2102 Practice Exam I Fall 2007 Name: _____________________________ 1. Joey has a project requiring a $30,000 initial investment.

He expects the following returns: Return Year 1 $8,000 Year 2 $8,000 Year 3 $6,000 Year 4 $6,000 Year 5 $6,000 Year 6 $3,000 Which of these is false given the above data? A. Joey gets return of investment. B. Joeys return on investment is 23.33%. C. Joey earns considerably more than 23.33% per year (IRR). D. Joeys annual return (IRR) is considerably less than 23.33%. 2. Your Rich Uncle Henry is sending you on a trip to Greece for the year when you graduate one month from now. In addition, your Uncle wants to be sure you have at least $3,000 a month to spend while you are on vacation. He is going to write you a check today for you to put in a spending money savings account. How would you figure out the size of the check that your Uncle should write right now, assuming you can earn a yearly rate of 3% in a savings account and the interest will be compounded and posted monthly? A. Find the factor on the present value of $1 table for 12 periods at interest rate of 1/4% per period and multiply that factor times $3,000. B. Find the factor on the future value of $1 table for 12 periods at interest rate of 1/4% per period and multiply that factor times $3,000. C. Find the factor on the present value of an annuity of $1 table for 12 periods at interest rate of 1/4% per period and multiply that factor times $3,000. D. Find the factor on the future value of an annuity of $1 table for 12 periods at interest rate of 1/4% per period and multiply that factor times $3,000.

3. In general, the return on investment (ROI) should not be used to rank investments because it does not take the size of the investment into account or the time the investment was held. If you are advising a firm with a 10% cost of capital on the following investments, which one should NOT be considered? Opportunity Maximum I n v e st m e n t 1 2 3 A. B. C. D. $20,000 $20,000 $5,000 100% 32% 65% ROI Internal rate of return (IRR)

14% 18% 6%

opportunity 1. opportunity 2. opportunity 3. All of them should be considered.

4. You are analyzing investments for three different clients. Each clients cost of capital and time-adjusted rate of return for the investment are shown below. They have asked you to compute the net present value for the investment. Which of the following is TRUE? Clients Name Andrea Inc. Burly Inc. Chipper Inc. Cost of Capital 17.2% 14.6% 15.0% Inernal Rate of Return (IRR) 13.0% 13.6% 17.5% Net Present Value $(2,500) $1,500 $4,600

E. Based on the data given, it is reasonable to assume that all of the above the computations are correct. F. The computation for Andrea Inc. is incorrect. G. The computation for Burly Inc. is incorrect. H. The computation for Chipper Inc. is incorrect. 5. Which of these descriptions of ownership in a business is FALSE? A. Sole proprietors and partners record the money taken out of the business for personal use as withdrawals since they do not have dividends paid to them.

B. The risk of ownership in a corporation is limited to the amount invested. C. A stock dividend changes the percentage share a shareholder has in the business. D. Outstanding shares are the number of shares issued less the number of shares repurchased and held as treasury stock.

7. Consider the similarities and differences on a typical companys balance sheet for the three different ownership forms: sole proprietorship, partnership and corporation. Which of these descriptions would apply only to the corporate form of ownership? A. The assets section of the balance sheet would show cash or other assets received from owners. B. The owners equity section would show treasury stock, if any. C. The owners equity section would be the residual or net of assets less liabilities. D. The owners equity section would be increased if operations are profitable. 8. Zulu Corp. has 2,000,000 shares of $1.50 par value common stock authorized. They issued 200,000 shares. There have been no treasury stock transactions. Earnings were $170,000 in the current year. Dividends declared were $30,000. If beginning retained earnings were $340,000, what is ending retained earnings? A. B. C. D. $305,000 $480,000 $510,000 $540,000

9. The N & Z Partnership is owned by Nate and Zach. Since Nate manages the daily operations, Nate receives a salary allowance distribution of $20,000 per year. The partnership agreement states that any remaining profits or losses after the salary allowance will be shared 70% to Nate and 30% to Zach. N&Z reported net income of $15,000 for the year. What will be the change in Nates capital accounts assuming no withdrawals or contributions during the year? A. B. C. D. Increase by $20,000 Decrease by $3,500 Increase by $14,000 Increase by $16,500

10. Jack, Jerry and Jeff formed a partnership called J-Cubed. They agreed to distribute 10% on beginning capital balances each year and then share profits equally. The partnership earned $40,000 this year. Beginning capital accounts are $50,000 for Jack, $20,000 for Jerry and $30,000 for Jeff. There are no salary allowances. What is Jerrys share of this years profits? A. $12,000

B. $20,000 C. $15,333 D. $32,000

11. Beta Corporation declared a dividend of $1.20 per outstanding share today. They have 1,000,000 shares authorized, 300,000 shares issued and 40,000 shares held in treasury. How much is the dividends payable created by this declaration of dividends? A. B. C. D. $1,200,000 $360,000 $312,000 $48,000

12. Felt Partnership is applying for its first loan in the amount of $200,000 with an interest rate of 6%. Last years net income was $14,000. Simpsons total stockholders equity is $375,000 and its income tax rate is 20%.A banker studying Simpsons times interest earned ratio and debt ratio is likely to notice that: a. Simpsons earnings do not cover interest expense with any room for contingencies or taxes. b. Simpsons equity amounts are so healthy than low income levels are not a significant issue. c. Simpsons debt ratio shows that they will have no trouble repaying the debt because they can always sell more equity to repay balances. d. Simpsons earnings net income of $14,000 is distorted since it has interest expense and income taxes deducted from it. 13. Joe can set aside $1,000 a year to buy a new car. If he saves this amount for 12 years and earns 8% compounded annually, what is the most expensive car he can buy at the end of the 12th year? a. $ 22,000 Ford Taurus b. $ 15,700 Used Toyota Corolla c. $ 17,000 Used Volkswagen Beetle d. $ 43,000 Mercedes Sedan 14. If Burger Barn Inc. needs to have $15,000 for a planned equipment purchase in 3 years, and they earn 4% annually on idle cash, how much do they need to set aside now to have enough to purchase the equipment in 3 years? a. $ 13,335 b. $ 16,874 c. $ 5,405 d. none of these

15. What is a drawback (weakness) of using simple rate of return or return on investment (ROA or ROI) to analyze an investment opportunity? a. You cant tell if you are going to get your initial investment back. b. You might be earnings a great return but it takes too long to earn it. c. You dont know if you will earn a profit or loss on the investment. d. The investment might generate more than the cost of capital. 16. Jimmy is getting a $12,000 loan to buy a new boat. He will make semi-annual payments at an annual interest rate of 8%. If the loan matures in 6 years, what are Jimmys semi-annual payments (rounded)? a. $799 b. $1,279 c. $3,696 d. none of these 17. Jimmy wants to have $5,000 saved by graduation. What must he put aside now earning 12% compounded monthly to achieve his goal in 3 years (rounded)? a. $5,000 b. $5,273 c. $3,559 d. $3,495 18. Randy computes the Net Present Value of a $23,000 project to be negative $3,000. The cost of capital is 8%. Which of these rates would you most likely believe is a correct computation in your excel spreadsheet for annualized return on investment (IRR) of this project? a. 10.4% b. 9% c. 7.3 % d. 149% Use this information for the next three questions. A manager analyzed a particular investment in two ways as follows:
Equipment (scenario #1) investment savings year 1 savings year 2 savings year 3 savings year 4 cost of capital rate of return (return on investment) time adjusted rate of return [IRR] net present value NPV ($21,500.00) $8,000.00 $7,000.00 $6,000.00 $5,000.00 12.00% 20.9% 8.78% ($1,186.17) investment savings year 1 savings year 2 savings year 3 savings year 4 cost of capital rate of return (return on investment) time adjusted rate of return [IRR] net present value NPV Equipment (scenario #2) ($21,500.00) $15,000.00 $6,000.00 $7,000.00 $8,000.00 12.00% ? ? ?

19. The rate of return [or return on investment] for scenario #2 is: a. 20.9% b. 65.1% c. 67.4% d. 167.4% e. Can not be determined with Excel function features 20. For scenario #2, do you expect the IRR (annualized rate of return) will be higher, lower than scenario #1. a. Higher because the cash flows occur later in the four year period. b. Lower because the cash flows occur later in the four year period. c. Higher because the cash flows are greater in scenario 2. d. Lower because the cash flows are greater in scenario 2. 21. Under what conditions does a positive net present value occur? a. When earnings are less than cost of capital b. When earnings are more than cost of capital c. When you do not receive return OF investment d. When you receive return ON investment at exactly cost of capital. 22. Which company probably has a higher financing risk? a. Violet Co., debt to equity of 9.1 b. Blue Co., debt to equity of 1.0 c. Gold Co., return on equity of 11.6 d. Black Co., times interest earned of 3.20 23. Trio Partners has three partners, Alfa, Bo and Cee. The partnership earned $30,000 this year. Their partnership agreement calls for Partner Bo to receive a salary allowance of $3,000 and then distribute the rest evenly to all partners. If partner Bos capital account was $12,000 before the income distribution, what is partner Bos new capital balance after income distribution? a. $15,000 b. $24,000 c. $21,000 d. $25,000 24. Fancy Corp sells 200,000 common shares to the public on January 1, 2005. Fancy Corp then buys back 5,000 shares on October 1, 2005 to use for management bonuses. How many shares are issued/outstanding? a. 200,000 issued /195,000 outstanding b. 195,000 issued /195,000 outstanding c. 195,000 issued /200,000 outstanding d. 200,000 issued /200,000 outstanding 25. Flat Rock Partnership lost $40,000 this year. Their partnership agreement calls for allocation of 10% interest on beginning capital and then equal shares for the remaining income or loss. Here are the partners beginning capital balances:

Ann Sue Nick Beginning capital $ 10,000 $ 30,000 $ 40,000 What is Anns share of the partnership loss this year? a. ($16,000) b. ($15,000) c. ($6,000) d. ($5,000) 26. Brandy Inc. is considering buying new equipment costing $40,000 that enables them to save $15,000 per year for four years. They can depreciate the equipment $10,000 per year for the four years. Their tax rate is 40%. What is the NPV of this equipment if Brandy Inc. uses a hurdle rate of 12% annually to analyze this investment? a. b. c. d. $27,355.70 $12,149.20 ($515.10) $39,484.90

27. Brother John intends to save $4,000 annually in his IRA account. If he does this faithfully for 12 years and earns 9% annual interest, what will his IRA investment be worth (rounded)? a. b. c. d. $80,563 $28,643 $52,320 $77,004

28. Which of these shareholders will get a dividend that was declared on December 11th for shareholders on the date of record of December 20th to be paid on Jan 4th? a. b. c. d. Sandy sold her shares on Jan 3 Bill sold his shares on December 19 Jane sold her shares on December 7 Bob purchased his shares on December 26

29. Yates Inc. issued 10,000 shares of common stock for $40 per share. They subsequently repurchased 1,000 shares at $50 per share. What is the total equity ignoring earnings? a. b. c. d. $400,000 $450,000 $350,000 $500,000

30. Zipper Zulu has a 2% $100 par value cumulative preferred stock with 10,000 shares issued and outstanding and a $1.00 per value common stock with 100,000 shares outstanding. Zipper issued both classes of stock in 2004, their first year of operations. In 2007, Zippers board of directors declared the first dividend in the amount of $91,000. How much of this dividend will go to the common shareholders? a. $80,000 b. $11,000 c. $31,000 d. None of it. 31. If Zipper Zulus preferred stock was NOT cumulative in the above problem, what would the common shareholders get for a dividend in 2007? a. $71,000 b. $31,000 c. $11,000 d. none of it 32. What is treasury stock? a. Stock that is purchased by someone who intends to give it to management. b. Stock that is bought back from the original investors who bought it. c. A companys own stock that they repurchase in the open market. d. A companys own stock that they issue hoping to increase contributed capital 33. Why does treasury stock reduce equity? a. Because you are giving back cash to owners so contributed capital goes down. b. Because you are giving back stock to owners so contributed capital goes down. c. Because you are canceling owners rights even though they still get dividends. d. Because treasury stock is purchased at a lower price than other trades. 34. If you have $350,000 in assets, no debt and earnings of 16% on assets, what is your return on equity? a. 16.0% b. 22.4% c. 11.4% d. 13.1% 35. If the company in the question above, decides to get a $100,000 loan and still earns 16% on their existing and newly acquired assets, what is their new estimated return on equity? a. 20.6%

b. 16.0% c. 12.4% d. 4.6%