Missouri Southern State University

ECON 350

Financial Management Exam

Chapters 1

Multiple Choice 

1)Under which of the following legal forms of organization, is ownership readily transferable?

1. 1. limited partnerships
   2. partnerships
   3. sole proprietorships
   4. corporations

2. Agency costs include all of the following EXCEPT
   1. cost of goods sold.
   2. monitoring expenditures.
   3. bonding and structuring expenses.
   4. opportunity costs.

3. By definition, the money market involves the buying and selling of
   1. stocks and bonds.
   2. flows of funds.
   3. funds that mature in more than one year.
   4. short-term funds.

4. The average tax rate of a corporation with ordinary income of $105,000 and a tax liability of $24,200 is
   1. 46 percent.
   2. 15 percent.
   3. 34 percent.
   4. 23 percent.

5. In a corporation, the members of the board of directors are elected by the
   1. creditors.
   2. employees.
   3. chief executive officer.
   4. stockholders.

6. The financial manager is interested in the cash inflows and outflows of the firm, rather than the accounting data, in order to ensure

1. 1. the ability to acquire new assets.
   2. the ability to pay dividends.
   3. solvency.
   4. profitability.

7. The primary goal of the financial manager is
   1. minimizing risk.
   2. maximizing profit.
   3. minimizing return.
   4. maximizing wealth.

8. Congress allows corporations to exclude from taxes 70 to 100 percent of dividends received from other corporations. Congress did this to
   1. avoid double taxation on dividends.
   2. encourage corporations to invest in each other.
   3. increase tax revenue.
   4. lower the cost of equity financing for corporations.

9. Operating profits are defined as
   1. sales revenue minus cost of goods sold.
   2. gross profits minus operating expenses.
   3. sales revenue minus depreciation expense.
   4. earnings before depreciation and taxes.

10. Candy Corporation has pretax profits of $1.2 million, an average tax rate of 34 percent, and it pays preferred dividends of $50,000. There are 100,000 shares outstanding and no interest expenses. What is Candy Corporation's earnings per share?

A) $7.59

B) $7.42

C) $3.91

D) $4.52

11. To analyze the firm's financial performance, the following types of ratio analyses EXCEPT         may be used.

1. cross-section analysis
2. marginal analysis
3. time-series analysis
4. combined analysis

12.                          ratios are a measure of the speed with which various accounts are converted into sales or cash.

1. Profitability
2. Liquidity
3. Activity
4. Debt

Balance Sheet Cole Eagan Enterprises

December 31, 2002

Information (2002 values)

1. 1. Sales totaled $110,000
   2. The gross profit margin was 25 percent.
   3. Inventory turnover was 0.
   4. There are 360 days in the year.
   5. The average collection period was 65 days.
   6. The current ratio was 2.40.
   7. The total asset turnover was 1.13.
   8. The debt ratio was 53.8 percent.

13. Total liabilities and stockholders’ equity for CEE in 2002 were                           . (See Figure 2.1.) A) $45,895

B) $97,345

C) $58,603

D) $124,300

14. A firm with an operating profit margin which meets industry standard and a gross profit margin which is below industry standard must have excessive

1. principal payments.
2. general and administrative expenses.
3. cost of goods sold.
4. dividend payments.

15. An increase in financial leverage will result in                           in the return on equity.

1. an increase
2. an undetermined change
3. a decrease
4. no change

Dana Dairy Products Key Ratio

Income Statement Dana Dairy Products

For the Year Ended December 31, 2002

16. The debt ratio for Dana Dairy Products in 2002 is (See Figure 2.2.)

1. 55 percent.
2. 44 percent.
3. 11 percent.
4. 50 percent.

17. Given the financial manager's preference for faster receipt of cash flows,

1. the manager is not concerned with depreciable lives, because once purchased, depreciation is considered a sunk cost.
2. a longer depreciable life is preferred to a shorter one.
3. the manager is not concerned with depreciable lives, because depreciation is a non-cash expense.
4. a shorter depreciable life is preferred to a longer one.

18. All of the following are sources of cash EXCEPT

1. a decrease in accounts receivable.
2. dividends.
3. net profits after taxes.
4. an increase in accruals.

19. For the year ended December 31, 2003, a corporation had cash flow from operating activities of $30,000, cash flow from investment activities of -$15,000, and cash flow from financing activities of -$10,000. The Statement of Cash Flows would show a

1. net decrease of $5,000 in cash and marketable securities.
2. net increase of $25,000 in cash and marketable securities.
3. net decrease of $15,000 in cash and marketable securities.
4. net increase of $5,000 in cash and marketable securities.

20. Cash disbursements may include all of the following EXCEPT

1. rent payments.
2. tax payments.
3. fixed asset outlays.
4. depreciation expense.

21. The                           method of developing a pro forma balance sheet estimates values of certain balance sheet accounts while others are calculated. In this method, the firm's external financing is used as a balancing, or plug, figure.

1. accrual
2. percent-of-sales
3. judgmental
4. cash

22. Under MACRS, an asset which originally cost $50,000 is being depreciated using a 5-year normal recovery period. The depreciation expense in year 5 is         .

A) $6,000

B) $10,000

C) $16,000

D) $2,500

FIGURE 3.1

RUFF SANDPAPER CO.

Balance Sheets

For the Years Ended 2002 and 2003

24. A firm has actual sales in November of $1,000 and projected sales in December and January of $3,000 and $4,000, respectively. The firm makes 10 percent of its sales in cash, collects 40 percent of its sales one month following the sale, and collects the balance two months following the sale. The firm's total expected cash receipts in January

A) are $1,900.

B) are $2,100.

3. are $700.
4. cannot be determined with the information provided.

FIGURE 3.4

Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2004, for Hennesaw Lumber, Inc.

Hennesaw Lumber, Inc. estimates that its sales in 2000 will be $4,500,000. Interest expense is to remain unchanged at

$105,000 and the firm plans to pay cash dividends of $150,000 during 2004. Hennesaw Lumber, Inc.'s income statement for the year ended December 31, 2003 is shown below.

Income Statement Hennesaw Lumber, Inc.

For the Year Ended December 31, 2003

25. The pro forma cost of goods sold for 2004 is                         . (See Figure 3.4.) A) $3,825,000

B) $4,000,000

C) $3,500,000

D) $3,750,000

SHORT ANSWER

1. Given the following balance sheet, income statement, historical ratios and industry averages, calculate the Pulp, Paper, and Paperboard, Inc. financial ratios for the most recent year. Analyze its overall financial situation for the most recent year. Analyze its overall financial situation from both a cross-sectional and time-series viewpoint.

Income Statement

Pulp, Paper and Paperboard, Inc.

For the Year Ended December 31, 2008

Balance Sheet

Pulp, Paper and Paperboard, Inc.

December 31, 2008

ASSETS

LIABILITIES & STOCKHOLDERS’ EQUITY

Current liabilities

Historical and Industry Average Ratios Pulp, Paper and Paperboard, Inc.

Industry average

2.  Gerry Jacobs, a financial analyst for Best Value Supermarkets, has prepared the following sales and cash disbursement estimates for the period August through December of the current year.

Ninety percent of sales are for cash, the remaining 10 percent are collected one month later. All disbursements are on a cash basis. The firm wishes to maintain a minimum cash balance of $50. The beginning cash balance for October is $25. Prepare a cash budget for the month of October only, noting any needed financing or excess cash available.

Magna Fax, Inc.

Income Statement For the Year Ended December 31, 2008

Magna Fax, Inc.

Balance Sheet For the Years Ended December 31, 2007 and 2008

3.  Prepare the cash flow from operating activities section of the statement of cash flows for the year ended December 31, 2008 for Magna Fax, Inc.

Income Statement Huddleston Manufacturing Company For the Year Ended December 31, 2008

Huddleston Manufacturing estimates its sales in 2009 will be $3 million. Interest expense is expected to remain unchanged at $70,000, and the firm plans to pay cash dividends of $140,000 during 2009. Cost of goods sold includes $200,000 in fixed costs, and operating expenses include $50,000 in fixed costs. Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2009, based on the 2008 income statement shown above.