INDIANA UNIVERSITY NORTHWEST

Division of Business and Economics

F301 Financial Management

Fall 2000

Professor Wm. Nelson

TEST 1 1. The proper goal of the financial manager should be to maximize the firm’s expected profit, since this will add the most wealth to each of the individual shareholders (owners) of the firm.

a. True b. False

2. An agency relationship exists when one or more persons hire another person to perform some service but withhold decision-making authority from that person.

a. True b. False

3. In order to accurately estimate cash flow from operations, depreciation must be added back to net income. The reason for this is that even though depreciation is deducted from revenue it is really a non-cash charge.

a. True b. False

4. Your corporation has the following cash flows:

Operating income $250,000

Interest received 10,000

Interest paid 45,000

Dividends received 20,000

Dividends paid 50,000

If the applicable income tax rate is 40 percent (federal and state combined), and if 70 percent of dividends received are exempt from taxes, what is the corporation’s tax liability?

a. $ 74,000, b. $ 88,400, c. $ 91,600, d. $100,000, e. $106,500

5. As a corporate investor paying a marginal tax rate of 35 percent, if 70 percent of dividends are excludable, what would be your after-tax dividend yield on preferred stock with a 16 percent before-tax dividend yield?

a. 6.36%, b. 7.36%, c. 12.19%, d. 13.01%, e. 14.32%

6. Weston Corporation has some money to invest, and its treasurer is choosing between General Motors bonds and State of Illinois bonds. Both have the same maturity, and they are equally risky and liquid. If the Illinois bonds, which are tax-exempt, yield 6 percent, and Weston’s marginal income tax rate is 40 percent, what yield on GM bonds would make Weston’s treasurer indifferent between the two?

a. 6.0%, b. 7.5%, c. 10.0%, d. 12.5%, e. 15.0%

7. A firm’s current ratio has steadily increased over the past 5 years, from 1.9 five years ago to 3.8 today. What would a financial analyst be most justified in concluding?

a. The firm’s fixed assets turnover has probably improved.

b. The firm’s liquidity position has probably improved.

c. The firm’s stock price has probably increased.

d. Each of the above is likely to have occurred.

e. The analyst would be unable to draw any conclusions from this information.

8. If Boyd Corporation has sales of $2 million per year (all credit) and days sales outstanding of 35 days, what is its average amount of accounts receivable outstanding (assume a 360 day year)?

a. $194,444, b. $ 57,143, c. $ 5,556, d. $ 97,222, e. $285,714

9. You are given the following information: Stockholders’ equity = $1,250; price/earnings ratio = 5; shares outstanding = 25; market/book ratio = 1.5. Calculate the market price of a share of the company’s stock.

a. $ 33.33, b. $ 75.00, c. $ 10.00, d. $166.67, e. $133.32

10. Your company had the following balance sheet and income statement information for 1995: