Finance 325 Final Exam

A firm has total debt of $4,850 and a debt-equity ratio of .57. What is the value of the total assets?

$13,358.77 Total equity = $4,850 / .57 = $8,508.77 Total assets = $4,850 + 8,508.77 = $13,358.77

The Distribution Point plans to save $2,000 a month for the next 3 years for future emergencies. The interest rate is 4.5 percent compounded monthly. The first monthly deposit will be made today. What would today's deposit amount have to be if the firm opted for one lump sum deposit that would yield the same amount of savings as the monthly deposits after 3 years?

$67,485.97 FVA Due = $2,000 × ({[1 + (.045 / 12)]^(3 × 12) - 1} / (.045 / 12)) × [1 + (.045 / 12)] = $77,220.67 PV = $77,220.67 / [1 + (.045 / .12)]^(3 × 12) = $67,485.97

how to calculate retention ratio

(NI-DIV)/NI

A firm has annual sales of $416,000, a price-earnings ratio of 18, and a profit margin of 3.7 percent. There are 12,000 shares of stock outstanding. What is the price-sales ratio?

0.67 [Earnings per share = ($416,000 × .037) / 12,000 = $1.28 Price-sales ratio = (18 × $1.28) / ($416,000 / 12,000) = .67]

You own a stock portfolio invested 40 percent in Stock Q, 25 percent in Stock R, 25 percent in Stock S, and 10 percent in Stock T. The betas for these four stocks are .78, 1.16, 1.17, and 1.34, respectively. What is the portfolio beta?

1.03 βP = .40(.78) + .25(1.16) + .25(1.17) + .10(1.34) βP = 1.03

Lannister Manufacturing has a target debt−equity ratio of .65. Its cost of equity is 13 percent, and its cost of debt is 9 percent. If the tax rate is 40 percent, what is the company's WACC

10.01% WACC = .13(1 / 1.65) + .09(.65 / 1.65)(1 - .40) WACC = .1001, or 10.01%

You are given the following information on Kaleb's Welding Supply: profit margin 5.3% capital intensity ratio 0.62 debt-equity ratio 0.6 net income $54,000 dividends $13,600

11.37% ROE= (PM)(TAT)(EM)ROE= (.053)(1 / .62)(1 + .60)ROE= .1368, or 13.68% The plowback ratio is one minus the dividend payout ratio, so: b= 1 - ($13,600 / $54,000)b= .7481 Now we can use the sustainable growth rate equation to get: Sustainable growth rate= (ROE × b) / [1 - (ROE × b)] Sustainable growth rate= [.1368(.7481)] / [1 - .1368(.7481)] Sustainable growth rate= .1140, or 11.40%

A stock has a beta of 1.32, the expected return on the market is 10 percent, and the risk-free rate is 3.5 percent. What must the expected return on this stock be?

12.08% E(Ri) = Rf + [E(RM) − Rf] × βi E(Ri) = .035 + (.10 − .035)(1.32) E(Ri) = .1208, or 12.08%

A firm has sales of $3,340, net income of $274, net fixed assets of $2,600, and current assets of $920. The firm has $430 in inventory. What is the common-size statement value of inventory?

12.22 percent [Common-size inventory = $430 / ($2,600 + 920) = .1222, or 12.22 percent]

A project has an initial cost of $27,000 and a three-year life. The company uses straight-line depreciation to a book value of zero over the life of the project. The projected net income from the project is $1,600, $2,200, and $1,700 a year for the next three years, respectively. What is the average accounting return?

13.58 percent AAR = [($1,600 + 2,200 + 1,700) / 3] / [($27,000 + 0) / 2] = .1358, or 13.58 percent

A firm has 160,000 shares of stock outstanding, sales of $1.94 million, net income of $126,400, a price-earnings ratio of 21.3, and a book value per share of $7.92. What is the market-to-book ratio?

2.12 [Earnings per share = $126,400 / 160,000 = $.79 Price per share = $.79 × 21.3 = $16.827 Market-to-book ratio = $16.827 / $7.92 = 2.12]

At 6 percent interest, how long would it take to quadruple your money?

23.79 years $4 = $1 ×(1 + .06)t; t = 23.79 years

Stone Sour Co. has an ROA of 9 percent and a payout ratio of 19 percent. What is its internal growth rate?

7.86% We need to calculate the retention ratio to calculate the internal growth rate. The retention ratio is: b= 1 - .19b=.81 Now we can use the internal growth rate equation to get: Internal growth rate= (ROA × b) / [1 - (ROA × b)] Internal growth rate= [.09(.81)] / [1 - .09(.81)] Internal growth rate= .0786, or 7.86%

TJ's has annual sales of $813,200, total debt of $176,000, total equity of $395,000, and a profit margin of 5.63 percent. What is the return on assets?

8.02% [Return on assets = (.0563 × $813,200) / ($176,000 + 395,000) = .0802, or 8.02 percent]

Tell Me Why Co. is expected to maintain a constant 3.2 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 5 percent, what is the required return on the company's stock?

8.2% R = Dividend yield + Capital gains yield R = .050 + .032 R = .0820, or 8.20%

A bond has a yield to maturity of 11.68 percent. If the inflation rate is 3.2 percent, what is the real rate of return on the bond?

8.22 percent r = 1.1168 / 1.032 - 1 = .0822, or 8.22%

Some time ago, Tracie purchased 11 acres of land costing $77,900. Today, that land is valued at $54,800. How long has she owned this land if the price of the land has been decreasing by 3.5 percent per year?

9.87 years $54,800 = $77,900 ×[1 + (-.035)]^t; t = 9.87 years

Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 15 years to maturity, and a coupon rate of 6.9 percent paid annually. If the yield to maturity is 8 percent, what is the current price of the bond?

905.85 in calculator: n=15 i/y= 8% solve for PV pmt= 69 fv= 1000

As of 2015, which one of the following statements concerning corporate income taxes is correct?

A firm's tax is computed on an incremental basis.

Which one of the following will increase the cash flow from assets, all else equal?

Decrease in the change in net working capital.

According to the statement of cash flows, an increase in inventory will _____ the cash flow from _____ activities.

Decrease; operating.

Corporate bylaws:

determine how a corporation regulates itself

Cash flow to stockholders is defined as:

dividend payments less net new equity raised.

Relationships determined from a firm's financial information and used for comparison purposes are known as:

financial ratios

Treasury bonds are:

generally issued as semi-annual coupon bonds

Which one of the following is included in a firm's market value but yet is excluded from the firm's accounting value?

good reputation of the company

Graphing the crossover point helps explain:

how decisions concerning mutually exclusive projects are derived.

Which one of the following is true according to generally accepted accounting principles?

income is recorded based on the realization principle

Which one of the following functions should be the responsibility of the controller rather than the treasurer?

income tax returns

How to calculate external financing needed

projected total assets= total liability and equity*projected sales growth projected accts payable= accts pay*projected sales growth projected RE= RE+[NI-DIV)*projected sales growth] External Financing needed= proj total assets- proj accts pay- long term debt- c-stk- proj RE

Financial managers should primarily focus on the interests of:

shareholders

Which one of the following costs was incurred in the past and cannot be recouped?

sunk

Which one of the following represents the most liquid asset?

$100 of inventory that is sold today for $100 cash.

Which of the following are current assets? I. Cash II. Trademark III. Accounts receivable IV. Notes payable

I and III only

Gold Corp. has an ROE of 19 percent and a payout ratio of 27 percent. What is its sustainable growth rate?

16.10% We need to calculate the retention ratio to calculate the sustainable growth rate. The retention ratio is: b= 1 - .27b= .73 Now we can use the sustainable growth rate equation to get: Sustainable growth rate= (ROE × b) / [1 - (ROE × b)] Sustainable growth rate= [.19(.73)] / [1 - .19(.73)] Sustainable growth rate= .1610, or 16.10%

Billings, Inc. has net income of $161,000, a profit margin of 7.6 percent, and an accounts receivable balance of $127,100. Assume that 66 percent of sales are on credit. What is the days' sales in receivables?

33.18 days [Sales = $161,000 / .076 = $2,118,421 Credit sales = $2,118,421 × .66 = $1,398,158 Accounts receivable turnover = $1,398,158 / $127,100 = 11 times Days' sales in receivables = 365 / 11 = 33.18 days]

You expect to receive $5,000 at graduation in 2 years. You plan on investing this money at 9 percent until you have $75,000. How many years from today will it be until this occurs?

33.42 years $75,000 = $5,000 ×(1.09)^t; t = 31.42 years Total time = 2 + 31.42 = 33.42 years

Say you own an asset that had a total return last year of 11.5 percent. If the inflation rate last year was 6.5 percent, what was your real return?

4.69% The Fisher equation, which shows the exact relationship between nominal interest rates, real interest rates, and inflation is: (1 + R) = (1 + r)(1 + h) r = [(1 + .115) / (1 + .065)] - 1 r = .0469, or 4.69%

Moraine, Inc., has an issue of preferred stock outstanding that pays a $4.55 dividend every year in perpetuity. If this issue currently sells for $96 per share, what is the required return?

4.74% R = D / P0 R = $4.55 / $96 R = .0474, or 4.74%

A Japanese company has a bond outstanding that sells for 93 percent of its ¥100,000 par value. The bond has a coupon rate of 6 percent paid annually and matures in 16 years. What is the yield to maturity of this bond?

6.73% In calculator: n=16 Solve for I/Y pv= 93000 fv= 100,000

Which one of the following statements related to the cash flow to creditors is correct?

A positive cash flow to creditors represents a net cash outflow from the firm.

A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?

Callable.

The interest rate risk premium is the:

Compensation investors demand for accepting interest rate risk.

Hungry Lunch has net income of $68,710, a price-earnings ratio of 13.7, and earnings per share of $.24. How many shares of stock are outstanding?

286292 [Number of shares = $68,710 / $.24 = 286,292]

You're trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $11.4 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,794,300, $1,847,600, $1,816,000, and $1,269,500 over these four years, what is the project's average accounting return (AAR)?

29.50% Our definition of AAR is the average net income divided by the average book value. The average net income for this project is: Average net income = ($1,794,300 + 1,847,600 + 1,816,000 + 1,269,500) / 4 = $1,681,850 And the average book value is: Average book value = ($11,400,000 + 0) / 2 = $5,700,000 So, the AAR for this project is: AAR = Average net income / Average book valueAAR = $1,681,850 / $5,700,000AAR = .2951, or 29.51%

Which of the following should a financial manager consider when analyzing a capital budgeting project? I. Project start-up costs. II. Timing of all projected cash flows. III. Dependability of future cash flows. IV. Dollar amount of each projected cash flow.

I, II, III, and IV.

Which of the following accounts are included in working capital management? I. Accounts Payable II. Accounts Receivable III. Fixed Assets IV. Inventory

I, II, and IV only.

Which of the following is (are) included in the market value of a firm but is (are) excluded from the firm's book value? I. Value of management skills. II. Value of a copyright. III. Value of the firm's reputation. IV. Value of employee's experience.

I, III, and IV only

Which of the following questions are addressed by financial managers? I. How should a product be marketed? II. Should customers be given 30 or 45 days to pay for their credit purchases? III. Should the firm borrow more money? IV. Should the firm acquire new equipment?

I, III, and IV only

Jen owns 30 shares of stock in Delta Fashions and wants to win a seat on the board of directors. The firm has a total of 100 shares of stock outstanding. Each share receives one vote. Presently, the company is voting to elect three new directors. Which one of the following statements must be true given this information?

If cumulative voting applies, Jen is assured one seat on the board.

Which one of the following statements is correct?

Income from both sole proprietorships and partnerships is taxed as individual income.

In 1884, the winner of a competition was paid $100. In 2015, the winner's prize was $375,000. What will the winner's prize be in 2040 if the prize continues increasing at the same rate? (Round your answer to the nearest $500.)

$,1,803,500 $375,000 = $100 ×(1 + r)^131; r = 6.48359 percent FV = $375,000 ×(1 + .0648359)25 = $1,803,500 (rounded to nearest $500)

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 sales are generated from every $1 in total assets?

$1.08 [Total asset turnover = $31,350 / ($2,715 + 22,407 + 3,908) = 1.08 Every $1 in total assets generates $1.08 in sales.]

Sue plans to save $4,500, $0, and $5,500 at the end of each of the next three years, respectively. What will her investment account be worth at the end of the third year if she earns an annual rate of 4.15 percent?

$10,381.25 FV = $4,500 �1.04152 + $5,500 = $10,381.25

KNJ Companies is preparing to pay dividends of $.52, $.60, and $.75 a share over the next three years, respectively. After that, the annual dividend will be $1.10 per share indefinitely. What is this stock worth to you per share if you require a return of 9.8 percent?

$10.02 P3 = $1.10 / .098 = $11.2245 P0 = $.52 / (1 + .098) + $.60 / (1 + .098)^2 + ($.75 + 11.2245) / (1 + .098)^3 P0 = $10.02

DT Motors paid its first annual dividend yesterday in the amount of $.15 a share. The company plans to double the dividend in each of the next 3 years. Starting in year 4, the firm plans to pay $1.50 a share indefinitely. What is one share of this stock worth today if the market rate of return on similar securities is 11.2 percent?

$11.37 P3 = $1.50 / .112 = $13.39 P0 = $.30 / (1 + .112) + $.60 / (1 + .112)^2 + ($1.20 + 13.39) / (1 + .112)^3 P0 = $11.37

Suppose you are committed to owning a $195,000 Ferrari. You believe your mutual fund can achieve an annual rate of return of 8 percent and you want to buy the car in 7 years. How much must you invest today to fund this purchase assuming the price of the car remains constant?

$113,780.63 PV = $195,000/(1 + .08)^7; PV = $113,780.63

You are purchasing a 20-year, zero-coupon bond. The yield to maturity is 8.68 percent and the face value is $1,000. What is the current market price? Assume semiannual compounding.

$182.80 Bond price = $1,000 / [1 + (.0868 / 2)]^(20 × 2) = $182.80

Four years ago, Ship Express purchased a mailing machine at a cost of $218,000. This equipment is currently valued at $97,400 on today's balance sheet but could actually be sold for $92,900. This is the only fixed asset the firm owns. Net working capital is $41,300 and long-term debt is $102,800. What is the book value of shareholders' equity?

$35,900 (Book value of shareholders' equity = $97,400 + 41,300 - 102,800 = $35,900)

Use the below information to answer the following question. COGS $92,511 Interest $4,608 Dividends $3,200 Depreciation $18,709 Change in RE $14,308 Tax rate 35% What is the operating cash flow given the above information?

$40,825.00 (Net income = $14,308 + 3,200 = $17,508 Taxable income = $17,508 / (1 - .35) = $26,935.38 Earnings before interest and taxes = $26,935.38 + 4,608 = $31,543.38 Operating cash flow = $31,543.38 + 18,709 - .35($26,935.38) = $40,825.00)

Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 22 percent for the next three years, with the growth rate falling off to a constant 7 percent thereafter. If the required return is 12 percent, and the company just paid a dividend of $1.30, what is the current share price?

$40.60 With supernormal dividends, we find the price of the stock when the dividends level off at a constant growth rate, and then find the PV of the future stock price, plus the PV of all dividends during the supernormal growth period. The stock begins constant growth in Year 4, so we can find the price of the stock in Year 3, one year before the constant dividend growth begins as: P3 = D3(1 + g) / (R − g) = D0(1 + g1)3(1 + g2) / (R − g)P3 = $1.30(1.22)3(1.07) / (.12 − .07)P3 = $50.52 The price of the stock today is the PV of the first three dividends, plus the PV of the Year 3 stock price. The price of the stock today will be: P0 = $1.30(1.22) / 1.12 + $1.30(1.22)2/ 1.122 + $1.30(1.22)3/ 1.123 + $50.52 / 1.123P0 = $40.60 We could also use the two-stage dividend growth model for this problem, which is: P0 = [D0(1 + g1) / (R − g1)]{1 − [(1 + g1) / (1 + R)]t} + [(1 + g1) / (1 + R)]t[D0(1 + g2) / (R − g2)]P0 = [$1.30(1.22) / (.12 − .22)][1 − (1.22 / 1.12)3] + [(1 + .22) / (1 + .12)]3[$1.30(1.07) / (.12 − .07)]P0 = $40.60

Keyser Mining is considering a project that will require the purchase of $875,000 of equipment. The equipment will be depreciated straight-line to a zero book value over the seven-year life of the project after which it will be worthless. The required return is 13 percent and the tax rate is 34 percent. What is the value of the depreciation tax shield in year 4 of the project?

$42,500 Depreciation tax shield = $875,000 / 7 *.34 = $42,500

The semiannual, 8-year bonds of Alto Music are selling at par and have an effective annual yield of 8.6285 percent. What is the amount of each interest payment if the face value of the bonds is $1,000?

$42.25 EAY = .086285 = [1 + (r / 2)]^2; r = .0845, or 8.45% Because the bond is selling at par, the APR and the coupon rate are equal.Semiannual interest payment = (.0845 × $1,000) / 2 = $42.25

A firm has a current EPS of $2.54 and a benchmark PE of 16.4. Earnings are expected to grow 3.8 percent annually. What is the target stock price in one year?

$43.24 P1 = $2.54 × (1 + .038) × 16.4 = $43.24

An insurance annuity offers to pay you $1,000 per quarter for 20 years. If you want to earn a rate of return of 6.5 percent, what is the most you are willing to pay as a lump sum today to buy this annuity?

$44,591.11 PVA = $1,000 × [(1 - {1 / [1 + (.065 / 4)]^(20 × 4)}) / (.065 / 4)] = $44,591.11

You are considering a project that will provide annual cash inflows of $16,500, $25,700, and $18,000 at the end of each year for the next three years, respectively. What is the present value of these cash flows, given a discount rate of 12.5 percent?

$47,615 PV = $16,500 / 1.125 + $25,700 / 1.125^2 + $18,000 / 1.125^3 = $47,61

Secolo Corporation stock currently sells for $82 per share. The market requires a return of 10.2 percent on the firm's stock. If the company maintains a constant 3.1 percent growth rate in dividends, what was the most recent dividend per share paid on the stock?

$5.65 P0 = $82 = D0(1 + g) / (R − g) Solving this equation for the dividend gives us: D0 = $82(.102 − .031) / (1.031)D0 = $5.65

The beginning of year balance sheet of The Beach Shoppe showed long-term debt of $2.1 million, while the end of year balance sheet showed long-term debt of $2.3 million. The annual income statement showed an interest expense of $250,000. What was the cash flow to creditors for the year ?

$50,000 [Cash flow to creditors = $250,000 - ($2,300,000 - 2,100,000) = $50,000]

A firm has a debt-equity ratio of 62 percent, a total asset turnover of 1.24, and a profit margin of 5.1 percent. The total equity is $489,600. What is the amount of the net income?

$50,159 [Return on equity = .051 × 1.24 × (1 + .62) = .1024 Net income = $489,600 × .1024 = $50,159]

Caan Corporation will pay a $3.18 per share dividend next year. The company pledges to increase its dividend by 5.5 percent per year indefinitely. If you require a return of 10 percent on your investment, how much will you pay for the company's stock today?

$70.67 Using the constant growth model, we find the price of the stock today is: P0 = D1 / (R − g) P0 = $3.18 / (.10 − .055) P0 = $70.67

The next dividend payment by Halestorm, Inc., will be $1.88 per share. The dividends are anticipated to maintain a growth rate of 4 percent forever. If the stock currently sells for $37 per share, what is the required return?

9.11% We need to find the required return of the stock. Using the constant growth model, we can solve the equation for R. Doing so, we find: R = (D1 / P0) + g R = ($1.88 / $37) + .04 R = .0908, or 9.08%

On a common-base year financial statement, accounts receivables for the current year will be expressed relative to which one of the following?

Base-year accounts receivables.

Which one of these is a strength of the average accounting return method of project analysis?

Based on easily obtainable information.

Why should financial managers strive to maximize the current value per share of the existing stock?

Because they have been hired to represent the interests of the current shareholders.

A stock has an expected return of 12 percent, the risk-free rate is 3.5 percent, and the market risk premium is 5 percent. What must the beta of this stock be?

beta of stock: 1.70 E(Ri) = .120 = .035 + .050βi βi = 1.70

Which one of the following terms is defined as the management of a firm's long-term investments?

capital budgeting

A supplier, who requires payment within 10 days, should be most concerned with which one of the following ratios when granting credit?

cash

The cash flow of a firm that is available for distribution to the firm's creditors and stockholders is called the:

cash flow from assets

A bond is quoted at a price of $1,011. This price is referred to as the:

clean price

A business created as a distinct legal entity and treated as a legal "person" is called a:

corporation

Which form of business structure is most associated with agency problems?

corporation

Which one of the following is an unintended result of the Sarbanes-Oxley Act?

corporations delisting from major exchanges

The Absolute Zero Co. just issued a dividend of $3.20 per share on its common stock. The company is expected to maintain a constant 6.6 percent growth rate in its dividends indefinitely. If the stock sells for $64 a share, what is the company's cost of equity?

cost of equity 11.93% RE = [$3.20(1.066) / $64] + .066RE = .1193, or 11.93%

The Graber Corporation's common stock has a beta of 1.1. If the risk-free rate is 5.1 percent and the expected return on the market is 13 percent, what is the company's cost of equity capital?

cost of equity capital 13.79% RE = .051 + 1.1(.13 - .051) RE = .1379, or 13.79%

Holdup Bank has an issue of preferred stock with a $4.85 stated dividend that just sold for $85 per share. What is the bank's cost of preferred stock?

cost of preferred stock 5.71% RP = $4.85 / $85 RP = .0571, or 5.71%

You want to have $1 million in your savings account when you retire. You plan on investing a single lump sum today to fund this goal. You will earn 7.5 percent annual interest. Which of the following will reduce the amount that you must deposit today if you are to have your desired $1 million on the day you retire? I. Invest in a different account paying a higher rate of interest. II. Invest in a different account paying a lower rate of interest. III. Retire later. IV. Retire sooner.

I and III only.

Which of the following are expenses for accounting purposes but are not operating cash flows for financial purposes? I. Interest expense. II. Taxes. III. Cost of goods sold. IV. Depreciation.

I and IV only

Luis is going to receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Luis and Soo Lee apply a 7 percent discount rate to these amounts?

In today's dollars, Luis's money is worth more than Soo Lee's.

Which one of the following actions by a financial manager is most apt to create an agency problem?

Increasing current profits when doing so lowers the value of the firm's equity.

Which one of the following statements concerning a sole proprietorship is correct?

It is easy to create a sole proprietorship.

Decisions made by financial managers should primarily focus on increasing which one of the following?

Market value per share of outstanding stock.

If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:

Mutually exclusive.

On June 1, you borrowed $195,000 to buy a house. The mortgage rate is 5.25 percent. The loan is to be repaid in equal monthly payments over 15 years. All taxes and insurance premiums are to be paid separately. The first payment is due on July 1. How much of the first payment applies to the principal balance?

$714.43 $195,000 = C ×[(1 - {1 / [1 + (.0525 / 12)]^(15 ×12)}) / (.0525 / 12)] C = $1,567.56 Interest Month 1 = $195,000 × (.0525 / 12) = $853.13 Principal Month 1 = $1,567.56 - 853.13 = $714.43

Which one of the following statements related to an income statement is correct? Assume accrual accounting is used.

The labor costs for producing a product are expensed when the product is sold.

Travis International has a one-time expense of $2.86 million that must be paid three years from now. Since the firm cannot raise that amount in one day, it wants to save an equal amount each month over the next three years to fund this expense. If the firm can earn 2.1 percent on its savings, how much must it save each month?

$77,037.69 FVA = $2.86 million = C × ({[1 + (.021 / 12)]^(3 × 12) - 1} / (.021 / 12)) C = $77,037.69

The common stock of Water Town Mills pays an annual dividend of $1.84 a share. The company has promised to maintain a constant dividend even though economic times are tough. How much are you willing to pay for one share of this stock if you want to earn a 13.6 percent annual return?

$13.53 P0 = $1.84 / .136 = $13.53

Russell's is considering purchasing $388,000 of equipment for a four-year project. The equipment falls in the five-year MACRS class with annual percentages of .2, .32, .192, .1152, .1152, and .0576 for years 1 to 6, respectively. At the end of the project the equipment can be sold for an estimated $174,000. The required return is 14.6 percent and the tax rate is 34 percent. What is the amount of the aftertax salvage value of the equipment?

$137,635.78 Book value4 = $388,000 ×(1 - 2. - .32 - .192 - .1152) = $67,046.40 Aftertax salvage value = $174,000 + ($67,046.40 - 174,000)(.34) Aftertax salvage value = $137,635.78

The Fluffy Feather sells customized handbags. Currently, it sells 18,000 handbags annually at an average price of $89 each. It is considering adding a lower-priced line of handbags that sell for $59 each. The firm estimates it can sell 7,000 of the lower-priced handbags but will sell 3,000 less of the higher-priced handbags by doing so. What is the amount of the sales that should be used when evaluating the addition of the lower-priced handbags?

$146,000 Sales = (7,000 *$59) + (-3,000 *$89) = $146,000

Hot and Cold has annual sales of $982,000, annual depreciation of $127,000, and net working capital of $243,000. The tax rate is 34 percent and the profit margin is 6 percent. The firm has no interest expense. What is the amount of the operating cash flow?

$185,920 OCF = ($982,000 *.06) + $127,000 = $185,920

A project has an initial cost of $18,400 and is expected to produce cash inflows of $7,200, $8,900, and $7,500 over the next three years, respectively. What is the discounted payback period if the required rate of return is 12 percent?

2.91 years DPB = 2 + [$18,400 - ($7,200 / 1.12) - ($8,900 / 1.12^2)] / ($7,500 / 1.12^3) DPB = 2.91 years

Bernice's has $823,000 in sales. The profit margin is 3.9 percent and the firm has 7,500 shares of stock outstanding. The market price per share is $15. What is the price-earnings ratio?

3.51 [Price-earnings ratio = $15 / [(.039 × $823,000) / 7,500] = 3.51]

A sinking fund is managed by a trustee for which one of the following purposes?

Early bond redemption.

Which one of the following best describes pro forma financial statements?

Financial statements showing projected values for future time periods.

Wood Refinishers currently has $298,900 in sales and is operating at 86 percent of the firm's capacity. The dividend payout ratio is 40 percent and cost of goods sold is $211,300. What is the full capacity level of sales?

Full-capacity sales = $298,900 / .86 = $347,558.14

Which of the following individuals have unlimited liability based on their ownership interest? I. General partner II. Sole proprietor III. Stockholder IV. Limited partner

I and II only.

The articles of incorporation: I. Describe the purpose of the firm. II. Are amended periodically. III. Set forth the number of shares of stock that can be issued. IV. Detail the method that will be used to elect corporate directors.

I and III only

Net capital spending:

Is equal to zero if the decrease in the net fixed assets is equal to the depreciation expense.

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.52 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,020,000 in annual sales, with costs of $715,000. If the tax rate is 30 percent, what is the OCF for this project?

OCF $1,165,500 Using the tax shield approach to calculating OCF (Remember the approach is irrelevant; the final answer will be the same no matter which of the four methods you use.), we get: OCF = (Sales − Costs)(1 − TC) + TC(Depreciation) OCF = ($2,020,000 − 715,000)(1 − .30) + .30($2,520,000 / 3) OCF = $1,165,500

You are considering five loan offers. The only significant difference between them is their interest rates. Given the following information, which offer should you accept? (Assume a 365-day year.) Offer A: 6.75 percent APR with daily compounding. Offer B: 6.8 percent APR with monthly compounding. Offer C: 7 percent APR with annual compounding. Offer D: 6.825 percent APR with quarterly compounding. Offer E: 6.85 percent APR with semi-annual compounding.

Offer E Offer A: EAR = [1 + (.0675 / 365)]^365 - 1 = .0698, or 6.98 percent Offer B: EAR = [1 + (.068 / 12)]^12 - 1 = .0702, or 7.02 percent Offer C: EAR = (1 +.07)1 - 1 = .0700, or 7.00 percent Offer D: EAR = [1 + (.06825 / 4)]^4 - 1 = .0700, or 7.00 percent Offer E: EAR = [1 + (.0685 / 2)]^2 - 1 = .0697, or 6.97 percent

You are comparing two investment options that each pay 6 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate.

Option B has a higher present value at time zero.

What is the payback period for the following set of cash flows? 0. $5500 1. $1525 2. $1725 3. $2125 4. $1625

Payback Period 3.08 years To calculate the payback period, we need to find the time that the project has recovered its initial investment. After three years, the project has created: $1,525 + 1,725 + 2,125 = $5,375in cash flows. The project still needs to create another: $5,500 - 5,375 = $125 in cash flows. During the fourth year, the cash flows from the project will be $1,625. So, the payback period will be three years, plus what we still need to make divided by what we will make during the fourth year. The payback period is: Payback = 3 + ($125 / $1,625) = 3.08 years

Which two methods of project analysis are the most biased towards short-term projects?

Payback and discounted payback.

Which one of the following terms is applied to the financial planning method which uses the projected sales level as the basis for determining changes in balance sheet and income statement account values?

Percentage of sales method.

You own a portfolio that has $2,400 invested in Stock A and $3,400 invested in Stock B. If the expected returns on these stocks are 9 percent and 12 percent, respectively, what is the expected return on the portfolio?

Portfolio expected return 10.76% The expected return of a portfolio is the sum of the weight of each asset times the expected return of each asset. The total value of the portfolio is: Total portfolio value = $2,400 + 3,400Total portfolio value = $5,800 So, the expected return of this portfolio is: E(RP) = ($2,400 / $5,800)(.09) + ($3,400 / $5,800)(.12) E(RP) = .1076, or 10.76%

Which one of the following is classified as a tangible fixed asset?

Production equipment.

The Square Box is considering two independent projects, both of which have an initial cost of $18,000. The cash inflows of Project A are $3,000, $7,000, and $10,000 over the next three years, respectively. The cash inflows for Project B are $3,000, $7,000, and $15,000 over the next three years, respectively. The required return is 12 percent and the required discounted payback period is 3 years. Based on discounted payback, which project(s), if either, should be accepted?

Project A should be rejected and Project B should be accepted. Discounted cash flowsA = $3,000 / 1.12 + $7,000 / 1.12^2 + $10,000 / 1.12^3 Discounted cash flowsA = $15,376.73 Project A never pays back on a discounted basis. DPBB = 2 + [$18,000 - $3,000 / 1.12 - $7,000 / 1.12^2] / ($15,000 / 1.12^3) DPBB= 2.91 years Project B should be accepted because it pays back within the required period

A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of:

Sales

Which one of the following accounts is the most liquid?

Accounts Receivable.

Which one of the following statements concerning stock exchanges is correct?

Some large companies are listed on NASDAQ.

Which one of the following is a source of cash?

acquisition of debt

You are working on a bid to build two apartment buildings a year for the next three years. This project requires the purchase of $1,089,000 of equipment that will be depreciated using straight-line depreciation to a zero book value over the project's life. The equipment can be sold at the end of the project for $815,000. You will also need $280,000 in net working capital over the life of the project. The fixed costs will be $528,000 a year and the variable costs will be $1,640,000 per building. Your required rate of return is 18 percent for this project and your tax rate is 35 percent. What is the minimal amount, rounded to the nearest $100, you should bid per building?

$2,116,200 OCF NPV = $1,089,000 + 280,000 - [($815,000 ×(1 - .35) + $280,000] / 1.18^3 OCF NPV = $876,161.15 $876,161.15 = OCF({1 - [1 / (1.18)^3]} / .18) OCF = $402,967.42 NI = $402,967.42 - ($1,089,000 / 3) = $39,967.42 EBT = $39,967.42 / (1 - .35) = $61,488.34 Sales = $61,488.34 + ($1,089,000 / 3) + $528,000 + ($1,640,000 ×2) = $4,232,488.34 Bid per building = $4,232,488.34 / 2 = $2,116,244.17 When rounded to the nearest $100, the bid price is $2,116,200

Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land six years ago for $5.7 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent these facilities from a competitor instead. If the land were sold today, the company would net $6 million. The company wants to build its new manufacturing plant on this land; the plant will cost $13.2 million to build, and the site requires $840,000 worth of grading before it is suitable for construction. What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project?

$20,040,000 The $5.7 million acquisition cost of the land six years ago is a sunk cost. The $6 million current aftertax value of the land is an opportunity cost if the land is used rather than sold off. The $13.2 million cash outlay and $840,000 grading expenses are the initial fixed asset investments needed to get the project going. Therefore, the proper Year 0 cash flow to use in evaluating this project is: $6,000,000 + 13,200,000 + 840,000 = $20,040,000

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

$21,903 Change in net working capital = ($122,418 - 103,718) - ($121,306 - 124,509) = $21,903

The Shore Hotel just paid a dividend of $2 per share. The company will increase its dividend by 6 percent next year and will then reduce its dividend growth rate by 2 percentage points per year until it reaches the industry average of 2 percent dividend growth, after which the company will keep a constant growth rate forever. What is the price of this stock today given a required return of 12 percent?

$21.58 P2 = [$2 ×(1 + .06) ×(1 + .04) ×(1 + .02)] / (.12 - .02) = $22.49 P0 = [$2 × (1 + .06)] / (1 + .12) + {[$2 × (1 + .06) × (1 + .04)] + $22.49} / (1 + .12)^2 = $21.58

Global Logistics just announced it is increasing its annual dividend to $1.68 next year and establishing a policy whereby the dividend will increase by 3.25 percent annually thereafter. How much will one share of this stock be worth ten years from now if the required rate of return is 13.5 percent?

$22.57 P10 = [$1.68 �(1 + .10325)^10] / (.135 - .0325) = $22.57

Global Tours has current assets of $1,360 and current liabilities of $940 as of the beginning of the year. At the end of the year, current assets are $1,720 and current liabilities are $1,080. What was the change in net working capital for the year?

$220 (Change in net working capital = ($1,720 - 1,080) - ($1,360 - 940) = $220)

You are depositing $3,000 in a retirement account today and expect to earn an average return of 7.5 percent on this money. How much additional income will you earn if you leave the money invested for 45 years instead of just 40 years?

$23,581.80 Future value = $3,000 × (1 + .075)^45 = $77,714.52 Future value = $3,000 × (1 + .075)^40 = $54,132.72 Difference = $77,714.52 - 54,132.72 = $23,581.80

Winnebagel Corp. currently sells 23,000 motor homes per year at $61,000 each, and 8,500 luxury motor coaches per year at $98,000 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 18,000 of these campers per year at $10,500 each. An independent consultant has determined that if Winnebagel introduces the new campers, it should boost the sales of its existing motor homes by 2,300 units per year, and reduce the sales of its motor coaches by 1,000 units per year. What is the amount to use as the annual sales figure when evaluating this project?

$231,300,000 Sales due solely to the new product line are: 18,000($10,500) = $189,000,000 Increased sales of the motor home line occur because of the new product line introduction; thus: 2,300($61,000) = $140,300,000 in new sales is relevant. Erosion of luxury motor coach sales is also due to the new campers; thus: 1,000($98,000) = $98,000,000 loss in sales is relevant. The net sales figure to use in evaluating the new line is thus: $189,000,000 + 140,300,000 − 98,000,000 = $231,300,000

Future Motors is expected to pay a $3.30 a share annual dividend next year. Dividends are expected to increase by 2.75 percent annually. What is one share of this stock worth to you today if your required rate of return is 15 percent?

$26.94 P0 = $3.30 / (.15 - .0275) = $26.94

Your parents have made you two offers. The first offer includes annual gifts of $10,000, $11,000, and $12,000 at the end of each of the next three years, respectively. The other offer is the payment of one lump sum amount today. You are trying to decide which offer to accept given the fact that your discount rate is 8 percent. What is the minimum amount that you will accept today if you are to select the lump sum offer?

$28,216 PV = $10,000 / 1.08 + $11,000 / 1.08^2 + $12,000 / 1.08^3 = $28,216

A proposed three-year project will require $627,000 for fixed assets, $169,000 for inventory, and $43,000 for accounts receivable. Accounts payable are expected to increase by $178,000. The fixed assets will be depreciated straight-line to a zero book value over five years. At the end of the project, the fixed assets can be sold for $225,000. The net working capital returns to its original level at the end of the project. The operating cash flow per year is $62,000. The tax rate is 35 percent and the discount rate is 12 percent. What is the total cash flow in the final year of the project?

$330,030 Net working capital recovery = $169,000 + 43,000 - 178,000 = $34,000 Book value3 = $627,000 / 5 × 2 = $250,800 CF3 = $62,000 + 34,000 + 225,000 + ($250,800 - 225,000)(.35) = $330,030

Stone Walls has a long-term debt ratio of.6 and a current ratio of 1.2. Current liabilities are $800, sales are $7,800, profit margin is 6.5 percent, and return on equity is 15.5 percent. What is the amount of the firm's net fixed assets?

$8,017.43 Current assets = 1.2 × $800 = $960 Net income = .065 × $7,800 = $507 Total equity = $507 / .155 = $3,270.97.6 = Long term debt / (Long-term debt + $3,270.97) Long-term debt = $4,906.46 Total debt = $800 + 4,906.46 = $5,706.46 Total assets = $5,706.46 + 3,270.97 = $8,977.43 Net fixed assets = $8,977.43 - 960 = $8,017.43

The tax rates are as shown. Nevada Mining currently has taxable income of $97,800. How much additional tax will the firm owe if taxable income increases by $21,000? $0-50,000 is 15% $50,001-75000 is 25% $75,001-100,000 is 34% 100,001-335,000 is 39%

$8080 (Additional tax = .34($100,000 - 97,800) + .39($97,800 + 21,000 - 100,000) = $8,080)

Lohn Corporation is expected to pay the following dividends over the next four years: $15, $11, $10, and $6.50. Afterward, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 12 percent, what is the current share price?

$95.37 With supernormal dividends, we find the price of the stock when the dividends level off at a constant growth rate, and then find the PV of the future stock price, plus the PV of all dividends during the supernormal growth period. The stock begins constant growth in Year 4, so we can find the price of the stock in Year 4, at the beginning of the constant dividend growth, as: P4 = D4(1 + g) / (R − g)P4 = $6.50(1.05) / (.12 − .05)P4 = $97.50 The price of the stock today is the PV of the first four dividends, plus the PV of the Year 4 stock price. So, the price of the stock today will be: P0 = $15 / 1.12 + $11 / 1.122 + $10 / 1.123 + $6.50 / 1.124 + $97.50 / 1.124 P0 = $95.37

A 10-year, 4.5 percent, semiannual coupon bond issued by Tyler Rentals has a $1,000 face value. The bond is currently quoted at 98.7. What is the clean price of this bond if the next interest payment will occur 2 months from today?

$987.00 Clean price = .987 × $1,000 = $987

RTF Oil has total sales of $911,400 and costs of $787,300. Depreciation is $52,600 and the tax rate is 34 percent. The firm does not have any interest expense. What is the operating cash flow?

$99,790 (Earnings before interest and taxes = $911,400 - 787,300 - 52,600 = $71,500 Tax = $71,500 ×.34 = $24,310 Operating cash flow = $71,500 + 52,600 - 24,310 = $99,790)

Jensen Enterprises paid $1,300 in dividends and $920 in interest this past year. Common stock increased by $1,200 and retained earnings decreased by $310. What is the net income for the year?

$990 (Net income = $1,300 + (-$310) = $990)

How to calculate net cash flows to stockholders

(Net Income-(end year RE- beg year RE)-(end year c-stk- beg year c-stk)

An investment project has an installed cost of $518,297. The cash flows over the four-year life of the investment are projected to be $287,636, $203,496, $103,802, and $92,556, respectively. What is the NPV of this project if the discount rate is infinite?

-$518,297 If the discount rate is infinite, the NPV will equal the cash flow at Time 0.

Fama's Llamas has a weighted average cost of capital of 9.5 percent. The company's cost of equity is 11 percent, and its pretax cost of debt is 7.5 percent. The tax rate is 40 percent. What is the company's target debt−equity ratio?

.3000 % plus/minus 1 Here we have the WACC and need to find the debt−equity ratio of the company. Setting up the WACC equation, we find: WACC = .0950 = .11(E/V) + .075(D/V)(1 - .40) Rearranging the equation, we find: .0950(V/E) = .11 + .075(.60)(D/E) Now we must realize that the V/E is just the equity multiplier, which is equal to: V/E = 1 + D/E .0950(D/E + 1) = .11 + .04500(D/E) Now we can solve for D/E as: .05000(D/E) = .015 D/E = .3000

A firm has a debt-equity ratio of .57. What is the total debt ratio?

.36 [The debt-equity ratio is .57. If total debt is $57 and total equity is $100, then total assets are $157. Total debt ratio = $57 / $157 = .36.]

A firm has sales of $96,400, costs of $53,800, interest paid of $2,800, and depreciation of $7,100. The tax rate is 34 percent. What is the value of the cash coverage ratio?

15.21 [Cash coverage ratio = ($96,400 − 53,800) / $2,800 = 15.21]

A portfolio is invested 16 percent in Stock G, 56 percent in Stock J, and 28 percent in Stock K. The expected returns on these stocks are 9 percent, 15 percent, and 20 percent, respectively. What is the portfolio's expected return?

15.44% The expected return of a portfolio is the sum of the weight of each asset times the expected return of each asset. So, the expected return of the portfolio is: E(RP) = .16(.09) + .56(.15) + .28(.20) E(RP) = .1544, or 15.44% If we own this portfolio, we would expect to earn a return of 15.44 percent.

Dinklage Corp. has 7 million shares of common stock outstanding. The current share price is $73, and the book value per share is $8. The company also has two bond issues outstanding. The first bond issue has a face value of $75 million, a coupon of 8 percent, and sells for 98 percent of par. The second issue has a face value of $55 million, a coupon of 9 percent, and sells for 107 percent of par. The first issue matures in 23 years, the second in 7 years. a. What are the company's capital structure weights on a book value basis? b. What are the company's capital structure weights on a market value basis?

A. equity/value is .3011 debt/value is .6989 b. equity/value is .7943 debt/value is .2057 The book value of equity is the book value per share times the number of shares, and the book value of debt is the face value of the company's debt, so: BVE = 7,000,000($8) BVE = $56,000,000 BVD = $75,000,000 + 55,000,000 BVD = $130,000,000 So, the total value of the company is: V = $56,000,000 + 130,000,000V = $186,000,000 And the book value weights of equity and debt are: E/V = $56,000,000 / $186,000,000 E/V = .3011 D/V = 1 - E/V = .6989 b. The market value of equity is the share price times the number of shares, so: MVE = 7,000,000($73) MVE = $511,000,000 Using the relationship that the total market value of debt is the price quote times the par value of the bond, we find the market value of debt is: MVD = .98($75,000,000) + 1.07($55,000,000) MVD = $132,350,000 This makes the total market value of the company: V = $511,000,000 + 132,350,000 V = $643,350,000 And the market value weights of equity and debt are: E/V = $511,000,000 / $643,350,000 E/V = .7943 D/V = 1 - E/V = .2057

What are the portfolio weights for a portfolio that has 144 shares of Stock A that sell for $40 per share and 100 shares of Stock B that sell for $20 per share?

A: .7423 ± 1% B: .2577 ± 1% The portfolio weight of an asset is the total investment in that asset divided by the total portfolio value. First, we will find the portfolio value, which is: Total value = 144($40) + 100($20)Total value = $7,760 The portfolio weight for each stock is: WeightA = 144($40) / $7,760WeightA = .7423 WeightB = 100($20) / $7,760WeightB = .2577

Project A costs $45,000 with cash inflows of $34,200 in year 1 and $28,700 in year 2. Project B costs $59,200 with cash inflows of $21,900 in year 1 and $59,200 in year 2. These projects are independent and have an assigned discount rate of 15 percent. Based on the profitability index, what is your recommendation concerning these projects?

Accept both projects. PVInflows A = $34,200 / 1.15 + $28,700 / 1.15^2 = $51,440.45 PIA = $51,440.45 / $45,000 = 1.14 PVInflows B = $21,900 / 1.15 + $59,200 / 1.15^2 = $63,807.18 PIB = $63,807.18 / $59,200 = 1.08 Since both PIs are greater than 1, both projects should be accepted.

An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $6,000,000 and will be sold for $1,200,000 at the end of the project. If the tax rate is 34 percent, what is the aftertax salvage value of the asset? Refer to Table 10.7.

Aftertax salvage value $1,144,512 To find the BV at the end of four years, we need to find the accumulated depreciation for the first four years. We could calculate a table as in Problem 6, but an easier way is to add the MACRS depreciation amounts for each of the first four years and multiply this percentage times the cost of the asset. We can then subtract this from the asset cost. Doing so, we get: BV4 = $6,000,000 − 6,000,000(.2000 + .3200 + .1920 + .1152) BV4 = $1,036,800 The asset is sold at a gain to book value, so this gain is taxable. Aftertax salvage value = $1,200,000 + ($1,036,800 − 1,200,000)(.34)Aftertax salvage value = $1,144,512

On your ninth birthday, you received $300 which you invested at 4.5 percent interest, compounded annually. Your investment is now worth $756. How old are you today?

Age 30 $756 = $300 ×(1 + .045)^t; t = 21 years; Age today = 9 + 21 = 30

A stock has had returns of 8 percent, 15 percent, 22 percent, −16 percent, 22 percent, and −9 percent over the last six years. What are the arithmetic and geometric returns for the stock?

Arithmetic return 7.00% Geometric return 5.93% The arithmetic average return is the sum of the known returns divided by the number of returns, so: Arithmetic average return = (.08 + .15 + .22 - .16 + .22 - .09) / 6 Arithmetic average return = .0700, or 7.00% Using the equation for the geometric return, we find: Geometric average return = [(1 + R1) × (1 + R2) × ... × (1 + RT)]1/T - 1 Geometric average return = [(1 + .08)(1 + .15)(1 + .22)(1 - .16)(1 + .22)(1 - .09)](1/6) - 1 Geometric average return = .0593, or 5.93% Remember, the geometric average return will always be less than the arithmetic average return if the returns have any variation.

Roger's Meat Market is considering two independent projects. The profitability index decision rule indicates that both projects should be accepted. This result most likely does which one of the following?

Assumes the firm has sufficient funds to undertake both projects.

Dixie South currently pays an annual dividend of $1.46 a share and plans on increasing that amount by 2.75 percent annually. Northern Culture currently pays an annual dividend of $1.42 a share and plans on increasing its dividend by 3.1 percent annually. Given this information, you know for certain that the stock of Northern Culture has a higher ______ than the stock of Dixie South.

Capital gains yield.

Which one of the following statements is correct?

Corporations can raise large amounts of capital generally easier than partnerships can.

Which one of the following applies to a premium bond?

Coupon rate > current yield > yield to maturity.

Which one of the following is a working capital management decision?

Determining whether to pay cash for a purchase or use the credit offered by the supplier.

Suppose a stock had an initial price of $68 per share, paid a dividend of $2.00 per share during the year, and had an ending share price of $80. What was the dividend yield and the capital gains yield?

Dividend yield 2.94% Capital gains yield 17.65% The dividend yield is the dividend divided by the beginning of the period price, so: Dividend yield = $2.00 / $68 Dividend yield = .0294, or 2.94% And the capital gains yield is the increase in price divided by the initial price, so: Capital gains yield = ($80 - 68) / $68 Capital gains yield = .1765, or 17.65%

You find a certain stock that had returns of 15 percent, −22 percent, 23 percent, and 10 percent for four of the last five years. The average return of the stock over this period was 9.5 percent. What was the stock's return for the missing year? What is the standard deviation of the stock's returns?

Stock's return 21.5 ± 1% Standard deviation 18.36 ± 1% Here we know the average stock return, and four of the five returns used to compute the average return. We can work the average return equation backward to find the missing return. The average return is calculated as: 5(.0950) = .15 - .22 + .23 + .10 + R R = .215, or 21.5% The missing return has to be 21.5 percent. Now we can use the equation for the variance to find: Variance = 1/4[(.15 - .0950)^2 + (-.22 - .0950)^2 + (.23 - .0950)^2 + (.10 - .0950)^2 + (.215 - .0950)^2] Variance = .03373 And the standard deviation is: Standard deviation = (.03373)^1/2 Standard deviation = .1836, or 18.36%

Corporate dividends are:

Taxable as personal income when received by shareholders even though that income was taxed at the corporate level.

Which one of the following characteristics applies to a limited liability company?

Taxed similar to a partnership.

Which one of the following statements related to an income statement is correct?

Taxes reduce both net income and operating cash flow.

The bottom-up approach to computing the operating cash flow applies only when:

The interest expense is equal to zero.

How to calculate maximum increase in sales

The maximum percentage sales increase is the sustainable growth rate. To calculate the sustainable growth rate, we first need to calculate the ROE, which is: ROE=NI / EQUITY ROE=$6,864 / $77,300 ROE=.0888, or 8.88% The plowback ratio, b, is one minus the payout ratio, so: b= 1 - .25b= .75 Now we can use the sustainable growth rate equation to get: Sustainable growth rate=(ROE × b) / [1 - (ROE × b)] Sustainable growth rate=[.0888(.75)] / [1 - .0888(.75)] Sustainable growth rate=.0713, or 7.13% So, the maximum dollar increase in sales is: Maximum increase in sales= $52,800(.0713) Maximum increase in sales= $3,767.25

Which one of the following statements concerning a sole proprietorship is correct?

The owner of a sole proprietorship is personally responsible for all of the company's debts.

Winston Co. has a dividend-paying stock with a total return for the year of -6.5 percent. Which one of the following must be true?

The stock has a negative capital gains yield.

Which one of the following correctly defines the upward chain of command in a typical corporate organizational structure?

The treasurer reports to the vice president of finance.

Tobin's Q relates the market value of a firm's assets to which one of the following?

Today's cost to duplicate those assets

Suppose a stock had an initial price of $60 per share, paid a dividend of $.60 per share during the year, and had an ending share price of $72. Compute the percentage total return.

Total return 21.00% The return of any asset is the increase in price, plus any dividends or cash flows, all divided by the initial price. The return of this stock is: R = ($72 - 60 + .60) / $60R = .2100, or 21.00%

Activities of a firm that require the spending of cash are known as:

Uses of cash.

Which one of the following statements related to loan interest rates is correct?

When comparing loans you should compare the effective annual rates.

Suppose you bought a bond with an annual coupon rate of 5.4 percent one year ago for $890. The bond sells for $920 today. a.Assuming a $1,000 face value, what was your total dollar return on this investment over the past year? b.What was your total nominal rate of return on this investment over the past year? c. If the inflation rate last year was 3 percent, what was your total real rate of return on this investment?

a. $84 b. 9.44% c. 6.25% a.The total dollar return is the increase in price plus the coupon payment, so: Total dollar return = $920 - 890 + 54 Total dollar return = $84 b.The total percentage return of the bond is: R = ($920 - 890 + 54) / $890R = .0944, or 9.44% Notice here that we could have simply used the total dollar return of $84 in the numerator of this equation. c.Using the Fisher equation, the real return was: (1 + R) = (1 + r)(1 + h) r = (1.0944 / 1.030) - 1r = .0625, or 6.25%

You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 11 percent, -10 percent, 19 percent, 18 percent, and 10 percent. Suppose the average inflation rate over this period was 2.7 percent and the average T-bill rate over the period was 4.8 percent. a.What was the average real return on Crash-n-Burn's stock? b.What was the average nominal risk premium on Crash-n-Burn's stock?

a. 6.7% b. 4.8% a. To find the average return, we sum all the returns and divide by the number of returns, so: Average return = (.11 - .10 + .19 + .18 + .10) / 5 Average return = .096, or 9.6% To calculate the average real return, we can use the average return of the asset, and the average inflation in the Fisher equation. Doing so, we find: (1 + R) = (1 + r)(1 + h) r⎯⎯r¯ = (1.096 / 1.027) - 1r⎯⎯r¯ = .0672, or 6.72% b. The average risk premium is simply the average return of the asset, minus the average risk-free rate, so, the average risk premium for this asset would be: Average risk premium = Average return − Average risk-free rate Average risk premium = .096 − .048 Average risk premium = .048, or 4.8%

Mullineaux Corporation has a target capital structure of 55 percent common stock, 15 percent preferred stock, and 30 percent debt. Its cost of equity is 9 percent, the cost of preferred stock is 4 percent, and the pretax cost of debt is 6 percent. The relevant tax rate is 40 percent. a.What is the company's WACC? b. What is the aftertax cost of debt?

a. Wacc is 6.63% b. After tax cost of debt is 3.60% a.Using the equation to calculate the WACC, we find: WACC = .55(.09) + .15(.04) + .30(.06)(1 - .40) WACC = .0663, or 6.63% b.The aftertax cost of debt is: RD = .06(1 - .40) RD = .0360, or 3.60% Hence, on an aftertax basis, debt is cheaper than the preferred stock.

Which of the following can affect a firm's sustainable rate of growth? I. Capital intensity ratio. II. Profit margin. III. Dividend policy. IV. Debt-equity ratio.

all

Locate the Treasury issue in Figure 7.4 maturing in February 2026. Assume a par value of $10,000. what is the coupon rate? what is the bid price in dollars? what is the previous day's asking price?

coupon rate: 6% bid price: $13028.13 asking price: $13104.69 The coupon rate, located in the second column of the quote, is 6 percent. The bid price is: Bid price = 130.2813 = 130.2813% Bid price = (130.2813 / 100)($10,000) Bid price = $13,028.13 The previous day's asked price is found by: Previous day's asked price = Today's asked price - Change Previous day's asked price = 130.3594 - (-.6875) Previous day's asked price = 131.0469 The previous day's price in dollars was: Previous day's dollar price = 131.0469 = 131.0469% Previous day's dollar price = (131.0469 / 100)($10,000) Previous day's dollar price = $13,104.69

A firm has an interval measure of 48. This means that the firm has sufficient liquid assets to do which one of the following?

cover its operating costs for the next 48 days

Your grandmother has promised to give you $10,000 when you graduate from college. She is expecting you to graduate three years from now. What happens to the present value of this gift if you speed up your graduation by one year and graduate two years from now?

increases

A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a:

limited partner

Sam, Alfredo, and Juan want to start a small U.S. business. Juan will fund the venture but wants to limit his liability to his initial investment and has no interest in the daily operations. Sam will contribute his full efforts on a daily basis but has limited funds to invest in the business. Alfredo will be involved as an active consultant and manager and will also contribute funds. Sam and Alfredo are willing to accept liability for the firm's debts as they feel they have nothing to lose by doing so. All three individuals will share in the firm's profits and wish to keep the initial organizational costs of the business to a minimum. Which form of business entity should these individuals adopt?

limited partnership

Which one of the following statements related to liquidity is correct?

liquid assets are valuable to a firm

Lenders probably have the most interest in which one of the following sets of ratios?

long term debt and times interest earned

The Sarbanes-Oxley Act of 2002 is a governmental response to:

management greed and abuses

Which one of the following best states the primary goal of financial management?

maximize the current value per share

calculate net capital spending

net fixed assets-prev year net fixed assets+prev year accounts rec

Which term relates to the cash flow that results from a firm's ongoing, normal business activities?

operating cash flow

The bid price is:

the minimum price that will provide your target rate of return

Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This transaction:

was facilitated in the secondary market

An investment project costs $10,000 and has annual cash flows of $2,990 for six years. What is the discounted payback period if the discount rate is zero percent? What is the discounted payback period if the discount rate is 5 percent? What is the discounted payback period if the discount rate is 5 percent?

~ 3.34 ~3.76 ~0, never R = 0%:3 + ($1,030 / $2,990) = 3.34 years Discounted payback = Regular payback = 3.34 years R = 5%:$2,990 / 1.05 + $2,990 / 1.052 + $2,990 / 1.053 = $8,142.51 $2,990 / 1.054 = $2,459.88 Discounted payback = 3 + ($10,000 - 8,142.51) / $2,459.88 = 3.76 years R = 20%:$2,990(PVIFA20%,6) = $9,943.28 The project never pays back.