Second Examination – Finance 3320 - Spring 2011 (Moore) R-Number: ____________________ Section and Time: ____________________ Printed Name: ____________________ Ethical conduct is an important component of any profession. The Texas Tech University Code of Student Conduct is in force during this exam. Students providing or accepting unauthorized assistance will be assigned a score of zero (0) for this piece of assessment. Using unauthorized materials during the exam will result in the same penalty. Ours’ should be a self-monitoring profession. It is the obligation of all students to report violations of the honor code in this course. By signing below, you are acknowledging that you have read the above statement and agree to abide by the stipulated terms. Student’s Signature: ______________________________ Clearly Fill in the appropriate bubble on the Scantron form for each of the following questions. Choose the BEST response. There is only one answer per question. 1. Which of the following statements is CORRECT? a. A reduction in inventories would have no effect on the current ratio. b. An increase in inventories would have no effect on the current ratio. c. If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase. d. A reduction in the inventory turnover ratio will generally lead to an increase in the ROE. e. If a firm increases its sales while holding its inventories constant, then, other things held constant, its fixed assets turnover ratio will decline. 2. Which of the following statements is CORRECT? a. If a security analyst saw that a firm’s days’ sales outstanding (DSO) was higher than the industry average, and was increasing and trending still higher, this would be interpreted as a sign of strength. b. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days’ sales outstanding will decline. c. There is no relationship between the days’ sales outstanding (DSO) and the average collection period (ACP). These ratios measure entirely different things. d. A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio. e. A high average DSO indicates that none of its customers are paying on time. In addition, it makes no sense to evaluate the firm's DSO with the firm's credit terms. 3. Companies E and P each reported the same earnings per share (EPS), but Company E’s stock trades at a higher price. Which of the following statements is CORRECT? a. b. c. d. e. V1 Company E probably has fewer growth opportunities. Company E is probably judged by investors to be riskier. Company E must have a higher market-to-book ratio. Company E trades at a higher P/E ratio. Company E must pay a lower dividend. -1- 76 Days 7.976 d. Use the Financial Statements for Cantel Medical Corporation for the next four questions. the higher its profit margin will be. 46. 9.4. e. Which of the following statements is CORRECT? a. a. The company’s dividend payment to common stockholders declined.606 b.55 Days d. 5. 6. 5. the higher its operating margin will be. the higher its TIE ratio will be.01% b. 10. 71. The company’s depreciation expense declined.084 e.61% d.92 turns b. b.20. 5. Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage. the more debt a firm uses.65 Days e. $75.85% e. The company’s cost of goods sold increased. $202. the lower the risk. the more debt a firm uses. c. 7.84 turns c. Other things held constant. c. Compute Days Supply of Inventory for the year ended 7/31/2008 and assume a 365 day year. $77. Austin Financial recently announced that its net income increased sharply from the previous year. The higher the debt ratio. Other things held constant. yet its net cash provided from operations declined. 5.483 c. d.15% c. $91. 5. a. $186.93% 8.454 V1 -2- . 61. The company’s interest expense increased. how much would it have to borrow on 7/31/2008 to accomplish this? a. Other things held constant. e. d. Compute Return on Equity for the year ended 7/31/2008. Debt management ratios show the extent to which a firm's managers are attempting to reduce risk through the use of financial leverage. b. Which of the following could explain this performance? a. If the company wanted to change its Total Liabilities to Equity ratio on the very last day of the 2008 financial year from its existing level to 1. The company’s expenditures on fixed assets declined. the higher a firm's debt ratio. The periodic rate is less than 3%. If Cantel had reduced its average collection period on accounts receivables (DSO’s) by 3 days during 2009. Which of the following investments would have the highest future value at the end of 10 years? Assume that the effective annual rate for all investments is the same and is greater than zero. $2. c. The discount rate increases. The total amount of cash flows remains the same. The PV of the $1. d.000. The cash flows are in the form of a deferred annuity. You learn that the annuity lasts for 10 years rather than 5 years.000 would be larger if interest were compounded monthly rather than semiannually. c.831.65 e. Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments). d. $43. b. $8.35 10.000 exactly 3 years from today. a.049. c. V1 -3- . $29. The discount rate decreases. e. Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments). how much is the maximum additional cash that could be on the balance sheet at year end? Assume 365 day year. $333. 12.36 b. semiannual compounding. d.000.33 ordinary annuity.66 c. $46.500 at the end of 10 years (just one payment). Investment D pays $2.000 rather than for $20. and they total to $100. An investment will pay a lump sum of $1. e. The present value would be greater if the lump sum were discounted back for more periods. Which of the following would increase the calculated value of the investment? a.66 d.000 lump sum has a smaller present value than the PV of a 3-year. Which of the following statements is CORRECT? a. You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. The periodic interest rate is greater than 3%. hence that each payment is for $10. Investment A pays $250 at the beginning of every year for the next 10 years (a total of 10 payments). b. The nominal interest rate is 6%. Investment E pays $250 at the end of every year for the next 10 years (a total of 10 payments). but more of the cash flows are received in the later years and less are received in the earlier years. The riskiness of the investment’s cash flows increases. a. The present value of the $1. e.9. b. 11. e. periodic. 16. If a loan or investment has annual payments.000 less one third of the interest paid during the first three years.912 $1. b.13. Which of the following statements is CORRECT? a. $150 ordinary annuity.000. b. An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%. If a loan has a nominal annual rate of 8%. c. Which of the following statements regarding a 15-year (180-month) $125.966 $1. d. then the effective rate can never be greater than 8%. The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year. d. d. Your bank account pays an 8% nominal rate of interest. but the total amount of each payment will remain constant. The periodic rate of interest is 8% and the effective rate of interest is greater than 8%. the monthly loan payments (which include both interest and principal payments) are constant. d. $1.) a. The periodic rate of interest is 4% and the effective rate of interest is less than 8%. The present value of a 3-year.063. 14.119. Which of the following statements is CORRECT? a.15%.303. and nominal rates of interest will all be different. fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.008 V1 -4- . Because it is a fixed-rate mortgage.968 $1. Your father is about to retire. The interest is compounded quarterly. c.240.000 of income a year for 25 years. b. then the effective. e. The outstanding balance declines at a slower rate in the later years of the loan’s life. The periodic rate of interest is 2% and the effective rate of interest is greater than 8%. The periodic rate of interest is 8% and the effective rate of interest is also 8%. Interest payments on the mortgage will increase steadily over time.960 $1. The remaining balance after three years will be $125. and he wants to buy an annuity that will provide him with $85. e. c. The going rate on such annuities is 5.178. The proportion of the payment that goes toward interest on a fully amortized loan increases over time. with the first payment coming immediately. How much would it cost him to buy the annuity today? a. e. 15. $150 annuity due will exceed the present value of a 3-year. c. The periodic rate of interest is 2% and the effective rate of interest is 4%. b. but you must make monthly payments.72% 18. b. and she wants to sell some of her stock and buy an annuity that will provide her with income of $50. 5 years from now? a. How much would it cost her to buy such an annuity today? a.0% with monthly compounding. Bank 2. Bank 3.251 $21.1% with annual compounding. d.264 $22. What is the effective annual rate? a.5% per year. 15.88% 17. e. You plan to deposit the funds in a mutual fund that you think will return 8. d. c.369 $19. Bank 4. c. d. d.0% with daily (365-day) compounding.333 $8.575 18.0% with quarterly compounding. b.695 0 | $750 1 | $2. 6. b. how much would you have just after you make the 5th deposit. b.214 $700. 21. What is the present value of the following cash flow stream at a rate of 8.917 $8.000 per year for 30 years. d. beginning one year from today. You plan to invest some money in a bank account.00% nominal annual rate.233 $9.400 19. and you can save $3. e. e.08% 16. The going rate on such annuities is 7. e. $7. c.0%? Years: CFs: a. $18.327 20. Your aunt is about to retire.25%. Suppose your credit card issuer states that it charges a 15. c.287 $20. which amounts to monthly compounding.183 $635. b.175 3 | $4.924 $605. $574. c. 6.0% with annual compounding.772 $9.17. Which of the following banks provides you with the highest effective rate of interest? a. 6. e. beginning a year from today.27% 16. You want to go to Europe 5 years from now.61% -5- V1 . Bank 1. Under these conditions.100 per year. Bank 5.442 $667. 6. 6.450 2 | $3. then the market must expect interest rates to rise. c. d. The differences in these rates were probably caused primarily by: a. $2. What would your equal monthly payments be? a. will remain constant. $1. Tax effects. then the market expects 1-year rates to be 6.5% in one year.029. with "seller financing.67 $4.66 $4. b. Inflation differences. If 2-year Treasury bond rates exceed 1-year rates. If the pure expectations theory holds. the Treasury yield curve must be upward sloping. but these concepts do not apply to Treasury bonds.49 b.000 at the end of the last month. r*.22. V1 -6- . d. c.18% 24. The terms of the loan would require you to make 12 equal end-of-month payments per year for 4 years. 25. then 5-year rates must also be 7%. $2.37 $4. Real risk-free rate differences. d. If the pure expectations theory holds.44 $4.209." at a 6.464. If both 2-year and 3-year Treasury rates are 7%. If there is a positive maturity risk premium. e. The expectations theory cannot hold if inflation is decreasing. You plan to borrow $35.46 c. the Treasury yield curve must be downward sloping.099. Your uncle will sell you his bicycle shop for $250. d.27 e. 26.000 at a 7. The terms require you to amortize the loan with 7 equal end-of-year payments. c. b. Reinvestment rate risk is higher on long-term bonds.96 d. b. e.442. there can be no maturity risk premium. How much interest would you be paying in Year 2? a.64% BBB = 10.59 Assuming the pure expectations theory is correct. If 1-year rates are 6% and 2-year rates are 7%. $4.947.0% nominal annual rate. b. other things held constant? a. If inflation is expected to decline. $2. Assume that inflation is expected to decline steadily in the future.994. Which of the following statements is CORRECT. $2. and interest rate price risk is higher on shortterm bonds.5% annual interest rate. e.72% A = 9. which of the following statements is CORRECT? a. Interest rate price risk and reinvestment rate risk are relevant to investors in corporate bonds.72% AAA = 8. c.01 23.699. but that the real risk-free rate. Default risk differences. e.326. Maturity risk differences.000.241. and then make an additional final (balloon) payment of $50. the corporate yield curve must be downward sloping. Assume that interest rates on 20-year Treasury and corporate bonds are as follows: T-bond = 7. Suppose 1-year Treasury bonds yield 4. c. and the maturity risk premium for all bonds is found with the formula MRP = (t – 1) × 0. The yield on a 3-year corporate bond should always exceed the yield on a 2-year corporate bond. r*? Disregard any cross-product terms. Which of the following statements is CORRECT? a. What is the default risk premium (DRP) on Keys' bonds? a.90% 6.57% 1. what is the yield on a 1-year T-bond expected to be one year from now? a.99% 4.40%. the liquidity premium for Keys' bonds is LP = 0. 3. What is the real risk-free rate of return.52% 6. The following represents a "possibly reasonable" formula for the maturity risk premium on bonds: MRP = -0. c. and thus the maturity risk premium for T-bonds is zero.43% 1.1%(t).5% versus zero for T-bonds. d.50%.62% 30. b. use the arithmetic average.1%.00% and the future inflation rate is expected to be constant at 3.21% 6. c. Keys Corporation's 5-year bonds yield 6. The real risk-free rate is r* = 2. e. d. The yield on a 2-year corporate bond should always exceed the yield on a 2-year Treasury bond.40% 4.5%. the inflation premium for 5-year bonds is IP = 1. 5.80% 3. b.73% V1 -7- . 1. b.. a.17% 1. e. i.20% per year. 28. Assuming the pure expectations theory is correct. e. The yield on a 3-year Treasury bond cannot exceed the yield on a 10-year Treasury bond.19% 4. b.30% 1.e. if averaging is required.19% 29.10%.27. The yield on a 10-year AAA-rated corporate bond should always exceed the yield on a 5-year AAArated corporate bond.00% while 2-year T-bonds yield 5. where t is the years to maturity.20% and 5-year T-bonds yield 4.85% 7. where t = number of years to maturity. d. e. d. Suppose 1-year T-bills currently yield 7. c. C ya urrent T t l C r e tL b o a u r n ia ilitie s L ongT ermD ebt O ther Non-C urrent L bilities ia T ta N n u r n L b o l o -C r e t ia ilitie s T t lL b o a ia ilitie s S kholders' E toc quity C m S k om on toc R inedE rning eta a s T suryS rea tock C pita S a l urplus O ther S kholder E toc quity T t l S c h ld rE u o a to k o e q ity T ta L b o l ia ilitie a dE u s n q ity 3 -Jul-0 1 7 3 -Jul-0 1 8 3 -Jul-0 1 9 1 .5 0 3 .9 2 8 2 5 .6 2 1 4 9 .8 1 2 .1 3 -1 .3 0 7 2 7 .6 1 2 .4 7 3 .5 1 4 6 1 9 .9 1 5 7 5 .2 4 6 9 1 .8 3 6 4 8 9 .0 0 23 7 6 .3 0 3 0 1 .5 4 6 3 -1 .6 5 4 1 16 4 8 .7 3 7 .0 0 2 2 .0 2 7 4 18 6 8 .7 2 29 9 7 .5 7 8 7 12 7 0 .1 8 8 6 6 0 .1 0 2 .3 0 0 0 2 .3 8 8 1 2 6 .3 8 3 6 3 9 .0 0 1 0 .5 6 1 5 10 7 1 .0 0 0 0 2 1 .3 2 8 4 5 .2 6 1 5 7 .6 1 1 .2 1 17 1 8 .8 9 3 .2 0 9 0 8 .2 1 0 9 18 1 6 .8 1 7 4 -9 2 .9 8 4 .9 0 8 1 96 5 3 .2 5 2 2 8 .C ntel Medic l C a a orp.4 5 1 7 1 .9 0 7 2 13 5 1 .9 4 3 .2 4 1 5 14 2 9 .4 4 15 7 5 .9 0 3 .8 3 3 .4 8 1 5 .6 9 29 9 7 .1 6 27 7 7 .1 3 9 1 3 .9 1 27 7 7 .9 0 23 7 6 .6 1 1 1 .3 0 1 4 8 .6 5 3 .9 2 1 7 2 .7 8 12 0 0 .6 0 2 3 18 0 0 .3 8 2 4 2 .8 1 7 .0 0 1 0 2 .9 5 3 .7 2 8 .8 0 5 6 1 7 .9 8 5 6 14 9 1 .0 3 4 .0 2 8 0 8 0 .B la e S a nc heet PE IO E ING R D ND A s ts se C urrent Assets C sh AndC sh E a a quiva lents S hort T ermInvestm ents Ac ounts R eiva (net) c ec ble Inventory T t l C r e tA s ts oa ur n s e L ongT ermInvestm ents PropertyPla a E nt nd quipm ent G oodwill Inta ible Assets ng T t l N n u r n A s ts o a o -C r e t s e T ta A s ts o l se L b ia ilitie s C urrent L bilities ia Ac ounts Pa ble c ya C urrent Portion of L ongT ermD ebt Notes Pa ble .7 1 6 3 1 7 .6 0 1 3 7 .1 0 2 .8 2 1 0 8 .8 1 1 8 3 .5 9 3 .1 9 7 6 8 8 .8 1 V1 -8- . (C MN) .7 5 0 5 1 8 . Income Statement PERIOD ENDING Total Revenue Cost of Goods Sold GrossProfit Operating Expenses Research Development Selling General and Administrative Total Operating Expenses Opera tingIncom or L e oss Interest Expense Income Tax Expense Net Incom e Common Shares Outstanding Ca ntel Medical Corp.4 2 8 8 4.9 7 31-Jul-08 8.4 0 1 5 0 1.8 0 3 2 V1 -9- .050 160.060 1 .9 2 7 5 3.300 434 1 8 .571 9 .006 -4 .252 71.044 140.5 5 7 9 2.569 15.529 0 -36.035 -1 .998 8 4 .639 9.5 7 8 5 31-Jul-09 15.5 5 1 3 -4.479 5 6 .215 -200 -7.9 2 0 9 -5.374 161.4 9 9 7 4.8 2 -842 0 -15.158 8 9 .212 61.8 0 6 4 31-Jul-09 260.864 1 .884 2 .631 5.144 1 .387 1 .4 6 8 6 -4.000 706 2 .134 69.000 2022 -1 .748 8 .Cash F lowS tatem ent PERIOD ENDING Net Income Accrual Adjustments to compute CFFO T otal CashFlowF romOpera tingActivities InvestingActivitiesCashFlows Capital Expenditures Investments Other Cashflows fromInvestingActivities T otal CashFlowsF romInvestingActivities F ncingActivitiesCashF ina lows Dividends Paid Sale Purchase of Stock Net Borrowings Other Cash Flows from Financing Activities T otal CashFlowsF romF inancingActivities 31-Jul-07 219.446 -2.032 7 .983 0 -13.8 0 6 4 31-Jul-07 8.423 3 .5 9 5 6 1 . (CMN) .483 -1 .4 0 5 2 31-Jul-08 249.508 5.6 6 7 2 4.632 67.4 6 1 .010 65.693 9.376 19. (CMN) .0 2 9 1 4.6 3 1 .Cantel Medical Corp.848 56.0 2 1 8 0 148 1.