FIN 320-Test 2
You have just won the lottery! You can either receive $5,000 a year for 15 years or $50,000 as a lump sum payment today. What is the interest rate on the annuity option?
5.56 percent
Joshua's Antiques has a total asset turnover rate of 1.2, an equity multiplier of 1.4, a profit margin of 5 percent, a retention ratio of 0.8, and total assets of $120,000. What is the sustainable growth rate?
7.20 percent
Today, Stacy is investing $26,000 at 6.0 percent, compounded annually, for 4 years. How much additional income could he earn if he had invested this amount at 7 percent, compounded annually?
$1,256.30 $100,000 = $50,000 × (1 + 0.055)t ; t = 12.95 years
You want to purchase a new condominium that costs $329,000. Your plan is to pay 20 percent down in cash and finance the balance over 25 years at 6.25 percent. What will be your monthly mortgage payment?
$1,736.25
If today is year 0, what is the future value of the following cash flows 10 years from now? Assume an interest rate of 7.8 percent per year. Year 2 8,500 Year 3 9,300 Year 6 7,100
$40,822.55
If you invest for a single period at an interest rate of r, your money will grow to ___ per dollar invested
(1+ r)
Suppose the present value is $100, the future value is 1,000 and t is 10 years. Which formula below is used to find the interest rate?
(1,000/100)^(1/10r) - 1
The Undergrounds Coffee Shop has total assets of $85,300 and an equity multiplier of 1.53. What is the debt-equity ratio?
0.53 EM = TA/TE or EM = 1+ Debt-equity ratio Debt-equity ratio = 1.53 - 1 = 0.53
Find the future value of an annuity of 100 per year for 10 years at 10 percent per year.
1,593.74
What is the debt-equity ratio for a company with 3.5 million in total assets and 1.4 million in equity?
1.50 (3.5-1.4)/ 1.4
The common stock of The Burger Hut is selling for $16.25 a share. The company has earnings per share of $0.42 and a book value per share of $9.28. What is the market-to-book ratio?
1.75 Market-to-book ratio = market value/book values = $16.25/$9.28 = 1.75
You agree to pay back 1,100 in 4 weeks for a 1,000 payday loan. Your annual percentage rate (APR) to two decimal places is ___%
130.00 [(1100/1000) - 1] x (52/4) (100)
Browning's, Inc. has a capital intensity ratio of 0.48, a profit margin of 4.80 percent, and a debt-equity ratio of 0.54. What is the firm's return on equity?
15.40 percent ROE = 0.048 × (1 / 0.48) × (1 + 0.54) = 15.40 percent
You have a loan with an APR of 14.7 percent with monthly compounding. What is the actual interest rate you are paying on this loan?
15.73 percent EAR = [1 + (0.147 /12)]12 - 1 = 15.73 percent
PayDay Loans is offering a special on one-year loans. The company will loan you $5,000 today in exchange for one payment of $5,900 one year from now. What is the APR on this loan?
18.00 percent
A firm had operating profit (EBIT) of 300,000 on sales of 500,000. Interest expense was 125,000 and taxes were 60,000. The company has a times interst earned ratio of
2.40 300,000/125,000
A new financial services company just opened in your town. To attract customers, it is offering a "9-11" loan special. The company will lend $9 today in exchange for a payment of $11 one year from today. What is the APR on this loan?
22.22 percent
If a firm's sales are growing at 5% per year, how long will it take for the firm's sales to triple?
22.5 years
You have $1,100 today and want to triple your money in 5 years. What interest rate must you earn if the interest is compounded annually?
24.57 percent $3,300 = $1,100 × (1 + r)5; r = 24.57 percent
Your grandparents just gave you a gift of $15,000. You are investing this money for 12 years at 6 percent simple interest. How much money will you have at the end of the 12 years?
25,800 Future value = $15,000 + ($15,000 × 0.06 × 12) = $25,800
A firm with a 26 percent return on equity earned ____ cents in profit for every one dollar in shareholders' equity
26
How long will it take 40 to grow to 240 at an interest rate of 6.53% compounded annually?
28.33 years
Alice has 20,000 in an account that pays 8% per year. Alice wants to withdraw equal amounts at the end of the next 10 years. How much will Alice receive each year?
2980.59
Which one of the following will increase the present value of a lump sum future amount? Assume the interest rate is a positive value and all interest is reinvested.
Decrease in the interest rate
A loan has an APR of 8.5 percent and an EAR of 8.5 percent. Given this, the loan must:
Charge interest annually
The process of accumulating interest in an investment over time to earn more interest is called
Compounding
Which of the following is the simplest form of loan?
a pure discount loan
The effective annual rate (EAR) takes into account the ___ of interest that occurs within a year
compounding
You just borrowed $3,000 from your bank and agreed to repay the interest on an annual basis and the principal at the end of three years. What type of loan did you obtain?
Interest only
Which one of the following is the maximum growth rate that a firm can achieve without any additional external financing?
Internal Growth rate
The present value of an annuity due is equal to the present value of a ___ annuity multiplied by (1 + r).
Ordinary
An interest rate expressed in terms of the interest payment made each period is called a
Stated or quoted interest rate
Alpha Co. has interest expense of 1.2 million, total assets of 84 million, sales of 76 million, long term debt of 16.4 million, and net income of 12.1 million. How will interest expense be recorded in the common-size income statement?
1.58% 1.2/76
In the future value factor for $1 invested for 5 years at 10% is ___, then the corresponding present value factor for $1 received in 5 years with a 10% discount rate is ___.
1.611; 0.6209
Smith Industries currently has $293,000 saved towards the purchase of a new $329,000 machine. How long does the firm need to wait to purchase this machine for cash if the firm does not save any more money and earns 6.50 percent on its savings?
1.84 years $329,000 = $293,000 × (1.065)t; t = 1.84 years
Which formula below represents a present value factor?
1/ (1+r) ^t
AD corporation has a ROE of 20% on total equity of 800,000. AD generated 1.6 million in sales on 2.7 million in assets. A DuPont decomposition of ROE shoes the 20% ROE is from a ____% profit margin
10 ROE= NI/SLS x SLS/TA x TA/CE
Vera's has earnings per share of $3 and dividends per share of 1.20. The stock sells for 30 a share. What is the PE ratio?
10 times 30/3
Alpha Star's net income is 300 on 2,000 of sales. The company has 5,000 in assets and equity of 3,000. The firm paid out 125 in cash dividends. What is the dividend payout ratio?
41.67%
Jake owes $3,400 on his credit card. He is not charging any additional purchases because he wants to get this debt paid in full. The card has an APR of 13.9 percent. How much longer will it take him to pay off this balance if he makes monthly payments of $50 rather than $60?
41.79 months
Delmont Movers has a profit margin of 6.2 percent and net income of $48,900. What is the common-size percentage for the cost of goods sold if that expense amounted to $379,000 for the year?
48.05 percent COGS common-size percentage = COGS/total assets = COGS/(net income/profit margin) = $379,000/($48,900/0.062) = 48.05 percent
Today, you deposit $2,400 in a bank account that pays 4 percent simple interest. How much interest will you earn over the next 5 years?
480.00 Interest = $2,400 × 0.04 × 5 = $480
Tom's Hardware has inventory of $318,000, equity of $421,800, total assets of $647,700, and sales of $687,400. What is the common-size percentage for the inventory account?
49.10 Inventory common-size percentage = inventory/total assets = $318,000/$647,700 = 49.10 percent
Galaxy Sales has sales of $746,700, cost of goods sold of $603,200, and inventory of $94,300. How long on average does it take the firm to sell its inventory?
57.06 days Inventory turnover = COGS/inventory = $603,200/$94,300 = 6.39661 Days' sales in inventory = 365/inventory turnover = 365/6.39661 = 57.06 days
AD Corporation had net income of 300,000 and paid out 125,000 in cash dividends to stockholders. The firm's retention ratio is ____?
58
Which one of the following has the highest effective annual rate?
6 percent compounded monthly
Sam wants to invest $5,000 for 5 years. Which one of the following rates will provide him with the largest future value?
7 percent interest, compounded annually
Turner's return on equity is 12 percent and its retention ratio is 60 percent. What is its sustainable growth rate?
7.76% (.12 * .60) / (1 - .12 * .60)
BC Corporation has net income of 176,000, sales of 1,982,000 and total assets of 2.24 million. What is the return on assets?
7.86% 176,000/ 2.24m
Jenny needs to borrow $16,000 for 3 years. The loan will be repaid in one lump sum at the end of the loan term. Which one of the following interest rates is best for Jenny?
8 percent simple interest
Last year, Benton Inc. had net income of 3.5 million and paid out 700,000 in cash dividends. If income this year is 4.1 million and the dividend payout ratio is held constant, how much will be paid in dividends?
820,000 4.1m (700,000 / 3.5m)
Friendly Skies Airline has earnings before interest and taxes of $21,680 and net income of $12,542. The tax rate is 35 percent. What is the times interest earned ratio?
9.09 Times interest earned ratio = EBIT/interest Interest paid is not given. Therefore, we have to deduce it based on the given information. According to the income statement: Net income = EBIT - interest - taxes Interest = EBIT - net income - taxes We do not have taxes, but know the tax rate. Therefore: net income = taxable income - (taxable income * tax rate) = taxable income*(1-tax rate) Because the unknown is taxable income: Taxable income = net income/(1-tax rate) Taxes = taxable income - net income Now plug in the tax amount: Interest = EBIT - net income - taxes = 21,680 - 12,542 - 6743.38 = 2,384.62 Times interest earned ratio = EBIT/interest = 21,680/2,384.62 = 9.09
Black Stone Industries has a return on equity of 14.10 percent and a debt-equity ratio of 0.53. What is the firm's return on assets?
9.22 percent ROA = 0.141 / (1 + 0.53) = 9.22 percent
The present value interest factor for an annuity with an interest rate of 8 percent per year over 20 years is ____.
9.8181 [1- (1/1.08^20)] / .08
Hughes Motors will sell you a $15,000 car for $380 a month for 48 months. What is the interest rate?
9.94 percent
How long will it take to double your savings if you earn 7.2 percent interest, compounded annually?
9.97 years $2 = $1 × (1 + 0.072)t; t = 9.97 years
Given an investment amount and a set rate of interest, the ___ the time period, the ___ the future value
longer; greater
Centre Bank pays 2.5 percent interest, compounded annually, on its savings accounts. Country Bank pays 2.5 percent simple interest on its savings accounts. You want to deposit sufficient funds today so that you will have $1,500 in your account 2 years from today. The amount you must deposit today:
will be greater if you invest with Country Bank.
Assume the total cost of a college education will be $285,000 when your child enters college in 22 years. You presently have $35,000 to invest. What annual rate of interest must you earn on your investment to cover the cost of your child's college education?
10.00 percent $285,000 = $35,000 × (1 + r)22; r = 10.00 percent
Today, you borrowed $22,000 at 10 percent interest. The loan is to be repaid in five equal annual payments. How much of the third payment will be interest?
$1,443.26 $22,000 = C × (1 - 1 / 1.105) / 0.10 = $5,803.54
Your grandparents would like to establish a trust fund that would pay annual payments to you and your heirs of $100,000 a year forever. How much do your parents need to deposit into this trust fund today to achieve their goal if the fund can earn 6 percent interest?
$1,666,666.67
Suppose Gallinger Corp. has the following characteristics: Shares outstanding: 1,000,000 Current share price: $10 Total debt: $1,000,000 Total cash: $500,000 Based on the formula above, what is the enterprise value of Gallinger Corp.?
$10,500,000 Enterprise value = total market value of stock + book value of all liabilities - cash = ($1,000,000 × $10) + $1,000,000 - $500,000 = $10,500,000
Today, you signed the papers for a 6-year pure discount loan with a 8 percent interest rate. If you have to repay $22,000 at the end of the loan term, how much cash did you receive today? Interest will compound annually.
$13,863.73 PV = $22,000 / 1.086 = $13,863.73
Travis invests $10,000 today into a retirement account. He expects to earn 8 percent, compounded annually, on his money for the next 26 years. After that, he wants to be more conservative, so only expects to earn 5 percent, compounded annually. How much money will he have in his account when he retires 38 years from now, assuming this is the only deposit he makes into the account?
$132,827.88 Future value = $10,000 × (1 + 0.08)26 × (1 + 0.05)(38 - 26) = $132,827.88
How much will you have saved at the end of 3 years if you save $4,400 at the end of each year for three years, compounded annually at 18 percent interest?
$15,718.56 FV = ($4,400 × 1.182) + ($4,400 × 1.181) + $4,400 = $15,718.56
How much money does Suzie need to have in her retirement savings account today if she wishes to withdraw $25,000 a year for 30 years? She expects to earn an average rate of return of 13 percent.
$187,391.34
Your parents spent $6,200 to buy 500 shares of stock in a new company 13 years ago. The stock has appreciated 9 percent per year on average. What is the current value of those 500 shares?
$19,007.99 Future value = $6,200 × (1 + 0.09)13 = $19,007.99
You just won a prize and will receive $2,400 two years from today. What is this prize worth to you today at a discount rate of 8.00 percent?
$2,057.61 PV $2,400 / 1.082 = $2,057.61
Rick is planning to invest the following amounts at 6 percent interest. How much money will he have saved at the end of year 3? Year 1 500 Year 2 800 Year 3 900
$2,309.80
You have $5,000 you want to invest for the next 45 years. You are offered an investment plan that will pay you 6 percent per year for the next 15 years and 10 percent per year for the last 30 years. How much will you have at the end of the 45 years? How much will you have if the investment plan pays you 10 percent per year for the first 15 years and 6 percent per year for the next 30 years?
$209,092.54; $119,959.94 Future value A = $5,000 × (1 + 0.06)15 × (1 + 0.10)30 = $209,092.54 Future value B = $5,000 × (1 + 0.10)15 × (1 + 0.06)30 = $119,959.94
Alfa Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $10,000 per year forever. If the required return on this investment is 4.75 percent, how much will you pay for the policy?
$210,526.32
Amish Bakery needs $210,000 today to fund a new project. The project will not produce any cash flows for two years and thus the firm agreed to a two-year, pure discount loan at 7.5 percent interest. How much will the firm owe on this loan at the time it must be repaid?
$242,681.25
You want to have $45,000 in cash to buy a car 4 years from today. You expect to earn 4.5 percent, compounded annually, on your savings. How much do you need to deposit today if this is the only money you save for this purpose?
$37,735.26 Present value = $45,000/(1 + 0.045)4 = $37,735.26
You will receive $5,900 a year for nineteen years with the first payment received today. What are these payments worth to you today at a discount rate of 17 percent, compounded annually?
$38,549.72 PV Annuity due = $5,900 × [(1 - 1 / 1.1719) / 0.17] × (1.17) = $38,549.72
Today, you have $3,464 in your savings account. How much will this account be worth 5 years from now if you earn 4.80 percent, compounded annually? Assume you do not deposit or withdraw any funds.
$4,379.09 FV = $3,464 × 1.0485 = $4,379.09
You grandmother has promised to give you $2,800 at the end of this year and $3,300 at the end of next year. What is this promise worth to you today at a discount rate of 17 percent?
$4,803.86 PV = ($2,800 / 1.17) + ($3,300 / 1.172) = $4,803.86
Mike's Place has total assets of $123,800, a debt-equity ratio of 0.75, and net income of $7,100. What is the return on equity?
10.04 percent Return on equity = net income/total equity Return on equity = ($7,100/$123,800) *(1 + 0.75) = 10.04 percent
The Inside Door has total debt of $78,600, total equity of $214,000, and a return on equity of 14.5 percent. What is the return on assets?
10.61 percent Return on assets = net income/total assets Total liabilities = 78,600 + 214,000 = 292,600 (we use this figure as total assets because on the balance sheet total liabilities equal total assets.) We are not given net income, but ROE = NI/TE and NI = ROE * TE Net income = 0.145*214,000 = 31,030 Return on assets = net income/total assets = 31,030/292,600 = 0.1061 or 10.61%
Westover Mills has a return on equity of 13.90 percent, an equity multiplier of 1.40, and a payout ratio of 30 percent. What is the firm's sustainable rate of growth?
10.78 percent Sustainable growth rate = [0.139 × (1 - 0.30)] / {1 - [0.139 × (1 - 0.30)]} = 10.78 percent
The Veggie Hut has net income of $26,400, total equity of $102,700, and total assets of $189,500. The dividend payout ratio is 0.30. What is the internal growth rate?
10.81 percent
Assume a 100 investment earns a stated interest rate of 10 percent, compounded monthly. What will be the investment value after one year?
101.11 FV= 100 x (1+ .10/12) ^ 12
You agree to repay 1,200 in 2 weeks for a 1,000 payday loan. What is your EAR assuming that there are 52 weeks in a year?
11,347.55% (1200/1000)^26 -1
The future value of $100 compounded for 50 years at 10% per year is
11,739.09
International Travel Services has net income of $48,400, total assets of $219,000, total equity of $154,800, and total sales of $411,700. What is the common-size percentage for the net income?
11.76 Percent Net income common-size percentage = net income/assets = $48,400/$411,700 = 11.76 percent
You want to invest an amount of money today and receive back twice that amount in the future. You expect to earn 6 percent interest. Approximately how long must you wait for your investment to double in value?
12 years Approximate time period = 72/6 = 12 years
Your aunt loaned you money at 1.00 percent interest per month. What is the APR of this loan?
12.00 percent
The Rainbow Company has total sales of $713,200 and a profit margin of 8.5 percent. Currently, the firm has 12,500 shares outstanding. What are the earnings per share?
$4.85 Earnings per share = net income/shares outstanding Net income = sales* profit margin Earnings per share = (0.085 * $713,200)/12,500 = $4.85
Precision Engineering invested $110,000 at 6.5 percent interest, compounded annually for 4 years. How much interest on interest did the company earn over this period of time?
2,911.30
If a company's balance sheet shows $400 in cash, 100 in inventory and 200 in current liabilities, its cash ratio is
2.0 400/200
BK Trucking has total equity of 25,380 and 1,500 shares outstanding. Its stock is currently selling at 38 dollars per share. What is the market-to-book ratio?
2.25 38/ (25,830/1,500)
A firm has an operating profit (EBIT) of 600 on sales of 1,000. Interest expense is 250 and taxes are 120. What is the times interest earned ratio?
2.40 600/250
Your grandfather started his own business 52 years ago. He opened a savings account at the end of his third month of business and contributed $x. Every three months since then, he faithfully saved another $x. His savings account has earned an average rate of 4.5 percent annually. Today, his account is valued at $364,209.11. How much did your grandfather save every three months?
$443.13
Slaughter Industries just signed a sales contract with a new customer. What is this contract worth as of the end of year 4 if the following payments will be received and the firm earns 6 percent on its savings? Year 1 84000 Year 2 113000 Year 3 125000 Year 4 130000
$489,512.14
What is the present value of an ordinary annuity that pays 100 per year for three years if the interest rate is 10 percent per year?
248.69 100{[1 - (1/(1.10)^3)]/.10}
If the quoted interest rate is 2% per month (12 months in a year), what is the EAR?
26.82% (1.02)^12 -1
Belk Department Store charges a daily rate of 0.01 percent on its store credit cards. What interest rate is the company required by law to report to potential customers?
36.50 percent
Days' sales in receivables is given by the following ratio:
365/ receivables turnover
Which of the following methods can be used to calculate present value?
An alegbraic formula, a time value of money table and a financial calculator
Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following terms?
Annuity
An annuity with payments beginning immediately rather than at the end of the period is called an ____.
Annuity due
Which of the following would a company wish to compare its ratios against?
Aspirant companies, peer companies, major competitors, its own historical ratios
Which one of the following qualifies as an annuity?
Auto loan payment
Liza donated money to her alma mater to establish a scholarship trust fund. How much did Liza contribute if the trust fund earns $65,500 in interest annually at a rate of 12.5 percent? Assume the entire interest earned is paid out in scholarships each year while the principal amount is never spent.
$524,000 PV = $65,500 / 0.125 = $524,000
Currently, you are earning an annual salary of $43,200. How much will your salary be 5 years from now if you receive annual raises of 4.6 percent?
$54,093.14 FV = $43,200 × 1.0465 = $54,093.14
Uptown Insurance offers an annuity due with semiannual payments for 25 years at 6 percent interest. The annuity costs $200,000 today. What is the amount of each annuity payment?
$7,546.70
If the appropriate discount rate for the following cash flows is 11.7 percent per year, what is the present value of the cash flows? Year 1 21,600 Year 2 25,900 Year 3 38,700 Year 4 16,200
$78,270.77
Travis United has net income of $13,280 for 2010. On the firm's common-size income statement for 2010, the net income is shown as 15.2 percent. What is the amount of the firm's sales for 2010?
$87,368 Sales = $13,280 / 0.152 = $87,368
A recent alumnus of your university gifted money to the school to fund annual scholarships for students in need. The school expects to earn an average rate of return of 5.5 percent and distribute $50,000 annually in scholarships. What was the amount of the gift?
$909,090.91
Which of the following is the general formula for EAR when m is the number of times interest is compounded in a year?
(1 + quoted rate/ m) ^ m -1
Which of the following is the correct representation of the cash coverage ratio?
(EBIT + deprecitation) / interest expense
What is the formula for computing the internal growth rate?
(ROA x b)/ (1- ROE x b)
What is the formula for computing a firm's sustainable growth rate?
(ROE x b)/ ( 1 - ROE x b)
True Blue Transport has a current stock price of $27. For the past year, the company had net income of $2,187,400, total equity of $13,892,300, sales of $26,511,000, and 2.5 million shares outstanding. What is the market-to-book ratio?
4.86 Market-to-book = Price per share/book value per share Price per share = $27 Book value per share = TE/shares outstanding = $13,892,300/2,500,000 = $5.55692 Market-to-book = $27/$5.55692 = 4.86
The present value interest factor for $1 at 5% compounded annually for 5 years
.7835 1/ (1.05)^5
Which of the following is an incorrect keystroke in a financial calculator for calculating the future value of 100 dollars today for 2 years at 10% per year?
0.10 I/Y
Gently Used Goods has cash of $2,950, inventory of $28,470, fixed assets of $9,860, accounts payable of $11,900, and accounts receivable of $4,660. What is the cash ratio?
0.25 Cash ratio = cash/accounts payable = $2,950/$11,900 = 0.25
Tressler Dry Cleaners has inventory of $1,700, accounts payable of $4,200, cash of $1,950, and accounts receivable of $3,680. What is the cash ratio?
0.46 Cash ratio = cash/accounts payable = $1,950/$4,200 = 0.46
The debt to equity ratio for a company with a 1 million in total debt and 2 million in equity is
0.50
A firm has a profit margin of 5.50 percent, a return on assets of 10.90 percent, and total sales of $401,000. What is the capital intensity ratio?
0.50 Net income = 0.055 × $401,000 = $22,055 Total assets = $22,055 / 0.109 = $202,339.45 Capital intensity ratio = $202,339.45 / $401,000 = 0.50
AD Corporation has a return on equity of 20% on total equity of 800,000. AD generated of 1.6 million in sales on 2.7 million in assets. A DuPont decomposition of ROE shoes the 20% return on equity is from a(n) ____ total asset turnover ratio.
0.59 TAT = SLS/TA
Wilson's Realty has total assets of $46,800, net fixed assets of $37,400, current liabilities of $6,100, and long-term liabilities of $24,600. What is the total debt ratio?
0.66 Total debt ratio = total debt/total assets = (current liabilities + long-term liabilities)/total assets = ($6,100 + $24,600)/$46,800 = 0.66
The future value of an annuity due of 100 per year for 10 years at 10% per year is:
1,753.12 100[(1.10^10 -1)/ .10] [1.10]
To calculate the future value of 100 invested for t years at r interst rate, you enter the present value in your calculator as a negative number. Why?
Because the 100 is an outflow from you which should be negative.
The major downside of using financial statements for analysis is that the data contained in them is based on
Book values and historical values
Tom earned $120 in interest on his savings account last year. Tom has decided to leave the $120 in his account so that he can earn interest on the $120 this year. This process of earning interest on prior interest earnings is called:
Compounding
A perpetuity in Canada is frequently referred to as which one of the following?
Consul
Which of the following are real-world examples of annuities?
preferred stock dividends, mortgages, pensions and leases
The current value of a future cash flow discounted as the appropriate rate is called the ___ value
present
With discounting, the resulting value is called the ___ value; while with compounding the result is called the ___ value
present; future
The original amount of the loan is called the
principal
Todd will be receiving a $10,000 bonus one year from now. The process of determining how much that bonus is worth today is called:
Discounting
Based on ROE and the sustainable growth rate, which of the following factors affect a firm's ability to sustain growth?
Dividend policy, profit margin and financial policy
Which one of the following is the correct formula for the future value of $500 invested today at 7 percent interest for 8 years?
FV = $500 (1 + 0.07)8
When entering the interest rate in a financial calculator, you should key in the interest rate as a decimal
False, the calculator is already programmed to interpret 10 as 10%
The inventory turnover ratios for Proctor and Gamble over the past three years are 5.09, 5.72, and 5.92 times respectively. Explaining the upward trend in the inventory turnover ratio requires:
Further investigation
The amount an investment is worth after one or more periods is called the ___ value.
Future
Martha is investing $5 today at 6 percent interest so she can have $10 later. The $10 is referred to as the:
Future Value
What will happen to the current ratio if current assets increase, while everything else remains unchanged?
It will increase
The sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions?
No new equity and a constant debt-equity ratio
If you want to know how much you need to invest today at 12% compounded annually in order to have 4,000 in five years, you will need to find a ___ value.
Present
Sue needs to invest $3,626 today in order for her savings account to be worth $5,000 six years from now. Which one of the following terms refers to the $3,626?
Present value
When entering variables in an excel function the "sign convention" can be critical to achieving a correct answer. The sign convention says that outflows are negative values; inflows are positive values. For which variables is this a consideration?
Present value, payment and future value
Return on assets (ROA) is a measure of ___
Profitability
Return on equity (ROE) is a measure of ____.
Profitability
Which of the following can be determined using the future value approach to compound growth developed in this chapter?
Sales, population and dividend growth
___ financial statements provide for comparison of firms that differ in size
Standardized
Which one of the following statements is correct?
The EAR, rather than the APR, should be used to compare both investment and loan options.
What does it mean when a firm has a days' sales in receivables of 45?
The firm collects its credit sales in 45 days on average
Which of the following create problems with financial statement analysis
The firm or its competitors are global companies, operate under different regulatory environments, are conglomerates
What is the primary difference between time value of money data entries in your calculator and in a spreadsheet function?
The interest rate in your calculator is entered as a whole number while in the spreadsheet function it is entered as a decimal
Which one of the following statements is correct?
The more frequent the compounding, the higher the EAR.
What is the impact on the total asset turnover ratio if sales increase significantly while there is no change in any of the other variables?
The total asset turnover ratio will increase
Which one of the following features distinguishes an ordinary annuity from an annuity due?
Timing of the annuity payments
SIC codes classify firms based on which one of the following?
business operations
When comparing savings accounts, you should select the account that has the:
highest effective annual rate
The information needed to compute the profit margin can be found on the ___.
income statement
If sales increase while there is no change in accounts receivable, the receivables turnover ratio will
increase
A perpetuity is a constant stream of cash flows for a ___ period of time
infinite
Time value of money tables are not as common as they once were because
it is easier to use inexpensive financial calculators instead and they are available for only a relatively small number of interest rates
If a company has inventory, the quick ratio will always be ___ the current ratio
less than
An ordinary annuity consists of a ___ stream of cash flows for a fixed period of time
level
The price-earnings ratio is a ___ ratio.
market value
The concept of the time value of money is based on the priciple that a dollar today is worth ___ a dollar promised at some time in the future
more than
At the end of this month, Les will start saving $150 a month for retirement through his company's retirement plan. His employer will contribute an additional $0.50 for every $1.00 that he saves. If he is employed by this firm for 30 more years and earns an average of 10.5 percent on his retirement savings, how much will Les have in his retirement account 30 years from now?
$566,190.22
Ten years from now, you will be inheriting $100,000. What is this inheritance worth to you today if you can earn 5.5 percent interest, compounded annually?
$58,543.06 Present value = $100,000/(1 + 0.055)10 = $58,543.06
Angela has just received an insurance settlement of $35,000. She wants to save this money until her daughter goes to college. If she can earn an average of 5.5 percent, compounded annually, how much will she have saved when her daughter enters college 10 years from now?
$59,785.06 Future value = $10,000 × (1 + 0.08)26 × (1 + 0.05)(38 - 26) = $132,827.88
Using a time value of money table, what is the future value interest factor for 10 percent for 2 years?
1.21
Tally Ho Inn has annual sales of $737,000. Earnings before interest and taxes is equal to 21 percent of sales. For the period, the firm paid $7,900 in interest. What is the profit margin if the tax rate is 35 percent?
12.95 percent Profit margin = net income/sales Net income is not provided, but we can calculate it: Net income = (sales*0.21) - interest - taxes = [(0.21 * $737,000) - $7,900] *(1-0.35) = 95,465.5 Profit margin = net income/sales = 95,465.5/$737,000 = 0.1295 or 12.95%
You just won $50,000 and deposited your winnings into an account that pays 5.5 percent interest, compounded annually. How long will you have to wait until your winnings are worth $100,000?
12.95 years $100,000 = $50,000 × (1 + 0.055)t ; t = 12.95 years
The future vale of a $100 investment in 4 years compounded at 8% per year equals
136.05
A credit card has a stated interest rate of 14.56 percent. What is the APR if interest is compounded monthly?
14.56 percent
PayDay Loans wants to earn an effective annual return on its consumer loans of 18 percent per year. The bank uses daily compounding on its loans. What interest rate is the bank required by law to report to potential borrowers?
16.56 percent
A credit card charges 1.5 percent interest each month. What is the EAR?
19.56% (1.015)^12 -1
Ben invested $5,000 twenty years ago with an insurance company that has paid him 5 percent simple interest on his funds. Charles invested $5,000 twenty years ago in a fund that has paid him 5 percent interest, compounded annually. How much more interest has Charles earned than Ben over the past 20 years?
3,266.49 Interest on interest = Total earnings with compounding interest - total earnings with simple interest = [$110,000 × (1 + 0.065)4 ] - [$110,000 + ($110,000 × 0.065 × 4)] = $2,911.30
AD corporation has a return on equity of 20% on total equity of 800,000. AD generated 1.6 million in sales on 2.7 million in assets. A DuPont decomposition of ROE shoes the 20% return on equity is from a ____equity multiplier
3.38
AD Corporation's return on assets is 14? and the firm retains 40? of all its earnings. AD's internal growth rate is ____%
5.93 (.14 x .40) / (1 - .14 x .40)
Suppose you borrow 1,000 at 5% interest per year for 10 years. The loan is an interest only loan so each year you will pay ___
50 5% x 1,000
What is the present value of the following cash flow stream discounted at 6%? 100 in years 1 and 2 followed by 200 in years 3 and 4
509.68
Kato's Corner has an average inventory balance of $41,000, total sales of $363,600, and cost of goods sold of $288,700. How long on average does it take the firm to sell its inventory?
51.84 days Inventory turnover = $288,700/ $41,000 = 7.04146. Days' sales in inventory = 365 / 7.04146= 51.84 days.
A firm has $42,900 in receivables and $211,800 in total assets. The total asset turnover rate is 1.40 and the profit margin is 5.2 percent. How long on average does it take the firm to collect its receivables?
52.81 days Accounts receivable turnover = sales/account receivables Note that sales are not given, but we can calculate it as: Sales = total assets * total asset turnover Accounts receivable turnover = ($211,800 × 1.40)/$42,900 = 6.9119 Days' sales in receivables = 365/receivables turnover = 365/6.9119 = 52.81 days
You want to borrow $40,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $775, but no more. Assuming monthly compounding, what is the highest rate you can afford on a 60-month APR loan?
6.1 percent
Chubb's Market has a return on equity of 17.85 percent, an equity multiplier of 1.70, and a payout ratio of 45 percent. What is the firm's internal rate of growth?
6.13 percent Return on assets = 0.1785 / 1.70 = 10.50 percent. Internal growth rate = [0.105 × (1 - 0.45)] / {1 - [0.105 × (1 - 0.45)]} = 6.13 percent.
You just received a loan offer from Friendly Loans. The company is offering you $5,000 at 14.3 percent interest. The monthly payment is only $100. If you accept this offer, how long will it take you to pay off the loan?
6.37 years
Which of the following is a perpetuity?
A constant stream of cash flows forever
Adell Furniture has a profit margin of 8.2 percent and a dividend payout ratio of 40 percent. What is the plowback ratio?
60.00 percent Plowback ratio = addition to retained earnings/net income, but also Dividend payout ratio = 1 - b b = 1 - dividend payout ratio = 1- 0.40 = 0.60
You invest 500 at 10 percent interest per annum. At the end of 2 years with simple interest you will have ___ and with compound interest you will have ___
600;605
What is the future value of 100 deposited each year for 2 years beginning next year, then 200 deposited for the next two years if you can earn 6% per year?
643.46
Rock construction has current assets of 45 million, total liabilities and equity of 67 million, and sales of 59 million. How would current assets be expressed on a common-size balance sheet?
67% 45m/67m
What is the present value of an annuity that makes payments of 100 per year for ten years if the first payment is made immediately and the discount rate is 10 percent per year?
675.90 100[(1- 1/1.10^10) / .10] [1.10]
Today, you invested $3,900 in a retirement account. What annual rate of return will you have to earn if your account is to be worth $54,000 when you retire 33 years from now? Assume you make no further deposits into this account.
8.29 percent $54,000 = $3,900 × (1 + r)33; r = 8.29 percent
Overnight Trucking recently purchased a new truck costing $150,800. The firm financed this purchase at 8.6 percent interest with monthly payments of $2,100. How many years will it take the firm to pay off this debt?
8.44 years
Suppose you paid a 1,200 loan off by paying 400 in principal each ear plus 10% yearly interest. How much is the second interest payment?
80
BC Corporation had net income of $3.5 million and paid out 700,000 in cash dividends to stockholders. Their retention ratio is ___%.
80 Retention ratio = (3,500,000 - 700,000) / 3,500,000
Which one of the following statements is true concerning annuities?
All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.
Which of the following create problems when conducting financial statement analysis?
All of the above are common problems
Bill just financed a used car through his credit union. His loan requires payments of $275 a month for five years. Assuming that all payments are paid on time, his last payment will pay off the loan in full. What type of loan does Bill have?
Amortized
Which of the following processes can be used to calculate the future value of multiple cash flows?
Calcultate the FV of each cash flow first and then add them up. Compound the accumulated balance forward one year at a time
Which of the following items are used to compute the current ratio?
Cash and accounts payable
How is the inventory turnover ratio computed?
Cost of goods sold/ Inventory
Which one of the following will decrease the present value of an annuity?
Decrease in the annuity payment
The interest rate used to compute the present value of a future cash flow is called the:
Discount rate
Computing the present value of a future cash flow to determine what that cash flow is worth today is called:
Discounted cash flow valuation
Which of the following is the appropriate Excel function to convert a quoted rate of 12% compounded quarterly to an EAR?
EFFECT (0.12,4)
Which one of the following is a measure of long-term solvency?
Equity Multiplier
The ratios that are based on financial statement values and used for comparison purposes are called:
Financial Ratios
Which of the following are the primary ways used to perform financial calculations today?
Financial calculator and spreadsheet functions
Long-term solvency ratios are also known as:
Financial leverage ratios
Which of the following are traditional financial ratio categories
Financial leverage, turnover, profitability ratios
Which of the following is not a way to amortize a loan?
Fixed interest payments only
If the interest rate is greater than zero, the value of an annuity due is always ___ an ordinary annuity
Greater than
Given an internal growth rate of 3 percent, a firm can ___
Grow by 3 percent or less without any additional external financing
More frequent compounding leads to:
Higher EARs
The major downside of using financial statements for analyses is that the data contained in them is based on
Historical and book values
Which of the following will increase the future value of a lump sum investment? I. Decreasing the interest rate II. Increasing the interest rate III. Increasing the time period IV. Decreasing the amount of the lump sum investment
II and III only
Which of the following will decrease the future value of a lump sum investment made today assuming that all interest is reinvested? Assume the interest rate is a positive value. I. Increase in the interest rate II. Decrease in the lump sum amount III. Increase in the investment time period IV. Decrease in the investment time period
II and IV only
Sara is investing $1,000 today. Which one of the following will increase the future value of that amount?
Increasing the interest rate
Jamie earned $180 in interest on her savings account last year. She has decided to leave the $180 in her account so that she can earn interest on the $180 this year. The interest Jamie earns this year on this $180 is referred to as:
Interest on interest
Whenever ___ information is available, it should be used instead of accounting data
Market
How is the market-to-book ratio measured?
Market value per share/ book value per share
Based on the DuPont Identity, an increase in sales, all else held equal, ____ ROE
May increase or decrease May not change
Which one of the following is the correct equation for computing return on assets?
Net income/ total assets
Which of the following is the correct equation for return on equity?
Net income/ total equity
Which one of the following is the correct formula for computing the present value of $600 to be received in 6 years? The discount rate is 7 percent.
PV = $600/(1 + 0.07)6
Suppose you expect to receive 5,000 in one year, 4,300 in two years and an additional 5,000 in three years. Match each present value amount to the corresponding cash flow assuming a discount rate of 17%.
PV of year 1: 5,000/1.17= 4,273.50 PV of year 2: 4,300/ (1.17) ^ 2 = 3,141.21 PV of year 3: 5,000 / (1.17)^ 3 = 3,121.85
Which of the following are ways to amortize a loan?
Pay principal and interest every period in a fixed payment. Pay the interest each period plus some fixed amount of the principal
The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships can best be described by which one of the following terms?
Perpetuity
Chandler Tire Co. is trying to decide which one of two projects it should accept. Both projects have the same start-up costs. Project 1 will produce annual cash flows of $52,000 a year for six years. Project 2 will produce cash flows of $48,000 a year for eight years. The company requires a 15 percent rate of return. Which project should the company select and why?
Project 2, because the present value of the cash inflows exceeds those of Project 1 by $18,598.33
If you borrow 15,000 today at 5% annual interest to be repaid in one year as a lump sum, this is termed a
Pure discount loan
Which one of the following is the abbreviation for the U.S. government coding system that classifies a firm by its specific type of business operations?
SIC
The profit margin is equal to net income divided by
Sales
You are comparing three investments, all of which pay $100 a month and have an 8 percent interest rate. One is ordinary annuity, one is an annuity due, and the third investment is a perpetuity. Which one of the following statements is correct given these three investment options?
The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due.
For a given time period (t) and interest rate (r), the present value factor is ___ the future value factor
The reciprocal of and 1 divided by
In the excel setup of a loan amortization problem, which of the following occurs?
To find the principal payment each month, you subtract the dollar interest payment from the fixed payment. The payment is found with =PMT (rate, nper, -pv, 0)
Why is a dollar received today worth more than a dollar received in the future?
Today's dollar can be reinvested, yielding a greater amount in the future and inflation will make a dollar in the future worth less than a dollar today
Kelso's Pharmacy generates $2 in sales for every $1 the firm has invested in total assets. Which one of the following ratios would reflect this relationship?
Total asset turnover
A common-size balance sheet expresses accounts as a percentage of ___
Total assets
Common-size balance sheets express each account value as a percentage of which one of the following?
Total assets
Currently, you are expecting a payment of $5,000 three years from today and you have a discount rate of 6.5 percent. Which one of the following will increase the present value of this payment, all else held constant?
decreasing the discount rate to 6 percent
Calculating the present value of a future cash flow to determine its worth today is commonly called ____ valuation
discounted cash flow
Anna pays 1.5 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded only annually, the rate would be referred to as the:
effective annual rate
Assume interest is compounded monthly. The ___ annual rate will express this rate as though it were compounded annually
effective
Financial statement analysis is primarily "management by ____"
exception
With typical interest-only loans, the entire principal is:
repaid at some point in the future
Which of the following could not be evaluated as annuities?
tips to a waiter and monthly electric bills
Because of ___ and ___, interest rates are often quoted in many different ways
tradition; legislation
A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account:
will be greater than 12.9 percent
