FIN
Model Products, Inc. just paid $3.00 to their shareholders as the annual dividend. In the same press release, the company announced that future dividends will be increasing by 4 percent per year. If you require a 12 percent rate of return, the value of a share of Model Products stock is closest to:
$39; 3(1+.04)/(.12-.04)
Winchester Products, Inc. bought equipment costing $57,000 seven years ago. The equipment was depreciated as a 5-year asset using MACRS (table on Formula Sheet). The company's marginal tax rate is 38 percent. If the equipment is sold for $3,000, the cash flow associated with the sale of the equipment is
$1860; BV=0 --> 3000-0= 3000*.38=1140 --> 3000-1140
The Yellen Corporation issued a bond with a $1,000 par value and a coupon rate of 5 percent. If the bond has 30 years remaining and the yield to maturity is 8 percent, the bond's value is closest to:
$661; N=30*2, I=8/2, PMT=(.05*1000)/2, FV=1000, find PV
You inherited $100,000 that was deposited into a trust account on your 15th birthday that earns interest at a fixed rate of return of 3 percent, compounded monthly. The trust agreement specified that you would not have access to the money until you are 40 years old. The amount that will be available for withdrawal from the account on your 40th birthday is closest to:
$211,502; 40-15=25*12=N, 3%/12=I, PV=-100,00 --> find FV
If a company just paid $1.00 per share in dividends, investors expect annual growth in dividends to be 4 percent, and the estimated required rate of return to be 8%, the value of a share of stock of this company is closest to:
$26
You have $1,000 to invest you have a choice of investing the money into two differing accounts. One offers a 6% annual simple interest or one with a 5% compounded semi-annually. After 10 years the difference in the Future Value of these accounts would be closest to:
$38.62
The Bar Company (BC) has current annual credit sales of $36,500 and a current balance in accounts receivable of $1,000. The company has projected annual credit sales of $43,800. If BC wants to reduce the number of days that customers are allowed to pay to 6 days, its projected accounts receivable balance, assuming 365 days in a year, is closest to
$720; 6 = AR/120 --> AR = 720
What is the future value of $1,000 invested for five years at 5 percent, compounded continuously?
1,284.03 --> 1284
Consider the following cash flows: year 0-5 -15,000; 2,000; 2,000, 2,000, 2,000, 15,000 the MIRR of the project based on a project cost of capital of 12% a reinvestment rate of 8% and the 5 year planning horizon
10.5%; NPV=(8,0,{2000,2000,2000,2000,15000})=16833.00164 --> =PV, N=5, I=8, find FV--> FV=24733.20193, PV=-15000, N=5, find new I
The Glow-worm Company has revenues of $1,000,000, net profits after taxes of $30,000, total assets of $1,500,000, and total liabilities of $500,000. Its return on equity closest to:
3%; 1500000-500000=1000000 --> ROE = 30,000/1,000,000 = 3%
which of the following transaction takes place in the secondary market? An investor buying: - 500 shares of stock in his online brokerage account - a newly issued municipal bond - 500 shares of an IPO - a u.s. treasury bill through the government auction
500 shares of stock in his online brokerage account
The Inc.com Company has determined that it could issue $1,000 face value bonds with a 7% coupon (paid semi-annually) and a ten-year maturity, at $950 per bond. If Inc.com's marginal tax rate is 22%, what is Inc.com's after-tax cost of debt?
6% < after-tax cost of debt < 6.5%
What is the future value of $5,685 to be received in 3 years if the discount rate is 3 percent, compounded semi-annually?
6,216
suppose a company has a debt-to-equity ratio of .54, what it this company's debt-to-total asset ratio
.3506
if the risk-free rate is 1%, the shape ration for a security that has an expected return of 6% and a st. dev. of 8% is closest to:
.63; (.06-.01)/.08
you are lookin into two investments and you find the correlation between the returns of two investments is 0.35. with a little digging you uncover the st. dev. of the two investments, 15% and 7%. the covariance between these two investments is closest to
0.003675
Science Direct Laboratories has sales of $3,000,000. The company's fixed operating costs total $500,000 and its variable costs equal 45.50% of sales, so the company's current operating income (EBIT) is $1,135,000. The company's interest expense is $500,000. What is the company's degree of total leverage (DTL)?
2.5748
Tidewater Fishing has a current beta of 1.21. The market risk premium is 8.9 percent and the risk-free rate of return is 3.2 percent. By how much will the cost of equity increase if the company expands its operations such that the company beta rises to 1.50?
2.581%
Lexington company with a degree of operating leverage of 1.50 and a degree of financial leverage of 1.90 has a degree of total leverage closest
2.85
the term IPO stands for "individual purchase order" as when an individual (as opposed to an institution) places an order to buy a stock True or False?
False
Mangrove Fruit Farms has a $250,000 bond issue outstanding that is selling at 92 percent of face value. The firm also has 1,500 shares of preferred stock and 15,000 shares of common stock outstanding. The preferred stock has a market price of $35 a share compared to a price of $24 a share for the common stock. What is the weight of the preferred stock as it relates to the firm's weighted average cost of capital?
8.17%
The market value of a company's shares is $30 each, the estimated dividend next year is $1.00, and the estimated long-term growth rate in dividends is 5 percent. The implied required rate of return on these shares is closest to:
8.3%; re = (D1 / P0) + g = ($1.00 / $30) + 0.05
A loan is offered with monthly payments and an 8 percent APR. The loan's effective annual rate (EAR) is closest to:
8.30%; EAR = (e^APR) - 1
Siemens AG issued € 1,000, 25 year, 6.4% semi-annual, callable bonds two years ago. The yield to maturity is stated at 7.5% and it is currently selling for 94% of par value. The bond is callable after 10 years with a Call premium of 115% What is this bond's Yield to Call?
8.79%
Madison Products, Inc. is estimating its weighted average cost of capital. The company has collected the following information: - Its target capital structure consists of 30 percent debt and 70 percent common equity. - The company can issue new long-term debt at par with a yield to maturity of 8 percent. - The company's marginal tax rate is 35 percent. - The risk-free rate is 3 percent. - The market risk premium is 6 percent. - The stock's beta is 1.4.
9.54%; r= .03+1.4(.6) = 8% .3(.08)(.65) + .7(.114)
Both interest and dividends paid by a corporation are deductible operating expenses, hence they decrease the firm's taxes; true or false
false
Which of the following is not an example of capital debt? - ford motor corp 10 yr convertible debenture - German bund 2 year yield - US 52 week treasury bill - commonwealth of VA transportation bond 2019 issue maturity 2029
US 52 week treasury bond
As a general rule, at the optima capital structure the:
WACC is minimized
which one of the following is not an underlying assumption of the dividend growth model - a stock's value changes in direct relation to the required return - growth rate must be less than required rate of return - dividends have to grow at a steady rate - a stock's value is equal to the discounted PV of the future cash flow which it generates
a stock's value changes in direct relation to the required return
The before-tax cost of debt, which is lower than the after-tax cost, is used as the component cost of debt for purposes of developing the firm's WACC true or false
false
When comparing firms of differing sizes Common Sizing allows you to more easily compare the performance of the firms. This is accomplished by taking the items on the Balance Sheets as a percentage of Total Sales. ture or false
false
a firm's business risk is largely determined by the financial characteristics of it industry, especially by the amount of debt the average firm in the industry uses true or false
false
other things equal, the greater the discount rate applied to future cash flows, the greater the PV of the investment being evaluated true or false
false
suppose a firm's debt ratio is 50%, their current interest rate on debt is 8%, the current cost of equity is 16%, and the tax rate is 22%, an increase in the debt ratio to 60% would definitely decrease the weighted average cost of capital (WACC) true or false
false
there is an inverse relationship between the risk of a stock being valued and the required rate of return for the stock true or false
false
Your mom & dad inherit $100,000 and wants to invest these funds for their retirement. They are very concerned about business continuity and want to be able to pass on this investment to the next generation of the family. Which of the following investment opportunities would not be appropriate for them? - food truck business operating as a sole proprietorship - stock of British petroleum, PLC - common stock of McDonald's - limited partner in a real estate LLC
food truck business operating as a sole proprietorship
On the balance sheet, retained earnings increase when the company
generate a net profit
The after-cost of debt:
has a greater effect on a firm's cost of capital when the debt-equity ratio increases
Because of differences in the expected returns on different investments, the standard deviation is not always an adequate measure of risk. However, the coefficient of variation adjusts for differences in expected returns and thus allows investors to make better comparisons of investments' stand-alone risk. True or false
true
conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR methods put the other one first. In theory, such conflicts should be resolved in favor for the project with the higher NPV true or false
true
if a firm borrows money, it is using financial leverage true or false
true
if corporate tax rates are increased the interest tax-shield will be more valuable to firms true or false
true
if the reinvestment rate is less than the project's internal rate of return the modified internal rate of return will be less than the internal rate or return true or false
true
which of the following best describe a sole proprietorship? - legal distinction between owner and management - unlimited liability for the owner - easy access to additional funds to operate firm
unlimited liability for the owner
the risk that diminishes as a portfolio of assets becomes more diversified is best described as:
unsystematic risk
which of the following best completes this sentence "in general, the capital structure used by US firms"
vary significantly across industries
the rate of tax on the next dollar earned is best described as the
marginal tax rate
The primary financial goal of financing a management is to maximize the:
market value of owner's equity
a decrease in a project's cost of capital tends to cause which of the following to increase? - payback period - net present value - internal rate of return - incremental cash flows
net present value
when evaluating mutually exclusive projects, the recommended method of evaluation is the:
net present value
a bond is payable to whomever has physical possession of the bond is said to be in:
new-issue condition
in order to minimize the potential of conflict between shareholder's interest and manager's interest, which of the following would best accomplish this? - offers the managers stock options in the company with varying vesting periods - increase executive salaries - base compensation on revenue - base bonus on bookable orders
offer the managers stock option in the company with varying vesting periods
a company M has a current ration of0.5 and company P has a current ration of 2.0. if both firms increase current assets and current liabilities by the same dollar amount, we should see that:
only company M's current ratio will increase
the amount of the time it take to buy and sell inventory and the time it take to collect accounts receivable, best describes
operating cycle
Characteristics of corporations regarding owners' liability and owners' control
owners' liability: limited owners' control: no operating control
what is something that decreases shareholders' equity on a corporation's balance sheet
payment of dividends
Which of the following portfolios could not lie on the efficient frontier? Expected return;Standard deviation of returns A 8%;6% B 9%;7% C 6%;3% D 7%;8%
portfolio D
Joe Finance estimated cash flows for two projects, Projects A and Project B. Project A has a net present value of $10,000, whereas Project B has a net present value of $5,000. Project A has an internal rate of return of 10%, whereas Project B as an internal rate of return of 12%. If these projects are mutually exclusive, which project should Joe select?
project A
Bozo, Inc. estimates that an average-risk project has a weighted average cost of capital of 10 percent, a below-average risk project has a weighted average cost of capital of 8 percent, and an above-average risk project has a weighted average cost of capital of 12 percent. Which of the following independent projects should the company accept?
project B has below-average risk and a return of 8.5%
Suppose a company reports on its statement of cash flows that it has a cash outflow for long-term investing activities and a cash inflow for financing activities. This company most likely has - sold property plant and equipment and use the funds to pay off outstanding debt - suffered a major investment loss and had to borrow funds to make up the shortfall. - purchased new property, plant, and equipment, financing this by issuing new debt or equity
purchased new property, plant, and equipment, financing this by issuing new debt or equity
Which of the following statements is correct? - Because the money is readily available, the cost of retained earnings is usually a lot cheaper than the cost of debt financing. - When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are tax deductible. - When calculating the cost of preferred stock, a company needs to adjust for taxes because preferred stock dividends are tax deductible.
when calculating the cost of debt, a company needs to adjust for taxes, because interest payments are tax deductible
Gugenheim, Inc. offers a 8.00 percent coupon bond with quarterly payments. The yield to maturity is 4.4 percent and the maturity date is 6 years. The market price of a $1,000 face value bond is closest to:
$1,188.93; N=21, I=1.1, PMT=20, FV=1000, solve for PV
The initial cost of new lily-growing equipment is estimated to be $50,000. This expenditure is made at the end of 2012. The project's estimated useful life is five years. At the end of five years (that is, at the end of 2017), Gilded Lily, Inc., intends to sell the equipment for $6,000. The equipment will be depreciated using MACRS as a 5-year asset. (MACRS table on Formulas). The inventory of bulbs will increase by $5,000 before the project starts (and be maintained at that level). The project will produce additional revenues of $55,000 and additional operating expenses of $25,000 for each year. The corporate tax rate is 40 percent and the project's cost of capital 15 percent. The operating cash flow in the first year of operations, 2013, is closest to:
$22,000; 50000*.2=10000 --> (55000-25000-10000)(1-.4)+10000
You decide you want to go to Medical School which you will complete 4 years from now, and you plan to save $5,500 per year, beginning tomorrow morning. You will make 4 deposits in an account that pays 5.1% interest. Under these assumptions, the amount you will have at the end of 4 years from today is closest to:
$24,952
The initial cost of new lily-growing equipment is estimated to be $50,000. This expenditure is made at the end of 2012. The project's estimated useful life is five years. At the end of five years (that is, at the end of 2017), Gilded Lily, Inc., intends to sell the equipment for $6,000. The equipment will be depreciated using MACRS as a 5-year asset. (MACRS table on Formulas). The inventory of bulbs will increase by $5,000 before the project starts (and be maintained at that level). The project will produce additional revenues of $55,000 and additional operating expenses of $25,000 for each year. The corporate tax rate is 40 percent and the project's cost of capital 15 percent. The cash flow for the 5th year that we would use in calculating the NPV or the IRR
$30,056; 50000*.0576 = 2880 --> 6000-2880=3120*.4 =1248 --> 6000-1248=4752 dep@yr5 = 50000*.1152=5760 op cash flow = (55000-25000-5760)(1-.4)+20000 = 20304 Cash flow = 20304+4752+5000
A capital budgeting project is expected to generate incremental revenues of $60,000 per year, but it will not affect expenses other than depreciation. Depreciation from the project is $20,000 for the first year of operations, and the firm's tax rate is 30 percent. The project's operating cash flow for the first year of operations is closest to:
$48000; (60000-0-20000)(1-.3) + 20000
You wish to buy a $15,000 dining room set. The furniture store offers you a 3-year loan with a 10 percent APR. Your monthly payments are closest to:
$484.01; N=3*12, I=10/12, PV=-15000, find PMT
The initial cost of new lily-growing equipment is estimated to be $50,000. This expenditure is made at the end of 2012. The project's estimated useful life is five years. At the end of five years (that is, at the end of 2017), Gilded Lily, Inc., intends to sell the equipment for $6,000. The equipment will be depreciated using MACRS as a 5-year asset. (MACRS table on Formulas). The inventory of bulbs will increase by $5,000 before the project starts (and be maintained at that level). The project will produce additional revenues of $55,000 and additional operating expenses of $25,000 for each year. The corporate tax rate is 40 percent and the project's cost of capital 15 percent. The initial investment outlay is closest to:
$55,000; 50000+50000
The value of a perpetuity today that pays $325 per year with an interest rate of 4.8% is closest to:
$6,770
Which of the following would be classified as a use of cash? - an increase in RE - an increase in AP - a decrease in marketable securities - a decrease in AR - an increase in inventories
- an increase in inventoried
Suppose Micro.com issues new common stock that has a par value of $1. Suppose further that the stock is issued at $40 a share, where Micro.com receives $38 for each share. If the current dividend of Micro.com common stock is $2 per share and is expected to grow at a rate of 15% per year, what is the cost of external equity for Micro.com if the marginal tax rate is 40%?
17% < cost of external equity
A 4.25 percent, semi-annual coupon bond with 8 years left to maturity is offered for sale at 98.336. The yield to maturity of the bond offering is closest to:
4.5%; PMT=.(0425*1000)/2, N=8*2, PV=-.98336*1000, FV=1000 --> find I and multiply by 2
The yield to maturity on a 30-year, 6 percent bond that pays semi-annual coupons and is selling for $1,025 is closest to:
5.82%; N = 60, PMT=30, PV=-1025, FV=1000 find I and multiply by 2
based on the information provided, length of cash cycle is closest to: Average collection period 46 days Average payment period 22 days Days sales in inventory 38 days
62 days; 46+38-22
suppose that the risk-free rate of interest is 2 percent and the market risk cerium is 5 percent, if the company's stock beta is 1.2 the return on this company's stock is closest to:
8 percent
Which of the following bank accounts has the lowest effective annual return? - An account that pays 8% nominal interest with quarterly compounding - An account that pays 7% nominal interest with daily (365-day) compounding. - An account that pays 7% nominal interest with monthly compounding. -An account that pays 7% nominal interest with quarterly compounding.
An account that pays 7% nominal interest with quarterly compounding.
which business form must pay income taxes on earning at the business level and then owners pay income taxes on the same earnings when the business earnings are distributed
C corporation
Martin invested $1,000 six years ago and expected to have $1,500 today. He has not added or withdrawn any money from this account since his initial investment. All interest was reinvested in the account. As it turns out, Martin only has $1,420 in his account today. Which one of the following must be true? - Martin earned simple interest rather than compound interest. - Martin ignored the Rule of 72 which caused his account to decrease in value. - Martin did not earn any interest on interest as he expected. - Martin earned a lower interest rate than he expected.
Martin earned a lower interest rate than he expected.
Which one of the following statements concerning NASDAQ is incorrect? - NASDAQ is an OTC market - NASDAQ is an auction market - NASDAQ is an electronic market - requirements are less stringent to be listed on NASDAQ than on the NYSE
NASDAQ is an auction market
Which of the following is a true statement? - A bond's price converges to its face value as it approaches maturity. - Bond ratings measure the interest rate risk associated with a given bond. - A bond's coupon rate typically changes semi-annually with market fluctuations in interest rates. - Bonds are referred to as amortized debt due to the fact that interest and principal payments are made each period to the lender until maturity.
a bond's price converges to its face value as it approaches maturity
Consider these cash flows years 0-3 Project A: -20,000; 11,000; 9,000; 6,000 Project B: -20,000; 10,000; 6,000; 10,000 the required rate of return on both is 10%, if the projects are mutually exclusive which one should be accepted or rejected
accept A, reject B find NPV of both, pick the higher NPV
An advantage of the corporate for of business is its
access to capital
which of the following are considered current liabilities - Accounts receivable - accounts payable - pension benefit obligation - long-term debt - wages payable
accounts payable and wages payable
An issue or conflict that arises due to potential divergence of interest between managers, shareholders, and creditors is best described as a(n)
agency problem
if the pension fund you managed purchased stock of Google's new seasoned equity offering from the underwriters, Goldman-Sachs, this transaction will take place in __ market and __ market
capital; primary
Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings? - dual cost - non-cumulative - preferred - cumulative - common
common
dividends are determined by the
corporation's board of directors
the cash conversion cycle is the
days sales outstanding, plus the days in inventory, less the days payable outstanding
World Global Capital exceeds $300 Trillion. Corporations utilize Equity, Debt and Derivatives to fund their operations. The largest and most common type of funding used by businesses is:
debt
which one of the following indicates a portfolio is being effectively diversified - decrease in the portfolio st. dev. - decrease in the component assets betas - increase in the portfolio st. dev. - increase in the portfolio rate of return
decrease in the portfolio st. dev.
Sovereign Bank is considering changing its terms on its credit cards to 15 percent interest, compounded continuously from its current 15.5 percent interest, compounded monthly. This change _______________________.
decreases the effective annual rate on accounts
Bond rating reflects which of the following: - default risk - maturity risk - yield curve risk - investment rate risk
default risk
bond rating primarily reflect which of the following - interest rate risk - default risk - reinvestment risk - yield curve risk
default risk
the latest hot stock has a beta of 1.8. if the returns on the market decline by 1.5% you should expect the price of the latest hot stock to go:
doen by 2.7%; 1.8*.015
Which of the following statements is correct? - if the company has no debt outstanding, then its degree of total leverage equals its degree of operating leverage - if a firm's degree of operating leverage increases, its degree of financial leverage must also have increased - if the company has no debt outstanding then its degree of total leverage quals its degree of financial leverage - an increase in interest expense will reduce the company's degree of financial leverage
if the company has no debt outstanding, then its degree of total leverage equals its degree of operating leverage
Which of the following would most likely increase the risk to the bondholder? - Inclusion of a call provision - using equipment as collateral - change in bond rating from A to AAA - adding covenants restricting the payment of cash dividends
inclusion of a call provision
as a company loosens its credit standards, the investment in accounts receivable is expected to
increase
the correlation of return on asset A and asset B is positive. this means that as the return on asset A increase, the returns on asset B tend to
increase
When considering the utilization of the Corporate Valuation Model for equity valuation, which of the following is NOT a benefit associated with this approach: - is the least likely to subject management manipulation - can be used on public firms that pay no dividends - easier to compare differing firms - frequently shares constant growth similar to DDM
is the lest likely to subject management manipulation
how easily something can be converted into cash is referred to as
liquidity
Joe Analyst believes that he can predict the market by trading based on how announced earnings differ from the expected earnings of the company, Joe is counting on the market not being
semi-strong efficient
which financial statement reports a company's capital expenditures during a particular time period
statement of cash flows
Which form of efficient market asserts that asset prices fully reflect all information, which includes both public and private information
strong-form efficient
investors' capital is best characterized as the
sum of the market value of debt and the market value of equity
The CEO said, "Mr. Sewat, since you have spent $6,000 in the past on research and development for this project, I must say you are making a mistake not to include it as a negative cash flow for the project." Apparently, the CEO does not understand the concept of:
sunk costs
Risk tolerance is best described as-
the ability to accept certain level of risk for potentially higher return
A 15-yr corporate bond has an annual coupon of 7%, the bond is currently selling at par ($1000) which of the following statements is correct
the bonds expected capital gain yield is zero
Which of the following statements is correct? - The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods. - The cash flows for an annuity due must all occur at the ends of the periods. - The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month. - If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.
the cash flows for an annuity must be equal and the must occur at regular intervals, such as once a year or once a month
a plastics manufacturing company has decided to decrease inventory turn over form 10 times to 4 times per year, assuming a constant sales level, what would be true for this statement
the chance of spoilage will increase
if the calculated NPV is negative, which of the following must be true? - the discount rate used is greater than the IRR - the discount rate used is less than the IRR - the discount rate is too low - the discount rate used I equal to the IRR - the discount rate used it too high
the discount rate used I greater than the IRR
the cost of internal equity is lower than the cost of external equity because..
the firm need not pay taxes on earnings that are reinvested in the firm, so using retained earnings produces a tax-shield for the firm
when a project's NPV exceeds zero
the project should be accepted, assuming we are confident that the cash flows and the required rate of return have been properly estimated
The net present value investment decision criteria typically assumes that cash flows are reinvested at:
the project's cost of capital
A 6% annual coupon bond is currently selling at a premium and matures in 7 years, the bond was originally issued 3 yrs ago at par, which one of the states is accurate in respect to this bond today
the yield-to-maturity is less than the coupon rate
the underlying theory of financial statement analysis is
there is no underlying theory
a firm increased the amount of debt it had outstanding the same, their profit margin remained constituent and their return in equity was the same. therefore:
total asset turnover decreased
