2008-12-16 033910 newFinExmnew

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 bonds YTM is higher than its current yield rate. FALSE
1
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.
2
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.
3
Answer the 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 $ 95,000

Receivables 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.
Debt to Asset = 60%

Total Liabilities / Total Assets = 60% Current Ratio = 2
Total Liabilities / $325,000 = 60% Current Assets / Current Liabilities = 2
Total Liabilities = $195,000 190,000 / Current Liabilities = 2
Current Liabilities = $95,000
Asset Turnover = 5x
Sales / Total Assets = 5x Bonds Payable = Total Liab. Current Liab.
Sales / $325,000 = 5x Bonds Payable = $195,000 95,000
Sales = $1,625,000 Bonds Payable = $100,000
Average Collection Period = 16.837 Total Liabilities and Net Worth = Total Assets
Receivable x 365/ Sales = 16.837 Total Liabilities and Net Worth = $325,000
Receivables x 365 / $1,625,000 = 16.837
Receivables = $76,000 Net Worth = Total Liab and Net Worth Total Liab
Net Worth = $325,000 195,000
Fixed Asset Turnover = 12.037x Net Worth = $130,000
Sales / Plant and Equipment = 12.037x
$1,625,000 / Plant and Equipment = 12.037x Quick Ratio = 1.1
Plant and Equipment = $135,000 (Cash + Receivables) / Current Liabilities = 1.1
(Cash + 76,000) / $95,000 = 1.1
Current Assets = Total Assets Plant and Cash = 28,500
Equipment
Current Assets = $325,000 135,000 Inventory = Total Current Assets Receivables Cash
Current Assets = $190,000 Inventory = $190,000 76,000 28,500
Inventory = $85,500
4
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, whats 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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EXAM 1

FINA 3309 Winter 2008-09

True-False Questions (2.5 points each)

1. C-corporation is created to avoid the double taxation of corporations. TRUE

Multiple Choice Questions (2.5 points each)

1. Increasing interest expense will have what effect on EBIT?

2. The firm's price-earnings (P/E) ratio is influenced by its

3. Ratio analysis can be useful for

4. In examining the liquidity ratios, the primary emphasis is the firm's

10. A higher interest rate (discount rate) would

Debt to Assets = 60 percent

Cash 28,500 Current Liabilities $ 95,000

Assume all sales are on credit and a 360-day year.

Debt to Asset = 60%

Future Value = $7,000 x FV of Annuity Due Factor, 7% for 30 periods

Present Value = $500 x PV of Annuity Factor, 1% for 50 periods

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