Exam 1 review

Cash flow of a firm which is available for distribution to the firm's creditors and stockholders is called:

Operating Cash Flow

** exam question will look like this You found a company which will pay an annual dividend of $15 forever. What price would you be willing to pay if the interest rate is 6%? Perpetuity Present Value Equation

$250.00 15/.06=250

Your grandmother is gifting you $125 a month for four years while you attend college to earn your bachelor's degree. At a 6.5 percent discount rate, what are these payments worth to you on the day you enter college? $5,201.16 $5,270.94 $5,509.19 $5,608.87 $5,800.00

$5,270.94

Problem 6-1 Present Value and Multiple Cash Flows [LO1] Wainright Co. has identified an investment project with the following cash flows. Year Cash Flow 1 $ 720 2 930 3 1,190 4 1,275 If the discount rate is 10 percent, what is the present value of these cash flows? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Present value $ What is the present value at 18 percent? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Present value $ What is the present value at 24 percent? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Present value $ on exam twice**

10%=3188.05 18%= 2659.98

Your parents set up a trust fund for you 10 years ago that is now worth $19,671.51. If the fund earned 7% per year, how much did your parents invest?

19,671.51/(1.07)^10= $10,000 N = 10, I/Y = 7, FV = 19671.51, PMT = 0,

. Which one of the following terms is used to describe a loan wherein each payment is equal in amount and includes both interest and principal? A. Amortized B. Continuous C. Balloon D. Pure Discount E. Interest-Only

A. Amortized

19. The higher the degree of financial leverage employed by a firm, the: A. Higher the probability that the firm will encounter financial distress B. Lower the amount of debt incurred C. Less debt a firm has per dollar of total assets D. Higher the number of outstanding shares of stock E. Lower the balance in accounts payable

A. Higher the probability that the firm will encounter financial distress

The cash flow of a firm which is available for distribution to the firm's creditors and stockholders is called the: A. Operating Cash Flow B. Net Capital Spending C. Net Working Capital D. Cash Flow from Assets E. Cash Flow to Stockholders

A. Operating Cash Flow

The interest rate that is quoted by a lender is referred to as which one of the following? A. Stated Interest Rate B. Compound Interest Rate C. Effective Annual Rate D. Discount Rate E. Common Rate

A. Stated Interest Rate

What is the interest rate charged per period multiplied by the number of periods per year called? A. Effective Annual Rate B. Annual Percentage Rate C. Periodic Interest Rate D. Compound Interest Rate E. Discount Interest Rate

B. Annual Percentage Rate

Ceteris Paribas (all other things equal), as the time period increases, the present value: A. Increases B. Decreases C. Stays the Same D. Becomes Negative E. None of the Above

B. Decreases

Which one of the following is a means by which shareholders can replace company management? A. Stock Options B. Proxy Fight C. Promotions D. Agency Problems E. Sarbanes-Oxley Act

B. Proxy Fight

This is the interest rate expressed as if it were compounded once per year. A. What is the stated interest rate? B. What is the effective annual rate? C. What is the annual percentage rate? D. What is the interest rate?

B. What is the effective annual rate?

Why do use financial statements in Finance? I. To aid in decision making II. To aid in valuation assumptions III. To identify relevant cash flows IV. Because book values always equal market values A. I, II B. III, IV C. I, II, III D. I, II, III, IV E. None of the above

C. I, II, III

Discount

Calculate the present value of future cash flows.

NWC=

Current Assets- Current Liabilities

A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) _____ loan. A. Amortized B. Continuous C. Balloon D. Pure Discount E. Interest-Only

D. Pure Discount

** Ceteris Paribas (all else equal): As interest rates increase → PV

Decreases

***** Ceteris Paribas (all else equal): As the time period increases → PV....

Decreases

Will has been purchasing $25,000 worth of New Tek stock annually for the past 15 years. His holdings are now worth $598,100. What is his annual rate of return on this stock? A. 6.13% B. 6.24% C. 6.29% D. 6.32% E. 6.36%

E. 6.36%

The decision to issue additional shares of stock is an example of which one of the following? A. Working Capital Management B. Net Working Capital Decision C. Capital Budgeting D. Controllership E. Capital Structure Decision

E. Capital Structure Decision

Which one of these statements related to growing annuities and perpetuities is correct? A. The cash flow used in the growing annuity formula is the initial cash flow at time zero B. Growth rates cannot be applied to perpetuities if you wish to compute the present value C. The future value of an annuity will decrease if the growth rate is increased. D. An increase in the rate of growth will decrease the present value of an annuity E. The present value of a growing perpetuity will decrease if the discount rate is increased

E. The present value of a growing perpetuity will decrease if the discount rate is increased

An ordinary annuity is best defined by which one of the following? A. Increasing payments paid for a definitive period of time B. Increasing payments paid forever C. Equal payments paid at regular intervals over a stated period of time D. Equal payments paid at regular intervals of time on an ongoing basis E. Unequal payments that occur at set intervals for a limited period of time

E. Unequal payments that occur at set intervals for a limited period of time

Compound interest *

Interest earned on the initial principle and the interest reinvested from prior periods

Simple Interest

Interest earned only on the original principal amount invested

Suppose you deposit $50 a month (starting next month) into an account that has an APR of 9%, based on monthly compounding. How much will you have in the account in 35 years?

N = 35 years * 12 months/year = 420 months; • I/Y = 9/12 = 0.75 rate/month; • PV = 0 • PMT = -50 • CPT FV = $147,089.22

Chauncey Collision has shareholders' equity of $141,800. The firm owes a total of $126,000 of which 60 percent is payable within the next year. The firm net fixed assets of $161,900. What is the amount of the net working capital? A. $25,300 B. $30,300 C. $75,600 D. $86,300 E. $111,500

NWC= Current Assets- Current Liabilities

The 2014 balance sheet of Ollivanders showed current assets of $1,360 and current liabilities of $940. The 2015 balance sheet showed current assets of $1,640 and current liabilities of $1,140. What was the change in net working capital for 2011?

NWCBEGIN = CABEGIN - CLBEGIN = 1,360 - 940 = 420 • NWCEND = CAEND - CLEND = 1,640 - 1,140 = 500 • NWC∆ = NWCEND - NWCBEGIN = 500 - 420 = $80

Present Value

The current value of future cash flows discounted at the appropriate discount rate.

Discount Rate

The rate used to calculate the present value of future cash flows.

Marktet Value

The value of an asset if it were sold in the marketplace

Borgin & Burkes has net working capital of $640. Long- term debt is $4,180, total assets are $6,230, and fixed assets are $3,910. What is the amount of the total liabilities? *** will ask question like this on exam hardest it will get on NWC

Total Assets = Current Assets + Fixed Assets 6,230 = Current Assets + 3,910 Current Assets = 2,320 • NWC = Current Assets - Current Liabilities 640 = 2,320 - Current Liabilities Current Liabilities = 1,680 • Total Liabilities = Current Liabilities + Long-term Debt Total Liabilities = 1,680 + 4,180 = $5,860

Book Value

U.S. financial statements list assets at historical cost

Growing perpetuity

a growing stream of cash flows that continues forever

Growing Annuity

a growing stream of cash flows with a fixed maturity

Discounted Cash flow

calculating the present value of a future cash flow to determine its value.

Change in Networking Capital

measured as the net change in current assets relative to current liabilities for the period being examined and represents the amount spent on net working capital • Calculation(s): • Change in NWC = Ending NWC - Beginning NWC • Recall, NWC = Current Assets - Current Liabilities

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

reciprocals of each other

current liabilities=

short term debt

Future Value

the amount an investment is worth after one or more periods.

balance sheet identity formula

total assets= Total Liabilities+Owners Equity

if the discount number is zero what is the value?

you raise it to the 0 power and it equals the value