, what will be the total

stockholders’ equity?

 20. (5 points) The most recent Income Statement and the Balance Sheet for Tibet Corporation are

given below:

 Tibet Corp., Balance Sheet, end of year 2013

Current Assets Current Liabilities

Cash 160 Accounts Payable 300

Accounts

Receivable

440 Notes Payable 100

Inventory 600 Total Current

Liabilities

400

Total Current

Assets

1,200 Long-Term Debt 800

Net Fixed Assets 1,800 Owners’ Equity

 Stock 800

 Retained Earnings 1,000

Total Assets 3,000 Total Liabilities and 3,000

Assuming that the company gets all of its supplies (raw materials etc. for the goods produced and

sold) on credit, on average, how long does it take for Tibet Corp., to pay its suppliers?

21. (5 points) For this question, use the income statement and the Balance Sheet given in question 20.

Tibet Corporation would like to grow by 10% from 2013 to 2014. What is the External Financing

Need?

22. (4 points) As a proxy, either the Stockholder’s Equity or Market Capitalization is used to

measure a company’s value. Write down a disadvantage of using each.

23. (3 points) What does an unusually high P/E Ratio (Price to Earnings Ratio) indicate?