公司金融英文试题

1. Which of the following is not considered one of the basic questions of corporate finance? A) What long-lived assets should the firm invest? B) How much inventory should the firm hold? C) How can the firm raise cash for required capital expenditures? D) How should the short-term operating cash flows be managed? E) All of the above.

Answer: B Difficulty: Medium Page: 4

2. Generally accepted accounting principles may recognize and record a sale A) before a customer pays assuming they will pay soon. B) only after the company receives payment in full.

C) when the company receives at least 50% of the total revenue from the customer.

D) All of the above. E) None of the above.

Answer: A Difficulty: Medium Page: 7

3. Working capital management includes decisions concerning which of the following?

I. accounts payable II. accounts receivable III. long-term debt IV. inventory A. I and II only B. I and III only C. II and IV only D. I, II, and IV only E. I, III, and IV only

Answer:D

4. Fixed assets can be either tangible or intangible. Intangible assets A) are property, plant and equipment.

B) can be converted to cash in the normal course of business.

C) may be very valuable, although they have no physical presence, such as trademarks or patents. D) are highly liquid. E) None of the above.

Answer: C Difficulty: Medium Page: 22

5. In 2004, TimeNow Corporation had fixed assets of $1,345, current assets of $260, current liabilities of $180 and shareholders' equity of $775. What was the net working capital for TimeNow in 2004? A) $ 80 B) $180 C) $260 D) $390

E) None of the above.

Answer: A Difficulty: Medium Page: 26 Rationale: $260 - $180 = $80

6. What is the effect on net working capital if the corporation decides to increase its investment in inventory and pay for it with cash? A) Increase in net working capital. B) Decrease in net working capital.

C) Depends on the amount of the investment. D) No change in net working capital. E) None of the above.

Answer: D Difficulty: Medium Page: 26-27

7. If you have a choice to earn simple interest on $10,000 for three years at 8% or annually compound interest at 7.5% for three years which one will pay more and by how much?

A) Simple interest by $50.00 B) Compound interest by $22.97 C) Compound interest by $150.75 D) Compound interest by $150.00 E) None of the above.

Answer: B Difficulty: Medium Page: Rationale: Simple Interest = $10,000 (.08)(3) = $2,400; Compound Interest = $10,000((1.075)3 1) = $2,422.97; Difference = $2,422.97 - $2,400 = $22.97

8. What is the relationship between present value and future value interest factors? A. The present value and future value factors are equal to each other. B. The present value factor is the exponent of the future value factor. C. The future value factor is the exponent of the present value factor. D. The factors are reciprocals of each other.

E. There is no relationship between these two factors.

Answers: D

9. You have deposited $1,500 in an account that promises to pay 8% compounded quarterly for the next five years. How much will you have in the account at the end? A) $1,598.33 B) $2,203.99 C) $2,228.92 D) $6,991.44

E) None of the above.

Answer: C Difficulty: Medium Page: 72-73 Rationale: $1,500(1.02)20 = $2,228.92

10. The process of calculating the present value of a future cash flow A) is called discounting which is the same as compounding. B) is called discounting which is the opposite of compounding. C) uses the present value factor to perform the discounting. D) Both A and C. E) Both B and C.

Answer: E Difficulty: Medium Page: 75

11. What is the present value of a payment of $21,000 three years from now if the annual interest rate is 4%? A) $17,951 B) $18,480 C) $18,658 D) $18,669 E) $19,218

Answer: D Difficulty: Medium Page: 70 Rationale: PV = FV/(1+r)n = $21,000/(1+.04)3 = $18,668.92

12. This afternoon, you deposited $1,000 into a retirement savings account. The account will compound interest at 6 percent annually. You will not withdraw any principal or interest until you retire in forty years. Which one of the following statements is correct?

A. The interest you earn six years from now will equal the interest you earn ten years from now.

B. The interest amount you earn will double in value every year.

C. The total amount of interest you will earn will equal $1,000  .06  40. D. The present value of this investment is equal to $1,000.

E. The future value of this amount is equal to $1,000  (1 + 40).06.

Answer: D

13. Luis is going to receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Luis and Soo Lee apply a 7 percent discount rate to these amounts? A. The present values of Luis and Soo Lee's monies are equal.

B. In future dollars, Soo Lee's money is worth more than Luis' money. C. In today's dollars, Luis' money is worth more than Soo Lee's.

D. Twenty years from now, the value of Luis' money will be equal to the value of Soo Lee's money.

E. Soo Lee's money is worth more than Luis' money given the 7 percent discount rate.

Answer: C

14. You want to have $1 million in your savings account when you retire. You plan on investing a single lump sum today to fund this goal. You are planning on investing in an account which will pay 7.5 percent annual interest. Which of the following will reduce the amount that you must deposit today if you are to have your desired $1 million on the day you retire?

I. Invest in a different account paying a higher rate of interest. II. Invest in a different account paying a lower rate of interest. III. Retire later. IV. Retire sooner. A. I only B. II only

C. I and III only D. I and IV only E. II and III only

Answer: C

15. This morning, TL Trucking invested $80,000 to help fund a company expansion project planned for 4 years from now. How much additional money will the firm have 4 years from now if it can earn 5 percent rather than 4 percent on its savings? A. $2,940.09 B. $3,651.82 C. $4,008.17 D. $4,219.68 E. $4,711.08

Future value = $80,000  (1 + .05)4 = $97,240.50 Future value = $80,000  (1 + .04)4 = $93,588.68 Difference = $97,240.50 - $93,588.68 = $3,651.82

16. Theo needs $40,000 as a down payment for a house 6 years from now. He earns 3.5 percent on his savings. Theo can either deposit one lump sum today for this purpose or he can wait a year and deposit a lump sum. How much additional money must he deposit if he waits for one year rather than making the deposit today? A. $878.98 B. $911.13 C. $1,138.90 D. $1,348.03 E. $1,420.18

Present value = $40,000  [1/(1 + .035)6] = $32,0.03 Present value = $26,000  [1/(1 + .035)5] = $33,678.93 Difference = $33,678.93 - $32,0.03 = $1,138.90

17. One year ago, you invested $1,800. Today it is worth $1,924.62. What rate of interest did you earn? A. 6.59 percent B. 6.67 percent C. 6.88 percent D. 6.92 percent E. 7.01 percent

$1,924.62 = $1,800  (1 + r)1; r = 6.92 percent

18. According to the Rule of 72, you can do which one of the following? A. double your money in five years at 7.2 percent interest B. double your money in 7.2 years at 8 percent interest C. double your money in 8 years at 9 percent interest

D. triple your money in 7.2 years at 5 percent interest E. triple your money at 10 percent interest in 7.2 years Rule of 72 = 72/8 years = 9 percent interest

19. Some time ago, Julie purchased eleven acres of land costing $36,900. Today, that land is valued at $214,800. How long has she owned this land if the price of the land has been increasing at 10.5 percent per year? A. 13.33 years B. 16.98 years C. 17. years D. 19.29 years E. 21.08 years

$214,800 = $36,900  (1 + .105)t; t = 17. years

20. Sixteen years ago, Alicia invested $1,000. Eight years ago, Travis invested $2,000. Today, both Alicia's and Travis' investments are each worth $2,400. Assume that both Alicia and Travis continue to earn their respective rates of return. Which one of the following statements is correct concerning these investments?

A. Three years from today, Travis' investment will be worth more than Alicia's. B. One year ago, Alicia's investment was worth less than Travis' investment. C. Travis earns a higher rate of return than Alicia.

D. Travis has earned an average annual interest rate of 3.37 percent. E. Alicia has earned an average annual interest rate of 6.01 percent.

Alicia: $2,400 = $1,000  (1 + r)16; r = 5.62 percent Travis: $2,400 = $2,000  (1 + r)8; r = 2.31 percent

Since both Alicia and Travis have equal account values today and since Alicia earns the higher rate of return, her account had to be worth less than Travis' account one year ago.

Concept Questions (5 points×2 = 10 points)

1. What is a liquid asset and why is it necessary for a firm to maintain a reasonable level of liquid assets?

Liquid assets are those that can be sold quickly with little or no loss in value. A firm that has sufficient liquidity will be less likely to experience financial distress.

Difficulty level: Difficult Topic: Liquid Assets

2. Why is interest expense excluded from the operating cash flow calculation?

Operating cash flow is designed to represent the cash flow a firm generates from its day-to-day operating activities. Interest expense arises from a financing decision and thus should be considered as a cash flow to creditors.

P43-21

Dahlia Industries had the following operating results for 2009:

Sales=$22,800; Cost of goods sold = $16,050; depreciation expense = $4,050; Interest expense = $1,830; Dividends paid = $1,300. At the beginning of this year, net fixed assets were $13,650, current assets were $4,800, and current liabilities were $2,700. At the end of the year, net fixed assets were $16,800, current assets were $5,930, and current liabilities were $3,150. The tax rate for 2009 was 34%

a. What is the net income for 2009?

b. What is the operating cash flow for 2009?

c. What is the cash flow from assets for 2009? Is this possible? Explain.

d. If no new debt was issued during the year, what is the cash flow to creditors?

What is the cash flow to stockholders? Explain and interpret the positive and negative signs of your answers in (a) and (b).

21.

b. OCF = EBIT + Depreciation – Taxes = $2,700 + 4,050 – 296 = $6,4

a.

Sales

Income Statement $22,800

16,050 4,050 $ 2,700 1,830 $ 870 296 $ 574 Cost of goods sold Depreciation EBIT Interest Taxable income Taxes (34%) Net income

c.

Change in NWC = NWCend – NWCbeg

= (CAend – CLend) – (CAbeg – CLbeg) = ($5,930 – 3,150) – ($4,800 – 2,700) = $2,780 – 2,100 = $680

Net capital spending = NFAend – NFAbeg + Depreciation = $16,800 – 13,650 + 4,050 = $7,200 CFA

= OCF – Change in NWC – Net capital spending = $6,4 – 680 – 7,200 = –$1,426

The cash flow from assets can be positive or negative, since it represents whether the firm raised funds or distributed funds on a net basis. In this problem, even though net income and OCF are positive, the firm invested heavily in both fixed assets and net working capital; it had to raise a net $1,426 in funds from its stockholders and creditors to make these investments.

d. Cash flow to creditors Cash flow to stockholders

= Interest – Net new LTD = $1,830 – 0 = $1,830 = Cash flow from assets – Cash flow to creditors = –$1,426 – 1,830 = –$3,256

We can also calculate the cash flow to stockholders as: Cash flow to stockholders

= Dividends – Net new equity

Solving for net new equity, we get:

Net new equity = $1,300 – (–3,256) = $4,556

The firm had positive earnings in an accounting sense (NI > 0) and had positive cash flow from operations. The firm invested $680 in new net working capital and $7,200 in new fixed assets. The firm had to raise $1,426 from its stakeholders to support this new investment. It accomplished this by raising $4,556 in the form of new equity. After paying out $1,300 of this in the form of dividends to shareholders and $1,830 in the form of interest to creditors, $1,426 was left to meet the firm’s cash flow needs for investment.

2. Refer to the corporate marginal tax rate information in Table 2

a. Why do you think the marginal tax rate jumps up from 34% to 39% at a taxable income of 100,001, and then falls back to a 34% marginal rate at a taxable income of $335,001?

b. Compute the average tax rate for a corporation with exactly $335,001 in taxable income. Does this confirm your explanation in part (a)? What is the average tax rate for a corporation with exactly $18,333,334? Is the same thing happening here?

c. The 39% and 38% tax rates both represent what is called a tax “bubble.” Suppose the government wanted to lower the upper threshold of the 39% marginal tax bracket from $335,000 to $200,000. What would the new 39% bubble rate have to be?

Answers:

a. The tax bubble causes average tax rates to catch up to marginal tax rates, thus eliminating the tax advantage of low marginal rates for high income corporations. b. Taxes = 0.15($50,000) + 0.25($25,000) + 0.34($25,000) + 0.39($235,000) = $113,900 Average tax rate = $113,900 / $335,000 = 34% The marginal tax rate on the next dollar of income is 34 percent. For corporate taxable income levels of $335,000 to $10 million, average tax rates are equal to marginal tax rates. Taxes = 0.34($10,000,000) + 0.35($5,000,000) + 0.38($3,333,333)= $6,416,667 Average tax rate = $6,416,667 / $18,333,334 = 35% The marginal tax rate on the next dollar of income is 35 percent. For corporate taxable income levels over $18,333,334, average tax rates are again equal to marginal tax rates.

c. Taxes = 0.34($200,000) = $68,000 $68,000 = 0.15($50,000) + 0.25($25,000) + 0.34($25,000) + X($100,000); X($100,000) = $68,000 – 22,250 X = $45,750 / $100,000 X = 45.75%