FI 320
Which one of the following actions by a financial manager is most apt to create an agency problem?
Increasing current profits when doing so lowers the value of the company's equity
You are bored in college and a friend approach you with a side job: entry level financial advisor in a neighborhood where fraud is prevalent. One day, a client brought a text message for you to help decode the content. The said message promised $100 investment today will become $1000 in just half a year. To appear legit, the message mentioned the promised return on the investment. It is very complex: 8% the first month, 6% the second month, 10% the third month, 15% the fourth month, 11% for the fifth month, and 9% in the sixth month. Your client seems to be very impressed with the numbers. You perform a simple future value calculation and indicate that $100 will not become $1000 in six months, rather it will only accumulate to even with the impressive monthly returns referenced.
$175
When you pay off your student debt, you decide to buy a drink to reward yourself. While at the grocery store, you pick up a lottery ticket. The lottery ticket turns out to be a small winner. Your winnings are 12 monthly payments starting immediately. You decide to put all the money in your bank account that earns 3% annually (monthly rate is 3%/12 in this account), what is the value of your total winnings (i.e., all 12 payments) today?
$23,674
Just when you thought you are done with your internship, your colleagues return the last report you did in Question #9 and ask for one more analysis. After your estimate, the board is not sure about the rate of return you calculated. They ask a hypothetical question, if the required rate of return on this stock were 12%, what would the stock price be?
$35.33
Since you start your finance classes, you become interested in working in the consulting industry with a focus on financial service. You get an internship and were asked to evaluate a stock that has just paid a dividend of $1.80. Your colleague in the strategic department believes that this stock's dividend should maintain a growth rate of 5% indefinitely. Your job is to apply the valuation knowledge and figure out the price for this stock. You realize that you need an expected rate of return to perform such valuation. You turn to your colleague in the accounting department and get an estimate that the expected rate of return should be 10%. What is your calculation of the price?
$37.80
A fully amortizing loan is issued in the amount of $80,000. The interest is 6% per year compounding monthly (the monthly interest rate is 0.5%). The loan term is 15 years, and the lender is expecting equal monthly payment. What is the interest payment for the first month of the loan?
$400
You believe that you will become a movie producer and need $2 million in 2 years. You won the vaccine lottery for $300,000 just yesterday. You are risk-averse and decide to put the lottery money in your bank account. If the bank account earns 1% per month, how much do you have to deposit into the account every month to fulfill your dream of being a movie producer in 2 years?
$60,025
A fully amortizing loan is issued in the amount of $80,000. The interest is 6% per year compounding monthly (the monthly interest rate is 0.5%). The loan term is 15 years, and the lender is expecting equal monthly payment. What is the payment for the first month in the second year of the loan?
$675.09
Your consulting job keeps bringing in new challenges. This time, your colleagues need help in calculating rate of return instead of valuation models. You pull your notes on stock valuation and indicate that you need the stock's current price, dividend related information and potential growth rate. The marketing department submits a report that sustains the growt Finance page and mark that this company's stock currently sells for $50 per share. It takes some time, but you also find the current dividend level on Yahoo Finance: the company just paid a dividend $2. What is the expected rate of return on this stock?
10.24%
You win the vaccine lottery for college tuition. Just when you are celebrating, everything falls apart. You now have to save for college all by yourself. You only have $35,000 to deposit into a bank account that earns annual interest. You will need $80,000 in 8 years for your college expense and the request to pay in installments instead of a large sum of $80,000 is declined. What is the interest rate that will help fulfill your dream of going to college?
10.89%
Your friend just bought a bond that will mature in 20 years. The bond comes with a 10% coupon rate and pays coupons semi-annually. If your friend bought the bond for $875, what is the bond's yield to maturity?
11.62%
Your parents bought Berkshire Hathaway in 1962 at $18 per share. The share is currently trading at $308,139. Your parents want to know the capital gain for this investment. Your parents ask you whether you need the dividend payment history. After some research, you decide that capital gain is not related to the dividends paid, hence you go ahead and calculate the capital gains with the above information. What is your answer?
18.65%
When you are saving for college, your life seems to turn the corner. Your parents praise your courage to face life challenges with a positive attitude and decide to share a recent inheritance with you if you can provide a good investment opportunity for yourself. You pull out the proposal you have had since a child, to invest in Berkshire Hathaway. Your parents like the proposal and hand you $230,000. Although this is a significant amount of money, you realize that the starting investment amount in Berkshire Hathaway is at least $1 million. You don't get discouraged and decide to put the money in an investment account that consistently earns 5% per year. How many years do you have to wait before you can pursue your dream of Berkshire Hathaway?
30.12 years
Company A's stock pays a dividend of $1 in Year 1, $2 in Year 2, and $2.5 in Year 3. Company A note that it will maintain a constant growth of 5% after the third year. If the required rate of return is 10%. What is the stock price today?
43.88
Company A's stock pays a dividend of $2.4 in Year 1, $2.88 in Year 2, $3.46 in Year 3, $4.15 in Year 4, $4.98 in Year 5, $5.18 in Year 6. Company A is confident that it will maintain a constant growth of 4% from the seventh year onward. What will be the dividend for Year 7?
5.39
Company A's stock pays a dividend of $2.4 in Year 1, $2.88 in Year 2, $3.46 in Year 3, $4.15 in Year 4, $4.98 in Year 5, $5.18 in Year 6. Company A is confident that it will maintain a constant growth of 4% from the seventh year onward. If the required rate of return is 10%. What is the stock price today?
66.64
Bonds are usually issued at par and par value is usually $1000. A bond with coupon rate of 11% is issued when the market interest rate is 11%. After issuance, the interest rate declines to 9%. Now the bond will be traded at a premium. Which of the following statements is/are true? I. Consider a scenario where there are 12 years to maturity and the bond pays annual coupon. I can use the discounted cash flow methodology to value this bond when the market rate declines to 9%. The bond value will increase to $1,143.21 under the new interest rate environment. When I calculate the value of this bond today, I use 9% as the yield to maturity (the discount rate used in the calculation) as this reflects the current interest rate environment. II. One year later, there are 11 years to maturity. If the interest rate stays at 9%, the value of the bond one year later is $1,136.1. When I calculate the value of this bond one year later, I use 9% as the yield to maturity (the discount rate used in the calculation) as this reflects the ongoing interest rate environment. III. Combining the information in I and II, here is what the investor expects. When there are 12 years to maturity, the bond's current yield (next coupon payment/today's price) is 9.62%, while the expected capital gains yield is -0.62%. This assumes that the interest rate will stay at 9% (i.e., the interest rate is 9% today and stays at 9% one year later).
All are correct
Bonds are usually issued at par and par value is usually $1000. A bond with coupon rate of 9% is issued when the market interest rate is 9%. After issuance, the research shows that the interest rate will remain at 9%. Which of the following statements is/are true? I. If there are 12 years to maturity and the bond pays annual coupon, the value of the bond today is $1,000. When I calculate the value of this bond today, I use 9% as the yield to maturity (the discount rate used in the calculation) as this reflects the current interest rate environment. II. One year later, there are 11 years to maturity. If the interest rate stays at 9%, the value of the bond one year later is $1,000. When I calculate the value of this bond one year later, I use 9% as the yield to maturity (the discount rate used in the calculation) as this reflects the ongoing interest rate environment. III. Combining the information in I and II, here is what the investor expects. When there are 12 years to maturity, the bond's current yield (next coupon payment/today's price) is 9%, while the expected capital gains yield is zero since the interest rate remain at 9% one year later. IV. When we know that the current interest rate stays at 9%, the same as the coupon rate, the bond will be traded at par. Without calculation, the bond value will remain at $1000.
All are correct
Which of the following statements is/are true when making an income statement for Year T? I. Relevant information of the firm's operation in Year T is needed. II. Various costs are deducted before distribution to various stakeholders. III. The bottom of the income statement is net income, which belongs to stockholder (the residual stakeholder). Net income is distributed to shareholders in the form of dividends or returned to the company for future operations in the form of retained earnings. IV. Entries in the income statement are needed for both the firm's statement of stockholders' equity and cash flows.
All are correct
Which of the following statements is/are true? I. A bond with a higher rating will be traded at a higher price, all else equal. II. A bond with a call provision be traded at a lower price, all else equal. III. A bond with a protective covenant be traded at a higher price, all else equal.
All are correct
Which of the following statements is/are true? I. Agency problem deals with the conflict of interest between the principal (stockholders) and agent (managers). II. Capital structure helps answer how much debt should be assumed to fund a project. III. Capital budgeting concerns the management of a firm's long-term investments. IV. A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a general partnership.
All are correct
Which of the following statements is/are true? I. Bond value = present value of coupons + present value of face value. II. As interest rate increases (the required rate of return, the discount rate used to calculate bond value), bond prices decrease. III. Bonds are usually issued at par and par value is usually $1000. A bond with coupon rate of 7% is issued when the market interest rate is 7%. If the interest rate goes up to 9% after issuance, the bond value will go down from $1000 (par value). In this case, the bond will be traded at a discount. IV. For the bond in III, consider a scenario where there are 12 years to maturity and the bond pays annual coupon. If the interest rate stays at 9%, the value of the bond today is $856.79. When I calculate the value of this bond today, I use 9% as the yield to maturity (the discount rate used in the calculation) as this reflects the current interest rate environment. V. Continuing from IV but one year later, there are 11 years to maturity. If the interest rate stays at 9%, the value of the bond one year later is $863.9. When I calculate the value of this bond one year later, I use 9% as the yield to maturity (the discount rate used in the calculation) as this reflects the ongoing interest rate environment
All are correct
Which of the following statements is/are true? I. Capital budgeting deals with long-term investments and/or projects. II. Capital structure helps answer the type of financing to be used. III. One drawback for sole proprietorship is unlimited liability. IV. One advantage of corporation is the separation of ownership and management.
All are correct
Which of the following statements is/are true? I. For preferred stock, dividends can be deferred indefinitely. II. Preferred stock generally does not carry voting rights. III. One way to value preferred stock is using the perpetuity formula. This method assumes that the preferred stock gets an infinite stream of constant dividends. IV. Price of preferred stock = dividend / required rate of return.
All are correct
Which of the following statements is/are true? I. The top financial manager within a firm is usually the Chief Financial Officer II. Treasurer is also a financial manager, who oversees cash management, credit management, capital expenditures, and financial planning III. Controller is also a financial manager, who oversees taxes, cost accounting, financial accounting, and data processing
All are correct
Which is the highest rating a bond can have and still not be considered Investment Grade?
BB+
Which of the following statements is/are true? I. The statement "The present value is $100" is problematic because "When you refer to the concept of present value, you need to refer to specific cash flows. Further, at which specific time spot, the present value is referred to." II. The present value of $110 a year from today is $100 if the interest rate is 10% per year.
Both are correct
Which of the following statements is/are true? I. When interest increases (holding the time period of earning interests constant), the future value of one dollar increases. II. When the time period of earning interest increases (holding interest rate constant), the future value of one dollar goes up at a faster speed.
Both are correct
Which of the following statements is/are true? I. When interest increases (holding the time period of earning interests constant), the present value of one dollar decreases. II. When the time period of earning interest increases (holding interest rate constant), the present value of one dollar goes down (at a slower speed).
Both are correct
Bond J has an 8% semiannual coupon and $1,000 face value. There are 9 years left until maturity and it is currently traded at a premium, $1,150. It is callable in 5 years at a call price of $1,040 (the issuer can buy back the bond at $1,040 anytime during the last 4 years of the bond, i.e., starting 5 years from today, Bond J is callable.) Which of the following statements is/are true? I. Bond value = present value of coupons + present value of face value. Using the current trading price $1,150, the remaining coupons, and the face value, I can calculate the yield to maturity. RATE (18, 40, -1150, 1000) * 2. The above calculation assumes the side of a potential buyer today, pays $1,150 today (hence outflow), holding the bond until maturity and receiving the future 18 coupon payments of $40 each / the final par payment of $1,000 (hence inflow for both PMT and FV). Since the bond has semiannual coupon, RATE will calculate the yield over half a year. RATE (18, 40, -1150, 1000) * 2 gives the yield to maturity for a year. II. If we expect that the bond is called 5 years from today, then Bond value = present value of coupons + present value of called value. Using the current trading price $1,150, the remaining coupons, and the called value, I can calculate the yield to call. RATE (10, 40, -1150, 1040) * 2. The above calculation assumes the side of a potential buyer today, pays $1,150 today (hence outflow), holding the bond for 5 years, getting paid for $1,040 when the bond is called. The buyer receives the future 10 coupon payments of $40 each / the called value of $1,040 (hence inflow for both PMT and FV). Since the bond has semiannual coupon, RATE will calculate the yield over half a year. RATE (10, 40, -1150, 1040) * 2 gives the yield to call for a year.
Both are true
You want to buy a new car that will cost $68,500 in 2 years. The account you plan to save money will earn an annual rate of 9%. What is the amount of money you need to put in the account to fulfill your dream of buying the car in two years? I. You decide to solve the problem by using Excel function PV (9%, 2, 0, -68500). The solution for the referenced problem is taking the side of an account you set up to buy a car. The account gets a deposit PV, so inflow positive PV, there will be a withdrawal from the account, so outflow FV -68500$ to pay for the car. II. You decide to solve the problem by using Excel function PV (9%, 2, 0, 68500). The solution for the referenced problem is taking your side when you set up the account to buy a car. You make a deposit PV, so outflow negative PV, you will withdraw from the account, so inflow FV 68500$ to pay for the car.
Both explanations are correct
Which of the following individuals have unlimited liability for a firm's debts based on their ownership interest?
Both general partners and sole proprietors
Who is the top financial manager within a firm?
CFO
Considering what long term business investments take on is __
Capital budgeting
The decision to issue additional shares of stock is an example of:
Capital structure decision
A business created as a distinct legal entity and treated as a legal "person" is called a:
Corporation
As interest rates increase, present values _________.
Decrease
Which of the following is NOT a disadvantage to a Sole Proprietorship?
Double taxation
Which of the following statements is/are true? I. Net income is part of retained earnings. You can find both items in the income statement. II. Retained earnings is part of net income. You can find both items in the income statement. III. Dividend payment is part of net income. You can find both items in the income statement.
Only II and III are correct
T/F: "Coupon" is the stated interest payment
True
T/F: An agency problem occurs when: The best interests of an employee is in conflict with her or her employer
True
T/F: Long-term bonds have more price risk than short-term bonds
True
T/F: Par value (face value) is the principal amount, repaid at maturity
True
T/F: Yield to maturity is the rate of return required in the market for the bond
True
T/F: Yield to maturity, required return, and market rate can all be used interchangeably
True
The additions to property, plant, and equipment = net fixed asset T - net fixed asset T-1 + depreciation T
True
The increase in accounts receivable (Accounts receivable T minus Accounts receivable T-1) should be deducted from net income of Year T when calculating the net cash provided by operating activities.
True
The increase in common stock (common stock T minus common stock T-1) is equal to the amount of cash provided through issuance of common stocks in Year T.
True
To balance the cash holding from T-1 to T, you need the net cash provided by operating, financing, and investment activities
True
Which of the following statements is/are true? I. There are five main basic functions in Excel: PV, FV, PMT, RATE, NPER. II. There are five main variables in the basic functions: PV, FV, PMT, RATE, NPER (these names also coincide with the five functions). III. The basic functions help balance three sets of cash flows: PV at the beginning of the time period, FV at the end of the time period, and recurring PMT at the end of each payment period. IV. The basic functions make sure that the inflows are equal to the outflows by setting the present value of all three cash flows are zero. For example, when you use PV function and enter PMT=0 FV=10 RATE =3% NPER=5, the PV function will help calculate the present value of $10 at the end of Year 5 when the yearly interest rate is 3%. You will get a negative value for PV as PV is the outflow and FV is the inflow in this example.
All are correct
Which of the following statements is/are true? I. Yield to maturity, required return, required rate of return and market rate are used interchangeably. II. Coupon is the stated interest payment, which doesn't change after bond issuance. III. Par value, also called face value, is the principal amount to be repaid at bond maturity. It doesn't change after bond issuance. IV. Coupon rate = annual coupon divided by face value, which doesn't change after bond issuance.
All are correct
High Grade bonds must have at least what rating by Moody's and S&P?
At least Moody's Aa and S&P AA
The prospect for both sole proprietorships and partnerships is limited by:
Inability to access large amounts of funds or the potential death of the owners
You purchased a bond that is sold at a premium. After your purchase, the price of the bond increases, what happens to its yield to maturity?
It decreases
You purchased a bond that is sold at par. After your purchase, the price of the bond increases, what happens to its coupon rate?
It stays the same
Which one of the following best states the primary goal of financial management?
Maximize the current value per share
Which of the following statements is/are true? I. Sole proprietorship has only one owner. II. Both partnership and corporation can have unlimited term of existence. III. Corporation suffers from double taxation.
Only I and III are correct
Which of the following items may appear in the statement of cash flows? I. EBIT or EBITDA. II. Increase in accounts payable. III. Increase in inventories.
Only II and III are correct
Which of the following does the controller NOT do?
Oversees cash management
Uncertainty concerning rates at which cash flows can be reinvested is ______.
Reinvestment Rate Risk
Financial managers should primarily focus on the interests of:
Shareholders
Double taxation means that corporate dividends are taxed at both the corporate level and the personal level
True
If the additions to property, plant and equipment (net fixed asset T - net fixed asset T-1 + depreciation T) is positive, and this item is the only item for investing activities in Year T, this indicates a net cash outflow for investing activities in Year T. Put differently, investing activities in Year T decrease cash holding positions for the firm, i.e., use cash instead of providing cash.
True
You believe that you will open an organic farm and need $68,500 in 2 years. If the bank account earns 9% per year, how much do you have to deposit into the account today to fulfill your dream of opening the farm in 2 years?
$57,655
Which of the following statements is/are true? I. Income statement is a snapshot of the firm's asset and liability. II. Income statement helps track the firm's sales, costs and net income for equity holders. III. The statement of cash flows records the firm's cash flow changes from operating, financing, and investment activities.
Only II and III are correct
In your consulting job, you come across a case with a Company that has outstanding Preferred stock in the firm's capital structure. Your colleagues are not familiar with this type of security and ask for your help. The task is to come up with a valuation model for the preferred stock. After some help from the marketing department, you decide that it is a reasonable estimate that the preferred stock may pay a $10 annual dividend forever. You are not sure what the rate of return should be, so you turn to similar investments. If the required rate of return on similar investments is 10%, then what is valuation for a share of the Preferred stock for this company?
$100.00
For an initial investment of $325 that earns an interest rate of 14%, what is the simple interest for Year 5 if the investment is only earning simple interest? What is the total interest for Year 5 if the investment is earning compound interest?
$10; $14.64
Company A's stock pays a dividend of $2.4 today. Company A is expecting a constant growth of 5% and the required rate of return is 13%. What is the stock price today?
$31.5
You are considering your retirement options. You want to retire in 30 years from today. You anticipate that you will need to make 20 withdrawals during your retirement life. You want to maintain a luxury lifestyle during retirement, so each withdrawal is set to be $90,000. Use 8% interest rate for your calculation. Suppose you have the following complex plan to meet your retirement goal. First, your employer will contribute $1,500 each year until your retirement. Second, you also expect a distribution of $25,000 from a family trust 20 years from today. What amount must you deposit annually to meet the retirement goal?
$5824
Which of the following is NOT a main financial statement
10k
After winning the vaccine lottery, your luck seems to leave you behind. You lose your part-time job that pays well, and all lottery money was lost in gambling. You decide to put your life back on track by reviewing your financing situation. You realize that you only have $2,500 student debt left from graduate school. The monthly rate is 1.5% per month. You are determined to stop accruing debt and commit to a monthly payment towards your debt. If you can pay $50 each month, how many months will it take for you to be debt free?
93.11 months
Which of the following statements is/are true about the statement of stockholders' equity for Year T? I. It expands the section of the common equity on the balance sheets, i.e., helps explain the changes from Year T-1 and Year T. II. The retained earnings portion in the income statement for Year T = entry of retained earnings on the Year T balance sheet minus entry of retained earnings on Year T-1 balance sheet. III. If the differences of the entry common stock in the balance sheets from Year T-1 to Year T is positive, it is the net issuance of new stocks in the statement of stockholders' equity.
All are correct
$50,000 is due 20 years from today. The borrower wants to make quarterly payments into a fund that will earn compound interest at an annual rate of 5%, compounding monthly. Which of the following statements is/are true? I. The basic functions help balance three sets of cash flows (PV, FV, and recurring PMT) so that inflows are equal to the outflows in terms of time value of money. In this case, it is recurring PMT (outflow) vs. FV (inflow). II. The complication is payment period and interest accrual period are not the same. The basic function requires an input of interest over the payment period, i.e., a quarter (three months) in this problem. Since the interest is 5%/12 for a month, I will need to compound 3 times to get the interest over a quarter.
I and II are correct
While your friends go to the beach on Spring Break, you decide to work and apply for full-time jobs. After your part-time job, you get bored and decide to buy a lottery ticket for your parents' anniversary party. During the party, you find out that the ticket wins 3 million Yen. You are given a choice between receiving a check for 2 million Yen immediately or taking your winnings in annual instalments over the next 10 years. From a financial perspective, using an annual discount rate of 10%, which is the optimal choice?
Immediate Check
The growth of both sole proprietorships and partnerships is frequently limited by the firm's:
Inability to raise cash
As interest rates decrease, bond prices ________.
Increase
Which one of the following is leasly apt to help convince managers to work in the best interest of the stockholders?
Increasing managers' base salaries
Please calculate the present value of the following cash flows: Year 0 of $18,400,000, Year 1 of $19,400,000, Year 2 of $24,400,000, Year 3 of $27,525,000, Year 4 of $28,400,000, Year 5 of $21,000,000. The interest rate is 12%. When you try to solve this problem, which of the following is/are true? I. I tackle the problem one cash flow by one cash flow. e.g., for the first cash flow, there is no calculation needed. For Year 1 cash flow, I use PV (12%, 1, 0, -19400000) and this gives me a positive value. I repeat the above exercise for the other cash flows. It is important to remember that the input of the other cash flows in the PV function also must be negative. When I add the present value of all five cash flows to $18,400,000, I get $104,729,388. II. NPV function calculates the present value of a series of continuous cash flows as of today. The first cash flow is one time period from today. In this case, NPV function calculates the present value of cash flow 1 through 5. Then I add it to $18,400,000, I get $104,729,388. III. NPV function calculates the present value of a series of continuous cash flows as of today. I enter the five cash flows Year 1 through Year 5, I get $86,329,388. IV. NPV function calculates the present value of a series of continuous cash flows as of today. I enter the six cash flows Year 0 through Year 5, I get $93,508,382.
Only and II are correct (If I had to guess its prob I she forgot the answer in the key)
What are the five basic variables/functions in Excel?
PV, FV, PMT, RATE, NPER
An agency problem occurs when:
Selina's agent went golfing today instead of meeting with a film producer to sign a movie deal. When questioned, the agent admitted that the decision is not in the best interests of the principal, Selina
Financial managers should focus on the interests of _________ and the main goal for financial management is ________
Shareholders; maximize equity (share price)
A business owned by a solitary individual who has unlimited liability for the firm's debt is called a:
Sole propietorship
Corporate dividends are:
Taxable income of the recipient even though income was previously taxed
Stock is a type of security where investors get paid in two ways: dividend payment and capital gains when shares are sold to other investors or back to the company. Stock value is the present value of these expected cash flows. Stock value = present value of dividends + present value of expected sale price.
True
