MGMT640 MIDTERM EXAM WITH 100 % CORRECT ANSWER AND WORKING DONE ON APRIL 2015

Question 1

Which of the following cannot be engaged in managing the business?

		a limited partner
		a general partner
		a sole proprietor
		none of these

Question 2

One reason for the existence of agency problems between managers and share holders is that:

		managers know how to manage the firm better than shareholders.
		there is a separation of ownership and control of the firm.
		shareholders have unreasonable expectations about managerial performance.
		none of these.

Question 3

On June 23, 2008, Mikhal Cosmetics sold $250,000 worth of its products to Rynex Corporation, with the payment to be made in 90 days on September 20. The goods were shipped to Rynex on July 2. The firm's accountants should recognize the sale on

		June 23, 2008.
		July 2, 2008.
		September 20, 2008.
		none of the above

Question 4

During the last year, Sigma Co had Net Income of $154, paid $18 in dividends, and sold new stock for $39. Beginning equity for the year was $610. Ending equity was

Question 5

The following items are components of a traditional balance sheet. How much are the total assets of the firm?

Plant and equipment	$43,300
Common stock	15,000
Cash	6,400
Inventory	23,800
Bad debt reserve	6,000
Paid in excess	6,000
Accumulated depreciation	27,100
Accounts receivable	22,000

Question 6

Brighton Corp. bought an oil rig exactly 6 years ago for $110,000,000. Brighton depreciates oil rigs straight line over 10 years assuming no salvage value. The rig was just sold to British Petroleum for $25,000,000. What Capital Gain/Loss will Brighton report on this transaction?

Question 7

Walker Corporation conducted the following activities during 2001: (1) they sold 10,000 shares of their own stock for $16.00 per share; (2) they issued bonds for which they received $493,000; (3) they paid dividends to their stockholders totaling $84,000; (4) they sold a piece of equipment for $50,000 that they were carrying on their books for $20,000; (5) they earned net income of $140,000. What would be shown on the Statement of Cash Flows for “Cash from financing activities” based on the information above?

Question 8

Given the following selected information on Cicalese’s Chocolate, Inc., calculate Cash Flow from Operating Activities for 2001.

	Last Year	This Year
EAT	$ 600,000	$ 730,000
Depreciation Exp.	100,000	150,000
Dividends	400,000	550,000
Accounts Receivable	1,500,000	2,000,000
Inventory	3,500,000	2,000,000
Accts. Payable/Accr.	350,000	500,000
Long-Term Debt	2,300,000	3,000,000
Common Stock	2,200,000	2,500,000
Retained Earnings	6,150,000	6,350,000

Question 9

Cameron Balance Sheet

Accounts Payable	32
Accounts Receivable	65
Accruals	30
Accumulated Depreciation	(175)
Cash	31
Common Stock	120
Fixed Assets (gross)	390
Inventory	130
Long-Term Debt	200
Retained Earnings	65

What is Cameron Inc.’s Net Working Capital?

Question 10

A firm’s current ratio is 1.8, and its quick ratio is 1.0. If its current liabilities are $10,100, what are its inventories?

Question 11

Iris Income Statement

Cost of Goods Sold	350
Depreciation Expense	35
Interest Expense	20
Operating Expense (excluding depreciation)	115
Sales	520

What was Iris Inc.’s earnings before interest and
taxes (EBIT)?

Question 12

Iris Balance Sheet

Accounts Payable	35
Accounts Receivable	55
Accruals	30
Accumulated Depreciation	(175)
Cash	32
Common Stock	120
Fixed Assets (gross)	390
Inventory	124
Long-Term Debt	200
Retained Earnings	65

What is Iris Inc.’s Total Assets?

Question 13

If firm A has a higher debt-to-equity ratio than firm B, then

		firm A has a lower equity multiplier than firm B.
		firm B has lower financial leverage than firm A.
		firm B has a lower equity multiplier than firm A.
		none of the above

Question 14

Flying Tigers, Inc., has net sales of $754,000 and accounts receivables of $158,000. What is the firm's accounts receivables turnover?

Question 15

Reagan Corp. has reported a net income of $803,600 for the year. The company's share price is $13.78, and the company has 321,810 shares outstanding. Compute the firm's price-earnings ratio.

Question 16

You purchased a piece of property for $30,000 nine years ago and sold it today for $83,190. What was the annual rate of return on your investment?

		9%
		10%
		11%
		12%

Question 17

The First National Bank has agreed to lend you
$30,000 today, but you must repay $42,135 in 3 years. What rate is the bank is charging you?

		13%
		12%
		11%
		10%

Question 18

The Florida lottery agrees to pay the winner $247,000 at the end of each year for the next 20 years. What is the future value of this prize if each payment is put in an account earning 0.07?

Question 19

Which of the following is not a “Fundamental Decision of Financial Management”?

		The capital budgeting decision
		The macroeconomic management decision
		The financing decision
		Working capital management decision

Question 20

Which of the following is least likely to be part of an Annual Report?

		financial tables
		discussions of the firm’s product lines, its services to its customers, and its contributions to the communities in which it operates
		audited financial statements
		ratio analysis of other firms in the same industry

Question 21

What is the future value of $1,300, placed in a saving account for four years if the account pays 0.10, compounded quarterly?

Question 22

Your brother, who is 6 years old, just received a trust fund that will be worth $22,000 when he is 21 years old. If the fund earns 0.11 interest compounded annually, what is the value of the fund today?

Question 23

If you were to borrow $9,100 over five years at 0.10 compounded monthly, what would be your monthly payment?

Question 24

Your uncle promises to give you $700 per quarter for the next five years. How much is his promise worth right now if the interest rate is 0.10 compounded quarterly?

Question 25

A stock has an expected return of 0.10 and a variance of 0.20. What is Its coefficient of variation?

Question 26

Use the following information to calculate your company’s expected return.

State	Probability	Return
Boom	20%	0.50
Normal	60%	0.12
Recession	20%	-0.17
	0.14

Question 27

You have invested in stocks J and M. From the following information, determine the beta for your portfolio.

	Expected	Amount of
	Return	Investment	Beta
Stock J	0.10	$100,000	1.02
Stock M	0.11	$300,000	0.72
	0.80

Question 28

Frazier Manufacturing paid a dividend last year of
$2, which is expected to grow at a constant rate of 5%. Frazier has a beta of
1.3. If the market is returning 11% and the risk-free rate is 4%, calculate the
value of Frazier’s stock.

Question 29

You have invested 30 percent of your portfolio in Jacob, Inc., 40 percent in Bella Co., and 30 percent in Edward Resources. What is the expected return of your portfolio if Jacob, Bella, and Edward have expected returns of 0.01, 0.13, and 0.14, respectfully?

Question 30

The covariance of the returns between Willow Stock and Sky Diamond Stock is 0.0720. The variance of Willow is 0.2210, and the variance of Sky Diamond is 0.1110. What is the correlation coefficient between the returns of the two stocks?

Question 31

A project has the following cash flows:

0	1	2	3
($500)	$160.00	$200	$270.00

What is the project’s NPV if the interest rate is $6%?

Question 32

Medela's Entertainment Systems is setting up to manufacture a new line of video game consoles. The cost of the manufacturing equipment is $1,750,000. Expected cash flows over the next four years are $725,000, $850,000, $1,200,000, and $1,500,000. Given the company's required rate of return of 15 percent, what is the NPV of this project?

		$1,169,806
		$2,919,806
		$4,669,806
		$3,122, 607

Question 33

A project requires an initial outlay of $100,000, and is expected to generate annual net cash inflows of $28,000 for the next 5 years. Determine the payback period for the project

Question options:

	.28 years
	1.4 years
	3.57 years
	17.86 years

When grading the question, it would appear as:

A project requires an initial outlay of $100,000, and is expected to generate annual net cash inflows of $28,000 for the next 5 years. Determine the payback period for the project

		.28 years
		1.4 years
		3.57 years
		17.86 years

Question 34

An investment project requires an initial outlay of $100,000, and is expected to generate annual cash inflows of $28,000 for the next 5 years. (round to the nearest tenth of the percentage) Determine the (Internal Rate of Return) IRR for the project using a financial calculator

		12.0%
		3.6%
		12.6%
		12.4%

Question 35

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	2.0 yrs

Management should choose:

		Project B because most executives prefer the IRR method
		Project B because two out of three methods choose it
		Project A because NPV is the best method
		either project because the results aren’t consistent

Question 36

Christopher Electronics bought new machinery for $5,030,000 million. This is expected to result in additional cash flows of $1,230,000 million over the next 7 years. What is the payback period for this project? Their acceptance period is five years.

Question 37

AMP, Inc., has invested $2,165,800 on equipment. The firm uses payback period criteria of not accepting any project that takes more than four years to recover costs. The company anticipates cash flows of $442,386, $512,178, $564,755, $764,997, $816,500, and $825,375 over the next six years. What is the payback period?

Question 38

A common-size financial statement is one in which each number is expressed

		as a percentage of some base number for the firm (such as total assets or revenues)
		as a percentage of an industry average (such as rate of return)
		as a percentage of a stock market average (such as market capitalization)
		as a percentage of a national average (such as per capita GDP)

Question 39

Return on Equity (ROE) is defined as:

		Gross Income / Total Assets
		Revenues / Total Debt
		Net Income / Stockholder’s Equity
		(Revenues – COGS) / Total Liabilities

Question 40

Which of the following ratios is incorrect?

		Current ratio = Current assets / Current liabilities
		Quick ratio = (Current assets – Inventory) / Current liabilities
		Inventory turnover = (Cost of goods sold) / Inventory
		Days Sales Outstanding = 365 / Accounts payable turnover