الجامعة الا سلامية غزة كلية التجارة برامج الدراسات العليا الامتحان النهاي ي للفصل الدراسي الثاني من العام الجامعي 2006/2005 السبت 2006/1/7 م. المدرس/ د. فارس ا بو معمر المساق/ ا دارة مالية متقدمة الزمن/ ثلاث ساعات اسم الطالب/... الرقم الجامعي / Answer the following questions: 1- All else equal, which of the following will cause in increase in net capital operating working a. The firm sells 10,000 units of its product at a profit, but the sale is made on credit. b. The firm increases it cash dividend paid. c. The firm buys $200,000 in raw materials from one of its suppliers. d. The firm uses excess cash reserves to retire some outstanding debt, and decreases its interest expense. e. None of the above would cause an increase in net operating working capital. 2- Which of the following statements is most consistent with a relaxed policy current asset investment a. A firm carries small amounts of cash and inventories. b. Sales are stimulated by a tight credit policy. c. Accounts receivable are held at a high level. d. All of the above are correct. e. None of the above are correct. 3- Tullis Tours has average daily sales of $50,000 and average daily cost of goods sold of $35,000 A look at Tullis' balance sheet indicates that the company has $1.5 million of inventories, $1 million of accounts receivable, and accounts payable of $735,000. What is period Tullis' cash conversion a. 20 days b. 21 days c. 25 days d. 29 days e. 50 days 4- Tullis Tours has a credit policy where full payment is required after 60 days. If the customers pay by the 20th day, they are entitled to a 2 percent discount. Which of the following correctly identifies its 1
policy credit a 2/20, net 60 b. 2/60, net 20 c. 20/2 net 60 d. 20/60, net 2 e. 60/20, net 2 5- The conservative and aggressive working capital financing strategies discussed in the text, differ primarily in the a.relative amount of equity capital used. b. Relative amount invested in marketable securities. c. Average level of permanent current assets. d.amount of trade credit used. e. Use of short-term debt. 6- Roa Computers, Inc. trade policy is 3/10, net 30.Roa's annual cost of goods sold is $9,785,000. Roa uses a 360 day accounting year. credit What is Roa's nominal annual cost of trade a. 38.93% b. 47,48% c. 55.67% d. 64.78% e. 73.02% 7- If you were to argue that the firm's cost of equity, rs, does not change as the dividend payout decreases, you would be making an argument with MM's dividend irrelevance theory, and with Gordon and Lintner's "bird-in-the-hand" theory. a.consistent; inconsistent b. inconsistent; consistent c. consistent consistent d. inconsistent; inconsistent e. The argument above does not make sense; neither theory involves the cost of equity capital. 8- Carney Corporation faces an IOS schedule calling for a capital budget of $20 million.its optimal capital structure is 40 percent equity and 60 percent debt. Its earnings before interest and taxes (EBIT) were $36 million for the year. The firm has $180 million in assets, pays an average of 10 percent on all its debt and faces a marginal tax rate of 40 percent. If the firm maintains a residual dividend policy and will keep its optimal capital structure intact, what will be the amount of the dividends it pays out after financing budget its capital a. $0 b. $5.4 m c. $7.1 m d. $12.0 m e. $15.1 m correct 9- Which of the following statements is most a. Investors are indifferent to stock repurchases or cash dividends, because they are taxed the same way. b. Modigliani and Miller suggested that investors prefer capital gains 2
rather than dividends from their stock investments. c. The clientele effect suggests that firms attract a certain type of investor based upon their dividend policy. d. Both A and C are correct e. None of the above are correct. 10- Rust Foods posted a net income of $15 million this year. Financial planners at Rust anticipate having a capital budget of approximately $18 million. The firm also anticipates retaining its target capital structure of 60% equity and 40% debt.if the firm follows a strict residual dividend policy, what is their expected dividend payout ratio a. 28% b. 36% c. 50% d. 64%. 72% 11- Which of the following is a key determinant of operating leverage a. Sales variability. b. Physical location of production facilities, for example in a high tax state. c. Cost of debt. d. Capital structure. e. Level of fixed costs. 12- The additional risk placed on stockholders by a firm's decision to use more debt is called. a. market risk b.interest rate risk c. financial risk d. stand-alone risk e. business risk correct 13- Which of the following statements is most a. If a firm uses no debt, its Return on invested capital can be defined as the return on equity. b. If a firm uses no debt, its business risk can be measured by the standard deviation of the firm's ROE. c. The uncertainty regarding future ROE, assuming the firm uses no debt financing is the defined as the firm's corporate risk. d. Both A and B are correct. e. All of the above are correct. 14- Which of the following is not a factor that business risk is upon dependent a. product/service demand variability b. sales price variability c. foreign risk exposure d.interest rate levels e. input cost variability 15- Fisher Communications' common stock currently has a required return of 11.49%. The risk-free rate of interest is 5%, the market 3
risk premium is 5.5%, and Fisher's corporate tax rate is 40%. The firm currently has % 10 debt in its capital structure, but is considering recapitalizing to achieve a debt ratio of 50%. If the recapitalization is achieved, all else equal, what would the required be return on Fisher Communications' common stock a. 11.o8 b. 12.91% c. 13.85% d. 14.35% e. 14.74% 16- Holding other things constant the additional funds required for financing a firm's operations would be increased with an increase in a firm's a. Dividend payout ratio b. Profit margin. c. Total asset turnover d. Spontaneous liabilities. e.accruals. 17- Which of the following are ways that managers can use pro forma statements financial a. To investigate the impact of proposed changes in strategy and operations. b. To assess whether the firm's anticipated performance is in line with their own targets and with shareholder's expectations. c. To estimate future free cash flows. d. All of the above are correct. e. None of the above are correct. 18- Which of the following statements is most correct, regarding a structure forecast with constant ratios and a constant capital a. An increase in market interest rates would lead to an increased profit margin. b. All components of common equity grow at the same rate as the sales rate of growth. c. As a firm grows you will observe a greater accumulation of fixed assets compared to current assets. d. The most static variable in determining the additional funds needed is addition to retained earnings, which is determined by the income statement. e. All of the above are correct. 19- All else equal, which of the following conditions would lead to a needed decrease in the additional funds a. An increase of the dividend payout ratio. b.accounts payable increase slower than sales. c. The firm has a lot of excess capacity. d. All of the above are correct. e. None of the above are correct. 4
20- A firm's current ratio has steadily decreased over the past 3 years, from 2.9 three years ago to 1.1 today. What would a financial concluding analyst be most justified in a. The firm's stock price has probably declined. b. The firm's debt ratio will not be affected. c. The firm's fixed assets turnover has probably deteriorated. d. The firm's liquidity position has probably deteriorated. e. The analyst would be unable to draw any conclusions from this information. 21- Recently the Bevel Furniture Company has been having problems. As a result, its financial situation has deteriorated. Bevel approached the Wilmington Trust Company for a badly needed loan, but the loan officer insisted that the current ratio (currently 0.7) be improved to at least close to 1.0 before the bank would even consider making the loan. Which of the following actions would do the most to improve the ratio in the short run and would likely be the least costly Bevel to a. Using some cash to pay off some long-term and short-term liabilities. b. Purchasing some additional raw materials on credit thereby creating an additional accounts payable. c.paying off some notes payable with cash to reduce the firm's debt. d. Selling some fixed assets for cash. e. Collect some current accounts receivable. 22- Which of the following statements is most correct? If a company lowers its DSO, but no changes occur in sales or operating costs, then uses the additional cash to pay off debt: a. The company might well end up with a higher debt ratio. b. The company might well end up with a lower debt ratio, and a lower TIE ratio. c. The company would probably end up with a lower ROE. d. The company's total asset turnover ratio would probably decline. e. The company would have to finance the higher accounts receivable that will result from a lower DSO. 23- You are given the following information about a firm :The growth rate equals 9 percent; return on assets (ROA) is 12 percent; the debt ratio is 36 percent; and the stock is selling at $38. What is ROE ) the return on equity a. 14.05% b. 18.75% c. 12.0% d. 3.0% e. 13.5% 5
correct 24- Which of the following statements is most a. Ratio analysis can be distorted by seasonal factors. b. Ratio analysis is a great tool, because it allows a firm to be fairly compared to any other company. c. It is difficult to generalize financial ratios as being strictly good or bad. d. Both A and C are correct e. All of the above are correct. 25- Yohe Inc. has an ROA of 15% and a 10% profit margin. The company has sales equal to $5 million. What is the company's total millions assets (in a. 3.00 b. 3.33 c. 3.73 d. 4.17 e. 4.80 correct 26- Which of the following statements is NOT a. Under normal conditions, we cannot say whether the CAPM approach to estimating a firm's cost of retained earnings gives a better estimate than the DCF approach. b. The risk premium used in the bond-yield-plus-risk-premium method is not the same as the one used in the CAPM method. c. The CAPM approach cannot be used to estimate a firm's cost of internally generated equity only of externally generated equity. d The CAPM method probably should not be used in isolation (i.e. alone) to estimate a firm's cost of retained earnings equity. correct 27- Which of the following statements is most a. As a firm uses less debt and more equity in its capital structure, the MCC schedule declines. b. Depreciation-generated funds have a cost less than the firm's lowest WACC, and hence they have no impact on the MCC schedule. c- As a firm uses more debt the cost of debt decreases which lowers the WACC. d. A decrease in the corporate tax rate would increase the weighted average cost of capital for a typical firm other things held constant. 28- Which of the following activities is NOT a major use of the cost of capital a. Evaluating capital budgeting projects b.calculating rates of return on investments c. Calculating a firm's economic value added d. Deciding whether to lease or purchase assets e. Regulating the monopoly services provided by utilities companies 6
correct 29 Which of the following statements is most a. The WACC is an after-tax cost of capital. b. The WACC depends upon the component costs of existing capital. c. There is no cost associated with retained earnings. d. Both A and B are correct. e. Both A and C are correct. 30- Which of the following cost of capital factors can firms NOT control a. capital structure policy b. investment policy c. interest rate levels d. dividend policy e. All of the above factors can be controlled by the firm. 31- Which of the following is likely to occur if a company fails to properly risk adjust its hurdle rates of divisions with varying levels of risk a. The company will tend to accept too many risky projects. b.the company will tend to reject too many risky projects. c. The overall value of the firm will tend to increase. d. The overall risk of the firm will tend to decrease. e. None of the above are correct. 32- A firm wants to estimate the firm's WACC, and has compiled the following information : The firm's capital structure consists of 60% equity and 40% debt. The firm has bonds outstanding yield 8.75%. The real-risk free rate is 5%. The market risk premium is 6%. The firm's beta is. 1.4 The firm's tax rate is 40%. The firm uses the CAPM to estimate the cost of equity, and does not account for any kind of flotation costs in the calculation of the cost of capital. What is ( WACC ) the firm's weighted average cost of capital a. 9.44% b. 9.76% c.10.14% d. 11.54% e. 12.02% 7
33- A firm expects to pay a dividend of $2.00 one year from now. They expect the dividend to grow at a constant rate of 8%, forever. If the firm's required return is 12%, what is the expected stock price today a.$16.67 b. $18.00 c. $25.00 d. $50.00 e. $54.00 correct 34- Which of the following statements is most a. Historically speaking, large-company stocks have traditionally provided investors with the highest average returns. b. The risk premium represents the additional compensation investors require in order to assume additional risk. c. In an efficient market, a security's realized return will be equivalent to its expected return. d. Diversification has a stronger effect when a portfolio consists of perfectly positively correlated stocks. e. The relevant risk of a security refers to the amount of risk that can be diversified away. 35- Stock A has an expected return of 14.5% and a beta of 1.5. Stock B has a beta of 2. If the risk-free rate is %4 what is the expected B return of Stock a. 15.0% b 16.0 c. 18.0% d. 18.5% e. 19.0% correct 36 Which of the following statements is most a. In reference to security investments, earnings volatility is a direct indication of investment risk. b. If a firm's beta were to increase, the security market line for that firm would shift up vertically. c. Though possible, it is very unlikely for a firm to have a negative beta. d. If a stock's beta doubles, then its required return also doubles. e. None of the above are correct + 8