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The market rate of return is 9%. The face value of a bond is $1,000, the coupon rate is 9% with annual compounding, and the bond matures in 10 years. What is the value of this bond? $748 $1,000 $1,200 $1,548

$1,000

Acme Enterprises 20-year, $1,000 par value bonds pay 10 percent interest annually. The market price of the bonds is $1,050, and your required rate of return is 10 percent. Determine the value of the bond to you, given your required rate of return. Should you purchase this bond?

$1,000, no do not buy the bond because it's overpriced By calculating the bond price based on your required return you find that you are only willing to pay $1,000 (FV=1000,I=10%,PMT =100, N=20). Since this is less than the current market price of $1,050 you should not buy the bond.)

What is the present value of an ordinary annuity with the payment of $300 for 5 years if the discount rate is 10%?

$1,137.24 PVAordinary = PMT [(1-{1/(1+r)n})/r] = 300 [(1-{1/(1.10)5})/0.10] = 1,137.24 [Calculator: 300 PMT, 10 I/Y, 5 N, compute PV]

Risky, Inc. bonds have a 12 percent coupon rate. The interest rate is paid semiannually and the bonds mature in 6 years. The bonds have a par value of $1,000. If your required rate of return is 7 percent, what is the value of the bond?

$1,241.58 Calculator Inputs PMT = 1000*.12 = 120/2 = 60 N = 6*2 = 12 FV = 1000 I = 7/2 = 3.5

What is the present value of an ordinary annuity with the payments of $500 for 3 years if the discount rate is 10%?

$1,243.43 PVAordinary = PMT [(1-{1/(1+r)n})/r] = 500 [(1-{1/(1.10)3})/0.10] = $1,243.43 [Calculator: 500 PMT, 10 I/Y, 3 N, compute PV].

Your friend plans to contribute $315 a month at the end of each month to his retirement account. His employer will match the contribution on a dollar for dollar basis. He expects an annual return of 6%. How much will he have in 40 years?

$1,254,639 PV: 0FV: $1,254,639.16 PMT: -630 N: 480 I: 0.50% Mode: 0 (End)

A firm recorded Gross PP&E of $5,000 in 20x1 and $6,300 in 20x2. Further, accumulated depreciation was $2,000 and $2,400 in 20x1 and 20x2, respectively. Assuming no asset disposals, CFI is closest to which of the following?

$1,300 Solution: CFI = Change in Gross PP&E = 6300 - 5000 = $1,300.

What is the future value of an ordinary annuity with payments of $500 for 3 years if the discount rate is 10%?

$1,655.00 FVAordinary = PMT [({1+r}n - 1)/r] = 500 [({1.10}3 - 1)/0.10] = 1,655.00

Logan Enterprises Cash Flow 20x2 20x1 Gross PP&E $22,500 $????? Less: Acc. Depr $7,100 $????? Net PP&E $15,400 $15,200 Using the data above and assuming no asset disposals, what is the firm's CFI for the year 20x2? Assume that the firm claims $1,600 in depreciation expense during the period.

$1,800 With the assumption of no asset disposals, CFI will be equal to 1) change in Gross PP& E, or 2) Change in Net PP&E plus depreciation expense. The change in Net PP&E of $200 plus $1,600 in depreciation expense equals CFI of $1800.

What is the future value of an ordinary annuity with payments of $300 for 5 years if the discount rate is 10%?

$1,831.53 FVAordinary = PMT [({1+r}n - 1)/r] = 300 [({1.10}5 - 1)/0.10] = 1831.53 [Calculator: 300 PMT, 5 N, 10 I/Y, compute FV]

Logan Enterprises Cash Flow 20x2 20x1 Gross PP&E $22,500 $20,600 Less: Acc. Depr $????? $5,400 Net PP&E $????? $15,200 What is the firm's CFI?

$1,900 With the assumption of no asset disposals, CFI will be equal to 1) change in Gross PP&E, or 2) change in Net PP&E plus depreciation expense. The change in Gross PP&E is $1,900.

A company is preparing a pro forma balance sheet. The company forecast $10 million in projected sales. The projected cash needed 6% of sales, AR are 19% of sales, and PP&E are 50% of sales. Accounts payable has been 12% of sales, historically. Shareholders equity is $1.5 million. Pro forma income is $3.6 million. The company has no long-term debt. What is the total discretionary amount for the pro forma balance sheet?

$1.2 million

A company is preparing a pro forma balance sheet. The company forecast $10 million in projected sales. The projected cash needed 6% of sales, accounts receivable are 19% of sales, and PP&E are 50% of sales. Accounts payable have been 12% of sales, historically. Shareholders' equity is $1.5 million. Pro forma income is $3.6 million. The company has no long-term debt.What is the discretionary financing needed? $1.2 million $5.1 million $6.3 million $6.9 million

$1.2 million

A company preparing a pro forma balance sheet. The company forecast $10 million in projected sales. The projected cash needed 6% of sales, accounts receivable are 19% of sales, and PP&E are 50% of sales. Accounts payable has been 12% of sales, historically. Shareholders' equity is $1.5 million. Pro forma income is 3.6 million. The company has no long-term debt. What is the total discretionary amount for the pro forma balance sheet?

$1.2 million

Balken Inc. reports the following on their most recent financial statements: - Change in accounts payable: $50 - Change in notes payable: $100 - Change in long-term debt: $200 - Change in retained earnings: -$120 - Net income: $170 What is Balken's CFF for the period?

$10 CFF = change in notes payable + change in long-term debt - dividends (assuming no other relevant changes); hence, CFF = 100 + 200 -Dividends. The change in RE = net income - dividends; so, -120 = 170 - dividends; thus, dividends = 290. Finally, CFF = 100 +200 - 290 = 10.

Balken, Inc. reports the following on their most recent financial statements: Change in accounts payable: $50 Change in notes payable: $100 Change in long-term debt: $200 Change in retained earnings: -$120 Net income: $170 What is Balken's CFF for the period?

Given the following data, calculate CFF for 20X3. 20X2 20X3 Retained Earnings 3,400 3,600 Accounts Payable 2,100 1,900 Notes Payable 1,200 1,300 Common Stock 4,200 4,500 Accounts Receivable 3,200 3,700 Net Income 400 500 Long-Term Debt 4,500 4,500

$100 CFF = Change in N/P + Change in LTDebt + Change in CS - Dividends Change in LTDebt = 4500-4500 = 0 Dividends = NI - change in retained earnings = 500 - [3600-3400] = 300 <p margin-bottom:12.0pt;text-indent:-.25in"="">· Therefore CFF = 100 + 0 + 300 - 300 = $100

The market rate of return is 9%. The face value of the bond is $1000, the coupon rate is 9% with annual compounding, and the bond matures in 10 years. What is the value of the bond?

$1000

The market rate of return is 9%. The face value of the bond is $1000, the coupon rate is 9% with annual compounding, and the bond matures in 10 years. What is the value of the bond?

$1000 N = 10 FV = 1000 PMT = 1000*.09 = 90 I = 9 solve for PV=1000

Calculate the PV of the cash flows associated with a 10-year bond that pays $30 coupon payments every 6 months and a face value of $1000. The current interest rate is 6% APR.

$1000.00 N20=10*2PMT30 FV1000 Rate0.03=0.06/2 PV($1,000.00)

Suppose you turned 25 today and got married to your dream spouse (what a day!). You receive a wedding gift of $5,000. In consultation with your new spouse, you decide to put the money in an account that is earning 8% so that you can travel around the world when you retire at the age of 65. How much will you have in your account in 40 years? (allow $1 rounding)

$108,623 FV = PV(1+r)t = 5000(1+0.08)40 = $108,622.61

You calculated the present value of an ordinary annuity to be $10,000. The discount rate is 10%. Which of the following is the most likely solution for the present value of an annuity due with the same cash flows?

$11,000 If the stream of cash flows are the same between ordinary annuities and annuities due, then the present value of an annuity due must be higher. (The annuity due method shifts payments closer to time 0 which means the cash flows are discounted less).

The total cost of a new machine including the shipping and the installation was $250,000. Using the 3-year MACRS schedule, determine the depreciation expense in year 2. The factors for the three-years schedule are: year 1 = 33.33%, year 2 = 44.45%, year 3 = 14.81%, and year 4 = 7.41%.

$111,125 Using the tables, depreciation for each year is calculated as: Depr.expense = factori x cost. Hence, for year 2 depreciation expense = .4445 x $250,000 = $111,125.

BackJack reports retained earnings of $15,225 for 20x2. The firm paid dividends of $4000 and $2,025 in 20x1 and 20x2, respectively. Additionally, the firm reported net income of $8,000 and $5,000 in 20x1 and 20x2, respectively. What were BackJack's reported retained earnings for 20x1?

$12,250 Solution: New RE = Old RE + NI - Div; 15225 = Old RE + 5000 - 2025; Old RE = 12,250

Your grandparents decided to give you $3,500 a year at the beginning of each year for 4 years while you are in college. If instead they were to give you an equivalent single sum today, how much would they have to give you today? Assume that the discount rate is 6%.

$12,855.54 PV: ($12,855.54) FV: 0 PMT: 3500 N: 4 I: 6% Mode: 1 (Begin)

You have worked hard for the past 3 years to get your start-up venture off the ground. You now may have the chance to harvest your business by selling out to BigBoy Company. On your income statement, you have Sales of $10 million, EBITDA of $2.5 million, and earnings of $1.5 million. Through negotiation, you have agreed on a P/EBITDA ratio of 5. How much is your firm worth?

$12.5 million EBITDA = $2.5 million P/EBITDA = 5 2.5 * 5 = $12.5 million

You are thinking of investing in a semi-annual bond that has a face value of $1,000 and offers a coupon rate of 2.5%. How much would your semi-annual coupon payment be?

$12.50 Remember, to compute the semi-annual coupon payment, we multiply the face value ($1,000) by the semi-annual coupon rate (expressed as a decimal, so 0.025/2 = 0.0125). $1,000 * 0.0125 = $12.50 every six months. We divide the 2.5% annual coupon rate by 2 to make it a semi-annual coupon rate.

A firm reported retained earnings of $305 in 20x2. For 20x3, the firm reports retained earnings of $400 and pays dividends of $25. What was net income in 20x3?

$120 Solution: New RE = Old RE + NI - Div; 400 = 305 + NI - 25; NI = 120

A teacher won $100,000 and invests this money for 5 years at an interest rate of 4% (compounded annually). How much will the teacher have in principal and interest at the end of the 5 years?

$121,655 PV=-100,000 I/Y=4 N=5 CPT FV

A teacher won $100,000 and invests this money for 5 years at an interest rate of 4% (compounded annually). How much will the teacher have in principal and interest at the end of the 5 years?

$121,665

A teacher won $100,000 and invests this money for five years at an interest rate of 4% (compounded annually). How much will this teacher have in principal and interest at the end of the five years? $120,000 $121,551 $121,665 $125,000

$121,665

What is the value of a preferred stock where the dividend rate is 15 percent on a $100 par value? The appropriate discount rate is 12 percent.

$125.00 D = $15 kps = 12% V0 = 15/.12 = $125

During all 4 years of your college life, you save $3,000 a year at the end of each year. If you can earn a 6% annual return on your investment, how much will you have when you graduate in 4 years?

$13,124 PV: 0 FV: $13,123.85 PMT: -3000 N: 4 I: 6% Mode: 0(End)

TippingToys is considering the purchase of a new toy-making machine that will increase revenues by $50,000 a year and annual costs by $10,000. The new machine will replace an outdated machine with a current book vale of $10,000 but if scrapped now can only be sold for $6,000. The new machine will cost $100,000 with shipping and installation fees of $10,000. The machine will be depreciated via 5-year MACRS schedule (20.0%, 32.0%, 19.2%, 11.5%, 11.5%, 5.8%). The firm estimates that the new machine can be sold at the end of its five-year life for $20,000. The new machine will necessitate an investment of $30,000 in working capital that will be fully recovered at the end of the project. Tipping Toys has a 10% cost of capital and a corporate tax rate of 40%. What is the initial outlay?

$132,400 Cost of New Machine (100,000) Installation/Shipping (10,000) Depreciable base (110,000) Working Capital (30,000) Price of Old 6,000 BV of Old (10,000) Gain/Loss (4,000) Tax 1,600 Net Sales of Old 7,600 Initial Outlay (132,400) Notes: Note the net cash inflow from the sale of the old equipment is $7600 ($6,000 sale proceeds plus a $1,600 tax shield). The depreciable base is the cost of the asset plus shipping, or $110k. The working capital investment is not included in the depreciable base, but is part of the initial outlay. You can simplify this calculation by thinking of it as: IO = cost + shipping + working cap - sale of old = 100k + 10k + 30k - 7.6k = 132,400 (remember, this is an outflow!)

Active Alarm is replacing its old machine with a new one. The old machine is being sold for $200,000 and it has a book value of $50,000. The tax rate for the firm is 40%. What is the net proceed from the sale of the old machine?

$140,000 Net Sale = Sale price - (Sale price - Book Value) x Tax Rate = 200,000 - (200,000 - 50,000) X 0.4 = $140,000

Resorts International is trying to avoid a hostile takeover. Hiya Hotels has offered to buy a controlling share of Resorts' stocks if they meet certain criteria. What is the value of Resorts International if their free cash flows to the firm each year for the next five years are projected (in millions) at $1.66. Hiya assumes Resorts International will continue at the no growth rate. If Resorts' WACC is 11%, cost of debt is 9%, and cost of equity is 13%, what is the total value of their company.

$15.1 Million 1. Calculate terminal value in year 5 TV = 1.66/.11 = 15.09 million 2. Calculate NPV of all cash flows CF1 = 1.66 CF2 = 1.66 CF3 = 1.66 CF4 = 1.66 + 15.09 NPV = 15.09 million

U&I Inc. recorded retained earnings of $2,000 last year and $2,500 this year. Net income of U&I Inc. is $500 and $650 for last year and this year, respectively. This year, U&I Inc. must have paid dividends of:

$150 Solution: Change in RE = NI -dividends. Rearranging: Dividends = NI - Change in RE. Therefore: Dividends = 650 - (2500 - 2000) = $150.

You and your spouse welcomed a new baby boy today. Your parents gave you $5,000 for the child's education and you invest it in an account that earns 7% annual return, so that he can use the money to go to a college in 18 years. How much will he have when he starts going to college?

$16,900 FV = PV(1+r)t = 5000(1+0.07)18 = $16,900

JackerCracks is trying to value their firm. Their forecast of EBIT (in millions of dollars) for the next three years is $15, 21, 28. Assume depreciation is $3 million per year, CAPEX will be $2 million each year, and net working capital will not change. After the third year free cash flows will be constant at $30 million per year, You compute a WACC of 15%. Assume a corporate tax rate of 38%. What is the value of JackerCracks using a DCF approach?

$163.13 Terminal Value = 30/.15 = 200 Year 1 FCFF = 15*(1-.38) + 3 - 2 = 10.3 Year 2 FCFF = 21*(1-.38) + 3 - 2 = 14.02 Year 3 FCFF = 28*(1-.38) + 3 - 2 = 18.36 + 200 = 218.36 Calculate NPV of cash flows R = .15 NPV = $163.13

Your grandparents set-up a family education fund that pays $5,000 every quarter in perpetuity to fund family educational pursuits. The fund earns 12%. How much did your grandparents set aside to establish the fund? Assume that the fund started making distributions 3 months after establishment.

$166,667 Since payments are made every 3 months, you need to divide the rate by 4 (quarterly rate of 12%/4 = 3%). PVperpetuity = PMT/Rate = 5000/0.03 = $166,667

Shovels Incorporated is up for sale. They have forecasted their free cash flows to the firm in two years at $3 Million. If the industry growth rate is 4 percent per year and Shovels' WACC has been calculated at 17 percent. What is the terminal value for Shovels Incorporated in today's dollars (present value)?

$17.5 Million FCFF year 2 = 3,000,000 g = 4% WACC = 17% Terminal Value = (3,000,000*1.04)/(.17-.04) = $24,000,000 Discounted Terminal Value = 24,000,000/(1+.17)2 = $17,532,325

Today is your 30th birthday. As luck would have it, you also welcome a new baby into your home as your birthday present. You desire to provide some financial support for your baby in 18 years and a lump sum of money when you retire at the age of 60. Four years of college tuition costs a total of $21,657 in today's dollars. Additionally, you desire to have purchasing power of $1,000,000 (at today's value) when you retire. If the average inflation rate is 2% and you can earn 8% on your account, how much do you need in your account today to cover your baby's future college tuition and your retirement goal? (allow $5 rounding error)

$187,749 · Step 1: $21657 in 18 years = FV = PV(1+r)t = 21657(1+0.02)18 = $30931.53 · Step 2: $1,000,000 in 30 years = FV = PV(1+r)t = 1000000(1+0.02)30 = $1,811,362 · Step 3: Discount tuition for 18 years = FV = PV(1+r)t = 30931.53/(1+0.08)18 = $7741 · Step 4: Discount retirement for 30 years = PV = FV/(1+r)t = 1811362/(1+0.08)30 = $180,008 Step 5: Add PVs together; Total amount needed today = $7741 + 180008 = $187,749.

Year 2010 ending retained earnings were $2 million. Year 2011 forecasted sales are $100,000 with a 25% net margin and 20% dividend payout ratio. What are the forecasted retained earnings for year 2011? $5,000 $30,000 $2,020,000 $2,025,000

$2,020,000

Year 2010 ending retained earnings were $2,000,000. Year 2011 forecasted sales are $100,000 with a 25% net margin and 20% dividend payout ratio. What are the forecasted retained earnings for Year 2011?

$2,020,000

Year 2010 ending retained earnings were 2 millions. Year 2011 forecasted sales are $100,000 with a 25% net margin and 20% dividend payout ratio. What are the forecasted retained earnings for Year 2011?

$2,020,000

Starting on your child's 10th birthday, you plan to make annual contributions of $1,994.70 to an account that earns a 5% annual return. Your final contribution will be on your child's 17th birthday. How much will your child have in the account when they start college on their 18th birthday?

$20,000 PV: 0 FV: ($20,000) PMT: 1,994.70 N: 8 I: 5% Mode: 1 (Begin)

You are considering buying a security that will pay $1,000 every year forever. If you buy the asset, you will start receiving the first $1,000 payment immediately (today). If the discount rate is 5%, what is the most you should be willing to pay for this security?

$21,000 Remember that the perpetuity formula assumes the payments come at the end of the period (i.e., the first payment is one year from today). If the payment starts immediately, use the perpetuity formula to get the value of payments at time 1 through infinity and add one additional payment of $1000. So PV = (1000/0.05) + 1000 = $21,000.

A company would like to invest in a capital budget project what will be worth $500,000 in 40 years. How much should the company invest today, assuming an average inflation rate of 2% and a 10% annual return?

$23, 015

A company would like to invest in a capital budget project that will be worth $500,000 in 40 years. How much should the company invest today, assuming an average inflation rate of 2% and a 10% annual return?

$23,015 inflation adjusted return. That is done by doing the following: (1 + Return Rate) ----------------------- - 1 = Inflation Adjusted Rate of Return (1 + Inflation Rate) If Annual Return = 10% Inflation = 3% (1 + .10) 1.10 ----------- - 1 = ----- - 1 = .068 or 6.8% (1 + .03) 1.03 Once you have the adjusted return it becomes your I/Yr number.

In order to start the new project, the firm has to replace an old machine with a remaining book value of $25,000. However, while still functional, the machine has no market value and will be scrapped if the new equipment is acquired. The new machine will cost the firm $220,000. In order to put the machine in working condition, ABC will spend $6,000 in installation and $4,000 in shipping. If the new machine is purchased net working capital will be increased by $10,000. The new machine will be depreciated via the straight-line depreciation method to a salvage value of $0. However, at the end of the new machine's five-year life, it can be sold for $30,000. If accepted, the new machine will increase annual revenues by $150,000 and will increase annual operating costs by $45,000. The company has a marginal tax rate of 40% and a cost of capital of 14%. The project will last 5 years. What is the initial outlay of this project?

$230,000 · Depreciable asset = Cost of New + Install + Ship = 220k + 6k + 4k = 230k · Net cash from sale of old machine = MV of Old -/+ Tax effect = $0 + $10k = 10k o Gain (Loss) = Sale price - BV = $0 - $25k = ($25k) (note: not cash). o Reduces initial outlay! Initial outlay = cost of new + install + ship + increase in WC - net cash from sale of old = 220k + 6k + 4K + 10k - 10k = 230k

An investor deposits $2000 per year (beginning today) for 10 years in a 4% interest bearing account. The last cash flow is received 1 year prior to the end of the tenth year. What is the investor's future balance after 10 years?

$24,012 n=10, I/Y=4, PMT=2000 solve for FV

A company would like to invest in a capital budget project that will be worth $500,000 in 40 years. How much should this company invest today, assuming an average inflation rate of 2% and a 10% annual return? $11,047 $23,015 $24,393 $10,248,724

$24,393

You just turned 25 and graduated from a university. You are already thinking about your retirement. You want to have $500,000 in today's dollar value when you retire. You have a lot of savings today and you were wondering if the savings may be enough if you invest wisely. You are anticipating an average inflation rate of 2% and you can earn 10% return on average. If you retire 40 years from now, how much savings do you need to have today to reach your goal?

$24,393 First, you need to find the future value of $500,000 with the inflation rate. Then you need to find how much you need today if you can earn 10% a year for 40 years. Step 1: FV = PV(1+r)t = 500000(1+0.02)40 = $1,104,020 [calculator: 500000 PV, 2 I/Y, 40 N, compute FV] Step 2: PV = FV/(1+r)t = 1104020/(1+0.10)40 = $24,393 [calculator: 1104020 FV, 10 I/Y, 40 N, compute PV]

An investor deposits $2,000 per year (beginning today) for 10 years in a 4% interest bearing account. The last cash flow is received 1 year prior to the end of the tenth year. What is the investor's future balance after 10 years?

$24,973

An investor deposits $2,000 per year (beginning today) for 10 years in a 4% interest-bearing account. The last cash flow is received one year prior to the end of the tenth year. What is this investor's future balance after 10 years? $24,012 $24,973 $26,012 $26,973

$24,973

XYZ Company is considering the purchase of new equipment. The firm spent $12,000 on consulting several months ago as well as $7,000 on a market study about a year ago. In order to start the new project, the firm has to replace the old machine which has a book value of $0 and will be scrapped. The new machine will cost the firm $220,000. Additionally, XYZ will spend $7,000 in installation and $3,000 in shipping. Since the new machine will produce more, an investment in net working capital of $10,000 is required. The new machine will be depreciated using straight-line depreciation to a salvage value of $0. However, the realizable salvage value of the new machine at year 5 is expected to be $50,000. The project will increase annual revenues by $125,000 and will increase annual operating cost by $45,000. The company has a marginal tax rate of 34%. It has the cost of capital of 14% and the project will last 5 years. What is the initial outlay of this project?

$240,000 Initial outlay = Price of New Machine + Shipping/Installation + Required NWC + Net Proceed from Sale of Old Machine = 220,000 + 10,000 + 10,000 + 0 = 240,000

You decided to invest $2,000 a year for next ten years starting one year from today. If you make the annual contribution into an account paying 5%, how much will you have in 10 years? (round to nearest $1)

$25,156 PV FV PMT N I Mode - ($25,155.79) 2,000.00 10 5.00% 0 (End)

4 years ago you received a student loan of $20,000 with the annual interest rate of 8% compounded monthly. Because it is a student loan, you did not make any payments during the time you were in school (interest was still accruing). What is the current balance of the student loan?

$27,557.09 PV: 20000 FV: $27,557.09 PMT: 0 N: 48 I: 0.67% Mode: 0 (End)

SomeNewBurger Corp is considering acquiring a competitor called Burgerz R Us. McBurger Corp, a comparable company to Burgerz R Us, is currently selling for $98.60 per share. McBurger's last income statement listed NI at $5 M, $2.5 of which was paid out in dividends and 2.5 M shares are outstanding. Burgerz R Us has a NI of $550,000. Using the PE ratio of McBurger, what should SomeNewBurger pay for Burgerz R Us?

$27.1 Million Burgerz R Us NI = 550,000 McBurger P/E Ratio = (98.6*2,500,000)/5,000,000) = 49.3 * Note here that we have calculated the price of McBurger by multiplying the price per share by the number of shares outstanding and then divided this by the earnings (or net income). Value estimate for Burgerz R Us = 550,000 * 49.3 = 27,115,000 *We can then estimate the value of Burgerz R Us by multiplying its earnings (net income) by this comparable PE ratio to end up with the "price" of Burgerz R Us.

OrangeCo is a growing tech company. They have anticipated their growth rate will be 15% for the next three years. After the three year hyper-growth period, they expect their growth to be closer to the industry growth rate of 5% for the foreseeable future (forever). OrangeCo paid a small dividend of $1 to their investors last month. If your required rate of return is 10%, what would be the highest price you would pay for OrangeCo stock?

$27.28 g1 = 15% g2 = 5% D0 = $1.00 Discount rate 10% Year 1 D1 = 1.00*1.15 = 1.15 PV of D1 = 1.15/1.101 = 1.05 Year 2 D2 = 1.15*1.15 = 1.32 PV of D2 = 1.32/1.102 = 1.09 Year 3 D3 = 1.32*1.15 = 1.52 PV of D3 = 1.52/1.103 = 1.14 Stage 2 FV = (1.52*1.05)/(.1-.05) = 31.94 PV = 31.94/1.103 = 24 Sum of PV's = 1.05 + 1.09 + 1.14 + 24 = 27.28

You have a 5-year-old son. You want to provide financial help when he goes to college in 13 years. You are planning to give him $20,000 a year at the beginning of each year. You will be make annual contribution at the end of each year to an account which will earn 5%. If you have $5,000 in the account already, how much will your annual deposit be?

$3,671.70 PV: ($74,464.96)FV: 0PMT: 20000N: 4I: 5%Mode: 1 (Begin) PV: ($5,000.00)FV: $74,464.96 PMT: $(3,671.70)N: 13I: 5.00%Mode: 0 (End)

You have purchased 1000 shares of Omega Corporation for $11 per share. You require a 35 percent return for investing in start-up companies. How much must the dividend be in order to reach your required rate of return?

$3.85 Using the perpetuity equation, solve for D. D = V0 * kps D = 11 * .35

Your firm is considering a new project that will initially cost $25 million and will generate cash flows of $5 million in year 1, $10 million in year 2, $12.5 million in year 3, $7.5 million in year 4 and $2.5 million in year 5. If the required rate is 10%, what is the total present value of cash flows? (Be sure to subtract out the initial cost of $25 million.)

$3.88 million Step 1: find the present value of the future cash inflows: Year 1 2 3 4 5 FV 5 10 12.5 7.5 2.5 PV $4.55 $8.26 $9.39 $5.12 $1.55 PV of CFs $28.88 Step 2: subtract the initial cost from the present value of the inflows calculated in step 1: PV = $28.88 - $25 = 3.88 million.

You are considering purchasing a stock that recently paid a dividend of $2.10 and is expected to grow at the average industry rate of 3 percent a year. What would you pay for this stock if you require a 10 percent return on your investments?

$30.90 Using the Gordon Growth Model, we compute V0. Remember to grow the dividend! V0 =(2.1*1.03)/(.10-.03)

TippingToys is considering the purchase of a new toy-making machine that will increase revenues by $50,000 a year and annual costs by $10,000. The new machine will cost $100,000 with shipping and installation fees of $10,000. The machine will be depreciated via 5-year MACRS schedule (20.0%, 32.0%, 19.2%, 11.5%, 11.5%, 5.8%). The firm estimates that the new machine can be sold at the end of its five-year life for $20,000. The new machine will necessitate an investment of $30,000 in working capital that will be fully recovered at the end of the project. Tipping Toys has a 10% cost of capital and a corporate tax rate of 40%. What is the differential cash flow in Year 3?

$32,448 Remember, the terms differential cash flow and operating cash flow are used interchangeably. The calculation is as follows: Year 3 MACRS Factoryear 3 19.20% Depr Expyr3 ($110k x.192) 21,120 Revenue 50,000 Cost (10,000) Depreciation Expense (21,120) EBIT 18,880 Tax (40%) (7,552) NOPAT 11,328 Add: Depreciation Exp 21,120 Differential Cash Flow3 32,448 Total Cash Flow3 32,448 Note: Even though the revenues and costs are constant in all five years of the project's life, the differential cash flow will be different each year because of differing depreciation expense.

You are considering the purchase of common stock of Wahoo, Inc that just paid a dividend of $2.50 per share. Due to a new alliance with Koogle Corp, security analysts project a steady growth of 16% in dividends and earnings for the next 4 years. After this period, the firm will grow at an industry average rate of 7% forever. Your required rate of return for stocks of this type is 18%. How much should you expect to pay for this stock?

$32.29 D0 $2.50 g1 16% g2 7% Discount rate 18% Super growth length 4 D1 = 2.5 * 1.16 = 2.90 PV of D1 = 2.90/1.181 (Can also be calculated with calculator using TVM function) D2 = 2.90 * 1.16 = 3.36 PV of D2 = 3.36/1.182 = 2.42 D3 = 3.36 * 1.16 = 3.90 PV of D3 = 3.90/1.183 = 2.38 D4 = 3.90 * 1.16 = 4.53 PV of D4 = 4/53/1.184 = 2.33 Stage 2 (4.53 * 1.07)/(.18-.07) = 44.03 PV of Stage 2 = 44.03/1.184 = 22.71 V0 = 2.46 + 2.42 + 2.38 + 2.33 + 22.71 = 32.29

Calculate FCFF using the following information: EBIT 598,000 Interest expense 42000 ΔNWC 15,000 ΔCAPEX 22,000 Current Liabilities 302,000 Depreciation 9,000 Tax rate 40%

$330,800 FCFF = EBIT(1-t) + Dep - ΔCAPEX - ΔNWC FCFF = 598,000*(1-.4) + 9,000 - 22,000 - 15,000 = 330,800

4 years ago, you received a student loan of $20,000 with the annual interest rate of 8% compounded monthly. Because it is a student loan, you did not make any payments while you were in school (although interest was still accruing). You just graduated and your payments start at the end of each month (assume that today is 1st of the month). If you plan to pay back the loan over 10 years, what is the amount of your monthly payment?

$334.93 Step 1: Find the amount of the loan at the beginning of the current month. PV: 20000FV: $27,557.09PMT: 0N: 48I: 0.67%Mode: 0 Step 2: Calculate payment for a 10 year amortization of the loan PV: $27,557.09FV: 0PMT: 334.93N: 120I: 0.67%Mode: 0 (End)

An accountant is 40 years old and has an anticipated retirement age of 70 years old. The accountant plans to save $6,000 per year at the end of the next 30 years to fund retirement. How much will this accountant have upon retirement, if the accountant is able to earn 4% annually on this investment? $180,000 $336,510 $349,970 $442,000

$336,510

An accountant is 40 years old with an anticipated retirement age of 70 years old. The accountant plans to save $6,000 per year at the end of the next 30 years to fund retirement. How much will the accountant have upon retirement, if the accountant is able to earn 4% annually on his investment?

$336,510

$336,510 N=30 PMT=-6,000 I/Y=4 solve for FV

You just bought a new car. You will make a down payment of $4,000 now, and take a loan for the remaining amount. The loan is for 5 years as with an APR of 4.8%. If you are going to make monthly payments of $563.39 at the end of each month, what is the price of the car you purchased?

$34,000 PV: 30000FV: 0PMT: -563.39N: 60I: 0.4%Mode: 0

A broker is considering buying a dividend-paying stock. The dividend will be paid at the end of the year. The analyst consensus is the stock will be worth $36 in one year. The company pays a $2.25 annual dividend (ex dividend date is not a consideration, the broker will receive the full $2.25), and the broker expects a 12% rate of return. What is the highest price the broker should be willing to pay for stock?

$34.15

A broker is considering buying a dividend-paying stock. The dividend will be paid at the end of the year. The analyst consensus is the stock will be worth $36 in one year. The company pays a $2.25 annual dividend. (The ex-dividend date is not a consideration; the broker will receive the full $2.25.) The broker expects a 12% rate of return. What is the highest price this broker should be willing to pay for this stock? $33.89 $34.01 $34.15 $38.25

$34.15

A broker is considering buying a dividend-paying stock. The dividend will be paid at the end of the year. The analyst consensus is the stock will be worth $36 in one year. The company pays a $2.25 annual dividend (ex. dividend date is not a consideration, the broker will receive the full $2.25), and the broker expects a 12% rate of return. What is the highest price the broker should be willing to pay for the stock?

$34.15 I/Y = 12, n = 1, FV = 38.25

Suppose an asset that cost $250,000 is depreciated straight-line over 7 years. The salvage value is assessed as $5,000. What is the depreciation expense in Year 3?

$35,000 Depreciation Expense = (250000 - 5000) / 7 = $35,000

A bond has the typical face value of $1,000 and promised to pay a 3.5% coupon rate. How much is the annual coupon payment?

$35.00 Remember, to compute the annual coupon payment, simply multiply the face value ($1,000) by the coupon rate (expressed as a decimal, so 0.035). $1,000 * 0.035 = $35 per year.

Calculate the value of a preferred stock that pays a dividend of $5 per share and your required rate of return is 14 percent.

$35.71 D = $5.00 kps = 14% V0 = 5.00/.14

The total cost of a new machine, including the shipping and installation, is $250,000. Using the 3-year MACRS schedule, determine the depreciation expense in year 3. Year 3-YR MACRS (%) 1 33.33% 2 44.45% 3 14.81% 4 7.41%

$37,025 Year 3-YR MACRS (%) Depreciation Expense 1 33.33% .3333 x $250000 = 83,325 2 44.45% .4445 x 250000 = 111,125 3 14.81% .1481 x 250000 = 37,025 4 7.41% .0741 x 250000 = 18,525

Some New Co. needs funding for a new product that will revolutionize the world. They want to issue new bonds to fund their project. Some New Co. is worried about generating enough cash to make coupon payments during the introduction phase of their product, so they would like to keep the coupon payments below the market interest rate. They are offering a 5-year, $1000 face value bond with a YTM of 15% for $750. What will their coupon payments be if they make coupon payments semi-annually?

$38.58 N10=5*2FV1000 Rate0.075=0.15/2PV-750 PMT$38.58

Suppose another company is planning to pay a $1.25 dividend in the upcoming year, a $1.75 dividend in year 2, and a dividend of $2 in year 3. Also assume the stock price in three years will be $50.65. If the required return by shareholders is 13%, what is the price today?

$38.97 Vo = 1.25/1.13 + 1.75/(1.13)2 + 2/(1.13)3 + 50.65/(1.13)3 = 38.97

You have a 5 year old son. You want to provide financial help when he goes to college in 13 years. You are planning to give him $20,000 a year at the beginning of each year during his 4 years of college. How much do you have to set aside today if you can earn annual interest of 5% in an account you deposit the money?

$39,490 Step 1: PV: ($74,464.96) FV: 0 PMT 20000 N: 4 I: 5% Mode: 1 (Begin) Step 2: PV: ($39,490.36) FV: $74,464.96 PMT: 0 N: 13 I: 5% Mode: 0

Snapp Corporation is expecting to pay a dividend of $3.25 to their common stockholders this year. If your required rate of return is 10 percent and the expected price of Snapp in one year is $40, what would you be willing to pay for the stock today?

$39.32 This problem can be solved with a calculator/Excel function or the equation. With calculator/Excel: FV = ($3.25+$40), I/Y = 10%, n = 1, compute PV = $39.32 With the equation: D1 = $3.25 V1 = $40.00 Rate = 10% V0 = (3.25+40)/(1+.10) = $39.32

FredCo preferred stock pays a constant dividend of $3.55 to their shareholders. If your required rate of return on investments is 9 percent, what would you be willing to pay for FredCo stock?

$39.44 Using the perpetuity equation, compute V0. V0 = D/kps V0 = 3.55/.09

Initial Outlay $(5,000) Year 1 $3,000 Year 2 $3,500 Year 3 $3,200 Year 4 $2,800 Year 5 $2,500 What is the NPV if the discount rate is 20%?

$4,137 NPV = -5 + 3/1.21 + 3.5/1.22 + 3.2/1.23 + 2.8/1.24 + 2.5/1.25 = $4.137 (= $4,137)

Balken Inc. reports the following on their most recent financial statements: - Change in accounts payable: $50 - Change in notes payable: $100 - Change in long-term debt: $200 - Change in retained earnings: -$120 - Dividends declared: $160 What is Balken's net income for the period?

$40 Change in RE = net income - dividends; -120 = net income - 160.

$44,552 Remember that "terminal cash flow" refers only to the cash flows that occur because the project concludes (sometimes called 'wrap-up' or 'wind-down' cash flows). The major components are the sale of the "new" equipment purchased at project origination (including any tax implications) plus the recapture of working capital. Note: recall that we are using a 5-year MACRS schedule and have claimed 5 years of depreciation. But, the 5-year schedule has 6 factors. So, to fully depreciate an asset under a 5-year schedule requires 6 years (note: don't look for logic in the tax code!). Since we have claimed only 5 years, there is still 5.8% of the original depreciable base remaining on the books (i.e., the sixth year's depreciation under the 5-year MACRS schedule is 5.8%). That is, at the end of the 5th year the book value of the new equipment = depreciable base x .058 = 110k x .058 = $6,380. This has important implications for the calculation of terminal cash flows. Specifically, if we sell the asset for $20k, the taxable gain will be: 20,000 - 6,380 = $13,620. This creates a tax liability of $5,448 (=13,620 x .4). Hence, the net proceeds from selling the equipment at the end of 5 years = sale price - tax liability = 20,000 - 5448 = $14,552.

You are starting a four-year educational program today. Since you did not save enough money, you plan to take a loan of $10,000 each year for four years. The loan has an interest rate of 4.5% and you are taking the first $10,000 installment today. You plan to finish your education in exactly four years. What will be the balance owing on your loan when you graduate? (Round to the nearest $1)

$44,707 PV FV PMT N I Mode - ($44,707) 10,000.00 4 4.50% 1 (Begin)

Your friend will retire a year from today and she is hoping to have enough in her retirement account for her to withdraw $50,000 each year for 15 years with the first withdrawal coming on the day she retires (i.e., one year from today). She does not plan to contribute any money during her final year before retirement. She has been earning 7% return on her retirement account and is assuming that will continue in the future. How much should she have today in her account?

$455,396 PV: ($455,395.70) FV: 0 PMT: 50000 N: 15 I: 7% Mode: 0

XYZ motors paid a $2.75 dividend last year. At a constant growth rate of 8 percent, what is the value of the common stock if the investors require a 14 percent rate of return?

$49.50 D0 = $2.75 g = 8% kcs = 14% V0 = (2.75 * 1.08)/(.14-.08) = $49.50

A company reports an increase in $5,000 in Accounts Receivable for the year and half will be collected next year. What is the impact on the cash flow from operations?

$5,000 decrease in cash flow for the year

Selected Data for 20x2 for ABD Inc. Net Income$ 1,000 Depreciation Expense$ 300 Change in Operating Assets$ 600 Change in Net Property, Plant, and Equipment$ 5,000 Changes in Long-Term Liabilities$ 1,000 Dividends Paid$ 200 What is this firm's cash flow from investments, using the data above and assuming no asset disposals? $5,000 inflow $5,000 outflow $5,300 inflow $5,300 outflow

$5,300 outflow

What is the firms cash flow from investments, using the data above and assuming no asset disposals?

$5,300 outflow **CFI = Change in Net PP&E + Depreciation Expense

You just graduated from a university and have some student loan debt. The interest rate on your loan is 4%. If you make monthly payments of $504.54 for 10 years at the beginning of each month (starting today) your debt will be completely repaid. The amount you owe today is closest to which of the following? (Round to the nearest $1)

$50,000 PV FV PMT N I Mode ($50,000) $0.00 504.54 10 x 12= 120 4/12 = 0.3333% 1 (Begin)

A firm purchased equipment three years ago for $500,000. The equipment is the only fixed asset the firm has ever owned. If the firm claimed depreciation of $20,000 the first year, $35,000 the second year and $32,500 the third year, the Gross Fixed Assets should be equal to:

$500,000

TellAll reports retained earnings of $1122 and $1402 for 20x1 and 20x2, respectively. Additionally, the firm paid dividends of $200 and $225 in 20x1 and 20x2, respectively. What was TellAll's net income for 20x2?

$505 Solution: New RE = Old RE + NI - Div; 1402 = 1122 + NI - 225; NI = 505

You just turned 20 years old today and started thinking about retirement savings. If you deposit $2,000 at the end of each year into an account earning annual interest of 8%, how much will you have if you retire in 40 years?

$518,113 PV: 0 FV: ($518,113.04) PMT: 2000 N: 40 I: 8% Mode: 0

You are considering purchasing Quarry Diamonds stock. They have promised to pay dividends of $2.50, $3.00, and $3.50 over the next three years. Dividends will grow at 5% after that indefinitely. How much are you willing to pay for the stock if your required rate of return is 11%?

$52.03 Discount Rate = 11% g = 5% D1 = $2.50 D2 = 3.00 D3 = 3.50 PV of D1 = 2.50/1.111 = 2.25 PV of D2 = 3.00/1.112 = 2.43 PV of D3 = 3.50/1.113 = 2.56 (Can also be calculated on your calculator using TVM function) Stage 2 (3.50*1.05)/(.11-.05) = 61.25 PV = 61.25/1.113 = 44.79 V0 = 2.25 + 2.43 + 2.56 + 44.79 = 52.03

You are planning for retirement and need $4,000,000 when you retire in exactly 40 years. Your employer will match all contributions to your retirement account on 1-for-1 basis and you can earn 8% on all invested funds. Currently, you have $10,000 in your retirement account. To reach your goal, you plan to make monthly contributions starting today. How much do you have to contribute to your retirement account each month? (Use at least four decimal places of accuracy for the interest rate and round to the nearest $1)

$534.57 PVFVPMTNIMode($10,000.00)$4,000,000.00($1,069.14)40 x 12 = 4808 / 12 = 0.67%1 (Begin) This table represents TVM buttons on your financial calculator. Step 1: Solve for the total monthly contribution (PMT). The highlighted cell is the solution. (Put calculator in Begin mode, enter PV, FV, N, I, and solve for PMT.) Step 2: Divide the total monthly payment by two to account for the 1-for-1 matching contribution. 1069.14/2 = $534.57

Your Mom is asking you for help with her retirement planning. She and your Dad are hoping to start withdrawing from their retirement accounting beginning in one year from today, and they want to make sure that they have enough in the account to make annual withdrawals of $60,000 for 20 years. Their retirement account pays 8% annually. How much do they have to have now in the account? (Round to the nearest $1)

$589,089 PV FV PMT N I Mode ($589,089) $0.00 60,000.00 20 8.00% 0 (End)

Your professor just talked about going on a trip when he retires in 10 years. He anticipates the cost of the trip to be $10,000. He said he will deposit some money today so that he will have $10,000 in 10 years. If he can earn an annual rate of 5% on his account, how much does he have to set aside today?

$6,139 PV = FV/(1+r)t = 10000/(1+0.05)10 = $6,139

You are looking to purchase Ordway common stock at $55 per share, hold it one year, and sell after a dividend of $3 is paid. What would the stock price need to be in order to satisfy your required rate of return of 15 percent?

$60.25 V0 = $55.00 D1 = $3.00 Rate = 15% (V1-55+3)/55 = .15, Solve for V1

If you require a 10 percent return on your money, and ABC stock is currently selling at $55, what would you have to sell this stock at in one year to earn your required return? Assume no dividends are paid and annual compounding.

$60.50 We can solve this problem with a financial calculator/Excel function or the equation. With calculator/Excel function: PV = 55, I/Y = 10%, n = 1, solve for FV = $60.50. Using the equation, we solve for P1. P1 = P0*(1+ks) P1 = 55*(1.10)

If you were to set up a perpetual educational fund for your family which will pay $5,000 a year forever, how much do you have to set a side today? Assume the appropriate discount rate is 8%.

$62,500 The correct answer is $62,500. PVperpetuity = PMT/I = 5000/0.08 = $62,500

Your firm is considering a new project. The project will cost the firm $50 million initially and will generate cash flows of $10 million in year 1, $20 million in year 2, $25 million in year 3, $15 million in year 4 and $5 million in year 5. If the required rate is 10%, what is the total present value of cash flows? (Be sure to subtract out the initial cost of $50 million.)

$7.75 million Step 1: Present values of future cash flows: Year 1 FV: $10 PV: $9.09 Year 2 FV: $20 PV: $16.53 Year 3 FV: $25 PV: $18.78 Year 4 FV: $15 PV: $10.25 Year 5 FV: $5 PV: $3.10 PV - Inflow: $57.75 Step 2: PV of CFs - Initial Cost = $57.75 million - $50 million = 7.75 million

Last year a firm recorded Net PP&E of $4,600 while this year the same firm recorded Net PP&E of $4,500. If the depreciation expense for last year and this year are $500 and $800 respectively, what is the CFI of the company? (assume no asset disposals)

$700 Solution: CFI = (Change in Net PP&E + Depreciation Exp) = (4500 - 4600 + 800) = $700

Suppose a different company is planning to pay a $2 dividend in the upcoming year, a $2.50 dividend in year 2, and a dividend of $3 in year 3. Also assume the stock price in three years will be $100. If the required return by shareholders is 15%, what is the price today?

$71.35 Vo = 2/1.15 + 2.50/(1.15)2 + 3/(1.15)3 + 100/(1.15)3 = 71.35

Trampoline Inc. wants to expand their business. They will issue bonds to fund their expansion. If the current required rate of return for investors is 11%, what should the price be for their bonds with a $1000 face value, 15 years to maturity, and a coupon rate of 8% paid semi-annually?

$781.99 I=11%/2 = 5.5% N=15*2 = 30 PMT=(0.08*1000)/2 = 40 FV=1000 Price ($781.99)

Suppose a company is planning to pay a $2 dividend in the upcoming year and a $2.50 dividend in year 2. Also assume the stock price in two years will be $100. If the required return by shareholders is 15%, what is the price today?

$79.25 Vo = 2/1.15 + 2.50/(1.15)2 + 100/(1.15)2 = 79.25

A corporation established its projected sales at $210 million. It is using its current year balance sheet as a basis for creating a pro forma balance sheet. It estimates cash will be 7% of projected sales, accounts receivable will be 19% of projected sales, and property, plant, and equipment (PP&E) will be 55% of projected sales. Accounts payable are estimated to be 12% of projected sales. Owners' equity is $34 million. Long-term debt is $90 million. Additionally, the firm raised $12.9 million of equity capital. What is the amount of discretionary financing needed? $8 million $10.1 million $12 million $15.4 million

$8 million

A corporation established its projected sales at $210 million. It is using its current year balance sheet as a basis for creating a pro forma balance sheet. They estimate cash will be 7% of projected sales, accounts receivable will be 19% of projected sales, and PP&E will be 55% of projected sales. Accounts payable are estimated to be 12% of projected sales. Owners' equity is $34 million. Long-term debt is $90 million. Additionally, the firm raised $12.9 million of equity capital. What is the amount of discretionary financing needed?

$8 million

A corporation established its projected sales at $210 million. It is using its current year balance sheet as a basis for creating a pro forma balance sheet. They estimate cash will be 7% of projected sales, accounts receivable will be 19% of projected sales, and the PP&E will be 55% of the projected sales. Accounts payable are estimated to be 12% of projected sales. Owner's equity is $34 million. Long-term debt is $90 million. Additionally, the firm raised $12.9 million of equity capital. What is the amount of discretionary financing needed?

$8 million

Calculate the value of a bond that matures in 15 years and has a $1,000 face value. The coupon rate is 9 percent and the investor's required rate of return is 11 percent. Assume annual compounding.

$856.18 Calculator Inputs N = 15 FV = 1000 PMT = 1000*.09 = 90 I = 11

You have a son who just turned 8 years old. You want him to go to a university and would like to provide financial support. Your goal is to give him a gift of $15,000 when he enters college in exactly 10 years. Assuming you can earn 5%, how much do you have to set aside today? (round to the nearest $1)

$9,209 PV = FV/(1+r)t = 15000/(1+0.05)10 = $9,208.70

What is the PV of a 1-year $100 bond that pays no coupon payments if borrowing rates are 4%?

$96.15 N1 PMT0 FV100 I0.04 PV($96.15)

Trampoline Inc. wants to expand their business. They will issue bonds to fund their expansion. If current required rate of return for investors is 11%, what should the price be for their bonds with a $1000 face value, 15 years to maturity, and a coupon rate of 10.5% paid semi-annually?

$963.67 I 5.5%=11%/2 N30=15*2 PMT52.5=(0.105*1000)/2FV1000 Price($963.67)

The projected sales for a new project is expected to be 100 million. Accounts receivable is expected to be 20% of sales, PPE is expected to be 50% of sales, and accounts payable is expected to be 5% of sales. The proforma income is expected to be 15% of sales and projected equity of 12 million and debt of 10 million. What is the DFN?

((.2*100)+(.5*100))-((.5*100)+10)-(12+(.15*100))=28million

A broker purchased a stock that pays $1.15 in an annual dividend for $16 with a required rate of return of 15%. What is the actual return if sold at the end of year 1 for $19?

((1.15+19)-16)/16=.259

What is the expected rate of return for a stock where there is a 60% chance of a recession and a 40% chance of an expansion? The stock would return 2% during a recession and 8% in an expansionary period.

(.6*.02)+(.4*.08)=.044

A company reports EBIT of 1,000,000, depreciation of 30,000, change in working capital of (10,000), net capital expenditures of 15,000 and tax rate of 40%. What is the free cash flow?

(1,000,000*(1-.04)+30,000)-(-10,000)-15,000=625,000

If the cash flow today is $100,000 and the annual inflation rate is 5%, what will the cash flow be worth one year from now?

(1-.05)*100,000=95,000

A company has 100 million in debt and 200 million in equity. The cost of debt is 8% and the marginal tax rate is 40%. What is the weighted average after tax cost of debt?

(100/300)*.08*(1-.4)=.016

What is the cash flow from investing? Increase in gross PP&E 125,000 Beginning net PP&E 750,000 Ending net PP&E 850,000 Depreciation expense 25,000

(125,000) Net end 850 less net beg 750 plus depn 25 = 125

Intel reported the following for 2014: Gross equipment (1/1/14) 50,000 Gross equipment (12/31/14) 65,000 Net income 100,000 Depreciation 20,000 What is the cash flow from investing activities for 2014?

(15,000) (15,000) Depreciation is not counted when using Gross PPE

A stock is expected to pay a dividend of $5 and the dividend is expected to grow at 4%. If the investor paid $40 for the stock today, what is the expected rate of return on the stock?

(5/40)+.04=.165

Quick Ratio

(CA-Inventory)/CL, a liquidity ratio.

FAT

(Fixed Asset Turnover) Sales/Fixed Assets, an efficiency ratio.

A company plans to invest $10,000 in a project that will generate cash flows of 6,000, 4,000, and 3,000 during its three year useful life. If the discount rate is 8%, what is the NPV for the project?

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A company plans to invest $10,000 in a project that will generate cash flows of 6,000,4,000,and 3,000 during its three year useful life. What is the IRR for the project?

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What is the Expected Rate of Return for a stock where treasury bills are returning 2.5% and the market as a whole, is returning 15%. The stock has a beta of 1.25?

.025+(1.25*(.15-.025))=.181

You are interested in buying a preferred stock and want to know what the rate of return is. The stock is selling for $85 and pays a dividend today of $2.25. What is the rate of return?

.0265 2.25 / 85.00 = .0265 or 2.65% (Preferred stock has no growth.)

The ask price of stock A is $56.75 while the bid price for stock A is $56.71. What is the bid ask spread?

.04 56.75-56.71 = 0.04

Suppose you bought a stock for $45 one year ago. Today the stock is currently priced at $47.42. If the stock does not pay a dividend, what is the percentage return for this stock?

.0538 (47.42-45)/45 = 0.0538 or 5.38%

The company expected to pay a dividend of $13.85 at the end of the year. Management has estimated growth at 2.75%, and the stock is currently selling for $290. What is the expected rate of the return for this investment?

.0753 (13.85 / 290) + .0275 = .0753 or 7.53%

If a common stock is worth $75 and the growth rate is 5% with a dividend expected to pay $2 in a year's time, what is the expected rate of return?

.0767 (2.00 / 75.00) + .05 = .0767

Suppose you bought a stock for $101.44 one year ago. Today the stock is currently priced at $109.54. If the stock does not pay a dividend, what is the percentage return for this stock?

.0799 (109.54-101.44)/101.44 = 0.0799 or 7.99%

Capital is valued at $3,000,000 consisting of $1,600,000 of common stock, $1,000,000 of bonds, and $400,000 of short-term debt. CAPM expected return is .135. Bonds before tax are .045. Short term debt costs .065. What is the after tax WACC if the tax rate is 35%?

.0874 (1600/3000 * .135) + (1,000/3,000 * .045 * .65) + (400/3,000 * .065 * .65) = .0720 + .0098 + .0056 = .0874

If a company has a capital structure of $5,000,000 common stock with a cost of 17%, $2,000,000 bonds at 4%, $1,000,000 of short term debt with a cost of 7%, and $2,000,000 preferred stock with a cost of 3%, what is the weighted average cost of Capital? The company has a 40% tax rate.

.1000 (.50 * .17) +( .20 * .04 * (1-t) or .6) + (.10 * .07 * .6) + (.2 * .03) = .0850 + .0048 + .0042 + .0060 = .1000

Given the information below, what is the expected return of the portfolio made up of 25% of stock A, 35% of stock B, and 40% of stock C. Submit your answer in decimal format. Economic State Probability π Stock A Stock B Stock C Recessionary .33 10% 15% -4% Expansionary .67 8% -2% 28%

.10405 E[R] of the portfolio = 10.405% Expected return during recession: .25*.1+.35*.15+.4*(-.04) = 6.15% Expected return during expansion: .25*.08+.35*(-.02)+.4*.28 = 12.5% Expected return of portfolio: =0.33*0.0615+0.67*0.125

If a company has a capital structure of $100,000 common stock, $50,000 bonds, and $10,000 preferred stock, and the respective rates are 15% common stock, 3% bonds (after tax), and 4% preferred stock, what is the weighted average cost of capital?

.1057 (.625 * .15) + (.3125 * .03) + (.0625 * .04) = .0938 + .0094 + .0025 = .1057 3% bonds are AFTER tax.

Suppose you bought a stock for $19.84 one year ago. Today the stock is currently priced at $18.45. The stock recently paid a $3.50 dividend, what is the percentage return for this stock?

.1064 (18.45-19.84+3.50)/19.84 = 0.1064 or 10.64%

What is the discount rate of a stream of cash flows of 50,000 that have a present value of 450,000?

.11 50,000 / 450,000 = 11.1%

Common stock is valued at $1,000,000 and costs .20. Bonds are valued at $850,000 and cost .04. Preferred stock is valued at $500,000 and costs .06. The tax rate is 40%. What is the pre-tax WACC?

.1124 (1000/2350 * .2) + (850/2350 * .04) + (500/2350 * .06) = .0851 + .0145 + .0128 = .1124

Common stock is valued at $400,000; long-term debt is valued at $250,000; and preferred stock is valued at $50,000. What is the WACC where common stock costs .16, long-term debt costs .08, and preferred stock costs .07? The tax rate is 40%.

.1135 (400/700 * .16) + (250/700 *.08 * .6) + (50/700 * .07) = .0914 + .0171 + .0050 = .1135

Given the information below, what is the expected return for Stock X? Submit your answer in decimal format. Economic State Probability π Returns for Stock X Recessionary .15 -4% Normal .60 12% Expansionary .25 21%

.1185 =0.15*-0.04+0.6*0.12+0.25*0.21

If a company has a capital structure of internal equity of $15,000,000 at 15%, a new offering of external equity of $5,000,000 at 17% with flotation costs of 3%, and $10,000,000 of bonds at 5% after tax, what is the weighted average cost of capital?

.1209 (.50 * .15) + (.167 * .17 * 1.03) + (.333 * .05) = .0750 + .0292 + .0167 = .1209

Given the information below, what is the expected return for Stock Z? Submit your answer in decimal format. Economic State Probability π Returns for Stock Z Recessionary .25 3% Normal .35 16% Expansionary .40 26%

.1675 =.25*.03+.35*.16+.4*.26

Given the information below, what is the expected return for Stock A? Submit your answer in decimal format. Economic State Probability π Returns for Stock A Recessionary .40 10% Expansionary .60 23%

.178 =0.4*0.1+0.6*0.23

Suppose you bought a stock for $22.10 one year ago. Today the stock is currently priced at $22.08. The stock recently paid a $4 dividend, what is the percentage return for this stock?

.1801 (22.08-22.10 + 4)/22.10 = 0.1801 or 18.01%

Suppose returns over the last four years were 15%, 12%, 27%, and 21%. If the mean return over the past five years was 20%, what was the return five years ago? Submit your answer in decimal format.

.25 (15+12+27+21+X)/5 = 20% Solving for X yields X = 100-75 = 25%

What is the Sustainable Growth rate given the following: Sales are 2.5 million Total Expenses 2 million Total Assets 3 million Equity 1.3 million Dividend payout ratio is .25

.2885 find out Net Income 2.5mil -2 mil NI=500,000 ROE is net income/equity 500,000/1.3mil ROE is .3846 Sustainable Growth Rate = ROE *(1-dividend payout ratio) .3846*(1-.25) = .2885

The ask price of stock A is $215.54 while the bid price for stock A is $215.14. What is the bid ask spread?

.40 215.54-215.14 = 0.40

0.044 Cycle Prob Stock Recession 60% .02 .012 Expansion 40% .08 .032 .044

There are two economic states, expansion and recession. The probability of an expansion is 70%; the probability of a recession is 30%. What is the expected return of Company A's stock if it has an expected return of 2% in a recession and 10% in an expansion?

0.0760 Cycle Prob Stock Recession 30% .02 .0060 Expansion 70% .10 .0700 .0760

Find the portfolio expected rate of return given the following information: Expansion probability is 55%, recession probability is 45% Stock A—Expansion return is 15%, recession return is 2% Stock B—Expansion return is 12%, recession return is -3% You own $75,000 worth of shares of Stock A and $15,000 worth of Stock B.

0.0851 Hint: Cycle Prob Stock A Stock B Recession 45% .02 .0090 -.03 -.0135 Expansion 55% .15 .0825 .12 .0660 .0915 .0525 Mkt Val 75,000 15,000 % 75/90=.833 15/90=.167 Weighted Cost .0762 .0088 = .0851

The market rate is 0.14. Treasury bonds are returning 0.025. A stock has a beta of 0.75. What is that stock's expected return?

0.1113 0.025 + [0.75 × (0.14 - 0.025)] = 0.1113

A company is planning to issue a new $1,000 face value bond that will mature in 20 years. The price of the bond is expected to be equal to the face value and the annual coupon rate is 7.5%. Flotation costs are $12 per bond. How much higher is the before tax cost of debt when accounting for flotation costs? (Round to the nearest hundredth: .00)

0.12 Cost of debt without flotation costs: I/Y = 7.5% Cost of debt with flotation costs: (FV=-1000,PMT=-75, PV=988, N=20, CPT I/Y=7.62% Difference is 0.12%

A stock has a beta of 1.42. The stock market is returning 0.11, and Treasury bills are trading at a rate of 0.014. What is the expected return?

0.1503 0.014 + 1.42(0.11 − 0.014) = 0.1503

The market rate is 0.09, and the risk-free rate is 0.015. If a stock has a beta of 1.92, what is the expected rate of return?

0.1590 0.015 + 1.92(0.09 − 0.015) = 0.1590

What is the expected rate of return for a stock where Treasury bills are returning 2.5%, and the market as a whole is returning 15%? The stock has a beta of 1.25.

0.181 E(R) = 0.025 + [1.25(0.15 − 0.025)] = 0.18125

A stock has a beta of 2.1 and a market premium of 0.14 where the market rate is 0.17. What is the expected rate of return?

0.3240 E(r) = Rf + B (Rm - Rf) 0.17 − 0.14 + 2.1 × 0.14 = 0.324

If a company has current assets of $90 and fixed assets of $140, if it has debt of $125, what is its debt ratio?

0.54 (debt) 125 / 140 + 90 (total assets) = .5435

UniFy Inc. has an expected return of 14.5%. If the market risk premium is 11.5% and the risk free rate is 3%, what is the beta for this company?

1 14.5% = 3% + B(11.5%). Solve for B, B = 1

You want to buy a semiannual bond that has four years left before maturity. It has a 6% coupon rate and the market yield is currently 5.2%. What is the price you are willing to pay?

1,028.56 N = 8 , I/Y = 2.6 , PMT = 30 , PV = ? , FV = 1,000 PV = -1028.56

A $1000 3% bond with a yield of 2.4% matures in six years. What is the price if the interest payments are made semiannually?

1,033.34 N = 12 , I/Y = 1.2 , PMT = 15 , PV = ? , FV = 1,000 PV = 1033.34

What is the price of a six-year $1,000 bond with a coupon rate of 7.4% and a YTM of 6.2% that has semiannual payments?

1,059.37 N = 12 , I/Y = 3.1 , PMT = 37.00 , PV = ? , FV = 1,000 PV = 1059.37

A woman has just found out that a rich great-aunt has bequeathed a trust fund that pays $50,000 to her and to her descendants forever. If the trust fund earns 3.5% interest, what is the amount of the trust fund?

1,428,571 50,000 / .035 = PV or 1,428,571

What is the present value of a stream of cash flows of $125,000 at a discount rate of 7%?

1,785,714 125,000 / .07 = 1,785,714

A company has cash of $100, accounts receivable of $250, inventory of $300, and accounts payable of $300. What is the quick ratio?

1.17 100 + 250 / 300 = 1.17

A stock has an expected return of 0.16. The market premium is 0.11, and federal funds are returning 0.025. What is the beta?

1.2273 0.025 + x(0.11) = 0.16(0.16 − 0.025) / 0.11 = 1.2273

If a company has current assets of $80 and fixed assets of $120, if sales are $150 and EBIT is $35, what is the fixed asset turnover?

1.25 150 / 120 = 1.25

A firm has EBIT of $126 million and earnings before taxes (EBT) of $101 million. What is the firms degree of financial leverage? (Round to the nearest hundredth: .00)

1.25 DFL: 126/101 = 1.25

A stock sells for $87 one year from now, giving a total return of 8%. What is the dividend if the stock was originally purchased for $82?

1.56 D = Vo * (1+r) - V1 Dividend step by step: 82.00 * 1.08 = 88.56, 88.56 -87.00 = 1.56 dividend

A firm has EBIT of $14 million and interest expense of $5 million. What is the firm's degree of financial leverage? (Round to the nearest hundredth: .00)

1.56 DFL: 14/(14-5)=1.56

What is the beta of a stock where the expected rate of return is 14%, the market premium is 7%, and the risk-free rate is 3%?

1.57 0.14 = 0.03 + X(0.07) or (0.14 − 0.03) / 0.07 = 1.57 Note: 0.07 = (0.10 − 0.03) Rm = market premium + risk-free rate

Use the following information to calculate the payback period for the project. Initial Outlay $(10,000) Year 1 $6,000 Year 2 $7,000 Year 3 $6,400 Year 4 $5,600 Year 5 $5,000

1.57 years After year 1, the project is $4k short of "paying back" the initial investment ($10k initial investment - $6k year 1 inflow). The $4k needed to achieve payback will require 57% of year 2 inflows ($4k/$7k). Hence, the payback is: Payback Period = 1 + (4000/7000) = 1.57 years

Use the following information to answer the question. Initial Outlay $ (5,000) Year 1 $ 3,000 Year 2 $ 3,500 Year 3 $ 3,200 Year 4 $ 2,800 Year 5 $ 2,500 What is the payback period of above cash flows?

1.57 years Year 1 cash flow will be used to payback a part of the initial outlay and $2,000 will be left to payback still. Since Year 2 has more cash inflow than needed to achieve payback, payback period can be calculated as: 1 + (2000/3500) = 1.57 years.

A firm has EBIT of $56 million and earnings before taxes (EBT) of $34 million. What is the firms degree of financial leverage? (Round to the nearest hundredth: .00)

1.65 DFL: 56/34 = 1.65

Suppose a firm has variable costs of $14 million, fixed costs of $15 million, depreciation of $3 million, and EBIT of $25 million. Given this information, what is the degree of operating leverage? (Round to the nearest hundredth: .00)

1.72 Sales: 25+3+15+14 = 57 DOL = (57-14)/25 = 1.72

A firm just announced a new preferred stock issue. The preferred dividend, which will be paid in perpetuity, is expected to be $4.10. The return required by shareholders is 10%. What is the cost of preferred equity in percent? (Round to the nearest hundredth: .00)

10 Cost of preferred equity: 10%

An investment of $10,000 made today at 8% simple interest for 3 years and 9 months will yield in principal and interest of

10,000+(10,000*.08*3.75)=$13,000

If the net change in common stock is $10,000, net change in long term liabilities is $20,000, and dividends paid are $5,000 what is the cash flow financing activities?

10,000+20,000-5,000=$25,000 cash inflow from financing

A firm just announced a new preferred stock issue. The preferred dividend, which will be paid in perpetuity, is expected to be $10. The price per share of preferred stock is expected to be $94. Given this information, what is the cost of preferred equity in percent? (Round to the nearest hundredth: .00)

10.64 Cost of preferred equity: 10/94 = 10.64%

Johnny Jims Corporation is issuing new bonds. They will pay a semi-annual coupon and mature in 15 years. They are currently selling for $800.00, the annual coupon rate is 8%. What is the yield to maturity on Johnny Jims' bonds? (Assume a $1,000 face value).

10.7% Calculator Inputs N = 15 * 2 = 30 PV = -800 PMT = .08 * 1000 = 80/2 = 40 FV = 1000

ABC's common stock currently sells for $36.68 per share. The company's executives anticipate a growth rate of 6 percent and a future dividend of $1.75. What is your expected rate of return?

10.77% V0 = $36.68 g = 6% D1 = $1.75 kcs = 6% + (1.75/36.68) = 10.77%

Net Income 100,000 Depreciation 20,000 Change in Operating Assets 10,000 Change in Equipment (25,000) Dividends paid 5,000 Change in long term liabilities 15,000

100,000+20,000-10,000=110,000 cash inflow

If a company reports net income of $100,000, depreciation of 20,000, and an increase in accounts receivable of $5,000 what is the cash flow from operating activities?

100,000+20,000-5,000 = $115,000 inflow

A firm just announced a new preferred stock issue. The preferred dividend, which will be paid in perpetuity, is expected to be $4.10. The price per share of preferred stock is expected to be $37. Given this information, cost of preferred equity in percent? (Round to the nearest hundredth: .00)

11.08 Cost of preferred equity: 4.10/37 = 11.08%

Suppose a company has an after-tax cost of debt of 4%, and the cost of common equity of 17%. Also assume the market value of the firm is $10 million, with $4.5 million in debt and $5.5 million in common equity. What is the firm's WACC in percent? (Round to the nearest hundredth: .00)

11.15 WACC = (5.5/10)*17% +(4.5/10)*4% = 11.15%

Your friend is trying to finance a home purchase and asks for your help. The home she wishes to buy will cost $300,000. She has enough cash to make a down payment of 20% of the price of the house and can afford monthly mortgage payments of $2,500 for principal and interest (ignore taxes and insurance). The mortgage contract calls for monthly payments due at the beginning of each month with the first payment due at the signing of the loan agreement. If the loan will be completely repaid in 20 years, the annual interest rate is closest to: (Note: use four decimal places of accuracy)

11.28% Step 1: Calculate the monthly rate. PV FV PMT N I Mode $240,000.00 $0.00 (2,500) 240 0.9402% 1 (due) Step 2: Annualize the monthly rate (multiply by 12). Using monthly data in Step 1 gives us a monthly rate. To annualize, multiply by 12: .9402 x 12 =11.28%APR. Note the first payment is due at contract signing; hence, you must use the annuity due mode (i.e., Begin mode) on your calculator. If you erroneously used the end mode, you would get answer C (11.14%).

A firm just announced a new preferred stock issue. The preferred dividend, which will be paid in perpetuity, is expected to be $5.85. The price of the preferred stock is expected to be $49 per share. What is the cost of preferred equity in percent? (Round to the nearest hundredth: .00)

11.94 Cost of preferred equity: 5.85/49 = 11.94%

A company is planning to issue new equity in order to raise capital. The current share price is $45 and the company is planning to pay a dividend of $2.50 and grow the dividend at a constant rate of 6% per year, indefinitely. If flotation costs are $3 per share, what is the cost of common equity? (Round to the nearest hundredth: .00)

11.95 Cost of common equity: 2.50/(45-3) + .06 = 11.95%

Given the information below, what is the expected return in percent of the portfolio made up of 40% of stock A and 60% of Stock B? Economic State Probability π Stock A Stock B Recessionary .35 12% 2% Expansionary .65 5% 22%

11.98 1. E[R] of the portfolio = 11.98% =((.35*(.4*12%+.6*2%))+(.65*(.4*5%+.6*22%)))

Intel reported the following for 2014: Net income 100,000 Depreciation 20,000 Change in A/R 10,000 What is the cash flow from operating activities?

110,000 100 + 20 - 10 = 110

What is the return on a $1000 face value bond that pays annual coupon payments of $75, matures in 4 years, and is currently selling at $850?

12.49% N: 4 PMT: $75 FV: $1,000 PV:-$850 R: 12.49%

A firm reported retained earnings of $300 in 12/31/2012. For 12/31/2013, the firm reports retained earnings of $400 and pays dividends of $25. What was their net income in 2013?

125 Beg RE = 300, NI = 125, Div = -25, End RE = 400

Honeydwell's common stock just paid a dividend of $1.95. Dividends are expected to grow at a 5 percent annual rate forever. If Honeydwell's stock is currently selling at $25.45, what is the stock's expected rate of return?

13.05% V0 = $25.45 D0 = $1.95 g = 5% 25.45 = (1.95*1.05)/( kcs-5%), solve for kcs

Suppose a firm is looking to calculate the cost of common equity using the dividend growth (Gordon) model. The company has just paid a dividend of $4.50 and anticipates growing its dividend at a constant rate of 4% indefinitely. If the current price of the company is valued at $50, what is the cost of common equity in percent (Round to the nearest hundredth: .00)

13.36 Cost of Common Equity: Re = [4.50(1.04)]/50 + .04 = 13.36%

Suppose a small company is determining whether to invest in new computing equipment to enhance R&D. The total cost of the investment is $7 million. The market value of common equity makes up 45% of the total market value of the firm. The market value of preferred equity makes up 15% of the total market value of the firm. The market value of debt makes up 40% of the total market value of the firm. The company has a marginal tax rate of 34%. Bonds: The current trading price of the companies bonds is $857. They expect to issue 10-year, $1,000 face value bonds that have an annual coupon rate of 7.5%. Common Stock: The company's beta is 1.5. The market risk premium is 11% and the expected return on the market is 15%. Preferred Stock: The company anticipates issuing new shares of preferred stock that pays a perpetual dividend yield of 10.5% per year. Given this information, what is the WACC? (Round to the nearest hundredth: .00)

13.39 Cost of Debt: (FV = -1000, PMT = -75, PV= 857, N = 10, CPT I/Y = 9.81% Cost of Common Equity: E[R] = 4% + 1.5(11%) = 20.50% Cost of Preferred Equity: 10.5% WACC = (.45)*20.50%+(.15)*10.5%+(.40)*9.81%*(1-.34) = 13.39%

Suppose a company has a before tax cost of debt of 10%, cost of common equity of 22%, cost of preferred equity of 15%, and a marginal tax rate of 40%. Also assume that the fraction of the firm's total market value that is made up from debt is .45, made up from common equity is .35, and made up from preferred equity is .20. What is the firm's WACC? (Round to the nearest hundredth: .00)

13.40 WACC = (.35)*22%+(.20)*15%+(.45)*10%*(1-.40) = 13.40%

Suppose a company is financed entirely with equity. Further suppose that the company is financed with 70% internal equity and 30% external equity. The company currently has a share price of $50. The company recently paid a dividend of $4 and expects to grow the dividend by a constant rate of 5% per year, indefinitely. If flotation costs sum to 6%, what is the WACC of this company in percent? (Round to the nearest hundredth: .00).

13.64 Cost of common equity: (4*1.05)/50 + .05 = 13.4% WACC: .70*13.4% + .30*13.4%(1.06) = 9.38% + 4.26% = 13.64%

Suppose a firm is looking to calculate the cost of common equity using the arithmetic mean return for the company's stock over the past six years. The company reported returns of 13.5%, 15.4%, 8.4%, 19.1%, 22.1%, and 4.3% over the last six years. Given this information, what is the cost of common equity in percent? (Round to the nearest hundredth: .00)

13.80 Cost of Common Equity: Re = (13.5+15.4+8.4+19.1+22.1+4.3)/6 = 13.80%

You are considering investing in a bond that has a 12% coupon rate, 10 years to maturity, and is priced at $900. What would be your YTM if you received your coupon payments quarterly? (Assume a $1,000 face value).

13.9% Calculator inputs PMT = 1000 * .12 = 120/4 = 30 N = 10 * 4 = 40 PV = -900 FV = 1000 I = 3.47 * 4 = 13.9%

Calculate the free cash flow given the following information: Net working capital increases by 20,000 Tax rate is .40 EBIT is 250,000 Capital expenditures are 10,000 Depreciation is 15,000

135,000 250,000 (1-.40) + 15,000 - 20,000 - 10,000 = 135,000

If the investment is $140,000, what is the net present value, given a total present value of $154,606?

14,606 154,606 - 140,000 = 14,606

A couple has $25,000 in their retirement savings today. How many years do they have to save at 6%, putting in $1,000 at the beginning of each year, to reach $80,000?

14.2

A person buys shares of a company at $45. They recently paid a $2 annual dividend which is expected to grow by 10% per year. What is the expected return per year?

14.9 ERR formula Gorden Growth formula ((2(1 + .10)) ÷ 45) + .10 = .149 14.9%

A person buys shares of a company at $45 and recently paid a $2 annual dividend that is expected to grow by 10% per year. What is the expected return per year? 12.2% 14.9% 15.7% 17.0%

14.9%

A person buys shares of a company at $45. They recently paid a $2 annual dividend which is expected to grow by 10% per year. What is the expected return per year?

14.9%

What is the cash flow from financing? Accounts payable 100,000 Accrued expenses 50,000 Increase in mortgage payable 300,000 Decrease in bonds payable 75,000 Dividends paid 80,000

145,000 Inc mort 300 - Dec bonds 75 - Div paid 80 = 145

POLO Outerwear has a beta of 1.1. The expected return on the market is 14% while the risk free rate is 4%. According to the CAPM, what is the required return by shareholders of POLO in percent?

15 E[R] = 4% + 1.1(14%-4%)= 15%

What is the rate of return for a stock purchased for $89, sold in a year for $100, paying a dividend during that time of $2.75?

15.45% R = (V1 + D) / Vo Rate of return step by step: 100.00 + 2.75 = 102.75 / 89.00 = 1.1545 Less 1 = 15.45 %

Suppose Crill Co. has a beta of 1.4. The expected return on the market is 12% while the risk free rate is 3%. Given this information, what is the expected return for this company in percent?

15.6 E[R] = 3% + 1.4(12%-3%) = 15.6%

Suppose a company is financed entirely with equity. Further suppose that the company is financed with 60% internal equity and 40% external equity. The company has a beta of 1.2, expected returns on the market are 13.5%, and the risk free rate is 3.5%. If flotation costs have historically summed to 4.5%, what is the WACC of this company in percent? (Round to the nearest hundredth: .00.)

15.78 Cost of common equity: 3.5%+1.2(13.5%-3.5%) = 15.5% WACC: .60*15.5% + .40*15.5%(1.045) = 9.3% + 6.48% = 15.78%

Suppose a company is financed entirely with equity. Further suppose that the company is financed with 75% internal equity and 25% external equity. The company has a beta of 1.1, expected returns on the market are 14.5%, and the risk free rate is 3%. If flotation costs have historically summed to 4%, what is the WACC of this company in percent? (Round to the nearest hundredth: .00.)

15.81 Cost of common equity: 3%+1.1(14.5%-3%) = 15.65% WACC: .75*15.65% + .25*15.65%(1.04) = 11.74% + 4.07% = 15.81%

From the following information, calculate the terminal cash flow. Proceeds from sale of equipment 100,000 Book value of equipment sold 50,000 Year 3 diff cash flow 225,000 Tax rate 40% Depreciation Yrs 1 to 5 125,000 Working capital return 75,000

155,000 100,000 - 50,000 = 50,000 Net realizable value * tax rate of .4 = 20,000 to be paid in taxes. 100,000 from buyer - taxes paid of 20,000 = 80,000 total salvage value + 75,000 in working capital return = 155,000 terminal cash flow

A project is closing. Equipment is sold for $50,000, even though the book value was $75,000. The tax rate is 30%. The project started with $100,000 in working capital. What is the terminal cash flow?

157,500 50,000 - ((50,000-75,000)*.3) + 100,000 = 157,500

What is the differential cash flow given the following? Sales 50,000 Expenses (w/o depn) 30,000 Depreciation 10,000 Taxes (.40) 4,000

16,000 NI + depn 50,000 - 30,000 - 10,000 = 10,000 EBIT - taxes of 4,000 = 6,000 NI + 10,000 depn = 16,000 diff cash flow

Suppose GrungeRock.com has a beta of 1.2. The expected return on the market is 14% while the risk free rate is 3%. Given this information, what is GrungeRock's required return by shareholders in percent?

16.2 E[R] = 3% + 1.2(14% -3%)= 16.2%

A firm purchased raw materials on June1st on credit, paid for the materials on June 10th, finished producing and sold the finished product on June 20th, and received payment on June 27th. How many days was the cash cycle?

17 The firm paid for the materials on June 10 and received cash payment on June 27. This implies the cash cycle was 17 days.

Suppose a firm is looking to calculate the cost of common equity using the Capital Asset Pricing Model. The company has a beta of 1.6. Market returns are expected to be 12% and the risk free rate is 3.5%. Given this information, what is the cost of common equity in percent? (Round to the nearest hundredth: .00)

17.10 Cost of Common Equity: Re = 3.5% + 1.6(12%-3.5%) = 17.10%

What is the IRR given the following? Investment is $250,000. Yr 1 is $50,000, Yr 2 is $60,000, Yr 3 is $80,000, Yr 4 is $100,000, Yr 5 is $90,000, and the terminal cash flow is $45,000.

17.213% Make sure to add the TCF to Yr 5 for 135,000.

YouWatch.com has a beta of 1.2. The market risk premium is 12.5% while the expected return on the market is 15%. Given this information what is the expected return for this company in percent?

17.5 E[R] = (15%-12.5%) + 1.2(12.5%) = 17.5%

Suppose a firm is looking to calculate the cost of common equity using the Capital Asset Pricing Model. The company has a beta of 1.3. Market returns are expected to be 14.5% and the risk free rate is 3%. Given this information, what is the cost of common equity in percent? (Round to the nearest hundredth: .00)

17.95 Cost of Common Equity: Re = 3% + 1.3(14.5%-3%) = 17.95%

Management of Hind Sight Solutions has revamped its operations. Looking forward to future growth, their new goal is to pay 8 percent of net income as dividends, reaching a net margin of 6 percent. Last year's information is as follows: sales $5,000,000; Inventory $3,500; total assets $4,500,000; total liabilities $3,000,000. Calculate their sustainable growth rate rounded to the nearest percent. (Hint: You will need to use the DuPont equation to solve this one.)

18% NM 6% Payout ratio 8% Sales 5,000,000 Assets 4,500,000 Liabilities 3,000,000 Asset Turnover = 5,000,000/4,500,000 = 1.1% Equity Multiplier = 4,500,000/(4,500,000-3,000,000) = 3 SGR = .06 * 1.11 * 3 * (1-.08) = 18% Notice on this solution, we have to use the DuPont equation which states that ROE equals net profit margin times asset turnover times equity multiplier. Once we have ROE, we can use the standard SGR equation of SGR = ROE * plowback to complete the problem.

A couple wants to save up for a down payment on a house. They think they need to save $100,000 in five years. If the interest rate is 4% and they start at the end of the year when they both get bonuses from their employers, how much do they have to put aside annually?

18,462.71 FV = 100,000, N = 5, I/Y = 4, PV = 0, Solve for PMT This is an END problem = 18,462.71

Which of the following gives the largest effective rate? use the formula: Eff Rate = (1 + i/m)m - 1

18.6% APR compounded daily

Which of the following gives the largest effective rate (APY)?

18.6% compounded daily

Which of the following gives the smallest effective yield?

18.7% APR compounded monthly Recall the formula: EY = (1 + [stated/m])m - 1. Use the formula to calculate the effective yield for each option: 20.4% compounded annually: EY = (1 + [.204/1])1 - 1 = 20.40% (with m = 1, stated and EY are identical) 19% compounded quarterly: EY = (1 + [.19/4])4 - 1 = 20.40% 18.7% compounded monthly: EY = (1 + [.187/12])12 - 1 = 20.39% (smallest effective yield) 18.6% compounded daily: EY = (1 + [.186/365])365 - 1 = 20.44%

XFly Inc. has a beta of 1.5. The market risk premium is 11% and the expected return on the market is 14%. Given this information, what is the required return by shareholders of XFly in percent?

19.5 E[R] = (14%-11%) + 1.5(11%)= 19.5%

A company reports the following for the first year of a new project: Increase in revenue: 2,000,000 Increase in variable and fixed costs: 800,000 Depreciation expense: 300,000 Increase in working capital: 10% of increase in revenue Tax Rate 40% What is the differential cash flow for the first year?

2,000,000-800,000-((2,000,000-800,000-300,000)*.4)-(.10*2,000,000)=640,000

What is the discounted cash flow of the company with the following cash flows? Cash flows: Yr 1 $100,000, Yr 2 $150,000, Yr 3 $150,000, and future forecasted annual cash flows $100,000. Discount rate is 5%.

2,088,543 N FV I/Y PV 1 100,000 5 95,238 2 150000 5 136,054 3 150000 5 129,576 Infin 100000 -- Perpetuity: 100,000 / .05 = 2,000,000 3 2,000,00 5 1,727,675 Find PV using same int rate and last yr of annual values 2,088,543

Kyoto Restaurant has total asset turnover of 1.50, ROE of 18.00%, and net profit margin of 6.00%. What is Kyoto's financial leverage ratio?

2.00 ROE = Net Margin x TAT x FLR, so FLR = ROE / (Net Margin x TAT) = 0.18 / (0.06 x 1.50) = 2.00.

Suppose a firm has sales of $15 million, variable costs of $4 million, fixed costs of $5 million, and EBIT of $5 million. Given this information, what is the degree of operating leverage? (Round to the nearest hundredth: .00)

2.2 DOL: (15 - 4) / 5 = 2.2

A firm has sales of $15 million, variable costs of $4 million, fixed costs of $3 million, depreciation of $1 million, interest expense $2 million and taxes of $.5 million. What is the degree of combined leverage? (Round to the nearest hundredth: .00)

2.20 DCL: (15-4)/([15-4-3-1]-2) = 2.20

A firm has EBIT of $138 million and interest expense of $77 million. What is the firm's degree of financial leverage? (Round to the nearest hundredth: .00)

2.26 DFL: 138/(138-77) = 2.26

Suppose a firm has sales of $56 million, variable costs of $20 million, fixed costs of $16 million, and depreciation of $5 million. Given this information, what is the degree of operating leverage? (Round to the nearest hundredth: .00)

2.40 EBIT: 56-20-16-5 $15 million DOL: (56-20)/15 = 2.40

Suppose you bought a stock for $45 one year ago. Today the stock is currently priced at $47.42. If the stock does not pay a dividend, what is the dollar return for this stock?

2.42 47.42-45 = 2.42

What is the degree of operating leverage given sales of $100,000, variable costs of $75,000, and EBIT of $10,000?

2.50 100,000 - 75,000 / 10,000 = 2.50

Suppose a firm has sales of $102 million, fixed costs of $45 million, depreciation of $13 million, and EBIT of $35 million. Given this information, what is the degree of operating leverage? (Round to the nearest hundredth: .00)

2.66 Variable costs: 102-45-13-35=9 DOL: (102-9)/35 = 2.66

Intel provides the following data for 2014: · A/R 600 · Inventory 800 · Fixed assets 1,000 · A/P 500 · Long term debt 900 · Common stock 400 What is the current ratio?

2.8 600 + 800 / 500 = 2.8

Your credit union is advertising a 10 year CD at a rate of 3% EAR. These CD's compound quarterly. What is the APR?

2.97% 1.03 = (1 +rq)4 Effective quarterly rate = 1.031/4 - 1 Effective quarterly rate = .0074APR = .0074 * 4APR =2.97%

A firm reported sales revenues of $100,000, margin of 25% and dividend payout ratio of 10%. The beginning retained earnings was $20,000. What is the ending retained earnings?

20,000 + (.25*100,000) - (.10*(.25*100,000)) = $42,500

A firm reported sales revenue of $100,000 margin of 25% and dividend payout ratio of 10%. The beginning retained earnings was $20,000. What is the ending retained earnings?

20,000+( .25 * 100,000 ) - ( .10 * (.25*100,000))=$42,500

A company is planning to issue new equity in order to raise capital. The company has a beta of 1.5. Returns on the market are expected to be 14% and the market risk premium is expected to be 11%. If flotation costs sum to 4%, what is the cost of common equity? (Round to the nearest hundredth: .00)

20.28 Cost of common equity: 3%+1.5(11%) = 19.5%(1.04) = 20.28%

A company doesn't carry any debt on its balance sheet. The company is completely financed with common equity. The company has a beta of 1.5. Expected returns on the market are 15%, and the risk free rate is 3.5%. Given this information, what is the WACC? (Round to the nearest hundredth: .00)

20.75 WACC = Cost of Equity using the CAPM = 3.5%+1.5(11.5%) = 20.75%

What is the equipment cost subject to depreciation from the following initial outlay? Old equipment sells for (net of taxes) 55,000 New equipment at cost 190,000 Installation and shipping 18,000 Working capital 62,000

208,000 190 + 18 = 208

You can buy a stock today at $39 that is expected to pay a $3.25 dividend at the end of one year. If you think that you can sell it for $45 after the dividend is paid, what would be your return?

23.72% Using the holding period return equation, we can solve for the rate of return. ks = [(P1 + D1)/P0]- 1 ks = [(45 + 3.25)/39] - 1

A piece of equipment is to be sold at the end of the project. Its appraised value is $420,000. A company makes an offer for $350,000. The equipment has a book value of $75,000. The tax rate is 40%. What is the salvage value if the company accepts the offer?

240,000 350,000 - ((350,000 - 75,000) * .4) = 240,000

An investor wishes to know what the value of a common stock is if it pays a dividend of $6 today. The company's growth rate is 4.5% and the investor expects the stock to earn 7%. What is the value of the common stock?

250.80 (6 * 1.045) / (.07 - .045) = 250.80

If you are looking for a return of at least 10%, what would you invest in a company given that it just paid a dividend of $1.80 and estimates a growth rate of 3%?

26.49 Vo = ((1.80 * 1.03) /(.10 - .03) = 26.49

IVAT Inc. has a beta of 2. The market risk premium is 11.5% while the risk free rate is 3.5%. Given this information, what is the required return by shareholders of IVAT in percent?

26.5 E[R] = 3.5% + 2(11.5%)= 26.5%

Suppose that an investment will pay 24% APR for a year and the interest will be compounded monthly. What is the expected APY for the investment?

26.82% (1 + .24/12)^12 - 1 = 26.82%

Suppose that an investment will pay 24% APR for a year and that the interest will be comounded monthly. What is the expected return (APY) of the investment?

26.82% APY = [1 + (0.24 / 12)]12 - 1 APY = (1 + APR / m)m - 1 where m is the number of compounds in a year. So suppose you are interested in a semiannual bond with a 3% APR, this is how you would compute the APY: APY = (1 + (0.03 / 2))2 - 1 = 3.0225%.

27 The operating cycle begins when raw materials are received (June 1) and finishes when payment is received for the finished good (June 27th).

Suppose a firm was provided an option to purchase $100 of raw materials according to a 2/15 net 45 discount policy. What is the 30-day interest rate in percent in annual terms on this effective loan? (round to the nearest hundredth: .00).

27.86 (100-98)/98 = .020408 (1+.020408)^(365/30) - 1 = 1.278643 -1 = .278643 or 27.86%

What will an investment of $10,000 made today at 8% simple interest for 3 years and 9 months will yield in principal and interest at the time of maturity?

3 years and 9 months = 3 + (9/12) = 3.75 years Principal + Interest = 10,000 + (10,000*0.08*3.75) = $13,000

If a company has a constant growth rate estimated at 5% and a free cash flow of $150,000, what is its estimated valuation (terminal value)?

3,000,000 150,000 / .05 = 3,000,000

Orange Zest Cafe is seeking to buy Wild Parsley Grill. Wild Parsley is a private company. Wild Parsley Grill had an EPS of $2.80 last year and has 125,000 shares outstanding. Orange Zest stock sells for $43 and has an EPS of $5. Orange is larger than Wild Parsley but sees both companies as operating in similar markets. What is the value of Wild Parsley?

3,010,000 43.00 / 5.00 = 8.60 PE ratio 8.6 PE * 2.8 EPS * 125,000 Shares O/S = 3,010,000

A mother wants to contribute to her child's higher education fund. She wishes to have $15,000 available each year for six years. Her child starts college in 15 years and she can save 6% before school starts if she puts her end-of-year bonus into a trust fund and figures that the fund will earn 4% after her child begins her college education. How much does she have to put aside annually if the money is withdrawn for college at the beginning of each year attending college?

3,513.38 Step 1: PMT = 15,000, I/Y = 4, N = 6, FV = 0, Solve for PV Begin mode PV = 81,777.34 Step 2: Take PV in Step 1 and use it as FV in Step 2. N = 15, I/Y = 6, PV = 0, Solve for PMT End problem = 3,513.38

How far in the future can one typically predict information required for pro forma statements?

3-5 years

A firm has sales of $101 million, variable costs of $74 million, fixed costs of $9 million, depreciation of $6 million, interest expense $3 million and taxes of $.5 million. What is the degree of combined leverage? (Round to the nearest hundredth: .00)

3.00 DCL: (101-74)/([101-74-9-6]-3)= 3.00

Suppose a firm was provided an option to purchase $100 of raw materials according to a 3/15 net 45 discount policy. What is the 30 day interest rate in percent on this effective loan? (round to the nearest hundredth: .00).

3.09 .03*100 = $3. (100-97)/97 = 3.09%

A 5% semiannual $1,000 bond matures in four years. What is the YTM if the price is $1,069?

3.15 N = 8 , I/Y = ? , PMT = 25 , PV = - 1069 , FV = 1,000 I/Y = 1.5752 x 2 = 3.15%

A company has a degree of operating leverage of 1.5 and a degree financial leverage of 2.2. What is the company's degree of combined leverage? (Round to the nearest hundredth: .00)

3.30 DCL: (1.5*2.2) =3.30

What is the degree of combined leverage when EBIT is $700,000, interest expense is $100,000, sales are $3,500,000, and variable costs are $1,200,000?

3.833 (3,500-1,200) / (700-100) = 3.833

Suppose you bought a stock for $22.10 one year ago. Today the stock is currently priced at $22.08. The stock recently paid a $4 dividend, what is the dollar return for this stock?

3.98 22.08-22.10 + 4 = 3.98

A firm purchased raw materials on April 1st on credit, paid for the materials on April 15th, finished producing and sold the finished product for cash on May 15th. How many days was the cash cycle?

30 The firm paid for the materials on April 15th and received cash payment on May 15th. This implies the cash cycle is one month or 30 days.

A firm reported retained earnings of $300 in 12/31/20x2. For 12/31/20x3, the firm reports retained earnings of $400 and pays dividends of $25. What was the net income in 20x3?

300+NI-25=400 NI=125

A firm reported retained earnings of $300 in 12/31/20x2. For 12/31/20x3, the firm reports retained earnings of $400 and pays dividends of $25. What was net income in 20x3?

300+NI-25=400 NI=125

What is the company valuation given the following? Cash flows: Yr 1 $80,000, Yr 2 $100,000, Yr 3 $95,000, Yr 4 $80,000, Discount rate 7%

300,690 N FV I/Y PV 1 80000 7 74,766 2 100000 7 87,344 3 95000 7 77,548 4 80000 7 61,032 300,690

Given the following information, what is the sustainable growth rate for this company? Net income $2,000,000.00, Sales $20,000,000.00, Assets $4,000,000.00, Dividends $1,000,000.00, Equity $3,000,000.00, Liabilities: $1,000,000.00

33% NI 2,000,000 Equity 3,000,000 Dividends 1,000,000 Payout ratio = 1,000,000/2,000,000 = .5 ROE = 2,000,000/3,000,000 = .667 SGR = .667 * .5 = 33.33%

Days On Hand (DOH)

365/Inventory turnover; the number of days of inventory the firm currently holds

Give Me Your Paycheck, a short-term loan institution, advertises a new long-term car loan rate of 1% per day (or 365% APR). In the small print, you notice that this loan compounds daily. What is the APY of the advertised car loan?

3678% APY = (1+.01)365-1 = 3678% using daily rate APY = (1+3.65/365)365-1 = 3678% using APR In this one, notice the rate is already given as a DAILY rate, so you do not divide by 365 days. In effect, the 1% DAILY rate is already the APR/365. The question also lists 365% as an APR and you divide it by 365 days and end up with the same result. This question tests to see if you understand the intuition behind the equation as well as the calculation.

A company just paid a dividend of $2.30 per share to its shareholders. It estimates that future growth will be at 2%. What is the value of the stock if you are looking for an 8% return on your investment?

39.10 (2.30 * 1.02) / (.08 - .02) = 39.10

A company's year end balance sheet for 2013: AR: 900 Inventory: 1200 Fixed assets: 1000 AP: 1300 Sales: 4000 Salaries: 275 What is their fixed asset turnover ratio?

4.0

A company's year-end balance sheet for 2013 shows the following: Accounts Receivable: $900 Inventory: $1,200 Fixed Assets: $1,000 Accounts Payable: $1,300 Sales: $4,000 Salaries Expense: $275 What is its fixed asset turnover ratio? 1.7 1.8 3.7 4.0

4.0

A companys year end balance sheet for 2013: AR: 900 Inventory: 1200 Fixed assets: 1000 AP: 1300 Sales: 4000 Salaries: 275 What is their fixed asset turnover ratio?

4.0

A company has sales of $300, expenses of $200 and interest expense of $25, what is its times interest earned ratio?

4.00 EBIT / Int Exp (300 - 200) / 25 = 4

A firm has sales of $150 million, variable costs of $61 million, EBIT of $44 million, and interest expense of $22 million. What is the degree of combined leverage? (Round to the nearest hundredth: .00)

4.05 DCL: (150-61)/(44-22) = 4.05

The common stock of Zed Corporation is selling for $32.84. The stock expects to pay a dividend of $2.94 per share next year. The expected rate of return on Zed's stock is 13 percent. What is Zed's estimated growth rate?

4.05 % Using the Gordon Growth Model: V0=D1/(r-g), we can solve for g. g = r - (D1/V0) g = 13% - (2.94/32.84)

What is the APY for a loan that has a stated rate of 4% APR when it is compounded quarterly?

4.06% APY = (1 + .04/4)4 - 1 In this one, the equation is just directly applied because the 4% is given as an APR.

A bond pays $27.50 semiannually, matures in 9 yrs, and is currently priced at $1090. What is the yield to maturity for this bond?

4.28 PMT =27.50 N=18 2x9 FV=1000 PV=-1090

A bond pays $27.50 semiannually, matures in 9 years, and is currently priced at $1,090. What is the yield to maturity for this bond?

4.28%

A bond pays $27.50 semiannually, matures in nine years, and is currently priced at $1,090. What is the yield to maturity for this bond? 3.80% 4.28% 5.00% 6.31%

4.28%

What would a dividend have to be if the investor buys a stock for $110, expects to sell the stock in a year for $120, and expects an annual return of 13%?

4.30 D = Vo * (1+r) - V1 Dividend step by step: 110 * 1.13 = 124.30 124.30 - 120.00 = 4.30

A company has 100,000 $1,000 face value bonds outstanding that are currently priced at $925 each. These bonds have 25 years until maturity and pay a 6% annual coupon rate (coupons are paid semiannually). If the company has a marginal tax rate that is 34%, what is the company's after tax cost of debt? (Round to the nearest hundredth: .00)

4.37 After-Tax Cost of Debt: FV = -1000, PMT = -60/2=-30, PV = 925, N = 25*2=50, CPT I/Y = 3.31*2=6.62% 6.62%*(1-.34) = 4.37%

Tom purchased stock from HAL Corporation one year ago for $179.00. He recently received one dividend payment in the amount of $5.05 and then sold the stock for $182.00. What is Tom's return?

4.5% Using the holding period return equation, we can solve for our return. ks = [(P1 + D1)/P0]- 1 ks = [(182+5.05)/179] - 1

Jayne and Josh are ready to buy a house. The bank is advertising an APR for 30-year fixed rate mortgages of 4.75%. What is the EAR for this mortgage that is compounded monthly?

4.85% EAR =(1+(.0475/12))^12 - 1

A company has 125,000 $1,000 face value bonds outstanding that are currently priced at 101% of face value. These bonds have 12 years until maturity and pay a 7.5% annual coupon rate, but the coupons are paid semiannually. If the company has a marginal tax rate that is 34%, what is the company's after tax cost of debt in percent? (Round to the nearest hundredth: .00)

4.87 After-Tax Cost of Debt: FV = -1000, PMT = -75/2 = -37.50, PV = 1010, N = 12*2=24, CPT I/Y = 3.69*2=7.37% 7.37%*(1-.34) = 4.87%

Suppose a firm has a financial leverage ratio of 2.50. What percentage of the firm's assets are financed by equity?

40% The correct answer is 40%. We know that Assets (100%) = Liabilities (X%) + Equity (Y%). So Financial leverage ratio = 2.5 = 100% / Y% = Assets/Equity; thus Y = 100 / 2.5 = 40%.

Suppose a firm has a financial leverage ratio of 2.50. What percentage of the firm's assets is financed by equity?

40% The ratio is 2.5 to 1. The amount financed by equity is a ratio of 1 to 2.5 or the inverse. 1 / 2.5 = .40

Suppose a firm was provided an option to purchase $100 of raw materials according to a 3/15 net 45 discount policy. What is the 30 day interest rate in percent in annual terms on this effective loan? (round to the nearest hundredth: .00).

44.86 Answer: .4486 .03*100 = $3. (100-97)/97 = 3.09% (1.0309)(365/30)-1 =.4486 or 44.86% The calculation requires a 1 to be added when taking it to additional powers and the 1 is subtracted from the result to get the effective rate.

A firm purchased raw materials on April 1st on credit, paid for the materials on April 15th, finished producing and sold the finished product on May 15th, and received payment on May 30th. How many days was the cash cycle?

45 The firm paid for the materials on April 15th and received cash payment on May 30th. This implies the cash cycle is a month and a half, or 45 days.

A firm purchased raw materials on April 1st on credit, paid for the materials on April 15th, finished producing and sold the finished product for cash on May 15th. How many days was the operating cycle?

45 The firm received the raw materials on April 1 and received cash payment on May 15. This implies the operating cycle was one and a half months, or 45 days.

An investor wishes to know the value of preferred stock when the dividend is $3 per share and the expected rate of return is 6.5%

46.15 3.00 / .065 = 46.15

A man has just inherited $250,000. If he invests the money at 4.5%, how much can he expect to have at the end of 15 years when he retires?

483,820.61 PV = 250,000, I/Y = 4.5, N = 15, PMT = 0, Solve for FV No PMT, so it does not matter what mode. = 483,820.61

What is the initial outlay given the following information? Equipment price 375,000 Installation 10,000 Power survey 30,000 Shipping 8,000 Working capital 100,000 Project marketing report 15,000

493,000

A company has 75,000 $1,000 face value bonds outstanding that are currently priced at 95% of face value. These bonds have 15 years until maturity and pay an 8% annual coupon rate. If the company has a marginal tax rate that is 40%, what is the company's after tax cost of debtin percent? (Round to the nearest hundredth: .00)

5.16 After-Tax Cost of Debt: FV = -1000, PMT = -80, PV = 950, N = 15, CPT I/Y = 8.61%*(1-.40) = 5.16%

A company has a degree of operating leverage of 2.1 and a degree financial leverage of 2.5. What is the company's degree of combined leverage? (Round to the nearest hundredth: .00)

5.25 DCL: 2.1*2.5 = 5.25

Suppose a company is financed with 100% debt. Of the company's debt, 75% is made up of long-term debt. The yield on the company's short-term debt is 6.8% and the yield on the long-term debt is 8.5%. If the marginal tax rate is 34%, what is the weighted average cost of capital in percent? (Round to the nearest hundredth: .00)

5.33 WACC: .75*(8.5%)(1-.34) + .25*(6.8%)(1-.34) = 4.21% + 1.12% = 5.33%

A $1,000 bond matures in six years. It pays $35 every six months. The current market price is $1,075. What is the yield?

5.51 N = 2 x 6, PV = -1,075, PMT = 35 (already calculated), FV = 1,000, I/Y = 2.755 x 2 = 5.51

A stock is expected to pay a dividend of $5 and the dividend is expected to grow 4%. If the required rate of return is 10%, what is the maximum that should be paid for the stock today?

5/(.10-.04)=$83.33

What is the cash flow stream for a present value 1,000,000 at 5% paid in equal installments in the future?

50,000 1,000,000 * .05 = 50,000

What is the cash flow from operations given the following information? Net income 450,000 Change in accounts receivable 120,000 Change in inventory - 90,000 Change in PP&E 60,000 Depreciation expense 110,000 Change in accounts payable 50,000 Change in accrued expenses - 75,000 Change in common stock 300,000

505,000 450 + 110 depn - 120 + 90 + 50 - 75 = 505,000

What would an investor be willing to pay for a stock today if the value in a year would be $55 with a dividend of $2.24 per share, and the investor wants to make 9% on the investment?

52.51 Vo = V1 + D / (1 + r) Stock Price Today step by step: 55.00 + 2.24 = 57.24 57.24 / 1.09 = 52.51

You just turned 20 years old today and you were thinking that it would be nice to have $4,000,000 when you retire. If you deposit $14,759 at the end of each year into an account which earns annual interest of 10%, how old will you be when you can retire with $4,000,000?

55 years old PV: 0FV: $4,000,000.00 PMT: -14,759 N: 35 I: 10% Mode: 0 Current age (20 years) + How long it takes (35 years) = 55 years old.

Bullzai Inc. is seeking to sell the company, but it is a private company with no sales of stock to determine its market value. It has earnings of $1,200,000 on 350,000 shares. Endothon Company is a direct competitor and of equal size and profitability. Its stock sells for $21 per share and has earnings per share of $3.80. What is the value of Bullzai?

6,632,000 1,200,000/350,000 = 3.4286 earnings per share 21 / 3.80 = 5.5263 multiple $3.4286 * 5.5263 * 350,000 = 6,631,615

Suppose a company is financed with 100% debt. Of the company's debt, 67% is made up of long-term debt. The yield on the company's short-term debt is 8% and the yield on the long-term debt is 10.2%. If the marginal tax rate is 34%, what is the weighted average cost of capital in percent? (Round to the nearest hundredth: .00)

6.25 WACC: .67*10.2%(1-.34) + .33*(8%)(1-.34) = 4.51%+1.74% = 6.25%

A company wishes to issue 10-year bonds with a face value of $1,000 and a coupon rate of 5.5%. The market has shifted before the issuance and the bonds will sell at 94% of face value. What is the YTM of the bonds when they are sold?

6.33% N = 10 , I/Y = ? , PMT = 55 , PV = - 940 , FV = 1,000 I/Yr = 6.33%

Currently, Sport City's 10-year bonds are selling for $975. What is the bond's yield to maturity given that the bond has a $1,000 face value and that it pays 6% interest annually? (Assume coupons are paid semi-annually.)

6.34% N 20 PMT 30 FV 1000 PV -975 R 3.17% YTM 6.34%

Currently, Sport City's 10-year bonds are selling for $975. What is the bond's yield to maturity given that the bond has a $1,000 face value and that it pays 6% interest annually?

6.34% N20PMT30FV1000PV-975 R3.17%YTM6.34%

You own 175 shares of Rain's preferred stock, which currently sells for $45 per share and pays annual dividends of $2.90 per share. What is your expected return?

6.44% Using the perpetuity equation, we compute kps = D/V kps = 2.90/45

A company has a before-tax cost of common equity of 14%, a pre-tax cost of debt 6%, a cost of preferred equity 8%, and a marginal tax rate of 34%. The current market value of the company is $150 million, with $75 million common equity, $50 million debt, and $25 million preferred equity. What is the company's weighted average pre-tax cost of capital?

6.5% key is pre tax, if it says pre-tax dont

An investor wants to know what the yield to maturity is for a $1,000 bond with a 5.5% coupon rate that matures in five years if the current market price is $955

6.59 N = 5, PV = -955, PMT = 55, FV = 1,000, I/Y = 6.59

A company has 50,000 $1,000 face value bonds outstanding that are currently priced at 92% of face value. These bonds have 10 years until maturity and pay a 9% annual coupon rate. If the company has a marginal tax rate that is 34%, what is the company's after tax cost of debt? (Round to the nearest hundredth: .00)

6.81 After-Tax Cost of Debt: FV = -1000, PMT = -90, PV = 920, N = 10, CPT I/Y = 10.32% 10.32%*(1-.34) = 6.81%

60 The firm received the raw materials on April 1 and received cash payment on May 30. This implies the operating cycle was 2 months, or 60 days.

If a firm's financial leverage ratio is 2.50, what percentage of assets are financed by debt?

60% Solution: We know that Assets (100%) = Liabilities (X%) + Equity (Y%). So, Financial leverage ratio = 2.5 = 100%/Y% = Assets/Equity; thus Y = 40%, so X = 60% = percent financed by debt.

Financial data for Intel is given below for 2014: · EBIT 1,000,000 · Depreciation 30,000 · Change in working capital (10,000) · Net capital expenditures 15,000 · Tax Rate 40% Compute the free cash flow for 2014.

625,000 FCFF = EBIT (1-t) + Depn - Inc NWC - CapEx 1000 * (1-.4) + 30 + 10 - 15 = 625

Equipment is sold for $30,000 at the end of a project. The working capital return is $50,000. The tax rate is 40%. What is the terminal cash flow?

68,000 30,000 - (30,000 * .4) + 50,000 = 68,000

GetStrong, Inc has net income of $10 million, equity on the balance sheet of $100 million, and pays an aggregate dividend of $3 million. Compute GetStrong's sustainable growth rate (SGR).

7.0% NI 10 E 100 Div 3 ROE = 10/100 = 10.0% 1- Payout ratio = 1-(3/10) = .7 SGR = 10% * .7 = 7%

A company issues bonds at a market price of $925. The face value is $1,000. The bonds mature in 10 years, and the coupon rate is 6% compounded semiannually. What is the yield to maturity (YTM) on this company's bonds? 3.53% 7.06% 10.00% 12.46%

7.06%

A company issues bonds at a market price of $925. The face value is $1000. The bond matures in 10 years, and the coupon rate is 6% compounded semiannually. What is the yield to maturity (YTM) on the company's bonds?

7.06%

A company issues bonds at a market price of $925. The face value is $1000. The bonds mature in 10 years, and the coupon rate is 6% compounded semiannually. What is the yield to maturity (YTM) on the company's bonds?

7.06% PV = -925 FV = 1000 PMT = 30 (= 6% × 1000)/2 semiannually n = 20 10 years x 2 semiannually Solve for I/Y =3.529 X2 to bring back to annually

What is the YTM for a 14-year semiannual bond that pays $35 every six months and has a purchase price of $980? Face value is $1,000

7.23% N = 28 , I/Y = ? , PMT = 35 , PV = - 980, FV = 1,000 I/Y = 3.6148 x 2 = 7.23%

A company has a market value of $500 million. It has a market value of equity of $200 million, a market value of long-term debt of $150 million, and a market value of short-term debt of $150 million. The cost of equity is 12%, the cost of long-term debt is 8%, and the cost of short-term debt is 6%. The marginal tax rate is 35%. What is the weighted average pre-tax cost of capital (WACC) for this company?

7.53%

Suppose a company is valued by the market at $135 billion and is financed with both debt and equity. Currently, the company has a market value of equity of $47 billion. The company also has a market value of short-term debt of $40 billion and a market value of long-term debt of $48 billion. The cost of equity is 13.4%, the cost of short-term debt is 6.8% and the cost of long-term debt is 8.2%. If the marginal tax rate is 40%, what is the weighted average cost of capital? (Round to the nearest hundredth: .00)

7.63 WACC: (47/135)*13.4% + (48/135)*8.2%(1-.40) + (40/135)*6.8(1-.40)= 4.67%+1.75%+1.21%=7.63%

Last year a firm recorded net PP&E of $4,600 while this year the same firm recorded net PP&E of $4,500. If the depreciation expense for last year and this year are $500 and $800, respectively, what is the CFI of the company? (Assume no asset disposals)

700 outflow PPE end 4500 - PPE beg 4600 + Curr yr depn 800 = 700 increase/outflow

What is the net equipment cost given the following when a new piece of equipment replaces an old one? Old equipment sells for 125,000 Book value of old equipment 22,000 Tax rate 40% New equipment cost 800,000 Site survey 18,000 Installation cost 20,000

736,200 125,000 - 22000 = 103,000 * .4 = 41,200 125,000 - 41,200 = 83,800 deducted from new equipment 800,000 + 20,000 - 83,800 = 736,200

Partial financial data for a company is as follows: Assets: $10,000,000 Liabilities: $4,000,000 Equity: $6,000,000 Sales: $25,000,000 Net Income: $5,000,000 Profit Margin: 20%Dividends: $500,000 Dividend Payout Ratio: 10% ROA: 50% ROE: 83% What is the sustainable growth rate for this company? 20% 50% 75% 83%

75%

Partial financial data for the company is as follows assets $10,000,000 Liabilities $4,000,000 Equity $6,000,000 Sales $25,000,000 Profit margin 20% Dividends $500,000 Divided payout ratio 10% ROA 50% ROE 83% What is the sustainable growth rate for the company?

75% ROE x (1 - dividend-payout ratio) b is the dividend payout ratio (dividends/net income) .83 x (1-.10) .747 Sometimes its a 1-

A project has sales of $300,000, general expenses of $195,000, and depreciation expense of $25,000. The tax rate is 35%. What is the differential cash flow?

77,000 (300 - 195 - 25) * (1 - .35) + 25 = 77

A project has net income of $750,000 including depreciation expense of $42,000. What is the differential cash flow?

792,000 750 + 42 = 792

Suppose you bought a stock for $101.44 one year ago. Today the stock is currently priced at $109.54. If the stock does not pay a dividend, what is the dollar return for this stock?

8.10 109.54-101.44 = 8.10

A company is planning to issue a new $1,000 face value bond that will mature in 15 years. The bond will be priced at 101% of face value and the annual coupon rate is 8%. Flotation costs are expected to sum to 3%. What is the before-tax cost of debt in percent? (Round to the nearest hundredth: .00)

8.12 Cost of Debt: (FV=-1000, PMT=-80, PV=1010, N=15 CPT I/Y=7.88%) 7.88(1.03) = 8.12%

A company has a market value of $500 million. It has a market value of equity of $200 million, a market value of long-term debt of $150 million. The cost of equity is 12%, the cost of long -term debt is 8%, and the cost of short-term debt is 6%. The marginal tax rate is 35%. What is the weighted average per-tax cost of capital (WACC) for this company?

8.37%

A company is planning to issue a new $1,000 face value bond that will mature in 10 years. The price of the bond is expected to be $950 and the annual coupon rate is 7.5%. If flotation costs are $12 per bond, what is the before-tax cost of debt in percent? (Round to the nearest hundredth: .00)

8.44 Cost of debt: (FV = -1000, PMT = -75, PV = 950-12=938, N = 10, CPT I/Y= 8.44%) 8.44%

Suppose a company is valued by the market at $60 million and is financed with both debt and equity. Currently, the company has a market value of equity of $10 million. The company also has a market value of short-term debt of $15 million and a market value of long-term debt of $35 million. The cost of equity is 17%, the cost of short-term debt is 9% and the cost of long-term debt is 11%. If the marginal tax rate is 34%, what is the weighted average cost of capital? (Round to the nearest hundredth: .00)

8.56 WACC: (10/60)*17% + (15/60)*9%(1-.34) + (35/60)*(11%)(1-.34) = 2.83%+1.49%+4.24% = 8.56%

Suppose a company has a before tax cost of debt of 8%, cost of common equity of 15%, cost of preferred equity of 10%, and a marginal tax rate of 34%. Also assume the market value of the firm is $100 million, with $60 million in debt, $30 million in common equity, and $10 million in preferred equity. What is the firm's WACC in percent? (Round to the nearest hundredth: .00)

8.67 WACC = (30/100)*15%+(10/100)*10%+(60/100)*8%*(1-.34) = 8.67%

A person wants to put aside $500 at the beginning of each month for 10 years. If she estimates an interest rate of 5.5%, how much will she have in her savings account at the end of the 10 years?

80,118.33 PMT = 500, N = 120, I/Y = 0.4583 (5.5/12), PV = 0, Solve for FV This is a BEGIN problem 80,118.33

A piece of equipment was sold at the end of the project. The project received $85,000 for the equipment that carried a book value of $75,000. The tax rate is 35%. What is the salvage value?

81,500 85,000 - ((85,000-75,000)*.35) = 81,500

Equipment is scrapped at the end of the project and has a book value of $20,000. The tax rate is 35%. The projected started with $75,000 of working capital. What is the terminal cash flow?

82,000 (20,000 * .35) + 75,000 = 82,000

You just purchased a new car that cost $20,000 with all taxes and fees. You are making a down payment of $5,000 and can afford $200 payments each month starting one month from today. If the APR of the loan is 3%, how many months will it take to repay the loan? (round to nearest month)

83 months PV FV PMT N I Mode $15,000.00 $0.00 -200 83.2 0.25% 0 (End)

What does a stock have to sell for one year in the future if it currently sells for $75, has a planned dividend of $1.87 a share, and has an expected return of 14%?

83.63 V1 = Vo * (1+r) - D where Vo = stock price today, V1 = stock price in 1 yr, r = rate of return, D = dividend. Stock in the future step by step: 75 * .14 = 10.50 10.50 - 1.87 = 8.63 75 + 8.63 = 83.63 stock price in one year

You are interested in a quarterly $1,000 bond that matures in seven years and has a coupon rate of 6% and a YTM of 8%. What is the price?

893.59 N = 28 , I/Y = 2 , PMT = 15 , PV = ? , FV = 1,000 PV = 893.59

Jennie purchased $10,000 worth of Techno Corp's stock at $50/share. She held this stock for one year. After receiving a dividend of $2.00/share, she sold it for $52.50/share. What is her rate of return?

9% D1 = $2.00 V0 = $50.00 V1 = 52.50 Rate = (52.50+2.00)/50.00 - 1 = .09

FarFromGrooving, Inc. has just been invited to bid on the contract of their dreams. Last year FarFromGrooving had a net margin of 1.96 percent, plowback ratio of 75 percent, ROA of 6.52 percent, and ROE of 11.9 percent. Using this information, calculate the company's SGR to the nearest percent.

9% ROE 11.90% Plowback 75% SGR = .119 * .75 = .08925

North Rim bonds are being issued at a market price of $1000. They have a face value of $1000 and have a coupon rate of 9% that is paid monthly. These bonds mature in 8 years. What is the YTM?

9.0% Calculator Inputs PV = -1000 FV = 1000 N = 8 * 12 = 96 PMT = 1000 * .09 = 90/12 = 7.5 I = .75 * 12 = 9% Note that when a bond is selling at the same price as the face value, the YTM will be equal to the coupon rate

9.00%

Suppose a company is valued by the market at $60 million and is financed with both debt and common equity. Currently, the company has a market value of equity of $20 million, of which the company is financed with $7 million of external equity and $13 million of internal equity. The company also has a market value of short-term debt of $15 million and a market value of long-term debt of $25 million. The cost of equity is 14%, the cost of short-term debt is 9% and the cost of long-term debt is 10.5%. Further, flotation costs on the external equity have summed to 3%. If the marginal tax rate is 34%, what is the weighted average cost of capital? (Round to the nearest hundredth: .00)

9.09 WACC: (13/60)*14%+(7/60)*14%*(1.03) + (15/60)*9%(1-.34)+(25/60)*10.5%(1-.34) = 3.03%+1.68%+1.49%+2.89% = 9.09%

A firm just announced a new preferred stock issue. The preferred dividend, which will be paid in perpetuity, is expected to be $2. The return required by shareholders is 9.5%. What is the cost of preferred equity in percent? (Round to the nearest hundredth: .00)

9.5 Cost of preferred equity: 9.5%

A company has a before-tax cost of common equity of 14%, a pre-tax cost of debt 6%, a cost of preferred equity 8%, and a marginal tax rate of 34%. The current market value of the company is $150 million, with $75 million common equity, $50 million debt, and $25 million preferred equity. What will the company's weighted average pre-tax cost of capital be?

9.7%

A company has a before-tax cost of common equity of 14%, a pre-tax cost of debt of 6%, a cost of preferred equity of 8%, and a marginal tax rate of 34%. The current market value of the company is $150 million, with $75 million common equity, $50 million debt, and $25 million preferred equity. What is this company's weighted average cost of capital? 6.5% 7.2% 8.8% 9.7%

9.7%

Suppose a company is valued by the market at $100 million and is financed with both debt and equity. Currently, the company has a market value of equity of $50 million. The company also has a market value of short-term debt of $20 million and a market value of long-term debt of $30 million. The cost of equity is 15%, the cost of short-term debt is 7% and the cost of long-term debt is 8%. If the marginal tax rate is 40%, what is the weighted average cost of capital in percent? (Round to the nearest hundredth: .00)

9.78 WACC: (50/100)*15% + (20/100)*7%(1-.40) + (30/100)*(8%)(1-.40) = 7.5%+.84%+1.44% = 9.78%

Suppose a company is valued by the market at $100 million and is financed with both debt and common equity. Currently, the company has a market value of equity of $50 million, of which the company is financed with $10 million of internal equity and $40 million of external equity. The company also has a market value of short-term debt of $25 million and a market value of long-term debt of $25 million. The cost of equity is 15%, the cost of short-term debt is 7% and the cost of long-term debt is 8%. Further, flotation costs on the external equity have summed to 4%. If the marginal tax rate is 40%, what is the weighted average cost of capital? (Round to the nearest hundredth: .00)

9.99 WACC: (10/100)*15%+(40/100)*15%(1.04) + (25/100)*7%(1-.40)+(25/100)*8%(1-.40) = 1.5%+6.24%+1.05%+1.2% = 9.99%

A bond issued with a face value of $1,000 pays a 3% coupon rate and matures in seven years. If an investor wants a yield of 4%, how much is the investor willing to pay for the bond?

939.98 N = 7, I/Y = 4, PMT = 30, FV = 1,000, PV = 939.98

A bond issued with a face value of $1,000 pays a 6% coupon rate semiannually. It matures in four years. Current market interest is 7.5%. What is the price of the bond?

948.98 N=8, I/Y = 3.75, PMT = 30, FV = 1000, PV = 948.98

A company has 100,000 $1,000 face value bonds outstanding that are currently priced at 95% of face value. What is the market value of the company's debt?

95000000 Market Value of Debt = Price*bonds outstanding = $950*100,000 = $95,000,000

An investor wants to make 5% YTM on a bond that is $1,000 face value with a coupon rate of 4.2%. What price would the investor pay if the bond payments are quarterly and the bond matures in five years?

964.80 N = 20 , I/Y =1.25 , PMT = 10.50 , PV = ? , FV = 1,000 PV = 964.80

What is the price of a 1-year $1,000 bond with a 3% coupon rate if the YTM is 5.2%?

979.09 N = 1, I/Y = 5.2, PMT = 30, FV = 1,000 = 979.09

Consumer Banking

A bank that focuses mostly on individuals, families, and small business.

Commercial Banks

A bank that focuses mostly on mid to large sized companies.

Negative Covenants

A bond covenant that prohibits the firm from doing something.

Affirmative Covenants

A bond covenant that requires the firm to do something.

Municipal Bonds

A bond issued by a local municipality such as a city or county.

Treasury Bonds

A bond issued by the US federal government.

Debentures

A bond that is not secured by collateral or guarantees.

Payback

A capital budgeting method that does not include time value of money, all of the cash flows, or an objective decision rule.

IRR

A capital budgeting method that includes the time value of money, all of the cash flows, and has an objective decision rule. Mathematically, the IRR is the discount rate that forces the NPV to equal zero.

NPV

A capital budgeting method that includes the time value of money, all of the cash flows, and has an objective decision rule. The dollar amount by which the present value of future inflows exceeds the initial investment.

Which of the following statements is NOT correct with respect to using ratios to analyze a firm or firms?

A change in a ratios reveals the economic character of the firm.

PE Ratio

A common multiple for valuing a firm which equals price divided by earnings. The price of the stock divided by its earnings (Net Income). Another way of writing it: (Price per Share) / (Earnings Per Share).

EBITDA

A comparable multiples approach for valuing entrepreneurial firms.

NASDAQ

A computer network where stocks are bought and sold - it is the second largest stock exchange in the world. Typically, technology-related companies will go public through this exchange.

Which of the following is an unsecured loan?

A credit card

Cash-only Policy

A credit policy that only allows the purchase of inventory or the sale of products using money on hand.

Inventories

A current asset that is typically viewed as the least-liquid current asset. Includes raw materials, work-in-process, and finished goods.

Accounts Payable

A current liability that represents any money the firm owes suppliers and other firms. Typically the firm does not pay interest on accounts payable.

Notes Payable

A current liability that represents money borrowed for the short term, typically under 5 years.

Treasury Securities

A debt instrument (bonds) that is issued by the United States Government in order to raise capital.

Corporate Bonds

A debt instrument that is issued by a corporation in order to raise capital.

Currency Forward

A derivative that locks in the exchange rate of a currency in the future, similar to a forward but more structured

Futures

A derivative that locks in the exchange rate of a currency in the future, similar to a future but less structured

How does the anticipation of bankruptcy affect a firm's capital structure?

A firm facing bankruptcy will reduce debt to avoid associate high levels of bankruptcy costs

How does the anticipation of bankruptcy affect a firm's capital structure?

A firm facing bankruptcy will reduce debt to avoid associated high levels of bankruptcy costs

How does the anticipation of bankruptcy affect a firm's capital structure? A firm facing bankruptcy will increase the relative amount of debt in order to increase payment to creditors rather than shareholders. A firm facing bankruptcy will reduce debt to avoid associated high levels of bankruptcy costs. A firm facing bankruptcy is not affected by any costs and therefore does nothing to restructure capital. A firm facing bankruptcy is exempt from repaying debt and therefore restructures its capital structure towards debt.

A firm facing bankruptcy will reduce debt to avoid associated high levels of bankruptcy costs.

Enron

A firm that perpetrated one of the largest corporate frauds in history.

Which of the following firms would fit the assumptions of the replacement cost method the best?

A firm with large real estate holdings

What do cash flows from investing activities generally relate to?

A firm's purchase and sale of long-term assets

What do cash flows from investing activities generally relate to? A firm's debt and equity transactions A firm's purchase and sale of long-term assets A firm's sale of goods and services A firm's non-cash transactions

A firm's purchase and sale of long-term assets

What do cash flows from investing activities generally relate to?

A firm's purchase and sale of long-term assets.

Stock Options

A form of compensation where the employee is paid with company stock options.

Company Y has a greater degree of financial risk than Company Z. What would be a result of a 1% decrease in EBIT for both companies? A greater percentage decrease in Company Y's pre-tax profit A greater percentage decrease in Company Z's pre-tax profit A greater percentage increase in Company Z's pre-tax profit A greater percentage increase in Company Y's pre-tax profit

A greater percentage decrease in Company Y's pre-tax profit

Syndicate

A group of intermediaries that is used to oversee the issuance of stocks and/or bonds.

Which type of firm would the replacement cost method be most appropriate for?

A holding company that primarily holds real estate assets

Partnership

A legal entity of two or more owners with unlimited liability and single taxation.

LLC

A legal entity that offers limited liability with single or double taxation.

Unsecured Loan

A loan that is not backed by a specific asset.

Subordinated Debentures

A lower-ranked bond that is not secured by collateral or guarantees.

Dealer Market

A market made up from multiple dealers that hold an inventory of securities and quote prices.

Specialist

A market maker on the New York Stock Exchange that holds an inventory of securities and acts as a liquidity provider to those that wish to buy and sell.

Auction Market

A market with a physical location and where prices are determined by investors' willingness to pay.

DuPont Formula

A mathematical break-down that breaks ROE into multiple components: profitability, efficiency, and leverage typically.

Degree of Operating Leverage (DOL)

A measure of business risk that examines the change in operating income relative to the change in sales. A measure of the firm's operating leverage. DOL = (Sales - Variable Costs)/EBIT

Degree of Financial Leverage (DFL)

A measure of financial risk that examines the change in pre-tax profit relative to the change in operating income. A measure of the firm's financial leverage. DFL = EBIT/(EBIT - Interest Expense).

Beta

A measure of systematic risk for a particular security (or portfolio) that quantifies the security's (or portfolio's) price sensitivity to price changes in the market.

The New York Stock Exchange (NYSE)

A physical trading floor and a computer network where stocks are bought and sold. It is the largest stock exchange in the world

Dividends in Arrears

A preferred stock characteristic where common stock dividends cannot be paid until the preferred dividends are paid. See also "Cumulative Dividends".

Effective Yield

A rate that includes non-annual compounding = (1+stated rate/m)^m -1.

Rule 144A

A safe harbor by the SEC to sell private capital to accredited investors.

Regulation S

A safe harbor by the SEC to sell securities outside of the US without publicly registering.

Hybrid Security

A security that has characteristics like stock and bonds - an example could be a preferred stock.

Annuity

A series of payments or receipts.

Lump Sum

A single cash flow at one point in time.

The timing of a firm's fiscal year end would be most relevant to which of the following firms:

A snowboard shop.

Leveraged Buyouts

A strategy used by a firm to increase their debt-to-equity ratio using an outside entity. This is when a firm is purchased with a ton of debt.

Leveraged Recapitalizations

A strategy used by firms to increase their debt-to-equity ratio.

Replacement Cost Method

A technique to value an entire firm based upon estimating how much it would cost to rebuild the company from scratch.

Irrelevance Hypothesis

A theory proposed by Modigliani and Miller that suggests that the value of a firm does not depend on the leverage of the firm.

Preferred Stock

A type of equity viewed as a hybrid security because some of its characteristics are debt like (i.e., having a set dividend payment), and others are more like equity (i.e. lower claim to assets). They typically do not have voting rights, however.

Percent of Sales Forecast

A way to make pro forma financial statements based on a sales prediction and how accounts vary with sales.

Equity Multiplier

A/E, the third part of the DuPont Formula.

A financial product in which banks bundle international stocks so they can be sold on US exchanges in US dollars is termed a __________.

ADR

A financial product in which banks bundle international stocks so they can be sold on US exchanges in US dollars is termed a(n) __________.

ADR

Which of the following is another name for the effective yield?

APY

Suppose that an investment will pay 24% APR for a year and that the interest will be compounded monthly. What is the expected return (APY) of the investment?

APY = [1 + (0.24 / 12)]^12 - 1 = 0.2682 or 26.82%

Suppose that an investment will pay 24% APR for a year and that the interest will be compounded monthly. What is the expected return (APY) of the investment?

APY=[1+(0.24/12)]^12 -1 = 0.2682

Which financial ratio is used to measure a company effectiveness in extending credit as well as collecting debts?

AR turnover

Average Collection Period (ACP)

AR/Daily Credit Sales, a liquidity ratio.

WACC

Abbreviation of the weighted-average cost of capital.

Which of the following is the main benefit of holding inventory?

Ability to meet the demands of customers

What is the acceptance criteria when using internal rate of return to evaluate a project?

Accept when the project return is greater than the required return

What is the acceptance criteria when using internal rate of return to evaluate a project? Accept when the project return is greater than the required return Accept when the required return is greater than the project return Accept when the internal rate of return equals the net present value Accept when the net present value is positive

Accept when the project return is greater than the required return

What is the acceptance criteria when using internal rate of return to evaluate a project?

Accept when the project return is greater than the required return.

Accrual Accounting

Accounting system based on recording accounts based on historical prices and the matching principle.

What are examples of current liabilities?

Accounts Payable Accrued Expenses

What are examples of Current Assets?

Accounts Receivable Inventory Prepaid Expenses

Which financial ratio is used to measure a company's effectiveness in extending credit as well as collecting debts?

Accounts Receivable Turnover

Trade Credit

Accounts payable on the balance sheet. A way to bootstrap a start-up.

Which of the following represent operating asset accounts considered in the calculation of CFO?

Accounts receivable and inventory

Which financial ratio is used to measure a company's effectiveness in extending credit as well as collecting debts? Accounts receivable turnover Rate of return on sales Times interest earned ratio Earnings per share

Accounts receivable turnover

Revenue Recognition

Accrual accounting permits firms to time the recognition of sales based on certain rules.

Matching Principle

Accrual accounting principle to match revenues and expenses in the same period.

Historical Cost Principle

Accrual accounting principle to recorded assets, liabilities, and equity at historical levels.

While looking at XYZ Corp's two most recent balance sheets, you notice inventory decreased by $100,000. The firm has a tax rate of 40%. To calculate Cash Flow from Operations, you will:

Add $100,000 to CFO

When calculating CFO, which of the following is correct?

Add an increase in accrued wages

Which of the following does NOT go into the calculation of the Initial Outlay according to the textbook?

After-tax proceeds from the sale of the new equipment

What issue(s) are associated with the firm goal to maximize shareholder value?

Agency costs and potential unethical behavior

NAFTA (North America Free Trade Agreement)

Agreement removed most taxes and tariffs for cross-border business within North America

Which one of the following is NOT a characteristic of annuities due?

All are characteristics of annuities due.

Which of the following is NOT an implication of the Capital Asset Pricing Model (CAPM)?

All choices are implications of the CAPM

Why would a country have incentives to devalue its currency?

All of the above are true.

Which types of costs are not associated with holding inventory?

All of these are associated costs of holding inventory

Which of the following is NOT one of the ways to value a firm that was covered in this topic?

All of these are methods

According to the survey of nearly 400 Chief Financial Officers discussed in the topic, which of the following methods do firms use as methods of calculating the cost of common equity?

All of these choices

FINRA helps the SEC protect investors by providing information in the following ways:

All of these choices

How do we compute projected RE?

All of these choices

In an effort to reduce fraudulent activities in corporations, the SEC now requires which of the following?

All of these choices

Maximizing shareholder value ethically can improve society generally by:

All of these choices

Spontaneous accounts generally include

All of these choices

The DCF method serves as a good review for all of the following except?

All of these choices

The SEC requires firms that want to go public to file a prospectus. What is the purpose of this filing?

All of these choices

The SEC was designed to enforce statutes that regulate markets and protect investors. Which of the following are ways they accomplish this goal?

All of these choices

What are ways firms can maximize shareholder value?

All of these choices

What does a "safe harbor" to the 1933 Act provide?

All of these choices

When establishing a credit policy, firms should consider which of the following:

All of these choices

Which of the following are real methods to manage sales growth?

All of these choices

Which of the following balance sheet accounts is working capital management most concerned with?

All of these choices

Which of the following best explains the role of prices?

All of these choices

Which of the following can be a discretionary account?

All of these choices

Which of the following is a typical characteristic of preferred stock?

All of these choices

Which of the following is not a benefit of holding inventory?

All of these choices

Which of the following principles is related to working capital management?

All of these choices

Which of the following ways can inventory be identified?

All of these choices

Which type of bond is an unsecured bond?

All of these choices

Which types of costs are associated with holding inventory?

All of these choices

Why is it important to use accurate estimates for financial forecasting?

All of these choices

Which of the following is NOT an assumption in Modigliani and Miller (1958, 1963)?

All of these choices are assumptions made.

Which of the following is NOT essential to evaluate projects?

All of these choices are essential criteria.

Which of the following is not a problem associated with payback period?

All of these choices are problems associated with payback period.

Who is NOT subject to FINRA regulation?

All of these choices are subject to FINRA regulation

Which of the following is NOT a way discussed to manage sales growth?

All of these choices are ways

When evaluating a potential capital project, which of the following should be considered?

All of these choices.

In order to make ratio analysis a more effective tool, you should carefully consider:

All the statements are correct.

Which 2 techniques would be considered effective ways to manage the growth of a firm, if additional financing is not available?

Alter capacity Increase sales price

Expenses

Amount incurred to manufacture products

Interest Expense

Amount owed to creditors that appears on the income statement between EBIT and earnings before taxes.

Liabilities

Amounts owed by the company to others

LLC Members

An "owner" of an LLC.

S-1/As

An amendment to the original S-1.

Perpetuity

An annuity that lasts forever.

Ordinary Annuity

An annuity that pays at the end of each period.

Proxy

An approximation measure for something else.

Current Yield

An approximation of the yield to maturity that does not incorporate the time value of money = Annual Coupon/Current Market Value

Residual Claim

An asset (such as stock) which earns its return after fixed-income assets (such as bonds) are paid. This means that holder of stock will get "whatever is left over" (i.e., the residual value) in the event of default.

Liquid Asset

An asset that can be converted into cash quickly without the loss of significant value.

Gordon Growth Model

An economic model to compute the value of a stock assuming the stock will have constant dividend growth. Gordon Growth Model = D1/(r-g).

Multi-stage Growth Models

An economic model to compute the value of equity assuming multiple growth rates. This is in comparison to "Constant Growth".

Two-stage Model

An economic model to compute the value of equity assuming two growth rates. Similar to the "Multi-Stage Growth Model".

Stocks

An equity instrument that is issued by a firm and represents a share of ownership in a particular company.

Additional Paid-in Capital (APIC)

An equity item on the balance sheet representing the proceeds (price at which stock is initially sold) minus the par value of the stock (note: par is usually $1 per share).

Holding Period Return

An estimate of a stock's return over a certain period of time. Typically ignores time value of money.

Which of the following will decrease CFO?

An increase in accounts receivable and a decrease in accounts payable

Which of the following is true with respect to CFO?

An increase in inventory indicates a reduction in CFO

Which of the following will NOT affect differential cash flows?

An increase in the estimation of value of a new machine at the end of the project.

Use of Cash

An increase of an asset (including cash) or the decrease of a liability.

S&P 500

An index managed by Standard and Poor's that is designed to approximate the total stock market. Is often used as a benchmark to understand how the stock market performed overall.

Shareholder

An individual (or entity) that holds a share or fraction of ownership in a particular company.

Which of the following best describes the difference between an annuity due and an ordinary annuity?

An ordinary annuity pays at the end of the period, but an annuity due pays at the beginning.

Naked Position

An ownership position without any hedges

The flexibility aspect of ratios and ratio analysis refers to which of the following?

Analysts can create new ratios if needed.

Which three pieces of data are needed to perform a capital budget analysis? Choose 3 answers. Annual cash flows for the life of the new project Cash flow when the firm terminates the project The estimated value of the firm's stock price The initial cost of the new project The estimated value of the firm's capital assets

Annual cash flows for the life of the new project Cash flow when the firm terminates the project The initial cost of the new project

Differential Cash Flows (DiffCF)

Annual incremental cash flows that result because of the project.

Coupon Rate

Another name for coupon yield.

Par Value

Another name for face value. (The lump sum amount paid on a bond's maturity date.)

Fixed-return Securities

Another name for fixed-income securities. These are typically debt instruments, such as a bond.

Discretionary Accounts

Another name for non-spontaneous accounts.

Required Rate of Return

Another name for the discount rate. The minimum return an investor requires to invest in an asset, given the riskiness of the asset and potential opportunity cost to the investor.

Plowback Ratio

Another name for the retention ratio.

Diversifiable Risk

Another name for unsystematic risk.

Zero Coupon Bonds

Another name for zeros.

Operating Risk

Another term for business risk.

Non-diversifiable Risk

Another word for market risk.

Earnings

Another word for net income.

Non-cash Expense

Any expense that is not an actual cash flow, but is recorded in the financial statements. An example is depreciation.

In a CAPM framework, why do investors hold the market portfolio?

Any stock with higher expected returns, relative to risk, will converge to the market portfolio.

Under which circumstances will annual percentage yield (APY) is greater than the annual percentage rate (APR)?

Any time the number of compounding periods is greater than annual

Under which circumstances will APY be greater than the APR?

Any time the number of compounding periods is greater than annual.

Under which circumstances will annual percentage yield (APY) be greater than the annual percentage rate (APR)? Any time the number of compounding periods is greater than annual. Any time the number of compounding periods is exactly 1.0. Any time the effective annual rate equals the APR. Any time the stated nominal rate equals the APY.

Any time the number of compounding periods is greater than annual.

Under which circumstances will annual percentage yield (APY) be greater than the annual percentage rate (APR)?

Anytime the number of compounding periods is greater than annual

What is the benefit of using the earnings yield vs. PE ratio?

As earnings approach zero, using the earnings yield will produce a small number

Given the information below, an investor that wishes to increase return relative to risk will prefer which of the following assets?

Asset A

Balance Sheet Equation

Assets = Liabilities + Equity

What is the basic equation for a balance sheet?

Assets = Liabilities + Equity

What is the basic equation for a balance sheet? Revenue + expenses = income Assets = Liabilities − Equity Revenue + Assets = Equity Assets = Liabilities + Equity

Assets = Liabilities + Equity

What is the basic equation for a balance sheet?

Assets = Liability + Equity

Fixed Assets

Assets on the balance sheet with a lifespan greater than a year.

Current Assets

Assets that are expected to be liquidated within a year.

What is the basic equation for a balance sheet?

Assets=liabilities+equity

Which of the following is not one of the ways the Dodd Frank Act monitors capital markets?

Assign a CAMELS score to bank

Which of the following is NOT part of the Sarbanes-Oxley Act:

Assigns specific accounting firms to audit a firm based on its industry

Dodd-Frank regulates which segment of the U.S. economy?

Banking industry

Why are American regulators focused on international investing in a global marketplace?

Because American investors are focused on international investing in a global marketplace

Why are American regulators focused on international investing in a global marketplace?

Because American investors are focused on international investing in a global marketplace.

Why are American regulators focused on international investing in a global marketplace?

Because international investing in a global marketplace is the concern of American investors

Why are American regulators focused on international investing in a global marketplace? - Because international investing in a global marketplace is the concern of American investors - Because an exclusively domestically focused regulatory approach is still effective - Because weaving international concerns into domestic policy is cost-effective - Because other jurisdictions have the same priorities and solutions as the United States

Because international investing in a global marketplace is the concern of American investors

If an investor knows the idiosyncratic risk, the investor knows the ____________.

Beta coefficient

An investor wants to maximize the YTM. Which bond would the investor choose? Bond 1 has a price of $954 with a coupon rate of 7% and a maturity of four years. Bond 2 has a price of $972 with a coupon rate of 6.5% and a maturity of six years. Both have a face value of $1,000 and the coupon payments are paid semiannually.

Bond 1: 8.38 Bond 2: 7.08 Bond 1: N = 8 , I/Y = ? , PMT = 35 , PV = -954 , FV = 1,000 I/Y = 4.1886 x 2 = 8.38 Bond 2: N = 12 , I/Y = ? , PMT = 32.50 , PV = -972 , FV = 1,000 I/Y = 3.5404 x 2 = 7.08

What is one of the two basic types of financial instruments

Bonds

What is one of the two basic types of financial instruments?

Bonds

What is one of the two basic types of financial instruments? - Checking accounts - Bonds - Euros - Hedge funds

Bonds

Which is the largest source of capital for firms?

Bonds

Samurai Bonds

Bonds issued by a firm foreign to Japan but denominated in yen

Foreign Bonds

Bonds issued in a domestic market by a foreign firm, but in the domestic currency.

Eurobonds

Bonds issued in non-US countries by US firms and denominated in dollars

Bulldog Bonds

Bonds issued in the UK and denominated in British pounds

Investment Grade

Bonds rated BBB or above.

Mortgage Bonds

Bonds that are secured by real property.

Convertible Bonds

Bonds that can be converted into equity at the owner's request.

Zeros

Bonds that do not pay interest payments.

Which components are part of total liabilities?

Bonds, accounts payable, mortgage

Firms that are regulated by FIRNA are primarily ______________ and ______________.

Brokerage firms, Exchange markets

What would be a source of information to determine replacement cost?

Building appraisal

How can a company maximize shareholder value?

By making decisions that keep the control of the business with the owners

How can a private firm appropriately maximize a sharholder value?

By making decisions that keep the control of the business with the owners

How can a private firm appropriately maximize shareholder value?

By making decisions that keep the control of the business with the owners

How can a private firm appropriately maximize shareholder value? - By increasing the firm's stock price - By reducing the firm's labor - By making decisions that keep the control of the business with the owners

By making decisions that keep the control of the business with the owners

How can a private firm appropriately maximize shareholder value?

By making decisions that keep the control of the business with the owners.

How does the SEC regulate the financial industry?

By requiring public disclosure of information about entities that sell public equity or debt

How does the Securities Exchange Commission (SEC) regulate the financial industry?

By requiring public disclosure of information about entities that sell public equity or debt

How does the Securities Exchange Commission (SEC) regulate the financial industry? By requiring public disclosure of information about entities that sell public equity or debt By providing advice to institutions and individuals who are considering making financial investments By designing software, management systems, and other technologies to coordinate financial exchanges By investigating the reasons behind poor investment decisions and organizational underperformance

By requiring public disclosure of information about entities that sell public equity or debt

The figure below represents a portfolio that plots the expected return against the risk of each investment: Where along this line will a highly risk-averse investor likely be? A1 C1 D2 D3

Where along this line will a highly risk-averse investor likely fall? efficient frontier chart

Current Ratio

CA/CL, a liquidity ratio.

What advantage does the capital asset pricing model (CAPM) have over the Gordon growth model?

CAPM considers risk of a stock relative to the market to determine expected return

What advantage does the capital asset pricing model (CAPM) have over the Gordon growth model?

CAPM considers risk of a stock relative to the market to determine expected return.

Which advantage does the capital asset pricing model (CAPM) have over the Gordon growth model? CAPM does not rely on an estimate of the market risk. CAPM is tied to relative market risk, which provides a less reliable estimate growth. CAPM considers risk of a stock relative to the market to determine expected return. The relative market risk is always constant.

CAPM considers risk of a stock relative to the market to determine expected return.

What advantage does the capital asset pricing model (CAPM) have over the Gordon growth model?

CAPM considers risk of a stock relative to the market to determine expected returns

What are 2 primary benefits of the capital asset pricing model (CAPM)?

CAPM provides a way to determine the expected return for stocks CAPM provides a way to incorporate risk

What are two primary benefits of the capital asset pricing model (CAPM)? Choose 2 answers. CAPM provides a way to forecast actual return for stocks. CAPM provides a way to determine the expected return for stocks. CAPM provides a way to estimate the required return. CAPM provides a way to adjust a portfolio to a market beta of one (1).

CAPM provides a way to determine the expected return for stocks. CAPM provides a way to estimate the required return.

What are two primary benefits of the capital asset pricing model (CAPM)?

CAPM provides a way to determine the expected return for stocks. CAPM provides a way to estimate the required returned.

What are two primary benefits of the capital asset pricing model (CAPM)?

CAPM provides a way to determine the expected return for stocks. CAPM provides a way to estimate the required return

If net change in common stock is $35,000 and net change in Long Term Liabilities ($15,000) and dividends paid are $5,000, what is the Cash Flow from Financing Activities?

CFF = -15,000 + 35,000 - 5,000 = $15,000 inflow

If net change in common stock is $35,000 and net change in Long Term Liabilities is $15,000 and dividends paid are $5,000, what is the Cash Flow from Financing Activities?

CFF = 15,000 + 35,000 - 5,000 = $45,000 inflow

Harrison reported Net PPE of $5,000 last year and this year the firm reported Net PPE of $4,500. The depreciation last year and this year were $400 and $300 respectively. What is the Cash Flow from Investment Activities?

CFI = ((4,500 - 5,000) + 300) x (-1) CFI = (-500 + 300) x (-1) CFI = -200 x (-1) CFI = 200 inflow

If the net change in PPE is $20,000 and depreciation expense is $5,000, what is the Cash flow from Investing Activities?

CFI = (20,000 + 5,000) x (-1) CFI = -25,000 outflow

CFI = (4,500-4,600)+800=700

If the net change in PPE is $20,000 and depreciation expense is $5,000, what is the cash flow from investing activities?

CFI=20,000+5,000=$25,000

Johnson company reported the following: Net Income $100,000 Depreciation $20,000 Change in Accounts Receivable $10,000 Change in Inventory ($3,000) Change in Accounts Payable ($6,000) Change in Accrued Expenses $2,000 Change in Equipment ($25,000) Dividends paid $5,000 Change in Long Term Liabilities $30,000 What is the Cash Flow from Operating Activities?

CFO = 100,000 + 20,000 - ((10,000-3,000) - (-6,000+2,000)) CFO = 100,000+20,000 - (7,000 +4,000) CFO = $109,000 inflow

Johnson company reported the following: Net Income $100,000 Depreciation $20,000 Change in Operating Assets $10,000 Change in Operating Liabilities ($4,000) Change in Equipment (25,000) Dividends paid $5,000 Change in Long Term Liabilities $30,000 What is the Cash Flow from Operating Activities

CFO = 100,000 + 20,000 - (10,000- (-4,000)) CFO = 100,000+20,000-(14,000) CFO = $106,000 inflow

Intel reported the following for 2014:

CFO = 100,000+20,000-10,000 = 110,000

Johnson Company reported a Net Income of $50,000. It also reported depreciation expense of $10,000 and an increase in Current Assets of $8,000 and decrease in Current Liabilities of $3,000. What is the Cash Flow from operations?

CFO = 50,000 + 10,000 - ((8,000-0) - (0 - 3,000)) CFO = 50,000 + 10,000 - (8,000+3,000) CFO = $49,000 inflow

Which of the following best describes the simplified calculation of CFO:

CFO = NI + Depreciation expense + changes in operating accounts

Harrison Company reported an increase of $5,000 in Accounts Receivable for the year and half of it will be collected the following year. What is the impact on CFO for the current year?

CFO = XXX + XX - ((+5,000) - (0)) CFO = -5,000 or it will decrease CFO by $5,000

Harrison Company reported an increase of $5,000 in Accounts Payable for the year and half of it will be paid the following year. What is the impact on CFO for the current year?

CFO = XXX + XX - ((0) - (+5,000)) CFO = XXX + XX +5,000 CFO = +5,000 or it will increase CFO by $5,000

Inventory Turnover

COGS/Inventory, a liquidity ratio.

An investor purchased a stock for $55 today that will pay a dividend of $3 at the end of the year. What should the stock price be at the end of the year if the investor requires a 15% rate of return?

CPT=FV=60.25

The face value of a bond is 1,000 and the coupon rate is 10%. If the current price of the bond is 920 and the bond matures in 10 years, what is the yield?

CPT=I/Y=11.38

The face value of a bond is 1,000 and the coupon rate is 10%. If the yield is 8% and the bond matures in 5 years, what is the value of the bond?

CPT=PV=1,079.85

An investor will receive $10,000 per year at the end of every year for the next ten years. If the annual interest earned on the investment is 8%, what is the present value of the investment?

CPT=PV=67100.81

Accounts Receivable 600 Inventory 800 Fixed assets 1,000 Accounts payable 500 Long term debt 900 Common stock 400

CR=(600+800)/500=2.8

A stock will be worth $40 at the end of the year and will pay a dividend of $2. How much should an investor pay for the stock if the investor requires a 15% rate of return?

CTP=PV=36.52

Which one of the following is NOT part of the capital budgeting calculation?

Calculating the estimated value of the stock when the firm terminates the project

Which of the following is NOT given as an example of a nation that has experienced significant country risk over recent years?

Canada

Which of the following is NOT given as an example that has experienced significant country risk over recent years?

Canada

CAPM

Capital Asset Pricing Model, a linear model that relates risk and return: Re = Rf + Beta(Rm-Rf).

CAPEX

Capital Expenditures, how much the firm spends on fixed assets.

Which of the following is an example of firm capital?

Cash

Which components are part of total assets?

Cash accounts receivable, inventory, long term assets

Which of the following are current asset or current liability accounts that are not included in the calculation of CFO?

Cash and notes payable

What does free cash flow represent?

Cash available for distribution after funding required reinvestment

What does free cash flow represent? Cash flows from operating activities Cash balance at the end of the period Cash available for distribution after funding required reinvestment Cash available for dividends

Cash available for distribution after funding required reinvestment

What does free cash flow represent?

Cash available for distribution after funding required reinvestment.

When fixed assets increase what happens to cash?

Cash decreases

Which one of the following is NOT a part of the statement of cash flows?

Cash flows from liquidating activities

Incremental Cash Flows

Cash flows that arise that are directly related to a specific project and would not occur otherwise.

Free Cash Flow to the Firm

Cash left over after operations and taxes available to creditors and shareholders.

Which transaction is reflected in cash flow from operating activities?

Cash sales to customers

Which transaction is reflected in cash flow from operating activities? Amortization expense Gain or loss on the sale of property, plant, and equipment Credit sales to customers Cash sales to customers

Cash sales to customers

Which transaction is reflected in cash flow from operating activities?

Cash sales to customers.

Free Cash Flows (FCFs)

Cash that is left over after business operations and taxes are paid.

American Depository Receipts (ADRs)

Certificates issued by U.S. banks and traded on U.S. markets but represent shares of foreign stocks

Which one of the following items should NOT be included in the calculation of CFF?

Change in Retained Earnings

The evolution of retained earnings is best described by:

Change in retained earnings = net income - dividends

When performing ratio analysis, scrubbing the data includes all of the following except:

Choosing a relevant comparison set.

What should a company do to manage its working capital?

Collect quickly and pay slowly.

The two main types of stock are:

Common and Preferred

PS Ratio

Commonly used to value a firm when earnings are negative, equals price divided by sales.

Company A has an EBIT of $700,000 and interest expense of $30,000. Company B has EBIT of $1,500,000 and interest expense of $30,000. Which company has a higher degree of financial leverage?

Company A 700,000/670,000 = 1.04 Co B: 1,500,000/1,470,000 = 1.02

Company A offers trade credit of 2% 10 / net 30, and Company B offers trade credit at net 30. What can be said about the credit policies of each company?

Company A can attract more customers.

Company A has a degree of operating leverage of 1.85 and Comapny B has a degree of operating leverage of 6.5. What does the degree of operating leverage say about the 2 companies?

Company A has lower risk than Company B

Company A has a degree of operating leverage of 1.85, and Company B has a degree of operating leverage of 6.5. What does the degree of operating leverage say about these two companies? Company A has lower risk than Company B. Company A must have a lower increase in sales than Company B to achieve the same operating income. Company A has lower debt than Company B. Company A has higher fixed costs than Company B.

Company A has lower risk than Company B.

Company A has a degree of operating leverage of 1.85 and Company B has a degree of operating leverage of 6.5. What does the degree of operating leverage say about the two companies?

Company A must have a lower increase in sales than Company B to achieve the same operating income

Company A wishes to keep 20% of its assets as cash. Company B keeps its cash balance at 5% of assets. Which of the following statements applies?

Company B invests in more working current assets.

Company A's inventory is larger than Company B's. Both companies are competitors and are about the same size. What does this difference mean from a working capital management standpoint?

Company B might have higher inventory turnover.

Which of the following valuation methods is most appropriate to use for a young firm with high growth prospects?

Comparable Multiples

What are the two ways a syndicate can place a bond?

Competitive sale or negotiated sale

What are the likeliest outcomes if a company outsources the manufacturing of its products to a foreign country? Choose 2 answers. - Consumer prices will decrease. - Tariffs will decrease. - Domestic wages will increase. - Production capacity will decrease. - Domestic employment will decrease.

Consumer prices will decrease. Domestic employment will decrease.

Which of the following is NOT a provision of SOX:

Control of compensation for top management

What are the three important areas of finance discussed in this section?

Corporate Finance, Investments, and Banking/financial institutions

The control issues involved in running a firm are known as:

Corporate governance

Which one of the following items should NOT be included in capital budgeting analysis?

Cost of the market analysis used to generate sales forecasts.

Flotation Costs

Costs associated with the initial placing of newly issued securities. These costs are negotiated and typically paid to underwriters of the issuance. The costs a firm must pay to raise external financing. A company typically doesn't have the expertise to raise external financing on their own, so they will hire an investment bank to do it for them. The investment bank will charge the company and this is known as flotation costs.

Exchange Rates Regimes

Country strategies for its currency strength to include fixed/pegged, free floating, and managed floating

The stated interest rate on a bond is the:

Coupon

What is the interest rate for annual payments of the bond known as?

Coupon Rate

Based on the following financial data? Accounts Receivable $600 Inventory $800 Fixed Assets $1,000 Accounts Payable $500 Long term debt $900 Common Stock $400 What is a company's current ratio?

Current Ratio = (600+800)/500 = 2.8

The figure below represents the levels of market efficiency. Which investment option is less desirable for a prudent investor? A, B, C, D

Debt Ratio

D/A, a financing ratio.

Debt-to-equity Ratio

D/E, a financing ratio.

A stock just paid a dividend of $5 and the dividend is expected to grow at 4%. If the investor paid $40 for the stock today, what is the expected rate of return on the stock?

D1=5(1+.04)=5.20 (5.20/40)+.04=.17

A stock just paid a dividend of $5 and the dividend is expected to grow 4%. If the required rate of return is 10%, what is the maximum that should be paid for the stock today?

D1=5(1+.04)=5.20 5.20/(.10-.04)=$86.67

The projected sales for a new project is expected to be $100 million. Accounts receivable is expected to be 20% of sales, PPE is expected to be 50% of sales, and accounts payable is expected to be 5% of sales. The proforma income is expected to be 15% of sales and projected equity of 12 million and debt of 10 million. What is the DFN?

DFN = (100*0.20) + (100*0.50) - (100*0.05) - 10 - 12 - (100*0.15) DFN = 28 million

How do we compute DFN?

DFN = Projected total assets - projected total liabilities - projected owners' equity

Projected total assets are 500,000 with projected total liabilities of 230,000 and projected owner's equity of 100,000. What amount of discretionary financing is needed?

DFN=500,000-230,000-100,000=170,000

What is the Degree of Operating Leverage given Sales of 100,000. Variable Costs of 75,000 and EBIT of 10,000?

DOL= (100,000-75,000)/10,000=2.5

What is the degree of operating leverage given sales of 100,000. Variable costs of 75,000 and EBIT of 10,000?

DOL=(100,000-75,000)/10,000=2.5

Brighton and DarkTec are identical companies: both companies sell computers to identical clients, recognize the same amount of revenue, and purchased the same capital equipment at the same cost at the beginning of this year. However, Brighton's sales are 1/3 on credit while 2/3 of DarkTec's sales are on credit. In addition, while both companies use straight-line depreciation, Brighton calculates depreciation of the new equipment based on an 8-year useful life while DarkTec calculates depreciation based on 10-year life (i.e. Depreciation Expense = Cost of Machine/Life of the Machine). Assume both companies had exactly the same balance sheets at the beginning of the year. Which of the following statements is most likely correct?

DarkTec has a higher net income than Brighton.

Why would a company prefer to raise capital by issuing debt instead of issuing new equity?

Debt financing provides interest tax benefits

Why would a company prefer to raise capital by issuing debt instead of issuing new equity? Debt financing provides greater solvency risk. Debt financing provides interest tax benefits. Debt financing provides less shareholders' control. Debt financing provides optimal capital structure.

Debt financing provides interest tax benefits.

Why would a company prefer to raise capital by issuing debt instead of issuing new equity?

Debt financing provides optimal capital structure

Suppose the following information: Economic State Probability π Returns for Stock A Recessionary .40 10% Expansionary .60 23% If the probability of a recessionary state increases, the expected return is expected to __________.

Decrease

If the value of the dollar increases, the price of imports _________.

Decreases

What is the financial leverage of Company A? How will that leverage affect profits compared to Company B if sales decrease? For Company A, EBIT is $500,000, interest expense is $50,000, sales are $4,500,000, and variable costs are $3,000,000.

Degree of financial leverage: 1.11 Profits decrease with higher leverage. Profits decrease more as leverage increases. 500/(500 - 50) = 1.11

Which of the following acts was created in response to high inflation and the sluggish economy in the 1970's.

Depository Institutions Deregulation and Monetary Control Act

What is included in the income statement and not included in the statement of cash flows?

Depreciation expense

Depreciation expense is a significant source of difference between net income and CFO because:

Depreciation expense is non-cash expense on the income statement associated with the acquisition of long-lived assets.

Why is depreciation expense taken out of the net income calculation, yet added back at the end?

Depreciation expense is tax-deductible.

Which of the following is NOT an important part of managing accounts receivables?

Determining optimal inventory levels

A company reports the following for the first year of a new project: Increase in Revenue = $2,000,000 Increase in variable and fixed costs = $800,000 Depreciation expense = $300,000 Increase in working capital = 10% of increase in revenue Tax rate = 40% What is the differential cash flow for the 1st year?

Differential cash flow = Net income + Depreciation - Increase in Working Capital Net income = (2,000,000 - 800,000 - 300,000) x (1-0.40) = 540,000 Differential cash flow = 540,000 + 300,000 - (0.10*2,000,000) = $640,000

On the income statement, Cost of Goods Sold includes:

Direct materials and direct labor associated with production

Which company control is required by the Sarbanes-Oxley Act?

Disclosure of off-balance sheet debts

Which company control is required by the Sarbanes-Oxley Act? Disclosure of off-balance sheet debts Monthly evaluation of internal controls Publication of detailed prospectus for investors Announcement of annual public shareholder meetings

Disclosure of off-balance sheet debts

Which of the following is not one of the three main missions of SOX?

Discover instances of fraud in large corporations early to prevent economic disruptions

DFN stands for:

Discretionary Financing Needed

Projected total assts are $500,000 with projected total liabilities of $230,000 and the projected owner's equity of $100,000. What amount of discretionary financing is needed?

Discretionary Financing Needed = 500,000-230,000-100,000=170,000

DFN

Discretionary financing (or funds) needed. How much cash the firm needs in a pro forma statement.

To determine how much a spontaneous account will change we:

Divide last year's spontaneous account by last year's sales

Dividend Yield

Dividend payment/Current stock price. Could also be written as (Dividend per Share) / (Price per Share).

One of your friends is recommending a stock if it sells for more than $165.00 per share. The growth rate is 4% and the latest dividend was $6. You are expecting an 11% return. Why should you buy or not buy the stock?

Do not buy—the calculated price is too low. (6.00 * 1.04) / (.110 - .040) = 89.14

If a currency (Swiss Franc) appreciates relative to a second currency (Chinese Yuan), then the exchange rate measured as SF/Yuan goes:

Down

If a currency (Swiss franc) appreciates relative to a second currency (Chinese yuan), then the exchange rate measured as SF/Yuan goes _________.

Down

The figure below represents the levels of market efficiency: Which investment option is less desirable for a prudent investor? A B C D E

What is the Expected Rate of Return for a stock where treasury bills are returning 2.5% and the market as a whole, is returning 15%. The stock has a beta of 1.25 ?

E(r) = Rf + Beta (Rm-Rf) E(r) = .025+(1.25*(.15-.025))=.181

E(r)=(.6*.02)+(.4*.08)=.044

What is the Degree of Financial Leverage given Sales of $100,000, Variable Costs of $60,000, Fixed costs of $15,000 and Interest Expense of $4,000.

EBIT = 100,000-60,000-15,000=25,000 DFL=EBIT/(EBIT-Interest Expense) = 25,000/(25,000-4,000) = 25,000/21,000 = 1.19

What is the equation for FCFF?

EBIT(1-t) + Depreciation - CAPEX - Increase in NWC

The OIROI (operating income return on investment) uses what elements on the income statement?

EBIT, total assets

Operating Margin

EBIT/Sales, a profitability ratio.

What is the degree of Financial Leverage given Sales of 100,000, variable costs of 60,000, fixed costs, of 15,000 and interest expense of 4,000?

EBIT=100,000-60,000-15,000=25,000 DFL=25,000/(25,000-4,000)=1.19

What is the name of the reciprocal of the P/E ratio (P/E flipped upside down, E/P) called?

Earnings yield

What is FINRA's primary purpose?

Ensure the securities industry is fair and honest

Stock are also known as _________

Equities

A basic equation for the balance sheet is_______.

Equity = Assets - Liabilities

The basic equation for the balance sheet is:

Equity = Assets - Liabilities

Internal Equity

Equity capital that is available to the firm based on past cash flow.

What type of bond is paid in a different currency than the country's issuing it?

Euro Bond

A stock just paid a dividend of $5 and the dividend is expected to grow at 4%. If the required rate of return is 10%, what is the maximum that should be paid for the stock today?

Expected Dividend = Recent Dividend * (1 + Growth Rate) Expected Dividend = 5(1+.04) = 5.20 Price = Expected Dividend / (Required Return - Growth Rate) Price = 5.20/(.10-.04) = $86.67

A stock just paid a dividend of $5 and the dividend is expected to grow at 4%. If the investor paid $40 for the stock today, what is the expected rate of return on the stock?

Expected Dividend = Recent Dividend * (1 + Growth Rate) Expected Dividend = 5(1+.04) = 5.20 Required Return = (Expected Dividend / Price) + Growth Rate Required Return = (5.20/40) + .04 = .17 or 17%

Expense Recognition Principle

Expenses are recognized when they are incurred by the company

Capital Expenses

Expenses that do not flow directly to the income statement, instead they appear as assets on the balance sheet.

The date on which the face value of the bond is repaid is the:

Expiration or maturity date

EFN

External financing (or funds) needed. Another name for DFN.

A positive DFN indicates:

External financing is needed

A limit order to buy a stock at $101.55 would execute at the current ask price (T/F)

An IPO is a seasoned equity offering (T/F)

Dealer markets have a physical location.

Economics is a subfield of Finance (T/F)

Efficient markets are those in which prices are volatile

Efficient markets will often have mispriced securities

Inefficient markets are those in which prices will respond quickly to new information

NASDAQ is the world's largest secondary financial market. (T/F)

Nasdaq is an example of an auction market.

Stocks that are listed on dealer markets generally have a single dealer for each stock.

The NYSE specialist will charge a higher price to sellers of the stock and a lower price to the buyer of the stock

Trading on the NYSE is executed without a specialist (i.e. a market maker). (T/F)

While competitive sales allow underwriters to submit bids to purchase bonds, negotiated sales do not. (T/F)

Which of the following accurately describes the calculation of Free Cash Flow to the Firm?

FCFF = EBIT*(1-tax rate) + Depreciation - CAPEX - Increases in NWC

The Face value of a bond is $1,000 and the coupon rate is 10% and interest is paid semi-annually. If the market rate is 8% and the bond matures in 5 years, what is the value of the bond today? If the interest is paid semi-annually, then you should make the following three adjustments:

FV = 1,000 PMT = (1,000*0.10)/2 = 50 I/Y = (8/2) = 4 N=5*2 = 10 CPT = PV = -1,081.10

The Face value of a bond is $1,000 and the coupon rate is 10%. If the yield is 8% and the bond matures in 5 years, what is the value of the bond today?

FV = 1,000 PMT = 1,000*0.10 = 100 I/Y = 8 N=5 CPT = PV = -1,079.85

The face value of a bond is $1,000 and the coupon rate is 10%. If the current price of the bond is $920 and the bond matures in 10 years, what is the yield?

FV = 1,000 PV = -920 PMT = 100 N = 10 CPT = I/Y = 11.38

A broker purchased a stock that pays an annual dividend of $1.15 for $16 today with a required rate of return of 15%. What is the actual return if the broker sold the stock at the end of the year for $19?

FV = 19 PMT=1.15 N=1 PV=-16 CPT=I/Y=25.9375

A stock will be worth $40 at the end of the year and will pay a dividend of $2. How much should an investor pay for the stock if the investor requires a 15% rate of return?

FV = 40 PMT = 2 N = 1 I/Y = 15 CPT = PV = -36.52

What is a common abbreviation for foreign exchange risk?

FX risk

(True/False) A firm can sustain negative CFO indefinitely by borrowing, selling equity, and/or by selling assets.

False

(True/False) An income statement always provides an accurate measure of a firm's cash flows.

False

(True/False) Assuming no asset disposals, CFI is equal to the change in Net PP&E.

False

(True/False) The Statement of Cash Flows is not useful when assessing the financial health of a firm due to the impact of accrual accounting.

False

(True/False) The income statement represents a snapshot of the firm at one point in time.

False

(True/False) Unlike net income, CFO is not subject to managerial discretion or manipulation.

False

(True/False) When calculating CFO, you generally include the changes in all current assets and current liabilities.

False

A Treasury bond is a debt instrument issued by corporations.

False

A change in notes payable will impact CFO.

False

A commonly used method to shorten float time is discount policy.

False

A company can lower its WACC by increasing the percentage of total debt made up from long-term debt.

False

A discount policy 2/10 net 30 means that a discount of 2% is applied to the 10% of the total bill that is due in 30 days.

False

A discount policy is a policy that provides a discount to customers if they pay for the products on the payment due date.

False

A firm can use retained earnings to pay bills if needed.

False

A firm should always choose to pay cash and avoid credit purchases of raw materials.

False

A firm that has greater volatility in its stock price is likely to have a lower cost of capital.

False

A firm with positive CFO should be considered healthy.

False

A market order to sell a stock would execute at the current ask price.

False

A portfolio of Microsoft Co. and Apple Computers is better diversified than a portfolio made up of Microsoft Co. and John Deere Tractors.

False

A prospectus is separate from the SEC filing.

False

A stock is a debt instrument issued by corporations.

False

A working capital increase caused by an increase in inventory will be a cash inflow for the firm.

False

According to Modigliani and Miller (1958, 1963), an unlevered firm will not have the same cost of capital as a levered firm.

False

According to a survey by Graham and Harvey (2001), the dividend discount (Gordon) model is more widely used to calculate the cost of common equity by firms than the Capital Asset Pricing Model.

False

According to the CAPM, firms with higher betas have a lower return required by shareholders.

False

According to the CAPM, some systematic risk can be diversified away.

False

Accounts payable will be affected when a firm sells finished products to customers on credit.

False

Agency costs are commonly mitigated by increasing management compensation.

False

An IPO is a seasoned equity offering.

False

An advantage of selling products on credit is that the firm receives the money earlier, which provides a greater time value.

False

An example of agency costs is increased costs incurred because of higher levels of production.

False

An increasing debt-to-equity ratio might decrease the value of the firm because equity financing is more effective than debt financing.

False

An increasing debt-to-equity ratio might improve the value of a firm because equity financing is less costly than debt financing.

False

As depreciation increases, a firm's financial risk increases.

False

As flotation costs become more expensive, using internal equity will become more costly than using external equity.

False

Banks make money when interest rates they charge to borrowers are less than interest rates they pay depositors.

False

Business risk is the risk associated with having high debt levels.

False

Buying inventory with cash might be beneficial because doing so allows firms to hold onto their cash longer.

False

Cash accounting offers a superior method of analyzing a company.

False

Cash flow from operations cannot be managed.

False

Castanias (1983) presents evidence that when firms face higher bankruptcy risk, they will not carry lower levels of debt.

False

Collection float is defined as the amount of time it takes for a firm's payment to become an actual outflow.

False

Common stock guarantees an equal stream of future cash flows.

False

Corporate finance is devoted to understanding various types of financial instruments.

False

DCF is typically used for young, entrepreneurial firms.

False

Diversification allows investors to maximize returns by keeping much of their portfolio in a single asset.

False

Dividing CFO among the owners of a firm is a sustainable policy.

False

During the Great Depression, banking suffered because regulations were too stiff.

False

Economics is a subfield of Finance

False

Efficient markets are those in which prices are volatile.

False

Efficient markets will often have mispriced securities.

False

FINRA is a division of the federal government

False

Firms can always find ways to finance their growth.

False

Firms should hold as much inventory as can possibly be stored.

False

Firms that are maximizing shareholder value will generally see stability in the firm's stock price.

False

Firms with a higher degree of business leverage have lower pre-tax profit for a given increase in EBIT.

False

Firms with low unexpected earnings usually exhibit large positive returns on the earnings announcement day.

False

Flotation costs are costs that are incurred when management miscalculates the cost of capital.

False

Flotation costs are higher when management is more inexperienced.

False

For visualization purposes, it is correct to think of balance sheet accounts relevant to CFI as being on the bottom of the financing side.

False

Forecasting projected sales revenues and expenses is the final step in financial forecasting.

False

Growth is only financed by increased revenue.

False

Holding all else equal, as the length until maturity increases, the yields on bonds decreases.

False

Holding inventory does not present any type of opportunity costs.

False

If a firm expects it growth rate on its dividends to increase, then the firm's cost of capital is likely to decrease.

False

If a firm has its credit rating downgraded, the cost of debt will increase thus lowering the weighted average cost of capital.

False

If a firm increases the amount of dividends it will pay to shareholders, then the cost of capital will likely decrease.

False

If a stock has a CAPM beta greater than zero, the stock is considered more risky than the market.

False

If firm A has a greater degree of financial leverage than firm B, then a 1% increase in EBIT for both firms is going to result in a greater increase in pre-tax profit for firm B.

False

If marginal tax rates increase, the after-tax cost of debt will increase.

False

If returns are higher for an expansionary economic state than a recessionary economic state, then an increase in the probability of an expansionary economic state occurring will decrease the expected return.

False

If returns are higher for an expansionary economic state than a recessionary economic state, then an increase in the probability of an recessionary economic state occurring will increase the expected return.

False

If stock A has a higher expected return for a given level of risk than stock B, investors will sell stock A and buy stock B.

False

If the NPV of multiple projects are positive, you should always accept all projects.

False

If you want to understand a firm's operations, cash accounting is a superior tool.

False

If your firm is operating at full capacity, in the real world, an increase in sales will increase fixed assets incrementally as sales increase.

False

In general, as riskiness of a portfolio decreases, the expected return of the portfolio increases.

False

In general, investors will prefer stocks with higher expected return and higher risk.

False

In the DCF approach, we use some kind of FCF measure in the denominator.

False

Increases in operating balance sheet accounts will decrease CFO.

False

Inefficient markets are those in which prices will respond quickly to new information.

False

Information filed with FINRA is only available to approved agencies.

False

Inventory is the most liquid component of current assets.

False

Investing in a good, stable company is always a good investment.

False

It is better to use book values in the cost method than to estimate market values.

False

Jensen and Meckling (1976) show that shareholders prefer stock issuance to bond issuance because stock holders will be able to monitor management better than bond holders.

False

Jensen and Meckling (1976) suggest that a firm's capital structure cannot affect the level of agency costs.

False

Like debt, stock has a maturity or expiration date.

False

Masulis (1980) finds that the change in stock prices surrounding changes in capital structure is unrelated to level of tax shields.

False

Most corporations in the US issue preferred stock.

False

NASDAQ is the world's largest secondary financial market.

False

Nationalization is a type of recapitalization that allows individuals in a particular nation to purchase shares of a company.

False

One of the benefits of using equity is the associated tax benefits.

False

One of the reasons why firms should hold cash is that higher cash holdings provide confidence to shareholders.

False

One possible way for a firm to find its optimal debt-to-equity ratio is to find the average debt-to-equity ratio of all firms in the entire economy.

False

Optimal debt-to-equity ratios do not exist in practice.

False

Preferred stock carries voting rights.

False

Preferred stock is reserved for established companies like utilities and is not used for new start-up ventures.

False

Privately-held companies and publicly traded companies will always maximize shareholder value in the same way.

False

Proper management of a firm's working capital will require careful management of notes payable.

False

Retained Earnings is a spontaneous account.

False

Secondary markets are where securities are initially offered to the public.

False

T/F If we do an analysis and determine a company is really good, this means it is also a good investment.

False

Tangible assets are typically harder to value than intangible assets with the cost method.

False

Tax expense as shown on the income statement is the amount of cash the firm paid to the taxing authority during the period.

False

The CAPM is used to determine the return required by bond holders.

False

The Dodd Frank Act loosens regulations for banks.

False

The NYSE specialist will charge a higher price to sellers of the stock and a lower price to the buyer of the stock.

False

The Statement of Cash Flows categorizes cash flow into cash flow from operations, cash flow from production, and cash flow from financing.

False

The WACC is denoted in dollar terms.

False

The WACC is made up of costs of equity, the costs of debt and new labor costs.

False

The amount of the reserve balance is always determined by the firm.

False

The cash required to run the daily operations of the firm is sometimes referred to as "Free" cash.

False

The cost method is best for firms with a lot of intangible assets.

False

The cost of debt is usually considered the return required by shareholders.

False

The current liabilities account that is most affected by the management of working capital is notes payable.

False

The degree of combined leverage tells us how much EBIT increases for a given increase in Sales.

False

The degree of combined leverage tells us how much pre-tax profit increases for a given increase in EBIT.

False

The degree of operating leverage allows us to infer how much operating income will change with a change in variable costs.

False

The difference between FCFF and FCFE is that FCFE takes out interest expense and adjusts for long-term debt changes.

False

The dividend payout ratio is the reciprocal of the plowback ratio.

False

The emergence of electronic trading on the NYSE has eliminated the role of a specialist (i.e., a market maker).

False

The firm in an industry with the largest CFO is the industry's top performer.

False

The income statement is the most easily interpreted of the basic financial statements.

False

The outcome of capital budgeting analysis always points to optimal decisions.

False

The ratios used in financial analysis are defined by GAAP.

False

The reserve balance is defined as the amount of cash a company needs to meet its obligations.

False

The tax benefits associated with debt are higher when corporate tax rates are lower.

False

The two types of float discussed in the topic are Collection Float and Receivables Float.

False

Titman and Wessels (1988) do not find that transaction costs affect the capital structure of firms.

False

True or False: Country risk and political risk are the same thing.

False

True or False: Country risk and political risk are the same thing?

False

True or False: The only way to raise foreign capital is through the debt markets?

False

True or false: Corporate tax rates are the same in every country because of international trade agreements.

False

True or false: If a firm has more idiosyncratic risk, then, according to the CAPM, the return required by shareholders will be higher.

False

True or false: The only way to raise foreign capital is through the debt markets.

False

True or false: When Chile pegged the Chilean peso to the US dollar in the 1970s, it was a great help to Chile's national economy.

False

True/False. One of the strengths of the payback method is that the cutoff is subjective.

False

True/False: Corporate tax rates are the same in every country because of international trade agreements.

False

Using internal equity will increase the WACC more than using external equity.

False

When Chile pegged the Chilean Peso to the US dollar in the 1970s it was a great help to their national economy.

False

When a firm issues new debt to purchase some of its existing shares it is called a leveraged buyout.

False

When calculating CFF, most of the data can be located at the bottom of the asset side of the balance sheet.

False

When setting credit standards, the firm should allow for standards that provide some sort of credit to all of its customers.

False

While competitive sales allow underwriters to submit bids to purchase bonds, negotiated sales do not.

False

Working capital management involves determining which long-term investment projects will be profitable.

False

Working capital management is useful in determining the amount of cash required to obtain the optimal debt-to-equity ratio.

False

Which legislative act made it easier and potentially more lucrative for employees to blow the federal government has somehow been defrauded?

False Claims

A limit order to buy a stock at $101.55 would execute at the current ask price.

False The order would execute when the ask price is at or below $101.55.

SEC

Federal Securities and Exchange Commission created by Securities Exchange Act of 1934.

Bank Holding Company Act of 1956

Federal regulation designed to protect the banking industry from competition.

McFadden Act of 1927

Federal regulation designed to provide greater accessibility for bank customers.

Gramm-Leach-Bliley Financial Services Modernization Act of 1999

Federal regulation that largely repealed the Glass-Steagall act.

Glass-Steagall Banking Act of 1933

Federal regulation to curb bank failures by separating commercial/ consumer banks from investment banks.from investment banks.

National Banking Act of 1863

Federal regulation to deal with "wildcat banking."

Federal Reserve Act of 1913

Federal regulation to deal with bank runs and recessions.

Dodd-Frank Act of 2010

Federal regulation to regain control of financial institutions by the federal government after the 2008 meltdown.

Sarbanes-Oxley Act of 2002

Federal regulations resulting from corporate frauds such as Enron and designed to protect investors from fraud.

Entrepreneurial Finance

Field of finance that deals specifically with small businesses and high-growth ventures.

Compounding

Figuring out the future value of money you will invest.

The basic balance sheet equation states that Assets are equal to Liabilities plus Owner's equity. This is because all assets are:

Financed either by other people's money or by the firm's owners' money.

FINRA

Financial Industry Regulatory Authority, a private regulatory corporation.

Which of the following is not an example of firm capital?

Financial Markets

Which of the following committees was created as a direct result of the Dodd Frank Act?

Financial Stability Oversight Council

Non-spontaneous Accounts

Financial accounts that do not vary directly with sales.

Spontaneous Accounts

Financial accounts that vary directly with sales.

What are two primary methods used to mitigate FX risk? (Select two answers.)

Financial derivatives; Direct investment

Which are two primary methods used the mitigate FX risk?

Financial derivatives; Direct investment

What did the Dodd-Frank Act seek to prevent?

Financial institutions becoming too big to fail

What did the Dodd-Frank Act seek to prevent? Banks making loans to borrowers with low incomes Financial institutions becoming too big to fail Conflicts of interest in audits by accounting firms The loss of capital gains by large institutional investors

Financial institutions becoming too big to fail

Operating Accounts

Financial statement accounts which generate operating expenses.

Debt Capital

Firm financings that appears in the debt section of the balance sheet.

Idiosyncratic Risk

Firm-specific risk or the portion of risk that is diversifiable. Another name for unsystematic risk.

Which of the following is an assumption in Modigliani and Miller (1958, 1963)?

Firms do not face bankruptcy costs.

High-growth Firms

Firms expected to experience high growth. These types of firms typically have a market-to-book equity ratio greater than 1.

All of the following are reasons firms would not want to carry too much cash on the balance sheet EXCEPT:

Firms should always hold as much cash as possible

Seasonal Firms

Firms whose performance varies according to the season.

If a country intervenes to maintain a constant value of the country's currency, it is a ___________ exchange rate regime.

Fixed and Pegged

Which one of the following is NOT included in the DuPont calculation?

Fixed asset turnover

Form 10-K

Forms required by the SEC annually of all public firms.

Form 10-Q

Forms required by the SEC quarterly of all public firms.

A company reports EBIT of 1,00,000, depreciation of $30,000, change in working capital of (10,000), net capital expenditures of 15,000 and tax rate of 40%. What is the free cash flow?

Free Cash Flow= (1,000,000*(1-0.4) + 30,000 - (-10,000) - 15,000 = $625,000

Future Value, a lump sum.

Pro Forma Statements

Future or forecasted financial statements.

Which of the following best describes the problem associated with GAAP accounting standards when performing ratio analysis?

GAAP accounting standards allow for significant managerial discretion in reported financial statements.

Equipment with a book value of $10,000 is sold for $15,000. The tax rate is 30%. What is the proceeds from the sale of equipment?

Gain on Equipment = 15,000-10,000=$5,000 Tax on Gain= -.3-*5,000=%1,500 Proceeds from sale of equipment=15,000-1,500=$13,500

Equipment with a book value of $10,000 is sold for $15,000. The tax rate is 30%. What is the proceeds from the sale of equipment?

Gain on equipment = 15,000-10,000=5,000 Tax on Gain=0.30*5,000=1,500 Proceeds=15,000-1,500=13,500

GIGO

Garbage In, Garbage Out - referring to the importance of assumptions in modeling.

Which of the following Acts loosened the regulation on types of products financial institutions could offer?

Garn-St. Germain Act of 1982

GAAP

Generally accepted accounting principles.

Which of the following acts limited types of products a consumer bank could offer or hold, creating a wall between commercial banks and investment banks?

Glass-Steagall Banking Act of 1933

Which of the following ways is inventory not identified?

Goods sold on credit

Some financial institutions in the US became "too big to fail" after the Glass-Steagall Act was repealed. Which of the following had the largest hand in reversing the Glass-Steagall Act?

Gramm-Leach-Bliley Financial Services Modernization Act

Which of the following is NOT a benefit of using debt to finance investment projects?

Greater solvency risk

Revenues minus cost of goods sold is:

Gross Profit.

Gross Margin

Gross Profit/Sales, a profitability ratio.

What does the Sarbanes-Oxley Act require companies to do?

Have internal control audits.

The general process of eliminating risk with FX is referred to as ________.

Hedging

If a company wishes to obtain a bank loan, will it want to have a higher current ratio or a lower current ratio?

Higher

When a company uses more leverage as evidenced by a higher degree of either financial or operating leverage, what effect does it have on changes in profitability?

Higher leverage leads to higher profitability for a given sales level.

If a company has a high degree of financial leverage, what does that tell about the firm's risk profile?

Higher profits to shareholders

Consider Kyoto Restaurant. Kyoto's ROE is lower than the industry average. However, Kyoto's total asset turnover and financial leverage ratio are identical to the industry. The industry average net margin must be:

Higher than Kyoto's net margin. Kyoto's TAT and FLR are the same as the industry. Since TAT x FLR x net margin = ROE, the industry average net margin must be higher than Kyoto's since the industry has a higher ROE.

Common stock shareholders (in the aggregate) have all of the following rights except:

Highest claims position in a liquidation case

The SEC enforces all but which of the following statutes?

Hollis Act

Consider two companies, Hoogle and Mapple. They are economically identical. However, for reporting purposes Hoogle uses the managerial discretion that is required with accrual accounting to increase net income relative to Mapple (assume any balance sheet effects are inconsequential). Which of the following is correct:

Hoogle's OIROI is higher than Mapple's but Hoogle is NOT more efficient.

Which of the following is NOT mentioned as a type of global bond?

Hotdog bond

Investment Decisions

How a firm builds the asset side of the balance sheet by allocating funds, time, and other resources.

Financing Decisions

How a firm builds the liability and equity side of the balance sheet to finance its investments. Whether the firm chooses to finance (pay) for its assets through using debt, or issuing equity.

Returns

How much an investor gets out of an investment divided by how much the investor put into the investment.

Which of the following questions are NOT estimated by financial forecasting?

How much have we made in the past?

Cost of Equity

How much it costs a firm (in percentage terms) to use equity financing. From the investor's perspective, it is what they require given the riskiness/opportunity cost of the company. From the companies perspective, it is the same rate, but it is what it "costs" to attract those potential investors. It is the return they must give investors for them to invest with their company.

Harrison Co. sold $100,000 in products in 2018 and collected $70,000 from customers. The remainder was collected in 2019. The company also incurred $60,000 in expenses for 2018 and paid $40,000 in 2018 and the remainder was paid in 2019. How much revenues and expenses are recognized in 2018? What is the net income for 2018?

How much revenues and expenses are recognized in 2018? Revenues = $100,000 Expenses = $60,000 What is the net income for 2018? Net income = 100,000 - 60,000 = $40,000

Future Value

How much spending power money has at a point in the future.

Present Value

How much spending power money has today.

Market Value of the Firm

How much the firm sells for right now.

Preferred stock is often called a _______ security because it has some characteristics of debt and some of equity.

Hybrid

Which of the following statements describes a problem associated with IRR?

IRR does not correctly rank mutually exclusive projects.

NPV Decision Rule

If the computed NPV is greater than zero, accept.

Which one of the following is NOT an example of risk mitigation strategies discussed in the textbook?

Include unrelated projects to test for overlap.

Line Items

Income statement numbers on each line.

Suppose the following information: Economic State Probability π Returns for Stock A Recessionary .40 10% Expansionary .60 23% If the probability of an expansionary state increases, the expected return is expected to __________.

Increase

Which two techniques would be considered effective ways to manage the growth of a firm, if additional financing is not available?

Increase sales prices Alter capacity

Entrepreneurial finance and capital budgeting frequently rely on time value of money (TVM) calculations. Since risk varies between projects, adjusting for riskiness is a key element of financial analysis. The most common way of adjusting for the risk of an investment is to:

Increase the discount rate for riskier projects.

If providing liquidity becomes more risky, then dealers will __________ the spread.

Increase the spread

If the price of a particular stock begins to heavily fluctuate, then the specialist will __________ the spread.

Increase the spread

Which of the following characterizes collection float?

Increased float indicates slower processing time.

Financial Risk

Increased volatility in earnings as a result of using debt.

Which two techniques are effective ways to manage the growth of a firm, if additional financing is not available? Choose 2 answers. Increasing sales prices Altering capacity Increasing dividend payouts Increasing costs

Increasing sales prices Altering capacity

For capital budgeting analysis, the relevant cash flows from a new project are called:

Incremental cash flows

Which type of investment will a risk-averse investor most likely invest in?

Index funds

Which type of investment will a risk-averse investor most likely invest in? Individual securities Actively managed funds Floating-rate securities Index funds

Index funds

IBDTC

Interest bearing debt divided by total capital

Which of the following would not be considered an operating expense?

Interest expense

I/Yr

Interest rate per period.

Financial Institution

Intermediaries, such as banks, that link those that save to those that need to borrow.

If a product is made 100% domestically, what can affect its domestic market?

International competition

A broker is considering purchasing common stock in a company that has average but consistent operating performance. Which factor should lead the broker to purchase shares in this company?

Intrinsic value is 25% below the current stock price

Which components are part of current assets?

Inventory, cash, accounts receivable, short term investments

What is a way firms can maximize shareholder value?

Invest in new machinery that will be profitable.

Accredited Investors

Investors deemed by the SEC to be sophisticated enough to purchase non-public securities.

Depreciation expense is added back when calculating Free Cash Flow (FCF) because depreciation expense:

Is a non-cash expense

Which is the purpose of the statement of cash flows?

It explains the change in cash balance for one period of time.

Why would a company be interested in the TAT (total asset turnover) ratio?

It indicates how efficient assets are at producing sales.

What does the beta coefficient represent?

It is a statistically derived measure of volatility.

What is the main benefit associated with holding inventory?

It makes it possible to meet the demands of customers

What is the main benefit associated with holding inventory?

It makes it possible to meet the demands of customers.

What is the main benefit associated with holding inventory? It maximizes the value of the company. It makes it possible to meet the demands of customers. It provides the company with an income tax shield. It reduces current liabilities.

It makes it possible to meet the demands of customers.

What is the main benefit associated with holding inventory?

It makes it possible to meet the demands of the customers

What is true about the content and structure of a balance sheet?

It reports the assets, liabilities, and equity at a point in time

What is true about the content and structure of a balance sheet?

It reports the assets, liabilities, and equity at a point in time.

What is true about the content and structure of the balance sheet?

It reports the assets, liabilities, and equity at a point in time.

What does it mean if the US dollar/Canadian dollar exchange rate is 1.1?

It takes 1.1 US dollars to buy 1 Canadian dollar

Company Y has a greater degree of financial risk than Company Z. What will happen if there is a 1% decrease in EBIT for both companies?

It will result in a greater percentage decrease in Company Y's pre-tax profit.

Company Y has a greater degree of financial risk than Company Z. What will happen if there is a 1% decrease in EBT for both companies?

It will result in a greater percentage in Company Y's per-tax profit

Assets

Items that are owned by the company

You are planning to go on a great vacation when you retire in 30 years. You calculated the travel expense for several potential trips. To fund the travel, you decided to save $100 a year (starting at the end of the current year) for 30 years in an account with an annual interest rate of 7.5%. You want to use all of the savings for the trip. Which of the following four countries is the choice that is both feasible and will come closest to exhausting your savings?

Japan - cost of $10,000. PV FV PMT N I Mode - ($10,339.94) 100.00 30 7.50% 0 (End) Calculator: PV: 0. PMT: 100, N: 30, I: 7.5%, Mode: 0, solve for FV: $10,339.94.

Outsourcing involves the _________ market.

Labor

What is an example of an inventory method for accounting purposes?

Last in, first out method

Why do companies strive for a lower cost of capital?

Less money dedicated to financing means more money is available for production and operations

Why do companies strive for a lower cost of capital? Less money dedicated to financing means more money is available for production and operations. More money dedicated to financing means more money is available for production and operations. A lower cost of capital positively affects credit rating. A lower cost of capital means a higher debt-to-equity ratio.

Less money dedicated to financing means more money is available for production and operations.

Current Liabilities

Liabilities on the balance sheet with a short life span (typically less than one year).

If the company's asset accounts increase which of the following needs to happen?

Liability or equity accounts must increase by the same amount

Hedge Funds

Lightly regulated investment funds that have fewer restrictions than mutual funds pertaining to investment choices.

The McFadden Act of 1927 regulated which of the following?

Location of bank branches

Debt are also known as ____________

Long Term Liabilities

Big-Tokyo Inc. has a financial leverage ratio of 2.00, total asset turnover of 1.50 and ROE of 18.00%. For Big-Tokyo's industry, the average ROE is 16.00% and the industry average total asset turnover (TAT) and financial leverage ratio (FLR) are the same as Big-Tokyo. The industry average net margin must be:

Lower than Big-Tokyo's. TAT and FLR are the same for the industry and Big-Tokyo. Hence, since Big-Tokyo has a higher ROE, Big-Tokyo must have a higher net margin than the industry.

A bond that matures in 30 months is sold at a premium. What is the yield to maturity (YTM)?

Lower than the coupon rate

A bond that matures in 30 months is sold at a premium. What is the yield to maturity (YTM)? Higher than the coupon rate Equal to the coupon rate Lower than the coupon rate Not enough information to determine YTM

Lower than the coupon rate

A bond that matures in 30 months is sold at a premium. What is the yield to maturity (YTM)?

Lower than the coupon rate

A bond that matures in 30 months is sold at a premium. What is the yeld to maturity?

Lower than the coupon rate.

The policy that allows a currency to float within a minimum and a maximum is called ________.

Managed floating

Working Capital Management

Management of the cash resources required to run the firm's day-to-day operations.

Which of the following is not an important part of managing accounts receivables?

Managing disbursement float

Cash Management

Managing the day-to-day finance operations of a firm.

What are the two types of orders that are used by investors?

Market Orders and Limit Orders

A person needs to determine the cost to replace a company's property, plant, and equipment using the replacement cost method. Which value does this person need to consider in order to make this determination?

Market Value

A person needs to determine the cost o replace a company's property, plant, and equipment using the replacement cost method. Which value does this person need to consider in order to make this determination?

Market value

Systematic Risk

Market-wide risk or the portion of risk that is not diversifiable. Another word for market risk.

When a firm purchases short-term U.S. Treasury securities, they are generally included on the balance sheet as:

Marketable Securities

Current liabilities are reported in order of:

Maturity (shortest first)

The goal of the firm is to ___________ shareholder value.

Maximize

MACRS

Modified Accelerated Cost Recovery System - a type of depreciation method, typically used by the IRS.

Which of the following is not part of the CAMELS score?

Monetary limits

Debt

Money lent by a creditor to provide financing for the borrower.

Retained Earnings (RE)

Money plowed back into the company from prior earnings (net income).

Which type of bond is most likely a secured bond?

Mortgage Bond

Cash

Most liquid current asset on the balance sheet.

What type of bond is tax exempt?

Muni-bond

Which securities are issued by local governments and are usually tax exempt at the federal level?

Municipal Bonds

Which securities are issued by local governments and are usually tax exempt at the federal level?

Municipal bonds

Which securities are issued by local governments and are usually tax exempt at the federal level? Treasury bonds Corporate bonds Foreign bonds Municipal bonds

Municipal bonds

N 10 yrs, I/Y 4%, PV 0, PMT 2,000, solve for FV = $24,012.21

N 30 yrs., I/Y 4%, PV 0, PMT 6,000, solve for FV = $336,510 or $336,509.6265

A teacher won $100,000 and invests this money for 5 years at an interest rate of 4% (compounded annually). How much will the teacher have in principal and interest at the end of the 5 years?

N 5, I/Y 4%, PV 100,000, PMT 0, Solve for FV = $121,665

Which of the following is NOT discussed in this section as a potential cost of doing international business.

NAFTA

Which of the following is NOT discussed in this section as a potential cost of doing international business?

NAFTA

Two examples of US legislation to promote global free trade are: [Select two answers.]

NAFTA; TPP

What are two examples of U.S. legislation to promote global free trade?

NAFTA; TPP

If ranking conflicts occur among payback period, NPV and IRR, you generally should make a decision based on:

NPV

What are the NPV and IRR for an investment of $550,000 with annual differential cash flows as follows: Yr 1: $75,000, Yr 2: $90,000, Yr 3: $125,000, Yr 4: $100,000, Yr 5: $80,000, and a terminal cash flow of $180,000, if the company uses a discount rate of 7%?

NPV: -37594 IRR: 4.837% NPV = - 37,593.89 IRR = 4.8369 Remember, the TCF is added to Yr 5 so the Yr 5 calc entry is 260,000.

Which banking act began financial regulation in the United States?

National Banking Act

The "Wildcat Banking" era lead the government to regulate the banking industry in the US. Which of the following acts was instituted in an effort to help prevent bank runs:

National Banking Act of 1863

A company sold products in 2014 for $120,000 and collected 100,000 in cash in 2014 and the remainder in 2015. The company incurred $70,000 in expenses for 2014 and paid $100,000 which included 30,000 for expenses incurred in 2013. What is the net income for 2014?

Net Income = 120,000 - 70,000 = 50,000

Fixed Asset Turnover =

Net Sales / Average Net Fixed Assets

A companys year end balance sheet for 2013: AR: 900 Inventory: 1200 Fixed assets: 1000 AP: 1300 Sales: 4000 Salaries: 275 What is their fixed asset turnover ratio?

Net Sales / Average Net Fixed Assets Sales @ 4000 / Fixed Assets @ 1000= 4.0

NWC

Net Working Capital. Calculated by subtracting Current Liabilities from Current Assets (CA- CL).

How do you calculate the change in retained earnings?

Net income - Dividends

A firm reported retained earnings of $300 in 12/31/20x2. For 12/31/20x3, the firm reports retained earnings of $400 and pays dividends of $25. What was net income in 20x3?

Net income = 400-300+25 = 125

Which of the following is not a reason for the difference between CFO and net income?

Net income doesn't account for the change in cash

External Equity

New equity capital that must be raised through the process of security issuance or provided through other lending mechanisms.

You want to sell a bond for over $1,000. Can you do that if the coupon rate is 6.5% and the bond yield is 6.8%?

Would you buy a $1000 face value bond selling for $700, 10 years to maturity, which pays a 5% coupon? Your annual required rate of return is 10% and the bond pays its coupons semi-annually.

No, it won't pay greater than required rate of return of 10% N 20=10*2 PMT $25=5%/2 FV $1,000 PV ($700) Annual 9.77% This bond would only give you a 9.77% return, which is less than your required return of 10% so it should not be bought.

You just graduated with a bachelor's degree in mechanical engineering and are starting a new job tomorrow. You have a goal to start an MBA program in exactly three years and need to have $30,000 saved at that time. To fund your MBA, you are saving $690 a month at the end of each month starting a month from now in an account paying 12%. Will you have $30,000 when you start your MBA?

No; after three years, I only have $29,723 in my account. PV FV PMT N I Mode 0 ($29,723.05) 690 3 x 12 =36 12/12 = 1% 0 (End)

Opportunity Cost

Non-cash costs found from asking, "What could the firm have done with the money instead?".

Why does a long-term bond resemble an interest-only loan? A portion of the principal is repaid monthly. None of the principal is repaid until the bond matures. All the principal is repaid before the bond matures. Interest accrues and is paid when the bond matures.

None of the principal is repaid until the bond matures.

Why does a long-term bond resemble an interest-only loan?

None of the principle is repaid until the bond matures

Why does a long-term bond resemble an interest-only loan?

None of the principle is repaid until the bond matures.

Discretionary accounts:

None of these choices

Suppose a firm made a payment for some products produced by your firm. The check was mailed today. Collection float is:

None of these choices

A bond that matures in 30 months is sold at a premium. What is the yield to maturity

Not enough information to determine YTM

Which of the following balance sheet accounts is working capital management least concerned with?

Notes payable

Number of periods.

What are affirmative covenants?

Obligations a firm agrees to do

Equity

Often another name for stock.

Projected Retained Earnings is most correctly calculated by:

Old RE + Change in RE

Financing Ratios

One of the four classifications of ratios designed to measure how the firm finances its operations.

Liquidity Ratios

One of the four classifications of ratios designed to measure the ability of a firm to pay its near-term obligations.

Profitability Ratios

One of the four classifications of ratios designed to measure the profitability of the firm.

Efficiency Ratios

One of the four classifications of ratios designed to see how well the firm is using its assets and investments.

Investments

One of the three main areas of finance. As its name implies, it involves choosing which assets to invest in.

Income Statements

One of the three main financial statements. It covers a period of time and starts with sales, takes out expenses, and ends with net income.

Statement of Cash Flows (SCF)

One of the three main financial statements. It includes cash flow from operations, investing, and financing.

Balance Sheets

One of the three main financial statements. It is a snapshot of the firm's assets, liabilities, and equity at any point in time.

Cash Flow From Operations (I.e., CFO)

One of the three parts of the cash flow statement.

Trend Analysis

One of the three ways to use ratios by comparing a firm's ratios across time.

Which one of the following is NOT part of the common ratio categories?

Operating

Which one of the following ratios is NOT part of the common ratio categories?

Operating

Current Assets are also referred to as ___________________

Operating Assets

Earnings Before Interests and Taxes (EBIT) is also called:

Operating Income

OIROI

Operating Income Return on Investment. Operating income/Total Assets, an efficiency ratio.

Which of the following is generally true?

Operating Income and EBIT are the same

Current Liabilities are also referred to as ______________________

Operating Liabilities

Which term describes the amount of cash a firm needs in order to pay its immediate bills?

Operating balance

Which term describes the amount of cash a firm needs in order to pay its immediate bills? Operating balance Reserve balance Beginning balance Working capital

Operating balance

What is the operating leverage of Company Y? How will that affect profits compared with Company Z, which has an operating leverage of 5.25? Company Y has an EBIT of $3,000,000, sales of $25,000,000, and variable expenses of $18,000,000.

Operating leverage of 2.33 As sales increase, Company Y's profits will rise slower than Company Z's. As sales increase, Company Y's profits will rise slower than Company Z's. (25-18) / 3 = 2.33

Limit Orders

Orders used by investors that are executed only if market prices reach the "limit" price.

Market Orders

Orders used by investors that time sensitive and are executed on a "first come - first serve basis".

During the dot.com bubble, which comparable multiple became popular because many IPOs did not have positive earnings?

P/S Price/sales

An investor will receive $10,000 per year at the end of every year for the next 10 years. If the annual interest earned on the investment is 8%, what is the present value of the investment?

PMT = 10,000 N = 10 I/Y = 8 CPT = PV = -67,100.81

An investor purchased a stock for $55 today that will pay a dividend of $3 at the end of the year. What should the stock price be at the end of the year if the investor requires a 15% rate of return?

PV = -55 PMT = -55 N = 1 I/Y = 15 CPT = FV = 60.25

The amount repaid at the expiration date is called:

Par Value

Perpetuities are different from ordinary annuities in that perpetuities:

Pay an infinite number of payments.

If a company neglects paying dividends to a preferred stockholder in year one but they pay the set dividend in year two, they must do the following:

Pay year one preferred dividend before paying any common stockholder dividends

In regards to accounts payable balances, which of the following is true?

Paying off A/P on the last day due is good policy.

PMT

Payment, the annuity payment.

Which one of the following is NOT a characteristic of ordinary annuities?

Payments are made at the beginning of each period.

Capacity

Percent of unused productivity of fixed assets.

Which one of the following is not an element of the DuPont decomposition?

Percentage of net income paid out as dividends.

According to the survey of nearly 400 Chief Financial Officers discussed in the topic, which of the following methods do firms NOT use as methods of calculating the cost of common equity?

Perpetuity Dividend Model

To pick a good stock:

Pick a company that is undervalued

Which hybrid security system has special claims on a corporations profits or, in case of liquidation, corporate assets?

Preferred Stock

Which hybrid security has special claims on a corporation's profits or , in case of liquidation, corporate assets?

Preferred stock

Which hybrid security has special claims on a corporation's profits or, in case of liquidation, corporate assets? Common stock Convertible bond Preferred stock Treasury bond

Preferred stock

Balance Sheet

Prepared at a point in time

Income Statement

Prepared for a period of time

Retained Earnings Statement

Prepared for a period of time

Statement of Cash Flows

Prepared for a period of time

Present Value, a lump sum.

A stock is expected to pay a dividend of $5 and the dividend is expected to grow at 4%. If the required rate of return is 10%, what is the maximum that should be paid for the stock today?

Price = Expected Dividend / (Required Return - Growth Rate) Price = 5/(.10-.04) = $83.33

You are contemplating buying either an annual bond or a semiannual bond. Is there any difference in the price if both bonds have the same data: $1,000 face value with a 4% coupon rate? The bonds mature in five years having identical YTMs of 4.8%. Is there a price difference between the annual bond and the semiannual bond? Why or why not?

Price is higher with additional compounding periods.

When a firm first sells its shares to the public through an investment bank, the shares are bought by the ______________ market.

Primary market

A prospectus contains all of the following except:

Pro forma statements supporting the need for capital

Capital budgeting is the:

Process of deciding which projects increase firm value.

Ratio Analysis

Process of using financial analysis to determine the health of a firm.

Investment Banking

Professional banking services not regulated by federal banking regulations.

Venture Capitalists

Professional investors who manage investment capital that typically invests in very young new ventures.

Private Equity

Professionally managed investment capital that typically buys entire firms at a time.

If a company makes its product in a foreign country where labor costs are much lower, what happens?

Profits go up and domestic employment decreases.

What is the first step in the percent of sales process?

Project future sales

How is the amount of discretionary financing that is needed by a firm determined?

Projected total assets - projected total liabilities - projected owner's equity

How is the amount of discretionary financing that is needed by a firm determined? Projected total assets − projected total liabilities + projected owner's equity Projected total assets + projected total liabilities − projected owner's equity Projected total assets + projected total liabilities + projected owner's equity Projected total assets − projected total liabilities − projected owner's equity

Projected total assets − projected total liabilities − projected owner's equity

How is the amount of discretionary financing that is needed by a firm determined?

Projected total assets- projected total liabilities + projected owner's equity

PP&E

Property, plant, and equipment, a part of fixed assets on the balance sheet.

Financial Industry Regulatory Authority (FINRA) does the following: (Choose one)

Prosecutes corrupt stock brokers

Which document is required to be made available prior to a firm going public, according to the Securities Act 1933?

Prospectus

Which document is required to be made available prior to a firm going public, according to the Securities Act of 1933?

Prospectus

Which document is required to be made available prior to a firm going public, according to the Securities Act of 1933? Prospectus Annual report 10-K 10-Q

Prospectus

What are two primary benefits of the capital asset pricing model?

Provides a way to determine the expected return for stocks. Provides a way to estimate the required return.

Which company control is required by the Sarbanes-Oxley Act?

Publication of detailed prospectus for investors

The depreciable asset (aka depreciable base) in the initial outlay calculation is the :

Purchase price of a new asset + shipping/installation cost

Initial outlay for a capital project is calculated as:

Purchase price of the asset + Shipping/Installation + Investment in WC - Net Proceeds from Sale of Old Asset

What is the sustainable growth rate given the following: Sales are 2.5 million Total expenses 2 million Total Assets: 3 million Equity: 1.3 million Dividend Payout Ratio: .25

ROE=(2.5-2)/1.3=0.3846 SGR=0.3846*(1-0.25)=.2885

What is the sustainable growth rate given the following? - Sales are 2.5 million - Total expenses (including cost of goods sold through taxes) 2.0 milion - Total Assets are 3.0 Milion - Equity is 1.3 Million - Dividend Payout Ratio is .25

ROE=(2.5-2)1/3=0/3846 SGR=0.3846*(1-0.25)=0.2885

Which one of the following is NOT an example of the use of meaningful comparison standards for ratio analysis?

Reporting ratios in annual financial statements.

Free Cash Flow (FCF) is different from Cash Flows from Operations (CFO) because FCF:

Represents cash flow after required investment

A stock is expected to pay a dividend of $5 and the dividend is expected to grow at 4%. If the investor paid $40 for the stock today, what is the expected rate of return on the stock?

Required Return = (Expected Dividend / Price) + Growth Rate Required Return = (5/40) + .04 = .165 or 16.5%

Stockholders own the remaining earnings after operations are paid for and creditors are paid making equity a _________ claim.

Residual

Securities Act of 1933

Resulted from Great Depression. Requires firms to register with the SEC to sell public securities.

Which of the following represent potential uses of net income under the accrual accounting system:

Retain within the firm and dividends

ROA

Return on Assets = NI/A, a profitability ratio.

Big Box company has a 10% percent return of equity and has $100 in net income and pays out $25 in dividends.

Return on Equity = 0.10 Dividend payout ratio = 25/100 = .25 SGR=0.10*(1-0.25)=0.075

ROE

Return on Equity = NI/E, a profitability ratio.

Which statement accurately explains the recognition of revenues and expenses under accounting income and income for tax purposes?

Revenue and expenses may be recognized in one period for accounting income purposes and in a different period for income tax purposes.

Revenue Recognition Principle

Revenue is recognized when product or service is delivered to the customer

Which of the following best describes the guiding principle for revenue recognition within accrual accounting system:

Revenue is reported when the earnings process is complete

The basic equation of an income statement is:

Revenues - expenses = net income

Which statement accurately explains the recognition of revenues and expenses under accounting income and income for tax purposes?

Revenues and expenses are always recognized in the same period for accounting income purposes and income for tax purposes

Which statement accurately explains the recognition of revenues and expenses under accounting income and income for tax purposes?

Revenues and expenses may be recognized in one period for accounting income purposes and in a different period for income tax purposes.

Which statement accurately explains the recognition of revenues and expenses under accounting income and income for tax purposes? Revenue and expenses recognized must be matched with assets. Revenue and expenses recognized must be matched with liabilities. Revenues and expenses may be recognized in one period for accounting income purposes and in a different period for income tax purposes. Revenues and expenses are always recognized in the same period for accounting income purposes and income for tax purposes.

Revenues and expenses may be recognized in one period for accounting income purposes and in a different period for income tax purposes.

The matching principle in accrual accounting requires that:

Revenues are matched to the expenses incurred to generate the revenues

The matching principle in accrual accounting requires that:

Revenues be recognized when the earnings process is complete and matches expenses to revenues recognized.

A high-quality customer just purchased $500,000 worth of product from your company. The contract calls for immediate delivery of the product with a cash payment of $300,000 today and $200,000 to be paid 60 days. The expense associated with the product is $300,000, of which $100,000 has not been paid to your supplier. Under accrual based accounting system, you will most likely report.

Revenues of $500,000 and expenses of $300,000

A high-quality customer just purchased $500,000 worth of product from your company. The contract calls for immediate delivery of the product with a cash payment of $300,000 today and $200,000 to be paid in 60 days. The expense associated with the product is $300,000, of which $100,000 has not been paid to your supplier. Under an accrual based accounting system, you will most likely report which of these?

Revenues of 500,000 and expenses of 300,000

Accrual accounting recognizes:

Revenues when the earnings process is complete and matches expenses to revenues recognized.

Foreign Exchange Risk (Aka FX Risk)

Risk associated with the changing values of countries' currencies

Which happens to the risk level in a portfolio as the number of assets in the portfolio increases?

Risk decreases at a slower rate

Which happens to the risk level in a portfolio as the number of assets in the portfolio increases?

Risk decreases at a slower rate.

Which happens to the risk level in a portfolio as the number of assets in the portfolio increases? There is a linear decrease in risk. Risk decreases at a slower rate. All risk can be diversified away. Risk remains constant.

Risk decreases at a slower rate.

Market Risk

Risk that cannot be diversified away.

Covenants

Rules set forth in the bond indenture to protect bond investors.

What is the Sustainable Growth Rate given the following: - Net Income is 500,000 - Total Assets are 3.0 Million - Equity is 1.3 million - Dividends is 100,000

SGR = (500,000/1,300,000)*(1-(100,000/500,000)) SGR = 0.3076

What is the Sustainable Growth Rate given the following Net Income: 500,000 Total Assets: 3million Equity: 1.3 million Dividend: 100,000

SGR=(500,000/1,300,000)*(1-(100,000/500,000))=0.3076

What does the Financial Industry Regulatory Authority (FINRA) examine to determine if a firm is in compliance with rules of FINRA and the SEC? Sales practices Purchase practices Payroll practices Production practices

Sales practices

What does the Financial Industry Regulatory Authority (FINRA) examine to determine if a firm is in compliance with the rules of FINRA and Securities and Exchange Commision (SEC)?

Sales practices

What does the financial Industry Regulatory Authority (FINRA) examine to determine if a firm is in compliance with rules of FINRA and SEC?

Sales practices

Total Asset Turnover

Sales/Total Assets, an efficiency ratio. Sometimes written as "TAT."

International Financial Reporting Standards

Same set of accounting standards across countries and economies

Which of the following is not a step included in the Percent of Sales method?

Secure financing for project

Variable-return Securities

Securities that are not fixed-income securities.

Fixed-income Securities

Securities that pay an equal payment on fixed periods like a bond.

SRO

Self-regulatory organization, regulated by the SEC.

An ordinary annuity is best defined as:

Series of equally spaced cash flows of the same magnitude paid at the end of each period.

An investor deposits $2,000 per year (beginning today) for 10 years in a 4% interest-bearing account. The last cash flow is received one year prior to the end of the tenth year.What is this investor's future balance after 10 years?

Set the calculator in the "BGN" mode PMT = 2,000 N=10 I/Y = 4 CPT FV = 24,972.70

Which action is an important part of managing accounts receivable?

Setting credit terms

Which action is an important part of managing accounts receivable? Setting credit terms Determining optimal inventory levels Managing disbursement float Evaluating opportunity costs

Setting credit terms

Which of the following is an important part of managing accounts receivables?

Setting credit terms

The goal of the firm is to maximize ___________ value.

Shareholder

Capital Budgeting

Short for capital budgeting analysis.

Muni-bonds

Short for municipal bond.

Suppose an analyst is reviewing the profitability ratios for a firm. Which of the following statements represents the most valid insight for the analyst?

Since the profitability ratios of the firm declined, the analyst devotes additional effort to understanding revenues and costs.

What is the difference between a common stock and preferred stock?

Skipping a declared preferred stock dividend results in dividends in arrears

What is the difference between a common stock and a preferred stock? Common stock has no fixed maturity, and a preferred stock has a fixed maturity. Common stock has fixed maturity, and a preferred stock does not have a fixed maturity. Skipping a declared preferred stock dividend results in dividends in arrears. Skipping a common stock dividend means a preferred stock dividend may not be paid.

Skipping a declared preferred stock dividend results in dividends in arrears.

Secured Loan

Some type of asset is being used as collateral to back the loan.

Government funds designed to invest abroad are termed __________.

Sovereign wealth funds

Government funds designed to invest abroad are termed:

Sovereign wealth funds

Junk Bond

Speculative bonds rated BB or below.

Management typically decides to change all of the following accounts EXCEPT:

Spontaneous accounts

EBIT

Stands for "Earnings Before Interest and Taxes". EBIT is found on the income statement. Frequently used as a proxy for operating income).

A person wants to retire 15 years from today and would like an annual income of $200,000 per year for 10 years upon retirement starting in 15 years. The discount rate is 6%. What is the present value today?

Step 1 PMT = 200,000 N = 10 I/Y = 6 CPT PV = -1,472,017.41 Reset the calculator Step 2 FV = 1,472,017.41 N = 15 I/Y = 6 CPT = PV = -614,221.43

Suppose you calculated the expected returns and standard deviations of expected returns for two stocks. Your calculations are given below: Stock 1 Stock 2 E[R] 21.5% 18.4% σE[R] 8.74% 7.4% If you wish to maximize your expected return while, at the same time, minimizing your risk, which stock would you choose?

Stock 2 Stock 1: 21.5/8.74 = 2.460 Stock2: 18.4/7.4 = 2.487 Choose Stock 2

What stock has a higher mean return? Year Stock A Stock B 2012 12% 21% 2011 14% 15% 2010 15% 19% 2009 9% -3% 2008 2% -2%

Stock A Stock A: (12+14+15+9+2)/5 = 10.4% Stock B: (21+15+19+-3+-2)/5= 10% Stock A has a higher mean return than Stock B

What is an example of an inventory method for accounting purposes?

Straight-line method false, the inventory methods are LIFO FIFO

Which type of bond is the lowest priority for repayment in the event of liquidation of a firm?

Subordinated Debenture

Accounts payable represents money a firm owes to:

Suppliers due to purchases made on credit

If a country follows a floating exchange rate policy then the value of the currency is determined strictly by __________.

Supply and demand in the open market

SGR

Sustainable growth rate, equals ROE *(1-Div/NI).

A limit order to buy a stock at $101.55 would execute when the ask price is at or below $101.55 (T/F)

A market order to buy a stock would execute at the current ask price (T/F)

A market order to sell a stock would execute at the current ask price (T/F)

An IPO occurs on the primary market (T/F)

Auction markets have a physical location. (T/F)

Because in an efficient market all available information is built into the price of a stock - investment patterns and trends to "get rich quickly" are not easily discernable and it is difficult to predict the price

Capital is defined as a financial asset. (T/F)

In an efficient market, new information will move prices almost immediately (T/F)

In an inefficient market, prices will slowly respond to new information.

Inefficient markets will often have mispriced securities.

Markets are where prices are determined (T/F)

Primary financial markets are markets where issuers place new securities with investors. (T/F)

Stocks and bonds are two types of financial instruments (T/F)

Syndicates are generally made up of investment banks and other institutional investors (T/F)

The NYSE specialist has an objective to provide liquidity to the market. (T/F)

The bid-ask spread is compensation to the specialist for providing liquidity to the market. (T/F)

ABC Corp is considering a project requiring the purchase of new equipment. The firm spent $20,000 on a market assessment four months ago as well as $14,000 for a feasibility study a year ago. In order to start the new project, the firm has to replace an old machine with a remaining book value of $25,000 (note: this is the original salvage value of the old machine; as such, it is fully depreciated). While still functional, the machine has no market value and will be scrapped if the new equipment is acquired. The new machine will cost the firm $220,000. In order to put the machine in working condition, ABC will spend $6,000 in installation and $4,000 in shipping. If the new machine is purchased net working capital will be increased by $10,000. The new machine will be depreciated via the straight-line depreciation method to a salvage value of $0. However, at the end of the new machine's five-year life, it can be sold for $30,000. The corporate tax rate is 40%. If accepted, the new machine will increase annual revenues by $150,000 and will increase annual operating cost by $45,000. The company has a marginal tax rate of 40% and a cost of capital of 14%. The project will last 5 years. What is the tax implication from the sale of the new machine at Year 5 (the end of its useful life)?

Tax liabilities of $12,000 The machine is fully depreciated to a book value of $0. Hence, all of the sale proceeds are taxable. Tax liability = (Realizable salvage value - Book value) X Tax Rate = (30,000 - 0) X 0.40 = $12,000.

A machine will reach the end of its useful life in year 5. The realizable salvage value is expected to be $50,000 with a book value of zero. The company's marginal tax rate is 34%. What is the tax implication on the sale of the new machine at year 5?

Tax liabilities of $17,000

A machine will reach the end of its useful life in Year 5. The realizable salvage value is expected to be $50,000 with a book value of zero. The company's marginal tax rate is 34%. What is the tax implication on the sale of the new machine at Year 5?

Tax liabilities of $17,000 salvage = sell 50,000 x .34 =17,000

TippingToys is considering the purchase of a new toy-making machine that will increase revenues by $50,000 a year and annual costs by $10,000. The new machine will replace an outdated machine with a current book value of $10,000 but if scrapped now can only be sold for $6,000. The new machine will cost $100,000 with shipping and installation fees of $10,000. The machine will be depreciated via 5-year MACRS schedule (20.0%, 32.0%, 19.2%, 11.5%, 11.5%, 5.8%). The firm estimates that the new machine can be sold at the end of its five-year life for $20,000. The new machine will necessitate an investment of $30,000 in working capital that will be fully recovered at the end of the project. Tipping Toys has a 10% cost of capital and a corporate tax rate of 40%. What is the tax implication of selling the old machine?

Tax shield of $1,600 Sale of Old 6,000 BV of Old (10,000) Gain (Loss) (4,000) Tax shield 1,600 Note: since the sale of the old equipment results in a $4000 taxable loss, a tax shield of $1600 is created ($4k loss x .4 tax rate). Hence, the net cash impact of selling the old equipment = $6000 sales price + $1600 tax shield = $7600.

The last cash flow in the DCF approach which typically uses a model such as the Gordon Growth model to estimate all of the future cash flows beyond a certain point is called?

Terminal value

The use of the historical cost principle on the balance sheet means:

That most assets are stated at the original cost less depreciation

FIRREA

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 dealing mainly with capital requirements.

Why would you reject a project based on NPV?

The NPV is a negative number.

Volcker Rule

The Vlockler Rule limits bank investments in hedge funds and proprietary trading.

Liquidity

The ability to convert an asset to cash quickly without losing significant value.

Reserve Balance

The amount of cash the firm must hold as a safety net that will be available for future, unforeseen expenses.

Operating Balance

The amount of cash the firm needs to pay its immediate bills.

Dividend Policy

The amount of dividends management decides to pay out to shareholders.

Suppose a firm made a payment for some products produced by your firm. The check was mailed today. Collection float is:

The amount of time it takes for the company to have the check deposited and available at the bank.

What is the cash cycle?

The amount of time to regenerate cash

What do the content and structure of a balance sheet report? - The gains and losses at a point in time - The revenues and expenses for a period of time - The assets, liabilities, and equity at a point in time - The expenses, assets, and liabilities for a period in time

The assets, liabilities, and equity at a point in time

Accounting

The business function responsible for creating the historical financial statements.

Operations

The business function responsible for the production of the good or service being sold.

Marketing

The business function responsible of generating sales.

The terminal cash flow is:

The cash flows associated with unwinding the project

Terminal Cash Flow

The cash flows that result from "winding down" a project at the end of its life; does not include final year's differential cash flow. Another name for Terminal Value.

Value Chain

The chain of suppliers and customers the business relies on.

Assuming no asset disposals, depreciation expense is equal to:

The change in accumulated depreciation

The statement of cash flows shows _____________

The change in cash balance for a period of time

The sum of CFO + CFI + CFF is equal to:

The change in cash during the period

Suppose a firm shows an increase in accounts receivable of $100 during a period. Considered in isolation, which of the follow best describes the impact of this change on the Statement of Cash Flows?

The change will decrease CFO by $100 An increase in an asset account indicates an outflow of cash. Since A/R is an operating account, the $100 increase will decrease CFO by $100.

A company reported an increase in accounts receivable of $5,000 during the recent period. Half this amount is expected to be collected next period. How will this change in accounts receivable affect the cash flows from operating activities section.

The change will decrease cash flows from operations by $2,500

The change will decrease cash flows from operations by $5,000

A company reported an increase in accounts receivable of $5,000 during the recent period. Half of this amount is expected to be collected next period. How will this change in accounts receivable affect the cash flows from the operating activities section? - The change will decrease cash flows from operations by $2,500. - The change will increase cash flows from operations by $2,500. - The change will increase cash flows from operations by $5,000. - The change will decrease cash flows from operations by $5,000.

The change will decrease cash flows from operations by $5,000.

What are two examples of sunk costs? Choose 2 answers. The cost of a market study conducted prior to the decision The cost of feasibility consulting incurred before the decision point The cost of scrapping an old machine to replace with a new machine The cost of disposing an old asset

The cost of a market study conducted prior to the decision The cost of feasibility consulting incurred before the decision point

What are two examples of sunk costs?

The cost of a market study conducted prior to the decision The cost of feasibility consulting inccured before the decision point

What are two examples of sunk costs?

The cost of a market study conducted prior to the decision The cost of feasibility consulting incurred before the decision point

What are two examples of sunk costs?

The cost of a market study conducted prior to the decision The cost of feasibility consulting incurred before the decision point

Pre-tax Cost

The cost of capital before taking out the interest tax shield. This is only applicable to the cost of debt, since the common stock and preferred stock have no associated tax benefit/shield.

How will an increase in corporate tax rates affect a firm's cost of capital? The cost of debt will decrease. The cost of debt will increase. The cost of equity will decrease. The cost of equity will increase.

The cost of debt will decrease.

How will an increase in corporate tax rates affect a firm's cost of capital?

The cost of debt will increase

How will an increase in corporate tax rates affect a firm's cost of capital?

The cost of debt will increase false, the after tax cost of deb will decrease as a result of tax shield on interest

Which one of the following should be included in the capital budgeting calculation?

The cost of scrapping an old machine to replace with a new machine.

Opportunity Costs

The costs associated with foregone opportunities to use cash or credit in an alternative way.

Retained earnings represents:

The cumulative amount of the firm's earnings not distributed to shareholders

A broker is considering purchashing common stock that has average but consistent operating performance. What factor should lead the broker to purchase in this company?

The current price of the stock is 25% below its intrinsic value

A broker is considering purchasing common stock in a company that has average but consistent operating performance. Which factor should lead this broker to purchase shares in this company? A recent buying frenzy has driven the current price 50% higher than the previous trailing 12-month high price. The current price of the stock is 25% below its intrinsic value. The broker receives a tip that the company is about to announce a market breakthrough, and the price is above intrinsic value. Intrinsic value is 25% below the current stock price.

The current price of the stock is 25% below its intrinsic value.

Maturity Date

The date the bond issuer pays the face value and the bond expires.

Market Efficiency

The degree to which prices in a market reflect all available information.

Float

The delay between the payment form customers and the actual receipt of payments.

Income

The difference between revenues and expenses

What is DFN?

The difference between the forecasted asset accounts and the combination of the liability and equity accounts

Why would you reject this project based on the IRR?

The discount rate is higher than the IRR.

Which of the following is an implication of the Capital Asset Pricing Model (CAPM)?

The expected return of a stock depends on the stock's beta

Operating Expenses

The expenses on an income statement that fit between gross profit and EBIT

Corporate Finance

The finance function within a business. One of the three main areas of finance.

Primary Market

The financial market where securities (stocks and/or bonds) are first sold.

Secondary Market

The financial market where securities are traded after the initial issuance.

Suppose the inventory turnover of a company is higher than the industry. Based on this observation, which of the following is most likely?

The firm has too little inventory resulting in lost sales or stock-outs.

A firm has a ROE (return on equity) of 0.27 and the industry average ROE is 0.24. Which conclusion would an analyst draw when comparing the firm to the industry?

The firm is generating higher returns to owners than the industry

A firm has a ROE of 0.27 and the industry average ROE is 0.24 Which conclusion would an analyst draw when comparing the firm to the industry?

The firm is generating higher returns to owners than the industry

A firm has a ROE (return on equity) of 0.27, and the industry average ROE is 0.24. Which conclusion should an analyst draw when comparing this firm to the industry? The firm is generating higher returns to owners than the industry. The firm is generating lower returns to owners than the industry. The firm should use more equity financing. The firm should use less equity financing.

The firm is generating higher returns to owners than the industry.

A firm has a ROE of 0.27 and the industry average ROE is 0.24. Which conclusion would an analyst draw when comparing the firm to the industry?

The firm is generating higher returns to owners than the industry.

A firm has a ROE of .27 and the industry average ROE is .24. Which conclusion would an analyst draw when comparing the firm to the industry?

The firm is generating higher returns to the owners than the industry.

A firm reports the following cash flow data: o CFO = $1mm o CFI = -$750k o CFF = -$100k Which of the following is most reasonable assessment given the data?

The firm is sustainable in its current state

An analyst is comparing the ratios of two different firms and needs to address timing differences. What would be considered an example of a timing difference between the two firms?

The firms have different fiscal years

An analyst is comparing the ratios of 2 firms and needs to address timing differences. What would be considered an example of a timing difference between 2 firms?

The firms have different fiscal years.

An analyst is comparing the ratios of two firms and needs to address timing differences What is an example of a timing difference between these two firms? The firms have different fiscal years. The firms are in different industries. The firms use different depreciation methods. The firms use different inventory methods.

The firms have different fiscal years.

An analyst is comparing the ratios of two firms and needs to address timing differences. What would be considered and example of a timing difference between the two firms?

The firms have different fiscal years.

Efficient Frontier

The frontier where various portfolios have the highest ratio of return relative to risk.

Dollar Returns

The increase (or decrease) in price that is observed by an investor that buys and holds a particular security.

Differential Cash Flow

The incremental, annual cash from a project (aka Annual free cash flow)

Which three pieces of data are needed to perform a capital budget analysis?

The initial cost of the new project Annual cash flows for the life of the new project Cash flow when the firm terminates the project

Which three pieces of data are needed to perform a capital budget analysis?

The initial cost of the new project cash flow when the firm terminates the project Annual cash flows for the life of the new project

Earnings Yield

The inverse of the PE ratio.

Bond Indenture

The legal document detailing a bond.

Cash Cycle

The length of time between when the inventory is paid for and the time when the company is paid for the finished product.

Disbursement Float

The length of time it takes for a company's payment to become an actual outflow.

Collection Float

The length of time it takes for a firm to be able to use the payments from customers.

Face Value

The lump sum amount paid on a bond's maturity date. Also known as par value.

Mergers and Acquisitions

The market for firms that buy and sell each other.

The market value of debt. Usually the market value is not easily attainable, so the value of debt on your balance sheet will be used.

Standard Deviation

The measure of the width of the distribution or historical deviation away from the mean.

Capital structure can be defined as:

The mixture of a firm's debt and equity

Capital Structure

The mixture of the firm's level of debt and the firm's level of equity.

Why of the following is NOT a reason firms should carry cash?

The opportunity cost to holding cash is low

Net Fixed Assets represents:

The original cost of the firm's assets held for use less accumulated depreciation

On the balance sheet, Gross Fixed Assets represent:

The original cost of the fixed assets currently owned by the firm.

S-1

The original prospectus filed with the SEC by firms desiring to sell public securities.

Why is the balance sheet known as a permanent statement?

The other statements are reset at the end of the fiscal year.

Percentage Returns

The percentage increase (or decrease) in price that is observed by an investor that buys and holds a particular security.

Dividend Payout Ratio

The percentage of net income paid out to shareholders as dividends = Dividends/Net Income.

Retention Ratio

The percentage of net income plowed back in the firm as retained earnings = 1 - dividend payout ratio.

Credit Policy

The policy of the firm that manages the purchase of inventory or the sale of products on credit.

Financial Leverage

The portion of a firm's assets that are financed by debt. The more debt a company holds, the greater its financial leverage. Using debt to finance a company's operations.

Capital Structures

The portion of a firm's assets that are financed by either liabilities (debt), or by equity. The mix of debt and equity is referred to as the capital structure.

Risk

The potential of having prices of a particular security move in the direction opposite of the investors' expectations.

What is the value of a bond?

The present value of its cash flows

Capital Budgeting Analysis

The process of deciding what assets to buy.

Hedging

The process of eliminating risk

Financial Statement Analysis

The process of examining the three financial statements using financial skills.

Diversification

The process of spreading risk across multiple assets. Decreasing risk by combining assets that are not perfectly correlated, thus spreading the risk out.

DCF

The process of using time value of money skills and forecasting to value assets.

Time Value of Money

The process of valuing money at specific points in time.

Nationalization

The process when a nation or government purchases a controlling number of shares of a firm.

What must have taken place for a firm to recognize revenue, in order for the firm to comply with the accrual accounting rules?

The product must have been delivered.

What must have taken place for a firm to recognize revenue, in order for the firm to comply with the accrual accounting rules? The firm must have been paid for the product. The product must have been delivered. The price of the product must have included sales tax. The price of the product must have been exempt from sales tax.

The product must have been delivered.

If a WACC of 15.00% is used to compute the NPV, what does the IRR computed in question 110, above, tell about the project?

The project is acceptable.

Coupon Yield

The rate the bond issuer promises to pay its investors.

What does the degree of financial leverage indicate?

The reliance on debt

Maturity

The remaining life until the bond issuer pays the face value and the bond expires.

Recapitalization

The reorganization of the firm's capital structure.

Risk Premium

The required return in addition to the risk free rate demanded or received by investors, given the risk profile of the company.

Cost of Common Equity

The return required by those providing equity capital.

Owner's Equity (OE)

The sum of all equity accounts, most commonly common stock, APIC, and retained earnings

What is the par value of a bond?

The sum of money a corporation promises to pay upon expiration of the bond.

What is the par value (face value) of a bond?

The sum of money that the corporation promises to pay upon expiration of the bond

What is the par value (face value) of a bond? The interest accrued on the bond through expiration The sum of money that the corporation promises to pay upon expiration of the bond The transaction costs associated with bond issuance The coupon yield of the bond

The sum of money that the corporation promises to pay upon expiration of the bond

Marginal Tax Rate

The tax rate a firm must pay on the next dollar earned.

Credit Terms

The terms of the credit offered to customers and/or suppliers. These terms include the interest rates, early payment discounts, length of credit period, etc.

One of the weaknesses of payback period is that:

The time value of money is not considered.

Revenues

The top line of the income statement. The total amount of money a business brings in (before subtracting out any costs).

Sales

The top line of the income statement. The total amount of money a business brings in (before subtracting out any costs).

Initial Outlay

The total dollar amount required to begin a project.

Upside

The unlimited earnings potential of equity ownership.

If two companies have earnings of $2,000,000, and Company X has a multiple of 1.2 and Company Z has a multiple of 2.0, what can be estimated about the value of each company?

The value of Company Z is higher.

Intrinsic Value

The value of an asset computed with an economic model. Based on the cash flows generated from the security, intrinsically it is worth x amount.

Expected Return

The weighted average of security returns across different economic states, where the weights are the probabilities of the different economic states.

Weighted-average Cost of Capital

The weighted average of the various costs of equity and costs of debt.

Thirty years ago, your firm purchased a parcel of land for $100,000. You still own the land. The current market price of the land is $1,000,000. Under accrual accounting, which of the following adjustment should be made to recognize the current value of the land?

There is no adjustment to be made.

Why are bonds the primary method for raising capital?

They avoid the costs of the intermediary

Which of the following is true for preferred stockholders?

They will have dividend priority over common stockholders

Long

To buy something

Invest

To exchange something in hope of a return.

What is the purpose of currency restrictions?

To limit the ability of a foreign firm to take capital out of a country

What is the goal of using a financial derivate such as a forward or future?

To make no profits through exchange rate movements

Finance (Verb)

To pay for something.

Outsourcing

To produce a product or service outside of the domestic country

What is the primary objective of the SEC?

To protect investors by ensuring public firms provide adequate information

What is he reason for holding cash and cash equivalents?

To provide liquidity

What is the reason for holding cash and cash equivalents?

To provide liquidity

What is the reason for holding cash and cash equivalents? To provide liquidity To ensure opportunity cost coverage To ensure shortage cost coverage To provide credibility

To provide liquidity

Why would a farmer buy a hedge when he signs a contract to sell produce overseas?

To reduce currency risk

Short

To sell something

Why is float important to understand?

To time cash expenditures

Goal of the Firm

Traditionally to maximize shareholder wealth.

(True/False) Current liabilities represent money owed by a firm that requires payment within one year.

True

(True/False) Retained earnings represent the accumulated net income of the firm less dividends paid.

True

(True/False) The calculation of FCFF uses NOPAT instead of Net Income because FCFF is the cash available to both debt holders and equity holders.

True

(True/False) The effective rate is always lower than or equal to the stated rate.

True

A bond is a debt instrument issued by corporations or governments.

True

A bond is similar to a loan.

True

A commonly used method for shortening the float time is electronic check processing.

True

A company's WACC will increase if the company reduces the percentage of its total debt made up from short-term debt.

True

A disadvantage of buying products on credit is that accounts payable will have to be more closely managed.

True

A discount policy 2/10 net 30 means that a discount of 2% is applied if a payment is received within 10 days and that the total bill is due in 30 days.

True

A discount policy provides a discount to customers for paying for products before the payment due date.

True

A firm may choose to recapitalize by issuing new debt to buy back some existing shares.

True

A firm may choose to recapitalize by using equity to pay off some existing debt.

True

A firm that is financed with both internal and external equity will have a WACC that is higher when flotation costs are higher.

True

A firm with sound working capital management will carefully consider the float time of payments.

True

A limit order to buy a stock at $101.55 would execute when the ask price is at or below $101.55.

True

A market order to buy a stock would execute at the current ask price.

True

A secured loan means that some type of asset is being used as collateral to back the loan.

True

A syndicate is a group of investors that is temporarily formed to handle a bond or stock issue.

True

According to Modigliani and Miller (1958, 1963), an unlevered firm will have the same value as a levered firm.

True

According to a survey by Graham and Harvey (2001), the Capital Asset Pricing Model is the most widely used method for calculating the cost of common equity.

True

According to the CAPM, all idiosyncratic risk can be diversified away.

True

According to the CAPM, only systematic risk affects the expected return of an individual stock.

True

According to the Capital Asset Pricing Model, all investors will hold the market portfolio.

True

Accounts payable will be affected when a firm chooses to purchase raw materials on credit.

True

Agency costs are commonly mitigated by compensating management with company stock.

True

Agency costs are costs that are incurred when management does not act in the best interest of shareholders.

True

All firms that wish to make an initial public offering of equity or debt for non-accredited investors must first file public disclosure data with the SEC.

True

An IPO is where a company goes public or sells shares to the public for the first time.

True

An IPO occurs on the primary market.

True

An advantage of selling products on credit is the increased convenience for customers.

True

An example of agency costs is a firm's decision to invest in a project because management enjoys working on the project.

True

An example of agency costs is management spending company money on unprofitable goods and services.

True

An example of nationalization is the U.S. government purchase of the majority equity stake in U.S. automakers.

True

An important part of managing accounts receivables is setting a collection policy regarding credit sales.

True

An increase in inventory will decrease CFO.

True

An increasing debt-to-equity ratio might decrease the value of a firm because higher debt levels create higher costs associated with bankruptcy risk.

True

An increasing debt-to-equity ratio might improve the value of the firm because of tax shields.

True

As debt levels increase, firms face greater financial risk.

True

Business risk is sometimes referred to as operating risk.

True

Capacity constraints are usually examined carefully when DFN is too high.

True

Capital is defined as a financial asset.

True

Cash policies could result in a loss of business because customers lack the freedom and flexibility of buying products on credit.

True

Cash policies make it easier to manage accounts receivable and accounts payable.

True

Castanias (1983) shows that industries with more firm bankruptcies generally have firms that have lower debt-to-equity ratios.

True

Collection float is defined as the time it takes for a firm to be able to use the payments from its customers.

True

Common stock represents ownership in the firm.

True

Companies can raise capital by issuing bonds or stocks.

True

Companies should always maximize shareholder value.

True

Corporate finance focuses on the decision making by the management of the firm.

True

Disbursement float involves the amount of time it takes for a payment to become an actual outflow.

True

During a leveraged buyout, the acquiring firm might use the assets of the target firm as collateral on the new debt issue.

True

FCFF can sustainably be distributed to the providers of capital.

True

Financial risk is the risk associated with a firm's inability to meet its debt obligations.

True

Finding the cost of preferred stock requires the use of the perpetuity model.

True

Firms that are maximizing shareholder value will generally see increases in the firm's stock price.

True

Firms try to mitigate agency costs by aligning managers' interests with shareholders' interests.

True

Firms with high unexpected earnings usually exhibit large positive returns on the earnings announcement day.

True

Flotation costs are costs that are incurred when companies issue new securities.

True

Flotation costs are paid to firms that underwrite the new security issues.

True

Generally speaking, the operating accounts relevant to the calculation of CFO are located at the top of both the asset and financing side of the balance sheet.

True

Higher debt levels are generally associated with more risk.

True

If a firm gains greater exposure to systematic risk, then the cost of capital will likely increase.

True

If a firm has more systematic risk, then, according to the CAPM, the return required by shareholders will be higher.

True

If a firm refinances its debt and extends the length of maturity on all of its bonds, then the cost of capital will increase.

True

If an already heavily levered firm increases its debt even further, the weighted average cost of capital will likely increase.

True

If firm A has a shorter cash cycle than firm B, then, holding everything else constant, firm A will hold less cash than firm B.

True

If market interest rates increase, then a firm's cost of capital will likely increase.

True

If sales were to increase 1%, then operating income will increase in proportion to the degree of operating leverage.

True

In an efficient market, new information will move prices almost immediately.

True

In an inefficient market, prices will slowly respond to new information.

True

In general, as riskiness of a portfolio increases, the expected return of the portfolio increases.

True

Increases in operating assets and decreases in operating liabilities will decrease CFO.

True

Inefficient markets will often have mispriced securities.

True

Inventory is defined as materials that are required in the production of a finished good as well as the finished goods themselves.

True

Jensen and Meckling (1976) suggest that agency costs can affect the value of the firm.

True

Leveraged buyouts occur when a company issues new debt to finance the acquisition of another company.

True

Leveraged recapitalizing generally increases the debt-to-equity ratios.

True

Management can dictate how spontaneous accounts should change.

True

Masulis (1980) finds empirical evidence that stocks prices change around the changes in capital structure suggesting that market value is affected by capital structure.

True

Masulis (1980) finds that tax shields affect the change in stock prices surrounding changes in capital structure.

True

Myers and Majluf (1984) combined the investment and financing decision and show that a firm's capital structure can affect the value of that firm.

True

NYSE daily trading volume has increased over the last 50 years.

True

Notes Payable carry an explicit interest cost

True

On an income statement, interest payments are deducted before taxes are calculated.

True

One of the assumptions of the Modigliani and Miller (1958, 1963) research is that firms do not face bankruptcy costs.

True

One of the reasons why firms should hold cash is for liquidity reasons.

True

One of the reasons why firms should not hold too much cash is that cash is low risk and subsequently low return.

True

One possible way for a firm to find its optimal debt-to-equity ratio is to estimate a concave function using regression analysis and find the optimal point on that function.

True

One possible way for a firm to find its optimal debt-to-equity ratio is to find the average debt-to-equity ratio for similar firms within the same industry.

True

Preferred stock holders have priority in dividends over common stock holders.

True

Primary financial markets are markets where issuers place new securities with investors.

True

Proper management of a firm's working capital will require careful management of accounts payable.

True

Ratios help identify the areas of a firm that need investigation.

True

Securities sold outside the US to non-US citizens typically do not require registrations with the SEC.

True

Short-term bonds generally have lower yields than long-term bonds, holding everything else constant.

True

Some analysts argue that the expense of SOX in both time and money has caused the number of public firms in the US to decrease.

True

Some high frequency traders provide liquidity to the rest of the market.

True

Stock and equity mean the same thing in finance.

True

Stock represents ownership in a particular company.

True

Stocks and bonds are two types of financial instruments

True

Stocks and bonds are two types of financial instruments.

True

Syndicates are generally made up of investment banks and other institutional investors.

True

T/F A well diversified portfolio should have a lower standard deviation of expected returns than an undiversified portfolio.

True

T/F Proper diversification should reduce the riskiness associated with a portfolio.

True

T/F: Some types of equity give the owner the right to vote on company matters.

True

The CAPM beta for the market is equal to one.

True

The CAPM can be used to determine the return required by shareholders.

True

The NYSE specialist has an objective to provide liquidity to the market.

True

The New York Stock Exchange is an auction market.

True

The after-tax cost of debt is equal to the yield to maturity on a company's bonds multiplied by 1 minus the marginal tax rate.

True

The bid-ask spread is compensation to the specialist for providing liquidity to the market.

True

The cost of common equity is defined as the return required by common shareholders.

True

The cost of debt is denoted in percentage terms.

True

The cost of debt is usually calculated as the interest rate on a company's bonds.

True

The degree of combined leverage is calculated by multiplying the degree of operating leverage and the degree of financial leverage.

True

The degree of combined leverage tells us how much pre-tax profit increases for a given increase in Sales.

True

The difference between the expected return for the market and the risk free rate is often called the market risk premium.

True

The final price and number of shares can be changed as late as the morning of the offering.

True

The firm that wishes to sell securities can amend their S-1 filing with the SEC as late as the morning of their IPO.

True

The goal of the firm is to maximize shareholder value.

True

The idea of the replacement cost method is to determine the value of the firm if it was to be built from the ground up today.

True

The longer a firm's cash cycle the more cash the firm is required to hold in order to operate on a daily basis.

True

The operating balance is defined as the amount of cash the firm needs to pay its immediate bills.

True

The process of recapitalization generally affects the capital structure of firms.

True

The reason that using external equity is more costly than using internal equity is because of flotation costs.

True

The reserve balance is the amount of cash the firm should hold as a safety net.

True

The two types of credit policies discussed in the topic are cash-only policies and discount policies.

True

The type of costs associated with a firm holding too much cash is opportunity costs.

True

Titman and Wessels (1988) present evidence that a firm's capital structure will depend, in part, on the presence of transaction costs.

True

Top management is now required to personally guarantee the accuracy of financial statements because of SOX.

True

Trading on the NYSE is executed with a specialist (i.e. a market maker).

True

True or False: A US bond that is denominated in US dollars but issued in Europe is an example of a Eurobond.

True

True or false: A U.S. bond denominated in U.S. dollars and issued in Europe is classified as a Eurobond.

True

True or false: As the market risk premium increases, the CAPM suggests that expected returns for individual stocks will increase as well.

True

True or false: The idea of comparative economic advantage provides support for the benefits of global free trade.

True

True/False. The process of making a target firm's data comparable to a peer group is known as scrubbing the data.

True

True/False: The idea of comparative economic advantage provides support for the benefits of global free trade?

True

Upon bankruptcy, preferred stock holders do not have claim on the assets of the firm.

True

Using debt is less costly than using equity to finance a capital investment project.

True

We can value stocks like debt by discounting all future cash flows to the present value.

True

When an increase in inventory causes an increase in working capital, the firm will experience a cash outflow.

True

When determining the present value of the future cash flows that will come from a capital investment project, you should discount the cash flows with the weighted average cost of capital.

True

When determining whether a particular project will be profitable, the appropriate discount rate is the WACC.

True

When firms with relatively low levels of debt increase their debt-to-equity ratios, the value of the firm will increase.

True

When revenue and costs are relatively stable, overall business risk is lower.

True

When setting credit standards, the firm should determine the types of customers that qualify for credit.

True

While theory in Miller and Modigliani (1958, 1963) assumes that firms do not face bankruptcy risk, Castanias (1983) shows that firms that do face bankruptcy risks generally carry less debt.

True

While theory in Miller and Modigliani (1958, 1963) assumes that firms do not pay taxes, Masulis (1980) finds evidence that because firms pay taxes, a firm's capital structure affects the value of the firm.

True

Without financial markets, exchange would become more costly.

True

Working capital management is the management of cash required to meet the day-to-day operations of the firm.

True

A company has cash sales of $200 and credit sales of $750. It's average accounts receivable is $90. What is the A/R turnover? What is the average collection period?

Turnover 8.33 ACP: 43.8 750 / 90 = 8.33 ACP = 365 / 8.33 = 43.8

Which of the following types of loans are classifed as a secured loan?

Two of these choices

Net Income

Typically last line of the income statement, also known as earnings.

Tax Expense

Typically second to the last line of the income statement right before net income, represents income taxes paid by the firm.

Gross Profit

Typically the third line of the income statement which equals Sales - COGS

Which two effects does the unbundling and offshoring of production have on employment when the global value chain is taken into consideration?

Unbundling and offshoring allows firms to offer intermediate and final goods at lower prices, thus increasing employment. Unbundling and offshoring decreases costs, which results in expansion of sales and higher employment

Which 2 effects does the unbundling and offshoring of production have on employment when the global value chain is taken into consideration?

Unbundling and offshoring decreases stock value and increases market share Unbundling and offshoring allows firms to offer intermediate and final goods at lower prices, thus increasing employement

Which one of the following is NOT an example of meaningful ratio analysis?

Using GAAP rules to calculate standard ratios.

Which of the following changes will most likely increase the incremental cash flow in the early years of a long-lived project?

Using MACRS instead of straight-line depreciation.

Leverage

Using cost structure or debt to magnify returns.

If the cash flow today is $100,000 and the annual inflation rate is 5%, what will the cash flow be worth one year from now?

Value of cash flow in one year=(100%-5%)*100,000=$95,000

Unlike bonds which are fixed-return securities, stocks are ___________________ securities.

Variable return

Stocks are:

Variable-return securities

Bonds

Vehicles by which corporations and governments raise debt capital.

Marketable Securities

Very liquid current asset on the balance sheet such as money markets, t-bills, etc.

Which is the appropriate equation for finding the value of a firm?

Vfirm = VEquity + VDebt

Which discount rate would be used to calculate the value of a firm using FCFF?

WACC

If a company has a capital structure of $5 million common stock with a cost of 17%, $2 million bonds at 4%, $1 million of Short Term Debt with a cost of 7%, and $2 million preferred stock with a cost of 3%, what is the weighted average cost of capital? The company has a 40% tax rate.

WACC=((5/10)*.17)+((2/10)*.04*(1-.4))+((1/10)*.07*(1-.4))+(2/10)*.03)=.10

Accrued Wages

Wages that the company owes to employees, but has not paid yet.

A company has 100 million in debt and 200 million in equity. The cost of debt is 8% and the marginal tax rate is 40%. What is the weighted average after tax cost of debt?

Weighted average after tax cost of debt = (100/300)*.08(1-.4) = .016 or 1.6%

A person wants to retire 15 years from today and would like to have an annual income of $200,000 per year for 10 years starting in 15 years. The discount rate is 6%. What is the present value?

What is needed at the start the drawl CPT=PV=1,472,017.41 What is needed at the start of deposit CPT=PV=614,221.43

Current Market Values

What someone would pay right now for an asset.

Investing Activities

What type of projects a firm decides to take.

Initial Public Offering (IPO)

When a company goes out to raise money from the public for the first (initial) time by "offering" a share of its company, it is called an Initial Public Offering

Managed Floating Exchange Rate System

When a country allows the value of currency to float, but the fluctuations are managed by the government within a minimum and maximum value

Fixed Exchange Rate System

When a country's currency value is fixed to a second country's currency

Indirect Quotes

When a currency exchange rate is stated with the currency of interest in the denominator (e.g., USD/MXN - Peso indirect quote)

Excess Capacity

When fixed assets do not need to increase as sales increase.

Full Capacity

When fixed assets have to increase if the firm wants to increase sales.

A $1,000 bond matures in 6 years. The coupon rate is 6% and interest is paid semi-annually. The current market price is $1,075. What is the yield?

When interest is paid semi-annually, you should do the following: •N = should be multiplied by 2 •PMT = should be divided by 2 •Yield = after you compute the yield should be multiplied by 2. FV = $1,000 PMT = (1,000*0.06)/2 = 30 N = 6 x 2 = 12 PV = -1,075 CPT = I/Y = 2.28 x 2 = 4.56

Which statement is true about fluctuations in bond prices?

When market interest rates fluctuate, the bond coupon rate is unchanged

What is true about fluctuations in bond prices?

When market interest rates fluctuate, the bond coupon rate is unchanged.

Which statement is true about fluctuations in bond prices? When market interest rates fluctuate, the bond coupon rate is unchanged. When market interest rates are stagnant, the bond coupon rate fluctuates. When market interest rates fluctuate, the bond coupon rate fluctuates. When the market interest rates fluctuate, the required rate of return equals the bond coupon rate.

When market interest rates fluctuate, the bond coupon rate is unchanged.

Inverse Price-yield Relationship

When market yields go up, bond prices go down and vice versa.

Which term describes the amount of cash a firm needs in order to pay its immediate bills?

Working capital

A 1,000 bond matures in six years. The coupon rate is 6% and interest is paid semi-annually. The current market price is 1,075. What is the yield?

YTM=2.28*2=4.56

The rate of return investors receive on a bond is called the:

Yield to maturity

YTM

Yield to maturity, the required rate of return of a bond.

If the current ratio of a company is higher than the industry, then:

You cannot tell without looking at other liquidity ratios.

A basic equation for the balance sheet is: a. Equity = Assets - Liabilities b. Liabilities = Equity + Assets c. Assets = Liabilities - Equity d. Assets = Equity - Liabilities

A credit agency recently downgraded a company's debt. What is the impact on the cost of debt? A. The cost of capital will increase B. The cost of capital will decrease C. The cost of equity will decrease D. The cost of capital will remain the same

Firms A and B are in the same industry. For the year 2013, Firm A has a gross margin of .45 and Firm B has a gross margin of .36. Which conclusion would an analyst draw when comparing Firm A to Firm B? A. Firm A has a more efficient production process B. Firm A has higher depreciation expense C. Firm A has lower depreciation expense D. Firm A has less efficient production process

How are the Securities and Exchange Commissions Regulation S and Rule 144A similar? A. Both allow firms to raise capital without registering with the SEC if certain conditions are met B. Both encourage specialized training by individuals designated to sell securities. C. Both use incentives and penalties to ensure dealing between large financial institutions and small investors D. Both are intended to increase transparency of financial markets

How does the weighted average cost of capital affect a company's growth opportunities? A. The lower the cost of capital, the greater the growth opportunities B. Only the cost of debt will affect growth opportunities C. The lower the cost of capital, the lower the growth opportunities D. The higher the cost of capital, the greater the growth opportunities

How is a short-term receivable, with the maturity of less than one year, carried on the balance sheet? A. As a current asset B. As a current liability C. As owner's equity D. As a long-term liability

If a company wishes to obtain a bank loan, will it want to have a higher current ratio or a lower current ratio? a. higher b. lower c. the same d. it doesn't matter

If debt is less costly than equity, why don't firms maximize debt use? a. Excessive debt inceases risk of banruptcy b. Restricted by Federal tax regulations c. It reduces the benfits of financial leverage d. It increases operating leverage

If market interest rates rise, what impact does it have on a given bond? a. Its price decreases b. It will have a discount price c. No impact since the coupon rate is fixed d. Its price increases

If the coupon rate on a particular bond is higher than the market rate of return, at what will the bond sell? A. At a premium B. A par C. At the risk-free rate D. At a discount

If the coupon rate on a particular bond is higher than the market rate of return, at what will the bond sell? A. At a premium B. A the risk-free rate C. At par D. At a discount

If the debt ratio increases, what effect does that have on ROE? a. ROE increases b. ROE decreases c. ROE is unchanged d. Cannot be determined

In cash flow statements, which section reflects so-called "spontaneous" accounts which vary with sales? a. Cash flow operations b. Cash flow investing c. Cash flow financing d. Cash flow Sales

Modigilani and Miller's initial capital structure theory suggested that in the absence of taxes, bankruptcy costs and transaction costs, the firm's capital structure would not affect the weighted average cost of capital (WACC). What has been proven by subsequent research and inclusion of factors omitted in the initial theory? A. A firm's capital structure does affect the weighted average costs of capital, and thus a firm's value. B. Modigliani and Miller's initial work has proven accurate in determining a firm's value. C. Financing decisions do not affect a firm's value D. Taxes are the only factor that impacts the weighted average cost of capital and a firm's value

The SEC Securities & Exchange Commission requires public companies to do the following: a. File audited financial statements with SEC b. Change CEOs on a regular basis e. Regulates the Money Supply d. Prohibits foreign bribery

The matching principle in accrual accounting requires that: a. Revenues be recognized when the earnings process is complete and matches expenses to revenues recognized. b. Expenses are matched to the year in which they are incurred c. Revenues are matched to the year in which they are booked d. Revenues should be large enough to match expenses

The stock price of a company increases and the market is deemed efficient. What assumption can be made? A. A new, patented, product was introduced to the market. B. New machinery was purchased with a useful life of 20 years. C. Management is optimizing its resources and operating efficiently. D. Management hired new employees and invested in a training program.

Thinking about levels of market efficiency quadrants. Which investment option should be selected assuming a prudent investor wants to maximize their expected return E(R)? Quad 1; Quad 2; Quad 3; Quad 4 A. A B. B C. C D. D E. E

To assess firm efficiency, which ratio would you use? a. Asset turnover b. Operating margin c. Debt ratio d. None of the above

What are discretionary accounts? A. Accounts that require management to deliberately increase or decrease B. Accounts that increase automatically with sales C. Accounts that include current assets D. Accounts that only appear on an income statement

What are secondary markets? A. Markets where securities are traded subsequent to the initial offering. B. Markets were securities are issued for the first time. C. Markets were securities are issued through a competitive sale. D. Markets where securities are issued through a negotiated sale.

What do investors, entrepreneurs and other market participants rely on the SEC to do? A. Determine safety and efficiency of investment by US and foreign investors B. Regulate the Money Supply C. Prohibit foreign bribery D. Require Private Firms to Register

What does the beta coefficient represent? a. It is a statistically-derived measure of volatility b. It is the Expected Return minus the Growth Rate c. It is the volatility of the Risk Free Return d. It is the expected return for a basket of preferred stocks

What effect does the method of financing investments have on the value of the firm? A. The method of financing investments alters the weighted average of the cost of capital. B. Financing through tax-advantage debt has no effect on the value of the firm C. Issuing more costly (ie risker) bonds for financing investments has no effect on the value of the firm D. Any mehod of financing investments has the same effect on the value of the firm

What explains the size of the yield spread of junk bonds over Treasury? a. It is the value of the expected default loss b. It depends the firm'a profit c. It is the probability of default d. It is a "psychological' reaction of investors.

What is an example of an estimate used in recording transactions? A. Deciding the salvage value of fixed asset when calculating depreciation expense B. Deciding whether to expense or depreciate a fixed asset C. Deciding the cost of a fixed asset when calculating depreciation expense D. Deciding whether to sell a fixed asset

What is the difference between a secured loan and an unsecured loan? A. Secured loans require some form of collateral. B. Unsecured loans typically have a lower interest rate C. Unsecured loans require some form of collateral. D. Secured loans typically have a higher interest rate

What is the relationship between annual percentage rate (APR) and annual percentage yield (APY)? A. The APR will be greater than the APY if compounding happens more frequently than annually B. The APR will equal the APY if compounding happens more frequently than annually C. The APR will be less than the APY if compounding happens more frequently than annually D. The APR will be less than the APY if compounding happens more frequently than annually

What is true about the cash flow from the operating activities section of the statement of cash flows? A. Increases in current liability accounts represents an inflow of cash and should be added to net income B. Decreases in current liability accounts represent an outflow of cash and should be added to net income C. Increases in current liability accounts represent an outflow of cash and should be subtracted from net income D. Decreases in current liability accounts represent an inflow of cash and should be added to net income

What metric converts FV to PV? a. The discount rate b. Time c. The PE ratio d. None of the above

What should a company do to manage its working capital? a. Collect quickly and pay slowly b. Keep a large cash balance c. Maximize the use of long term investment d. Depreciate assets more slowly

What would be a source of information to determine Replacement Cost? a. Building Appraisal b. Accumulated Depreciation Expense c. Stock price d. Statement of Cash Flows

When is a company that has strong operating revenues and competent management a good investment? A. When the intrinsic value of the price per share is higher than the current stock price B. When the intrinsic value of the price per share is lower than the current stock price C. When the current stock price is currently equal to the intrinsic value D. When the current stock price is overvalued relative to the intrinsic value

Which element is a required disclosure in the prospectus, according to the Securities Act of 1933? A. Audited financial statements B. Tax returns C. Budgets D. Internal control reports

Which financial ratio measures a company's ability to meet its short term obligations with its most liquid assets? A. Quick ratio B. Equity ratio C. Debt ratio D. Current ratio

Which investment option should be selected assuming a prudent investor wants to maximize their return E(R)? A. Quad 1 A B. Quad 2 B C. Quad 2 C D. Quad 3 D E. Quad 4 E

Which is the best diversification for stock investment? a. Auto company and grocery chain b. Walmart and Costco c. Home buider and auto company d. Boeing and Lockheed

Which measure of cash flow is commonly used to evaluate the change in revenue and costs? A. Cash flow from operating activities B. Free cash flow to the firm C. Cash flow from financing activities D. Free cash flow to equity

Which section of the Statement of Cash Flows describes the production and sales of the firm's product? a. Cash Flow Operations b. Cash Flow Investing c. Cash Flow Financing. d. Cash Flow Securities

Which strategy issues new debt within a company and takes the proceeds from the debt issuance to buy back some of the outstanding shares? A. Leverage recapitalization B. Leverage buyouts C. Reorganization D. Nationalization

Which term describes the amount of cash that a firm must hold as a safety net to counter future unforeseen expenses? A. Reserve balance B. Budgetary balance C. Beginning balance D. Operating balance

Which would have the highest value? a. Gross margin b. Operating margin c. Net margin d. All are equal

Why do companies strive for a lower cost of capital?

a lower cost of capital positively affects credit rating

The SEC Securities & Exchange Commission requires companies to do the following: (pick two) a. Register all public offerings b. Change CEOs on a regular basis c. Regulates stock sales d. Prohibits foreign bribery e. Regulates the Money Supply

a, c

Which two ratios are used to evaluate a company's working capital management? A. Receivable turnover B. Earnings per share C. Return on equity D. Cash ratio E Profit Margin

a, d

Which type of investment will a risk-averse investor most likely invest in?

actively managed funds

Why would a country have incentives to devalue its currency? A weaker currency ______________.

all of the above are true.

What is the par value (face value) of a bond?

amount that is payable on maturity

An analyst is comparing the ratios of two firms and needs to address accounting differences. What would be considered an accounting difference between the two firms? A. The firms have different auditors B. The firms use different inventory methods C. The firms have different fiscal years D. The firms are in different industries

Company A has a high degree of business risk. What will be the effect on the company's EBIT if the company suffers a slight decrease in sales? A. Large increase in EBIT B. Large decrease in EBIT C. Small decrease in EBIT D. Small increase in EBIT

Company A wishes to keep 20% of its assets as cash. Company B keeps its cash balance at 5% of assets. Which of the following statements apply? a. Company A is less liquid than Company B b. Company B invests in more working current assets c. Company A uses better working capital management d. Company B has a more conservative cash policy

Dodd-Frank regulates which segment of the U.S. Economy? a. Fannie Mae and Freddie Mac (Housing financing) b. Banking Industry c. Multi-level Marketing Industry d. Automobile Industry

Economists forecast the probability of recession at 22%. During periods of recession, returns for a company have been -2%. Returns for the company have been 18% during an expansionary period. What is the forecast probability of an expansionary period? A. 80% B. 78% C. 76% D. 82%

For calculating cash flows, why is depreciation added to Net Income? a. To offset taxes b. Depreciation is a non-cash deduction c. To determine pre-tax income d. None of the above

How are the Security and Exchange Commissions' Regulation S and Rule 144A similar? A. Both use incentives and penalties to ensure fair dealings between large financial institutions and small investors. B. Both allow firms to raise capital without registering with the SEC if certain conditions are met C. Both are intended to increase transparency of financial markets D. Both encourage specialized training by individuals designated to sell securities

If a company produces and sells a product only in the U.S., what international developments may affect its sales? a. Fluctuating exchange rates b. Imports of competing products c. Immigration policy d. Inflation in Europe

If a firm's financial and operating leverage is high, what is the implication? a. The firm is more profitable b. Profits are more volatile as sales fluctuate c. The firm is less profitable d. The two leverages offset each other - - neutral impact

If a product is made 100% domestically, what can affect its domestic market? a. International exchange rates b. International competition c. Product tariffs d. International political regulations

If an industry, such as autos, has very high fixed costs and very cyclical sales, what is the implication for financial leverage? a. Use high financial leverage to offset high fixed costs b. Use low financial leverage to offset high operating leverage c. It has no implication at all d. None of the above

If an investor knows the idiosyncratic risk, the investor knows the: a. Profit Margin percentage b. Beta Coefficient c. Operating Leverage d. Free Cash Flow

If the current coupon rate on a bond is 6% and the bond is selling at a 5% discount, what is the yield to maturity on the bond? A. Equal to 5% B. Equal to 6% C. Less than 6% D. Greater than 6%

If the value of a dollar increases, the price of imports: a. Increases b. Decreases c. Stays the same d. Fluctuates

If two annuities have the same payments and term, why is an Annuity Due more valuable than an Ordinary Annuity? a. The have equal value b. Annuity Due payments occur earlier c. Annuity Due uses a lower discount rate d. Ordinary annuities are consider more risky

If you are assessing a firm's ability to meet short term obligations, you would use which ratio? a. Debt ratio b. Quick ratio c. Gross margin d. Financial leverage

Investors will often sell a stock that has gains rather than a stock that is suffering losses in their portfolio, despite subsidized tax relief when selling at a loss. What the logic-defying behavioral implications of such a decision. A. Selling a stock at a gain results in dollar cost average benefits B. Maintaining winning positions in the portfolio enhances future portfolio growth rate C. Investors hate taking a loss, especially when they can realize a gain D. Selling an equity position at any point results in a favorable tax benefit

Investors will often sell as stock that has gains rather than a stock that is suffering losses in their portfolio, despite subsidized tax relief when selling at a loss. What are the logic defying behavioral implications of such a decision? A. Selling a stock at a gain results in dollar cost averaging benefits B. Maintaining winning positions in the portfolio enhances future portfolio growth rate C. Investors hate taking a loss, especially when they can realize a gain. D. Selling an equity position at any point results in a favorable tax benefit.

PV ordinarily is less than FV. What would cause the opposite? a. Compounding b. Negative interest rates c. The exchange rate d. The Federal Reserve

The OIROI (Operating Income Return on Investment) uses what elements on the income statement? a. Operating Income, EBIT, Total Liabilities b. EBIT, Total Assets c. Sales, Total Assets, Equity d. Net Margin, Total Current Assets

What advantage does the Gordon growth model have compared to the capital asset pricing model (CAPM)? A. It requires assumptions about growth that benefit fast growing companies B. It provides an easier to understand and relatively accurate forecast when growth rates are stable C. It is highly accurate in predicting future growth D. It requires the use of accurate known factors, such as future growth rates

What does Beta measure? a. The default risk of a stock b. The relative riskiness of an individual stock c. Indicates the market value of the stock d. Stocks to avoid purchasing

What does net income measure that the cash flow from operating activities does not? A. Credit sales to customers B. Payments made to suppliers of goods and services C. Depreciation expenses D. Payments to employees or other expenses

What factor determines the "market risk premium" on stocks? a. The level of Treasury yields b. The investor-perceived riskiness of stocks c. Seasonality d. Projected future earnings

What impact did the recent corporate tax cut have on a firm's WACC? a. It decreased WACC b. It increased WACC c. No impact since WACC depend on firm risk d. None of the above

What is the current price of the bond, if the required rate of return on a bond is the same as the coupon rate? A. Greater than the par value of the bond B. Equal to the par value of the bond C. The current prevailing market price of the bond D. Less than the par value of the bond

What is the relationship between NPV and IRR? a. Both must exceed WACC to accept investment b. If discount rate equals IRR, NPV is equal to zero. c. NPV must exceed WACC to accept investment d. If discount rate equals IRR, should accept investment

What is the relationship between WACC and IRR? a. Just 2 different numbers b. IRR must exceed WACC to accept investment c. WACC must exceed IRR to accept investment d. WACC and IRR are the same thing

What is true about the content and structure of an income statement? A. It reports the expenses and liabilities at a point in time. B. It reports the revenues and expenses for a period of time. C. It reports the assets and expenses for a period of time. D. It reports the assets, liabilities, and equity at a point in time.

Which best describes conceptually the valuation of all financial assets in financial markets? a. Based on opinions of Wall Street analysts b. The NPV of anticipated cash flows c. Based on the book value of assets and liabilities d. None of the above

Which components are part of total assets? a. Cash, Accounts Receivable, Short Term Debt b. Cash Accounts Receivable, Inventory, Long Term Assets c. Accounts Payable, Long Term Assets, Long Term Debt d. Accounts Payable, Net Income, Equity

Which hybrid security has some elements that resemble equity and others that resemble debt? A. Derivative stock B. Preferred stock C. Common stock D. Treasury stock

Which is not a component of the DuPont formula? a. Net Income to Sales b. Debt to Equity Ratio c. Sales to Asset Ratio d. Assets to Equity Ratio

Which of the following characterizes collection float a. Longer float indicates good financial practices b. Increased float indicates slower processing time c. Accounts receivable increase with shorter float d. Liquidity is enhanced with longer float

Which of the following gives the largest effective rate (APY) a. 18.6% compounded monthly b. 18.6% compounded daily c. 18.6% compounded weekly d. 18.6% compounded yearly

Which organization was created by Dodd-Frank to monitor how systematic risk could impact the banking industry? A. Public Oversight Board B. Financial Stability Oversight Council C. Federal Insurance Office D. Financial Regulatory Agency

Which securities are issued by the U.S. federal government and are taxable at the federal level? A. Municipal bonds B. Treasury bonds C. Corporate bonds D. Eurobonds

Which statement about a PE ratio is false? a. High PE ratios reflect higher expected growth rates b. Low PE stocks are cheap c. PE is the ratio of price to earnings d. High Beta stocks have lower PE ratios

Which type of bond gives an investor the right to trade each bond for a set number of shares of common stock whenever the investor chooses? A. Treasury bond B. Convertible bond C. Mortgage bond D. Foreign bond

Which would likely have the lowest price? a. 3-month commercial paper b. Zero coupon bond c. 5-year Treasury note d. AAA corporate note

Why do firms often use "sensitivity" tests in analyzing investment projects a. Required by the SEC b. Uncertainty of forecast assumptions c. Auditors require it. d. Required section of financial statements

Why is it a challenge for a fund manager to review financial statements from other countries? A. Because the U.S. Financial Accounting Standards Board is in the beginning stages of working with the International Accounting Standards Board on converging reporting standards. B. Because the U.S. Generally Accepted Accounting Principles and the International Financial Reporting Standards vary. C. Because the U.S. Financial Accounting Standards and the International Accounting Standards Board abandoned the project to converge financial reporting rules. D. Because the U.S. Financial Accounting Standards Board does not work with the International Accounting Standards Board on mitigating differences in reporting standards.

Why is it important to prepare an accurate fixed asset financing forecast? A. The method used to finance fixed assets will drive product demand. B. Firms producing above capacity may not require additional fixed asset investment to increase sales. C. Accurate forecasting of fixed assets requirements ensures the complete discretion of management in budgeting. D. Firms producing below capacity may not require additional fixed asset investment to increase sales.

Why is the Balance Sheet known as a permanent statement? a. Because the statement is sent to the SEC. b. Because the other statements are reset at the end of the fiscal year c. Because it is printed out and archived d. Because it persists in the minds of the shareholders.

Why would a farmer buy a hedge when he signs a contract to sell produce overseas? a. To avoid tariffs b. To reduce currency risk c. To increase profits d. To avoid competition

Why is the NPV preferred over the IRR? Pick Two a. It has a higher dollar value b. It measures the dollar value c. It is more reliable d. It is harder to calculate

b, c

Under which three conditions would a firm decide to reduce the growth rate? A. When investors are dissatisfied with the dividend payout ratio B. When additional investor capital is not available C. When capacity has been reached D. When customers are dissatisfied with the company's products E. When the company's borrowing limits have reached the maximum allowed by the lender

b, c, d

Which three costs are associated with holding inventory? A. Variable costs B. Opportunity costs C. Storage costs D. Product costs E. Fixed costs

b, c, d

Which three changes would affect an estimate of differential cash flows? A. An increase in the marginal tax rate of a company B. An increase in the estimated value of the new machine at the end of the project C. A revision in the depreciation schedule D. A decrease in projected annual revenue E. An increase in the overhead allocation

b, c, e

Some companies offer discounts to customers in order to give incentive for paying earlier than the due date. What two terms incentivize customers to accept trade discounts? A. Cash cycle B. Length of the credit period C. Sales commission D. Amount of discount E. Days sales in receivables

b, d

Under which three conditions would a firm decide to reduce the growth rate? Choose 3 A. When investors are dissatisfied with the dividend payout ratio B. When additional investor capital is not available C. When the company's borrowing limits have reached the maximum allowed by the lender D. When capacity has been reached E. When customers are dissatisfied with the company's products

b, d, e

Which three costs are associated with holding inventory? A. Fixed costs B. Storage costs C. Variable costs D. Product costs E. Opportunity costs

b, d, e

Some companies offer discounts to customers in order to give incentive for paying earlier than the due date. Which two terms incentivize customers to accept trade discounts? Choose 2 A. Sales commission B. Amount of discount C. Cash cycle D. Day's sales in receivables E. Length of the credit period

b, e

Yankee Bonds

bonds issued in the U.S. by non-U.S. firms

An analyst is comparing the ratios of two firms and needs to address accounting differences. What would be considered an accounting difference between two firms? A. The firms are in different industries B. The firms have different auditors C. The firms use different inventory methods D. The firms have different fiscal years

Company A offers trade credit of 2% 10 / net 30 and Company B offers trade credit at net 30. What can be said about the credit policies of each company? a. Company B has a looser credit policy b. Company A keeps more of its Accounts Receivable c. Company A can attract more customers d. Company B can attract more customer

Company A's inventory is larger than Company B. Both companies are competitors and are about the same size. What does this difference mean from a working capital management standpoint? a. Company B has lower inventory float b. Company A has more cash in hand c. Company B might have higher inventory turnover d. Company A has tighter credit.

Diversification protects against a. Systematic risk b. Market risk c. Idiosyncratic risk d. Inflation risk

Firm A has a lower degree of business risk than Firm B. What will happen if there is a 1% increase in sales for both firms? A. It will result in a greater percentage in Firm A's operating income B. It will result in a greater percentage in Firm Bs operating income C. It will result in a greater percentage in Firm Bs operating income D. It will result in a greater percentage in Firm As operating income

How do increases in market interest rates affect a firm's cost of capital? A. The cost of debt decreases B. The cost of equity decreases C. The cost of debt increases D. The cost of equity increases

How is the value of a project determined in the capital budgeting process? A. The net present value of the incremental before-tax cash flows B. The future value of the incremental tax cash flows C. The net present value of the incremental tax cash flows D. The future value of the incremental before-tax cash flows

If a firm's goal is to maximize stockholder wealth, which would the firm avoid? a. Stock buybacks b. Risky long-term investments c. Investments with negative NPV d. Transparency in financial statements

If the current coupon rate on a bond is 6% and the bond is selling at a 5% discount, what is the yield to maturity on the bond? A. Less than 6% B. Greater than 6% C. Equal to 6% D. Equal to 5%

If two companies have earnings of $2,000,000, and Company X has a multiple of 1.2 and Company Z has a multiple of 2.0, what can we estimate about the value of each company? a. The value is the same b. The value of Company X is higher c. The value of Company Z is higher d. The relative value can't be determined

If you wanted to evaluate a non-public company, what sources would you use? a. The financial statements filed with the SEC b. The latest stock price quoted in the Wall Street Journal c. The PE of a comparable public company d. The book value of equity in its balance sheet

Supply and demand factors suggest the slope for an individual asset in the portfolio will equal the slope of the market portfolio itself. What is the significance of this equalization? A. The entire risk-return slope will decrease over time B. Investors will be forced to frequently shift their portfolios C. Investors will be incentivized to hold the market portfolio D. The slope of the individual assets in a portfolio will diverge to increase diversification.

Suppose the inventory turnover of a company is higher than the industry. Based on this observation, which of the following is most likely? a. The firm has lower liquidity than the industry average. b. The firm has too much inventory thus impairing overall liquidity. c. The firm has too little inventory resulting in lost sales or stock-outs. d. The firm has low sales volume.

The SEC requires the following to file audited financial statements: a. All companies b. All for-profit companies c. All publicly-traded corporations d. There is no such requirement

The SGR measures: a. Historical dividend growth rate b. Sales growth rate c. Potential sales growth with internal funding d. None of the above

The fundamental concept underlying the valuation of all financial assets is: a. The application of the PE ratio b. Use of the Gordon Model c. The present value of anticipated cash flows. d. The future value of cash flows

The interest rate on a corporate bond does not reflect a. Risk b. Inflation c. Face Value d. U.S. Treasury rates

The value of a corporation is best measured by a. Equity on the Balance Sheet b. Assets minus Liabilities on the Balance Sheet c. Market capitalization d. Its book value

What advantage does the Gordon Growth Model have compared to the capital asset pricing model (CAPM)? A. It is highly accurate in predicting future growth B. It requires assumptions about growth that benefit fast-growing companies C. It provides an easier to understand and relatively accurate forecast when growth rates are stable D. It requires the use of accurate known factors, such future as growth rates.

What do cash flows from financing activities generally relate to? A. A firm's purchase and sale of long-term assets B. A firm's non-cash transactions C. A firms' debt and equity transactions D. A firms sale of goods and services

What does the Degree of Financial Leverage indicate? a. The firms cash balance b. The cost of financed assets c. The reliance on debt d. The reliance on assets

What does the statement of cash flows report? A. A firm's cash balance at a point in time B. A firm's cash net income for a point in time C. A firm's cash balance and changes for a period of time D. A firm's cash net income for a period of time

What is an example of an estimate used in recording transactions? A. Deciding whether to expense or depreciate a fixed asset B. Deciding the cost of fixed asset when calculating depreciation expense C. Deciding the salvage value of a fixed asset when calculating depreciation expense D. Deciding whether to sell a fixed asset

What is beta? A. An absolute measure of idiosyncratic risk B. A measure of market value relative to the market risk C. An absolute measure of systematic risk D. A measure of systematic risk, relative to the market risk

What is one of the two basic types of financial instruments? A. Money Markets B. Mutual Funds C. Stocks D. Options

What is the impact of rising interest rates on foreign exchange? a. Makes USD decline in value b. Has no impact on USD c. Increases the value of USD d. Increases the value of EUR

What is the intrinsic value of a stock? A. The future estimated market value B. The 100-day moving average of the stock price C. Net present value of expected future cash flows D. Past market value

What is the most effective use of financial statements in valuing a stock? a. Use the book value of equity on the balance sheet b. Use GAAP earnnings c. Use data to estimate future earnings d. Read the footnotes

What is the priority order of repayment (first to last) to a company's investors and creditors? A. Creditors, common stockholders, preferred stockholders B. Preferred stockholders, creditors, common stockholders C. Creditors, preferred stockholders, common stockholders D. Common stockholders, preferred stockholders, creditors

When Fixed Assets increase what happens to Cash? a. Cash stays the same b. Cash increases c. Cash decreases d. Assets decrease

Which accurately describes an "efficient" market? a. Prices are low b. Prices do not fluctuate c. Deviations from "fair value" are quickly eliminated d. "Hot stocks" are the best investment

Which components are part of Total Liabilities? a. Accounts Payable, Accounts Receivable, Short Term Debt b. Long Term Debt, Common Stock, Retained Earnings c. Bonds, Accounts Payable, Mortgage d. Common Stock, Long Term Debt, Short Term Investments

Which element is a required disclosure in the prospectus, according to the Securities Act of 1933? A. Internal control reports B. Tax returns C. Audited financial statements D. Budgets

Which is not true of both stocks and bonds a. Market value derived from expected cash flows b. Market value varies over time c. Have voting rights d. Trade in both primary and secondary markets

Which is the most important profit ratio? a. Gross Margin b. Net Margin c. Return on Equity d. Return on Assets

Which is the purpose of the statement of cash flows? a. serves as the replacement for the income statement and balance sheet b. explains the change in cash balance at one point in time c. explains the change in cash balance for one period of time d. both (a) and (b) above

Which of the following is generally true? a. Gross Profit and Operating Income are the same b. Cost of Goods Sold + Operating Expenses = Net Income c. Operating Income and EBIT are the same d. EBIT + Income Taxes = Net income

Which practice is limited by the Volcker rule of the Dodd-Frank Act? A. The role of inside directors B. Issuance of limited prospectuses C. Bank investments in hedge funds D. Conflicts of interests by bank board members

Which ratio is used in the comparable multiples method? A. Quick ratio B. Current ratio C. Price earnings ratio D. Debt to equity ratio

Why should a company carry cash A. The opportunity cost of holding cash is low B. The shortage cost of holding cash is high C. Cash is needed for day to day operations D. Cash is needed to meet the customers demands

Why should a company carry cash? A. The opportunity cost of holding cash is low. B. Cash is needed to meet the customers' demand. C. Cash is needed for day to day operations D. The shortage cost of holding cash is high.

Why would a company be interested in the TAT(Total Asset Turnover) ratio? a. How efficient assets are at producing income b. What the turnover of sales is to liabilities c. How efficient assets are at producing sales d. How efficient assets are to liabilities and equity

Why would we reject a project based on the NPV? a. The NPV is lower than the IRR b. The NPV is lower than investment c. The NPV is a negative number d. The IRR is positive.

What are the components required in calculating weighted average cost of capital (WACC)? Choose 3 A. The market cap of the company B. The desired growth rate C. The value of the preferred stock and debt D. The firms market value E The marginal tax rate F The combined total expected growth rate The amount and required return for common equity, preferred equity and debt

c,d, e

Which transaction is reflected in cash flow from operating activities?

cash transactions

What is the difference between a common stock and a preferred stock?

common stock has no fixed maturity and preferred stock has a fixed maturity.

If a company outsources the manufacturing of its products to a foreign country, what are the likeliest outcomes?

consumer prices will decrease, domestic employment will decrease

What type of bond can be traded in for stock?

convertible bond

How will an increase in corporate tax rates affect a firm's cost of capital?

cost of debt will decrease

A company's trial balance shows $900 in long-term debt. On which financial statement should this be shown? A. The general ledger B. The statement of cash flows C. The income statement D. The balance sheet

A special interest group in the U.S. has been lobbying intensely for protectionism through increased tariffs and trade restrictions, with the argument that it will save jobs in the industry they represent. What is the most likely result if they are successful? A. Employees and shareholders of the domestic industry that produce the protective goods will be hurt and the nation will benefit. B. The overall economy will benefit from trade restrictions and tariffs. C. Removing the trade restrictions and tariffs will result in a net economic loss to the overall U.S. economy. D. Employees and shareholders of the domestic industry that produce the protected goods will benefit and the nation will be hurt.

FINRA (Financial Industry Regulatory Authority) does the following: (pick one) a. No foreign bribery by corporations b. Regulates bond prices c. Establishes Credit Unions d. Prosecutes naughty stock brokers e. Regulates Hedge Funds

For the year 2013, a firm has a return on equity (ROE) that is greater than return on assets (ROA). Which conclusion would an analyst draw from these numbers? A. The firm is ineffectively using debt. B. The firm is ineffectively managing their inventory C. The firm is effectively managing their inventory D. The firm is effectively using debt

How do you calculate the change in Retained Earnings? a. Ending Retained Earnings - Change in Cash b. EBIT divided by Total Assets + Dividends c. EBIT - Change in Cash - Dividends d. Net Income - Dividends

How does the weighted average cost of capital affect a company's growth opportunities? A. The higher the cost of capital, the greater the growth opportunities B. Only the cost of debit will affect growth opportunities C. The lower the cost of capital, the lower the growth opportunities D. The lower the cost of capital, the greater the growth opportunities

If a company has a high degree of financial leverage, what does that tell us about the firm's risk profile? a. Low Risk b. Appropriate Risk c. Higher ability to pay debt d. Higher profits to shareholders

If a company makes its product in a foreign country where labor costs are much lower, what happens? a. Profits and domestic employment goes up b. Costs go up and domestic employment goes down c. Costs stay the same and domestic employment increases d. Profits go up and domestic employment decreases.

If a firm cannot access markets sufficiently to meet their DFN, what strategies might they use? a. Slow sales growth b. Lower dividend payout c. Increase the net margin d. All of the above.

In regards to Accounts Payable balances, which of the following is true: a. Higher Accounts Payable is better than a lower balance b. Paying off A/P as soon as possible is good policy c. Increased Accounts Payable means faster collections d. Paying off A/P on the last day due is good policy

Junk bonds are those whose rating is below a. AAA b. AA c. A d. BBB

What are the practical disadvantages of the Gordon model for equity valuation? a. How to use if no dividends are paid b. Must project dividends "forever" into the future. c. Does not address the appropriate discount rate d. All of the above

What does the Sarbanes-Oxley Act require companies to do? a. Have a board of directors b. Register all foreign sales c. Make estimated tax payments d. Have internal control audits

What is a subordinated debenture? A. A bond that is risk free B. A bond that is backed by collateral C. A bond that has a higher claim to the assets of the firm in the event of liquidation D. A bond that has a lower claim to the assets of the firm in the event of liquidation

What is commonly used method that limits the time it takes between payment and the receipt of cash? A. Automated data processing B. Payment by mail processing C. Disbursement float processing D. Electronic check processing

What is one way a firm maximizes shareholder value? A. By switching inventory methods B. By reducing the firm's labor force C. By outsourcing the production of the firm's core product D. By avoiding investments that cost more money than they bring in

What is the basis used to compute a company's income tax expense? A. Pretax accounting income. B. Taxable income. C. Net operating income. D. Taxes payable.

What is the cash cycle? a. The speed of collecting cash from customers b. The amount of cash kept in banks c. The comparison of debt to cash d.The amount of time to regenerate cash

What is the coupon rate (yield) of a bond? A. The interest accrued on the bond through expiration B. The interest rate of the bond that can be changed at any time during the life of the bond C. The sum of money that the corporation promises to pay upon expiration of the bond D. The interest rate of the bond that is contractually set upon issuance

What is the primary intent of the Sarbanes-Oxley Act? A. To impose requirements on stockholders of public companies B. To reduce the fees associated with financial transactions C. To control the rise in the rate of executive compensation D. To ensure honest audit and accounting procedures

What is the purpose of the capital budget process? A. Estimating the budget of a new project B. Estimating the cost to start a new project C. Budgeting a firm's monthly revenue and expenses D. Deciding which projects increase the firm's value

What is true about the content of an income statement? A. It reports the assets, liabilities, and the equity at a point in time. B. It reports the assets and expenses for a period of time. C. It reports the expenses and liabilities at a point in time. D. It reports the revenues and expenses for a period of time.

What is true when income for tax purposes is higher than accounting income A. Accounting income tax expenses is the same as actual income tax payable. B. Actual income taxes payable will be lower than accounting income tax expense. C. Actual income taxes payable will be the same as accounting income tax expense. D. Actual income taxes payable will be higher than accounting income tax expense.

What makes the "efficient frontier" efficient? A. It always produces the minimum risk B. It disregards risk to produce the maximum return C. It provides the highest level of risk for a given return D. It maximizes the ratio of expected return to risk

What must a firm have to be in compliance with Financial Industry Regulatory Authority (FINRA) rules? A. Significant cash reserves B. Diversity in board membership C. Public disclosure of personnel files D. Current and accurate books

Where on the "efficient frontier" is a young investor with a high risk tolerance likely to fall? A. A1 B. C1 C. D2 D. D3

Which components are part of current assets? a. Cash, Accounts Receivable, Property Plant & Equipment b. Accounts Receivable, Accounts Payable, Inventory c. Long Term Debt, Property Plant & Equipment, Common Stock d. Inventory, Cash, Accounts Receivable, Short Term Investments

Which condition must be met for a firm that trades in equities to be in compliance with the Securities and Exchange (SEC) regulations? Securities and Exchange (SEC) regulations? A. Payments pursuant to the Sarbanes-Oxley Act B. Participation in the MSRB (Municipal Securities Rulemaking Board) C. Certification under the Dodd-Frank Act D. Membership in FINRA (Financial Industry Regulatory Authority)

Which factor does NOT affect a firm's WACC? a. The market risk premium b. The tax rate c. Treasury yields d. The exchange rate

Which ratio is used in the comparable multiples method? A. Current ratio B. Debt to equity ratio C. Quick ratio D. Price earnings ratio

Which securities are issued by the U.S. Federal government and are taxable at the federal level? A. Eurobonds B. Municipal bonds C. Corporate bonds D. Treasury bonds

Which security type includes the right to vote for a board of directors? A. Preferred stock B. Money market funds C. Bonds D. Common stock

Which statement is true about how the global market affects the U.S. A. A bad options trade executed by a foreign subsidiary of a Wall Street bank will affect layoffs overseas. B. A Bad derivatives trade executed by a foreign subsidiary of a Wall Street bank will affect layoffs overseas. C. American investors and fund managers make decisions based on financial reporting standards developed and financial statements audited overseas. D. Foreign investors and fund managers make decisions based on financial reporting standards developed and financial statements audited overseas.

Why does a firm's investment opportunities affect it dividend payout ratio? a. Maximization of shareholder wealth strategy b. Limited access to market financing c. Attempts to increase stock price d. All of the above

Why is depreciation expense taken out of the net income calculation, yet added back at the end? a. Because fixed assets should remain on the balance sheet b. Because depreciation is not a current asset c. Because depreciation is a non-cash liability d. Because depreciation expense is tax deductible

Why is float important to understand? a. To know how to keep the company profitable b. To know why the company needs cash c. To determine when to buy fixed assets d. To time cash expenditures e. None of the above

Why should an investor diversify the portfolio? a. To achieve a better combination of risk and return b. To avoid putting "all eggs in one basket" c. Stock returns are a function of systematic risk d. All of the above

Why would a company buy back outstanding stock? a. To boost the price of the stock b. To increase financial leverage c. Lack of investment opportunities d. All of the above

Why would a company prefer equity financing over debt financing? A. Too much debt can lead to a greater risk of possible insolvency B. Equity financing has tax benefits C. Issuing new debt diminishes the existing control of shareholders D. Using equity to finance a capital investment project is less costly

Why would we reject a project based on the IRR? a. The IRR is higher than the sum of the cash flows b. The discount rate is lower than the IRR c. The IRR is higher than the NPV d. The discount rate is higher than the IRR

What are 3 components required in calculating weighted average cost of capital (WACC)? A. The market cap of the company B. The desired growth rate C. The amount and required return for common equity, preferred equity and debt D. The marginal tax rate E. The value of preferred stock and debt F. The firm's market value G. The combined total expected growth rate

d, e, f

Which company control is required by the Sarbanes-Oxley Act?

disclosure of off - balance sheet debts

Which of the following is NOT a type of exchange rate regime discussed in this section?

flat

Trans-Pacific Partnership

free trade agreement potentially involving as many as 12 countries

Sovereign Wealth Funds

government funds designed to invest abroad

The general process of eliminating risk with FX is referred to as:

hedging

Which of the following statements about a bond are true?i. A bond is a fixed-income security ii. The bond's interest payments vary each year with the market iii. Bonds allow firms to save on banker's overhead compared to bank loans

i and iii

Outsourcing involves the ______ market.

labor

Currency Restrictions

laws limiting the movement of currency out of a country

If Ford manufactures a vehicle in the US paying dollars and sells it in Mexico collecting pesos, if the price in Mexico for the vehicle stays constant, but the value of the Peso depreciates against the dollar, then Ford will make ____________ profit measured in US dollars.

less

In finance jargon, what is another word that means to buy an asset?

long

The goal of using a financial derivate such as a forward or future is to?

make no profits through exchange rate movements

The policy that allows a currency to float within a minimum and a maximum is called:

managed floating

Current assets are listed in order of:

most liquid to least liquid

Which type of bond placement - competitive sale or negotiated sale - requires a more thorough interview process?

negotiated sale

A stock is a share of ______________ in a particular company.

ownership

Which hybrid security has special claims on a corporation's profits or, in case of liquidation, corporate assets?

preferred stock

The matching principle in accrual accounting requires that_________.

revenues be recognized when the earnings process is complete and matches expenses to revenues recognized

revenues of $500,000 and expenses of $300,000.

Which happens to the risk level in a portfolio as the number of assets in the portfolio increases?

risk decreases at a slower rate

What does the Financial Industry Regulatory Authority (FINRA) examine to determine if a firm is in compliance with rules of FINRA and Securities and Exchange Commission (SEC)?

sales practices

If a country follows a floating exchange rate policy then the value of the currency is determined strictly by:

supply and demand in the open market

Tariffs

taxes levied on goods imported into a country

Note that when a bond is selling at the same price as the face value,

the YTM will be equal to the coupon rate

What happens to the risk level in portfolio as the number of assets in the portfolio increases?

there is a linear decrease in risk, false. The risk decreases but the decrease is not linear

Market orders are __________ sensitive while limit orders are _____________ sensitive.

time, price

The purpose of currency restrictions is:

to limit the ability of a foreign firm to take capital out of a country

What is the primary motive for tariffs?

to protect domestic industries

What statement is true about fluctuations in bond prices?

when the market interest rate fluctuates the bond fluctuates.False. The coupon rate never fluctuates with fluctuation in the market rates

Depreciation

A non-cash expense used to approximate the decrease in value of an asset.

Discount Policy

A policy that manages trade credit by offering discounts to buyers for earlier payment.

Bond Ratings

A rating assigned to a firm to measure the probability of default by a company like S&P or Moody's.

Capital

A financial asset that can be used by a firm. An example of capital may be cash held by a firm or machinery.

Comparable Multiples

A technique to value an entire firm based on financial ratios of other firms or industries.

Accounts Receivable (AR)

A type of current asset which represents any money owed to the firm for services rendered.

Common Stock (CS)

A type of equity on the balance sheet which represents equity sold to common share holders at par value.Common stock holders are last in line to receive their money back in the event of bankruptcy.

Common Stock

A type of equity which usually has voting rights. Common stock holders are last in line to receive their money back in the event of bankruptcy.

Agency Costs

Costs that are incurred when management does not act in the best interests of shareholders.The costs that result from the principle-agent problem.

Accounts Receivable (AR) Turnover

Credit Sales/AR, a liquidity ratio.

Discounting

Figuring out the present value of money you will receive in the future.

Cost of Capital

How much it costs the firm (in percentage terms) to finance its operations through debt and/or equity.

Net Margin

Net Income/Sales A profitability ratio

Accruals

Non-cash accounting accounts representing money either owed or due, typically in the short term.

Cross-sectional Analysis

One of the three ways to use ratios by comparing the firm to other firms' ratios or industry averages.

Book Value

The accounting value recorded on the balance sheet.

Annual Percentage Yield (APY)

The actual yield including compounding. Also known as effective annual rate.

Constant Growth

The assumption that dividends or free cash flows will grow forever at a constant rate.

Asset Pricing

The process of valuing assets.

Degree of Combined Leverage (DCL)

The product of DOL and DFL and a measure of the sensitivity of pre-tax profits to changes in sales. Degree of combined leverage. DOL × DFL.

Discount Rate

The rate at which money is discounted or compounded.

Continuously Compounded Interest

The rate of return assuming instantaneous compounding between periods.

Cost of Preferred Equity

The return required by those providing preferred capital.

Credit Standards

The standard level of credit worthiness of customers and/or suppliers.

Annual Percentage Rate (APR)

The stated annual rate (but ignores compounding)

Corporate Governance

The structure, rules, and regulations for owners and managers of a firm.

Accumulated Depreciation

The total amount of depreciation claimed against the fixed assets of the firm

Business Risk

The variability associated with operating income.

Cost of Debt

The yield (or return) required by those providing debt capital.

Angels

Wealthy individuals who invest in new ventures for the return, thrill, and to help entrepreneurs.

Compounding Problem

When the periods, payments, and interest must be adjusted for non-annual time value of money problems.

C214 FINANCIAL MANAGEMENT, WGU C214 Concepts Only Multi Choice Version, C214 Word Problems, WGU C214 Finance Management PVCC, C214 Study Guide, c214 Pre-Assessment, WGU C214 Finance Management PVCC, c214 quiz + notes, C214 Math Problems, Financial Ma...

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