FIN 600 Test 1
marginal tax rate
The percentage of next dollar you earn that must be paid in taxes is defined as the
Equal payments paid at regular intervals over a stated period of time
An ordinary annuity is best defined by which one of the following?
Sales - COGS - Interest Expense - Depreciation(1-.35) $82,550
Andre's Bakery has sales of $687,000 with costs of $492,000. Interest Expense is $26,000 and depreciation is $42,000. Tax rate is 35%. What is net income?
OCF = EBIT + Depreciation - Tax $309,076 EBIT= $1,349,800 - $903,500 - $42,700 = $403,600 Tax= $403,600 x .34 = $137,224 OCF= $403,600 + $42,700 - $137,224 = $309,07
Crandall Oil has total sales of $1,349,800 and costs of $903,500. Depreciation is $42,700 and tax rate is 34%. The firm does not have any interest expense. What is the operating cash flow?
Market Price Current Yield = Annual Interest / Market Price
Current yield is defined as the annual interest on a bond divided by what?
42.10 = 1.46 / R - 0.042 ; R = 7.67%
Denver Shoppes will pay an annual dividend of $1.46 a share next year with future dividends increasing by 4.2 percent annually. What is the market rate of return if the stock is currently selling for $42.10 a share?
reduces both taxes and net income
Depreciation
Inventory (520) + accounts receivable (190) + cash (70) = $780
A firm has $520 in inventory, $1,860 in fixed assets, $190 in accounts receivable, $210 in accounts payable, and $70 in cash. What are current assets?
EPS = 126,000/160,000 = $0.79 Price per Share = $0.79 x 18.7 = 14.773 Market-to-Book ratio = $14.773/$7.92 = 1.87
A firm has 160,000 shares of stock outstanding, sales of $1.94 million, net income of $126,400, a price-earnings ratio of 18.7, and a book value per share of $7.92. What is the market-to-book ratio
Cash Coverage ratio = (68,400 - 42,900)/2100 = 12.14
A firm has sales of $68,400, costs of $42,900, interest paid of $2,100, and depreciation of $6,500. Tax Rate = 34%. What is the value of the cash coverage ratio?
based on historical cost
The book value of a firm is
Du Pont identity
The formula which breaks down the return on equity into three component parts is referred to as?
Equity Multiplier Profit Margin Total Asset Turnover
Which one of the following accurately describes the three parts of the Du Pont identity?
1. Invest in a different account paying a higher rate of interest. 2. Retire later (increase the maturity)
Which of the following will reduce the amount that must deposit today if you are to have your desired $1 million on the day you retire.
n = 3 i = 5.65 FV = 10,400,000 PMT = solve
. Holiday Tours (HT) has an employment contract with its newly hired CEO. The contract requires a lump sum payment of $10.4 million be paid to the CEO upon the successful completion of her first three years of service. HT wants to set aside an equal amount of money at the end of each year to cover this anticipated cash outflow and will earn 5.65 percent on the funds. How much must HT set aside each year for this purpose?
585,000 - 273,000 - 71,000 - 38,000(1-.35) = $131,950
2. Lifeline, Inc. has sales of $585,000, costs of $273,000, depreciation expense of $71,000, interest expense of $38,000, and a tax rate of 35%. What is the net income for this firm?
Callable
A bond that can be paid off early at the issuer's discretion is referred to as being?
bearer form
A bond that is payable to whomever has physical possession of the bond is said to be in ..
General Partnership
A business formed by two or more individuals who each have unlimited eliability for all the firm's business debts is called a
Cannot be called during a certain period of time
A call-protected bond is a bond that:
Sales
A common-size income statement is an accounting statement that expressed all of a firm's expenses as a percentage of
The debt-equity ratio is 0.42. If total debt is $42 and total equity is $100, then total assets are $142. Total debt ratio = 42/142 = 0.30
A firm has debt-equity ratio of 0.42. What is the total debt ratio?
Total Asset Turnover = sales/(NWC + net fixed assets + current liabilities) $1.08
A firm has net working capital of $2,715, net fixed assets of $22,407, sales of $31,350, and current liabilities of $3,908. How many dollars worth of dales are generated from every $1 in total assets?
Current Assets = Total Assets - Fixed Assets Net Working Capital = Current Assets - Current Liabilities 2,320 = 6,230 - 3,910 640 = 2,320 - CL. CA = 2,320 CL = 1,680 CL + LTD = Total Liabilities 5,860 = Total Liabilities
A firm has net working capital of $640. LT Debt is $4,180, total assets are $6,230, and fixed assets are $3910. What are total liabilities?
Inventory / (Current Assets + Net Fixed Assets) 310 / (720 + 1,600) 13.36%
A firm has sales $2,190, net income of $174, net fixed assets of $1,600, and current assets of $720. The firm has $310 in inventory. What is the common-size statement value of inventory?
Total Equity = 4,850/0.57 = $8,508.77 Total Assets = 4,850 + 8,508.77 = 13,358.77
A firm has total debt of $4,850 and a debt-equity ratio of 0.57. What is the value of the total assets?
(1+Nominal) = (1+inflation)(1+real rate) (1.0528)/(1.041) = 1.13%
Getty Markets has bonds outstanding that pay a 5 percent semiannual coupon, have a 5.28 percent yield to maturity, and a face value of $1,000. The current rate of inflation is 4.1 percent. What is the real rate of return on these bonds?
P4 = 3.10(1.042)^5 / (0.16-0.042) = 32.27
Hightower Pharmacy just paid a $3.10 annual dividend. The company has a policy of increasing the dividend by 4.2 percent annually. You would like to purchase 100 shares of stock in this firm but realize that you will not have the funds to do so for another four years. If you require a 16 percent rate of return, how much will you be willing to pay per share for the 100 shares when you can afford to make this investment?
CFFA = OCF - NCS - Change Net Working Capital NCS = Change Fixed Assets + Depreciation NCS = 1,229 OCF= 3,396 + 1,611 - 740 = 4,267 CFFA = 4,267 - 1,229 - 1,306 CFFA = $1,732
What is the cash flow from assets for 2011?
Annual Percentage Rate
What is the interest rate charged per period multiplied by the number of periods per year called?
Balance Sheet
Which is the financial statement that shows the accounting value of a firm's equity at a particular day?
1. Limited liability for firm debt 2. Ability to raise capital 3. Unlimited firm life
Which of the following are advantages of the corporate form of busienss ownership?
Longer-termed, low coupon rate bonds have the highest interest rate risk. Choose the one with longest maturity and lowest coupon rate risk
Which of the following bonds has the highest interest rate risk? All bonds have same face value and make annual coupon payments.
General Partner and Sole Proprietor
Which of the following individuals have unlimited liability based on their ownership interest?
Preferred Stock
Which of the following is a type of equity security that has a fixed dividend and a priority status over other equity securities?
The effective annual rate equals the annual percentage rate when interest is compounded annually
Which of the following statements concerning interest rates is correct?
The owner of a sole proprietorship are subject to double taxation
Which one of the following is true about a sole proprietorship?
90,000 / .06 = $1,500,000
Wicker Imports established a trust fund that provides $90,000 in scholarships each year for needy students. The trust fund earns a fixed 6 percent rate of return. How much money did the firm contribute to the fund assuming that only the interest income is distributed?
Find EAR's Loan A: (1+(.0775/365))^365 = 8.06% Loan B:(1+(.08/2))^2 = 8.16% Take Loan A because the effective rate is lower
You are considering two loans. The terms of loans are equivalent with the except of interest. Loan A offers 7.75 percent, compounded daily. Loan B offers 8 percent, compounded semi-annually. Which loan do you take?
Inventory turnover = COGS/Inventory 628,300/208,400 = 3.014875 Days in inventory = Inv. T /365 121.07 days
Al's Sport Store has sales of $897,400, costs of goods sold of $628,300, inventory of $208,400, and accounts receivable of $74,100. How many days, on average, does it take the firm to sell its inventory assuming that all sales are on credit?
High Grade = AAA Medium Grade = A, A, Baa, BBB Low Grade = Ba, B, Caa, Ca, BB, B, CCC, CC Very Low Grade = C and C, D and D being the lowest already in default
Bond Ratings
Inventory Turnover = COGS/Inventory Days in Inventory = 365/inv. turnover 1,410,000/300,000 = 4.7x Days= 365/4.7 = 77.66
BL Industries has ending inventory of $300,000, and cost of goods sold for the year just ended was $1,410,000. On average, how ong does a unit of inventory sit on the shelf before it is sold?
Solve for Bond T, using the (New - Old)/Old formula Old = $1,227.51 New = $1,068.92 % change in price = -12.92%
Bond S is a 4 percent coupon bond. Bond T is a 10 percent coupon bond. Both bonds have 11 years to maturity, make semiannual payments, and have a yield-to-maturity of 7 percent. If interest rates suddenly rise by 2 percent, what will the percentage change in the price of Bond T be?
Solve for PMT, make sure to multiply payment by 2 in order to get the annualized coupon payment to bondholder.
Bryceton, Inc. has bonds on the market with 13 years to maturity, a yield-to-maturity of 9.2 percent, and a current price of $802.30. The bonds make semiannual payments. What is the coupon rate?
Unsecured, usually with a maturity of 10 years or more
Debentures
Inventory and Cash
Which of the following are current assets?
Shareholders
which of the following parties has ultimate control of a corporation?
EBIT + Depreciation - Taxes 19,750 - 9,460 - 1,620 - 2,130 = $6,360 NI Before Tax $2,226 = Tax @ 35% $4,134 + 2,130 (add back) + 1,620 (add back) = $7,884
4. Hammett, Inc. has sales of $19,750, costs of $9,460, depreciation expense of $2,130, and interest expense of $1,620. If the tax rate is 35%, what is the operating cash flow (OCF)?
Interest Expense / Sales 50 / 3,200 = 1.56%
A firm has sales of $3,200, net income of $390, total assets of $4,500, and total equity of $2,750. Interest expense is $50. What is the common-size value of interest expense?
5,600 + (5,600x.05x10) = $8,400
Gerald invested $5,600 in an account that pays 5 percent simple interest. How much money will she have at end of 10 years?
0.5 D/TA = Debt Equity 1.0 = 0.5/E
If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following?
current assets - current liabilities
Net Working Capital is defined as:
26.91 = 2.80 x (1 + 0.038) / (R-0.038) R = 14.60 percent
Northern Gas recently paid a $2.80 annual dividend on its common stock. This dividend increases at an average rate of 3.8 percent per year. The stock is currently selling for $26.91 a share. What is the market rate of return?
Unsecured, usually with a maturity of 10 years or more
Notes
Maximize the current value per share
Primary goal of financial management?
Profitability Ratios
Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as
Inflation
Real rates are defined as nominal rates that have been adjusted for
Return on Equity = (profit margin X sales)/(total assets X 1-total debt ratio) (.0968 x 807,200)/(1,105,100 x (1-.78)) = 32.14%
Reliable Cars has sales of $807,200, total assets of $1,105,100, and a profit margin of 9.68%. The firm has a total debt ratio of 78%. What is the return on equity?
38 = Do(1.03) / (.082-.03) Do = $1.92
Roy's Welding Supplies common stock sells for $38 a share and pays an annual dividend that increases by 3 percent annually. The market rate of return on this stock is 8.20 percent. What is the amount of the last dividend paid?
Po = 1.75 / (.14 + 0.015) = $11.29
Sessler Manufacturers made two announcements concerning its common stock today. First, the company announced that the next annual dividend will be $1.75 a share. Secondly, all dividends after that will decrease by 1.5 percent annually. What is the maximum amount you should pay to purchase a share of this stock today if you require a 14 percent rate of return? A. $11.29
Old Price (5.5%) = 1,028.41 New Price (7.0%) = 946.11 New - Old / Old 8% decrease in bond price
The Corner Grocer has a 7-year, 6 percent annual coupon bond outstanding with a $1,000 par value. The bond has a yield to maturity of 5.5 percent. Which one of the following statements is correct if the market yield suddenly increases to 7 percent?
1. Assumes that dividends increase at a constant rate forever 2. Can be used to compute a stock price at any point in time 3. Can be used to value zero-growth stocks 4. Requires the growth rate to be less than the required return
The dividend growth model
Sale of a new share of stock to an individual investor
Which is a primary market transaction?
A. $100 account receivable that is discounted and collected for $96 today B. $100 of inventory which is sold today on credit for $103 C. $100 of inventory which is discounted and sold for $97 cash today D. $100 of inventory that is sold today for $100 cash E. $100 accounts receivable that will be collected in full next week D
Which one of the following represents the most liquid asset?
Agency Problem
Which one of the following terms is defined as a conflict of interest between shareholders and the corporate managers
Selling inventory at a profit
Which one of the following will increase the value of a firm's net working capital
Operating Cash Flow
Which term is cash flows from the firm's ongoing business activities?
Voting by Proxy
You cannot attend shareholder's meeting so you authorize another bro to vote on your behalf. What is the granting of this authority called?
Accounts Receivable Quick Ratio = (Cash - Inventory) / Current Liabilities
An increase in which of the following will increase a firm's quick ratio without affecting its cash ratio?
(1.105) = (1.062)(1+h) (1.105)/(1.062) = h, h = 4.05%
An investment offers a 10.5 percent total return over the coming year. Sam Bernanke thinks the total real return on this investment will be only 6.2 percent. What does Sam believe the inflation rate will be for the next year? A. 5.60 percent
n = 14 i = 7.5 PV = -1,382.01 FV = 1,000 PMT = Solve
Kaiser Industries has bonds on the market making annual payments, with 14 years to maturity, and selling for $1,382.01. At this price, the bonds yield 7.5 percent. What is the coupon rate?
Inflation
The Fisher effect primarily emphasizes the effects of _____ on an investor's rate of return
EPS = (.041 x 747,000)/7500 = 4.0836 Price-Earnings Ratio = 22/4.0836
The Meat Market has $747,000 in sales. The profit margin is 4.1% and the firm has 7,500 shares of stock outstanding. The market price per share is $22. What is the price-earnings ratio?
Simple interest =$9,250 + (9250x.06x7) = 13135 Compounded Interest = (Calculator) $13,908.58 13,908- 13135 = 773
Travis invested $9,250 in an account that pays 6% simple interest. How much more could he have earned over a 7 year period if he compounded the interest annually?
900/(1.074)^1 + 1,500/(1.074)^2 + 3,000/(1.074)^3 = $4,560
You are considering two savings options. Both options offer a 7.4 percent rate of return. The first option is to save $900, $1,500, and $3,000 at the end of each year for the next three years, respectively. The other option is to save one lump sum amount today. If you want to have the same balance in your savings account at the end of the three years, regardless of the savings method you select, how much do you need to save today if you select the lump sum option?
Remember to use TVM solver and solve for FV for the future values. Add up the funds then calculate for retirement payment using the total fund sum as PV.
You are planning to save for retirement over the next 15 years. To do this, you will invest $1,100 a month in a stock account and $500 a month in a bond account. The return on the stock account is expected to be 7 percent, and the bond account will pay 4 percent. When you retire, you will combine your money into an account with a 5 percent return. How much can you withdraw each month during retirement assuming a 20-year withdrawal period?
Focus on how it says "deposit at the end of the year." The 5,200 doesn't have any time to accrue interest in that first year. 5,200(1.085)^2 + 0 + 7,500 = 13,621.57
You plan on saving $5,200 this year, nothing next year, and $7,500 the following year. You will deposit these amounts into your investment account at the end of each year. What will your investment account be worth at the end of year three if you can earn 8.5 percent on your funds?
EAR = (1+(.179/12))^12 = 19.44%
Your credit card company quotes you a rate of 17.9$. Interest is billed monthly. What is the actual rate of interest you are paying?
Net Working Capital = CA - CL CA = 4,900 - 3,200 = 1700 CL = 1,400 NWC = 1700-1400 = 300
Your firm has total assets of $4,900, fixed assets of $3,200, long-term debt of $2,900, and short-term debt of $1,400. What is the amount of net working capital?
2,400/50,000 =4.8%
Your grandfather won a lottery years ago. The value of his winnings at the time was $50,000. He invested his money so it would provide annual payments of $2,400 a year to his heirs forver. What is the rate of return?
It DECREASES
Your grandmother has promised to give you $5,000 when you graduate from college. She is expecting you to graduate two years from now. What happens to the present value of this gift if you delay your graduation by one year and graduate three years from now?
n = 48 i = 6.5/12 PMT= 125 n = solve PV
Your grandmother is gifting you $125 a month for 4 years while you attend college to earn your degree. At a 6.5% discount rate, what are these payments worth to you the day you enter college?
