FIN 300 UKY Exam 1

Ultimately, the ______ control(s) the corporation.

shareholders

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

An increase in the market value per share

Net working capital is defined as:

current assets minus current liabilities.

An ordinary annuity is best defined as:

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

Smashed Pumpkins Company paid $240 in dividends and $659 in interest over the past year. The company increased retained earnings by $552 and had accounts payable of $750. Sales for the year were $16,720 and depreciation was $772. The tax rate was 21 percent. What was the company's EBIT?

$1,662 Net income = $240 + 552 = $792 EBT = $792/( 1 − .21) = $1,003 EBIT = $1,003 + 659 = $1,662)

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

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

Your coin collection contains 42 1943 silver dollars. If your grandparents purchased them for their face value when they were new, how much will your collection be worth when you retire in 2058, assuming they appreciate at an annual rate of 12 percent?

$19,200,913.78 FV = PV(1 + r)^t FV = $42(1.12)^115 FV = $19,200,913.78

What is the future value of $500 in 24 years assuming an interest rate of 7 percent compounded semiannually?

$2,606.79 FV = PV(1 + r)^t FV = $500[1 + (.07/2)]^48 FV = $2,606.79

Your coin collection contains 59 1953 silver dollars. If your grandparents purchased them for their face value when they were new, how much will your collection be worth when you retire in 2049, assuming they appreciate at an annual rate of 9 percent?

$231,097.80 FV = PV(1 + r)^t FV = $59(1.09)^96 FV = $231,097.80

Your company will generate $64,000 in annual revenue each year for the next seven years from a new information database. If the appropriate discount rate is 7.25 percent, what is the present value?

$341,928.51 PVA = C({1 − [1/(1 + r)^t]}/r) PVA = $64,000{[1 − (1/1.0725^7)]/.0725} PVA = $341,928.51

Beginning three months from now, you want to be able to withdraw $2,800 each quarter from your bank account to cover college expenses over the next four years. If the account pays .50 percent interest per quarter, how much do you need to have in your bank account today to meet your expense needs over the next four years?

$42,951.79 PVA = C({1 − [1/(1 + r)^t]}/r) PVA = $2,800{[1 − (1/1.0050)^16]/.0050} PVA = $42,951.79

If you put up $51,000 today in exchange for a 6.25 percent, 15-year annuity, what will the annual cash flow be?

$5,337.21 PVA = C({1 − [1/(1 + r)^t]}/r) PVA = $51,000 = $C{[1 − (1/1.0625^15)]/.0625} C = $51,000/9.555549 C = $5,337.21

Which one of the following statements regarding corporations is correct?

Corporations can have an unlimited life.

Suppose you are going to receive $14,300 per year for six years. The appropriate interest rate is 9.4 percent. What is the present value of the payments if they are in the form of an ordinary annuity? What is the present value if the payments are an annuity due? Suppose you plan to invest the payments for six years. What is the future value if the payments are an ordinary annuity? Suppose you plan to invest the payments for six years. What is the future value if the payments are an annuity due?

Present value of an ordinary annuity = 63,390.76 Present value of an annuity due = 69,349.49 Future value of an ordinary annuity = 108,675.06 Future value of an annuity due = 118,890.52 PVA = C({1 - [1/(1 + r)^t]}/r) PVA = $14,300{1 - [1/(1 + .094)^6]}/.094] PVA = $63,390.76 PVAdue = (1 + r)PVA PVAdue = (1 + .094)$63,390.76 PVAdue = $69,349.49 FVA = C{[(1 + r)^t - 1]/r} FVA = $14,300[(1 + .094)^6 - 1]/.094} FVA = $108,675.06 FVAdue = (1 + r)FVA FVAdue = (1 + .094)$108,675.06 FVAdue = $118,890.52

Which one of the following statements is correct concerning the NYSE?

The listing requirements for the NYSE are more stringent than those of Nasdaq.

The interest rate that is most commonly quoted by a lender is referred to as the:

annual percentage rate.

Deciding which long-term investment a firm should make is a ______ decision.

capital budgeting

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

interest on interest.

A sole proprietorship

requires the owner to be personally responsible for all of the company's debts

You are planning to make monthly deposits of $440 into a retirement account that pays 9 percent interest compounded monthly. If your first deposit will be made one month from now, how large will your retirement account be in 35 years?

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

You want to buy a new sports car from Muscle Motors for $70,000. The contract is in the form of a 60-month annuity due at an APR of 6.85 percent. What will your monthly payment be?

$1,373.30 PVAdue = (1 + r)PVA PVAdue = $70,000 = [1 + (.0685/12)] × C[{1 - 1/[1 + (.0685/12)]^60}/(.0685/12)] $69,602.68 = $C{1 - [1/(1 + .0685/12)^60]}/(.0685/12) C = $1,373.30

The appropriate discount rate for the following cash flows is 15 percent compounded quarterly. Year. Cash Flow 1. 800 2 600 3 0 4 1100 What is the present value of the cash flows?

$1,747.75 EAR = [1 + (APR/m)]^m − 1 EAR = [1 + (.15/4)]^4 − 1 EAR = .1587, or 15.87% PV = $800/1.1587 + $600/1.1587^2 + $1,100/1.1587^4 PV = $1,747.75

At the beginning of the year, Vendors, Incorporated, had owners' equity of $50,435. During the year, net income was $6,675 and the company paid dividends of $4,535. The company also repurchased $8,785 in equity. What was the cash flow to stockholders for the year?

$13,320 (Cash flow to stockholders = $4,535 + 8,785 = $13,320)

At the beginning of the year, Vendors, Incorporated, had owners' equity of $51,410. During the year, net income was $7,550 and the company paid dividends of $5,010. The company also repurchased $9,510 in equity. What was the cash flow to stockholders for the year?

$14,520 (Cash flow to stockholders = $5,010 + 9,510 = $14,520)

The appropriate discount rate for the following cash flows is 9 percent compounded quarterly. Year. Cash Flow 1. 920 2. 1000 3 0 4 1590

$2,792.33 EAR = [1 + (APR/m)]^m - 1 EAR = [1 + (.09/4)]^4 - 1 EAR = .0931, or 9.31% PV = $920/1.0931 + $1,000/1.0931^2 + $1,590/1.0931^4 PV = $2,792.33

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

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

The Maybe Pay Life Insurance Company is trying to sell you an investment policy that will pay you and your heirs $23,000 per year forever. If the required return on this investment is 5.3 percent, how much will you pay for the policy?

$433,962.26 PV = C/r PV = $23,000/.053 PV = $433,962.26

You have just received notification that you have won the $3 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100th birthday (assuming you're around to collect), 61 years from now. What is the present value of your windfall if the appropriate discount rate is 11 percent?

$5,157.27 PV = FV/(1 + r)^t PV = $3,000,000/(1.11)^61 PV = $5,157.27

Today, your dream car costs $54,500. You feel that the price of the car will increase at an annual rate 2.4 percent. If you plan to wait 4 years to buy the car, how much will it cost at that time?

$59,923.38 FV = $54,500 × 1.024^4 = $59,923.38

What is the future value of $1,700 in 20 years at an APR of 7 percent compounded semiannually?

$6,730.74 FV = PV(1 + r)^t FV = $1,700[1 + (.070/2)]^(20(2)) FV = $6,730.74

You want to have $10,000 in 6 years for a dream vacation. If you can earn an interest rate of .5 percent per month, how much will you have to deposit today?

$6,983.02 PV = $10,000/1.005^(6×12) = $6,983.02

The Maybe Pay Life Insurance Company is trying to sell you an investment policy that will pay you and your heirs $35,000 per year forever. If the required return on this investment is 5.3 percent, how much will you pay for the policy?

$660,377.36 PV = C/r PV = $35,000/.053 PV = $660,377.36

You want to have $62,000 in your savings account 7 years from now, and you're prepared to make equal annual deposits into the account at the end of each year. If the account pays 7.1 percent interest, what amount must you deposit each year?

$7,142.44 FVA = C {[(1 + r)^t − 1]/r} $62,000 = $C[(1.071^7 − 1)/.071] C = $62,000/8.68051 C = $7,142.44

Teddy's Pillows had beginning net fixed assets of $458 and ending net fixed assets of $524. Assets valued at $306 were sold during the year. Depreciation was $16. What is the amount of net capital spending?

$82 (Net capital spending = $524 (ending net fixed assets) + 16 (Depreciation) - 458 (beginning net fixed assets)Net capital spending = $82)

You are planning to make annual deposits of $3,720 into a retirement account that pays 9 percent interest compounded monthly. How large will your account balance be in 35 years?

$874,944.05 EAR = [1 + (APR/m)]^m − 1 EAR = [1 + (.09/12)]^12 − 1 EAR = .0938, or 9.38%

You have just received notification that you have won the $2.5 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100th birthday (assuming you're around to collect), 73 years from now. What is the present value of your windfall if the appropriate discount rate is 8 percent?

$9,078.33 To find the PV of a lump sum, we use: PV = FV/(1 + r)^t PV = $2,500,000/(1.08)^73 PV = $9,078.33

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

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

Imprudential, Incorporated, has an unfunded pension liability of $550 million that must be paid in 21 years. To assess the value of the firm's stock, financial analysts want to discount this liability back to the present. If the relevant discount rate is 8.5 percent, what is the present value of this liability?

$99,160,381 PV = FV/(1 + r)^t PV = $550,000,000/(1.085)^21 PV = $99,160,381

Although appealing to more refined tastes, art as a collectible has not always performed so profitably. During 2003, Sotheby's sold the Edgar Degas bronze sculpture Petite Danseuse de Quatorze Ans at auction for a price of $10,331,500. Unfortunately for the previous owner, he had purchased it in 2000 at a price of $12,417,500. What was his annual rate of return on this sculpture?

-5.95% FV = PV(1 + r)^t Solving for r, we get: r = (FV/PV)^(1/t) - 1r = ($10,331,500/ $12,417,500)^(1/3) - 1r = −.0595, or -5.95% Notice that the interest rate is negative. This occurs when the FV is less than the PV.

The most recent census for a city indicated that there were 1,044,384 residents. The population of the city is expected to increase at an annual rate of 4.9 percent each year for the next 14 years. What will the population be at that time?

2,040,408 FV = 1,044,384 × 1.049^14 = 2,040,408

You expect to receive $11,000 at graduation in two years. You plan on investing it at 10 percent until you have $100,000. How long will you wait from now?

25.16 years FV = PV(1 + r)^t Solving for t, we get: t = ln(FV/PV)/ln(1 + r)^t = ln($100,000/$11,000)/ln(1.10) t = 23.16 So, the money must be invested for 23.16 years. However, you will not receive the money for another two years. From now, you'll wait: 2 years + 23.16 years = 25.16 years

You're trying to save to buy a new $190,000 Ferrari. You have $49,000 today that can be invested at your bank. The bank pays 4.5 percent annual interest on its accounts. How long will it be before you have enough to buy the car?

30.79 years FV = PV(1 + r)^t Solving for t, we get: t = ln(FV/PV)/ln(1 + r)t = ln ($190,000/$49,000)/ln 1.045 t = 30.79 years

According to the Census Bureau, in October 2016, the average house price in the United States was $27,858. 7 years earlier, the average price was $21,008. What was the annual increase in the price of the average house sold?

4.11% (FV = PV(1 + r)^t Solving for r, we get: r = (FV/PV)^(1/t) − 1r = ($27,858/$21,008)^(1/7) − 1 r = .0411, or 4.11%)

Maxxie purchased a tract of land for $30,500. Today, the same land is worth $41,800. How many years have passed if the price of the land has increased at an annual rate of 5.5 percent?

5.89 years $41,800 = $30,500(1.055)^t

You're prepared to make monthly payments of $370, beginning at the end of this month, into an account that pays 9 percent interest compounded monthly. How many payments will you have made when your account balance reaches $22,346?

50 FVA = $22,346 = $370[{[1 + (.09/12)]^t − 1 } / (.09/12)] 1.008^t = 1 + [($22,346)/($370)](.09/12) t = ln1.452959/ln1.008 t = 50.00 payments

You purchased a bond at a price of $5,000. In 30 years when the bond matures, the bond will be worth $25,000. It is exactly 24 years after you purchased the bond and you can sell the bond today for $16,000. If you hold the bond until it matures, what annual rate of return will you earn from today?

7.7% $25,000 = $16,000 × (1 + r)^6 r = ($25,000/$16,000)^(1/6) r = .077, or 7.7%

You want to borrow $100,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $2,200, but no more. Assuming monthly compounding, what is the highest rate you can afford on a 54-month APR loan?

7.76% PVA = $100,000 = $2,200[{1 - [1/(1 + r)^54]}/r] r = .647% APR = 12(.647%) APR = 7.76%

All else constant, which one of the following will result in the lowest present value of a lump sum?

8 percent interest for 10 years

Maxxie purchased a tract of land for $32,500. Today, the same land is worth $48,900. How many years have passed if the price of the land has increased at an annual rate of 5.1 percent?

8.21 years $48,900 = $32,500(1.051)^t t = 8.21 years

Assume the total cost of a college education will be $300,000 when your child enters college in 18 years. You presently have $71,000 to invest. What annual rate of interest must you earn on your investment to cover the cost of your child's college education?

8.34% (FV = PV(1 + r)^t Solving for r, we get: r = (FV/PV)^(1/t) - 1r = ($300,000/$71,000)^(1/18) - 1r = .0834, or 8.34%)

Big Dom's Pawn Shop charges an interest rate of 27.1 percent per month on loans to its customers. Like all lenders, Big Dom must report an APR to consumers. What rate should the shop report? What is the effective annual rate?

APR = 325.2% EAR = 1,677.24% APR = 12(27.1%) = 325.2% EAR = [1 + (APR/m)]^m − 1 EAR = (1 + .271)^12 − 1 EAR = 16.7724, or 1,677.24%

Big Dom's Pawn Shop charges an interest rate of 27.4 percent per month on loans to its customers. Like all lenders, Big Dom must report an APR to consumers What rate should the shop report? APR What is the effective annual rate? EAR

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

Andrew just calculated the present value of a $15,000 bonus he will receive next year. The interest rate he used in his calculation is referred to as the:

Discount Rate

Which one of the following describes a noncash item?

Expenses that do not consume cash

Which one of the following questions involves a capital structure decision?

How much debt should the firm incur to fund a project?

Your aunt has promised to give you $5,000 when you graduate from college. You expect to graduate three years from now. If you speed up your plans to enable you to graduate two years from now, the present value of the promised gift will:

Increase

Which one of the following is an expense for accounting purposes, but is not an operating cash flow for financial purposes?

Interest expense

Which one of the following is a primary market transaction?

Sale of a new share of stock from a corporation to an individual investor

Which one of the following questions involves a capital budgeting decision?

Should the firm purchase a new machine for the production line?