FIN 480 CORE MAIN EXAMINATION QUESTIONS AND
ANSWERS SURE A+
✔✔Assume you are using the dividend growth model to value stocks. If you expect the
market rate of return to increase across the board on all equity securities, then you
should also expect the: - ✔✔market values of all stocks to decrease.
✔✔Al's Sport Store has sales of $2,750, costs of goods sold of $2,090, inventory of
$536, and accounts receivable of $441. How many days, on average, does it take the
firm to sell its inventory assuming that all sales are on credit? - ✔✔93.6
Inventory turnover = $2,090/$536 = 3.8993 Days in inventory = 365/3.8993 = 93.61
days
✔✔A firm has a debt-equity ratio of .44. What is the total debt ratio? - ✔✔.31
The debt-equity ratio is 0.44. If total debt is $44 and total equity is $100, then total
assets are $144. Total debt ratio = $44/$144 = 0.31.
✔✔A firm has total debt of $1,060 and a debt-equity ratio of .27. What is the value of the
total assets? - ✔✔$4,986
Total equity = $1,060 / .27 = $3,926
Total assets = $1,060 + $3,926= $4,986
✔✔What is the days' sales in receivables? (use 2009 values) - ✔✔33.1
Accounts receivable turnover for 2009 = $8,500/$770 = 11.04
Days' sales in receivables for 2009 = 365/11.04 = 33.06
✔✔A firm has a total debt ratio of .47. This means the firm has 47 cents in debt for
every - ✔✔$.53 in total equity.
✔✔The external funds needed (EFN) equation projects the addition to retained earnings
as: - ✔✔PM × Projected sales × (1 - d).
✔✔If stockholders want to know how much profit the firm is making on their entire
investment in that firm, the stockholders should refer to the: - ✔✔return on equity.
✔✔Which of the following methods of project analysis are biased towards short-term
projects? - ✔✔discounted payback and payback
✔✔Matt is analyzing two mutually exclusive projects of similar size. Both projects have
5-year lives. Project A has an NPV of $18,389, a payback period of 2.38 years, an IRR
of 15.9 percent, and a discount rate of 13.6 percent. Project B has an NPV of $19,748,
a payback period of 2.69 years, an IRR of 13.4 percent, and a discount rate of 12.8
, percent. He can afford to fund either project, but not both. Matt should accept: -
✔✔Project B based on its NPV.
✔✔If a project is assigned a required rate of return of zero, then: - ✔✔the timing of the
project's cash flows has no bearing on the value of the project.
✔✔Kelly's Corner Bakery purchased a lot in Oil City five years ago at a cost of
$580,000. Today, that lot has a market value of $830,000. At the time of the purchase,
the company spent $41,000 to level the lot and another $4,900 to install storm drains.
The company now wants to build a new facility on that site. The building cost is
estimated at $1,000,000. What amount should be used as the initial cash flow for this
project? - ✔✔$-1,830,000
CF0 = -$830,000 - $1,000,000 = -$1,830,000
✔✔Kurt's Cabinets is looking at a project that will require $80,000 in fixed assets and
another $20,000 in net working capital. The project is expected to produce sales of
$110,000 with associated costs of $70,000. The project has a 4-year life. The company
uses straight-line depreciation to a zero book value over the life of the project. The tax
rate is 35 percent. What is the operating cash flow for this project? - ✔✔$33,000
OCF = ($110,000 - 70,000) � (1 ?.35) + ($80,) � .35 = $33,000
✔✔Toni's Tools is comparing machines to determine which one to purchase. The
machines sell for differing prices, have differing operating costs, differing machine lives,
and will be replaced when worn out. These machines should be compared using: -
✔✔their equivalent annual costs.
✔✔. Ernie's Electrical is evaluating a project which will increase sales by $50,000 and
costs by $30,000. The project will cost $150,000 and will be depreciated straight-line to
a zero book value over the 10-year life of the project. The applicable tax rate is 34
percent. What is the operating cash flow for this project? - ✔✔$18,300
OCF = ($50,000 - 30,000) � (1 ?.34) + ($150,) � .34 = $18,300
✔✔The By-Way has sales of $435,000, costs of $254,000, depreciation of $35,000,
interest expense of $22,000, and taxes of $43,400. What is the amount of the operating
cash flow? - ✔✔$137,600
OCF = $435,000 - 254,000 - 43,400 = $137,600
✔✔Miller Mfg. is analyzing a proposed project. The company expects to sell 11,000
units, give or take 3 percent. The expected variable cost per unit is $6.00 and the
expected fixed cost is $35,000. The fixed and variable cost estimates are considered
accurate within a plus or minus 6 percent range. The depreciation expense is $29,000.
The tax rate is 34 percent. The sale price is estimated at $14.00 a unit, give or take 4
percent.
ANSWERS SURE A+
✔✔Assume you are using the dividend growth model to value stocks. If you expect the
market rate of return to increase across the board on all equity securities, then you
should also expect the: - ✔✔market values of all stocks to decrease.
✔✔Al's Sport Store has sales of $2,750, costs of goods sold of $2,090, inventory of
$536, and accounts receivable of $441. How many days, on average, does it take the
firm to sell its inventory assuming that all sales are on credit? - ✔✔93.6
Inventory turnover = $2,090/$536 = 3.8993 Days in inventory = 365/3.8993 = 93.61
days
✔✔A firm has a debt-equity ratio of .44. What is the total debt ratio? - ✔✔.31
The debt-equity ratio is 0.44. If total debt is $44 and total equity is $100, then total
assets are $144. Total debt ratio = $44/$144 = 0.31.
✔✔A firm has total debt of $1,060 and a debt-equity ratio of .27. What is the value of the
total assets? - ✔✔$4,986
Total equity = $1,060 / .27 = $3,926
Total assets = $1,060 + $3,926= $4,986
✔✔What is the days' sales in receivables? (use 2009 values) - ✔✔33.1
Accounts receivable turnover for 2009 = $8,500/$770 = 11.04
Days' sales in receivables for 2009 = 365/11.04 = 33.06
✔✔A firm has a total debt ratio of .47. This means the firm has 47 cents in debt for
every - ✔✔$.53 in total equity.
✔✔The external funds needed (EFN) equation projects the addition to retained earnings
as: - ✔✔PM × Projected sales × (1 - d).
✔✔If stockholders want to know how much profit the firm is making on their entire
investment in that firm, the stockholders should refer to the: - ✔✔return on equity.
✔✔Which of the following methods of project analysis are biased towards short-term
projects? - ✔✔discounted payback and payback
✔✔Matt is analyzing two mutually exclusive projects of similar size. Both projects have
5-year lives. Project A has an NPV of $18,389, a payback period of 2.38 years, an IRR
of 15.9 percent, and a discount rate of 13.6 percent. Project B has an NPV of $19,748,
a payback period of 2.69 years, an IRR of 13.4 percent, and a discount rate of 12.8
, percent. He can afford to fund either project, but not both. Matt should accept: -
✔✔Project B based on its NPV.
✔✔If a project is assigned a required rate of return of zero, then: - ✔✔the timing of the
project's cash flows has no bearing on the value of the project.
✔✔Kelly's Corner Bakery purchased a lot in Oil City five years ago at a cost of
$580,000. Today, that lot has a market value of $830,000. At the time of the purchase,
the company spent $41,000 to level the lot and another $4,900 to install storm drains.
The company now wants to build a new facility on that site. The building cost is
estimated at $1,000,000. What amount should be used as the initial cash flow for this
project? - ✔✔$-1,830,000
CF0 = -$830,000 - $1,000,000 = -$1,830,000
✔✔Kurt's Cabinets is looking at a project that will require $80,000 in fixed assets and
another $20,000 in net working capital. The project is expected to produce sales of
$110,000 with associated costs of $70,000. The project has a 4-year life. The company
uses straight-line depreciation to a zero book value over the life of the project. The tax
rate is 35 percent. What is the operating cash flow for this project? - ✔✔$33,000
OCF = ($110,000 - 70,000) � (1 ?.35) + ($80,) � .35 = $33,000
✔✔Toni's Tools is comparing machines to determine which one to purchase. The
machines sell for differing prices, have differing operating costs, differing machine lives,
and will be replaced when worn out. These machines should be compared using: -
✔✔their equivalent annual costs.
✔✔. Ernie's Electrical is evaluating a project which will increase sales by $50,000 and
costs by $30,000. The project will cost $150,000 and will be depreciated straight-line to
a zero book value over the 10-year life of the project. The applicable tax rate is 34
percent. What is the operating cash flow for this project? - ✔✔$18,300
OCF = ($50,000 - 30,000) � (1 ?.34) + ($150,) � .34 = $18,300
✔✔The By-Way has sales of $435,000, costs of $254,000, depreciation of $35,000,
interest expense of $22,000, and taxes of $43,400. What is the amount of the operating
cash flow? - ✔✔$137,600
OCF = $435,000 - 254,000 - 43,400 = $137,600
✔✔Miller Mfg. is analyzing a proposed project. The company expects to sell 11,000
units, give or take 3 percent. The expected variable cost per unit is $6.00 and the
expected fixed cost is $35,000. The fixed and variable cost estimates are considered
accurate within a plus or minus 6 percent range. The depreciation expense is $29,000.
The tax rate is 34 percent. The sale price is estimated at $14.00 a unit, give or take 4
percent.
