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STR581 STR/581 FINAL EXAM CAPSTONE
1. Which of the following financial statements is concerned with the company at a point in time?
income statement
statement of cash flows
retained earnings statement
balance sheet
2. A cost which remains constant per unit at various levels of activity is a:
fixed cost
mixed cost
variable cost
manufacturing cost
3. M&M Proposition 1: Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock.
If Dynamo wishes to change its capital structure from 75 percent equity to 60 percent equity and use the debt proceeds to pay a special dividend to shareholders, how much debt should they use?
$600
$375
$225
$321
4. Serox stock was selling for $20 two years ago. The stock sold for $25 one year ago, and it is currently selling for $28. Serox pays a $1.10 dividend per year. What was the rate of return for owning Serox in the most recent year? (Round to the nearest percent.)
32%
16%
12%
40%
5. The process of evaluating financial data that change under alternative courses of action is called:
contribution margin analysis
cost-benefit analysis
double entry analysis
incremental analysis
6. What decision criteria should managers use in selecting projects when there is not enough capital to invest in all available positive NPV projects?
the discounted payback
the profitability index
the internal rate of return
the modified internal rate of return
7. The convention of consistency refers to consistent use of accounting principles:
among firms
within industries
throughout the accounting period
among accounting periods
8. External financing needed: Jockey Company has total assets worth $4,417,665. At year-end it will have net income of $2,771,342 and pay out 60 percent as dividends. If the firm wants no external financing, what is the growth rate it can support?
27.3%
32.9%
25.1%
30.3%
Growth rate = RR x ROE = (1-Divident payout ratio) x ($2,771,342 /$4,417,665) = 25.1%
9. Which of the following is considered a hybrid organizational form?
limited liability partnership
partnership
sole proprietorship
corporation
10. An activity that has a direct cause-effect relationship with the resources consumed is a(n):
overhead rate
product activity
cost driver
cost pool
11. Next year Jenkins Traders will pay a dividend of $3.00. It expects to increase its dividend by $0.25 in each of the following three years. If their required rate of return if 14 percent, what is the present value of their dividends over the next four years?
$11.63
$13.50
$9.72
$12.50
12. TuleTime Comics is considering a new show that will generate annual cash flows of $100,000 into the infinite future. If the initial outlay for such a production is $1,500,000 and the appropriate discount rate is 6 percent for the cash flows, then what is the profitability index for the project?
1.90
0.90
0.11
1.11
13. Your firm has an equity multiplier of 2.47. What is the debt-to-equity ratio?
0
1.74
0.60
1.47
14. If a company’s weighted average cost of capital is less than the required return on equity, then the firm:
partnership
is perceived to be safe
is financed with more than 50% debt
has debt in its capital structure
15. When a company assigns the costs of direct materials, direct labor, and both variable and fixed manufacturing overhead to products, that company is using:
operations costing
variable costing
absorption costing
product costing
16. The major element in budgetary control is:
the comparison of actual results with planned objectives.
the valuation of inventories
the preparation of long-term plans
the approval of the budget by the stockholders
17. Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time:
to determine which items are in error.
that has been arranged from the highest number to the lowest number.
to determine the amount and/or percentage increase or decrease that has taken place.
that has been arranged from the lowest number to the highest number.
18. Which of the following is an advantage of corporations relative to partnerships and sole proprietorships?
lower taxes
most common form of organization
harder to transfer ownership
reduced legal liability for investors
19. The break-even point is where:
contribution margin equals total fixed costs.
total variable costs equal total fixed costs.
total sales equal total variable costs.
total sales equal total fixed costs.
20. Turnbull Corp. had an EBIT of $247 million in the last fiscal year. Its depreciation and amortization expenses amounted to $84 million. The firm has 135 million shares outstanding and a share price of $12.80. A competing firm that is very similar to Turnbull has an enterprise value/EBITDA multiple of 5.40.
What is the enterprise value of Turnbull Corp.? Round to the nearest million dollars.
$1,787 million
$1,344 million
$1,315 million
$453.6 million
21. Which of the following is considered a hybrid organizational form?
partnership
limited liability partnership
corporation
sole proprietorship
22. The most important information needed to determine if companies can pay their current obligations is the:
projected net income for next year
relationship between short-term and long-term liabilities
relationship between current assets and current liabilities
net income for this year
23. Gateway, Corp. has an inventory turnover of 5.6. What is the firm’s days’s sales in inventory?
61.7
57.9
65.2
64.3
Solution: 365 days /5.6=65.2 days
24. Horizontal analysis is also known as:
vertical analysis
linear analysis
trend analysis
common size analysis
25. Which of the following presents a summary of changes in a firm’s balance sheet from the beginning of an accounting period to the end of that accounting period?
the statement of net worth
the statement of working capital
the statement of cash flows
the statement of retained earnings
26. Ajax Corp. is expecting the following cash flows - $79,000, $112,000, $164,000, $84,000, and $242,000 – over the next five years. If the company’s opportunity cost is 15 percent, what is the present value of these cash flows? (Round to the nearest dollar.)
$477,235
$429,560
$414,322
$480,906
27. Bond price: Regatta, Inc., has six-year bonds outstanding that pay a 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. What should the company's bonds be priced at today? Assume annual coupon payments. (Round to the nearest dollar.)
$972
$1,066
$1,014
$923
28. Process costing is used when:
dissimilar products are involved
production is aimed at fulfilling a specific customer order.
the production process is continuous.
costs are to be assigned to specific jobs.
29. Jack Robbins is saving for a new car. He needs to have $21,000 for the car in three years. How much will he have to invest today in an account paying 8 percent annually to achieve his target? (Round to nearest dollar)
$22,680
$26,454
$19,444
$16,670
30. The accumulation of accounting data on the basis of the individual manager who has the authority to make day-to-day decisions about activities in an area is called:
flexible accounting
static reporting
master budgeting
responsibility accounting
31. Variance reports are:
SEC financial reports
internal reports for management
external financial reports
all of these
32. The cash conversion cycle?
shows how long the firm keeps its inventory before selling it.
estimates how long it takes on average for the firm to collect its outstanding accounts receivables balance.
begins when the firm uses its cash to purchase raw materials and ends when the firm collects cash payments on its credit sales.
begins when the firm invests cash to purchase the raw materials that would be used to produce the goods that the firm manufactures.
33. In a process cost system, product costs are summarized:
when the products are sold.
on job cost sheets.
on production cost reports.
after each unit is produced.
34. Internal reports that review the actual impact of decisions are prepared by:
the controller
department heads
factory workers
management accountants
35. How firms estimate their cost of capital: The WACC for a firm is 13.00 percent. You know that the firm’s cost of debt capital is 10 percent and the cost of equity capital is 20% What proportion of the firm is financed with debt?
70%
50%
30%
33%
36. The group of users of accounting information charged with achieving the goals of the business is its:
auditors
investors
managers
creditors
37. An unrealistic budget is more likely to result when it:
has been developed in a bottom up fashion.
has been developed by all levels of management.
is developed with performance appraisal usages in mind.
has been developed in a top down fashion.
38. Jayadev Athreya has started his first job. He will invest $5,000 at the end of each year for the next 45 years in a fund that will earn a return of 10 percent. How much will Jayadev have at the end of 45 years?
$3,594,524
$2,667,904
$1,745,600
$5,233,442
39. Firms that achieve higher growth rates without seeking external financing:
Have a low plowback ratio
are highly leveraged
have less equity and/or are able to generate high net income leading to a high ROE.
None of these
40. Teakap, Inc. has current assets of $1,456,312 and total assets of $4,812,369 for the year ending September 30, 2006. It also has current liabilities of $1,041,012, common equity of $1,500,000 and retained earnings of $1,468,347. How much long-term debt does the firm have?
$803,010
$1,844,022
$2,123,612
$2,303,010
ANSWER
1. balance sheet
2. variable cost
3. $225
Solution: Debt = 0.25 x $1,500=$375
After restructuring =0.40 x $1,500=$600
Total debt issuance = $600-$375 = $225
4. 16%
Solution: 2 years ago the price was $20
After one year it was sold for $25 (Po=$25)
& Now it is selling for $28 (p1=$28)
Dividend (D1=110)
Rate of return (R) = D1+(P1-Po)/ Pox100 = [$1.10+$(28-25)]x100=16%
5. incremental analysis
6. the profitability index
7. among accounting periods
8. 25.1%
Solution: Total Assets = $4,417,665
Net income = $2,771,342
Dividend payout ratio = 60%
9. limited liability partnership
10. cost driver
11. $9.72
Solution: Given n=3,D1=$3.00,G=0.25,R=14%
Present value of dividends over the next 4 years =$(3.00/1.14)+$3.25/(1.14)2+$3.50/(1.14)3+$3.75/(1.14)4=$(2.63+2.50+2.36+2.22)=$9.72
12. 1.11
Solution: Annual cashflow=$100,000
Initial outflow ==$1,500,000, i=6%
Profitability index = Cash Inflow/Cash outflow=${100,000/.06}/$1,500,000=1.11
13. 1.47
Solution: Equity multiplier = Total Assets/Stockholders equity
Also, Equity Multiplier =1/Equity Ratio
Or, 2.47/1=Equity Ratio
Equity proportion = 2.47
Debt proportion = 2.47-1=1.47
14. has debt in its capital structure
15. absorption costing
16. the comparison of actual results with planned objectives.
17. to determine the amount and/or percentage increase or decrease that has taken place.
18. reduced legal liability for investors
19. contribution margin equals total fixed costs.
20. $1,787 million
Solution: Enterprise value is 5.4 * EBITA =5.4*(247+84)=1787.4 million
21. limited liability partnership
22. relationship between current assets and current liabilities
23. 65.2
Solution: 365 days /5.6=65.2 days
24. trend analysis
25. the statement of cash flows
26. $429,560
Solution: $79,000/1.15+$112,000/(1.15)2+$164,000/(1.15)3+$84,000/(1.15)4+$2,42,000/(1.15)5
=$(68696+84,688+107833+48027+120316)=429,560
27. $1,066
Solution: Given n=6 years, i=8.25%, YTM=6.875%, PV of Bond=?
PV of Bond = (1000x8.25%)x [1-1/(1.06875)6/.06875]+1000/(1.06875)6=(82.5x4.8)+671=$1,067
28. the production process is continuous.
29. $16,670
Solution: PV=$21,000/(1.08)3=$16,670
30. responsibility accounting
31. internal reports for management
32. begins when the firm invests cash to purchase the raw materials that would be used to produce the goods that the firm manufactures.
33. on production cost reports.
34management accountants
35. 70%
Solution: XDebt=Y, XEquity = (1-Y)
kfirm= XDebt kDebt + XEquity kEquity = = >0.13=(Yx0.1) + ((1-Y) x 0.20)= => Y=0.7
36. managers
37. has been developed in a top down fashion.
38. $3,594,524
Solution: Future value of ordinary annuity = A X[(1+i)n-1/i]
=$5,000x[(1.10)n-1/10)
=$3,594,524
39. have less equity and/or are able to generate high net income leading to a high ROE.
40. $803,010
Solution: Current Assets = $1, 456, 312
Total Assets = $, 812, 369
Current Liabilities = $1, 041, 012
Common equity = $1, 500, 000 $ Retained Earnings = $1,468, 347
Long term debt = $4,812,369-$1,041,012 $ 15,00,000-$1,468,347=$803,010
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