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ADMS 3530
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Final

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Administrative Studies

ADMS 3530

Lois King

Winter

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Practice Final Solutions
1. The followings are considered as financial assets, except:
A) well-trained sales force.
B) car insurance.
C) checking accounts.
D) mortgage loans.
Answer: A
A well-trained sales force is not a financial asset. All the others are
financial assets.
2. Which of the following does NOT address the question: "What are the roles of
a financial manager?"
I. Deciding how to maximize the stock prices.
II. Deciding the capital mix of long-term debt and equity.
III. Deciding which projects a firm should undertake.
IV. Deciding how much short-term debt to borrow.
A) I only
B) III only
C) II and III only
D) II, III, and IV only
E) I, II, III, and IV
Answer: A
Maximizing the stock price is not a role of the financial manager.
3. Given the following income statement data, calculate net income: sales =
$2,500, cost of goods sold = $1,800, miscellaneous expenses = $200,
depreciation = $150, interest expense = $50, average tax rate = 35%.
A) $195
B) $230
C) $377
D) $425
Answer: A
EBT = $2,500 - 1,800 - 200 - 150 - 50 = $300; NI = $300 - (300 x .35) =
$195
1 4. A firm with negative net working capital ______________.
A) is technically bankrupt
B) has no cash on hand
C) needs to sell some of its inventory to correct the problem
D) has more current liabilities than current assets
Answer: D
Net Working Capital = Current Assets – Current Liabilities
5. Calculate the EBIT (earnings before interest and taxes) for a firm with $5
million total revenues, $3 million cost of goods sold, $500,000 depreciation
expense, and $500,000 interest expense.
A) $1,500,000
B) $500,000
C) $1,000,000
D) -$500,000
Answer: A
EBIT = $5,000,000 - $3,000,000 - $500,000 = $1,500,000
6. What are the annual sales for a firm with $400,000 in liabilities, a total debt
ratio of 0.25, and an asset turnover of 3.0 (assume total assets remains
unchanged)?
A) $ 333,333
B) $3,200,000
C) $4,800,000
D) $6,400,000
Answer: C
Total Debt Ratio = Total Liabilities / Total Assets = .25 = ¼
¼ = $400,000/total assets, so total assets = $1,600,000
Asset Turnover = Sales / Average Total Assets = 3.0
3.0 = Sales / $1,600,000
So, Sales = $4,800,000
7. How much will accumulate in an account with an initial deposit of $100, and
which earns 15% interest for four years?
A) $107.69
B) $132.25
C) $152.09
D) $174.90
Answer: D
2 $100 x (1.15) ^4 = $174.90
8. How much would an investor expect to pay for a $1,000 par value bond with a
9% annual coupon that matures in 5 years if the interest rate is 5%?
A) $ 844.4
B) $1,075.8
C) $1,082.0
D) $1,173.2
Answer: D
PV = (90 x 4.3295) + (1000 x 0.7835) = $1173.15
9. What is the coupon rate for a bond with three years until maturity, a price of
$1,053.46, and a yield to maturity of 6%?
A) 6%
B) 8%
C) 10%
D) 11%
Answer: B
$1053.46 = (PMT x 2.6730) + (1000 x 0.8396)
PMT = 80
Coupon Rate = 8%
10. What happens to the price of a three-year bond with an 8% coupon when
interest rates change from 8% to 6%?
A) A price increase of $51.54
B) A price decrease of $53.47
C) A price increase of $53.47
D) No change in price
Answer: C
8%: (80 x 2.5771) + (1000 x 0.7938) = $999.97
6%: (80 x 2.6730) + (1000 x 0.8396) = $1053.44
Price increase of $53.47
11. What is the yield to maturity of a bond with the following characteristics?
Coupon rate is 8% with annual payments, current price is $950, three
years until maturity.
A) 4%
B) 5%
C) 10%
D) 12%
3 Answer: C
950 = (80 x PVA 3, r%) + (1000 x PV 3, r%) … Guess and Check
PVA = 2.4869 and PV = 0.7513
12. A stock paying $5 in annual dividends sells now for $80 and has an expected
return of 10%. What would be the stock price one year from now?
A) $83
B) $75
C) $85
D) $90
Answer: A
Div1+ P1− Po
Expected return = P
o
$5+P -$80
10% = 1
$80
$8 = P1– $75
$83 = P1
13. Which of the following statements is correct about a stock currently selling for
$50 per share that has a 15% expected return and a 10% expected capital
gain?
A) Its expected dividend this year is $5.
B) Its dividend yield is 5 percent.
C) It is expected to pay $7.5 in annual dividends for the next 2 years.
D) It is expected to pay $5.0 in annual dividends for the next 2 years.
Answer: B
Expected return = expected dividend yield + expected capital appreciation.
15% = expected dividend yield + 10%
5% = expected dividend yield
$50 share price x 5% = $2.5 expected dividend payment
14. Which of the following is true for a firm having a stock price of $42, and
expected dividend of $6, and a sustainable growth rate of 8%?
A) It has a required return of 25%.
B) It has a plowback ratio of 20%.
C) It has an ROE of 40%.
D) It has a dividend yield of 14.3%.
4 Answer: D
DIV yield = $6/$42 = 14.3%
15. What is the plowback ratio for a firm that has a required return 15%, dividend
yield 10% and a return on equity of 20%?
A) 12.50%
B) 14.00%
C) 25.00%
D) 35.00%
Answer: C
Expected Return = Dividend Yield + g
15% = 10% + g, so g = 5%
Plowback Ratio = g / ROE = g / 20% = 5% / 20% = .25 or 25%
16. What would be the stock price today if you know you will sell the stock in 2
years from today at $55/share and you expect annual dividends $2/share
in year 1 and $3/share in year 2, given the discount rate is 10%?
A) $55.0
B) $54.5
C) $49.8
D) $60.0
Answer: C
P2 = $55, Div1 = $2, Div2 = $3, Solve for Po
Po = (Div1 + P1) / (1+r), so therefore P1 = (Div2 +P2) / (1+r)
P1 = (Div2 +P2) / (1+r) …. Becomes, P1 = ($3+$55) / 1.1, P1 = $52.73
Now, use Po = (Div1 + P1) / (1+r) … becomes Po = ($2+$52.73) / 1.1
Po = $49.80
17. What is the NPV of a project that costs $80,000 today and cash inflows
$45,000 annually for t

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