BUAD341 - HW/Quiz Questions/Answers

One year ago, you invested $1,750. Today it is worth $1,815.48. What rate of interest did you earn?

$1,815.48 = $1,750(1 + r) r = .0374, or 3.74%

Chapter 2 HW: Which one of the following statements is correct concerning a corporation with taxable income of $125,000?

An increase in depreciation will increase the operating cash flow.

Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management?

An increase in the market value per share.

According to the Rule of 72, you can do which one of the following?

Approximately double your money in 11 years at 6.55 percent interest

You are going to deposit $4,100 in an account that pays .67 percent interest per quarter. How much will you have in 9 years?

FV = $4,100 × 1.0067^36 = $5,214.18

You are going to deposit $4,300 in an account that pays .49 percent interest per month. How much will you have in 6 years?

FV = $4,300 × 1.0049^72 = $6,113.83

Sue plans to save $4,500, $0, and $5,500 at the end of Years 1 to 3, respectively. What will her investment account be worth at the end of the Year 3 if she earns an annual rate of 4.15 percent?

FV = $4,500(1.0415^2) + $5,500 = $10,381.25

You have just started a new job and plan to save $4,600 per year for 42 years until you retire. You will make your first deposit in one year. How much will you have when you retire if you earn an annual interest rate of 10.38 percent?

FV = $4,600[1.1038^42 − 1)/.1038] = $2,760,838.90

The financial planning method that uses the projected sales level as the basis for determining changes in balance sheet and income statement account values is referred to as the _______method.

percentage of sales

Kurt won a lottery and will receive $1,000 a year for the next 50 years. The current value of these winnings is called the:

present value.

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios.

profitability

You just paid $480,000 for an annuity that will pay you and your heirs $15,000 a year forever. What rate of return are you earning on this policy?

r = $15,000/$480,000 = .03125, or 3.125%

Shareholders' equity:

represents the residual value of a firm.

The portion of net income that a firm reinvests in itself is called the:

retention ratio.

Financial plans generally tend to ignore:

risks associated with cash flows.

A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of:

sales.

Financial managers should primarily focus on the interests of:

shareholders.

A business owned by a solitary individual who has unlimited liability for the firm's debt is called a:

sole proprietorship.

Annual Percentage Rate (APR)

"APR "= ["APR" /m](m)

Effective Annual Rate (EAR)

"EAR "= [1 + "APR" /m]^m-" 1" EAR = e^ APR - 1

You are considering the purchase of new living room furniture that costs $1,260. The store will allow you to make weekly payments of $27.43 for one year to pay off the loan. What is the EAR of this arrangment?

$1,260 = $27.43{[(1 − 1(1 + r)t] / r} r = .0048 EAR = (1 + .0048)^52 − 1 = .2820, or 28.20%

Starling wants to retire with $1,970,000 in his retirement account exactly 38 years from today. He will make annual deposits at the end of each year to fund his retirement account. If he can earn 9.17 percent per year, how much must he deposit each year?

$1,970,000 = C[(1.0917^38 − 1)/.0917] C = $6,678.45

Which one of the following represents the most liquid asset?

$100 of inventory that is sold today for $100 cash.

Western Bank offers you a $12,000, 6-year term loan at 7 percent annual interest. What is the amount of your annual loan payment?

$12,000 = C{[1 − (1/1.07^6)]/.07} C = $2,517.55

Ed's Market is operating at full capacity with a sales level of $547,200 and fixed assets of $471,000. The profit margin is 5.4 percent. What is the required addition to fixed assets if sales are to increase by 4 percent?

$18,840

If you earn an annual interest rate of 10.1 percent, how many years will it take to double your money?

$2 = $1(1.101)^t t = 7.20 years

You expect to receive a payout from a trust fund in 2 years. The payout will be for $12,400. You plan to invest the money at an annual rate of 7 percent until the account is worth $21,100. How many years do you have to wait from today?

$21,100 = $12,400(1.070)^t t = 7.86 years Years to wait = 7.86 + 2 = 9.86 years

Rick deposited $2,600 into an account 8 years ago for an emergency fund. Today, that account is worth $4,025. What annual rate of return did Rick earn on this account assuming no other deposits and no withdrawals?

$4,025 = $2,600(1 + r)^8 r = ($4,025/$2,600)^1/8 − 1 = .0561, or 5.61%

Sixty years ago, your mother invested $4,500. Today, that investment is worth $430,065.11. What is the average annual rate of return she earned on this investment?

$430,065.11 = $4,500[(1 + r)^60] r = .0790, or 7.90%

Bob bought some land costing $16,390. Today, that same land is valued at $46,817. How long has Bob owned this land if the price of land has been increasing at 6 percent per year?

$46,817 = $16,390 × 1.06^t 2.85644 = 1.06^t t = ln 2.85644 / ln1.06 t = 1.04957 / 0.05827 t = 18.01 years

Maxxie purchased a tract of land for $32,000. Today, the same land is worth $48,400. How many years have passed if the price of the land has increased at an annual rate of 5.2 percent?

$48,400 = $32,000(1.052)^t = 8.16 years

When your father was born 48 years ago, his grandparents deposited $200 in an account for him. Today, that account is worth $5,000. What was the annual rate of return on this account?

$5,000 = $200(1 + r)^48 r = ($5,000/$200)^1/48 − 1 = .0694, or 6.94%

Quiz 5 (Chapter 5) Begins:term-266 You will receive $4,000 at graduation 3 years from now. You plan on investing this money at 5 percent annual interest until you have accumulated $50,000. How many years from today will it be when this occurs?

$50,000 = $4,000(1.05^t) t = 51.77 years Total time = 3 + 51.77 = 54.77 years

You're trying to save to buy a new $68,000 sports car. Currently, you have saved $36,840 which is invested at 4.9 percent annual interest. How many years will it be before you purchase the car, assuming the price of the car remains constant?

$68,000 = $36,840(1.049^t) t = 12.81 years

Which one of the following is a current asset?

Accounts receivable

On your tenth birthday, you received $300 which you invested at 4.5 percent interest, compounded annually. Your investment is now worth $756. How old are you today?

$756 = $300(1.045^t) = 21 years Age today = 10 + 21 = 31 years

You just received a letter from a credit card company and asked you to transfer your balance, if any, to it at a favorite APR of 9.99%. If you have $1000 balance can be transferred, what is the actual interest rate (EAR) you will pay if you choose this credit card company?

(1+0.0999/12)^12 -1 = 0.1046 = 10.46% If m = 365 (1 + 0.0999/365 )^365 - 1 = 10.505%

A firm has total debt of $1,530 and a debt-equity ratio of .38. What is the value of the total assets?

(1,530*1.38/0.38) = $5,556.32

You are looking at two savings accounts. One pays 5.25%, with daily compounding. The other pays 5.3% annually. Which account should you use?

-First account: •EAR = (1 + .0525/365)365 - 1 = 5.39% -Second account: •EAR = (1 + .053) - 1 = 5.3%

Which one of the following statements concerning a sole proprietorship is correct?

-The life of a sole proprietorship is limited. - The owner of a sole proprietorship is personally responsible for all the company's debts.

First Simple Bank pays 6.4 percent simple interest on its investment accounts. If First Complex Bank pays interest on its accounts compounded annually, what rate should the bank set if it wants to match First Simple Bank over an investment horizon of 10 years? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

.064(10) = .64 (1 + r)^10 − 1 (.064)(10) = (1 + r)^10 − 1 r = 1.64^1/10 − 1 = .0507, or 5.07%

Quiz 3 (Chapter 3) Begins: Samuelson's has a debt-equity ratio of 43 percent, sales of $10,000, net income of $1,700, and total debt of $8,700. What is the return on equity?

.43 = 8700/Equity Equity = 8700/.43 = 20233 Return on Equity = Net Income/Equity =1700/20233*100 = 8.40%

If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following?

.5

The retention ratio can be computed as:

1 − (Cash dividends/Net income).

Use the following information to answer this question. What is the equity multiplier for 2017?

1.73 times

•If you deposit $4,500 at the end of each of the next twenty years into an account paying 9.7% interest, how much money will you have in the account in 20 years? How much will you have if you make deposits for 40 years?

20 years: = 4500*((1+0.097)^20 -1)/(0.097) = 4500 (55.35978) = $249,119.03 40 years: = 4500 ((1+0.097)^40 -1)/(0.097) = 4500 (407.99602) =$1,835,982.10

Use the following information to answer this question. What is the cash coverage ratio for 2017?

20.11

Which one of the following will produce the lowest present value interest factor?

8 percent interest for 10 years

Your credit card company charges you 1.15 percent interest per month. What is the APR?

APR = .0115(12) = .1380, or 13.80%

What is the APR on a loan with a stated rate of 2.35 percent per quarter?

APR = .0235(4) = .0940, or 9.40%

Your credit card company charges you 1.32 percent per month. What is the APR on your credit card?

APR = 1.32% × 12 = 15.84%

You are paying an EAR of 16.78 percent on your credit card. The interest is compounded monthly. What is the annual percentage rate on this account?

APR = 12(1.1678^1/12 − 1) = .1561, or 15.61%

Big Dom's Pawn Shop charges an interest rate of 27.4 percent per month on loans to its customers. Like all lenders, Big Dom must report an APR to consumers. a.What rate should the shop report? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.) b.What is the effective annual rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

APR = 12(27.4%) = 328.8% EAR = [1 + (APR/m)]^m − 1 EAR = (1 + .274)12 − 1 = 17.2824, or 1,728.24%

Which one of the following is a current liability?

Account payable to a supplier that is due next week

Which one of the following accounts is the most liquid?

Accounts receivable

First National Bank charges 13.8 percent compounded monthly on its business loans. First United Bank charges 14.1 percent compounded semiannually. Calculate the EAR for First National Bank and First United Bank. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) First National: 14.70% First United: 14.59%

As a potential borrower, which bank would you go to for a new loan? First United Bank EAR = [1 + (APR/m)]^m − 1 First National: EAR = [1 + (.138/12)]^12 − 1 = .1471, or 14.71% First United: EAR = [1 + (.141/2)]^2 − 1 = .1460, or 14.60%

A firm has common stock of $6,200, paid-in surplus of $9,100, total liabilities of $8,400, current assets of $5,900, and fixed assets of $21,200. What is the amount of the shareholders' equity?

Assets = liabilities + equity Equity = assets - liabilities Equity = 21,200+5,900-8,400 = 18,700

The Widget Co. purchased all of its fixed assets three years ago for $4 million. These assets can be sold today for $2 million. The current balance sheet shows net fixed assets of $2,500,000, current liabilities of $1,375,000, and net working capital of $725,000. If all the current assets were liquidated today, the company would receive $1.9 million in cash. The book value of the total assets today is _____ and the market value of those assets is _____.

BV = ($725,000 + 1,375,000) + 2,500,000 = $4,600,000 MV = $1,900,000 + 2,000,000 = $3,900,000

Thomas invests $108 in an account that pays 5 percent simple interest. How much money will Thomas have at the end of 5 years?

Balance Year 5 = $108 + ($108 × 0.05 × 5) = $135.00

Chapter 5 HW: Beatrice invests $1,390 in an account that pays 4 percent simple interest. How much more could she have earned over a 5-year period if the interest had been compounded annually?

Balance Year 5 with simple interest = $1,390 + ($1,390 × 0.04 × 5) = $1,668.00 Balance Year 5 with compound interest = $1,390 × 1.04^5 = $1,691.15 Additional interest = $1,691.15 - $1,668.00 = $23.15

Which one of the following is the financial statement that shows the accounting value of a firm's equity as a particular date?

Balance sheet

Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date?

Balance sheet

Which of the following individuals have unlimited liability for a firm's debts based on their ownership interest?

Both general partners and sole proprietors

At the beginning of the year, the long-term debt of a firm was $72,918 and total debt was $138,407. At the end of the year, long-term debt was $68,219 and total debt was $145,838. The interest paid was $6,430. What is the amount of the cash flow to creditors?

CFC = $6,430 − ($68,219 − 72,918) = $11,129

The Daily News has projected annual net income of $272,600, of which 28 percent will be distributed as dividends. Assume the company will have net sales of $75,000 worth of common stock. What will be the cash flow to stockholders if the tax rate is 21 percent?

CFS = .28($272,600) − $75,000 = $1,328

Which one of the following terms is defined as the management of a firm's long-term investments?

Capital budgeting

Which one of the following terms is defined as the mixture of a firm's debt and equity financing?

Capital structure

The 2017 balance sheet of Kerber's Tennis Shop, Inc., showed long-term debt of $2.75 million, and the 2018 balance sheet showed long-term debt of $4.15 million. The 2018 income statement showed an interest expense of $210,000. What was the firm's cash flow to creditors during 2018?

Cash flow to creditors = Interest paid - Net new borrowing Cash flow to creditors = Interest paid - (LTDend - LTDbeg) Cash flow to creditors = $210,000 - ($4,150,000 - 2,750,000) = $-1,190,000

At the beginning of the year, a firm had current assets of $121,306 and current liabilities of $124,509. At the end of the year, the current assets were $122,418 and the current liabilities were $103,718. What is the change in net working capital?

Change in NWC = ($122,418 − 103,718) − ($121,306 − 124,509) = $21,903

Baked at Home Cookies expects sales of $672,500 next year. The profit margin is 4.6 percent and the firm has a dividend payout ratio of 15 percent. What is the projected increase in retained earnings?

Change in retained earnings = $672,500 (.046) (1 − .15) = $26,294.75

Which business form is best suited to raising large amounts of capital?

Corporation

Which one of the following statements is correct?

Corporations can have an unlimited life.

A firm has net working capital of $560. Long-term debt is $3,970, total assets are $7,390, and fixed assets are $3,910. What is the amount of the total liabilities?

Current assets = $7,390 − 3,910 = $3,480 Current liabilities = $3,480 − 560 = $2,920 Total liabilities = $2,920 + 3,970 = $6,890

Which one of the following is a use of cash?

Decrease in accounts payable

Which one of the following is a source of cash?

Decrease in inventory

Which one of the following will increase the cash flow from assets, all else equal?

Decrease in the change in net working capital.

For a tax-paying firm, an increase in _____ will cause the cash flow from assets to increase.

Depreciation

You are given the following information for Thrice Corp.: Decrease in inventory: $490 Decrease in accounts payable: 195 Increase in notes payable: 180 Increase in accounts receivable: 210

Did cash go up or down? By how much? Cash increased by $265. Classify each event as a source or use of cash. A decrease in inventory is a source of cash. A decrease in accounts payable is a use of cash. An increase in notes payable is a source of cash. An increase in accounts receivable is a use of cash. Change in cash = Sources − Uses Change in cash = $490 − 195 + 180 − 210 = $265 Cash increased by $265

When compiling a pro forma statement, which policy most directly affects the projection of the retained earnings account balance?

Dividend policy

Jensen Enterprises paid $700 in dividends and $320 in interest this past year. Common stock increased by $6,800 and retained earnings decreased by $180. What is the net income for the year?

Dividends paid by the firm: $700 Change in retained earnings: $180 Net income for the year: $520

Which one of these identifies the relationship between the return on assets and the return on equity?

DuPont identity

Your credit card company charges you 1.24 percent per month. What is the EAR on your credit card?

EAR = (1 + .0124)^12 = .1594, or 15.94%

What is the EAR if a bank charges you an APR of 7.65 percent, compounded quarterly?

EAR = (1 + .0765/4)^4 − 1 = .0787, or 7.87%

A new sports coupe costs $41,750 and the finance office has quoted you an APR of 7.7 compounded monthly, for 36 months. What is the EAR?

EAR = (1 + .077/12)^12 − 1 = .0798, or 7.98%

What is the effective annual rate for an APR of 10.00 percent compounded quarterly?

EAR = (1 + .1000/4)^4 - 1 = .1038, or 10.38%

What is the effective annual rate for an APR of 17.00 percent compounded monthly?

EAR = (1 + .1700/12)^12 - 1 = .1839, or 18.39%

A credit card company quotes you an APR of 18.9 percent. What is the actual rate of interest you are paying if interest is computed monthly?

EAR = (1 + .189/12)^12 − 1 = .2063, or 20.63%

Find the EAR in each of the following cases (Use 365 days a year. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.): Stated Rate (APR): 8.5% 17.5% 13.5% 10.5% Monthly of Times Compounded: Quarterly Monthly Daily Infinite

EAR = [1 + (APR/m)]^m − 1 EAR = [1 + (.085/4)]^4 − 1 = .0877, or 8.77% EAR = [1 + (.175/12)]^12 − 1 = .1897, or 18.97% EAR = [1 + (.135/365)]^365 − 1 = .1445, or 14.45% EAR = e^q − 1 EAR = e^.105 − 1 = .1107, or 11.07%

Find the APR, or stated rate, in each of the following cases (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.): Number of Times Compounded: Semiannually Monthly Weekly Infinite Effective Rate (EAR): 12.2% 13.1% 10.8% 14.5%

EAR = [1 + (APR/m)]^m − 1 APR = m[(1 + EAR)1/^m - 1] EAR = .122 = [1 + (APR/2)]^2 − 1 EAR = .131 = [1 + (APR/12)]^12 − 1 EAR = .108 = [1 + (APR/52)]^52 − 1 APR = 2[(1.122)^1/2 − 1] = .1185, or 11.85% APR = 12[(1.131)^1/12 − 1] = .1237, or 12.37% APR = 52[(1.108)^1/52 − 1] = .1027, or 10.27% EAR = eq − 1 APR = ln(1 + EAR) APR = ln(1 + .145) = .1354, or 13.54%

Elliott Credit Corp. wants to earn an effective annual return on its consumer loans of 14.5 percent per year. The bank uses daily compounding on its loans. What interest rate is the bank required by law to report to potential borrowers? (Use 365 days a year. Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

EAR = [1 + (APR/m)]^m − 1 APR = m[(1 + EAR)^1/m − 1] APR = 365[(1.145)^1/365 − 1] = .1354, or 13.54%

You are looking at an investment that has an effective annual rate of 12.7 percent. a. What is the effective semiannual return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the effective quarterly return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the effective monthly return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

EAR = [1 + (APR/m)]^m − 1 EAR = .127 = (1 + r)^2 − 1 r = (1.127)^1/2 − 1 = .0616, or 6.16% per six months EAR = .127 = (1 + r)^4 − 1 r = (1.127)^1/4 − 1 = .0303, or 3.03% per quarter EAR = .127 = (1 + r)^12 − 1 r = (1.127)1/12 − 1 = .0100, or 1.00% per month

You are planning to make annual deposits of $5,700 into a retirement account that pays 10 percent interest compounded monthly. How large will your account balance be in 30 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

EAR = [1 + (APR/m)]^m − 1 EAR = [1 + (.10/12)]^12 − 1 = .1047, or 10.47% FVA = C{[(1 + r)^t − 1]/r} FVA = $5,700[(1.1047^30 − 1)/.1047] = $1,025,403.79

What is the EAR of 14.9 percent compounded continuously?

EAR = e^.149 − 1 = .1607, or 16.07%

RTF Oil has total sales of $911,400 and costs of $787,300. Depreciation is $52,600 and the tax rate is 21 percent. The firm is all-equity financed. What is the operating cash flow?

EBIT = $911,400 − 787,300 − 52,600 = $71,500 Tax = $71,500(.21) = $15,015 OCF = $71,500 + 52,600 − 15,015 = $109,085

Winston Industries had sales of $843,800 and costs of $609,900. The company paid $38,200 in interest and $35,000 in dividends. The depreciation was $76,400. The firm has a combined tax rate of 24 percent. What was the addition to retained earnings for the year?

EBT = $843,800 − 609,900 − 76,400 − 38,200 = $119,300 Net income = $119,300(1 − .24) = $90,668 Addition to retained earnings = $90,668- 35,000 = $55,668

SME Company has a debt-equity ratio of .60. Return on assets is 7.9 percent, and total equity is $510,000. a.What is the equity multiplier? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b.What is the return on equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c.What is the net income? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

EM = 1 + D/EEM = 1 + .60 = 1.60 ROE = ROA(EM) = .079(1.60) = .1264, or 12.64% ROE can also be calculated as: ROE = NI/TE So, net income is: NI = ROE(TE) = .1264($510,000) = $64,464

Which of the following parties are considered stakeholders of a firm?

Employees and the government

Four years ago, Ship Express purchased a mailing machine at a cost of $218,000. This equipment is currently valued at $97,400 on today's balance sheet but could actually be sold for $92,900. This is the only fixed asset the firm owns. Net working capital is $41,300 and long-term debt is $102,800. What is the book value of shareholders' equity?

Equity BV = $97,400 + 41,300 − 102,800 = $35,900

The What-Not Shop owns the building in which it is located. This building initially cost $647,000 and is currently appraised at $819,000. The fixtures originally cost $148,000 and are currently valued at $65,000. The inventory has a book value of $319,000 and a market value equal to 1.1 times the book value. The shop expects to collect 96 percent of the $21,700 in accounts receivable. The shop has $26,800 in cash and total debt of $414,700. What is the market value of the shop's equity?

Equity MV = $819,000 + 65,000 + 1.1($319,000) + .96($21,700) + 26,800 − 414,700 = $867,832

To fund your dream around-the-world vacation, you plan to save $1,550 per year for the next 12 years starting one year from now. If you can earn an interest rate of 6.43 percent, how much will you have saved for your vacation?

FV = $1,550[1.0643^12 − 1)/.0643] = $26,814.37

The value of the following cash flows four years from today is $8,020.81. The interest rate is 5.2 percent. What is the value of the Year 3 cash flow? Year 1: $,645 Year 2: 1,832 Year 3: ? Year 4: 2,865

FV = $1,645(1.052)^3 + $1,832(1.052)^2 + $2,865 = $6,807.68 Difference = $8,020.81 − 6,807.68 = $1,213.13 PV = $1,213.13/1.052 = $1,153.17

What is the future value of $11,600 invested for 17 years at 7.25 percent compounded annually?

FV = $11,600(1 + .0725)^17 = $38,125.20

What is the future value of $11,600 invested for 17 years at 7.25 percent compounded annually?

FV = $11,600(1 + .0725)^17 = $38,125.20

Retirement Investment Advisors, Inc., has just offered you an annual interest rate of 6.2 percent until you retire in 40 years. You believe that interest rates will increase over the next year and you would be offered 6.8 percent per year one year from today. If you plan to deposit $19,000 into the account either this year or next year, how much more will you have when you retire if you wait one year to make your deposit?

FV = $19,000 × 1.062^40 = $210,733.84 FV = $19,000 × 1.068^39 = $247,190.89 Difference = $247,190.89 − 210,733.84 = $36,457.05

Alex invested $2,550 in an account that pays 5 percent simple interest. How much money will he have at the end of four years?

FV = $2,550 + ($2,550)(.05)(4) = $3,060

You are going to deposit $23,500 today. You will earn an annual rate of 5.1 percent for 10 years, and then earn an annual rate of 4.5 percent for 13 years. How much will you have in your account in 23 years?

FV = $23,500 × 1.051^10 = $38,645.15 FV = $38,645.15 × 1.045^13 = $68,486.79

Suppose an investment offers to triple your money in 12 months (don't believe it). What rate of return per quarter are you being offered? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

FV = $3 = $1(1 + r)^(12/3) r = .3161, or 31.61%

Assuming an interest rate of 5.4 percent, what is the value of the following cash flows four years from today? Year 1: $3,000 Year 2: 4,040 Year 3: 5,885 Year 4: 7,975

FV = $3,000(1.054)^3 + $4,040(1.054)^2 + $5,885(1.054) + $7,975 = $22,178.61

What is the future value of $3,058 invested for 10 years at 5.8 percent compounded annually?

FV = $3,058 × 1.058^10 = $5,373.96

Five years from today, you plan to invest $3,100 for 9 additional years at 5.4 percent compounded annually. How much will you have in your account 14 years from today?

FV = $3,100 × 1.054^9 = $4,976.54

Assuming an interest rate of 4.6 percent, what is the value of the following cash flows five years from today? Year 1: $3,215 Year 2: $5,305 Year 3: 5,305 Year 4: 6,520

FV = $3,215(1.046)^4 + $4,395(1.046)^3 + $5,305(1.046)^2 + $6,520(1.046) = $21,502.69

What is the future value of $3,325 per year for 20 years at an interest rate of 7.29 percent?

FV = $3,325[1.0729^20 − 1)/.0729] = $140,705.09

One year ago, you invested $2,550. Today, it is worth $3,350. What rate of interest did you earn?

FV = $3,350 = $2,550 × (1 + r)^1 r = 0.3137 or 31.37%

One year ago, the Jenkins Family Fun Center deposited $3,600 into an investment account for the purpose of buying new equipment four years from today. Today, they are adding another $5,400 to this account. They plan on making a final deposit of $7,600 to the account next year. How much will be available when they are ready to buy the equipment, assuming they earn a rate of return of 8 percent?

FV = $3,600 (1 + 0.08)^5 + $5,400 (1 + 0.08)^4 + $7,600 (1 + 0.08)^3 = $22,210.03

Noma plans to save $3,600 per year for the next 30 years. If she can earn an annual interest rate of 9.4 percent, how much will she have in 30 years?

FV = $3,600[1.0940^30 − 1)/.0940] = $528,847.39

Al invested $3,630 in an account that pays 6 percent simple interest. How much money will he have at the end of five years?

FV = $3,630 + ($3,630)(.06)(5) = $4,719

Today, you earn a salary of $31,000. What will be your annual salary ten years from now if you receive annual raises of 2.2 percent?

FV = $31,000(1.022^10) = $38,536.36

You just purchased two coins at a price of $370 each. Because one of the coins is more collectible, you believe that its value will increase at a rate of 6.6 percent per year, while you believe the second coin will only increase at 6 percent per year. If you are correct, how much more will the first coin be worth in 20 years?

FV = $370 × 1.066^20 = $1,328.45 FV = $370 × 1.060^20 = $1,186.64 Difference = $1,328.45 − 1,186.64 = $141.81

Marti's coin collection contains fifty 1948 silver dollars. Her grandparents purchased them at their face value in 1948. These coins have appreciated by 7.6 percent annually. How much will the collection be worth in 2025?

FV = $50(1.076^77) = $14,077.16

You Save Bank has a unique account. If you deposit $6,750 today, the bank will pay you an annual interest rate of 6 percent for 6 years, 6.6 percent for 5 years, and 7.3 percent for 9 years. How much will you have in your account in 20 years?

FV = $6,750 × 1.060^6 = $9,575.00 FV = $9,575.00 × 1.066^5 = $13,180.29 FV = $13,180.29 × 1.073^9 = $24,849.78

Today, your dream car costs $60,000. You feel that the price of the car will increase at an annual rate 2 percent. If you plan to wait 4 years to buy the car, how much will it cost at that time?

FV = $60,000 × 1.020^4 = $64,945.93

You plan to save $7,400 per year for the next 12 years. After the last deposit, you will keep the money in the account for 3 more years. The account will earn an interest rate of 7.7 percent. How much will there be in the account 15 years from today?

FV = $7,400[(1.077^12 − 1)/.077] = $137,957.31 FV = $137,957.31(1.077)^3 = $172,342.27

Troy will receive $7,500 at the end of Year 2. At the end of the following two years, he will receive $9,000 and $12,500, respectively. What is the future value of these cash flows at the end of Year 6 if the interest rate is 8 percent?

FV = $7,500(1.08^4) + $9,000(1.08^3) + $12,500(1.08^2) = $36,121.08

The most recent census for a city indicated that there were 867,771 residents. The population of the city is expected to increase at an annual rate of 3.2 percent each year for the next 8 years. What will the population be at that time?

FV = 867,771 × 1.032^8 = 1,116,459

Fuente, Inc., has identified an investment project with the following cash flows. Year 1: $960 Year 2: 1,190 Year 3: 1,410 Year 4: 2,150 a. If the discount rate is 9 percent, what is the future value of these cash flows in Year 4? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b.If the discount rate is 12 percent, what is the future value of these cash flows in Year 4? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c.If the discount rate is 23 percent, what is the future value of these cash flows in Year 4? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

FV = PV(1 + r)^t FV@9% = $960(1.09)^3 + $1,190(1.09)^2 + $1,410(1.09) + $2,150 = $6,343.97 FV@12% = $960(1.12)^3 + $1,190(1.12)^2 + $1,410(1.12) + $2,150 = $6,570.67 FV@23% = $960(1.23)^3 + $1,190(1.23)^2 + $1,410(1.23) + $2,150 = $7,471.08

You have an investment that will pay you .67 percent per month. a. How much will you have per dollar invested in one year? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. How much will you have per dollar invested in two years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

FV in one year = $1(1.0067)^12 = $1.08 FV in two years = $1(1.0067)^24 = $1.17 EAR = (1 + .0067)^12 - 1 = .0834, or 8.34% FV in one year = $1(1.0834)^1 = $1.08 FV in two years = $1(1.0834)^2 = $1.17

What is the future value of $1,575 a year for 25 years at 6.3 percent interest, compounded annually?

FVA = $1,575[(1.063^25 − 1)/.063] = $90,152.04

Rosina plans on saving $2,000 a year and expects to earn an annual rate of 6.9 percent. How much will she have in her account at the end of 37 years?

FVA = $2,000[(1.069^37 − 1)/.069] = $313,274.38

You plan to deposit $5,400 at the end of each of the next 25 years into an account paying 10.3 percent interest. a. How much will you have in your account if you make deposits for 25 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. How much will you have if you make deposits for 50 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

FVA = C{[(1 + r)^t − 1]/r} FVA for 25 years = $5,400[(1.1030^25 − 1)/.1030] = $555,629.89 FVA for 50 years = $5,400[(1.1030^50 − 1)/.1030] = $6,999,895.20

You want to have $81,000 in your savings account 12 years from now, and you're prepared to make equal annual deposits into the account at the end of each year. If the account pays 6.80 percent interest, what amount must you deposit each year? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

FVA = C{[(1 + r)^t − 1]/r} $81,000 = $C[(1.0680^12 − 1)/.0680] C = $81,000/17.67928 = $4,581.63

You are planning to make monthly deposits of $440 into a retirement account that pays 9 percent interest compounded monthly. If your first deposit will be made one month from now, how large will your retirement account be in 35 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

FVA = C{[(1 + r)t − 1]/r} FVA = $440[{[1 + (.09/12)]^420 - 1}/(.09/12)] = $1,294,385.17

You invested $6,500 at 6 percent simple interest. How much more could you have earned over a 10-year period if the interest had compounded annually?

FVSimple = $6,500 + ($6,500)(.06)(10) = $10,400 FVCompound = $6,500(1.06^10) = $11,640.51 Difference = $11,640.51 − 10,400 = $1,240.51

Travis invested $8,000 in an account that pays 4 percent simple interest. How much more could he have earned over a 7-year period if the interest had compounded annually?

FVSimple = $8,000 + ($8,000)(.04)(7) = $10,240 FVCompound = $8,000(1.04^7) = $10,527.45 Difference = $10,527.45 − 10,240 = $287.45

Use the following information to answer this question. Sales = $11,450 million Net fixed assets = $3,920 million

Fixed asset turnover = Sales / net fixed assets = $11,450 million / $3,920 million = 2.92 approximately

A firm is operating at 90 percent of capacity. This information is primarily needed to project which one of the following account values when compiling pro forma statements?

Fixed assets

Seaweed Mfg. is currently operating at only 84 percent of fixed asset capacity. Current sales are $550,000. What is the maximum rate at which sales can grow before any new fixed assets are needed?

Full capacity sales = $550,000/.84 = $654,761.90 Maximum sales growth = ($654,761.90/$550,000) − 1 = .1905, or 19.05 percent

Southern Mfg., Inc., is currently operating at only 92 percent of fixed asset capacity. Current sales are $690,000. How fast can sales grow before any new fixed assets are needed?

Full capacity sales = Current sales/percent of capacity ---- =D7/D6 ---- 690,000/92% = $750,000 Maximum sales growth = (Full capacity sales/current sales)-1 ---- =(D12/D7)-1 ---- (750,000/690,000)-1 = 8.70%

Hench's has annual sales of $56,900 is currently operating at 86 percent of capacity. What is the full-capacity level of sales?

Full-capacity sales = $56,900/.86 = $66,163

The Mill Press is operating at 94 percent of its fixed asset capacity and has current sales of $611,000. How much can the firm grow before any new fixed assets are needed?

Full-capacity sales = $611,000/.94 = $650,000 Maximum growth without additional assets = $650,000/$611,000 − 1 = .0638, or 6.38%

You are investing $100 today in a savings account. Which one of the following terms refers to the total value of this investment one year from now?

Future value

Which one of the following is included in a firm's market value but yet is excluded from the firm's accounting value?

Good reputation of the company

Which one of the following is an agency cost?

Hiring outside accountants to audit the company's financial statements

Chapter 1, Quiz 1 Begins: Which one of the following questions is a working capital management decision?

How much inventory should be on hand for immediate sale?

Which one of the following questions is least likely to be addressed by financial managers?

How should a product be marketed?

Financial planning includes the: I. determination of asset requirements. II. development of contingency plans. III. establishment of priorities. IV. analysis of funding options.

I, II, III, and IV

Which one of the following statements is correct?

Income from both sole proprietorship and partnerships that is taxable is treated as individual income.

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time?

Income statement

Which one of the following is a source of cash for a tax-exempt firm?

Increase in common stock

Depreciation for a tax-paying firm:

Increases expenses and lowers taxes.

Which one of the following actions by a financial manager is most apt to create an agency problem?

Increasing current profits when doing so lowers the value of the company's equity

Which one of the following is least apt to help convince managers to work in the best interest of the stockholders? Assume there are no golden parachutes.

Increasing managers' base salaries

Mario's Home Systems has sales of $2,860, costs of goods sold of $2,200, inventory of $512, and accounts receivable of $434. How many days, on average, does it take Mario's to sell its inventory?

Inventory Turnover Ratio = COGS / inventory - $2,200/$512 = 4.296875 - 365 / 4.296875 = 84.95 days

Sam, Alfredo, and Juan want to start a small U.S. business. Juan will fund the venture but wants to limit his liability to his initial investment and has no interest in the daily operations. Sam will contribute his full efforts on a daily basis but has limited funds to invest in the business. Alfredo will be involved as an active consultant and manager and will also contribute funds. Sam and Alfredo are willing to accept liability for the firm's debts as they feel they have nothing to lose by doing so. All three individuals will share in the firm's profits and wish to keep the initial organizational costs of the business to a minimum. Which form of business entity should these individuals adopt?

Limited partnership

Use the following information to answer this question. Windswept, Inc., has 600 million shares of stock outstanding. Its price-earnings ratio for 2017 is 20. What is the market price per share of stock?

Market price per share = Earning per share * price earning ratio = 2.1517 * 20 = 43.03 per share *Earnings per share = Net income / Shares outstanding = 1291 / 600 = 2.1517 per share

Which one of the following best states the primary goal of financial management?

Maximize the current value per share

JJ Enterprises has inventory of $11,600, fixed assets of $22,400, total liabilities of $12,900, cash of $1,900, accounts receivable of $8,700, and long-term debt of $6,500. What is the net working capital?

NWC = $1,900 + 8,700 + 11,600 − ($12,900 − 6,500) = $15,800

You would like to provide $125,000 a year forever for your heirs. How much money must you deposit today to fund this goal if you can earn a guaranteed 4.5 percent rate of return?

PV = $125,000/.045 = $2,777,778

A firm has $680 in inventory, $2,140 in fixed assets, $210 in accounts receivables, $250 in accounts payable, and $80 in cash. What is the amount of the net working capital?

NWC = Current assets - current liabilities NWC = (680+210+80)-250 = $720

Your firm has total assets of $4,900, fixed assets of $3,200, long-term debt of $2,900, and short-term debt of $1,400. What is the amount of net working capital?

NWC = Current assets - current liabilities (short-term debt) Current assets = 4,900 - 3,200 = 1,700 NWC = 1,700 - 1,400 = $300

Nan and Neal are twins. Nan invests $5,000 at 7 percent at age 25. Neal invests $5,000 at 7 percent at age 30. Both investments compound interest annually. Both twins retire at age 60 and neither adds nor withdraws funds prior to retirement. Which statement is correct?

Nan will have more money than Neal at any age.

A firm has net working capital of $400, net fixed assets of $2,146, sales of $5,100, and current liabilities of $710. How many dollars worth of sales are generated from every $1 in total assets?

Net Working Capital = $400 Add Current Liabilities of $710 Total current assets = $1,110 Net fixed assets + total current assets $2,146 + $1,110 = $3,256 $5,100 / $3,256 = $1.57

Nielsen Auto Parts had beginning net fixed assets of $218,470 and ending net fixed assets of $209,411. During the year, assets with a book value of $6,943 were sold. Depreciation for the year was $42,822. What is the amount of net capital spending?

Net capital spending = $209,411 − 218,470 + 42,822 = $33,763

For the past year, Galaxy Interiors had depreciation of $2,419, beginning total assets of $23,616, and ending total assets of $21,878. Current assets decreased by $1,356. What was the amount of net capital spending for the year?

Net capital spending = $21,878 − 23,616 + 1,356 + 2,419 = $2,037

Logano Driving School's 2017 balance sheet showed net fixed assets of $3.9 million, and the 2018 balance sheet showed net fixed assets of $5.9 million. The company's 2018 income statement showed a depreciation expense of $885,000. What was net capital spending for 2018?

Net capital spending = NFAend - NFAbeg + Depreciation Net capital spending = $5,900,000 − 3,900,000 + 885,000 = $2,885,000

Keisler's has cost of goods sold of $11,518, interest expense of $315, dividends of $420, depreciation of $811, and a change in retained earnings of $296. What is the taxable income given a tax rate of 21 percent?

Net income = $296 + 420 = $716 Taxable income = $716/(1 − .21) = $906.33

Hayes Bakery has sales of $30,600, costs of $15,350, an addition to retained earnings of $4,221, dividends paid of $469, interest expense of $1,300, and a tax rate of 21 percent. What is the amount of the depreciation expense?

Net income = $4,221 + 469 = $4,690 EBT = $4,690/(1 − .21) = $5,936.71 EBIT = $5,936.71 + 1,300 = $7,236.71 Depreciation = $30,600 − 15,350 − 7,236.71 = $8,013.29

Fresno Salads has current sales of $6,000 and a profit margin of 6.5 percent. The firm estimates that sales will increase by 4 percent next year and that all costs will vary in direct relationship to sales. What is the pro forma net income?

Net income = $6,000 (.065) (1.04) = $405.60

Last year, Kaylor Equipment had $15,900 of sales, $500 of net new equity, dividend payments of $75, an addition to retained earnings of $418, depreciation of $680, and $511 of interest expense. What are the earnings before interest and taxes at a tax rate of 21 percent?

Net income = $75 + 418 = $493 Taxable income = $493/(1 − .21) = $624.05 EBIT = $624.05 + 511 = $1,135.05

Andre's Bakery has sales of $487,000 with costs of $263,000. Interest expense is $26,000 and depreciation is $42,000. The tax rate is 21 percent. What is the net income?

Net income = ($487,000 − 263,000 − 26,000 − 42,000)(1 − .21) = $123,240

Beach Front Industries has sales of $546,000, costs of $295,000, depreciation expense of $37,000, interest expense of $15,000, and a tax rate of 21 percent. The firm paid $59,000 in cash dividends. What is the addition to retained earnings?

Net income = ($546,000 − 295,000 − 37,000 − 15,000)(1 − .21) = $157,210 Addition to retained earnings = $157,210 − 59,000 = $98,210

Up Towne Cleaners has taxable income of $48,900 and a tax rate of 21 percent. What is the change in retained earnings if the firm pays $20,200 in dividends for the year?

Net income = Taxable income*(1-tax rate) =48,900(1-0.21) = 38,631 Hence change in retained earnings = Net income - dividends = 38,631 - 20,200 = $18,431

Which one of the following statements concerning net working capital is correct?

Net working capital may be a negative value.

Pompeii, Inc., has sales of $55,000, costs of $25,000, depreciation expense of $2,750, and interest expense of $2,500.

OCF = EBIT + Depreciation - Taxes OCF = $27,250 + 2,750 - 5,693 = $24,308

Which one of these is most apt to be fixed cost?

Office salaries

Griffin's Goat Farm, Inc., has sales of $677,000, costs of $339,000, depreciation expense of $83,000, interest expense of $51,500, a tax rate of 25 percent, and paid out $41,500 in cash dividends.

One equation for net income is: Net income = Dividends + Addition to retained earnings Rearranging, we get: Addition to retained earnings = Net income - Dividends Addition to retained earnings = $152,625 - 41,500 = $111,125

Which term relates to the cash flow that results from a company's ongoing, normal business activities?

Operating cash flow

Chapter 6 Notes: The value today of the following cash flows is $7,329.81 at an interest rate of 3.4 percent. What is the value of the Year 3 cash flow? Year 1: $1,695 Year 2: 1,885 Year 3: ? Year 4: 2,555

PV = $1,695/1.034 + $1,885/1.034^2 + $2,555/1.034^4 = $5,637.50 Difference = $7,329.81 − 5,637.50 = $1,692.31 FV = $1,692.31(1.034)^3 = $1,870.86

Myca Corp. has a project with the following cash flows. What is the value of the cash flows today assuming an annual interest rate of 9.6 percent? Year 1: $1,740 Year 2: 2,180 Year 3: 2,500 Year 4: 2,510

PV = $1,740/1.096 + $2,180/1.096^2 + $2,500/1.096^3 + $2,510/1.096^4 = $7,040.87

What is the present value of $12,700 to be received 4 years from today if the discount rate is 7 percent?

PV = $12,700/1.07^4 = $9,688.77

You are considering a project with cash flows of $16,500, $25,700, and $18,000 at the end of each year for the next three years, respectively. What is the present value of these cash flows, given a discount rate of 7.9 percent?

PV = $16,500/1.079 + $25,700/1.079^2 + $18,000/1.079^3 = $51,695.15

You want to have $17,000 in 10 years for a dream vacation. If you can earn an interest rate of .4 percent per month, how much will you have to deposit today?

PV = $17,000/1.004^10×12 = $10,529.39

Your grandparents would like to establish a trust fund that will pay you and your heirs $180,000 per year forever with the first payment one year from today. If the trust fund earns an annual return of 3.5 percent, how much must your grandparents deposit today?

PV = $180,000/.035 = $5,142,857.14

The appropriate discount rate for the following cash flows is 7.08 percent per year. Year 1: $2,420 Year 2: 0 Year 3: 3,860 Year 4: 2,110 What is the present value of the cash flows? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)

PV = $2,420/1.0708 + $3,860/1.0708^3 + $2,110/1.0708^4 = $7,008.75

You are in talks to settle a potential lawsuit. The defendant has offered to make annual payments of $20,000, $27,500, $50,000, and $75,000 to you each year over the next four years, respectively. All payments will be made at the end of the year. If the appropriate interest rate is 4.2 percent, what is the value of the settlement offer today?

PV = $20,000/1.042 + $27,500/1.042^2 + $50,000/1.042^3 + $75,000/1.042^4 = $152,335.53

Your grandparents would like to establish a trust fund that will pay you and your heirs $205,000 per year forever with the first payment 12 years from today. If the trust fund earns an annual return of 4 percent, how much must your grandparents deposit today?

PV = $205,000/.04 = $5,125,000.00 PV = $5,125,000.00/(1.040)^11 = $3,329,102.27

George Jefferson established a trust fund that will provide $224,500 per year in scholarships. The trust fund earns an annual return of 3.9 percent. How much money did Mr. Jefferson contribute to the fund assuming that only income is distributed?

PV = $224,500/.039 = $5,756,410.26

You need to have $25,000 for a down payment on a house 3 in years. If you can earn an annual interest rate of 3.8 percent, how much will you have to deposit today?

PV = $25,000/1.038^3 = $22,353.62

Your crazy uncle left you a trust that will pay you $25,000 per year for the next 19 years with the first payment received one year from today. If the appropriate interest rate is 5.8 percent, what is the value of the payments today?

PV = $25,000[(1 −1/1.0580^19)/.0580] = $283,367.18

A small business has determined that the machinery they currently use will wear out in 16 years. To replace the new machine when it wears out, the company wants to establish a savings account today. If the interest rate on the account is 1.6 percent per quarter and the cost of the machinery will be $280,000, how much will the company have to deposit today?

PV = $280,000/1.016^16×4 = $101,381.97

You need to have $33,500 in 14 years. You can earn an annual interest rate of 5 percent for the first 4 years, 5.6 percent for the next 3 years, and 6.3 percent for the final 7 years. How much do you have to deposit today?

PV = $33,500/1.063^7 = $21,842.98 PV = $21,842.98/1.056^3 = $18,548.99 PV = $18,548.99/1.050^4 = $15,260.30

You just won the $90 million Ultimate Lotto jackpot. Your winnings will be paid as $4,500,000 per year for the next 20 years. If the appropriate interest rate is 7.8 percent, what is the value of your windfall?

PV = $4,500,000[(1 −1/1.078^20)/.078] = $44,847,053.76

A company has a pension liability of $450,000,000 that it must pay in 30 in years. If it can earn an annual interest rate of 4.1 percent, how much must it deposit today to fund this liability?

PV = $450,000,000/1.041^30 = $134,800,228.53

Marko, Inc., is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $6,500, $11,500, and $17,700 over the next three years, respectively. After that time, they feel the business will be worthless. Marko has determined that a rate of return of 12 percent is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.?

PV = $6,500/(1 + .12) + $11,500/(1.12)^2 + $17,700/(1.12)^3 = $27,569.81

You want to have $76,000 in 17 years to help your child attend college. If you can earn an annual interest rate of 3.2 percent, how much will you have to deposit today?

PV = $76,000/1.032^17 = $44,489.62

Live Forever Life Insurance Co. is selling a perpetuity contract that pays $1,650 monthly. The contract currently sells for $118,000. a. What is the monthly return on this investment vehicle? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the APR? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the effective annual return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

PV = C/r $118,000 = $1,650/r r = $1,650/$118,000 = .0140, or 1.40% per month APR = (12)1.40% = 16.78% EAR = [1 + (APR/m)]^m − 1 EAR = [1 + .0140]^12 − 1 = .1813, or 18.13%

The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $33,000 per year forever. Suppose a sales associate told you the policy costs $478,000. At what interest rate would this be a fair deal? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

PV = C/r $478,000 = $33,000/r r = $33,000/$478,000 = .0690, or 6.90%

The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $40,000 per year forever. If the required return on this investment is 6.3 percent, how much will you pay for the policy? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.

PV = C/r PV = $40,000/.0630 = $634,920.63

You have just received notification that you have won the $3.5 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100th birthday (assuming you're around to collect), 80 years from now. What is the present value of your windfall if the appropriate discount rate is 7 percent?

PV = FV / (1 + r)^t PV = $3,500,000 / (1.07)^80 = $15,608.67

Imprudential, Inc., has an unfunded pension liability of $650 million that must be paid in 24 years. To assess the value of the firm's stock, financial analysts want to discount this liability back to the present. If the relevant discount rate is 7.0 percent, what is the present value of this liability?

PV = FV / (1 + r)^t PV = $650,000,000 / (1.070)^24 = $128,145,303

McCann Co. has identified an investment project with the following cash flow Year 1: $860 Year 2: 1,210 Year 3: 1,470 Year 4: 1,625 a. If the discount rate is 11 percent, what is the present value of these cash flows? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b.What is the present value at 16 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c.What is the present value at 30 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

PV = FV/(1 + r)^t PV@11% = $860/1.11 + $1,210/1.11^2 + $1,470/1.11^3 + $1,625/1.11^4 = $3,902.13 PV@16% = $860/1.16 + $1,210/1.16^2 + $1,470/1.16^3 + $1,625/1.16^4 = $3,479.85 PV@30% = $860/1.30 + $1,210/1.30^2 + $1,470/1.30^3 + $1,625/1.30^4 = $2,615.57

Frequent Discounting

PV=FVt 1/((1+r/m)^tm ) PV=FV 1/e^rt

Southern Tours is considering acquiring Holiday Vacations. Management believes Holiday Vacations can generate cash flows of $218,000, $224,000, and $238,000 over the next three years, respectively. After that time, they feel the business will be worthless. If the desired rate of return is 14.5 percent, what is the maximum Southern Tours should pay today to acquire Holiday Vacations?

PVA = $218,000/1.145 + $224,000/1.145^2 + $238,000/1.145^3 = $519,799.59

Investment X offers to pay you $4,900 per year for 9 years, whereas Investment Y offers to pay you $7,500 per year for 5 years. If the discount rate is 3 percent, what is the present value of these cash flows? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) If the discount rate is 14 percent, what is the present value of these cash flows? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

PVA = C({1 - [1/(1 + r)t]}/r) X@3%: PVA = $4,900{[1 - (1/1.03)^9]/.03} = $38,151.93 Y@3%: PVA = $7,500{[1 - (1/1.03)^5]/.03} = $34,347.80 X@14%: PVA = $4,900{[1 - (1/1.14^)9]/.14 } = $24,237.22 Y@14%: PVA = $7,500{[1 - (1/1.14)^5]/.14 } = $25,748.11

Prescott Bank offers you a five-year loan for $69,000 at an annual interest rate of 8.5 percent. What will your annual loan payment be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

PVA = C({1 − [1/(1 + r)^t]}/r) $69,000 = C{[1 − (1/1.0850^5)]/.0850} C = $69,000/3.94064 = $17,509.84

You want to buy a new sports coupe for $80,500, and the finance office at the dealership has quoted you an APR of 6.2 percent for a 48 month loan to buy the car. a. What will your monthly payments be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the effective annual rate on this loan? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

PVA = C({1 − [1/(1 + r)^t]}/r) $80,500 = $C[1 − {1/[1 + (.062/12)]^48}/(.062/12)] C = $80,500/42.41452 = $1,897.94 EAR = [1 + (APR/m)]^m − 1 EAR = [1 + (.062/12)]^12 − 1 = .0638, or 6.38%

Your company will generate $58,000 in annual revenue each year for the next seven years from a new information database. If the appropriate interest rate is 8.75 percent, what is the present value? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

PVA = C({1 − [1/(1 + r)^t]}/r) PVA = $58,000{[1 − (1/1.0875^7)]/.0875} = $294,376.16

If you put up $55,000 today in exchange for a 6.5 percent, 16-year annuity, what will the annual cash flow be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

PVA = C({1 − [1/(1 + r)t]}/r) PVA = $55,000 = $C{[1 − (1/1.0650^16)]/.0650} C = $55,000/9.767764 = $5,630.77

An investment offers $5,400 per year, with the first payment occurring one year from now. The required return is 5 percent. a. What would the value be today if the payments occurred for 10 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What would the value be today if the payments occurred for 35 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. What would the value be today if the payments occurred for 65 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) d.What would the value be today if the payments occurred forever? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

PVA@10 yrs: PVA = $5,400{[1 − (1/1.05^10)]/.05} = $41,697.37 PVA@35 yrs: PVA = $5,400{[1 − (1/1.05^35)]/.05} = $88,420.65 PVA@65 yrs: PVA = $5,400{[1 − (1/1.05^65)]/.05} = $103,469.78 PV = C/r PV = $5,400/.05 = $108,000.00

Sue just purchased an annuity that will pay $24,000 a year for 25 years, starting today. What was the purchase price if the discount rate is 8.5 percent?

PVADue = $24,000{[1 − (1/1.085^25)]/.085}(1.085) = $266,498

Which one of the following represent a cash outflow from a corporation?

Payment of dividends

Which one of the following represents a cash outflow from a corporation?

Payment of dividends

Which one of the following is a cash flow from a corporation into the financial markets?

Payment of loan interest

If Gold Corp. has an ROE of 15 percent and a payout ratio of 25 percent, what is its sustainable growth rate?

Plowback ratio = 1-payout ratio --- =1-D7 ---- 1-25% = 75% Sustainable growth rate = (ROE*retention ratio)/(1-(ROE*retention ratio)) ---- =(D6*D12)/(1-(D6*D12)) ---- (15%*75%)/(1-(15%*75%)) = 12.68%

If Stone Sour Co. Has an ROA of 8% and a payout ratio of 30%, what is its internal growth rate?

Plowback ratio = 1-payout ratio ---- =1-D7 ---- 1-30% = 70% Internal growth rate = (ROA * retention ratio)/(1-(ROA*retention ratio)) ---- =(D6 * D12)/(1-(D6 * D12)) ---- (8% * 70%)/(1-(8% * 70%)) = 5.93%

Which one of the following functions should be the responsibility of the controller rather than the treasurer?

Processing cost reports

Which one of the following is classified as a tangible fixed asset?

Production equipment

Jupiter Explorers has $7,600 in sales. The profit margin is 3 percent. There are 5,100 shares of stock outstanding, with a price of $1.30 per share. What is the company's price-earnings ratio?

Profit margin = net income/sales Net income = (7,600*3%) = $228 EPS = Net income/shares of stock outstanding = (228/5100) =$0.044705882 PE ratio = Market price/EPS =1.3/0.044705882 =29.08(Approx).

Use the following information to answer this question. Total in 2017: $2,990 Inventory in 2017: $1,740 Accounts Payable in 2017: $1,460 What is the quick ratio for 2017?

Quick Ratio = (Total current assets - inventory) / Current liabilities Total Current assets - inventory = $2,990 - $1,740 = $1,250 Quick Ratio = $1,250 / $1,460 = 0.86

Which one of the following has the least effect on a firm's sustainable rate of growth?

Quick ratio

You just paid $420,000 for a policy that will pay you and your heirs $16,400 per year forever with the first payment in one year. What rate of return are you earning on this policy?

R = $16,400/$420,000 = .0390, or 3.90%

A prominent alumnus of your university has just donated $2,600,000 to fund a scholarship that will distribute $98,000 per year forever beginning in one year. For this to be true, what rate of return is expected on the donation?

R = $98,000/$2,600,000 = .0377, or 3.77%

A firm has a return on equity of 25 percent. The total asset turnover is 2.4 and the profit margin is 8 percent. The total equity is $4,100. What is the net income?

ROE (DuPont) = Net income/Sales x Sales/Total assets x Total assets/Total equity. 0.25= 0.08*2.4*x/4100 Total assets = $5340 Return on Equity = Net income / Total equity 0.25 = Net income / $4100 Net income = $4100*0.25 =$1025

Lee Sun's has sales of $3,400, total assets of $3,100, and a profit margin of 4 percent. The firm has a total debt ratio of 40 percent. What is the return on equity?

ROE = Profit margin*total asset turnover*equity multiplier 4% * (3,400/3,100) * (1/0.60) = 7.31%

Use the following information to answer this question. Sales = 9,360 Average Accounts Receivable = $880 What is the days' sales in receivables for 2017?

Receivable turnover = sales/average receivable = 9,360/880 = 10.64 times Accounts receivable days = 365/receivables turnover 365/10.64 = 34.32 days

•Previously we determined that a 21-year old could accumulate $1 million by age 65 by investing $15,091 today and letting it earn interest (at 10% compounded annually) for 44 years. Now, rather than plunking down $15,091 in one chunk, suppose she would rather invest smaller amounts annually to accumulate the million. If the first deposit is made in one year, and deposits will continue through age 65, how large is the annual deposit ? (find annual payment, c)

Regular annuity: FVIFa = 652.64076, A = 1532.24 Annuity due, FVIFa = 717.9048, A = 1392.94

Ed's Market is operating at full capacity with a sales level of $547,200 and fixed assets of $471,000. The profit margin is 5.4 percent. What is the required addition to fixed assets if sales are to increase by 4 percent?

Required addition to fixed assets = (.04) $471,000 = $18,840

The most recent financial statements for Schenkel Co. are shown below. Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 30 percent dividend payout ratio. What is the internal growth rate?

Return on assets = Net income/total assets ---- =D10/G8 ---- 3,480/36,600 = 9.51% Retention ratio = 1-payout ratio ---- =1-D12 ---- 1-30% = 70% Internal growth rate = (ROA*retention ratio)/(1-(ROA*retention ratio)) ---- =(D18*D20)/(1-(D18*D20)) ---- (9.51%*70%)/(1-(9.51%*70%)) = 7.13%

The Green Giant has a 5 percent profit margin and a 36 percent dividend payout ratio. The total asset turnover is 1.4 times and the equity multiplier is 1.4 times. What is the sustainable rate of growth?

Return on equity = .05 × 1.40 × 1.40 = .098 Sustainable rate of growth = [.098 × (1 - .36)]/{1 - [.098 × (1 - .36)]} = .0669, or 6.69 percent

The Green Giant has a 6 percent profit margin and a 60 percent dividend payout ratio. The total asset turnover is 1.3 times and the equity multiplier is 1.6 times. What is the sustainable rate of growth?

Return on equity = .06 × 1.30 × 1.60 = .125 Sustainable rate of growth = [.125 × (1 - .60)]/{1 - [.125 × (1 - .60)]} = .0525, or 5.25 percent

The most recent financial statements for Schenkel Co. are shown below. Assets and costs aAre proportional to sales. Debt and equity are not. The company maintains a constant 30 percent dividend payout ratio. What is the sustainable growth rate?

Return on equity = Net income/equity ---- =D10/I7 ---- 3,480/20,200 = 17.23% Retention ratio = 1- payout ratio ---- = 1-D12 ---- 1-30% = 70% Sustainable growth rate = (ROE*retention ratio)/(1-(ROE*retention ratio)) ---- =(D18*D20)/(1-(D18*D20)) ---- (17.23%*70%)/(1-(17.23%*70%)) = 13.71%

Assuming the following ratios are constant, what is the sustainable growth rate? Total asset turnover: 3.40 Profit margin: 5.2% Equity multiplier: 1.30 Payout ratio: 35%

Return on equity = Profit margin*total asset turnover*equity multiplier ---- =D7 * D6 * D8 ----- 5.2% * 3.40 * 1.30 = 22.98% Plowback ratio = 1-payout ratio ---- =1-D9 ---- 1-35% - 65% Sustainable growth rate = (ROE*retention ratio)/(1-(ROE * retention ratio)) ---- =(D14*D16)/(1-(D14 * D16)) ---- (22.98% * 65%)/(1-(22.98% * 65%)) = 17.56%

Which one of the following is a primary market transaction?

Sale of a new share of stock to an individual investor

CBC Industries has sales of $21,415, interest paid of $1,282, costs of $9,740, and depreciation of $1,480. What is the operating cash flow if the tax rate is 22 percent?

Sales: $21,415 Less: Costs: $9,740 Less: Depreciation: $1,480 ------------- EBIT: $10,195 Less: Interest: $1,282 Less: Tax: $1,960.86 -------------- Net income: $6,952.14 Operating cash flow = EBIT + Depreciation - Taxes (10,195+1,480-1,960.86) = $9,714.14

Griffin's Goat Farm, Inc., has sales of $554,000, costs of $255,000, depreciation expense of $52,000, interest expense of $25,000, and a tax rate of 23 percent. What is the net income for this firm?

Sales: $554,000 Costs: 255,000 Depreciation: 52,000 ------------------------ EBIT:$247,000 Interest: 25,000 EBT: $222,000 Taxes (23%): 1,060 ------------------------ Net income: $170,940

A firm has sales of $4,700, costs of $2,500, interest paid of $165, and depreciation of $465. The tax rate is 34 percent. What is the cash coverage ratio?

Sales: 4,700 Less: costs: 2,500 Less: depreciation: 465 EBIT = 1,735 Cash coverage ratio = (EBIT + depreciation)/interest expense =(1,735+465)/165 = 13.33

Shareholder A sold shares of Maplewood Cabinets stock to Shareholder B. The stock is listed on the NYSE. This trade occurred in which one of the following?

Secondary, auction market

Public offerings of debt and equity must be registered with the:

Securities and Exchange Commission.

Which one of the following will decrease the value of a firm's net working capital?

Selling inventory at a loss

Which one of the following parties has ultimate control of a corporation?

Shareholders

The River Side Stop has a current market value of $26,400 and owes its creditors $31,300. What is the market value of the shareholders' equity?

Shareholders' equity = Max [($26,400 − 31,300), 0] = 0 Since the market value of equity cannot be negative, the answer is zero.

Which one of the following is a working capital management decision?

Should the firm pay cash for a purchase or use the credit offered by the supplier?

Renee invested $2,000 six years ago at 4.5 percent interest. She spends all of her interest earnings immediately so she only receives interest on her initial $2,000 investment. Which type of interest is she earning?

Simple interest

You can invest in an account that pays simple interest or an account that pays compound interest. In either case, you plan to invest $3,500 today and both accounts have an annual interest rate of 9 percent. How much more interest will you receive in the 6th year in the account that pays compound interest?

Simple interest: Interest per year = $3,500 × .09 = $315 Compound interest: Value after 5 years = $3,500 × 1.09^5 = $5,385.18 Interest in Year 6 = $5,385.18 × .09 = $484.67 Difference = $484.67 − 315 = $169.67

You are planning to save for retirement over the next 30 years. To do this, you will invest $860 per month in a stock account and $460 per month in a bond account. The return of the stock account is expected to be 10.6 percent, and the bond account will pay 6.6 percent. When you retire, you will combine your money into an account with a return of 7.6 percent. How much can you withdraw each month from your account assuming a 25-year withdrawal period? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Stock account: FVA = $860[{[1 + (.106/12)]^360 − 1}/(.106/12)] = $2,211,335.13 Bond account: FVA = $460[{[1 + (.066/12)]^360 − 1}/(.066/12)] = $518,842.92 So, the total amount saved at retirement is: $2,211,335.13 + 518,842.92 = $2,730,178.05 Solving for the withdrawal amount in retirement using the PVA equation gives us: PVA = $2,730,178.05 = $C[1 - {1/[1 + (.076/12)]^300}/(.076/12)] C = $2,730,178.05/134.13672 = $20,353.70 withdrawal per month

A firm wants a sustainable growth rate of 2.7 percent while maintaining a dividend payout ratio of 36 percent and a profit margin of 6 percent. The firm has a capital intensity ratio of 2. What is the debt-equity ratio that is required to achieve the firm's desired rate of growth?

Sustainable growth rate = .0270 = [ROE × (1 - .36)]/{1 - [ROE × (1 - .36)]} ROE = .04108 ROE = .04108 = .06 × (1/2) × Equity multiplier Equity multiplier = 1.37 Debt-equity ratio = 1.37 - 1 = .37 times

Which one of the following statements related to an income statement is correct?

Taxes reduce both net income and operating cash flow.

Which one of the following is correct in relation to pro forma statements?

The addition to retained earnings is equal to net income less cash dividends.

The appropriate discount rate for the following cash flows is 10 percent compounded quarterly. Year 1: $820 Year 2: 900 Year 3: 0 Year 4: 1,490 What is the present value of the cash flows? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

The cash flows are annual and the compounding period is quarterly, so we need to calculate the EAR to make the interest rate comparable with the timing of the cash flows. Using the equation for the EAR, we get: EAR = [1 + (APR/m)]^m - 1 EAR = [1 + (.10/4)]^4 - 1 = .1038, or 10.38% PV = $820/1.1038 + $900/1.1038^2 + $1,490/1.1038^4 = $2,485.25

Which one of the following correctly defines the upward chain of command in a typical corporate organizational structure?

The controller reports to the chief financial officer.

A positive cash flow to stockholders indicates which one of the following with certainty?

The dividends paid exceeded the net new equity raised.

Which one of the following statements concerning interest rates is correct?

The effective annual rate equals the annual percentage rate when interest is compounded annually.

What is the relationship between the present value and future value interest factors?

The factors are reciprocals of each other.

Which one of the following statements concerning corporate income taxes is correct for 2018?

The federal income tax on corporations is a flat-rate tax with the same rate applying to all levels of taxable income.

Quiz 2 (Chapter 2) Begins: Which one of the following statements related to corporate taxes is correct?

The marginal tax rate for a company can be either higher than or equal to the average tax rate.

The sustainable growth rate of a firm is best described as the _____ growth rate achievable _____.

maximum; excluding any external equity financing while maintaining a constant debt-equity ratio

Jack Corp. has a profit margin of 6.4 percent, total asset turnover of 1.9, and ROE of 18.54 percent. What is this firm's debt-equity ratio? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

This question gives all of the necessary ratios for the DuPont Identity except the equity multiplier, so, using the DuPont Identity: ROE = (PM)(TAT)(EM) = .1854 = (.064)(1.90)(EM) EM = .1854/(.064)(1.90) = 1.52 D/E = EM - 1 D/E = 1.52 - 1 = .52

According to the Census Bureau, in October 2016, the average house price in the United States was $27,658. 6 years earlier, the average price was $21,708. What was the annual increase in the price of the average house sold?

To answer this question, we can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will use the FV formula, that is: r = (FV / PV)1 / t - 1 r = ($27,658 / $21,708)^1/6 - 1 = 4.12%

You're trying to save to buy a new $210,000 Ferrari. You have $31,000 today that can be invested at your bank. The bank pays 5.5 percent annual interest on its accounts. How long will it be before you have enough to buy the car?

To answer this question, we can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will use the FV formula, that is: FV = PV(1 + r)^t t = ln(FV / PV) / ln(1 + r) t = ln ($210,000 / $31,000) / ln 1.055 = 35.73 years

A firm has sales of $1,140, net income of $218, net fixed assets of $528, and current assets of $284. The firm has $93 in inventory. What is the common-size balance sheet value of inventory?

Total Asset = Net fixed assets + current assets Total Asset = 528 + 284 = 812 Inventory = 93 The common-size statement value of inventory = Inventory/Total Asset The common-size statement value of inventory = 93//812 The common-size statement value of inventory = 11.45%

Based on the following information, calculate the sustainable growth rate for Kaleb's Wielding Supply:

Total asset turnover = 1/capital intensity ratio ---- =1/D7 ---- 1/0.65 = 1.54 Equity Multiplier = 1 +debt-equity ratio ---- =1+D8 ---- 1+0.60 = 1.60 ROE= profit margin*(1/capital intensity ratio)*equity multiplier --- =D6*(1/D7)*D17 ---- 7.5%*(1/0.65)*1.60 = 18.46% Plowback ratio = (Net income-dividends)/net income ---- =(D9-D10)/D9 ---- (67,000-16,000)/67,000 = 76.12% Sustainable growth rate = (ROE*retention ratio)/(1-(ROE*retention ratio)) ---- =(D19*D21)/(1-(D19*D21)) ---- (18.46%*76.12%)/(1-(18.46%*76.12%)) = 16.35%

Martin Aerospace is currently operating at full capacity based on its current level of assets. Sales are expected to increase by 4.5 percent next year, which is the firm's internal rate of growth. Net working capital and operating costs are expected to increase directly with sales. The interest expense will remain constant at its current level. The tax rate and the dividend payout ratio will be held constant. Current and projected net income is positive. Which one of the following statements is correct regarding the pro forma statement for next year?

Total assets will increase at the same rate as sales.

The treasurer of a corporation generally reports directly to the:

Vice president of finance.

Both you and your older brother would like to have $22,500 in 15 in years. Because of your success in this class, you feel that you are a more savvy investor than your brother and will be able to earn an annual return of 10.9 percent compared to your brother's 9.4 percent. How much less than your brother will you have to deposit today?

You: PV = $22,500/1.109^15 = $4,766.61 Brother: PV = $22,500/1.094^15 = $5,846.86 Difference = $5,846.86 − $4,766.61 = $1,080.25

The decision to issue additional shares of stock is an example of:

a capital structure decision.

Square Hammer Corp. shows the following information on its 2018 income statement: Sales = $210,000; Costs = $95,000; Other expenses = $6,600; Depreciation expense = $9,100; Interest expense = $13,200; Taxes = $25,830; Dividends = $9,600. In addition, you're told that the firm issued $7,400 in new equity during 2018 and redeemed $9,000 in outstanding long-term debt. a. What is the 2018 operating cash flow? b. What is the 2018 cash flow to creditors? c. What is the 2018 cash flow to stockholders? d. If net fixed assets increased by $25,000 during the year, what was the addition to NWC?

a. OCF = EBIT + Depreciation - Taxes OCF = $99,300 + 9,100 - 25,830 = $82,570 b. CFC = Interest - Net new LTD CFC = $13,200 - (-9,000) = $22,200 c. CFS = Dividends - Net new equity = $9,600 - 7,400 = $2,200 d. We know that CFA = CFC + CFS, so: CFA = $22,200 + 2,200 = $24,400 CFA is also equal to OCF - Net capital spending - Change in NWC. We already know OCF. Net capital spending is equal to: Net capital spending = Increase in NFA + Depreciation Net capital spending = $25,000 + 9,100 = $34,100 Now we can use: CFA = OCF - Net capital spending - Change in NWC $24,400 = $82,570 - 34,100 - Change in NWC Solving for the change in NWC gives $24,070, meaning the company increased its NWC by $24,070.

Wims, Inc., has current assets of $3,200, net fixed assets of $14,500, current liabilities of $2,700, and long-term debt of $6,300. a. What is the value of the shareholders' equity account for this firm? b. How much is net working capital?

a. OE = $17,700 − 6,300 − 2,700 = $8,700 b. NWC = CA − CL NWC = $3,200 − 2,700 = $500

The cash flow that is available for distribution to a corporation's creditors and stockholders is called the:

cash flow from assets.

The cash flow related to interest payments less any net new borrowing is called the:

cash flow to creditors.

DTO, Inc., has sales of $20 million, total assets of $18.2 million, and total debt of $9.1 million. Assume the profit margin is 9 percent. a.What is the company's net income? (Do not round intermediate calculations. Enter your answer in dollars not in millions, e.g., 1,234,567.) b.What is the company's ROA? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c.What is the company's ROE? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

a. Profit margin = Net income/Sales Net income = Profit margin(Sales) Net income = .09($20,000,000) = $1,800,000 ROA = Net income/TA ROA = $1,800,000/$18,200,000 = .0989, or 9.89% To find ROE, we need to find total equity. Since TL & OE equals TA: TA = TD + TETE = TA − TD TE = $18,200,000 − 9,100,000 = $9,100,000 ROE = Net income/TE ROE = $1,800,000/$9,100,000 = .1978, or 19.78%

Klingon Widgets, Inc., purchased new cloaking machinery three years ago for $7.7 million. The machinery can be sold to the Romulans today for $4.25 million. Klingon's current balance sheet shows net fixed assets of $2.9 million, current liabilities of $2.2 million, and net working capital of $390,000. If all the current assets and current liabilties were liquidated today, the company would receive $1.9 million cash. a. What is the book value of Klingon's total assets today? b. What is the sum of the market value of NWC and market value of fixed assets?

a. To find the book value of current assets, we use: NWC = CA - CL. Rearranging to solve for current assets, we get: CA = NWC + CL CA = $390,000 + 2,200,000 CA = $2,590,000 b. Market value CA:$1,900,000 Market value NFA: $4,250,000 ------------------------------------- Market value assets: $6,150,000

Your credit card charges you .85 percent interest per month. This rate when multiplied by 12 is called the ____ rate.

annual percentage

Chapter 4 HW: Pro forma statements:

are projections, not guarantees.

The _____ tax rate is equal to total taxes divided by total taxable income.

average

The book value of a firm is:

based on historical cost.

Financial managers should strive to maximize the current value per share of the existing stock to:

best represent the interests of the current shareholders.

The internal growth rate of a firm is best described as the ____ growth rate achievable _____.

maximum; excluding external financing of any kind

The interest earned on both the initial principal and the interest reinvested from prior periods is called:

compound interest.

Christina invested $3,000 five years ago and earns 2 percent annual interest. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as:

compounding.

A _____ has all the respective rights and privileges of a legal person.

corporation

A business created as a distinct legal entity and treated as a legal "person" is called a(n):

corporation.

Agency problems are most associated with:

corporations.

Net working capital is defined as:

current assets minus current liabilities

A firm's external financing need is met by:

debt or equity.

All else constant, a(n) ______ will increase the internal rate of growth.

decrease in total assets

According to the statement of cash flows, an increase in inventory will _____ the cash flow from _____ activities.

decrease; operating

Steve just computed the present value of a $10,000 bonus he will receive next year. The interest rate he used in his computation is referred to as the:

discount rate.

Cash flow to stockholders is defined as:

dividend payments less net new equity raised.

One disadvantage of the corporate form of business ownership is the:

double taxation of distributed profits.

Quiz 6 (Chapter 6): An ordinary annuity is best defined as:

equal payments paid at the end of regular intervals over a stated time period.

Quiz 4 (Chapter 4) Begins: Worthington Industries is currently operating at full-capacity sales. Thus, sales are currently being limited by the firm's:

fixed assets.

Worthington Industries is currently operating at full-capacity sales. Thus, sales are currently being limited by the firm's:

fixed assets.

Cash flow from assets is also known as the firm's:

free cash flow

A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a:

general partnership.

Capital structure decisions include determining:

how much debt should be assumed to fund a project.

Your grandmother has promised to give you $10,000 when you graduate from college. If you speed up your graduation by one year and graduate two years from now rather than the expected three years, the present value of this gift will:

increase.

The maximum rate of growth a corporation can achieve can be increased by:

increasing the retention ratio.

Art invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his $108 investment. The extra $.64 he earned in interest the second year is referred to as:

interest on interest.

Net capital spending:

is equal to zero if the decrease in the net fixed assets is equal to the depreciation expense.

Your goal is to have $1 million in your retirement savings on the day you retire. To fund this goal, you will make one lump sum deposit today. If you plan to retire _____ rather than _____ and earn a _____ rate of interest, then you can deposit a smaller lump sum today.

later; sooner; high

A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a:

limited partner.

A firm is currently operating at full capacity. Net working capital, costs, and all assets vary directly with sales. The firm does not wish to obtain any additional equity financing. The dividend payout ratio is constant at 40 percent. If the firm has a positive external financing need, that need will be met by:

long-term debt.

The percentage of the next dollar you earn that must be paid in taxes is referred to as the _____ tax rate.

marginal

Decisions made by financial managers should primarily focus on increasing the:

market value per share of outstanding stock.

The sources and uses of cash over a stated period of time are reflected on the:

statement of cash flows.

Corporate dividends are:

taxable income of the recipient even though that income was previously taxed.

Corporate dividends are:

taxable income of the recipient even though the income was previously taxed.

Working capital management decisions include determining:

the minimum level of cash to be kept in a checking account.

The primary advantage of being a limited partner is:

the partner's maximum loss is limited to their capital investment.

The plowback ratio is:

the percentage of net income available to the firm to fund future growth.

When constructing a pro forma statement, net working capital generally:

varies proportionally with sales.

Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This transaction:

was facilitated in the secondary market.

An example of a capital budgeting decision is deciding:

whether or not to purchase a new machine for the production line

The external financing need:

will limit growth if unfunded.

A firm's short-term assets and its short-term liabilities are referred to as the firm's:

working capital.