FIN 320 F Quiz answers for midterm

Coupon rate = ($22.50 ×2)/$1,000 = .0450, or 4.50 percent

A $1,000 face value bond is currently quoted at 100.8. The bond pays semiannual payments of $22.50 each and matures in six years. What is the coupon rate?

An employee has a claim on the cash flows of Martin's Machines. This claim is defined as a claim by one of the firm's:

stakeholders

An agency issue is most apt to develop when:

the control of a firm is separated from the firm's ownership.

PV = FV / (1 + r)t PV@10% = $1,030 / 1.10 + $850 / 1.102 + $1,460 / 1.103 + $1,820 / 1.104 = $3,978.85 PV@18% = $1,030 / 1.18 + $850 / 1.182 + $1,460 / 1.183 + $1,820 / 1.184 = $3,310.67 PV@24% = $1,030 / 1.24 + $850 / 1.242 + $1,460 / 1.243 + $1,820 / 1.244 = $2,919.02

15 !!! Eulis Co. has identified an investment project with the following cash flows. Year Cash Flow 1 $ 1,030 2 850 3 1,460 4 1,820

Stated Rate (APR) Number of Times Compounded Effective Rate (EAR) 8.25 % Quarterly 8.51 ± 1% % 17.75 Monthly 19.27 ± 1% % 14.25 Daily 15.31 ± 1% % 10.25 Semiannually 10.51 ± 1% %

17!!! Find the EAR in each of the following cases. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. Use 365 days in a year.)

paid out of net income.

Dividends are:

PV = $1,102.60 = PMT ×{1 - [1 / (1 + .0533)12]} / .0533 + $1,000 / (1 + .0533)12 PMT = $65.09 Coupon rate = $65.09 / $1,000 = .0651, or 6.51 percent

A 12-year, annual coupon bond is priced at $1,102.60. The bond has a $1,000 face value and a yield to maturity of 5.33 percent. What is the coupon rate?

terms of repayment. details of protective covenants. description of property used as security. total amount of the bond issue.

A bond's indenture agreement generally includes all of the following

After tax yield = .0665 ×(1 -.25) = .0499, or 4.99 percent

A corporate bond pays 6.65 percent interest. How much would a municipal bond have to pay to be equivalent to this on an after tax basis if you are in the 25 marginal percent tax bracket?

Addition to retained earnings = [($513,000 -406,800-43,800 -11,200)(1 -.33)] - $4,500 = Addition to retained earnings = $29,804

AV Sales has net revenue of $513,000 and costs of $406,800. The depreciation expense is $43,800,interest paid is $11,200, and dividends for the year are$4,500. The tax rate is 33 percent. What is the addition to retained earnings?

yield to maturity decreases.

All else held constant, the present value of a bond increases when the:

records expenses based on the matching principle.

An income statement prepared according to GAAP:

highest effective annual rate.

Assume all else is equal. When comparing savings accounts, you should select the account that has the:

Enter 4 × 4 .75% ±$3,500 N I/Y PV PMT FV Solve for $52,585.09

Beginning three months from now, you want to be able to withdraw $3,500 each quarter from your bank account to cover college expenses over the next four years. If the account pays .75 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? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Amount needed $ 52,585.09 ± 0.1%

Size, timing, and risk of future cash flows

Capital budgeting includes the evaluation of which of the following?

PV = ($11,000/1.12) + ($24,000/1.122) + ($36,000/1.123) = $54,578.17

Capstone Investments is considering a project that will produce cash inflows of $11,000 at the end of Year 1, $24,000 in Year 2, and $36,000 in Year 3. What is the present value of these cash inflows at a discount rate of 12 percent?

g =.0948- ($1.58/$18.53) = .0095, or .95 percent

Dry Dock Marina is expected to pay an annual dividend of $1.58 next year. The stock is selling for $18.53 a share and has a total return of 9.48 percent. What is the dividend growth rate?

To compute the initial loan amount, you must use a monthly interest rate.

Christie is buying a new car today and is paying a $500 cash down payment. She will finance the balance at 6.3 percent interest. Her loan requires 36 equal monthly payments of $450 each with the first payment due 30 days from today. Which one of the following statements is correct concerning this purchase?q

EAR = .189 = [1 + (APR/365)]365-1 APR = .1732, or 17.32 percent

City Loans wants to earn an effective annual return on its consumer loans of 18.9 percent per year. The bank applies daily compounding. What interest rate is the firm required by law to report to potential borrowers?

Ending long-term debt = $64,500 -16,300 + 4,100 + 11,000 = $63,300

Cornerstone Markets has beginning long-term debt of $64,500, which is the principal balance of a loan payable to Centre Bank. During the year, the company paid a total of $16,300 to the bank, including $4,100 of interest. The company also borrowed $11,000. What is the value of the ending long-term debt?

PV = $1,200,000 = $75,000 × (1 - {1 / [1 + (.0635 / 2)]t}) / (.0635 / 2) t = 22.69 semiannual periods Years = 22.69 / 2 = 11.35 years

Cromwell is acquiring some land for $1,200,000 in exchange for semiannual payments of $75,000 at an interest rate of 6.35 percent. How many years will it take Cromwell to pay for this purchase?

Here, we have a stock that pays no dividends for 20 years. Once the stock begins paying dividends, it will have the same dividends forever, a preferred stock. We value the stock at that point, using the preferred stock equation. It is important to remember that the price we find will be the price one year before the first dividend, so: P19 = D20 / R P19 = $20 / .0925 P19 = $216.22 The price of the stock today is simply the present value of the stock price in the future. We simply discount the future stock price at the required return. The price of the stock today will be: P0 = $216.22 / 1.092519 P0 = $40.26

E-Eyes.com has a new issue of preferred stock it calls 20/20 preferred. The stock will pay a $20 dividend per year, but the first dividend will not be paid until 20 years from today. If you require a return of 9.25 percent on this stock, how much should you pay today?

Current bond price $ 1,148.73 ± .1%

Harrison Co. issued 17-year bonds one year ago at a coupon rate of 6.8 percent. The bonds make semiannual payments. If the YTM on these bonds is 5.4 percent, what is the current dollar price assuming a $1,000 par value

P0 = ($1.62 × 1.021)/(.157-.021) = $12.16

Healthy Foods just paid its annual dividend of $1.62 a share. The firm recently announced that all future dividends will be increased by 2.1 percent annually. What is one share of this stock worth to you if you require a rate of return of 15.7 percent?

Net income = ($509,600 -448,150 -36,100 -12,400)(1 -.28) = $9,324

Holly Farms has sales of $509,600, costs of $448,150, depreciation expense of $36,100, and interest paid of $12,400. The tax rate is 28 percent. How much net income did the firm earn for the period?

$2 = $1 ×(1 + .064)t t = 11.17 years

How long will it take to double your savings if you earn 6.4 percent interest, compounded annually?

zero

If an investment is producing a return that is equal to the required return, the investment's net present value will be:

Investments

If you accept a job as a domestic security analyst for a brokerage firm, you are most likely working in which one of the following financial areas?

5B

In relation to bonds, which one of the following terms has the same meaning as the term "crossover"?

P0 = [$.20/(.12 -.015)] / (1 + .12)^5 = $1.08

JL Tools is a young start-up company. The company expects to pay its first dividend of $.20 a share in Year 6 with annual dividend increases of 1.5 percent thereafter. At a required return of 12 percent, what is the current share price?

interest on interest.

Jamie earned $14 in interest on her savings account last year. She has decided to leave the $14 in her account so that she can earn interest on the $14 this year. The interest earned on last year's interest earnings is called:

Net income = ($179,600 -138,200 -28,400 -14,900)(1 -.35) = -$1,235

Marcie's has sales of $179,600,depreciation of $14,900, costs of goods sold of $138,200, and other costs of $28,400. The tax rate is 35 percent. What is the net income?

future value

Marcos is investing $5 today at 7 percent interest so he can have $35 later. This $35 is referred to as the:

Cumulative

Mary owns 100 shares of stock. Each share entitles her to one vote per open seat on the board of directors. Assume there are three open seats in the current election and Mary casts all 300 of her votes for a single candidate. What is the term used to describe this type of voting?

generally callable.

Municipal bonds are:

Average tax rate = ($16,929 + 48)/$61,609 = .2756, or 27.56 percent

Neiger Flours owes $16,929 in taxes on taxable income of $61,509. If the firm earns $100 more in income, it will owe an additional $48 in taxes. What is the average tax rate on income of $61,609?

Which one of the following statements correctly applies to a sole proprietorship?

Obtaining additional equity is dependent on the owner's personal finances.

2-year, 7 percent coupon bonds.

Of these choices, a risk-adverse investor who prefers to minimize interest rate risk is most apt to invest in:

the cash that a firm generates from its normal business activities

Operating cash flow is defined as:

Which one of the following is included in the market value of a firm but not in the book value?

Reputation of the firm

Current assets = $5,200 + 26,400 + 53,300 = $84,900

Rooster's currently has $5,200 in cash. The company owes $31,700 to suppliers for merchandise and $41,500 to the bank for a long-term loan. Customers owe the company $26,400 for their purchases. The inventory has a book value of $53,300 and an estimated market value of $56,500. If the store compiled a balance sheet as of today, what would be the book value of the current assets?

PV = $1,023 = C ×{(1 - {1 / [1 + (.064 / 2)]27}) / (.064 / 2)} + $1,000 / [1 + ( .064 / 2)]27 C = $33.28 Coupon rate = ($33.28×2) / $1,000 Coupon rate = .0666, or 6.66 percent

Smiley Industrial Goods has $1,000 face value bonds on the market with semiannual interest payments, 13.5 years to maturity, and a market price of $1,023. At this price, the bonds yield 6.4 percent. What must be the coupon rate on these bonds?

The price of a share of preferred stock is the dividend divided by the required return. This is the same equation as the constant growth model, with a dividend growth rate of zero percent. Remember, most preferred stock pays a fixed dividend, so the growth rate is zero. This is a special case of the dividend growth model where the growth rate is zero, or the level perpetuity equation. Using this equation, we find the price per share of the preferred stock is: R = D / P0 R = $5.90 / $80.55 R = .0732, or 7.32%

Smiling Elephant, Inc., has an issue of preferred stock outstanding that pays a $5.90 dividend every year, in perpetuity. If this issue currently sells for $80.55 per share, what is the required return?

Kurt will have a larger account value than Stacey will.

Stacey deposits $5,000 into an account that pays 2 percent interest, compounded annually. At the same time, Kurt deposits $5,000 into an account paying 3.5 percent interest, compounded annually. At the end of three years:

($1.23) ×(1.08)4×(1.02)2

Sugar Cookies will pay an annual dividend of $1.23 a share next year. The firm expects to increase this dividend by 8 percent per year the following four years and then decrease the dividend growth to 2 percent annually thereafter. Which one of the following is the correct computation of the dividend for Year 7?

Dividend per share $ 2.88 ± 1% We know the stock has a required return of 9 percent, and the dividend and capital gains yield are equal, so: Dividend yield = 1/2(.09) Dividend yield = .045 = Capital gains yield Now we know both the dividend yield and capital gains yield. The dividend is simply the stock price times the dividend yield, so: D1 = .045($66.90) D1 = $3.01 This is the dividend next year. The question asks for the dividend this year. Using the relationship between the dividend this year and the dividend next year: D1 = D0(1 + g) We can solve for the dividend that was just paid: $3.01 = D0(1 + .045) D0 = $3.01 / 1.045 D0 = $2.88

Suppose you know that a company's stock currently sells for $66.90 per share and the required return on the stock is 9 percent. You also know that the total return on the stock is evenly divided between capital gains yield and dividend yield. If it's the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share?

R = $2.38/$52.60 = .0452, or 4.52 percent

Sweet Treats pays a constant annual dividend of $2.38 a share and currently sells for $52.60 a share. What is the rate of return?

Operating cash flow $ 622,500 ± .1% Explanation: The cash flow to creditors is the interest paid, minus any net new borrowing, so: Cash flow to creditors = Interest paid - Net new borrowing Cash flow to creditors = Interest paid - (LTDend - LTDbeg) Cash flow to creditors = $97,500 - ($1,650,000 - 1,435,000) Cash flow to creditors = -$117,500 The cash flow to stockholders is the dividends paid minus any new equity raised. So, the cash flow to stockholders is: (Note that APIS is the additional paid-in surplus.) Cash flow to stockholders = Dividends paid - Net new equity Cash flow to stockholders = Dividends paid - [(Commonend + APISend) - (Commonbeg + APISbeg)] Cash flow to stockholders = $152,000 - [($157,000 + 3,020,000) - ($147,000 + 2,720,000)] Cash flow to stockholders = -$158,000 We know that cash flow from assets is equal to cash flow to creditors plus cash flow to stockholders. So, cash flow from assets is: Cash flow from assets = Cash flow to creditors + Cash flow to stockholders Cash flow from assets = -$117,500 - 158,000 Cash flow from assets = -$275,500 We also know that cash flow from assets is equal to the operating cash flow minus the change in net working capital and the net capital spending. We can use this relationship to find the operating cash flow. Doing so, we find: Cash flow from assets = OCF - Change in NWC - Net capital spending -$275,500 = OCF - (-$132,000) - ($1,030,000) OCF = -$275,500 - 132,000 + 1,030,000 OCF = $622,500

The December 31, 2015, balance sheet of Schism, Inc., showed long-term debt of $1,435,000, $147,000 in the common stock account, and $2,720,000 in the additional paid-in surplus account. The December 31, 2016, balance sheet showed long-term debt of $1,650,000, $157,000 in the common stock account, and $3,020,000 in the additional paid-in surplus account. The 2016 income statement showed an interest expense of $97,500 and the company paid out $152,000 in cash dividends during 2016. The firm's net capital spending for 2016 was $1,030,000, and the firm reduced its net working capital investment by $132,000. What was the firm's 2016 operating cash flow, or OCF? (A negative answer should be indicated by a minus sign. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

The IRR is ($80,000 - $75,000)/$75,000 = 6.67% Calculating the IRR does not involve using the opportunity cost.

The Expresso Roast Corporation (ERC) is considering expanding its product lines by purchasing the Quick-Roast Coffee Company.. The company's founder is obscenely wealthy and will operate these lines for only one year before retiring and will therefore use only a one-year planning horizon. Quick-Roast Coffee has a cost today of $75,000 and is expected to produce cash benefits of $80,000 in one year. A major government study may come out later on this year declaring coffee drinking a major health risk, so this is a risky investment and ERC's CFO has recommended a risk premium of 15%. What is the IRR of this investment? Just enter the number and sign of your answer. Give your answer in percents (do not use the percent sign).

Quick-Roast's discount rate is the risk-free rate + the risk premium 4% + 15% = 19%. NPV = PVI - PVO = $80,000/(1.19) - $75,000 = $67,227 - $75,000 = -$7,773 This is not a wealth-increasing investment and should be rejected.

The Expresso Roast Corporation (ERC) is considering expanding its product lines. The company's founder is obscenely wealthy and will operate these lines for only one year before retiring and will therefore use only a one-year planning horizon. The first candidate for acquisition is Quick-Roast Coffee, which has a cost today of $75,000 and is expected to produce cash benefits of $80,000 in one year. A major government study may come out later on this year declaring coffee drinking a major health risk, so this is a risky investment and ERC's CFO has recommended a risk premium of 15%. All future cash benefits will occur at the end of the year. The rate of return on US T-Bills is 4%. What is the NPV of this investment? Do not enter "$" or comma: just enter the number and sign of your answer.

Dividends that are either constant or change annually at a constant rate

The constant growth model can be used to value the stock of firms that have which type(s) of dividends?

working capital

The daily financial operations of a firm are primarily controlled by managing the:

stock price decreases.

The dividend yield on a stock will increase if the:

yield to maturity.

The market-required rate of return on a bond that is held for its entire life is called the:

decreases as the required rate of return increases.

The net present value:

multiple rates of return.

The possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as:

repay bonds early either through purchases or calls.

The purpose of a bond sinking fund is to:

sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined.

The recognition principle states that:

inverse.

The relationship between the present value and the investment time period is best described as:

marginal tax rate.

The tax rate that determines the amount of tax that will be due on the next dollar of taxable income earned is called the:

alculator Solution: Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation. Enter 123 −$240 $1,580,000 N I/Y PV PMT FV Solve for 7.41% Enter 26 7.41% −$1,580,000 N I/Y PV PMT FV Solve for $10,134,638.01

U6 P7 In 1892, the first Green Jacket Golf Championship was held. The winner's prize money was $240. In 2015, the winner's check was $1,580,000. What was the annual percentage increase in the winner's check over this period? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Annual percentage 7.41 correct % If the winner's prize increases at the same rate, what will it be in 2041? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Prize money $ 10,134,963.40 correct

Price $ 9,537.91 ± .1%

Union Local School District has bonds outstanding with a coupon rate of 3.1 percent paid semiannually and 22 years to maturity. The yield to maturity on these bonds is 3.4 percent and the bonds have a par value of $10,000.

The Sarbanes-Oxley Act:

require the corporate officers to personally attest that the financial statements are a fair representation of the company's financial results.

cash management

Which one of the following functions should be assigned to the corporate treasurer rather than to the controller?

Limit cash dividends to $1 per share or less

Which one of the following might be included in a bond's list of negative covenants?

A decrease in the interest rate

Which one of the following will increase the present value of a lump sum future amount to be received in 15 years?

Cumulative preferred

Which type of stock pays a fixed dividend, receives first priority in dividend payment, and maintains the right to a dividend payment, even if that payment is deferred?

To sell bonds at par, the coupon rate must be set equal to the yield to maturity on comparable bonds, which in this case is 9.50 percent.

Whitts BBQ would like to issue some 10-year, semiannual coupon bonds at par. Comparable bonds have a current yield of 9.16 percent, an effective annual yield of 9.68 percent, and a yield to maturity of 9.50 percent. What coupon rate should Whitts BBQ set on its bonds?

Price $ 3,838.49 ± .1%

You find a zero coupon bond with a par value of $10,000 and 22 years to maturity. The yield to maturity on this bond is 4.4 percent. Assume semiannual compounding periods. What is the price of the bond?

Present value = $40,000/(1 + .056)4 = $32,166.54

You want to have $40,000 for a down payment on a house 4 years from now. If you can earn 5.6 percent, compounded annually on your savings, how much do you need to deposit today to reach your goal?

Future value = $10 ×(1 + .051)(2065-1949) = $3,205.64

Your coin collection contains ten 1949 silver dollars. If your grandparents purchased the coins for their face value when they were new, how much will your collection be worth when you retire in 2065, assuming the coins appreciate at an annual rate of 5.1 percent?

The potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict?

agency

he goal of financial management is to increase the:

current market value per share.

Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm's net working capital:

had to decrease

A sole proprietorship:

has its profits taxed as personal income.

Corporate shareholders:

have the ability to change the corporation's bylaws.

Financial leverage:

increases the potential return to the stockholders.

a corporation

is a legal entity separate from its owners.