Finance

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Linda is saving for retirement and would like to accumulate $800,000 at her retirement. She currently has $30,000 saved and would like to work for another 25 years. She plans to save $3500 at the end of each year over the next 25 years. What rate of return must she earn on her investments over the next 25 years?

10.95%

You are given the following information: Accounts Receivable $81,692 Sales $1,949,156 Net Income $5,664 Based on this, your Days Sales Outstanding is ______.

15.3

Consider the following probability distribution Probability Return 0.05 -80% 0.20 -10% 0.25 12% 0.30 30% 0.20 50% Calculate the expected return for this security.

16%

You are offered an investment that will pay you $3000 per year for the next 10 years. Assuming a 6% discount rate, the most you would pay for this cash flow stream today would be

22,080.26

Based on some budgeting analysis, you estimate that you can afford to make house payments of $1,188 per month. Assuming you are going to be able to borrow at 4.7% interest on a 30-year mortgage, how much home can you afford? (Hint -- you are solving for how much you can borrow today, given the interest rate and monthly payment. Ignore any down payment or closing costs). Be sure to write your answer down without a dollar sign (positive value) and round to the nearest cent.

229,062

You plan to save the following amounts $3,659 today $5,853 per year for the next 10 years $7,091 per year for the following 1 years $11,073 per year for the following 3 years $14,506 per year for the final 9 years Assuming you earn a 10.4% rate of return during the entire period, how much will you have at the END of the time horizon? Round answer to the nearest dollar.

234.21

Your firm wants to raise $1,431,120 by issuing preferred stock. The stock has a par value of $50 and pays a 9% dividend, how many shares must be issued if the required return is 8% (ignore costs associated with issuing the shares known as floatation costs -- round to the nearest share)?

25,442

You are given the following information: Cost of Goods Sold $29,843 Sales $41,907 Property, Plant and Equipment $18,522 Based on this, your Gross Profit Margin is ____%.

28.79

You are offered the opportunity to purchase a 6% coupon bond with 15 years remaining until maturity for $1105,40. Based on this, the yield-to-maturity for this bond is

4.99%

You are considering the purchase of a new stock. The stock is expected to grow at 1.79% for the foreseeable future and just paid a $3.95 dividend (D0). The required return is 11.03%. Based on this, wha is the value of the stock? Round to the nearest cent.

43.5

Which bond will be the least sensitive (in terms of percentage changes in its price) the interest rate changes?

5 year 10% coupon bond

You are offered an investment that pays 5.4% compounded monthly. Based on this, your effective annual rate would be ____%. Express your answer as a percentage (without the % sign) and round to 2 decimal places. For example 8.88% would be 8.88

5.54

You are offered an investment that will pay you the following amounts $5,865 today $1,579 per year for the next 4 years $2,894 per year for the following 3 years $7,626 per year for the following 1 years $14,563 per year for the final 3 years Assuming you earn a 11.9% rate of return during the entire period, how much is this investment worth TODAY? Round answer to the nearest dollar

523,712

You have just purchase a 10.25% coupon bond with 30 years remaining until maturity for $1201,75. The bond is callable in 10 years for $1102.50. Based on this, the Yield-to-Call is

7.97%

A firm has $55,818 in Owner's Equity and $141,447 in Total Assets. Based on this, the firm will have $____ in Total Liabilities. Omit the $ sign from your answer.

85,629

Find the value of a 11.8% coupon bond with a required return of 12.1% and 19 years maturity

977.87

Which of the following criteria does internal rate of return meet? This is a multiple answer question

?

Advantages to individuals of saving for retirement in a 401(k) plan instead of jest investing their own include

A 401(k) plan has the potential for a matching contribution from your employer

The expected rate of return on the Roth IRA is

A Roth IRA is a tax-shelter, not a type of investment. The expected rate of return depends on what investment you put in your Roth IRA

An example of a financial intermediary would be

A commercial bank A mutual fund A credit union

Consider two projects: Project A Project B PP 2.6 years 2.3 years IRR 14.5% 17.3% NPV $15,500 $6,900 Assume that the projects both have a required return of 12% and a critical acceptance level (T) of 2.5 years. If these are mutually exclusive projects we should

Accept Project A and reject Project B

Choose all the correct statements regarding SD.

All else equal, the higher the SD the riskier the investment is as a stand-alone investment If the SD is zero, the actual return will always equal the expected return.

In a common size balance sheet

All items in the balance sheet are expressed as a percentage of total assets

Choose the correct statement regarding EFTs

An ETF is a security that is structured like a mutual fund

With a traditional IRA

An investor receives a tax-break for her contribution to the traditional IRA An investor will not have to pay taxes on her investment income An investor will pay taxes on eligible withdraws from the traditional IRA during retirement as those withdraws will be treated as ordinary income.

Choose the correct statement regarding body prices and interest rates.

Bond prices are inversely related to the market rate of interest. If interest rates go up, this pushes bond prices down.

Choose the correct statement regarding the financial systme

Both capital and security flow both ways between financial markets and financial intermediaries When capital and securities flow between suppliers and demander of capital through financial intermediaries, the securities issued/sold by the demander of capital or often different than the securities purchased by the supplies of capital

Choose the correct statement(s) regarding the income statement. This is a multiple answer format question which means you should check all that apply...there may be more than one correct response.

Depreciation expense for the current period appears on the income statement The income statement is based on an accrual approach to accounting that recognizes revenues as they are earned instead of when the cash flows are received

A bond indenture refers to a bond with a AA bond rating are higher.

False

A normal expense ration is approximately 2%. A low expense ration would be 1% and it is extremely rare to see an expense ration of less than 1%. Because these rations are relatively small (3% or less) they have little impact on your net return from investing in mutual funds and investors should treat them as a minor factor in choosing funds

False

According to our stock valuation models, we are willing to pay more for a stock that we plan to hold for 10 or more years than we are for a stock we only plan to hold for 2 years. This is because we will receive more dividends over the 10 year time frame making the stock more valuable.

False

All else equal, an increase in the market rate of interest should lead to an increase in the price of a bond.

False

All else equal, forecasting the cash flow stream associated with stocks is easier than forecasting the cash flow stream associated with bonds.

False

Assuming markets are efficient, we should expect seasonal patterns in company performance to create seasonal patterns in stock prices. In other words, retail stocks should have higher return in the fourth quarter than the other three quarters, due to higher incomes around Christmas shopping season.

False

Assuming that I earn a 12% rate of return, it will take me 6.12 years to triple my money.

False

Assuming that Net Income, Liabilities and Owners' Equity are all positive, we should expect ROE to be lower than ROA.

False

Everything else being equal, we should expect a 30-year BB-rated bond to have a lower YTM than a 30-year AA-rated bond.

False

If I invest $2000 per year for the next 15 years and earn a 6% rate of return, I will have $19,424.50 at the end of the 15th year.

False

If you thought interest rates were going to decline in the future, you would prefer to buy short-term bonds instead of long-term bonds

False

Junk bonds refer to bonds that have recently defaulted and are declared worthless by the bankruptcy judge.

False

One of the advantages of mutual funds is that having a professional management ream typically allows investors to outperform the market on a risk adjusted basis by about 1-3% per yaer

False

Risk aversion means that when given a choice between two investments, an investor will always choose the investment that has the lowest risk.

False

The expected return represents the most likely outcome I will receive if I buy the stock today

False

The primary goal of finance is to maximize profits.

False

The statement of cash flows breaks down cash flows into the following three categories: Cash Flow from Assets, Cash Flow from Liabilities, and Cash Flow from Owners' Equity.

False

Trend Analysis and Comparative Analysis are essentially the same thing with respect to financial statement analysis. We should do one or the other, but not both.

False

When using the payback period as a capital budgeting rule, we should increase the critical acceptance level (T) when evaluations projects with above average risk

False

Which scenario is likely to best be explained by the concept of agency relationships?

Firm A announces that XYZ Corp will be its primary supplier of widgets despite the fact that XYZ corp charges 10% more than a similar quality supplier. XYZ Corp is owned by the son of Firm A's CEO. Firm A announces that it's earnings and cash flows for the year are going to be lower than previously expected due to a slowdown in sales of their primary product.

Choose the correct statement regarding correlation.

If we got students to answer honestly regarding the amount of time spent per week on the course and their exam scores, we would expect a positive correlation If we looked at the correlation to number of classes missed in a traditional Face to face class and exam scores, we would expect to see a positive correlation.

Choose the correct statement regarding vesting

If you are not vested, non of your contributions, the company's matching contributions, or the returns from those contributions belong to you when you leave the company

Which of the following should lead to an increase in the overall value of the US stock market? (This is a multiple answer format question which means you should check all that apply...there may be more than one correct response). Treat each response as an "all else equal" factor

Interest rates in general rise, causing the required return for stocks to go up as well

According to market efficiency,_________ .

It is possible to earth higher rates of return than the market average if we take on more risk.

Which of the following situations are consistent with the assumption of risk aversion? Assume that Certificates of Deposit offer the lowest rate of return, corporate bonds offer a return higher than CDs but lower than stocks, and common stocks offer rates of return higher than both CDs and corporate bonds. This is a multiple answer format question which may have more than one answer -- check all that are valid answers.

Jane buys common stocks which are riskier than Certificates of Deposit and corporate bonds. Joe buys corporate bonds which are riskier than Certificates of Deposit offered by commercial banks. David buys Certificates of Deposit which offer lower rates of return than common stocks and corporate bonds.

Diversification benefits investors by?

Lowering the standard deviation below the weighted average of each security in the portfolio.

When adding a stock to a well-diverted portfolio we would focus on the _______ of that stock

Market Risk

All else equal which of the three values will typically be the highest for common stock?

Market Value

You are evaluating a capital budgeting project that will cost $35,000 Year 1 ———— $12,000 Year 2 ———- $17,000 Year 3 ———-$10,000 Year 4 ———-$5,000 The required return is 15% and the critical acceptance level is 2.5 years. Calculate the payback period and determine whether or not the project should be accepted based solely on the payback period.

None of the other answers are correct

The info on the specifics of a particular mutual fund (costs, risks, objective, past performance, etc) can be found in the

Prospectus

The concept of double taxation refers to ___. (This is a multiple answer format question which means you should check all that apply...there may be more than one correct response).

Shareholders being taxed twice -- once at the corporate level and once when they receive dividends and/or capital gains.

From a pure finance perspective, which is the BEST statement regarding social responsibility and ethics?

Social responsibility and ethics should be pursued since they can offer significant benefits to the firm which benefits shareholders along with society.

Stocks are riskier than bonds. The reason(s) for this include ____. This is a multiple answer format question which may have more than one answer -- check all that are valid answers.

Stocks pay a variable cash flow stream while bonds pay a fixed cash flow stream. Stocks are paid after bonds in the priority of claims

Consider two projects: Project A Project B PP 2.6 years 2.3 years IRR 14.5% 17.3% NPV $15,500 $6,900 Assume that the projects both have a required return of 12% and a critical acceptance level (T) of 2.5 years. If these are independent projects we should

Take both projects A and B

You are evaluating a capital budgeting project that will cost $37,500 Year 1 ==> $12,000 Year 2 ==> $17,000 Year 3 ==> $10,000 Year 4 ==> $5,000 The required return is 15% and the critical acceptance level is 2.5 years. Calculate the Internal Rate of Return and determine whether or not the project should be accepted based solely on the Internal Rate of Return.

The IRR is 7.73% and we should reject the project

You are evaluating a capital budgeting project that will cost $55,000 Year 1 ==> $17,000 Year 2 ==> $10,000 Year 3 ==> $10,000 Year 4 ==> $17,000 Year 5 ==> $40,000 The required return is 12% and the critical acceptance level is 3.5 years. Calculate the Net Present Value and determine whether or not the project should be accepted based solely on the Net Present Value.

The NPV is $8,769.19 and we should accept the project

You are evaluating a capital budgeting project that will cost $35,000 Year 1 ==> $12,000 Year 2 ==> $17,000 Year 3 ==> $10,000 Year 4 ==> $5,000 The required return is 15% and the critical acceptance level is 2.5 years. Calculate the Payback Period and determine whether or not the project should be accepted based solely on the Payback Period.

The PP is 2.20 years and we should accept the project The PP is 2.20 years and we should reject the project The PP is 3.20 years and we should accept the project The PP is 3.20 years and we should reject the project **None of the other answers is correct

All else equal, which of the following would we expect to result in an increase in shareholder wealth (in each case assume "all else equal" for any factors not specifically addressed). This is a multiple answer format question which may have more than one answer -- check all that are valid answers.

The firm changes its revenue recognition process so that revenues are recognized more quickly for accounting purposes. No changes are made to the actual payment patterns of customers.

When a bond is trading at a premium ___. (This is a multiple answer format question which means you should check all that apply...there may be more than one correct response).

The price of the bond is greater than its par value ($1000). The Yield-to-Maturity is less than the coupon rate.

Secondary markets are critical because ___. This is a multiple answer format question which may have more than one correct answer -- check all that apply.

The provide the necessary liquidity to make primary markets function The provide information regarding the value of stocks and interest rates

Consider the following two projects Project A Project B CF0. -15,000 -15,000 CF1 10,000 2,000 CF2 8,000 3,000 CF3 5,000 22,000 Assuming these projects are mutually exclusive we could have problems when using IRR due to _____

The reinvestment rate problem

Financial Markets work best connecting suppliers and demander of capital when ______

The securities are homogeneous There are many potential buyer and sellers

A bond is indenture refers to the legal agreement between the bond and the bond holders designed to protect the interest of the bond holders during the life of the bond.

True

A non-convertible zero-coupon bond will not trade for a premium.

True

All else equal, we would expect convertible bonds to have lower yields (interest rates) and callable bonds to have higher yields (interest rates).

True

Assume you put away a fixed amount today for 20 years at a positive rate of return. You will earn more money during the last ten years than you did during the first 10 years.

True

Common stock tends o be riskier than preferred stock and has a higher expected returns.

True

Everything else being equal, a bond with a call provision will likely have a higher yield than a bond without call provision

True

Including a municipal bond in an IRA would generally be a bad Idea

True

One of the basic rights of common stockholders is the right to information. One aspect of this is that corporations must make audited financial statements available to shareholders.

True

Sole Proprietorships expose their owners to unlimited liability while corporations offer their owners limited liability.

True

Stock A has an expected return of 8.4% and a SD of 51.33% Stock B has an expected return of 10.1% and a SD of 40.11%. Assuming all investors must choose between these two stocks we would expect Stock A to decrease in value and stock B to increase in Value until the expected return for Stock A rises about economic the expected return of Stock B

True

The right to transfer is one of the basic rights of common stockholders. This means that stockholders can sell their shares in the secondary markets at any time if they choose to.

True

We want to focus on cash flows over earnings because earnings distort the timing associated with cash flows which distorts the underlying value of the firm.

True


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