Corporate Finance - Module 1
4B - Consider a bond with a coupon rate of 6% that pays semiannual interest and matures in eight years. The bond has a par value of $1,000 and is selling for $738.45. What is the yield to maturity? (Rounded to one decimal point.)
11
3A - What is the effective annual rate if your credit card charges you 10.64 percent compounded daily? (Assume a 365-day year.) 10.79 percent 11.22 percent 11.95 percent 11.48 percent 12.01 percent
11.22 percent
Earnings per share will increase when: depreciation decreases. the number of shares outstanding increase. operating income decreases. dividends per share decrease. the average tax rate increases.
depreciation decreases.
2- What is the matching principle?
revenues and expenses are time-based matched on statements.
4B - The principal amount of a bond that is repaid at the end of the loan term is called the bond's: coupon. face value. maturity. yield to maturity. coupon rate.
face value
4A - What is the value of a 20-year, zero-coupon bond with a face value of $1,000 when the market required rate of return is 9.6 percent, compounded semiannually? $153.30 $192.40 $195.26 $168.31 $172.19
153.30
5A - Lucie is reviewing a project with an initial cost of $32,500 and cash inflows of $8,800, $9,900, and $27,500 for years 1 to 3, respectively. What is the IRR for this project?
16.1
2B- Bob's Burger Barn has sales of $720,000 and costs of $410,000. Interest expense is $25,000 and depreciation is $38,000. Dividends are $75,000. The tax rate is 24%. What is net income?
187,720
2A- Bob's Burger Barn has sales of $720,000 and costs of $410,000. Interest expense is $25,000 and depreciation is $38,000. The tax rate is 23%. What is net income?
190,190
1- The cheapest business entity to form is typically the: ---limited liability company. ---joint stock company. ---general partnership. ---limited partnership. ---sole proprietorship.
sole proprietorship.
US govt Treasury bond coupons are exempt from _______ taxes. Municipal bond coupons are exempt from _______ taxes.
state; federal
2- Marginal tax rate is...
"if company earned one more dollar, what would that dollar be taxed on?"
3A - You want to establish a trust fund that will provide $50,000 a year forever for your heirs. If the fund can earn a guaranteed rate of return of 4.5 percent, how much must you deposit in a solitary lump sum to establish this trust? $1,333,333 $2,250,000 $1,250,000 $1,666,667 $1,111,111
$1,111,111
3A - Stu can purchase a house today for $110,000, including the cost of some minor repairs. He expects to be able to resell it in one year for $129,000 after cleaning up the property. At a discount rate of 5.5 percent, what is the expected net present value of this purchase opportunity? $13,001.61 $12,487.43 $12,274.88 $9,208.18 $11,311.02
$12,274.88
3A - U Do It Centers deposited $3,200 in an account two years ago and is depositing another $5,000 today. A final deposit of $3,500 will be made one year from now. What will the account balance be three years from now if the account pays 4.85 percent interest, compounded annually? $13,033.95 $13,430.84 $12,431.05 $14,328.90 $13,666.10
$13,666.10
3B - You have been offered a job that pays an annual salary of $48,000, $51,000, and $55,000 over the next three years, respectively. The offer also includes a starting bonus of $2,500 payable immediately. What is this offer worth to you today at a discount rate of 6.5 percent? $129,640.14 $134,383.56 $132,283.56 $138,066.75 $130,983.56
$138,066.75
3B - Theo is depositing $1,300 today in an account with an expected rate of return of 8.1 percent. If he deposits an additional $3,200 two years from today, and $4,000 three years from today, what will his account balance be ten years from today? $14,044.89 $16,412.31 $15,182.53 $15,699.54 $17,741.71
$15,699.54
2B- Deep Water Mining added $411 to retained earnings last year on sales of $24,646. The administrative expenses were $4,370, depreciation was $812, dividends paid were $285, and the interest expense was $103. What was the cost of goods sold if the total tax rate was 23 percent? $20,225 $24,385 $18,457 $14,815 $21,393
$18,457
4B - TJ's offers a $1,000 face value, zero coupon bond with a yield to maturity of 11.3 percent, given annual compounding. The bond matures in 16 years. What is the current price? $178.78 $180.33 $188.36 $190.09 $192.18
$180.33
3A - Benson's established a trust fund that provides $125,000 in college scholarships each year. The trust fund earns 6.15 percent and distributes only its annual income. How much money did Benson's contribute to establish this fund? $2,291,613 $2,032,520 $2,150,000 $2,018,970 $1,987,408
$2,032,520
3A - A project is expected to produce cash flows of $48,000, $39,000, and $15,000 over the next three years, respectively. After three years, the project will be worthless. What is the net present value of this project if the applicable discount rate is 15.25 percent and the initial cost is $78,500? −$1,201.76 $2,309.09 −$3,457.96 $1,808.17 $3,132.48
$2,309.09
3A - You borrow $199,000 to buy a house. The mortgage rate is 5.5 percent, compounded monthly. The loan period is 30 years, and payments are made monthly. If you pay for the house according to the loan agreement, how much total interest will you pay? $218,086 $198,161 $207,764 $211,086 $185,059
$207,764
3A - Wilt has a consulting contract that calls for annual payments of $50,000 a year for five years with the first payment due today. What is the current value of this contract if the discount rate is 8.4 percent? $214,142.50 $201,867.47 $195,618.19 $197,548.43 $224,267.10
$214,142.50
3A - What is the future value of $3,100 a year for six years at interest rate of 8.9 percent? $20,255.40 $26,847.26 $27,134.16 $23,263.57 $24,414.67
$23,263.57
3A - You borrow $12,600 to buy a car. The terms of the loan call for monthly payments for five years at an interest rate of 4.65 percent, compounded monthly. What is the amount of each payment? $253.22 $243.73 $230.62 $235.76 $233.04
$235.76
5B - Walks Softly currently sells 14,800 pairs of shoes annually at an average price of $59 a pair. It is considering adding a lower-priced line of shoes that will be priced at $39 a pair. The company estimates it can sell 6,000 pairs of the lower-priced shoes annually but will sell 3,500 less pairs of the higher-priced shoes each year by doing so. What annual sales revenue should be used when evaluating the addition of the lower-priced shoes?
$27,500
3B - Shawn has $2,500 invested at a guaranteed rate of 4.35 percent, compounded annually. What will his investment be worth after five years? $2,997.04 $3,288.00 $3,321.32 $3,093.16 $2,857.59
$3,093.16
3A - You want to save an equal amount each year for the next 38 years, at which time you will retire. What amount of annual savings are needed if you desire a retirement income of $55,000 a year for 25 years and earn 7.5 percent, compounded annually? $3,333.33 $2,640.85 $3,146.32 $2,889.04 $3,406.16
$3,146.32
3B - You want to have $20,000 saved in five years. If you can earn 4.5 percent on your savings, what amount must you save each year if the amount you save each year is the same? $3,775.04 $3,798.34 $3,801.03 $3,655.83 $4,038.01
$3,655.83
3A - Christina will receive annuity payments of $1,200 a year for five years, with the first payment occurring at Year 4. What is the value of this annuity to her today at a discount rate of 7.25 percent? $4,209.19 $4,774.04 $3,961.80 $4,887.48 $4,111.08
$3,961.80
3B - Uptown Industries just decided to save $3,000 a quarter for the next three years. The money will earn 2.75 percent, compounded quarterly, and the first deposit will be made today. If the company had wanted to deposit one lump sum today, rather than make quarterly deposits, how much would it have had to deposit to have the same amount saved at the end of the three years? $34,441.56 $34,678.35 $33,428.87 $33,687.23 $34,998.01
$34,678.35
3B - Starting today, Alicia is going to contribute $100 a month to her retirement account. Her employer matches her contribution by 50 percent. If these contributions remain constant, and she earns a monthly rate of .55 percent, how much will her savings be worth 40 years from now? $399,459.44 $300,456.74 $349,981.21 $299,189.16 $354,087.88
$354,087.88
3A - You want to purchase an annuity that will pay you $1,200 a quarter for 15 years and earn a return of 5.5 percent, compounded quarterly. What is the most you should pay to purchase this annuity? $52,988.16 $48,811.20 $47,455.33 $48,450.67 $52,806.30
$48,811.20
3A - Tracie will receive payments of $550 a month for ten years. What are these payments worth today at a discount rate of 6 percent, compounded monthly? $49,540.40 $51,523.74 $53,737.08 $49,757.69 $48,808.17
$49,540.40
3B - What is the present value of $6,811 to be received in one year if the discount rate is 6.5 percent? $6,395.31 $6,023.58 $6,643.29 $6,671.13 $7,253.72
$6,395.31
3B - Over the next three years, Marti plans to save $2,000, $2,500, and $3,000, respectively, starting one year from today. You want to have as much money as Marti does three years from now but you plan to make one lump sum investment today. What amount must you save today if you both earn 4.65 annually? $6,811.50 $6,791.42 $7,128.23 $6,607.23 $7,500.00
$6,811.50
You plan to invest $6,500 for three years at 4 percent simple interest. What will your investment be worth at the end of the three years? $7,280.00 $7,311.62 $7,250.00 $6,924.32 $6,760.00
$7,280.00
5B - Winslow Motors purchased $225,000 of MACRS 5-year property. The MACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively. The tax rate is 21 percent. If the firm sells the asset after four years for $10,000, what will be the aftertax cash flow from the sale if the firm applies bonus depreciation?
$7,900.00
3A - Sara is the recipient of a trust that will pay her $500 on the first day of each month, starting immediately and continuing for 40 years. What is the value of this inheritance today if the applicable discount rate is 7.3 percent, compounded monthly? $76,811.30 $67,557.52 $89,204.04 $78,192.28 $80,006.09
$78,192.28
3B - Your parents plan to give you $200 a month for four years while you are in college. At a discount rate of 6 percent, compounded monthly, what are these payments worth to you when you first start college? $8,797.40 $8,409.56 $8,198.79 $8,516.06 $8,279.32
$8,516.06
3B - A preferred stock pays an annual dividend of $6.50 a share and has an annual rate of return of 7.35 percent. What is the stock price? $74.50 $71.78 $92.09 $88.44 $77.78
$88.44
3A - Jenni's Diner has expected net annual cash flows of $16,200, $18,600, $19,100, and $19,500 for the next four years, respectively. At the end of the fourth year, the diner is expected to be worth $57,900 cash. What is the present value of the diner at a discount rate of 11.6 percent? $93,090.25 $87,492.16 $101,016.38 $104,998.02 $98,411.20
$93,090.25
5A - Jamestown Ltd. currently produces boat sails and is considering expanding its operations to include awnings. The expansion would require the use of land the firm purchased three years ago at a cost of $142,000 that is currently valued at $137,500. The expansion could use some equipment that is currently sitting idle if $6,700 of modifications were made to it. The equipment originally cost $139,500 six years ago, has a current book value of $24,700, and a current market value of $39,000. Other capital purchases costing $780,000 will also be required. What is the amount of the initial cash outflow for this expansion project? $953,400 $962,300 $948,900 $927,800 $963,200
$963,200
2- EBIT & EBITDA ---what do they stand for?
(earnings before interest, taxes, depreciation, amortization)
1.5 What are the two regulatory frameworks for public trading of securities and what did they set up?
---Securities Act of 1933 issuance of new securities (1933) -registration statement made publicly available via SEC ---Securities Exchange act of 1934 -creation of SEC and reporting requirements -Annual public reports insider trading rules
1- The decisions made by financial managers should all be ones which increase the: ---size of the firm. ---growth rate of the firm. ---marketability of the managers. ---market value of the existing owners' equity. ---firm's current sales.
---market value of the existing owners' equity.
1.5 What is Sarbanes-Oxley (2002)?
--in response to scandals at Enron, WorldCom, Tyco, Adelphia, etc. --increased reporting requirements and responsibility of corporate directors. e.g. personal attestation of accuracy of financial statements by CEO --audit requirements --no loans to officers of company from company (WorldCom) --In essence, makes company management responsible for accuracy of the company's financial statements. --Negative consequences some companies delisted because of cost of compliance (auditing, etc.) some companies listed in other countries on their exchanges, e.g. London's AIM (Alternative Investment Market)
5A - Eastern Tech is considering a new project that will require $127,000 of fixed assets and net working capital of $8,000. The fixed assets will be depreciated on a straight-line basis to zero salvage value over 3 years. The project is expected to produce an operating cash flow of $49,000 in the first year with that amount decreasing by 5% annually for two years before the project is shut down. The fixed assets can then be sold for $35,000 at the end of the project and all of the working capital will be recovered. The discount rate is 13.9% and the tax rate is 23%. What is the cash flow for time 0? Continued with the previous question, what is the cash flow for year 1? Continued with the previous question, what is the cash flow for year 2? Continued with the previous question, what is the cash flow for year 3? What is the NPV of the project? Should you accept the project?
-135,000 49,000 46,550 79,172.5 -2,518 no
5B - Eastern Tech is considering a new project that will require $123,000 of fixed assets and net working capital of $15,000. The fixed assets will be depreciated on a straight-line basis to zero salvage value over 3 years. The project is expected to produce an operating cash flow of $47,000 in the first year with that amount decreasing by 5% annually for two years before the project is shut down. The fixed assets can then be sold for $45,000 at the end of the project and all of the working capital will be recovered. The discount rate is 15.5% and the tax rate is 23%. What is the cash flow for time 0? Continued with the previous question, what is the cash flow for year 1? Continued with the previous question, what is the cash flow for year 2? Continued with the previous question, what is the cash flow for year 3? What is the NPV of the project? Should you accept the project?
-138,000 47,000 44,650 92,068 -4,084 No
5B - What is the net present value of a project with an initial cost of $44,325 and the following cash inflows: $16,540, $22,750, and $12,000 in years 1 to 3, respectively? The discount rate is 11%
-2,185
1.5 What is the Agency Problem? What is Agency Cost?
-Agency problems are possible when management and owners are different. Principal (owner) hires another (agent) to represent their interests. -Management can have different goals than owners. -Agency cost refers to cost of conflict of interest between stockholders and management.
5A - A project will have an initial cost of $7,500, and will produce cash flows of $2,720, each year for 3 years. The project will be shut down and the remaining assets will be sold at the end of year 4 for $3,400. Assume the sale proceeds are after tax. What is the net present value of this project if the required rate of return is 11.9%?
1,213
5B - A project will have an initial cost of $6,400, and will produce cash flows of $2,750, each year for 3 years. The project will be shut down and the remaining assets will be sold at the end of year 4 for $2,800. Assume the sale proceeds are after tax. What is the net present value of this project if the required rate of return is 15.5%?
1,401
2A- A firm has $820 in inventory, $3,200 in fixed assets, $670 in accounts receivable, $390 in accounts payable, $500 in long-term debt, and $360 in cash. What is the amount of the net working capital? $890 $960 $3,600 $3,340 $1,460
1,460
2A- A firm has the following account balances. What is the amount of their net working capital? Inventory $ 820 Fixed Assets $ 3,200 Accounts Receivable $ 1,210 Accounts Payable $ 890 Notes Payable $ 40 Cash $ 360 Long-term Debt $ 350
1,460
1.6 Summary: What are 3 basic questions financial managers must answer?
1-Where and when to invest? (Capital Budgeting). 2-How do I finance it? (Capital Structure). 3-Short-term cash management (working capital management).
4A - Moon Lite Cafe has a semiannual, 5 percent coupon bond with a current market price of $988.52. The bond has a par value of $1,000 and a yield to maturity of 5.68 percent. How many years is it until this bond matures? 1.5 years 1.8 years 2.1 years 2.2 years 1.6 years
1.8 years
4A - Which one of these bonds is the most interest-rate sensitive? 5-year zero coupon bond 10-year zero coupon bond 5-year, 6 percent, annual coupon bond 10-year, 6 percent, semiannual coupon bond 10-year, 6 percent, annual coupon bond
10-year zero coupon bond
Lucie is reviewing a project with an initial cost of $38,700 and cash inflows of $9,800, $16,400, and $21,700 for years 1 to 3, respectively. What is the IRR for this project? Should the project be accepted?
10.1 Yes
5B - Lucie is reviewing a project with an initial cost of $41,900 and cash inflows of $9,800, $19,500, and $24,450 for years 1 to 3, respectively. What is the IRR for this project? Continued with the previous question, if the opportunity cost of capital is 9%, should the project be accepted?
11.8 Yes
2A- Tom's Taco Town has sales of $920,000 and costs of $710,000. Interest expense is $25,000 and depreciation is $38,000. Dividends are $14,000. The tax rate is 24%. What is net income?
111,720
2B- Tom's Taco Town has sales of $920,000 and costs of $710,000. Interest expense is $25,000 and depreciation is $38,000. The tax rate is 23%. What is net income?
113,190
4A - Upland Motors recently paid a per share dividend of $1.48. Dividends are expected to increase by 2.5 percent annually. What is one share of this stock worth today if the appropriate discount rate is 14 percent? $12.87 $13.04 $14.16 $13.19 $12.25
13.19
2B- A firm has the following account balances. What is the amount of their net working capital? Inventory $ 430 Fixed Assets $ 50 Accounts Receivable $ 660 Accounts Payable $ 920 Notes Payable $ 400 Cash $ 245 Long-term Debt $ 15
15
3A - You are retired, have $264,500 in your savings, withdraw $2,000 each month, and earn 4.5 percent, compounded monthly. How long will it be until you run out of money? 13.67 years 15.25 years 22.08 years 13.02 years 18.78 years
15.25 years
4B - Victoria's Vineyards paid a dividend of $2.12 per share last year. The dividend is expected to grow by 5.5% annually. What is one share of this stock worth today if the appropriate discount rate is 16%? (Round your answer to two decimal places.)
21.3
2B- Given the tax rates as shown, what is the marginal tax rate for taxable income of $500,000? (Rounded to one decimal point.) Taxable IncomeTax Rate $0 --$50,000 . 10% $50,001 --$400,000 . 15% $400,001 --$750,000 . 25% $750,001 --$1,250,000 . 40%
25
3A - Several years ago, Sara invested $4,208. Today, that investment is worth $28,406 and has earned an average annual rate of return of 7.38 percent. How long ago did Sara make her investment? 31.09 years 26.82 years 18.98 years 14.97 years 23.03 years
26.82 years
1.2 State the following about sole proprietorship, partnership, LLC, and corporation: -How many people? -Limited or unlimited liability? -Corporate tax? -Life of entity limited? -Transferability easy or difficult? -Taxed double?
3 forms of business organization ----Sole proprietorship -one person -unlimited liability -simple -life limited to life of proprietor -no corporate tax. Taxes are all personal taxes of owner. -----Partnership -unlimited liability -more than one person. -partnership agreement. -transferability (liquidity of partner's investment) is difficult -general partnership means all partners share some fraction of work and cash and to share profits and losses. -Limited partnership limits liabilities of some partners to be the amount of cash they've contributed. -Usually don't participate in managing the business. no corporate tax. -Taxes are individual. ----Corporation -limited liability -individual shares of ownership -separated ownership of organization from management -Corps are basically individuals. They can buy and sell, sue and be sued, enter into contracts. But they live forever. For jurisdictional purposes, the corporation is a citizen of its state of incorporation. -Because a corporation is thought of as a person it pays tax (corporate tax). -Corporate earnings are taxed double (earnings by company and dividends by shareholders). -Each share gets 1 vote. Shareholders elect a board of directors, who in turn select top management.
5B - You are considering a project with an initial cost of $4,300. What is the payback period for this project if the cash inflows are $550, $970, $2,600, and $500 a year for Years 1 to 4, respectively? 2.04 years 2.36 years 2.89 years 3.04 years 3.36 years
3.36 years
Victoria's Vineyards paid a dividend of $4.12 per share last year. The dividend is expected to grow by 2.0% annually. What is one share of this stock worth today if the appropriate discount rate is 16%?
30.02 price = dividend/(r-g) price = dividend/(rate - growth rate)
2A- Thompson & Sons paid $246,220 in taxes last year on taxable income of $1,245,400. This year, the firm paid $354,250 on taxable income of $1,554,300. Assume the same tax rates/tables apply to both years. What was the marginal tax rate this year? (Rounded to one decimal point.)
35
2A- Given the tax rates as shown, what is the marginal tax rate for taxable income of $950,000? (Rounded to one decimal point.) Taxable IncomeTax Rate $0 --$50,000 . 10% $50,001 --$400,000 . 15% $400,001 --$750,000 . 25% $750,001 --$1,250,000 40%
40
2B- Given the tax rates as shown, what is the marginal tax rate for taxable income of $809,000? (Rounded to one decimal point.) Taxable IncomeTax Rate $0 --$50,000 . 10% $50,001 --$400,000 . 15% $400,001 --$750,000 . 25% $750,001 --$1,250,000 . 40%
40
A project will have an initial cost of $5,100, and will produce cash flows of $2,990, each year for 3 years. The project will be shut down and the remaining assets will be sold at the end of year 4 for $4,800. Assume the sale proceeds are after tax. What is the net present value of this project if the required rate of return is 14.9%?
4492
5A - What is the net present value of a project with an initial cost of $41,500 and the following cash inflows: $13,400, $18,400, and $30,000 in years 1 to 3, respectively? The discount rate is 13%
5,559.81
4B - The bonds issued by Manson and Son bear a coupon of 6 percent, payable semiannually. The bond matures in 15 years and has a $1,000 face value. Currently, the bond sells at par. What is the yield to maturity? 5.87 percent 5.97 percent 6.00 percent 6.09 percent 6.17 percent
6.00 percent
4A - A corporate bond has a coupon of 7.5 percent and pays interest annually. The face value is $1,000 and the current market price is $1,108.15. The bond matures in 14 years. What is the yield to maturity? 6.31 percent 7.82 percent 8.00 percent 8.04 percent 8.12 percent
6.31 percent
3A - What is the annual percentage rate on a loan that charges interest of 1.65 percent per quarter? 6.50 percent 6.45 percent 6.54 percent 6.60 percent 6.72 percent
6.60 percent
4B - Consider a bond with a coupon rate of 4% that pays semiannual interest and matures in eight years. The market rate of return on bonds of similar risk is currently 10%. The bond has a par value of $1,000. What is the current price of this bond in dollars? (Round your answers to two decimal places.)
674.87
4A - Consider a bond with a coupon rate of 6% that pays semiannual interest and matures in six years. The bond has a par value of $1,000 and is selling for $951.68. What is the yield to maturity? (Rounded to one decimal point.)
7
2A- Total equity is $1,620, fixed assets are $1,810, long-term debt is $650, and short-term debt is $300. What is the amount of current assets? $760 $360 $1,140 $480 $790
760
4A - Consider a bond with a coupon rate of 6% that pays semiannual interest and matures in six years. The market rate of return on bonds of similar risk is currently 11%. The bond has a par value of $1,000. What is the current price of this bond in dollars? (Round your answers to two decimal places.)
784.54
2B- Blauser's started the year with $280 in cash, $924 in inventory, $361 in accounts payable, $1,687 in equipment, and $414 in accounts receivable. At year's end, the firm had $311 in cash, $1,594 in equipment, $1,003 in inventory, $426 in accounts receivable, and $398 in accounts payable. What was the change in net working capital during the year?
85
Accept project if profitability index is ______ (<, >) 1.
> 1
What is APR? What is EAR?
APR = annual percentage rate. For example, 12%. EAR = effective annual rate. Which is greater than 12% with compounding more frequently than once a year.
2- Three things we have to add back to get operating cash flow
Add back non-cash expenses: depreciation, amortization, taxes (deferred)
Ordinary annuity vs annuity due?
An "ordinary" annuity has the payments occurring at the END of the periods. An "annuity due" says the first payment happens TODAY.
Difference between annuity and perpetuity?
Annuity: income stream with an end. Perpetuity: constant income forever.
5A - Which statement concerning the net present value (NPV) of an investment or a financing project is correct? A financing project should be accepted if, and only if, the NPV is exactly equal to zero. An investment project should be accepted only if the NPV is equal to the initial cash flow. Any type of project should be accepted if the NPV is positive and rejected if it is negative. Any type of project with greater total cash inflows than total cash outflows, should always be accepted. An investment project that has positive cash flows for every time period after the initial investment should be accepted.
Any type of project should be accepted if the NPV is positive and rejected if it is negative.
2A- Which one of the following statements concerning liquidity is correct ---Liquid assets generally earn higher rates of return than fixed assets. ---If you can sell an asset next year at a price equal to its actual value, the asset is highly liquid. ---Liquid assets are defined as those assets obtained within the past year. ---The less liquidity a firm has, the lower the probability the firm will encounter financial difficulties. ---Balance sheet accounts are listed in order of decreasing liquidity.
Balance sheet accounts are listed in order of decreasing liquidity.
1.1 Which is Capital Structure vs. Capital Budgeting? A-smart financing decisions "proportions of the firm's financing from current and long-term debt and equity." B-value-creating projects. "Process of making and managing expenditure on long-lived assets."
Capital Structure: A Capital Budgeting: B
1- Which one of the following business types is best suited to raising large amounts of capital? ---Sole proprietorship ---Limited liability company ----Corporation ---General partnership ---Limited partnership
Corporation
4B - All else constant, a coupon bond that is selling at a premium, must have: a coupon rate that is equal to the yield to maturity. a market price that is less than par value. semiannual interest payments. a yield to maturity that is less than the coupon rate. a coupon rate that is less than the yield to maturity.
Correct! a yield to maturity that is less than the coupon rate.
1.1 What is Net Working Capital?
Current assets minus current liabilities.
4B - Which one of these statements is correct? Investors earn a return called a spread. Dealers pay a fee, called the spread, to brokers. Investors sell at the ask price. Dealers buy at the bid price. Brokers maintain an inventory of securities.
Dealers buy at the bid price.
3A - Which one of these statements is correct concerning the time value of money? Increasing the initial cost of a project increases the project's NPV. Increasing the discount rate, increases the PV of a project. Increasing the FV decreases the PV. Decreasing the PV decreases the FV. Decreasing the discount rate increases the FV.
Decreasing the PV decreases the FV.
2B- Which one of these is a non-cash item? ---Deferred taxes ---Interest expense ---Current taxes ---Dividends ---Selling expenses
Deferred taxes
An increase in which one of the following will cause the operating cash flow to increase for a profitable firm? Depreciation Cash Net working capital Taxes Administrative expenses
Depreciation
2B- Which one of these accounts is classified as a fixed asset on the balance sheet? ---Intangible assets ---Accounts payable ---Preferred stock ---Inventory ---Accounts receivable
Intangible assets
Difference between and examples of pure discount loans, interest-only loans, and amortized loans.
Pure discount: borrower receives money today and repays a single lump sum (principle and interst) at a later date. (Treasury bill) Interest-only: interest payment each period with principle due at maturity. (Bond) Amortized: payment of principle and interest over time.
Operating cash flow is defined as: Pretax income − Taxes. Net income − Dividends. EBIT + Depreciation − Taxes. Pretax income + Depreciation. Cash flow to investors + Taxes.
EBIT + Depreciation − Taxes.
What is salvage value?
Estimated resale value of an asset at the end of its useful life.
Excel functions for the following: Future Value Present Value Discount Rate Number of Periods EAR Net present value Payment
FV PV Rate nper effect NPV PMT Have to put negative sign on either present value or future value to solve for the rate or number of periods. Also, for present value it will have a negative sign unless you put in a negative future value.
1- Which one of these is most apt to be an agency problem? ---Increasing the dividend payments to shareholders ---Paying off debt in a timely manner ---Increasing the sales of a profitable division ---Forsaking a profitable project because it involves some risk ---Selling an unprofitable division of the firm
Forsaking a profitable project because it involves some risk
4B - Which one of these factors generally has the greatest impact on a firm's PE ratio? Required rate of return Current dividends Future opportunities The overall risk level of the current firm Depreciation method used by the firm
Future opportunities
5A - A project has an initial cost of $2,250. The cash inflows are $0, $500, $900, and $700 for Years 1 to 4, respectively. What is the payback period? 2.97 years 2.84 years 3.98 years 3.92 years Never
Never
Profitability index formula
PV of future cash flows / initial investment
Bond value is PV of what two things combined?
PV of sum of coupon payments plus PV of par value
What has to have the same sign in excel calculations?
Payment and FV. Otherwise the answer will be wrong! This is because they're both inflows, and the PV is an outflow.
Perpetuity and growing perpetuity formulas?
Perpetuity: PV = C/r Growing Perpetuity: PV = C/(r-g)
Difference between primary market and secondary market?
Primary market for securities IPO, selling for first time secondary market resale of an existing share
Thing to remember when calculating the RATE() in excel.
Remember when calculating the RATE in excel, it will round it up!!! So make sure the digits are good so you can get the real value. Then multiply by 2 if it's a semiannual rate.
4A - A stock's PE ratio is primarily affected by which three factors? Accounting practices, opportunities, and the market rate of return Dividend yield, capital gains yield, and opportunities Market rate of return, risk, opportunities Accounting practices, market rate of return, risk Risk, opportunities, accounting practices
Risk, opportunities, accounting practices.
Difference between simple interest and compound interest?
SIMPLE INTEREST IS JUST FLAT PAYMENT CALCULATED ON ORIGINAL AMOUNT, THEN YOU ADD THAT AMOUNT FOR THE NUMBER OF YEARS. When the interest is added to principle it is "compounded."
1- Which one of the following is least apt to help convince managers to work in the best interest of the stockholders? ---Threat of a takeover of the firm by unsatisfied stockholders ---Implementation of a stock option plan ---Salary raises based on length of service ---Management compensation tied to the market value of the firm's stock ---Threat of a proxy fight
Salary raises based on length of service
2A- Which one of these equations is an accurate expression of the balance sheet? ---Assets ≡ Liabilities − Stockholders' equity ---Stockholders' equity ≡ Assets + Liabilities ---Liabilities ≡ Stockholders' equity − Assets ---Assets ≡ Stockholders' equity − Liabilities ---Stockholders' equity ≡ Assets − Liabilities
Stockholders' equity ≡ Assets − Liabilities
5A - Which one of the following should be excluded from the analysis of a project? Erosion costs Incremental fixed costs Incremental variable costs Sunk costs Opportunity costs
Sunk costs
Least risk bonds?
T-bills from the government.
1- Which one of these is a cash outflow from a corporation? ---Sale of an asset ---Tax payment ---Sale of common stock ---Issuance of debt ---Profit retained by the firm
Tax payment
3A - Ted purchased an annuity today that will pay $1,000 a month for five years. He received his first monthly payment today. Allison purchased an annuity today that will pay $1,000 a month for five years. She will receive her first payment one month from today. Which one of the following statements is correct concerning these two annuities? Both annuities are of equal value today. Allison's annuity is an annuity due. Ted's annuity has a higher present value than Allison's. Allison's annuity has a higher present value than Ted's. Ted's annuity is an ordinary annuity.
Ted's annuity has a higher present value than Allison's.
5A - You are considering an investment project with an internal rate of return of 8.7 percent, a net present value of $393, and a payback period of 2.44 years. Which one of the following is correct given this information? The discount rate used in computing the net present value was less than 8.7 percent. The discounted payback period will be less than 2.44 years. The discount rate used to compute the net present value is equal to the internal rate of return. The required payback period must be greater than 2.44 years. This project should be rejected based on the net present value.
The discount rate used in computing the net present value was less than 8.7 percent.
4A - Which one of these applies to the dividend growth model of stock valuation? The dividend must be for the same time period as the stock price. The growth rate must be less than the discount rate. The rate of growth must be positive. The model cannot be applied if the growth rate is zero. The dividend amount must be constant over time.
The growth rate must be less than the discount rate.
5A - How should a profitability index of zero be interpreted? The present value of the cash flows subsequent to the initial cash flow is equal to (−1 × Initial cash flow). The project has an internal rate of return equal to the discount rate. The project produces a net income of zero for every year of its life. The project's cash flows subsequent to the initial cash flow have a present value of zero. The project also has a net present value of zero.
The project's cash flows subsequent to the initial cash flow have a present value of zero.
1.4 What is the goal of financial management?
To maximize shareholder wealth.
1.1 What is the role of the Controller vs. Treasurer? A-manages the cash flows, managing capital expenditure decisions, and making financial plans. B-Accounting, which includes taxes, cost and financial accounting, and information systems.
Treasurer: A Controller: B
1- In most cases, it is appropriate and important to separate the financing and investment decision. ---True ---False
True
1.5 What helps managers stay inline with owners interests?
Very carefully-tailored compensation packages, e.g. stock options or RSU's.
3B -Assume an annuity will pay $1,000 a year for five years with the first payment occurring in Year 4, that is, four years from today. When you compute the present value of that annuity using the PV formula, the PV will be as of which point in time? Today, Year 0 Year 1 Year 3 Year 4 Year 2
Year 3
5A - Continued with the previous question, if the opportunity cost of capital is 9%, should the project be accepted
Yes
5A - The net working capital of a firm will decrease if there is: a decrease in accounts payable. an increase in inventory. a decrease in accounts receivable. an increase in the checking account balance. a decrease in fixed assets.
a decrease in accounts receivable.
4A - All else constant, a bond will sell at ________ when the yield to maturity is ________ the coupon rate. a premium; greater than a premium; equal to at par; greater than at par; less than a discount; greater than
a discount; greater than
NPV = the PV of _____ + _____
all future cash flows + initial investment (negative)
5A - The book value of an asset is primarily used to compute the: annual depreciation tax shield. amount of cash received from the sale of the asset. amount of tax saved annually due to the depreciation expense. amount of tax due on the sale of that asset. change in depreciation needed to reflect the market value of the asset.
amount of tax due on the sale of that asset.
5B - If a project has a net present value equal to zero, then: the initial cost of the project exceeds the present value of the project's subsequent cash flows. the internal rate of return exceeds the discount rate. the project produces cash inflows that exceed the minimum required inflows. any delay in receiving the projected cash inflows will cause the project's NPV to be negative. the discount rate exceeds the internal rate of return.
any delay in receiving the projected cash inflows will cause the project's NPV to be negative.
Changes in the net working capital: can affect the cash flows of a project every year of the project's life. only affect the initial cash flows of a project. are included in project analysis only if they represent cash outflows. are generally excluded from project analysis due to their irrelevance to the total project. can only affect the initial and the final cash flows of a project.
can affect the cash flows of a project every year of the project's life.
4B - The constant dividend growth model: is more complex than the differential growth model. requires the growth period be limited to a set number of years. is never used because firms rarely attempt to maintain steady dividend growth. can be used to compute a stock price at any point in time. most applies to stocks with differential growth rates.
can be used to compute a stock price at any point in time.
2A- Free cash flow is: ---the money generated from the sale of new shares of stock. ---another term for operating cash flow. ---the cash generated by decreasing net working capital. ---cash that the firm can distribute to creditors and stockholders. ---the net income of a firm after taxes have been paid.
cash that the firm can distribute to creditors and stockholders.
4A - The stated interest payment, in dollars, made on a bond each period is called the bond's: coupon. face value. maturity. yield to maturity. coupon rate.
coupon
1- A partnership: ---is taxed the same as a corporation. ---terminates at the death of any limited partner. ---creates an unlimited liability for all general partners for the partnership's debts. ---has the same ability as a corporation to raise capital. ---allows for easy transfer of interest from one general partner to another.
creates an unlimited liability for all general partners for the partnership's debts.
2- Net working capital = ?
current assets - current liabilities
Difference between dealer vs broker?
dealer holds inventory and buys and sells stocks broker brings buyers and sellers together, do not own inventories
2A- Payments to creditors that include interest and the repayment of principal are referred to as: ---the cash flow to stockholders. ---the reduction in net working capital. ---debt service. ---operating cash flow. ---the change in net working capital.
debt service
5A - The cash flow tax savings generated as a result of a firm's tax-deductible depreciation expense is called the: aftertax depreciation savings. depreciable basis. depreciation tax shield. operating cash flow. aftertax salvage value.
depreciation tax shield.
2- To get marginal tax rate from prior year and current year data given:
difference of taxes paid of two years divided by difference of taxable income of two years in other words, (Current taxes - Last year's taxes) / (Current income - Last year's income)
4B - A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a ________ bond. par discount premium zero coupon floating rate
discount
If bond purchase price is lower than par value, then it is a ________ bond and the ytm will be higher than the coupon rate. If bond purchase price is higher than par value, then it is a _________ bond and the ytm will be lower than the coupon rate.
discount; premium Premium coupon rate above yield to maturity. Discount coupon rate below yield to maturity.
1- One disadvantage of the corporate form of business ownership is the: ---limited liability protection provided for all owners. ---firm's ability to raise cash. ---unlimited life of the firm. ---difficulties encountered when changing ownership. ---double taxation of profits.
double taxation of profits.
A forward PE is generally based on the projected: average earnings for the next five years. average earnings for the next three years. earnings for the upcoming quarter. earnings for the next year. stock price in one year.
earnings for the next year.
3A - An interest rate that is compounded monthly, but is expressed as if the rate were compounded annually, is called the ________ rate. stated interest compound interest effective annual periodic interest daily interest
effective annual
3B - An annuity stream of cash flow payments is a set of: equal cash flows occurring at equal periods of time over a fixed length of time. equal cash flows occurring each time period forever. either equal or varying cash flows occurring at set intervals of time for a fixed period. increasing cash flows occurring at set intervals of time that go on forever. arbitrary cash flows occurring each time period for no more than 10 years.
equal cash flows occurring at equal periods of time over a fixed length of time.
A project has an initial cost of $26,000, a discount rate of 11.7 percent, a life of 5 years, and an NPV of $11,216. Given this, you know that the project is expected to earn a return: equal to 11.7 percent of $26,000 plus an additional $11,216. of $11,216 in total. equal to 11.7 percent of $37,216 (= $26,000 + 11,216). of 11.7 percent of $11,216. of $26,000 minus $11,216.
equal to 11.7 percent of $26,000 plus an additional $11,216.
5A - A decrease in a firm's current cash flows resulting from the implementation of a new project is referred to as: salvage value expenses. net working capital expenses. sunk costs. opportunity costs. erosion costs.
erosion costs.
4B - The interest paid on any municipal bond is: free of default risk. subject to default risk and is exempt from state income taxation. free of both default risk and federal income taxation. exempt from federal income taxation and may or may not be exempt from state taxation. taxable at the federal level and tax exempt at the state and local level.
exempt from federal income taxation and may or may not be exempt from state taxation.
2A- Noncash items refer to: ---the credit sales of a firm. ---the accounts payable of a firm. ---the costs incurred for the purchase of intangible fixed assets. ---expenses charged against revenues that do not directly affect cash flow. ---all accounts on the balance sheet other than cash on hand.
expenses charged against revenues that do not directly affect cash flow.
1- A business formed by two or more individuals who each have unlimited personal liability for all of the firm's debts is called a: ---corporation. ---sole proprietorship. ---general partnership. ---limited partnership. ---limited liability company.
general partnership.
Accept projects when IRR is ____ than the discount rate. Reject projects when IRR is ____ than the discount rate.
greater; less
NASDAQ: has a single trading floor located in Chicago, Illinois. has multiple trading floors. is a designated market maker system. has a multiple market maker system. is closed to all electronic communications networks (ECNs).
has a multiple market maker system. market maker is a individual market participant or member firm of an exchange that also buys and sells securities for its own account, at prices it displays in its exchange's trading system, with the primary goal of profiting on the bid-ask spread, which is the amount by which the ask price exceeds the bid price a market asset. The most common type of market maker is a brokerage house that provides purchase and sale solutions for investors in an effort to keep financial markets liquid.
5A - The payback method of analysis: discounts cash flows. ignores the initial cost. considers all project cash flows. applies an industry-standard recoupment period. has a timing bias.
has a timing bias.
Thing to remember when finding number of periods if it's a semi-annual bond.
if you're finding number of periods, and computing for a semi-annual bond but it wants the number of years, then remember you have to divide by 2 to get the number of years, not the number of semi-annums.
5B - The cash flows of a project should: be computed on a pretax basis. include all sunk costs and opportunity costs. include all incremental and opportunity costs. be applied to the year when the related expense or income is recognized by GAAP. include all financing costs related to new debt acquired to finance the project.
include all incremental and opportunity costs.
2B- The financial statement summarizing a firm's accounting performance over a period of time is the: ---income statement. ---balance sheet. ---statement of cash flows. ---tax reconciliation statement. ---statement of equity.
income statement.
IRR stands for ____ and sets the NPV to ___. Exel formula is:
internal rate of return; 0 IRR(C8:C12)
2B- The book value of assets: ---is determined under Generally Accepted Accounting Principles (GAAP) and is based on the cost of those assets. ----represents the true market value of those assets according to GAAP. ---is always the best measure of the company's value to an investor. ---is always higher than the replacement cost of the assets. ---is shown on the firm's income statement.
is determined under Generally Accepted Accounting Principles (GAAP) and is based on the cost of those assets.
5B - Net working capital: can be ignored in project analysis because any expenditure is normally recouped by the end of the project. requirements generally, but not always, create a cash inflow at the beginning of a project. expenditures commonly occur at the end of a project. is frequently affected by the additional sales generated by a new project. is the only expenditure where at least a partial recovery can be made at the end of a project.
is frequently affected by the additional sales generated by a new project.
For investment projects, the internal rate of return (IRR): rule indicates acceptance of an investment when the IRR is less than the discount rate. is the rate generated solely by the cash flows of the investment. is used primarily to rank projects of varying sizes. is the rate that causes the net present value of a project to equal the project's initial cost. can effectively be used to compare all types and sizes of mutually exclusive projects.
is the rate generated solely by the cash flows of the investment.
The profitability index: rule often results in decisions that conflict with the decisions based on the net present value rule. is useful as a decision tool when investment funds are limited and all available funds are allocated. method is most commonly used when deciding between mutually exclusive projects of varying size. rule states that the project with the lower index value should be accepted. produces results which typically are difficult to comprehend.
is useful as a decision tool when investment funds are limited and all available funds are allocated.
2B- One of the reasons why cash flow analysis is popular is because: ---cash flows are more subjective than net income. ---deferred taxes require future cash payment. ---cash flows are strictly defined by Generally Accepted Accounting Principles (GAAP). ---it is difficult to manipulate, or spin the cash flows. ---operating cash flows are found on the income statement.
it is difficult to manipulate, or spin the cash flows.
1- If a firm is currently profitable, then: ---its current cash inflows must exceed its current cash outflows. ---its reported sales exceed its costs. ---its cash flows are known with certainty. ---it will always have sufficient cash to pay its bills in a timely manner. ---the timing of the related cash flows is irrelevant.
its reported sales exceed its costs.
If NPV is negative than IRR is ______ than the discount rate. If NPV is positive then IRR is _____ than the discount rate.
less; greater
2- Which has a lower rate of return, liquid assets or fixed assets?
liquid
5A - Erosion can be explained as the: additional income generated from the sales of a newly added product. loss of current sales due to a new project being implemented. loss of revenue due to employee theft. loss of revenue due to customer theft. decrease in expected annual revenues as a new product ages.
loss of current sales due to a new project being implemented.
1- Stock options granted to a corporation's managers are primarily designed to: ---reduce agency costs. ---increase current profits. ---replace salary increases. ---reward long-term employment. ---replace promotions.
reduce agency costs.
Market order? Limit order? stop order?
market orders vs limit orders market orders: you specify ticker and quantity and immediate execution at best available price limit orders: ticker, quantity, price, and limit buy executed at limit price or lower, and limit sell executed at limit price or higher stop order sell stock as soon as price goes below certain price. So becomes a market order at that point.
5B - The pretax salvage value of an asset is equal to the: book value if straight-line depreciation is used. book value if MACRS depreciation is used. market value minus the book value. book value minus the market value. market value.
market value.
4B - Assume you are using the dividend growth model to value stocks. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect the: market values of all stocks to increase. market values of all stocks to remain constant as the dividend growth will offset the increase in the market rate. market values of all stocks to decrease. stocks that do not pay dividends to decrease in price while the dividend-paying stocks maintain a constant price. dividend growth rates to increase to offset this change.
market values of all stocks to decrease.
1- The primary goal of financial management is to: ---maximize current dividends per share of the existing stock. ---maximize the current value per share of the existing stock. ---avoid financial distress. ---minimize operational costs and maximize firm efficiency. ---maintain steady growth in both sales and net earnings.
maximize the current value per share of the existing stock.
5B - The difference between the present value of an investment's future cash flows and its initial cost is the: net present value. internal rate of return. payback period. payback period. discounted payback period.
net present value.
________ is the present value of all future cash flows minus the initial cash flow.
net present value.
5B - The term "tax shield" refers to a reduction in taxes created by: a reduction in sales. an increase in interest expense. noncash expenses. a project's incremental expenses. opportunity costs.
noncash expenses.
2B- All else held constant, the earnings per share will decrease as the: ---net income increases. ---number of shares outstanding increases. ---total revenue of the firm increases. ---tax rate decreases. ---costs decrease.
number of shares outstanding increases.
5B - The most valuable investment given up if an alternative investment is chosen is referred to as a(n): salvage value expense. net working capital expense. sunk cost. opportunity cost. erosion cost.
opportunity cost.
5B - If a firm is more concerned about the quick return of its initial investment than it is about the amount of value created, then the firm is most apt to evaluate a capital project using the ________ method of analysis. internal rate of return net present value modified internal rate of return payback profitability index
payback
If a stock pays a constant annual dividend then the stock can be valued using the: fixed coupon bond present value formula. present value of an annuity due formula. payout ratio formula. present value of an ordinary annuity formula. perpetuity present value formula.
perpetuity present value formula.
When NPV is (negative, positive), that option is best.
positive
NPV is ______ for discount rates below the IRR and ____ for discount rates above the IRR.
positive; negative If we accept projects where the discount rate is less than the IRR we will be accepting positive NPV projects.
4B - If a bond's yield to maturity is less than its coupon rate, the bond will sell at a ________, and increases in market interest rates will: discount; decrease this discount. discount; increase this discount. premium; decrease this premium. premium; increase this premium. premium; not affect this premium.
premium; decrease this premium.
5B - The profitability index of an investment project is the ratio of the: average net income from the project to the average investment cost. internal rate of return to the current market rate of interest. net present value of the project's cash outflows divided by the net present value of its inflows. net present value of every cash flow related to the project compared to the initial cost. present value of the cash flows subsequent to the initial cost compared to the initial cost.
present value of the cash flows subsequent to the initial cost compared to the initial cost.
3B - The net present value of a project is equal to the: present value of the future cash flows. present value of the future cash flows minus the initial cost. future value of the future cash flows minus the initial cost. future value of the future cash flows minus the present value of the initial cost. sum of the project's anticipated cash inflows.
present value of the future cash flows minus the initial cost.
2- What is the difference between product costs and period costs?
product costs are those associated with generation of a product, whereas period costs are other costs.
1- A firm's capital structure refers to the firm's: ---mixture of various types of production equipment. ---investment selections for its excess cash reserves. ---combination of cash and cash equivalents. ---combination of accounts appearing on the left side of its balance sheet. ---proportions of financing from current and long-term debt and equity.
proportions of financing from current and long-term debt and equity.
1- One intent of the Sarbanes Oxley Act of 2002 is to: ---prevent minority investors from making demands on corporations. ---protect corporate directors from frivolous lawsuits. ---guarantee the repayment of all future personal loans to corporate officers and directors. ---protect investors from corporate abuses. ---require all public corporations to "go dark" within the next twenty years.
protect investors from corporate abuses.
5A - Interest rates or rates of return on investments that have been adjusted for the effects of inflation are called ________ rates. real nominal effective stripped coupon
real
5B - You spent $500 last week fixing the transmission in your car. Now, the brakes are acting up and you are trying to decide whether to fix them or trade the car in for a newer model. In analyzing the brake situation, the $500 you spent fixing the transmission is a(n) ________ cost. opportunity fixed incremental sunk relevant
sunk
2- average cash flow is ...
the effective tax rate (total taxes divided by total taxable income)
5B - The internal rate of return for a project will increase if: the initial cost of the project can be reduced. the total amount of the cash inflows is reduced. each cash inflow is moved such that it occurs one year later than originally projected. the required rate of return is reduced. the discount rate is increased.
the initial cost of the project can be reduced.
Short-term finance deals with: the timing of cash flows. acquiring and selling fixed assets. financing long-term projects. capital budgeting. issuing additional shares of common stock.
the timing of cash flows.
5A - If a project is assigned a required rate of return of zero, then: the timing of the project's cash flows has no bearing on the value of the project. the project will always be accepted. the project will always be rejected. whether the project is accepted or rejected will depend on the timing of the cash flows. the project can never add value for the shareholders.
the timing of the project's cash flows has no bearing on the value of the project.
Toni's Tools is comparing machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs, differing machine lives, and will be replaced when worn out. These machines should be compared using: net present value only. both net present value and the internal rate of return. their equivalent annual costs. the depreciation tax shield approach. the replacement cost approach.
their equivalent annual costs.
Payback period ignores (a) and (b) and is biased against _____ term projects.
time value of money; cash flows after the payback period; long
Rosina purchased one 15-year bond at par value when it was initially issued. This bond has a coupon rate of 7 percent and matures 13 years from now. If the current market rate for this type and quality of bond is 7.5 percent, then Rosina should expect: the bond issuer to increase the amount of all future interest payments. the yield to maturity to remain constant due to the fixed coupon rate. to realize a capital loss if she sold the bond at today's market price. today's market price to exceed the face value of the bond. the current yield today to be less than 7 percent.
to realize a capital loss if she sold the bond at today's market price.
1- Given the corporate form of business organization, ownership: ---must be granted with equal rights assigned to each and every shareholder. ---transfers are unlimited. ---can only be transferred with the approval of the board of directors. ---is controlled by the corporate officers. ---must be held by non-management owners.
transfers are unlimited.
As interest rates go down, bond prices go ________. And vise versa.
up. This is because if you're getting a higher rate of return the PV is lower.
4A - If the issuer of a stock receives the proceeds from a sale of that issuer's stock, then the sale: had to have occurred on the floor of an exchange. was a secondary market transaction. was transacted on the NYSE. was conducted in the primary market. had to have been a limit order.
was conducted in the primary market
5B - The equivalent annual cost method is most useful in determining: the annual operating cost of an idle machine that is currently owned by a firm. the tax shield benefits of depreciation given the purchase of new assets for a project. operating cash flows for cost-cutting projects of equal duration. which one of two machines to acquire given equal machine lives but unequal machine costs. which one of two machines to purchase when the machines are mutually exclusive, have differing lives, and will be replaced.
which one of two machines to purchase when the machines are mutually exclusive, have differing lives, and will be replaced.
2A- Earnings per share: ---will increase if net income increases and the number of shares outstanding decreases. ---will increase if net income decreases and the number of shares outstanding increases. ---is defined as the addition to retained earnings divided by the number of shares outstanding. ---is the total amount of dividends paid per year on a per share basis. ---must increase at the same rate as the net income.
will increase if net income increases and the number of shares outstanding decreases.
4A - A bond that makes no coupon payments and is initially priced at a deep discount is called a ________ bond. Treasury municipal floating-rate junk zero coupon
zero coupon
5A - If Lew's Steel Forms purchases $618,000 of new equipment, they can lower annual operating costs by $265,000. The equipment will be depreciated straight-line to a zero book value over its 3-year life. Ignore bonus depreciation. At the end of the three years, the equipment will be sold for an estimated $60,000. The equipment will require the company to hold an extra $23,000 of inventory over the 3-year period. What is the NPV if the discount rate is 14 percent and the tax rate is 21 percent?
−$7,014.54
