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Multiple Choice and Computation: Financial Management

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1. You are trying to determine which of two companies is the most profitable. Which of the following would be the best indicator of relative profitability?
A) highest net income
B) highest retained earnings
C) highest return on equity
D) highest income from continuing operations

2. You are examining the common size income statements of two companies, A and B, for 2015. This data is most likely to help you answer which of the following questions?
A) Which company had the largest net income.
B) Which company had the highest gross margin ratio.
C) Which company utilized its assets most efficiently.
D) Which company had the biggest increase in sales from the prior year.

3. Which of the following is (are) a change(s) in accounting principle?

I. a change from LIFO to FIFO
II. a change in estimated salvage value of depreciable asset
III. a change from straight line to sum-of-the-years digits
IV. recording depreciation for first time on machinery purchased five years
ago

A) I, II, III and IV
B) I, II and III
C) I and II
D) I

4. When analyzing financial statements it is important to recognize that accounting distortions can arise. Accounting distortions are those things that cause deviations in accounting information from the underlying economics. Which of the following statements is not correct? Accounting distortions
A) can arise as management may deliberately manipulate financial statements
B) arise often through application of (correct) accounting principles
C) can affect the quality of earnings
D) will arise if contingent liabilities are reported

5. Under Statement of Financial Concept 8, the two fundamental qualities of accounting information to make it useful for decision making are:
A) Consistency and Comparability
B) Relevance and Reliability
C) Relevance and Faithful Representation
D) Comparability and Verifiability

6. When considering cash versus accrual accounting, which of the following statements is correct?
A) both cash flows and net income can be manipulated
B) neither cash flows nor net income can be manipulated
C) net income cannot be manipulated but cash flows can
D) cash flows cannot be manipulated but net income can be manipulated

7. Recording a long-term lease as an operating lease, as opposed to a capital lease, for a lessee will cause the following ratios to be:
Debt/Equity Total Asset Turnover
A) Higher Lower
B) Higher Higher
C) Lower Higher
D) Lower Lower

8. For a company with a current ratio of less than 1.0, which of the following accounting actions is most likely to increase its current ratio?
A) Sell property, plant, or equipment for cash.
B) Making cash payments on accounts payable.
C) Paying off long-term debt.
D) Leasing equipment under a long-term capital lease agreement.

9. Companies are supposed to write-down value of assets if a permanent impairment of value or loss of utility occurs. If a company writes down its assets this year due to an impairment, what is the effect on:
This year's ROA Next year's ROA
A) Increased No change
B) Decreased No change
C) Decreased Decreased
D) Decreased Increased

10. AVPR Company sets up a qualifying SPE to sell their accounts receivable (A/R) to the SPE. The SPE meets the unconsolidated requirement under GAAP. The most likely outcome of using the SPE by AVPR will be to
A) improve operating performance ratios of AVPR.
B) have a lesser cost of financing to AVPR than borrowing funds from the credit markets
C) have AVPR recognize gains on the sale of their A/R to the SPE.
D) have AVPR issue debentures.

11. In addition to the internal operating activities that affect a company's ratios, which of the following can also affect their ratios?
A) economic events
B) management policies
C) accounting methods
D) all of the above (a, b, and c) can affect a company's ratios

12.The Will Company reports the following information for their 2016 year-end:
2016 2015
Retained Earnings $2,000,000 $ 1,300,000
Common Stock $ 500,000 $ 500,000
Paid-in Capital $3,000,000 $ 3,000,000
Net Income for year $ 900,000 $ 400,000

Required: Calculate the dividend payout ratio for 2016.

13 Cleveland Company reports the following information as of 12/31/2014:

* Preferred Stock - 10% cumulative preferred stock, par value $100, one-year of dividends in arrears; 20,000 shares authorized, 10,000 shares issued; total par $1,000,000.
* Common Stock - 500,000 shares authorized, 40,000 issued and outstanding; $2 par value, total par $80,000; additional paid-in-capital common stock, $450,000.
* Retained Earnings - $2,000,000.

13 (a) Calculate the book value per share of common stock on 12/31/2014.

13 (b) Calculate the book value per share of preferred stock on 12/31/2014.

14. Part A - 10 Points
On January 1, 2016, Hurt Corporation acquired a capital lease that is carried on its books
at its present value of $100,000 (discounted at 12%). Its' annual lease payment is $15,000 and the effective interest method is used. What is the amount of interest expense which will be reported for the calendar years ending on December 31, 2016 and December 31, 2017 from this lease?

15 Part A - 10 Points
The following information is given for Control Furniture Company for the years 2015 and 2016:

Control Furniture Company
(Figures in thousands of dollars)

December 31 2015 2016

Inventories at FIFO Cost 846.3 852.6
Excess of FIFO Cost over LIFO Cost (231.4) (257.2)
Inventories at LIFO Cost 614.9 595.4

The income tax rate is 34%. Whichever method of inventory valuation used for
financial reporting is also used for tax purposes.

(a) Given the financial information presented above what would be the effect (increase/decrease and amount) on cash in 2015 of converting the company from LIFO to FIFO? Why would this increase/decrease occur?

(b) Given the financial information presented above what would be the effect (increase/decrease and amount) on net income before taxes in 2016 of converting the company from LIFO to FIFO? What would cause this increase/decrease? Assume that LIFO was used in 2015.

16. Financial Statements of ABC Corp. indicates that ending inventory levels in 2014 and 2015 were $200,000 and $350,000 respectively. Net Sales for 2014 and 2015 were $5,000,000 and $5,500,000 respectively. Gross margin (gross profit) for 2014 and 2015 were $3,100,000 and $3,300,000 respectively. Purchases are recorded using the net method and purchase discounts lost are expensed. Purchase discounts lost in 2014 and 2015 were $50,000 and $75,000 respectively. Calculate the amount of purchases for the ABC Corporation in the year 2015.

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Finances Multiple Choice Questions & Problems

Multiple Choice Questions:

1. Corporate managers are expected to make corporate decisions that are in the best interest of

A) top corporate management.
B) the corporation's board of directors.
C) the corporation's shareholders.
D) all corporate employees.

2. Financial markets are used for trading:

A) both real assets and financial assets.
B) the goods and services produced by a firm.
C) securities, such as shares of IBM.
D) the raw materials used in manufacturing.

3. The best criterion for success in a capital budgeting decision would be to:

A) minimize the cost of the investment.
B) maximize the number of capital budgeting projects.
C) maximize the difference between cash inflows and cost.
D) finance all capital budgeting projects with debt.

4. The term "capital structure" refers to:

A) the manner in which a firm obtains its long-term sources of funding.
B) the length of time needed to repay debt.
C) whether the firm invests in capital budgeting projects.
D) which specific assets the firm should invest in.

5. Which of the following financial assets might be least likely to have an active secondary market?

A) Common stock of a large firm
B) Bank loans made to smaller firms
C) Bonds of a major, multinational corporation
D) Debt issued by the United States Treasury

6. How much can be accumulated for retirement if $2,000 is deposited annually, beginning one year from today, and the account earns 9% interest compounded annually for 40 years?

A) $ 87,200.00
B) $675,764.89
C) $736,583.73
D) $802,876.27

7. The present value of the following cash flows is known to be $6,939.91; $500 today, $2,000 in one year, and $5,000 in two years. What discount rate is being used?

A) 3%
B) 4%
C) 5%
D) 6%

8. How much should you pay for a $1,000 bond with 10% coupon, annual payments, and five years to maturity if the interest rate is 12%?

A) $ 927.90
B) $ 981.40
C) $1,000.00
D) $1,075.82

9. If an investor purchases a bond when its current yield is less than the coupon
rate, then the bond's price will be expected to:

A) decline over time, reaching par value at maturity.
B) increase over time, reaching par value at maturity.
C) be less than the face value at maturity.
D) exceed the face value at maturity.

10. In the calculation of rates of return on common stock, dividends are ___ and capital gains are ____.

A) guaranteed; not guaranteed
B) guaranteed; guaranteed
C) not guaranteed; not guaranteed
D) not guaranteed; guaranteed

11. What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8%?

A) $22.86
B) $28.00
C) $42.00
D) $43.75

12. An increase in a firm's financial leverage will:

A) increase the variability in earnings per share.
B) reduce the operating risk of the firm.
C) increase the value of the firm in a non-MM world.
D) increase the WACC.

13. How much could NPV be affected by a worst-case scenario of 25% reduction from the $3 million in expected annual cash flows on a five-year project with 10% cost of capital?

A) $2,843,090
B) $3,750,000
C) $4,578,825
D) $6,155,274

14. Projects that are calculated as having negative NPVs should be:

A) depreciated over a longer time period.
B) charged less in overhead costs.
C) discounted using lower rates.
D) rejected or abandoned.

15. If a project is expected to increase inventory by $15,000, increase accounts payable by $10,000, and decrease accounts receivable by $1,000, what effect does working capital have during the life of the project?

A) Increases investment by $4,000.
B) Increases investment by $5,000.
C) Increases investment by $6,000.
D) Working capital has no effect during the life of the project.

Problem 1:

Examine the following book-value balance sheet for University Products, Inc. The preferred stock currently sells for $15 per share and the common stock for $20 per share. There are one million common shares outstanding. (Provide all computations in addition to the solutions.)

BOOK VALUE BALANCE SHEET (in millions)

Assets
Cash and short-term securities $ 1.0
Accounts receivable 3.0
Inventories 7.0
Plant and equipment 21.0
Total $32.0

Liabilities and Net Worth
Bonds, coupon = 8%, paid annually $10.0
(maturity = 10 years, current yield to maturity = 9%)
Preferred stock (par value $20 per share) 2.0
Common stock (par value $.10) 0.1
Additional paid in stockholders' capital 9.9
Retained earnings 10.0
Total $32.0

a. What is the capital structure of the firm based on market values (V)?

b. If the preferred stock pays a dividend of $2 per share, the beta of the stock is .8,
the market risk premium is 10 percent, the risk-free rate is 6 percent, and the firm's tax rate is 40 percent, what is University's weighted-average cost of capital?

Problem 2:

Dominique, Inc. is considering an investment in a new shoe factory which will entail an immediate capital expenditure of $2 million. The plant is going to be depreciated on a straight line basis over 10 years with no expected salvage value. The operating income before deducting depreciation is expected to be $500,000 per year over the 10-year life of the project. If Dominique is in the 30 percent tax bracket and the required return is 15 percent, calculate

a) the after-tax cash flows of the project (NCF),

b) the payback period (PBP),

c) the net present value (NPV),

d) the net profitability index (PI),

e) the internal rate of return (IRR).

(Provide all computations for this problem in addition to the solutions.)

Bonus Problem:

Ms. Amidala Inflamada is celebrating today her birthday and 15th anniversary as the Executive Secretary for Mr. Num Bei Wan, President of Last Chance, Inc. During the day she was talking to her closest friends how turbulent where the first days she came in to work after her graduation from the University when she was only 22 years old. One of her friends asked her if she have planned for her retirement. She replied that she has to establish a retirement plan that should provide for her needs after her retirement, considering that probably she will be alone and maybe the Social Security will not be around any more.

For a female her age and ethnic group, the life expectancy is 85 years and according to new rules her retirement age should be 65. She thinks that she will do fine with a monthly pension payment of $3,500.00.

How much should Ms. Inflamada deposit every end of month starting this same month in order to accumulate the proper amount to fund her pension payments after her retirement? Assume that she can obtain a 9% average return on her deposits and on her funds accumulated on her retirement plan.

(Provide all computations for this problem in addition to the solution.)

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