Finance

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If the appropriate discount rate for the following cash flows is 11.7 percent per year, what is the present value of the cash flows? Year 1 21,600 Year 2 25,900 Year 3 38,700 Year 4 16,200

$78,270.77

Children's Place has a market-to-book ratio of 2.9, net income of $68,400, a book value per share of $37, and 45,000 shares of stock outstanding. What is the price-earnings ratio?

70.59

Based on ROE and the sustainable growth rate, which of the following factors affect a firm's ability to sustain growth?

Dividend policy, profit margin and financial policy

Which one of the following is the correct formula for the future value of $500 invested today at 7 percent interest for 8 years?

FV = $500 (1 + 0.07)8

Which of the following are traditional financial ratio categories

Financial leverage, turnover, profitability ratios

What will happen to the current ratio if current assets increase, while everything else remains unchanged?

It will increase

How is the market-to-book ratio measured?

Market value per share/ book value per share

You agree to repay 1,200 in 2 weeks for a 1,000 payday loan. What is your EAR assuming that there are 52 weeks in a year?

11,347.55% (1200/1000)^26 -1

A firm earns $0.18 in profit for every $1 of equity in the firm. The company borrows $0.60 for every $1 of equity. What is the firm's return on assets?

11.25 percent

Which of the following are ways to amortize a loan?

Pay principal and interest every period in a fixed payment. Pay the interest each period plus some fixed amount of the principal

Which one of the following has nearly the same meaning as free cash flow?

cash flow from assets

Which one of the following will decrease the liquidity level of a firm?

cash purchase of inventory

A firm has a profit margin of 5.50 percent, a return on assets of 10.90 percent, and total sales of $401,000. What is the capital intensity ratio?

0.50 Net income = 0.055 × $401,000 = $22,055 Total assets = $22,055 / 0.109 = $202,339.45 Capital intensity ratio = $202,339.45 / $401,000 = 0.50

Your firm has cash of $3,800, accounts receivable of $8,600, inventory of $33,100, and net working capital of $1,100. What is the cash ratio?

0.09

Which of the following is an incorrect keystroke in a financial calculator for calculating the future value of 100 dollars today for 2 years at 10% per year?

0.10 I/Y

Circle K Stores has net income of $41,000, a profit margin of 3.7 percent, and a return on assets of 9 percent. What is the capital intensity ratio?

0.41

Tressler Dry Cleaners has inventory of $1,700, accounts payable of $4,200, cash of $1,950, and accounts receivable of $3,680. What is the cash ratio?

0.46

The debt to equity ratio for a company with a 1 million in total debt and 2 million in equity is

0.50

The Blue Lagoon has a return on equity of 18.9 percent, an equity multiplier of 1.9, and a total asset turnover of 1.45. What is the profit margin?

6.85 percent

Net capital spending is equal to:

A. ending net fixed assets minus beginning net fixed assets plus depreciation.

Cash flow to creditors is defined as:

A. interest paid minus net new borrowing.

How is the inventory turnover ratio computed?

Cost of goods sold/ Inventory

Which one of the following transactions will increase the liquidity of a firm?

Credit sale of inventory at cost

New Working Capital

Current Assets-Current Liabilities

Which one of the following will decrease the present value of an annuity?

Decrease in the annuity payment

Which of the following best indicates a firm utilizing its assets more efficiently than it has in the past?

Decrease in the capital intensity ratio

Which one of the following best indicates a firm is utilizing its assets more efficiently than it has in the past?

Decrease in the capital intensity ratio

Which one of the following will increase the present value of a lump sum future amount? Assume the interest rate is a positive value and all interest is reinvested.

Decrease in the interest rate

The beta of a risky portfolio cannot be less than _____ nor greater than ____.

E. the lowest individual beta in the portfolio; the highest individual beta in the portfolio

Sara is investing $1,000 today. Which one of the following will increase the future value of that amount?

Increasing the interest rate

Which one of the following decreases net income but does not affect the operating cash flow of a firm that owes no taxes for the current year?

non cash item

The equity multiplier is equal to :

one plus the debt-equity ratio

The equity multiplier is equal to:

one plus the debt-equity ratio.

Operating cash flow is defined as:

the cash that a firm generates from its normal business activities

The matching principle states that:

the costs of producing an item should be recorded when the sale of that item is recorded as revenue

Which one of the following statements is correct concerning a firm's fixed assets?

the market value is the expected selling price in today's economy

Which one of the following statements concerning market and book values is correct?

the market value tends to provide a better guide to the actual worth of an asset than does the book value

Which of the following could not be evaluated as annuities?

tips to a waiter and monthly electric bills

Common-size financial statements present all balance sheet account values as a percentage of:

total assets.

A firm has an equity multiplier of 1.5. This means that the firm has a:

total debt ratio of 0.33.

Because of ___ and ___, interest rates are often quoted in many different ways

tradition; legislation

High Tower Pharmacy pays out a fixed percentage of its net income to its shareholders in the form of annual dividends. Given this, the percentage shown on a common-size income statement for the dividend account will:

vary in direct relation to the net profit percentage.

Centre Bank pays 2.5 percent interest, compounded annually, on its savings accounts. Country Bank pays 2.5 percent simple interest on its savings accounts. You want to deposit sufficient funds today so that you will have $1,500 in your account 2 years from today. The amount you must deposit today:

will be greater if you invest with Country Bank.

Taylor, Inc. has sales of $11,898, total assets of $9,315, and a debt-equity ratio of 0.55. If its return on equity is 14 percent, what is its net income?

$841.35

If you invest for a single period at an interest rate of r, your money will grow to ___ per dollar invested

(1+ r)

Blooming Gardens has an inventory turnover of 16. this means the firm:

Sells its inventory an average of 16 times per year

A perpetuity is a constant stream of cash flows for a ___ period of time

infinite

The effective annual rate (EAR) takes into account the ___ of interest that occurs within a year

compounding

Cash flow to stockholders is defined as

dividends paid - net new equity raised

Days' sales in receivables is given by the following ratio:

365/ receivables turnover

A purchase of new fixed assets will:

Decrease cash flow from assets

which one of the following will increase the profit margin of a firm, all else constant?

Decrease in tax rate

Decrease cash flow to creditors

Issue New Debt

Which of the following will decrease the net working capital of a firm?

Making a payment on a long term debt

Marginal Tax Rate

Tax rate that applies to the next dollar of taxable income that a firm earns

Terry invested $2,000 today in an investment that pays 6.5 percent annual interest. Which one of the following statements is correct, assuming all interest is reinvested?

Terry could have the same future value and invest less...

A firm has inventory of $11,400, accounts payable of $9,800, cash of $850, net fixed assets of $12,150, long-term debt of $9,500, accounts receivable of $6,600, and total equity of $11,700. What is the common-size percentage for the net fixed assets?

39.19 percent

Today, you signed the papers for a 6-year pure discount loan with a 8 percent interest rate. If you have to repay $22,000 at the end of the loan term, how much cash did you receive today? Interest will compound annually.

$13,863.73 PV = $22,000 / 1.086 = $13,863.73

You and your sister are planning a large anniversary party 3 years from today for your parents' 50th wedding anniversary. You have estimated that you will need $4,500 for this party. You can earn 2.5 percent compounded annually on your savings. How much would you and your sister have to deposit today in one lump sum to pay for the entire party?

$4178

Margie opened a used bookstore and is both the 100 percent owner and the store's manager. Which type of business entity does Margie own if she is personally liable for all the store's debts? A. Sole proprietorship B. Limited partnership C. Corporation D. Joint stock company E. General partnership

A. sole proprietorship

What is the future value of $4,900 invested for 8 years at 7 percent compounded annually?

$8,419.11

The common stock of The Burger Hut is selling for $16.25 a share. The company has earnings per share of $0.42 and a book value per share of $9.28. What is the market-to-book ratio?

1.75

Assume the total cost of a college education will be $285,000 when your child enters college in 22 years. You presently have $35,000 to invest. What annual rate of interest must you earn on your investment to cover the cost of your child's college education?

10.00 percent $285,000 = $35,000 × (1 + r)22; r = 10.00 percent

The future vale of a $100 investment in 4 years compounded at 8% per year equals

136.05

You have $1,100 today and want to triple your money in 5 years. What interest rate must you earn if the interest is compounded annually?

24.57 percent $3,300 = $1,100 × (1 + r)5; r = 24.57 percent

A perpetuity in Canada is frequently referred to as which one of the following?

Consul

Builder's Outlet just hired a new chief financial officer. To get a feel for the company, she wants to compare the firm's sales and costs over the past 3 years determine if any trends are present and also determine where the firm might need to make changes. Which one of the following statements will best suit her purposes?

Common-size income statement

The process of accumulating interest in an investment over time to earn more interest is called

Compounding

The interest rate used to compute the present value of a future cash flow is called the:

Discount rate

Depreciation does which one of the following for a profitable firm?

lowers taxes

If a firm has a 100 percent dividend payout ratio, then the internal growth rate of the firm is:

Zero percent

12. Jenny needs to borrow $16,000 for 3 years. The loan will be repaid in one lump sum at the end of the loan term. Which one of the following interest rates is best for Jenny? A. 8 percent simple interest B. 8 percent interest, compounded annually C. 8.5 percent simple interest D. 8.5 percent interest, compounded annually E. 9 percent interest, compounded annually Refer to section 4.1.

23. The present value of a lump sum future amount: A. increases as the interest rate decreases. B. decreases as the time period decreases. C. is inversely related to the future value. D. is directly related to the interest rate. E. is directly related to the time period. Refer to section 4.2.

6. Sue needs to invest $3,626 today in order for her savings account to be worth $5,000 six years from now. Which one of the following terms refers to the $3,626? A. Present value B. Compound value C. Future value D. Complex value E. Factor value Refer to section 4.2.

Which of the following is the simplest form of loan?

a pure discount loan

The cash coverage ratio is used to evaluate the:

ability of a firm to pay the interest on its debt.

Which one of the following is included in net working capital?

accounts payable

Which one of the following will increase the cash flow from assets for a tax-paying firm, all else constant?

an increase in depreciation

Highly liquid assets:

can be sold quickly at close to full value

Firms that compile financial statements according to GAAP:

can still manipulate their earnings to some degree

Lester had $6,270 in his savings account at the beginning of this year. This amount includes both the $6,000 he originally invested at the beginning of last year plus the $270 he earned in interest last year. This year, Lester earned a total of $282.15 in interest even though the interest rate on the account remained constant. This $282.15 is best described as:

compound

Which one of the following is an intangible fixed asset?

The federal government has a tax claim on the cash flows of the The Window Store. This claim is defined as a claim by one of the firm's: A. residual owners B. shareholders C. financiers D. provisional partners E. stakeholders

E, stakeholders

The security market line is a linear function that is graphed by plotting data points based on the relationship between which two of the following variables?

E. Expected return and beta

More frequent compounding leads to:

Higher EARs

Which of the following will decrease the future value of a lump sum investment made today assuming that all interest is reinvested? Assume the interest rate is a positive value.

II and IV

Which one of the following is the maximum growth rate that a firm can achieve without any additional external financing?

Internal Growth rate

Which one of the following is the maximum growth rate that a firm can achieve without any additional external financing?

Internal growth rate

Decrease cash flow to stockholders

Issue new stock

Cash Flow from assets:

Operating Cash Flow - change in net working capital - net capital spending

The present value of an annuity due is equal to the present value of a ___ annuity multiplied by (1 + r).

Ordinary

Textile Mills has sales of $923,000, cost of goods sold of $748,000, and accounts receivable of $106,700. How long on average does it take the firm's customers to pay for their purchases?

42.19 days

Tom's Hardware has inventory of $318,000, equity of $421,800, total assets of $647,700, and sales of $687,400. What is the common-size percentage for the inventory account?

49.10 percent

Sam wants to invest $5,000 for 5 years. Which one of the following rates will provide him with the largest future value?

7%, compounded annually

Larry's Gun Shop has sales of $189,000, a profit margin of 5.6 percent, and a capital intensity ratio of 0.79. What is the return on assets?

7.09 percent

Joshua's Antiques has a total asset turnover rate of 1.2, an equity multiplier of 1.4, a profit margin of 5 percent, a retention ratio of 0.8, and total assets of $120,000. What is the sustainable growth rate?

7.20 percent

Turner's return on equity is 12 percent and its retention ratio is 60 percent. What is its sustainable growth rate?

7.76% (.12 * .60) / (1 - .12 * .60)

The After Life has sales of $428,300, total assets of $389,100, and a profit margin of 7.2 percent. What is the return on assets?

7.93 percent

International Travel Services has net income of $48,400, total assets of $219,000, total equity of $154,800, and total sales of $411,700. What is the common-size percentage for the net income?

850.62 percent

You have $1,500 today in your savings account. How long must you wait for your savings to be worth $4,000 if you are earning 1.1 percent interest, compounded annually?

89.66 yrs

Hughes Motors will sell you a $15,000 car for $380 a month for 48 months. What is the interest rate?

9.94 percent

How long will it take to double your savings if you earn 7.2 percent interest, compounded annually?

9.97 years $2 = $1 × (1 + 0.072)t; t = 9.97 years

How long will it take to double your savings if you earn 7.2 percent interest, compounded annually?

9.97 yrs

A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account:

will be greater than 12.9 percent

Mike's Place has total assets of $123,800, a debt-equity ratio of 0.75, and net income of $7,100. What is the return on equity?

10.04 percent Return on equity = net income/total equity Return on equity = ($7,100/$123,800) *(1 + 0.75) = 10.04 percent

Travis invests $10,000 today into a retirement account. He expects to earn 8 percent, compounded annually, on his money for the next 26 years. After that, he wants to be more conservative, so only expects to earn 5 percent, compounded annually. How much money will he have in his account when he retires 38 years from now, assuming this is the only deposit he makes into the account?

$132,827.88

The Medicine Shoppe has a return on equity of 19.2 percent, a profit margin of 11.6 percent, and total equity of $738,000. What is the net income?

$149,897

How much will you have saved at the end of 3 years if you save $4,400 at the end of each year for three years, compounded annually at 18 percent interest?

$15,718.56 FV = ($4,400 × 1.182) + ($4,400 × 1.181) + $4,400 = $15,718.56

Precision Engineering invested $110,000 at 6.5 percent interest, compounded annually for 4 years. How much interest on interest did the company earn over this period of time?

$2911.30

You want to have $45,000 in cash to buy a car 4 years from today. You expect to earn 4.5 percent, compounded annually, on your savings. How much do you need to deposit today if this is the only money you save for this purpose?

$37, 735

The Donut Hut has sales of $68,000, current assets of $11,300, net income of $5,100, net fixed assets of $54,900, total debt of $23,800, and dividends of $800. What is the sustainable growth rate?

11.29 percent

You want to invest an amount of money today and receive back twice that amount in the future. You expect to earn 6 percent interest. Approximately how long must you wait for your investment to double in value?

If today is year 0, what is the future value of the following cash flows 10 years from now? Assume an interest rate of 7.8 percent per year. Year 2 8,500 Year 3 9,300 Year 6 7,100

$40,822.55

If a company's balance sheet shows $400 in cash, 100 in inventory and 200 in current liabilities, its cash ratio is

2.0 400/200

Underwood Homes Sales has total assets of $589,900 and total debt of $318,000. What is the equity multiplier?

2.17

BK Trucking has total equity of 25,380 and 1,500 shares outstanding. Its stock is currently selling at 38 dollars per share. What is the market-to-book ratio?

2.25 38/ (25,830/1,500)

For the most recent year, Wilson Enterprises had sales of $689,000, cost of goods sold of $470,300, depreciation expense of $61,200, and additions to retained earnings of $48,560. The firm currently has 12,000 shares of common stock outstanding, and the previous year's dividends per share were $1.18. Assuming a 35 percent tax rate, what was the times interest earned ratio?

2.58

Fresh Foods has sales of $213,600, total assets of $198,700, a debt-equity ratio of 1.7, and a profit margin of 2.4 percent. What is the equity multiplier?

2.70

Isaac only has $690 today but needs $800 to buy a new laptop. How long will he have to wait to buy the laptop if he earns 5.4 percent compounded annually on his savings?

2.81 years

A firm has net income of $114,000, a return on assets of 12.6 percent, and a debt-equity ratio of 0.60. What is the return on equity?

20.16 percent

Your grandfather started his own business 52 years ago. He opened a savings account at the end of his third month of business and contributed $x. Every three months since then, he faithfully saved another $x. His savings account has earned an average rate of 4.5 percent annually. Today, his account is valued at $364,209.11. How much did your grandfather save every three months?

$443.13

What is the present value of an ordinary annuity that pays 100 per year for three years if the interest rate is 10 percent per year?

248.69 100{[1 - (1/(1.10)^3)]/.10}

Last year, a firm earned $31,200 in net income on sales of $217,600. The company paid $8,500 in dividends. What is the dividend payout ratio?

27.24 percent

Ben invested $5,000 twenty years ago with an insurance company that has paid him 5 percent simple interest on his funds. Charles invested $5,000 twenty years ago in a fund that has paid him 5 percent interest, compounded annually. How much more interest has Charles earned than Ben over the past 20 years?

3,266.49 Interest on interest = Total earnings with compounding interest - total earnings with simple interest = [$110,000 × (1 + 0.065)4 ] - [$110,000 + ($110,000 × 0.065 × 4)] = $2,911.30

If a firm has a negative cash flow from assets every year for several years, the firm:

A. may be continually increasing in size.

Which of the following would a company wish to compare its ratios against?

Aspirant companies, peer companies, major competitors, its own historical ratios

New Steel Products has total assets of $991,000, a total asset turnover rate of 1.1, a debt-equity ratio of 0.6, and a return on equity of 8.7 percent. What is the firm's net income?

$53,885.63

Currently, you are earning an annual salary of $43,200. How much will your salary be 5 years from now if you receive annual raises of 4.6 percent?

$54,093.14 FV = $43,200 × 1.0465 = $54,093.14

A recent alumnus of your university gifted money to the school to fund annual scholarships for students in need. The school expects to earn an average rate of return of 5.5 percent and distribute $50,000 annually in scholarships. What was the amount of the gift?

$909,090.91

What is the formula for computing a firm's sustainable growth rate?

(ROE x b)/ ( 1 - ROE x b)

Sequence on the Balance Sheet

-Cash -Short Term Investments -Accounts Receivables -Inventory -Fixed Assets -Accounts Payable -Notes Payable -Long-term Debt -Common Stock

Decrease cash flow from assets

-Increase in net working capital -Purchase fixed assets

Increase cash flow to stockholders

-Repurchase stock -Pay dividends

Increase cash flow to creditors

-Retire (pay off) debt -Pay interest expense

Which two of the following determine when revenue is recorded on the financial statements based on the recognition principle?

-The earnings process is virtually complete -The value of a sale can be reliably determined

What are the values of the three components of the DuPont identity? Use ending balance sheet values.

0.15; 0.98; 2.86

Denbo's, Inc. has total equity of $389,600, long-term debt of $116,400, net working capital of $1,600, and total assets of $627,600. What is the total debt ratio?

0.38

The Undergrounds Coffee Shop has total assets of $85,300 and an equity multiplier of 1.53. What is the debt-equity ratio?

0.53

Chevelle, Inc. has sales of $487,000 and costs of $394,500. The depreciation expense is $43,800. Interest paid equals $18,200 and dividends paid equal $6,500. The tax rate is 35 percent. What is the addition to retained earnings?

D. $13,325 Addition to retained earnings = [($487,000 - $394,500 - $43,800 - $18,200)(1 - 0.35)] - $6,500 = $13,325

Which one of the following is the slope of the security market line?

B. Market risk premium

The Play House's December 31, 2013, balance sheet showed net fixed assets of $1,238,000 and the December 31, 2014, balance sheet showed net fixed assets of $1,416,000. The company's 2014 income statement showed a depreciation expense of $214,600. What was the firm's net capital spending for 2014?

C. $392,600 Net capital spending = $1,416,000 - $1,238,000 + $214,600 = $392,600

CHART CH 3 #28 What is the operating cash flow for 2014? A. $21,900 B. $26,700 C. $42,100 D. $48,300 E. $52,600

C. $42,100

BJB, Inc. stock has an expected return of 15.15 percent. The risk-free rate is 3.8 percent and the market risk premium is 8.6 percent. What is the stock's beta?

C. 1.32 E(R) = 0.1515 = 0.038 + β(0.086) β = 1.32

Which of the following are real-world examples of annuities?

preferred stock dividends, mortgages, pensions and leases

Sue needs to invest $3,626 today in order for her savings account to be worth $5,000 six years from now. Which one of the following terms refers to the $3,626?

present value

Delivery trucks are classified as:

tangible fixed assets

Cash flow to stockholders is defined as:

D. dividends paid minus net new equity raised.

Sue needs to invest $3,626 today in order for her savings account to be worth $5,000 six years from now. Which one of the following terms refers to the $3,626?

Present value

New Century Products is a company that was founded last year. While the outlook for the company is positive, it currently has negative earnings. If you wanted to measure the progress of this firm, which one of the following ratios would probably be best to monitor given the firm's current situation?

Price-sales ratio

Return on equity (ROE) is a measure of ____.

Profitability

What does it mean when a firm has a days' sales in receivables of 45?

The firm collects its credit sales in 45 days on average

Which of the following create problems with financial statement analysis

The firm or its competitors are global companies, operate under different regulatory environments, are conglomerates

Which one of the following is a correct statement, all else held constant?

The future value is directly related to the interest rate.

What is the primary difference between time value of money data entries in your calculator and in a spreadsheet function?

The interest rate in your calculator is entered as a whole number while in the spreadsheet function it is entered as a decimal

Which one of the following statements is correct?

The more frequent the compounding, the higher the EAR.

What is the impact on the total asset turnover ratio if sales increase significantly while there is no change in any of the other variables?

The total asset turnover ratio will increase

Which one of the following features distinguishes an ordinary annuity from an annuity due?

Timing of the annuity payments

You have $5,000 you want to invest for the next 45 years. You are offered an investment plan that will pay you 6 percent per year for the next 15 years and 10 percent per year for the last 30 years. How much will you have at the end of the 45 years? How much will you have if the investment plan pays you 10 percent per year for the first 15 years and 6 percent per year for the next 30 years?

$209,092.54; $119,959.94

Twelve years ago, you deposited $3,400 into an account. Seven years ago, you added an additional $1,000 to this account. You earned 8 percent, compounded annually, for the first 5 years and 5.5 percent, compounded annually, for the last 7 years. How much money do you have in your account today?

$8,721.97

You have been told that you need $25,600 today in order to have $100,000 when you retire 35 years from now. What rate of interest was used in the present value computation? Assume interest is compounded annually.

3.97

SIC codes classify firms based on which one of the following?

business operations

Martha is investing $5 today at 6 percent interest so she can have $10 later. The $10 is referred to as the

future value

which one of the following is the maximum growth rate that a firm can achieve without any additional external financing?

internal growth rate

The relationship between the present value and the number of periods is best described as:

inverse

Which one of the following is included in net working capital?

invoice from a supplier for inventory purshased

The market value of a firm's fixed assets:

is equal to the estimated current cash value of those assets

Time value of money tables are not as common as they once were because

it is easier to use inexpensive financial calculators instead and they are available for only a relatively small number of interest rates

If a company has inventory, the quick ratio will always be ___ the current ratio

less than

Which one of the following will decrease the net working capital of a firm?

making a payment on a long-term debt

Which one of the following is the tax rate that applies to the next dollar of taxable income that a firm earns?

marginal tax rate

The price-earnings ratio is a ___ ratio.

market value

If a firm has a negative cash flow from assets every year for several years, the firm:

may be continually increasing in size

The corporate tax structure in the U.S. is based on a:

modified flat-rate tax

Shareholders' equity is equal to:

net fixed assets minus long-term debt plus net working capital

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

net income is distributed either to dividends or retained earnings

To calculate the future value of 100 invested for t years at r interst rate, you enter the present value in your calculator as a negative number. Why?

Because the 100 is an outflow from you which should be negative.

The major downside of using financial statements for analysis is that the data contained in them is based on

Book values and historical values

Paddle Fans & More has a marginal tax rate of 34 percent and an average tax rate of 23.7 percent. If the firm earns $138,500 in taxable income, how much will it owe in taxes?

C. $32,824.50 Tax = ($138,500)(0.237) = $32,824.50

Plato's Foods has ending net fixed assets of $84,400 and beginning net fixed assets of $79,900. During the year, the firm sold assets with a total book value of $13,600 and also recorded $14,800 in depreciation expense. How much did the company spend to buy new fixed assets?

C. $32,900 New fixed asset purchases = $84,400 - $79,900 + $13,600 + $14,800 = $32,900

Adell Furniture has a profit margin of 8.2 percent and a dividend payout ratio of 40 percent. What is the plowback ratio?

60.00 percent

What is the present value of an annuity that makes payments of 100 per year for ten years if the first payment is made immediately and the discount rate is 10 percent per year?

675.90 100[(1- 1/1.10^10) / .10] [1.10]

Sam wants to invest $5,000 for 5 years. Which one of the following rates will provide him with the largest future value?

7 percent interest, compounded annually

Which of the following is a perpetuity?

A constant stream of cash flows forever

Which one of the following terms is defined as the total tax paid divided by the total taxable income?

A. Average tax rate

Which one of the following is an equity account?

A. Paid-in surplus

The daily financial operations of a firm are primarily controlled by managing the: A. total debt level B. working capital C. capital structure D. capital budget E. long-term liabilities

B, working capital

The Pier Import Store has cash of $34,600 and accounts receivable of $54,200. The inventory cost $92,300 and can be sold today for $146,900. The fixed assets were purchased at a cost of $234,500 of which $107,900 has been depreciated. The fixed assets can be sold today for $199,000. What is the total book value of the firm's assets?

B. $307,700 Total book value = $34,600 + $54,200 + $92,300 + $234,500 - $107,900 = $307,700

Andersen's Nursery has sales of $318,400, costs of $199,400, depreciation expense of $28,600, interest expense of $1,100, and a tax rate of 34 percent. The firm paid out $16,500 in dividends. What is the addition to retained earnings?

B. $42,438 Addition to retained earnings = [($318,400 - $199,400 - $28,600 - $1,100)(1 - 0.34)] - $16,500 = $42,438

Holly Farms has sales of $581,600, costs of $479,700, depreciation expense of $32,100, and interest paid of $8,400. The tax rate is 42 percent. How much net income did the firm earn for the period?

B. 35,612 Net income = ($581,600 - $479,700 - $32,100 - $8,400)(1 - 0.42) = $35,612

CHART CH 4 #18 What are the values of the three components of the DuPont identity? Use ending balance sheet values. A. 0.15; 1.02; 0.35 B. 0.15; 2.02; 0.35 C. 0.15; 0.98; 2.86 D. 0.16; 0.98; 0.35 E. 0.16; 1.02; 2.86

C. 0.15; 0.98; 2.86

You currently own a portfolio valued at $80,000 that is equally as risky as the market. Given the information below, what is the beta of Stock C? Stock Value Beta A $24,600 1.14 B 17,500 1.06 C 32,000 ? Risk-free asset ? ?

C. 1.04 Value of risk-free asset = $80,000 - $24,600 - $17,500 - $32,000 = $5,900 βP = 1 = ($24,600/$80,000)(1.14) + ($17,500/$80,000)(1.06) + ($32,000/$80,000)(βC) + ($5,900/$80,000)(0) βC = 1.04

You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.12 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?

C. 1.88 βP = 1 = (1/3)(0) + (1/3)(1.12) + (1/3)(x) x = 1.88

Which one of the following is the tax rate that applies to the next dollar of taxable income that a firm earns?

C. Marginal tax rate

Which one of the following is the tax rate that applies to the next dollar of taxable income that a firm earns? A. Average tax rate B. Variable tax rate C. Marginal tax rate D. Absolute tax rate E. Contingent tax rate

C. Marginal tax rate

The concept of marginal taxation is best exemplified by which one of the following?

C. Mitchell's Grocer increased its sales by $52,000 last year and had to pay an additional $16,000 in taxes.

Which one of the following decreases net income but does not affect the operating cash flow of a firm that owes no taxes for the current year?

C. Noncash item

Stock J has a beta of 1.17 and an expected return of 14.4 percent, while Stock K has a beta of 0.68 and an expected return of 7.6 percent. You want a portfolio with the same risk as the market. What is the expected return of your portfolio?

D. 12.04 percent βP = 1.0 = 1.17x + 0.68(1 - x) x = 0.653061 E(RP) = 0.653061(0.144) + (1 - 0.653061)(0.076) = 12.04 percent

You own a portfolio that has $1,900 invested in Stock A and $2,700 invested in Stock B. If the expected returns on these stocks are 9 percent and 15 percent, respectively, what is the expected return on the portfolio?

D. 12.52 percent E(R) = [1,900/($1,900 + $2,700)][0.09] + [$2,700/($1,900 + $2,700)][0.15] = 12.52 percent

Miser Materials paid $27,500 in dividends and $28,311 in interest over the past year while net working capital increased from $13,506 to $18,219. The company purchased $42,000 in net new fixed assets and had depreciation expenses of $16,805. During the year, the firm issued $25,000 in net new equity and paid off $21,000 in long-term debt. What is the amount of the cash flow from assets?

E. 51,811 Cash flow from assets = ($28,311 + $21,000) + ($27,500 - $25,000) = $51,811

Which one of the following is the abbreviation for the U.S. government coding system that classifies a firm by its specific type of business operations?

SIC

The profit margin is equal to net income divided by

Sales

Today, Courtney wants to invest less than $5,000 with the goal of receiving $5,000 back some time in the future. Which one of the following statements is correct?

The period of time she has to wait decreases as the amount she invests today increases.

For a given time period (t) and interest rate (r), the present value factor is ___ the future value factor

The reciprocal of and 1 divided by

Common-size balance sheets express each account value as a percentage of which one of the following?

Total assets

Comon size financial statements present all balance sheet account values as a percentage of

Total assets

High Tower Pharmacy pays a fixed percentage of its net income out to its shareholders in the form of annual dividends. Given this, the percent shown on a common-size income statement for the dividend account will:

Vary in direct relation to the net profit percentage

Sara is investing $1,000 today. Which one of the following will increase the future value of that amount?

increasing interest rate

Net working capital is defined as: A. the depreciated book value of a firm's fixed assets. B. the value of a firm's current assets. C. available cash minus current liabilities. D. total assets minus total liabilities. E. current assets minus current liabilities.

E. current assets minus current liabilities.

Accounting principles dictate that assets should be placed on the balance sheet at:

Historical Cost-Assets are placed on balance sheet at the amount paid for them when they are purchased. Referred to as the asset's historical cost, book value, or carrying value.

The major downside of using financial statements for analyses is that the data contained in them is based on

Historical and book values

I, II, III, and IV

The T-shirt Hut successfully managed to reduce its general and administrative costs this year. This cost improvement will increase which of the following ratios? I. Profit margin II. Return on assets III. Total asset turnover IV. Return on equity

I, II, and IV only

Jamie earned $180 in interest on her savings account last year. She has decided to leave the $180 in her account so that she can earn interest on the $180 this year. The interest Jamie earns this year on this $180 is referred to as:

interest on interest

Given an investment amount and a set rate of interest, the ___ the time period, the ___ the future value

longer; greater

The concept of the time value of money is based on the priciple that a dollar today is worth ___ a dollar promised at some time in the future

more than

Which of the following are determinants of a firm's sustainable rate of growth? I. Amount of sales generated from each dollar invested in assets II. Amount of debt per dollar of equity III. Amount of current assets per dollar of current liabilities IV. Percentage of net income distributed as dividends

I, II, and IV only

You just borrowed $3,000 from your bank and agreed to repay the interest on an annual basis and the principal at the end of three years. What type of loan did you obtain?

Interest only

Least Liquid Current Asset is typically considered to be:

Inventory-b/c it may be subject to obsolescence, and will likely incur the greatest loss in value if it must be sold quickly

Which of the following is the correct equation for return on equity?

Net income/ total equity

The sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions?

No new equity and a constant debt-equity ratio

Which decreases net income but does not affect the operating cash flow of a firm that owes no taxes for the current year?

Noncash Item

Which is included in the market value of a firm, but not in the book value?

Reputation of a firm

Financial statement analysis is primarily "management by ____"

exception

Rick is planning to invest the following amounts at 6 percent interest. How much money will he have saved at the end of year 3? Year 1 500 Year 2 800 Year 3 900

$2,309.80

What is the formula for computing the internal growth rate?

(ROA x b)/ (1- ROE x b)

Which of the following methods can be used to calculate present value?

An alegbraic formula, a time value of money table and a financial calculator

Which of the following items are used to compute the current ratio?

Cash and accounts payable

Which one of the following is the correct formula for the future value of $500 invested today at 7 percent interest for 8 years?

FV = $500 (1 + 0.07)^8

Which one of the following is the correct formula for computing the present value of $600 to be received in 6 years? The discount rate is 7 percent.

PV = $600/(1 + 0.07)6

Suppose you expect to receive 5,000 in one year, 4,300 in two years and an additional 5,000 in three years. Match each present value amount to the corresponding cash flow assuming a discount rate of 17%.

PV of year 1: 5,000/1.17= 4,273.50 PV of year 2: 4,300/ (1.17) ^ 2 = 3,141.21 PV of year 3: 5,000 / (1.17)^ 3 = 3,121.85

Delivery Trucks are classified as:

Tangible fixed assets

Cash flow to creditors is defined as:

interest paid minus net new borrowing

Your aunt loaned you money at 1.00 percent interest per month. What is the APR of this loan?

12.00 percent

Skyline Industries will need $1.8 million 5 years from now to replace some equipment. Currently, the firm has some extra cash and would like to establish a savings account for this purpose. The account pays 5.25 percent interest, compounded annually. How much money must the company deposit today to fully fund the equipment purchase?

$1,393

You want to purchase a new condominium that costs $329,000. Your plan is to pay 20 percent down in cash and finance the balance over 25 years at 6.25 percent. What will be your monthly mortgage payment?

$1,736.25

Today, Stacy is investing $26,000 at 6.0 percent, compounded annually, for 4 years. How much additional income could he earn if he had invested this amount at 7 percent, compounded annually?

$1256

Which of the following is the general formula for EAR when m is the number of times interest is compounded in a year?

(1 + quoted rate/ m) ^ m -1

Which of the following is the correct representation of the cash coverage ratio?

(EBIT + deprecitation) / interest expense

Aardvaark & Co. has sales of $291,200, cost of goods sold of $163,300, net profit of $11,360, net fixed assets of $154,500, and current assets of $89,500. What is the total asset turnover rate?

1.19

Using a time value of money table, what is the future value interest factor for 10 percent for 2 years?

1.21

In the future value factor for $1 invested for 5 years at 10% is ___, then the corresponding present value factor for $1 received in 5 years with a 10% discount rate is ___.

1.611; 0.6209

The Inside Door has total debt of $78,600, total equity of $214,000, and a return on equity of 14.5 percent. What is the return on assets?

10.61 percent

Assume a 100 investment earns a stated interest rate of 10 percent, compounded monthly. What will be the investment value after one year?

101.11 FV= 100 x (1+ .10/12) ^ 12

The future value of $100 compounded for 50 years at 10% per year is

11,739.09

You agree to pay back 1,100 in 4 weeks for a 1,000 payday loan. Your annual percentage rate (APR) to two decimal places is ___%

130.00 [(1100/1000) - 1] x (52/4) (100)

You have a loan with an APR of 14.7 percent with monthly compounding. What is the actual interest rate you are paying on this loan?

15.73 percent EAR = [1 + (0.147 /12)]12 - 1 = 15.73 percent

Your grandparents just gave you a gift of $15,000. You are investing this money for 12 years at 6 percent simple interest. How much money will you have at the end of the 12 years?

25,800 Future value = $15,000 + ($15,000 × 0.06 × 12) = $25,800

Goshen Industrial Sales has sales of $828,900, total equity of $539,200, a profit margin of 4.6 percent, and a debt-equity ratio of 0.55. What is the return on assets?

4.56 percent

You have just won the lottery! You can either receive $5,000 a year for 15 years or $50,000 as a lump sum payment today. What is the interest rate on the annuity option?

5.56 percent

Which one of the following qualifies as an annuity?

Auto loan payment

Cash flow from assets is defined as: A. the cash flow to shareholders minus the cash flow to creditors. B. operating cash flow plus the cash flow to creditors plus the cash flow to shareholders. C. operating cash flow minus the change in net working capital minus net capital spending. D. operating cash flow plus net capital spending plus the change in net working capital. E. cash flow to shareholders minus net capital spending plus the change in net working capital.

C. operating cash flow minus the change in net working capital minus net capital spending.

The matching principle states that:

C. the costs of producing an item should be recorded when the sale of that item is recorded as revenue.

Lester's BBQ has $121,000 in current assets and $109,000 in current liabilities. These values as referred to as the firm's A. capital structure. B. cash equivalents. C. working capital. D. net assets. E. fixed accounts.

C. working capital

Which of the following processes can be used to calculate the future value of multiple cash flows?

Calcultate the FV of each cash flow first and then add them up. Compound the accumulated balance forward one year at a time

Donovan Brothers, Inc. would like to increase its internal rate of growth. Decreasing which one of the following will help the firm achieve its goal?

Dividend payout ratio

The federal government has a tax claim on the cash flows of The Window Store. This claim is defined as a claim by one of the firm's: A. residual owners. B. shareholders. C. financiers. D. provisional partners. E. Stakeholders.

E. stakeholders

LEAST likely to have book value near its market value

Fixed Assets-for many companies, intangible fixed assets such as good management, a good reputation, talented employees, and the company brand name, are not even shown on the balance sheet

Retiring (paying off) debt will:

Increase cash flow to creditors

Increase Cash Flow from Assets

Increase in operating cash flow (OCF)

Whenever ___ information is available, it should be used instead of accounting data

Market

Which of the following statements concerning market and book values is correct?

Market value tends to provide a better guide to the actual worth of an asset than does the book value

Return on assets (ROA) is a measure of ___

Profitability

If you borrow 15,000 today at 5% annual interest to be repaid in one year as a lump sum, this is termed a

Pure discount loan

Liquidty

Speed and ease with which an asset can be converted to cash at or near market value

___ financial statements provide for comparison of firms that differ in size

Standardized

The original amount of the loan is called the

principal

The Du Pont identity can be totally defined by which one of the following?

Equity multiplier and return on assets

Suppose Gallinger Corp. has the following characteristics: Shares outstanding: 1,000,000 Current share price: $10 Total debt: $1,000,000 Total cash: $500,000 Based on the formula above, what is the enterprise value of Gallinger Corp.?

$10,500,000

$10,500,000 Enterprise value = total market value of stock + book value of all liabilities - cash = ($1,000,000 × $10) + $1,000,000 - $500,000 = $10,500,000

Phil's Hardware sells its inventory in 75 days, on average. Costs of goods sold for the year are $631,800. What is the average value of the firm's inventory?

$129,821

Systematic risk is:

D. measured by beta.

Which one of the following has the highest effective annual rate?

6 percent compounded monthly

The capital asset pricing model:

C. considers the time value of money.

Current assets are expected to:

Convert to cash over the next 12 months

An increase in which one of the following will increase net income?

revenue

Ten years from now, you will be inheriting $100,000. What is this inheritance worth to you today if you can earn 5.5 percent interest, compounded annually?

$58, 543

Travis United has net income of $13,280 for 2010. On the firm's common-size income statement for 2010, the net income is shown as 15.2 percent. What is the amount of the firm's sales for 2010?

$87,368 Sales = $13,280 / 0.152 = $87,368

Which one of the following statements is correct concerning a firm's fixed assets?

A. The market value is the expected selling price in today's economy.

A risky security has less risk than the overall market. What must the beta of this security be?

B. > 0 but < 1

Which one of the following occupations best fits into the international area of finance? A. bank teller B. treasury bill analyst C. currency trader D. insurance risk manager E. local bank manager

C, currency trader

C. $392,600

Which one of the following will decrease the net working capital of a firm?

E. Making a payment on a long-term debt

Which one of the following actions will increase the current ratio, all else constant? Assume the current ratio is greater than 1.0

Cash payment of an account payable

Which one of the following is the best example of systematic risk?

D. Decrease in gross domestic product

The security market line is defined as a positively sloped straight line that displays the relationship between which two of the following variables?

D. Expected return and beta

Depreciation does which one of the following for a profitable firm?

D. Lowers taxes

An increase in which one of the following will increase net income

D. Revenue

Delivery trucks are classified as:

D. tangible fixed assets.

Which of the following is the appropriate Excel function to convert a quoted rate of 12% compounded quarterly to an EAR?

EFFECT (0.12,4)

Another name for cash flow from assets:

Free Cash Flow

Which one of the following statements concerning the balance sheet is correct?

assets are listed in descending order of liquidity

Turner's Store had a profit margin of 6.8 percent, sales of $898,200, and total assets of $798,000. If management set a goal of increasing the total asset turnover to 1.40 times, what would the new sales figure need to be, assuming no increase in total assets?

$1,117,200

Today, Stacy is investing $26,000 at 6.0 percent, compounded annually, for 4 years. How much additional income could he earn if he had invested this amount at 7 percent, compounded annually?

$1,256.30 $100,000 = $50,000 × (1 + 0.055)t ; t = 12.95 years

Today, you borrowed $22,000 at 10 percent interest. The loan is to be repaid in five equal annual payments. How much of the third payment will be interest?

$1,443.26 $22,000 = C × (1 - 1 / 1.105) / 0.10 = $5,803.54

Your grandparents would like to establish a trust fund that would pay annual payments to you and your heirs of $100,000 a year forever. How much do your parents need to deposit into this trust fund today to achieve their goal if the fund can earn 6 percent interest?

$1,666,666.67

You are scheduled to receive $7,500 in three years. When you receive it, you will invest it for eight more years at 7.5 percent per year. How much will you have in eleven years?

$13,376

$132,827.88 Future value = $10,000 × (1 + 0.08)26 × (1 + 0.05)(38 - 26) = $132,827.88

Western Hardwood Sales has total equity of $79,000, a profit margin of 4.8 percent, an equity multiplier of 1.5, and a total asset turnover of 1.3. What is the amount of the firm's sales?

$154,050

You want to have $25,000 for a down payment on a house 6 years from now. If you can earn 6.5 percent, compounded annually, on your savings, how much do you need to deposit today to reach your goal?

$17,133

How much money does Suzie need to have in her retirement savings account today if she wishes to withdraw $25,000 a year for 30 years? She expects to earn an average rate of return of 13 percent.

$187,391.34

Your parents spent $6,200 to buy 500 shares of stock in a new company 13 years ago. The stock has appreciated 9 percent per year on average. What is the current value of those 500 shares?

$19,007

Your parents spent $6,200 to buy 500 shares of stock in a new company 13 years ago. The stock has appreciated 9 percent per year on average. What is the current value of those 500 shares?

$19,007.99 Future value = $6,200 × (1 + 0.09)13 = $19,007.99

You just won a prize and will receive $2,400 two years from today. What is this prize worth to you today at a discount rate of 8.00 percent?

$2,057.61 PV $2,400 / 1.082 = $2,057.61

$209,092.54; $119,959.94 Future value A = $5,000 × (1 + 0.06)15 × (1 + 0.10)30 = $209,092.54 Future value B = $5,000 × (1 + 0.10)15 × (1 + 0.06)30 = $119,959.94

Alfa Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $10,000 per year forever. If the required return on this investment is 4.75 percent, how much will you pay for the policy?

$210,526.32

Amish Bakery needs $210,000 today to fund a new project. The project will not produce any cash flows for two years and thus the firm agreed to a two-year, pure discount loan at 7.5 percent interest. How much will the firm owe on this loan at the time it must be repaid?

$242,681.25

Your coin collection contains ten 1939 silver dollars. If your great grandparents purchased them for their face value when they were new, how much will your collection be worth when you retire in 2050, assuming they appreciate at a 5.1 percent annual rate?

$2499

Your grandparents just gave you a gift of $15,000. You are investing this money for 12 years at 6 percent simple interest. How much money will you have at the end of the 12 years?

$25,800

You have just made your first $5,000 contribution to your individual retirement account. Assuming you earn a 5 percent rate of return and make no additional contributions, what will your account be worth when you retire in 35 years? What if you wait for 5 years before contributing?

$27,580.08; 21,609.71

You expect to receive $20,000 at graduation one year from now. You plan on investing it at 6 percent until you have $100,000. How long will you wait from now?

$28.62

$3,266.49

$37,735.26 Present value = $45,000/(1 + 0.045)4 = $37,735.26

You will receive $5,900 a year for nineteen years with the first payment received today. What are these payments worth to you today at a discount rate of 17 percent, compounded annually?

$38,549.72 PV Annuity due = $5,900 × [(1 - 1 / 1.1719) / 0.17] × (1.17) = $38,549.72

Today, you have $3,464 in your savings account. How much will this account be worth 5 years from now if you earn 4.80 percent, compounded annually? Assume you do not deposit or withdraw any funds.

$4,379.09 FV = $3,464 × 1.0485 = $4,379.09

You grandmother has promised to give you $2,800 at the end of this year and $3,300 at the end of next year. What is this promise worth to you today at a discount rate of 17 percent?

$4,803.86 PV = ($2,800 / 1.17) + ($3,300 / 1.172) = $4,803.86

The Rainbow Company has total sales of $713,200 and a profit margin of 8.5 percent. Currently, the firm has 12,500 shares outstanding. What are the earnings per share?

$4.85

The Rainbow Company has total sales of $713,200 and a profit margin of 8.5 percent. Currently, the firm has 12,500 shares outstanding. What are the earnings per share?

$4.85 Earnings per share = net income/shares outstanding Net income = sales* profit margin Earnings per share = (0.085 * $713,200)/12,500 = $4.85

Today, you deposit $2,400 in a bank account that pays 4 percent simple interest. How much interest will you earn over the next 5 years?

$480

Slaughter Industries just signed a sales contract with a new customer. What is this contract worth as of the end of year 4 if the following payments will be received and the firm earns 6 percent on its savings? Year 1 84000 Year 2 113000 Year 3 125000 Year 4 130000

$489,512.14

Liza donated money to her alma mater to establish a scholarship trust fund. How much did Liza contribute if the trust fund earns $65,500 in interest annually at a rate of 12.5 percent? Assume the entire interest earned is paid out in scholarships each year while the principal amount is never spent.

$524,000 PV = $65,500 / 0.125 = $524,000

At the end of this month, Les will start saving $150 a month for retirement through his company's retirement plan. His employer will contribute an additional $0.50 for every $1.00 that he saves. If he is employed by this firm for 30 more years and earns an average of 10.5 percent on his retirement savings, how much will Les have in his retirement account 30 years from now?

$566,190.22

Ten years from now, you will be inheriting $100,000. What is this inheritance worth to you today if you can earn 5.5 percent interest, compounded annually?

$58,543.06 Present value = $100,000/(1 + 0.055)10 = $58,543.06

Angela has just received an insurance settlement of $35,000. She wants to save this money until her daughter goes to college. If she can earn an average of 5.5 percent, compounded annually, how much will she have saved when her daughter enters college 10 years from now?

$59, 785.06

$59,785.06 Future value = $10,000 × (1 + 0.08)26 × (1 + 0.05)(38 - 26) = $132,827.88

Sunshine Rentals has a debt-equity ratio of 0.84. Return on assets is 7.9 percent, and total equity is $438,000. What is the net income?

$63,667.68

Uptown Insurance offers an annuity due with semiannual payments for 25 years at 6 percent interest. The annuity costs $200,000 today. What is the amount of each annuity payment?

$7,546.70

Suppose the present value is $100, the future value is 1,000 and t is 10 years. Which formula below is used to find the interest rate?

(1,000/100)^(1/10r) - 1

The present value interest factor for $1 at 5% compounded annually for 5 years

.7835 1/ (1.05)^5

AD Corporation has a return on equity of 20% on total equity of 800,000. AD generated of 1.6 million in sales on 2.7 million in assets. A DuPont decomposition of ROE shoes the 20% return on equity is from a(n) ____ total asset turnover ratio.

0.59 TAT = SLS/TA

Wilson's Realty has total assets of $46,800, net fixed assets of $37,400, current liabilities of $6,100, and long-term liabilities of $24,600. What is the total debt ratio?

0.66

A firm has total assets of $523,100, current assets of $186,500, current liabilities of $141,000, and total debt of $215,000. What is the debt-equity ratio?

0.70

Martha's Fabric House has sales of $137,200, total equity of $74,400, and a debt-equity ratio of 0.45. What is the capital intensity ratio?

0.79

Peter's Motor Works has total assets of $689,400, long-term debt of $299,500, total equity of $275,000, net fixed assets of $497,800, and sales of $721,500. The profit margin is 4.6 percent. What is the current ratio?

0.91

Eric & Jared's Department Store has current liabilities of $7,630, net working capital of $2,180, inventory of $2,750, and sales of $51,800. What is the quick ratio?

0.93

Find the future value of an annuity of 100 per year for 10 years at 10 percent per year.

1,593.74

The future value of an annuity due of 100 per year for 10 years at 10% per year is:

1,753.12 100[(1.10^10 -1)/ .10] [1.10]

You are analyzing a company that has cash of $11,200, accounts receivable of $27,800, fixed assets of $124,600, accounts payable of $31,300, and inventory of $56,900. What is the quick ratio?

1.25

A firm has sales of $529,000 for the year. The profit margin is 3.4 percent and the retention ratio is 60 percent. What is the common-size percentage for the dividends paid?

1.36 percent

Whitt's BBQ has sales of $348,000, a profit margin of 8.1 percent, and a capital intensity ratio of 0.70. What is the total asset turnover rate?

1.43

A firm wishes to maintain an internal growth rate of 4.5 percent and a dividend payout ratio of 60 percent. The current profit margin is 7.5 percent and the firm uses no external financing sources. What must the total asset turnover be?

1.44

A firm has net working capital of $3,800 and current assets of $11,700. What is the current ratio?

1.48

What is the debt-equity ratio for a company with 3.5 million in total assets and 1.4 million in equity?

1.50 (3.5-1.4)/ 1.4

Whole Foods has a book value per share of $13.50, earnings per share of $1.21, and a price-earnings ratio of 17.6. What is the market-to-book ratio?

1.58

Alpha Co. has interest expense of 1.2 million, total assets of 84 million, sales of 76 million, long term debt of 16.4 million, and net income of 12.1 million. How will interest expense be recorded in the common-size income statement?

1.58% 1.2/76

The common stock of The Burger Hut is selling for $16.25 a share. The company has earnings per share of $0.42 and a book value per share of $9.28. What is the market-to-book ratio?

1.75 Market-to-book ratio = market value/book values = $16.25/$9.28 = 1.75

Smith Industries currently has $293,000 saved towards the purchase of a new $329,000 machine. How long does the firm need to wait to purchase this machine for cash if the firm does not save any more money and earns 6.50 percent on its savings?

1.84 years $329,000 = $293,000 × (1.065)t; t = 1.84 years

Which formula below represents a present value factor?

1/ (1+r) ^t

AD corporation has a ROE of 20% on total equity of 800,000. AD generated 1.6 million in sales on 2.7 million in assets. A DuPont decomposition of ROE shoes the 20% ROE is from a ____% profit margin

10 ROE= NI/SLS x SLS/TA x TA/CE

Vera's has earnings per share of $3 and dividends per share of 1.20. The stock sells for 30 a share. What is the PE ratio?

10 times 30/3

10.00

Mike's Place has total assets of $123,800, a debt-equity ratio of 0.75, and net income of $7,100. What is the return on equity?

10.04 percent

The Inside Door has total debt of $78,600, total equity of $214,000, and a return on equity of 14.5 percent. What is the return on assets?

10.61 percent Return on assets = net income/total assets Total liabilities = 78,600 + 214,000 = 292,600 (we use this figure as total assets because on the balance sheet total liabilities equal total assets.) We are not given net income, but ROE = NI/TE and NI = ROE * TE Net income = 0.145*214,000 = 31,030 Return on assets = net income/total assets = 31,030/292,600 = 0.1061 or 10.61%

Westover Mills has a return on equity of 13.90 percent, an equity multiplier of 1.40, and a payout ratio of 30 percent. What is the firm's sustainable rate of growth?

10.78 percent Sustainable growth rate = [0.139 × (1 - 0.30)] / {1 - [0.139 × (1 - 0.30)]} = 10.78 percent

The Veggie Hut has net income of $26,400, total equity of $102,700, and total assets of $189,500. The dividend payout ratio is 0.30. What is the internal growth rate?

10.81 percent

12 years Approximate time period = 72/6 = 12 years

It takes The Crossroads Boutique an average of 61 days to sell its inventory and 30 days to collect its accounts receivable. The firm has sales of $568,700 and costs of goods sold of $398,800. What is the accounts receivable turnover rate?

12.17

A firm has a return on equity of 16 percent, a return on assets of 11 percent, and a 30 percent dividend payout ratio. What is the sustainable growth rate?

12.61 percent

Mercier United has net income of $128,470. There are currently 32.67 days' sales in receivables. Total assets are $1,419,415, total receivables are $122,306, and the debt-equity ratio is 0.40. What is the return on equity?

12.67 percent

You just won $50,000 and deposited your winnings into an account that pays 5.5 percent interest, compounded annually. How long will you have to wait until your winnings are worth $100,000?

12.95

Tally Ho Inn has annual sales of $737,000. Earnings before interest and taxes is equal to 21 percent of sales. For the period, the firm paid $7,900 in interest. What is the profit margin if the tax rate is 35 percent?

12.95 percent

12.95 percent Profit margin = net income/sales Net income is not provided, but we can calculate it: Net income = (sales*0.21) - interest - taxes = [(0.21 * $737,000) - $7,900] *(1-0.35) = 95,465.5 Profit margin = net income/sales = 95,465.5/$737,000 = 0.1295 or 12.95%

You just won $50,000 and deposited your winnings into an account that pays 5.5 percent interest, compounded annually. How long will you have to wait until your winnings are worth $100,000?

12.95 years $100,000 = $50,000 × (1 + 0.055)t ; t = 12.95 years

At 10 percent interest, how long does it take to quadruple your money?

14.55

A credit card has a stated interest rate of 14.56 percent. What is the APR if interest is compounded monthly?

14.56 percent

The Space and Rocket Center takes an average of 55 days to sell its inventory and an average of 2.5 days to collect payment on its sales. What is the inventory turnover rate?

6.64

Browning's, Inc. has a capital intensity ratio of 0.48, a profit margin of 4.80 percent, and a debt-equity ratio of 0.54. What is the firm's return on equity?

15.40 percent ROE = 0.048 × (1 / 0.48) × (1 + 0.54) = 15.40 percent

The Saw Mill has a return on assets of 6.1 percent, a total asset turnover rate of 1.8, and a debt-equity ratio of 1.6. What is the return on equity?

15.86 percent

PayDay Loans wants to earn an effective annual return on its consumer loans of 18 percent per year. The bank uses daily compounding on its loans. What interest rate is the bank required by law to report to potential borrowers?

16.56 percent

A firm has net income of $31,300, depreciation of $5,100, taxes of $14,600, and interest paid of $3,100. What is the cash coverage ratio?

17.45

PayDay Loans is offering a special on one-year loans. The company will loan you $5,000 today in exchange for one payment of $5,900 one year from now. What is the APR on this loan?

18.00 percent

Baxter & Baxter has total assets of $710,000. There are 45,000 shares of stock outstanding with a market value of $28 a share. The firm has a profit margin of 7.1 percent and a total asset turnover of 1.29. What is the price-earnings ratio?

19.38

A credit card charges 1.5 percent interest each month. What is the EAR?

19.56% (1.015)^12 -1

Precision Engineering invested $110,000 at 6.5 percent interest, compounded annually for 4 years. How much interest on interest did the company earn over this period of time?

2,911.30

The Berry Patch has sales of $438,000, cost of goods sold of $369,000, depreciation of $37,400, and interest expense of $13,800. The tax rate is 35 percent. What is the times interest earned ratio?

2.29

A firm had operating profit (EBIT) of 300,000 on sales of 500,000. Interest expense was 125,000 and taxes were 60,000. The company has a times interst earned ratio of

2.40 300,000/125,000

A firm has an operating profit (EBIT) of 600 on sales of 1,000. Interest expense is 250 and taxes are 120. What is the times interest earned ratio?

2.40 600/250

Last year, Teresa's Fashions earned net income of $68,400 and had 12,000 shares of stock outstanding. The dividends per share were $1.20. What is the dividend payout ratio?

21.05 percent

A new financial services company just opened in your town. To attract customers, it is offering a "9-11" loan special. The company will lend $9 today in exchange for a payment of $11 one year from today. What is the APR on this loan?

22.22 percent

If a firm's sales are growing at 5% per year, how long will it take for the firm's sales to triple?

22.5 years

You have $1,100 today and want to triple your money in 5 years. What interest rate must you earn if the interest is compounded annually?

24.57

Jim just deposited $13,000 into his account at Traditions Bank. The bank will pay 1.3 percent interest, compounded annually, on this account. How much interest on interest will he earn over the next 15 years?

244.20

Undertaker Enterprises earns $0.17 in profit on every $1 of sales and has $0.67 in assets for every $1 of sales. The firm pays out 20 percent of its profits to its shareholders. What is the internal growth rate?

25.47 percent

A firm with a 26 percent return on equity earned ____ cents in profit for every one dollar in shareholders' equity

Peterboro Supply has a current accounts receivable balance of $391,648. Credit sales for the year just ended were $5,338,411. How long did it take on average for credit customers to pay off their accounts during the past year?

26.78 days

If the quoted interest rate is 2% per month (12 months in a year), what is the EAR?

26.82% (1.02)^12 -1

How long will it take 40 to grow to 240 at an interest rate of 6.53% compounded annually?

28.33 years

Alice has 20,000 in an account that pays 8% per year. Alice wants to withdraw equal amounts at the end of the next 10 years. How much will Alice receive each year?

2980.59

The Universal Network has sales of $496,500, cost of goods sold of $264,900, and inventory of $87,100. What is the inventory turnover rate?

3.04

A firm has sales of $311,000 and net income of $31,600. Currently, there are 28,000 shares outstanding at a market price of $36 per share. What is the price-sales ratio?

3.24

AD corporation has a return on equity of 20% on total equity of 800,000. AD generated 1.6 million in sales on 2.7 million in assets. A DuPont decomposition of ROE shoes the 20% return on equity is from a ____equity multiplier

3.38

Baugh & Essary has net income of $149,200, sales of $936,800, a capital intensity ratio of 0.74, and an equity multiplier of 1.5. What is the return on equity?

32.25 percent

Your friend claims that he invested $5,000 seven years ago and that this investment is worth $38,700 today. For this to be true, what annual rate of return did he have to earn? Assume the interest compounds annually.

33.96

Belk Department Store charges a daily rate of 0.01 percent on its store credit cards. What interest rate is the company required by law to report to potential customers?

36.50 percent

True Blue Transport has a current stock price of $27. For the past year, the company had net income of $2,187,400, total equity of $13,892,300, sales of $26,511,000, and 2.5 million shares outstanding. What is the market-to-book ratio?

4.86

4.86 Market-to-book = Price per share/book value per share Price per share = $27 Book value per share = TE/shares outstanding = $13,892,300/2,500,000 = $5.55692 Market-to-book = $27/$5.55692 = 4.86

A firm has adopted a policy whereby it will not seek any additional external financing. Given this, what is the maximum growth rate for the firm if it has net income of $12,100, total equity of $94,000, total assets of $156,000, and a 40 percent dividend payout ratio?

4.88 percent

Computer Geeks has sales of $521,000, a profit margin of 14.8 percent, a total asset turnover rate of 2.16, and an equity multiplier of 1.30. What is the return on equity?

41.56 percent

Alpha Star's net income is 300 on 2,000 of sales. The company has 5,000 in assets and equity of 3,000. The firm paid out 125 in cash dividends. What is the dividend payout ratio?

41.67%

Jake owes $3,400 on his credit card. He is not charging any additional purchases because he wants to get this debt paid in full. The card has an APR of 13.9 percent. How much longer will it take him to pay off this balance if he makes monthly payments of $50 rather than $60?

41.79 months

You're trying to save to buy a new $210,000 Ferrari. You have $38,000 today that can be invested at your bank. The bank pays 4.1 percent annual interest on its accounts. How long will it be before you have enough to buy the car?

42.54

Today, you deposit $2,400 in a bank account that pays 4 percent simple interest. How much interest will you earn over the next 5 years?

480.00 Interest = $2,400 × 0.04 × 5 = $480

Fried Foods has sales of $238,900, total assets of $217,000, total equity of $121,300, net income of $18,700, and dividends paid of $7,000. What is the internal growth rate?

5.70 percent

A firm has net income of $6,850 and interest expense of $2,130. The tax rate is 34 percent. What is the firm's times interest earned ratio?

5.87

Earth Fare Foods has total assets of $229,800, net fixed assets of $71,500, long-term debt of $52,000, and total debt of $78,700. If inventory is $45,000, what is the current ratio?

5.93

AD Corporation's return on assets is 14? and the firm retains 40? of all its earnings. AD's internal growth rate is ____%

5.93 (.14 x .40) / (1 - .14 x .40)

Suppose you borrow 1,000 at 5% interest per year for 10 years. The loan is an interest only loan so each year you will pay ___

50 5% x 1,000

What is the present value of the following cash flow stream discounted at 6%? 100 in years 1 and 2 followed by 200 in years 3 and 4

509.68

Kato's Corner has an average inventory balance of $41,000, total sales of $363,600, and cost of goods sold of $288,700. How long on average does it take the firm to sell its inventory?

51.84 days Inventory turnover = $288,700/ $41,000 = 7.04146. Days' sales in inventory = 365 / 7.04146= 51.84 days.

A firm has $42,900 in receivables and $211,800 in total assets. The total asset turnover rate is 1.40 and the profit margin is 5.2 percent. How long on average does it take the firm to collect its receivables?

52.81 days

52.81 days Accounts receivable turnover = sales/account receivables Note that sales are not given, but we can calculate it as: Sales = total assets * total asset turnover Accounts receivable turnover = ($211,800 × 1.40)/$42,900 = 6.9119 Days' sales in receivables = 365/receivables turnover = 365/6.9119 = 52.81 days

Galaxy Sales has sales of $746,700, cost of goods sold of $603,200, and inventory of $94,300. How long on average does it take the firm to sell its inventory?

57.06 days

AD Corporation had net income of 300,000 and paid out 125,000 in cash dividends to stockholders. The firm's retention ratio is ____?

You want to borrow $40,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $775, but no more. Assuming monthly compounding, what is the highest rate you can afford on a 60-month APR loan?

6.1 percent

Chubb's Market has a return on equity of 17.85 percent, an equity multiplier of 1.70, and a payout ratio of 45 percent. What is the firm's internal rate of growth?

6.13 percent Return on assets = 0.1785 / 1.70 = 10.50 percent. Internal growth rate = [0.105 × (1 - 0.45)] / {1 - [0.105 × (1 - 0.45)]} = 6.13 percent.

You just received a loan offer from Friendly Loans. The company is offering you $5,000 at 14.3 percent interest. The monthly payment is only $100. If you accept this offer, how long will it take you to pay off the loan?

6.37 years

Suppose that in 2010, a $10 silver certificate from 1898 sold for $11,200. For this to have been true, what would the annual increase in the value of the certificate have been?

6.47%

Donegal's Industrial Products wishes to maintain a growth rate of 6 percent a year, a debt-equity ratio of 0.45, and a dividend payout ratio of 30 percent. The ratio of total assets to sales is constant at 1.25. What profit margin must the firm achieve?

6.97 percent

Adell Furniture has a profit margin of 8.2 percent and a dividend payout ratio of 40 percent. What is the plowback ratio?

60.00 percent Plowback ratio = addition to retained earnings/net income, but also Dividend payout ratio = 1 - b b = 1 - dividend payout ratio = 1- 0.40 = 0.60

You invest 500 at 10 percent interest per annum. At the end of 2 years with simple interest you will have ___ and with compound interest you will have ___

600;605

Lawler's BBQ has sales of $311,800, a profit margin of 3.9 percent, and dividends of $4,500. What is the plowback ratio?

62.99 percent

What is the future value of 100 deposited each year for 2 years beginning next year, then 200 deposited for the next two years if you can earn 6% per year?

643.46

Rock construction has current assets of 45 million, total liabilities and equity of 67 million, and sales of 59 million. How would current assets be expressed on a common-size balance sheet?

67% 45m/67m

Tessler Farms has a return on equity of 12.71 percent, a debt-equity ratio of 0.75, and a total asset turnover of 0.9. What is the return on assets?

7.26 percent

BC Corporation has net income of 176,000, sales of 1,982,000 and total assets of 2.24 million. What is the return on assets?

7.86% 176,000/ 2.24m

Planters Bank pays 5 percent simple interest on its savings account balances, whereas Centura Bank pays 5 percent compounded annually. If you made a $12,000 deposit in each bank, how much more money would you earn from your Centura Bank account at the end of 20 years?

7839.57

Jenny needs to borrow $16,000 for 3 years. The loan will be repaid in one lump sum at the end of the loan term. Which one of the following interest rates is best for Jenny?

8 percent simple interest

Lisa has $1,000 in cash today. Which one of the following investment options is most apt to double her money?

8%, 9years

Jenny needs to borrow $16,000 for 3 years. The loan will be repaid in one lump sum at the end of the loan term. Which one of the following interest rates is best for Jenny?

8%, simple interest

A fire has destroyed a large percentage of the financial records of the Strongwell Co. You have the task of piecing together information in order to release a financial report. You have found the return on equity to be 13.8 percent. Sales were $979,000, the total debt ratio was 0.42, and total debt was $548,000. What is the return on assets?

8.00 percent

Today, you invested $3,900 in a retirement account. What annual rate of return will you have to earn if your account is to be worth $54,000 when you retire 33 years from now? Assume you make no further deposits into this account.

8.29 percent $54,000 = $3,900 × (1 + r)33; r = 8.29 percent

Overnight Trucking recently purchased a new truck costing $150,800. The firm financed this purchase at 8.6 percent interest with monthly payments of $2,100. How many years will it take the firm to pay off this debt?

8.44 years

Freedom Health Centers has total equity of $861,300, sales of $1.48 million, and a profit margin of 5.2 percent. What is the return on equity?

8.94 percent

Suppose you paid a 1,200 loan off by paying 400 in principal each ear plus 10% yearly interest. How much is the second interest payment?

BC Corporation had net income of $3.5 million and paid out 700,000 in cash dividends to stockholders. Their retention ratio is ___%.

80 Retention ratio = (3,500,000 - 700,000) / 3,500,000

Last year, Benton Inc. had net income of 3.5 million and paid out 700,000 in cash dividends. If income this year is 4.1 million and the dividend payout ratio is held constant, how much will be paid in dividends?

820,000 4.1m (700,000 / 3.5m)

Waldale Pools has total equity of $289,100 and net income of $64,500. The debt-equity ratio is 0.55 and the total asset turnover is 1.6. What is the profit margin?

9.00 percent

Friendly Skies Airline has earnings before interest and taxes of $21,680 and net income of $12,542. The tax rate is 35 percent. What is the times interest earned ratio?

9.09

Blue Water Cafe has $28,700 in total assets, depreciation of $3,100, and interest of $1,400. The total asset turnover rate is 1.2. Earnings before interest and taxes are equal to 28 percent of sales. What is the cash coverage ratio?

9.10

Valentino's maintains a constant debt-equity ratio of 0.45. The firm had net income of $11,800 for the year and paid $6,500 in dividends. The firm has total assets of $92,000. What is the sustainable growth rate?

9.11 percent

Kessler, Inc. has accounts receivable of $31,600, total assets of $311,500, cost of goods sold of $208,400, and a capital intensity ratio of 1.08. What is the accounts receivable turnover rate?

9.13

Black Stone Industries has a return on equity of 14.10 percent and a debt-equity ratio of 0.53. What is the firm's return on assets?

9.22 percent ROA = 0.141 / (1 + 0.53) = 9.22 percent

The present value interest factor for an annuity with an interest rate of 8 percent per year over 20 years is ____.

9.8181 [1- (1/1.08^20)] / .08

The Green House has a profit margin of 5.6 percent on sales of $311,200. The firm currently has 15,000 shares of stock outstanding at a market price of $11.60 per share. What is the price-earnings ratio?

9.98

When you were born, your parents opened an investment account in your name and deposited $500 into the account. The account has earned an average annual rate of return of 4.8 percent. Today, the account is valued at $36,911.22. How old are you?

91.75years

Which one of the following statements is true concerning the price-earnings (PE) ratio?

A high PE ratio may indicate that a firm is expected to grow significantly.

Which one of the following statements is true concerning the price-earnings (PE) ratio?

A high PE ratio may indicate that a firm is expecteed to grow significantly

2. Stadford Inc. is financed with 40 percent debt and 60 percent equity. This mixture of debt and equity is referred to as the firm's: A. capital structure B. capital budget C. asset allocation D. working capital E. risk structure

A, capital structure

Margie opened a used bookstore and is both the 100 percent owner and the store's manager. Which type of business entity does Margie own if she is personally liable for all the store's debts? A. sole proprietorship B. limited partnership C. corporation D. joint stock company E. general partnership

A, sole proprietorship

Leslie Printing has net income of $26,310 for the year. At the beginning of the year, the firm had common stock of $55,000, paid-in surplus of $11,200, and retained earnings of $48,420. At the end of the year, the firm had total equity of $142,430. The firm does not pay dividends. What is the amount of the net new equity raised during the year?

A. $1,500 Net new equity = $142,430 - $26,310 - $55,000 - $11,200 - $48,420 = $1,500

Lester's Fried Chick'n purchased its building 11 years ago at a cost of $139,000. The building is currently valued at $179,000. The firm has other fixed assets that cost $66,000 and are currently valued at $58,000. To date, the firm has recorded a total of $79,000 in depreciation on the various assets. The company has current liabilities of $36,600 and net working capital of $18,400. What is the total book value of the firm's assets?

A. $181,000 Book value = $139,000 + $66,000 - $79,000 + $18,400 + $36,600 = $181,000

The Good Life Store has sales of $79,600. The cost of goods sold is $48,200 and the other costs are $18,700. Depreciation is $8,300 and the tax rate is 34 percent. What is the net income? A. $2,904 B. $8,382 C. $11,204 D. $14,660 E. $16,682

A. $2,904

The Good Life Store has sales of $79,600. The cost of goods sold is $48,200 and the other costs are $18,700. Depreciation is $8,300 and the tax rate is 34 percent. What is the net income?

A. $2,904 Net income = ($79,600 - $48,200 - $18,700 - $8,300)(1 - 0.34) = $2,904

The Embroidery Shoppe had beginning retained earnings of $18,670. During the year, the company reported sales of $83,490, costs of $68,407, depreciation of $8,200, dividends of $950, and interest paid of $478. The tax rate is 35 percent. What is the retained earnings balance at the end of the year?

A. $21,883.25 Net income = ($83,490 - $68,407 - $8,200 - $478) × (1 - 0.35) = $4,163.25; Ending retained earnings = $18,670 + $4,163.25 - $950 = $21,883.25

During the year, The Dalton Firm had sales of $3,210,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $2,540,000, $389,000, and $112,000, respectively. In addition, the company had an interest expense of $118,000 and a tax rate of 34 percent. (Ignore any tax loss carryback or carryforward provisions.) What is its operating cash flow?

A. $263,660 EBIT = [($3,210,000 - $2,540,000 - $389,000 - $112,000 = $169,000; Tax = ($169,000 - $118,000) × 0.34 = $17,340; OCF = $169,000 + $112,000 - $17,340 = $263,660

CHART CH 3 #29 For 2014, the cash flow from assets is _____ and the cash flow to shareholders is ______. A. $49,100; $62,500 B. $49,100; $76,800 C. $49,100; $81,100 D. $56,400; $76,800 E. $56,400; $79,300

A. $49,100; $62,500

Home Supply, Inc. has compiled the following information: 2013 2014 Sales $427,400 $511,500 Interest paid $19,800 $21,600 Long-term debt $260,000 $295,000 Common stock $150,000 $160,000 depreciation $24,600 $23,500 accounts receivable $38,200 $34,900 other costs $58,400 $34,900 inventory $58,400 $61,100 accounts payable $36,800 $32,900 costs of goods sold $274,200 $289,300 cash $41,500 $36,700 taxes $11,400 $39,400 net fixed assets $336,900 $392,200 retained earnings $28,600 $32,700 For 2014, the cash flow from assets is _____ and the cash flow to shareholders is ______.

A. $49,100; $62,500 2014 operating cash flow = $511,500 - $61,100 - $289,300 - $39,400 = $121,700; Change in net working capital = ($34,900 + $56,800 - $32,900 + $36,700) - ($38,200 + $58,800 - $36,800 + $41,500) = -$6,200; Net capital spending = $392,200 - $336,900 + $23,500 = $78,800; Cash flow from assets = $121,700 - (-$6,200) - $78,800 = $49,100; Cash flow to creditors = $21,600 - ($295,000 - $260,000) = -$13,400; Addition to retained earnings = $32,700 - $28,600 = $4,100; Net income = $511,500 - $289,300 - $61,100 - $23,500 - $21,600 - $39,400 = $76,600; Dividends paid = $76,600 - $4,100 = $72,500; Cash flow to stockholders = $72,500 - ($160,000 - $150,000) = $62,500; Cash flow from assets = -$13,400 + $62,500 = $49,100

Donner United has total owners' equity of $18,800. The firm has current assets of $23,100, current liabilities of $12,200, and total assets of $36,400. What is the value of the long-term debt?

A. $5,400 Long-term debt = $36,400 - $18,800 - $12,200 = $5,400

The owners' equity for The Deer Store was $58,900 at the beginning of the year. During the year, the company had aftertax income of $4,200, of which $3,200 was paid in dividends. Also during the year, the company repurchased $6,500 of stock from one of the shareholders. What is the value of the owners' equity at year end?

A. $53,400 Ending owners' equity = $58,900 + $4,200 - $3,200 - $6,500 = $53,400

For the past year, LP Gas, Inc. had cash flow from assets of $38,100 of which $21,500 flowed to the firm's stockholders. The interest paid was $2,300. What is the amount of the net new borrowing?

A. -$14,300 Cash flow to creditors = $38,100 - $21,500 = $16,600; Net new borrowing = $2,300 - $16,600 = -$14,300

The balance sheet of a firm shows current liabilities of $56,300 and long-term debt of $289,200 as of last year. Current liabilities are $76,900 and long-term debt is $248,750 as of today, which is the end of the current year. The financial statements for the current year reflect an interest paid amount of $29,700 and dividends of $19,000. What is the amount of the net new borrowing? A. -$40,450 B. $40,450 C. $64,750 D. $70,150 E. $78,250

A. -$40,450

A. -$40,450 Net new borrowing = $248,750 - $289,200 = -$40,450

The balance sheet of Binger, Inc. has the following balances: Begining Ending Balance Balance Cash $21,400 $16,800 Accounts Recei $47,400 $52,300 Inventory $83,800 $77,400 Net fixed assets $211,600 $203,800 Accounts payable $54,900 $56,900 Long-term debt $170,000 $185,000 What is the amount of the change in net working capital?

A. -$8,100 Change in net working capital = ($16,800 + $52,300 + $77,400 - $56,900) - ($21,400 + $47,400 + $83,800 - $54,900) = -$8,100

Beasley Enterprises stock has an expected return of 11.5 percent. Given the information below, what is the expected return if the economy is in a recession? State.Of.Economy Prob Of S.O.E RateOfReturn Recession 0.18 ? Normal 0.65 .13 Boom 0.17 .24

A. -5.72 percent E(R) = 0.115 = (0.18 × x) + (0.65 × 0.13) + (0.17 × 0.24) x = -5.72 percent

Consider the following information: State of Probability of Economy State of Economy Boom .72 Bust .28 Rate of Return if occurs Stock A Stock B Stock C .06 .11 .17 .19 -.04 .23 What is the variance of a portfolio invested 30 percent each in Stocks A and B and 40 percent in Stock C?

A. 0.000065 E(RBoom) = (0.30 × 0.06) + (0.30 × 0.11) + (0.40 × 0.17) = 0.119 E(RBust) = (0.30 × 0.19) + (0.30 × -0.04) + (0.40 × 0.23) = 0.137 E(RPortfolio) = (0.72 × 0.119) + (0.28 × 0.137) = 0.12404 Variance = 0.72(0.119 - 0.12404)2 + 0.28(0.137 - 0.12404)2 = 0.000065

Which one of the following statements is correct?

A. Shareholders' equity is the residual value of a firm.

You currently own a portfolio valued at $56,000 that has a beta of 1.28. You have another $10,000 to invest and would like to invest it in a manner such that the portfolio beta decreases to 1.20. What does the beta of the new investment have to be?

A. 0.75 βP = 1.20 = ($56,000/$66,000)(1.28) + ($10,000/$66,000)x x = 0.75

What is the beta of the following portfolio? Stock Value Beta J $21,600 1.48 K 13,000 1.13 L 46,000 0.99 M 19,800 1.08

A. 1.13 Portfolio value = $21,600 + $13,000 + $46,000 + $19,800 = $100,400 βP = ($21,600/$100,400)(1.48) + ($13,000/$100,400)(1.13) + ($46,000/$100,400)(0.99) + ($19,800/$100,400)(1.08) = 1.13

Stock A has an expected return of 15.6 percent and a beta of 1.27. Stock B has an expected return of 11.4 percent and a beta of 0.89. Both stocks have the same reward-to-risk ratio. What is the risk-free rate?

A. 1.56 percent (0.156 - Rf)/1.27 = (0.114 - Rf)/0.95 Rf = 1.56 percent

Given the following information, what is the standard deviation of the returns on a portfolio that is invested 40 percent in Stock A, 35 percent in Stock B, and the remainder in Stock C? State of Probability of Economy State of Economy Normal .65 Recession .35 Rate of Return if occurs Stock A Stock B Stock C 14.3% 16.7% 18.2% -9.8% 5.4% -26.9%

A. 11.86 percent E(RNormal) = (0.40 × 0.143) + (0.35 × 0.167) + (0.25 × 0.182) = 0.16115 E(RRecession) = (0.40 × -0.098) + (0.35 × 0.054 + (0.25 × -0.269) = -0.08755 E(RPortfolio) = (0.65 × 0.16115) + (0.35 × -0.08755) = 0.074105 Variance = 0.65(0.16115 - 0.074105)2 + 0.35(-0.08755 - 0.074105)2 = 0.014071 Standard deviation = Ö0.014071 = 11.86 percent

Stadford, Inc. is financed with 40 percent debt and 60 percent equity. This mixture of debt and equity is referred to as the firm's A. capital structure. B. capital budget. C. asset allocation. D. working capital. E. risk structure.

A. capital structure

Given the following information, what is the expected return on a portfolio that is invested 30 percent in both Stocks A and C, and 40 percent in Stock B? State of Probability of Economy State of Economy Broom .05 Normal .85 Recession .10 Rate of Return if occurs Stock A Stock B Stock C 7.8% 23.6% 18.4% 9.1% 15.4% 13.7% 11.8% -12.3% 6.4%

A. 11.97 percent E(RBoom) = (0.30 × 0.078) + (0.40 × 0.236) + (0.30 × 0.184) = 0.1730 E(RNormal) = (0.30 × 0.091) + (0.40 × 0.154) + (0.30 × 0.137) = 0.1300 E(RRecession) = (0.30 × 0.118) + (0.40 × -0.123) + (0.30 × 0.064) = 0.0054 E(RPortfolio) = (0.05 × 0.1730) + (0.85 × 0.1300) + (0.10 × 0.0054) = 11.97 percent

Stock J has a beta of 1.47 and an expected return of 15.8 percent. Stock K has a beta of 1.05 and an expected return of 11.9 percent. What is the risk-free rate if these securities both plot on the security market line?

A. 2.15 percent (0.158 - Rf)/1.47 = (0.119 - Rf)/1.05 Rf = 2.15 percent

Stock Y has a beta of 1.28 and an expected return of 13.7 percent. Stock Z has a beta of 1.02 and an expected return of 11.4 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other?

A. 2.38 percent (0.137 - Rf)/1.28 = (0.114 - Rf)/1.02 Rf = 2.38 percent

Given the following information, what is the standard deviation of the returns on a portfolio that is invested 35 percent in both Stocks A and C, and 30 percent in Stock B? State of Probability of Economy State of Economy Broom .20 Normal .80 Rate of Return if occurs Stock A Stock B Stock C 16.4% 31.8% 11.4% 11.2% 19.6% 7.3%

A. 2.77 percent E(RBoom) = (0.35 × 0.164) + (0.30 × 0.318) + (0.35 × 0.114) = 0.1927 E(RNormal) = (0.35 × 0.112) + (0.30 × 0.196) + (0.35 × 0.073) = 0.12355 E(RPortfolio) = (0.20 × 0.1927) + (0.80 × 0.12355) = 0.13738 Variance = 0.20(0.1927 - 0.13738)2 + 0.80(0.12355 - 0.13738)2 = 0.000765 Standard deviation = √0.000765 = 2.77 percent

Last year, Teresa's Fashions earned net income of $68,400 and had 12,000 shares of stock outstanding. The dividends per share were $1.20. What is the dividend payout ratio? A. 21.05 percent B. 24.07 percent C. 38.60 percent D. 40.21 percent E. 44.14 percent

A. 21.05 percent

58. You own a $46,000 portfolio comprised of four stocks. The values of Stocks A, B, and C are $5,600, $16,700, and $11,400, respectively. What is the portfolio weight of Stock D?

A. 24.57 percent ValueD = $46,000 - $6,600 - $16,700 - $11,400 = $11,300 WeightD = $11,300/$46,000 = 24.57 percent

Noah's Landing stock is expected to produce the following returns given the various states of the economy. What is the expected return on this stock? State.Of.Economy Prob Of S.O.E RateOfReturn Recession 0.3 -0.27 Normal 0.65 0.16 Boom 0.05 0.35

A. 4.05 percent Expected return = (0.3 × -0.27) + (0.65 × 0.16) + (0.05 × 0.35) = 4.05 percent

Consider the following information on a portfolio of three stocks: State of Probability of Economy State of Economy Broom .15 Normal .80 Recession .05 Rate of Return if occurs Stock A Stock B Stock .05 .21 .18 .08 .15 .07 .12 .22 -.02 The portfolio is invested 35 percent in each Stock A and Stock B and 30 percent in Stock C. If the expected T-bill rate is 3.90 percent, what is the expected risk premium on the portfolio

A. 6.19 percent E(RBoom) = (0.35 × 0.05) + (0.35 × 0.21) + (0.30 × 0.18) = 0.1450 E(RNormal) = (0.35 × 0.08) + (0.35 × 0.15) + (0.30 × 0.07) = 0.1015 E(RBust) = (0.35 × 0.12) + (0.35 × -0.22) + (0.30 × -0.02) = -0.0410 E(RP) = (0.15 × 0.1450) + (0.80 × 0.1015) (0.05 × -0.0410) = 0.1009 E(RPP) = 0.1009 - 0.039 = 6.19 percent

A stock has a beta of 1.24, an expected return of 13.68 percent, and lies on the security market line. A risk-free asset is yielding 2.8 percent. You want to create a $6,000 portfolio consisting of Stock A and the risk-free security such that the portfolio beta is 0.65. What rate of return should you expect to earn on your portfolio?

A. 8.50 percent E(R) = 0.1368 = 0.028 + 1.24(MRP) MRP = 0.087742 E(RP) = 0.028 + 0.65(0.087742) = 8.50 percent

Which one of the following terms is defined as the total tax paid divided by the total taxable income? A. Average tax rate B. Variable tax rate C. Marginal tax rate D. Absolute tax rate E. Contingent tax rate

A. Average tax rate

Which one of the following will decrease the liquidity level of a firm?

A. Cash purchase of inventory

Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that stock. Which one of the following best describes the 16.5 percent rate?

A. Expected return

The expected return on a security depends on which of the following? I. Risk-free rate of return II. Amount of the security's unique risk III Market rate of return IV. Standard deviation of returns

A. I and III only

Which one of the following describes systemic risk?

A. Risk that affects a large number of assets

Cash flow to creditors is defined as: A. interest paid minus net new borrowing. B. interest paid plus net new borrowing. C. the operating cash flow minus net capital spending minus change in net working capital. D. dividends paid plus net new borrowing. E. cash flow from assets plus net new equity.

A. interest paid minus net new borrowing.

If a security plots to the right and below the security market line, then the security has ____ systematic risk than the market and is ____.

A. more; overpriced

The cash coverage ratio is used to evaluate the:

Ability of a firm to pay the interest on its debt

Which is included in net working capital

Accounts payable

which one of the following statements is correct?

Adjustments have to be made when comparing the icome statments of firms which use different methods of accounting for inventory.

Which one of the following statements is correct?

Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory.

Which one of the following statements is true concerning annuities?

All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.

Which of the following create problems when conducting financial statement analysis?

All of the above are common problems

Bill just financed a used car through his credit union. His loan requires payments of $275 a month for five years. Assuming that all payments are paid on time, his last payment will pay off the loan in full. What type of loan does Bill have?

Amortized

Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following terms?

Annuity

An annuity with payments beginning immediately rather than at the end of the period is called an ____.

Annuity due

Which one of the following is most apt to align management's priorities with shareholders' interests? A. increasing employee retirement benefits B. compensating managers with shares of stock that must be held for 3 years before the shares can be sold C. allowing a manager to decorate his or her own office once he or she has been in that office for a period of 3 years or more D. increasing the number of paid holidays that long-term employees are entitled to receive E. allowing employees to retire early with full retirement benefits

B, compensating manger with shares of stock that must be held for 3 years before the shares can be sold

Todd and Cathy created a firm that is a separate legal entity and will share ownership of that firm on a 50-50 basis. Which type of entity did they create if they have no personal liability for the firm's debts? A. limited partnership B. corporation C. sole proprietorship D. general partnership E. public company

B, corporation

Which one of the following is a capital structure decision? A. determining the optimal inventory level B. establishing the preferred debt-equity level C. selecting new equipment to purchase D. settling the terms of sale for credit sales E. determining when suppliers should be paid

B, establishing the preferred debt-equity level

Donut Delite has total assets of $31,300, long-term debt of $8,600, net fixed assets of $19,300, and owners' equity of $21,100. What is the value of the net working capital? A. $9,800 B. $10,400 C. $18,900 D. $21,300 E. $23,200

B. $10,400

Donut Delite has total assets of $31,300, long-term debt of $8,600, net fixed assets of $19,300, and owners' equity of $21,100. What is the value of the net working capital?

B. $10,400 Net working capital = $21,100 + $8,600 - $19,300 = $10,400

Gorman Distributors shows the following information on its 2014 income statement: sales = $317,800; costs = $211,400; other expenses = $18,500; depreciation expense = $31,200; interest expense = $2,100; taxes = $18,600; dividends = $12,000. In addition, you're told that the firm issued $4,500 in new equity during 2014, and redeemed $6,500 in outstanding long-term debt. If net fixed assets increased by $7,400 during the year, what was the addition to net working capital?

B. $14,600 OCF - $317,800 - $211,400 - $18,500 - $18,600 = $69,300; NCS = $7,400 + $31,200 = $38,600; CFA = CFC + CFS = [$2,100 - (-$6,500)] + [$12,000 - $4,500] = $16,100; Add to NWC = OCF - NCS - CFA = $69,300 - $38,600 - $16,100 = $14,600

CHART ON CH 3 #21- The Plaza Cafe has an operating cash flow of $78,460, depreciation expense of $8,960, and taxes paid of $21,590. A partial listing of its balance sheet accounts is as follows: What is the amount of the cash flow from assets? A. $58,913 B. $61,246 C. $61,487 D. $63,909 E. $64,128

B. $61,246

The Plaza Cafe has an operating cash flow of $78,460, depreciation expense of $8,960, and taxes paid of $21,590. A partial listing of its balance sheet accounts is as follows: Begining Ending Balance Balance Current assets $141,680 $138,509 Net Fixed assets $687,810 $703,411 current liabilities $87,340 $91,516 Long-term debt $267,000 $248,000 What is the amount of the cash flow from assets?

B. $61,246 Cash flow from assets = $78,460 - ($703,411 - $687,810 + $8,960) - [($138,509 - $91,516) - ($141,680 - $87,340)] = $61,246

You would like to invest $19,000 and have a portfolio expected return of 12.3 percent. You are considering two securities, A and B. Stock A has an expected return of 15.6 percent and B has an expected return of 10.3 percent. How much should you invest in Stock A if you invest the balance in Stock B?

B. $7,170 E(RP) = 0.123 = 0.156x + 0.103(1 - x) x = 0.377358 InvestmentA = 0.377358 × $19,000 = $7,170

Which of the following terms can be used to describe unsystematic risk? I. Asset-specific risk II. Diversifiable risk III. Market risk IV. Unique risk

C. I, II, and IV only

Red Roofs, Inc. has current liabilities of $24,300 and accounts receivable of $7,800. The firm has total assets of $43,100 and net fixed assets of $23,700. The owners' equity has a book value of $21,400. What is the amount of the net working capital?

B. -$4,900 Net working capital = $43,100 - $23,700 - $24,300 = -$4,900

Given the following information, what is the variance of the returns on this stock? State.Of.Economy Prob Of S.O.E RateOfReturn Broom .18 .29 Normal .77 .14 Recessiom .05 -.45

B. 0.021449 Expected return = (0.18 × 0.29) + (0.77 × 0.14) + (0.05 × -0.45) = 0.1375 Variance = 0.18(0.29 - 0.1375)2 + 0.77(0.14 - 0.1375)2 + 0.05(-0.45 - 0.1375)2 = 0.021449

Gently Used Goods has cash of $2,950, inventory of $28,470, fixed assets of $9,860, accounts payable of $11,900, and accounts receivable of $4,660. What is the cash ratio? A. 0.08 D. 0.46 B. 0.25 E. 0.51 C. 0.30

B. 0.25

What is the beta of the following portfolio? Stock Value Beta S $32,800 0.97 T 16,700 1.26 U 21,000 0.79 V 4,600 1.48

B. 1.02 Portfolio value = $32,800 + $16,700 + $21,100 + $4,600 = $75,200 βP = ($32,800/$75,200)(0.97) + ($16,700/$75,200)(1.26) + ($21,100/$75,200)(0.79) + ($4,600/$75,200)(1.48) = 1.02

Given the following information, what is the expected return on a portfolio that is invested 35 percent in Stock A, 45 percent in Stock B, and the balance in Stock C? State of Probability of Economy State of Economy Broom .20 Normal .75 Recession .05 Rate of Return if occurs Stock A Stock B Stock C 11.4% 31.2% 7.3% 8.7% 17.6% 8.1% -3.4% -37.6% 9.9%

B. 12.53 percent E(RBoom)= (0.35 × 0.114) + (0.45 × 0.312) + (0.20 × 0.073) = 0.1949 E(RNormal) = (0.35 × 0.087) + (0.45 × .0.176) + (0.20 × 0.081) = 0.12585 E(RRecession) = (0.35 × -0.034) + (0.45 × -0.376) + (0.20 × 0.099) = -0.1613 E(RPortfolio) = (0.20 × 0.1949) + (0.75 × 0.12585) + (0.05 × -0.1613) = 12.53 percent

B. 12.67 percent

You own a stock that has an expected return of 16.00 percent and a beta of 1.33. The U.S. Treasury bill is yielding 3.65 percent and the inflation rate is 2.95 percent. What is the expected rate of return on the market?

B. 12.94 percent E(R) = 0.1600 = 0.0365 + 1.33(Rm - 0.0365) Rm = 12.94 percent

B. 26.78 days

You own a portfolio that is invested as follows: $11,400 of Stock A, $8,800 of Stock B, $14,900 of Stock C, and $3,200 of Stock D. What is the portfolio weight of Stock C?

B. 38.90 percent WeightC = $14,900/($11,400 + $8,800 + $14,900 + $3,200) = 38.90 percent

A stock has an expected return of 17.2 percent and a beta of 1.65. The risk-free rate is 5.1 percent. What is the slope of the security market line?

B. 7.33 percent Slope = (0.172 - 0.051)/1.65 = 7.33 percent

B. 8.00 percent

You have compiled the following information on your investments. What rate of return should you expect to earn on this portfolio? Number Price Expected Stock Of Shares Per Share Return A 150 $23 12.8% B 400 37 3.6% C 200 42 9.4% D 350 16 24.5%

B. 9.83 percent ValueA = 150 × $23 = $3,450 ValueB = 400 × $37 = $14,800 ValueC = 200 × $42 = $8,400 ValueD = 350 × $16 = $5,600 ValuePort = $3,450 + $14,800 + $8,400 + $5,600 = $32,250 Expected return = [($3,450/$32,250) × 0.128] + [($14,800/$32,250) × 0.036] + [($8,400/$32,250) × 0.098] + [($5,600/$32,250) × 0.245] = 9.83 percent

Which one of the following statements related to the security market line is correct?

B. A security with a beta of 1.54 will plot on the security market line if it is correctly priced.

Which one of the following is the best example of unsystematic risk?

B. A warehouse fire

Which one of the following is included in net working capital? A. Land B. Accounts payable C. Equipment D. Depreciation E. Dividend

B. A/P

Which one of the following is included in net working capital?

B. Accounts payable

Which one of the following measures the amount of systematic risk present in a particular risky asset relative to that in an average risky asset?

B. Beta coefficient

Which one of the following has nearly the same meaning as free cash flow?

B. Cash flow from assets

Which one of the following is most apt to align management's priorities with shareholders' interests? A. Increasing employee retirement benefits B. Compensating managers with shares of stock that must be held for three years before the shares can be sold C. Allowing a manager to decorate his or her own office once he or she has been in that office for a period of three years or more D. Increasing the number of paid holidays that long-term employees are entitled to receive E. Allowing employees to retire early with full retirement benefits

B. Compensating managers with shares of stock that must be held for three years before the shares can be sold

The DuPont identity can be totally defined by which one of the following? A. Return on equity, total asset turnover, and equity multiplier B. Equity multiplier and return on assets C. Profit margin and return on equity D. Total asset turnover, profit margin, and debt-equity ratio E. Equity multiplier, return on assets, and profit margin

B. Equity multiplier and return on assets

Which one of the following is a capital structure decision? A. Determining the optimal inventory level B. Establishing the preferred debt-equity level C. Selecting new equipment to purchase D. Setting the terms of sale for credit sales E. Determining when suppliers should be paid

B. Establishing the preferred debt-equity level

All else equal, an increase in which one of the following will decrease owners' equity?

B. Increase in accounts payable

Which one of the following is an example of systematic risk?

B. Increase in consumption created by a reduction in personal tax rates

The risk-free rate is 4.2 percent and the expected return on the market is 12.3 percent. Stock A has a beta of 1.2 and an expected return of 13.1 percent. Stock B has a beta of 0.75 and an expected return of 11.4 percent. Are these stocks correctly priced? Why or why not?

B. No, Stock A is overpriced and Stock B is underpriced. E(RA) = 0.042 + 1.2(0.123 - 0.042) = 13.92 percent E(RB) = 0.042 + 0.75(0.123 - 0.042) = 10.28 percent Stock A is overpriced because its expected return lies below the security market line.

Which one of the following statements concerning market and book values is correct?

B. The market value tends to provide a better guide to the actual worth of an asset than does the book value.

Consider a portfolio comprised of four risky securities. Assume the economy has three states with varying probabilities of occurrence. Which one of the following will guarantee that the portfolio variance will equal zero?

B. The portfolio expected rate of return must be the same for each economic state.

The daily financial operations of a firm are primarily controlled by managing the: A. total debt level. B. working capital. C. capital structure. D. capital budget. E. long-term liabilities.

B. Working capital

Which one of the following has nearly the same meaning as free cash flow? A. Net income B. Cash flow from assets C. Operating cash flow D. Cash flow to shareholders E. Addition to retained earnings

B. cash flow from assets

Todd and Cathy created a firm that is a separate legal entity and will share ownership of that firm on a 50-50 basis. Which type of entity did they create if they have no personal liability for the firm's debts? A. Limited partnership B. Corporation C. Sole proprietorship D. General partnership E. Public company

B. corporation

Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm's net working capital:

B. had to decrease.

Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm's net working capital: A. had to increase. B. had to decrease. C. could have remained constant if the amount of the decrease in current assets equaled the amount of the increase in current liabilities. D. could have either increased, decreased, or remained constant. E. was unaffected as the changes occurred in the firm's current accounts.

B. had to decrease.

The accounting statement that measures the revenues, expenses, and net income of a firm over a period of time is called the:

B. income statement.

The accounting statement that measures the revenues, expenses, and net income of a firm over a period of time is called the: A. statement of cash flows. B. income statement. C. GAAP statement. D. Balance sheet. E. net working capital schedule.

B. income statement.

Operating cash flow is defined as:

B. the cash that a firm generates from its normal business activities.

Operating cash flow is defined as: A. a firm's net profit over a specified period of time. B. the cash that a firm generates from its normal business activities. C. a firm's operating margin. D. the change in the net working capital over a stated period of time. E. the cash that is generated and added to retained earnings.

B. the cash that a firm generates from its normal business activities.

Which one of the following transactions occurred in the primary market? A. Maria gave 100 shares of Alto stock to her best friend B. Gene purchased 300 shares of Alto stock from Ted C. South Wind Products sold 1,000 shares of newly issued stock to Mike D. Terry sold 3,000 shares of Uno stock to his brother E. The president of Trecco Inc. sold 500 shares of Trecco stock to his son

C, South Wind Products sold 1,000 shares of newly issued stock to Mike

Working capital management includes which one of the following? A. deciding which new projects to accept B. deciding whether to purchase a new machine or fix a current machine C. determining which customers will be granted credit D. determining how many new shares of stock should be issued E. establishing the target debt-equity ratio

C, determining which customers will be granted credit

Valerie bought 200 shares of Able stock today. Able stock has been trading for some time on the NYSE. Valerie's purchase occurred in which market? A. dealer market B. over-the-counter market C. secondary market D. primary market E. tertiary market

C, secondary market

Which one of the following is most apt to create a situation where an agency conflict could arise? A. increasing the size of a firm's operations B. downsizing a firm C. separating management from ownership D. decreasing employee turnover E. reducing both management and non-management salaries

C, separating management from ownership

Lester's BBQ has $121,000 in current assets and $109,000 in current liabilities. These values as referred to as the firm's: A. capital structure B. cash equivalents C. working capital D. net assets E. fixed accounts

C, working capital

Andre's Dog House had current assets of $67,200 and current liabilities of $71,100 last year. This year, the current assets are $82,600 and the current liabilities are $85,100. The depreciation expense for the past year is $9,600 and the interest paid is $8,700. What is the amount of the change in net working capital? A. -$2,800 B. -$1,400 C. $1,400 D. $2,100 E. $2,800

C. $1,400

C. $1,400 Change in net working capital = ($82,600 - $85,100) - ($67,200 - $71,100) = $1,400

A $36,000 portfolio is invested in a risk-free security and two stocks. The beta of Stock A is 1.29 while the beta of Stock B is 0.90. One-half of the portfolio is invested in the risk-free security. How much is invested in Stock A if the beta of the portfolio is 0.58?

C. $12,000 βP = 0.58 = [A/$36,000][1.29] + [($36,000 - A - $18,000)/$36,000)][0.90] + [0][0.50] A = $12,000

You want to create a $65,000 portfolio comprised of two stocks plus a risk-free security. Stock A has an expected return of 14.2 percent and Stock B has an expected return of 17.8 percent. You want to own $20,000 of Stock B. The risk-free rate is 4.8 percent and the expected return on the market is 13.1 percent. If you want the portfolio to have an expected return equal to that of the market, how much should you invest in the risk-free security?

C. $15,266

A portfolio has an expected return of 12.3 percent. This portfolio contains two stocks and one risk-free security. The expected return on Stock X is 9.7 percent and on Stock Y it is 17.7 percent. The risk-free rate is 3.8 percent. The portfolio value is $78,000 of which $18,000 is the risk-free security. How much is invested in Stock X?

C. $21,375

A firm has earnings before interest and taxes of $25,380 with a net income of $14,220. The taxes amounted to $5,400 for the year. During the year, the firm paid out $43,800 to pay off existing debt and then later borrowed an additional $24,000. What is the amount of the cash flow to creditors?

C. $25,560 Interest = $25,380 - $14,220 - $5,400 = $5,760; Cash flow to creditors = $5,760 + $43,800 - $24,000 = $25,560

Paddle Fans & More has a marginal tax rate of 34 percent and an average tax rate of 23.7 percent. If the firm earns $138,500 in taxable income, how much will it owe in taxes? A. $31,366.67 B. $31,500.00 C. $32,824.50 D. $39,957.25 E. $47,090.00

C. $32,824.50

Stock A has a beta of 1.47 while Stock B has a beta of 1.08 and an expected return of 13.2 percent. What is the expected return on Stock A if the risk-free rate is 4.5 percent and both stocks have equal reward-to-risk premiums?

C. 16.34 percent (RA - 0.045)/1.47 = (0.132 - 0.045)/1.08; RA = 16.34 percent

The Brown Jug has compiled the following information: 2013 2014 sales $312,400 $198,500 interest paid $18,720 $16,480 long-term debt $225,000 $187,000 owners' equity $134,600 $128,700 depreciation $21,600 $20,200 accounts receivable $15,600 $18,900 other costs $32,400 $27,100 inventory $36,800 $32,800 account payable $12,800 $21,900 cost of goods sold $186,200 $128,300 cash $36,500 $12,700 taxes $18,200 $1,000 What is the operating cash flow for 2014?

C. $42,100 2014 operating cash flow = $198,500 - $27,100 - $128,300 - $1,000 = $42,100

Tax Income Tax Rate 0- 50,000 15% 50,001- 75,000 25% 75,001- 100,000 34% 100,001- 335,000 39% 335,001- 10,000,000 34% The Holiday Inn earned $177,284 in taxable income for the year. How much tax does the company owe on this income?

C. $52,390.76 Total tax = ($50,000)(0.15) + ($25,000)(0.25) + ($25,000)(0.34) + ($177,284 - $100,000)(0.39) = $52,390.76

Baugh and Essary reports the following account balances: inventory of $17,600, equipment of $128,300, accounts payable of $24,700, cash of $11,900, and accounts receivable of $31,900. What is the amount of the current assets?

C. $61,400 Current assets = $17,600 + $11,900 + $31,900 = $61,400

Sunshine Rentals has a debt-equity ratio of 0.84. Return on assets is 7.9 percent, and total equity is $438,000. What is the net income? A. $41,147.09 B. $54,311.29 C. $63,667.68 D. $48,887.02 E. $50,458.95

C. $63,667.68

For the year, Movers United has net income of $31,800, net new equity of $7,500, and an addition to retained earnings of $24,200. What is the amount of the dividends paid?

C. $7,600 Dividends paid = $31,800 - $24,200 = $7,600

Last year, The Pizza Joint added $4,100 to retained earnings from sales of $93,600. The company had costs of $74,400, dividends of $2,500, and interest paid of $1,400. The tax rate was 34 percent. What was the amount of the depreciation expense? A. $7,300 B. $7,500 C. $7,800 D. $8,100 E. $8,400

C. $7,800

C. $7,800 Earnings before interest and taxes = [($4,100 + $2,500)/(1 - 0.34)] + $1,400 = $11,400; Depreciation = $93,600 - $74,400 - $11,400 = $7,800

Gino's Winery has net working capital of $29,800, net fixed assets of $64,800, current liabilities of $34,700, and long-term debt of $23,000. What is the value of the owners' equity?

C. $71,600 Owners' equity = $29,800 + $64,800 - $23,000 = $71,600

The stock of Wiley United has a beta of 0.92. The market risk premium is 8.4 percent and the risk-free rate is 3.2 percent. What is the expected return on this stock?

C. 11.11 percent E(R) = 0.032 + 0.92(0.086) = 11.11 percent

Fiddler's Music Stores' stock has a risk premium of 9.6 percent while the inflation rate is 4.1 percent and the risk-free rate is 3.9 percent. What is the expected return on this stock?

C. 13.5 percent Expected return = 0.039 + 0.096 = 13.5 percent

Southern Wear stock has an expected return of 14.6 percent. Given the information below, what is the expected return on this stock if the economy is normal? Round your answer to the nearest whole percentage. State.Of.Economy Prob Of S.O.E RateOfReturn Recession 0.15 -0.05 Normal 0.8 ? Boom 0.05 0.2

C. 18 percent E(R) = 0.146 = (0.15 × -0.05) + (0.80 × x) + (0.05 × 0.20) x = 17.94 percent

Given the following information, what is the standard deviation of the returns on this stock? State.Of.Economy Prob Of S.O.E RateOfReturn Broom .20 .21 Normal .70 .13 Recession .10 -.09

C. 7.80 percent Expected return = (0.20 × 0.21) + (0.70 × 0.13) + (0.10 × -0.09) = 0.124 Variance = 0.20(0.21 - 0.124)2 + 0.70(0.13 - 0.124)2 + 0.10(-0.09 - 0.124)2 = 0.006084 Standard deviation = √0.006084 = 7.80 percent

A stock has a beta of 1.47 and an expected return of 16.6 percent. The risk-free rate is 4.8 percent. What is the slope of the security market line?

C. 8.03 percent Slope = (0.166 - 0.048)/1.47 = 8.03 percent

Which one of the following portfolios will have a beta of zero?

C. A portfolio comprised solely of U. S. Treasury bills

Which one of the following will increase the cash flow from assets for a tax-paying firm, all else constant?

C. An increase in depreciation

Which one of the following statements concerning the balance sheet is correct?

C. Assets are listed in descending order of liquidity.

Builder's Outlet just hired a new chief financial officer. To get a feel for the company, she wants to compare the firm's sales and costs over the past three years to determine if any trends are present and also determine where the firm might need to make changes. Which one of the following statements will best suit her purposes? A. Income statement B. Balance sheet C. Common-size income statement D. Common-size balance sheet E. Statement of cash flows

C. Common-size income statement

Which one of the following is an intangible fixed asset?

C. Copyright

Working capital management includes which one of the following? A. Deciding which new projects to accept B. Deciding whether to purchase a new machine or fix a current machine C. Determining which customers will be granted credit D. Determining how many new shares of stock should be issued E. Establishing the target debt-equity ratio

C. Determining which customers will be granted credit

Which one of the following terms best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?

C. Diversification

Which one of the following is a measure of long-term solvency? A. Price-earnings ratio B. Profit margin C. Equity multiplier D. Receivables turnover E. Quick ratio

C. Equity multiplier

Cash flow to creditors is equal to:

C. beginning long-term debt minus ending long-term debt plus interest paid.

The expected return on a security is currently based on a 22 percent chance of a 15 percent return given an economic boom and a 78 percent chance of a 12 percent return given a normal economy. Which of the following changes will decrease the expected return on this security? I. An increase in the probability of an economic boom II. A decrease in the rate of return given a normal economy III. An increase in the probability of a normal economy IV. An increase in the rate of return given an economic boom

C. II and III only

Which two of the following determine when revenue is recorded on the financial statements based on the recognition principle? I. Payment is collected for the sale of a good or service. II. The earnings process is virtually complete. III. The value of a sale can be reliably determined. IV. The product is physically delivered to the buyer.

C. II and III only

Julie wants to create a $5,000 portfolio. She also wants to invest as much as possible in a high risk stock with the hope of earning a high rate of return. However, she wants her portfolio to have no more risk than the overall market. Which one of the following portfolios is most apt to meet all of her objectives?

C. Invest $2,500 in a risk-free asset and $2,500 in a stock with a beta of 2.0

Stock A comprises 28 percent of Susan's portfolio. Which one of the following terms applies to the 28 percent?

C. Portfolio weight

Which one of the following will increase cash flow from assets but not affect the operating cash flow?

C. Sale of a fixed asset

Valerie bought 200 shares of Able stock today. Able stock has been trading for some time on the NYSE. Valerie's purchase occurred in which market? A. Dealer market B. Over-the-counter market C. Secondary market D. Primary market E. Tertiary market

C. Secondary market

Which one of the following is most apt to create a situation where an agency conflict could arise? A. Increasing the size of a firm's operations B. Downsizing a firm C. Separating management from ownership D. Decreasing employee turnover E. Reducing both management and nonmanagement salaries

C. Separating management from ownership

Which one of the following transactions occurred in the primary market? A. Maria gave 100 shares of Alto stock to her best friend. B. Gene purchased 300 shares of Alto stock from Ted. C. South Wind Products sold 1,000 shares of newly issued stock to Mike. D. Terry sold 3,000 shares of Uno stock to his brother. E. The president of Trecco, Inc. sold 500 shares of Trecco stock to his son.

C. South Wind Products sold 1,000 shares of newly issued stock to Mike.

Which one of the following best exemplifies unsystematic risk?

C. Unexpected increase in the variable costs for a firm

Which one of the following occupations best fits into the international area of finance? A. Bank teller B. Treasury bill analyst C. Currency trader D. Insurance risk manager E. Local bank manager

C. currency trader

The addition of a risky security to a fully diversified portfolio:

C. may or may not affect the portfolio beta.

Shareholders' equity is equal to:

C. net fixed assets minus long-term debt plus net working capital.

Cash flow from assets is defined as:

C. operating cash flow minus the change in net working capital minus net capital spending.

Fred is the owner of a local feed store. Which one of the following ratios should he compute if he wants to know how long the store can pay its bills given the amount of cash the store currently has?

Cash Ratio

Cash coverage ratio = 2.6 Debt-equity ratio = .3

Cash coverage ratio = 2.6; debt-equity ratio = 0.3

Which one of the following actions will increase the current ratio, all else constant? Assume the current ratio is greater than 1.0.

Cash payment of an account payable

Which of the following will decrease the liquidity level of a firm?

Cash purchase of inventory

Fred is the owner of a local feed store. Which one of the following ratios should he compute if he wants to know how long the store can pay its bills given the amount of cash the store currently has?

Cash ratio

A loan has an APR of 8.5 percent and an EAR of 8.5 percent. Given this, the loan must:

Charge interest annually

Common-size income statement

Tom earned $120 in interest on his savings account last year. Tom has decided to leave the $120 in his account so that he can earn interest on the $120 this year. This process of earning interest on prior interest earnings is called:

Compounding

Which is an intangible fixed assets

The potential conflict of interest between a firm's owner and its managers is referred to as which type of conflict? A. organizational B. structural C. formation D. agency E. territorial

D, agency

1. Tim has been promoted and is now in charge of all fixed asset purchases. In other words, Tim is in charge of: A. capital structure management B. asset allocation C. risk management D. capital budgeting E. working capital management

D, capital budgeting

The goal of financial management is to increase the: A. future value of the firm's total equity B. book value of equity C. dividends paid per share D. current market value per share E. number of shares outstanding

D, current market value per share

A sole proprietorship: A. provides limited liability for its owner B. involves significant legal costs during the formation process C. has an unlimited life D. has its profits taxed as personal income E. can general raise significant capital from non owner sources.

D, has its profits taxed as personal income

Which one of the following forms of business organization offers liability protection to some of its owners but not to all of its owners? A. sole proprietorship B. general partnership C. limited partnership D. limited liability company E. corporation

D, limited liability company

The primary goal of financial management is to maximize which one of the following for a corporation? A. current profits B. market share C. number of shares outstanding D. market value of existing stock E. revenue growth

D, market value of existing stock

What is the goal of financial management for a sole proprietorship? A. maximize net income given the current resources of the firm B. decrease long-term debt to reduce the risk to the owner C. minimize the tax impact on the proprietor D. maximize the market value of the equity E. minimize the reliance on fixed costs

D, maximize the market value of the equity

Which one of the following situations is most apt to create an agency conflict? A. compensating a manger based on his or her division's net income B. giving all employees a bonus if a certain level of efficiency is maintained C. hiring an independent consultant to study the operating efficiency of the firm D. rejecting a profitable project to protect employee jobs E. selling an underproducing segment of the firm

D, rejecting a profitable project to protect employee jobs

Marti had an unexpected surprise when she ate her Lotsa Good cereal this morning. She found a piece of metal mixed in her cereal. The potential claim that Marti has against this firm is that of a(n): A. general creditor B. debtholder C. shareholder D. stakeholder E. agent

D, stakeholder

Tax Income Tax Rate 0- 50,000 15% 50,001- 75,000 25% 75,001- 100,000 34% 100,001- 335,000 39% 335,001- 10,000,000 34% Bait and Tackle has taxable income of $411,562. How much does it owe in taxes?

D. $139,931.08 Total tax = ($50,000)(0.15) + ($25,000)(0.25) + ($25,000)(0.34) + ($235,000)(0.39) + ($411,562 - $335,000)(0.34) = $139,931.08

The Toy Store has beginning retained earnings of $28,975. For the year, the company earned net income of $4,680 and paid dividends of $1,600. The company also issued $3,000 worth of new stock. What is the value of the retained earnings account at the end of the year?

D. $32,055 Retained earnings = $28,975 + $4,680 - $1,600 = $32,055

Kroeger Exporters has total assets of $74,300, net working capital of $22,900, owners' equity of $38,600, and long-term debt of $23,900. What is the value of the current assets?

D. $34,700 Current liabilities = $74,300 - $38,600 - $23,900 = $11,800; Current assets = $11,800 + $22,900 = $34,700

The Paint Ball Range, Inc. paid $30,500 in dividends and $7,600 in interest over the past year. Sales totaled $211,800 with costs of $167,900. The depreciation expense was $16,500. The applicable tax rate is 34 percent. What is the amount of the operating cash flow?

D. $37,168 EBIT = $211,800 - $167,900 - $16,500 = $27,400; Tax = ($27,400 - $7,600) × 0.34 = $6.732; OCF = $27,400 + $16,500 - $6,732 = $37,168

During the past year, Arther Anderson Services paid $360,800 in interest along with $48,000 in dividends. The company issued $230,000 of stock and $200,000 of new debt. The company reduced the balance due on the old debt by $225,000. What is the amount of the cash flow to creditors? A. -$88,200 B. $51,400 C. $161,800 D. $385,800 E. $585,800

D. $385,800

D. $385,800 Cash flow to creditors = $360,800 - $200,000 + $225,000 = $385,800

The Underground Cafe has an operating cash flow of $187,000 and a cash flow to creditors of $71,400 for the past year. During that time, the firm invested $28,000 in net working capital and incurred net capital spending of $47,900. What is the amount of the cash flow to stockholders for the last year? A. -$171,500 B. -$86,700 C. $21,200 D. $39,700 E. $111,100

D. $39,700

D. $39,700 Cash flow to stockholders = ($187,000 - $28,000 - $47,900) - $71,400 = $39,700

Able Co. has $218,000 in taxable income and Bravo Co. has $5,600,000 in taxable income. Suppose both firms have identified a new project that will increase taxable income by $12,000. The additional project will increase Able Co.'s taxes by _____ and Bravo Co.'s taxes by ____. Tax Income Tax Rate 0- 50,000 15% 50,001- 75,000 25% 75,001- 100,000 34% 100,001- 335,000 39% 335,001- 10,000,000 34%

D. $4,680; $4,080 Able Co. marginal tax = $12,000 × 0.39 = $4,680; Bravo Co. marginal tax = $12,000 × 0.34 = $4,080

You own a $222,000,000 portfolio that is invested in Stocks A and B. The portfolio beta is equal to the market beta. Stock A has an expected return of 18.7 percent and has a beta of 1.42. Stock B has a beta of 0.88. What is the value of your investment in Stock A?

D. $49,333 βP = 1.0 = 1.42A + [0.88 × (1 - A)]; A = 0.222222 Investment in Stock A = $222,000 × 0.222222 = $49,333

Pete's Warehouse has net working capital of $2,400, total assets of $19,300, and net fixed assets of $10,200. What is the value of the current liabilities? A. -$6,700 B. -$2,900 C. $2,900 D. $6,700 E. $11,500

D. $6,700

Pete's Warehouse has net working capital of $2,400, total assets of $19,300, and net fixed assets of $10,200. What is the value of the current liabilities?

D. $6,700 Current liabilities = $19,300 - $10,200 - $2,400 = $6,700

Daniel's Market has sales of $36,600, costs of $28,400, depreciation expense of $3,100, and interest expense of $1,500. If the tax rate is 34 percent, what is the operating cash flow, OCF?

D. $6,976 EBIT = $36,600 - $28,400 - $3,100 = $5,100; Tax = ($5,100 - $1,500) × 0.34 = $1,224; OCF = $5,100 + $3,100 - $1,224 = $6,976

The Braxton Co. has beginning long-term debt of $64,500, which is the principal balance of a loan payable to Centre Bank. During the year, the company paid a total of $16,300 to the bank, including $4,100 of interest. The company also borrowed $11,000. What is the value of the ending long-term debt?

D. $63,300 Ending long-term debt = $64,500 - $16,300 + $4,100 + $11,000 = $63,300

ACE, Inc. incurred depreciation expenses of $21,900 last year. The sales were $811,400 and the addition to retained earnings was $14,680. The firm paid interest of $9,700 and dividends of $10,100. The tax rate was 40 percent. What was the amount of the costs incurred by the firm?

D. $738,500.00 Earnings before interest and taxes = [($14,680 + $10,100)/(1 - 0.40)] + $9,700 = $51,000; Costs = $811,400 - $21,900 - $51,000 = $738,500

The Draiman, Inc. currently has $3,600 in cash. The company owes $41,800 to suppliers for merchandise and $21,500 to the bank for a long-term loan. Customers owe The Draiman $18,000 for their purchases. The inventory has a book value of $53,300 and an estimated market value of $61,200. If the store compiled a balance sheet as of today, what would be the book value of the current assets?

D. $74,900 Current assets = $3,600 + $18,000 + $53,300 = $74,900

The Carpentry Shop has sales of $398,600, costs of $254,800, depreciation expense of $26,400, interest expense of $1,600, and a tax rate of 34 percent. What is the net income for this firm?

D. $76,428 Net income = ($398,600 - $254,800 - $26,400 - $1,600) (1 - 0.34) = $76,428

Early Works had $87,600 in net fixed assets at the beginning of the year. During the year, the company purchased $6,400 in new equipment. It also sold, at a price of $2,300, some old equipment with a book value of $1,100. The depreciation expense for the year was $3,700. What is the net fixed asset balance at the end of the year?

D. $87,200 Ending net fixed assets = $87,600 + $6,400 - $1,100 - $3,700 = $87,200

Precision Manufacturing had the following operating results for 2014: sales = $38,900; cost of goods sold = $24,600; depreciation expense = $1,700; interest expense = $1,400; dividends paid = $1,000. At the beginning of the year, net fixed assets were $14,300, current assets were $8,700, and current liabilities were $6,600. At the end of the year, net fixed assets were $13,900, current assets were $9,200, and current liabilities were $7,400. The tax rate for 2014 was 34 percent. What is the cash flow from assets for 2014?

D. $9,492 OCF = [($38,900 - $24,600 - $1,700 - $1,400) (1 - 0.34)] + $1,700 + $1,400 = $10,492; CFA = $10,492 - ($13,900 - $14,300 + $1,700) - [($9,200 - $7,400) - $8,700 - $6,600)] = $9,492

Currently, you own a portfolio comprised of the following three securities. How much of the riskiest security should you sell and replace with risk-free securities if you want your portfolio beta to equal 90 percent of the market beta? Stock Value Beta A $16,400 1.06 B 20,500 1.32 C 18,200 0.98

D. $9,613.64 Portfolio value = $16,400 + $20,500 + $18,200 = $55,100 βP = (0.90)(1.00) = [$16,400/$55,100][1.06] + [($20,500 - x)/55,100)(1.32) + [$18,200/$55,100)(0.98) + ($x/$55,100)(0) x = $9,613.64

The Pretzel Factory has net sales of $821,300 and costs of $698,500. The depreciation expense is $28,400 and the interest paid is $8,400. What is the amount of the firm's operating cash flow if the tax rate is 34 percent? A. $87,620 B. $89,540 C. $91,220 D. $93,560 E. $95,240

D. $93,560

D. $93,560 EBIT = $821,300 - $698,500 - $28,400 = $94,400; Tax = ($94,400 - $8,400) × 0.34 = $29,240; OCF = $94,400 + $28,400 - $29,240 = $93,560

Given the following information, what is the variance of the returns on this stock? State.Of.Economy Prob Of S.O.E RateOfReturn Broom .30 .18 Normal .65 .11 Recession .05 -.06

D. 0.002759 Expected return = (0.30 × 0.18) + (0.65 × 0.11) + (0.05 × -0.06) = 0.1225 Variance = 0.30(0.18 - 0.1225)2 + 0.65(0.11 - 0.1225)2 + 0.05(-0.06 - 0.1225)2 = 0.002759

Given the following information, what is the variance of the returns on a portfolio that is invested 40 percent in both Stocks A and B, and 20 percent in Stock C? State of Probability of Economy State of Economy Normal .87 Recession .13 Rate of Return if occurs Stock A Stock B Stock C 13.4% 17.6% 9.3% 2.2.% -28.5% 11.2%

D. 0.005746 E(RNormal) = (0.40 × 0.134) + (0.40 × .0.176) + (0.20 × 0.093) = 0.1426 E(RRecession) = (0.40 × 0.022) + (0.40 × -0.285) + (0.20 × 0.112) = -0.0828 E(RPortfolio) = (0.87 × 0.1426) + (0.13 × -0.0828) = 0.113298 Variance = 0.87(0.1426 - 0.113298)2 + 0.13(-0.0828 - 0.113298)2 = 0.005746

You are analyzing a company that has cash of $11,200, accounts receivable of $27,800, fixed assets of $124,600, accounts payable of $31,300, and inventory of $56,900. What is the quick ratio? A. 0.30 B. 0.67 C. 0.80 D. 1.25 E. 1.37

D. 1.25

D. 1.67

Sugar and Spice stock is expected to produce the following returns given the various states of the economy. What is the expected return on this stock? State.Of.Economy Prob Of S.O.E RateOfReturn Recession 0.05 0.05 Normal 0.7 0.09 Boom 0.25 0.14

D. 10.05 percent Expected return = (0.05 × 0.05) + (0.70 × 0.09) + (0.25 × 0.14) = 10.05 percent

An increase in current assets

Decrease cash flow from assets

What is the expected return on a security given the following information? State.Of.Economy Prob Of S.O.E RateOfReturn Recession 0.14 0.18 Normal 0.75 0.11 Boom 0.11 -0.05

D. 10.22 percent Expected return = (0.14 × 0.18) + (0.75 × 0.11) + (0.11 × -0.05) = 10.22 percent

You own a portfolio that is invested 38 percent in Stock A, 43 percent in Stock B, and the remainder in Stock C. The expected returns on these stocks are 10.9 percent, 15.4 percent, and 9.1 percent, respectively. What is the expected return on the portfolio?

D. 12.49 percent Expected return = [0.38 × 0.109] + [0.43 × 0.154] + [(1 - 0.38 - 0.43) × 0.091] = 12.49 percent

You want to create a $48,000 portfolio that consists of three stocks and has an expected return of 14.5 percent. Currently, you own $16,700 of Stock A and $24,200 of Stock B. The expected return for Stock A is 18.7 percent, and for Stock B it is 11.2 percent. What is the expected rate of return for Stock C?

D. 15.87 percent Value Stock C = $48,000 - $16,700 - $24,200 = $7,100 E(RP) = 0.145 = [($16,700/$48,000) × 0.187] + [($24,200/$48,000) × 0.112] + [($7,100/$48,000) × E(RC)]; E(RC) = 15.87 percent

Bama Entertainment has common stock with a beta of 1.46. The market risk premium is 9.3 percent and the risk-free rate is 4.6 percent. What is the expected return on this stock?

D. 18.03 percent E(R) = 0.046 + 1.46(0.092) = 18.03 percent

Tom's Hardware has inventory of $318,000, equity of $421,800, total assets of $647,700, and sales of $687,400. What is the common-size percentage for the inventory account? A. 26.81 percent B. 33.66 percent C. 46.26 percent D. 49.10 percent E. 51.68 percent

D. 49.10 percent

D. 6.97 percent

A stock is expected to return 13 percent in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy. Which one of the following will lower the overall expected rate of return on this stock?

D. A decrease in the probability of an economic boom

You would like to borrow money three years from now to build a new building. In preparation for applying for that loan, you are in the process of developing target ratios for your firm. Which set of ratios represents the best target mix considering that you want to obtain outside financing in the relatively near future? A. Times interest earned = 1.7; debt-equity ratio = 1.6 B. Times interest earned = 1.5; debt-equity ratio = 1.2 C. Cash coverage ratio = 0.8; debt-equity ratio = 0.8 D. Cash coverage ratio = 2.6; debt-equity ratio = 0.3 E. Cash coverage ratio = 0.5; total debt ratio = 0.2

D. Cash coverage ratio = 2.6; debt-equity ratio = 0.3

Which one of the following best describes a portfolio?

D. Group of assets held by an investor

Based on the capital asset pricing model, investors are compensated based on which of the following? I. Market risk premium II. Portfolio standard deviation III. Portfolio beta IV. Risk-free rate

D. I, III, and IV only

Which one of the following statements is correct?

D. If a risky security is correctly priced, its expected risk premium will be positive.

World United stock currently plots on the security market line and has a beta of 1.04. Which one of the following will increase that stock's rate of return without affecting the risk level of the stock, all else constant?

D. Increase in the market risk-to-reward ratio

Which one of the following is the maximum growth rate that a firm can achieve without any additional external financing? A. DuPont rate B. External growth rate C. Sustainable growth rate D. Internal growth rate E. Cash flow rate

D. Internal growth rate

The systematic risk principle states that the expected return on a risky asset depends only on which one of the following?

D. Market risk

What is the goal of financial management for a sole proprietorship? A. Maximize net income given the current resources of the firm B. Decrease long-term debt to reduce the risk to the owner C. Minimize the tax impact on the proprietor D. Maximize the market value of the equity E. Minimize the reliance on fixed costs

D. Maximize the market value of the equity

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

D. Net income is distributed either to dividends or retained earnings.

which one of the following situations is most apt to create an agency conflict? A. Compensating a manager based on his or her division's net income B. Giving all employees a bonus if a certain level of efficiency is maintained C. Hiring an independent consultant to study the operating efficiency of the firm D. Rejecting a profitable project to protect employee jobs E. Selling an underproducing segment of the firm

D. Rejecting a profitable project to protect employee jobs

Which one of the following is included in the market value of a firm but not in the book value?

D. Reputation of the firm

Which one of the following is the best example of an announcement that is most apt to result in an unexpected return?

D. Statement by a firm that it has just discovered a manufacturing defect and is recalling its product

A stock has a beta of 1.56 and an expected return of 17.3 percent. A risk-free asset currently earns 5.1 percent. If a portfolio of the two assets has a beta of 1.06, what are the portfolio weights?

D. Stock weight = 0.68; risk-free weight = 0.32 βP = 1.06 = x(1.56) + (1 - x)(0) x = 0.68 Stock weight is 0.68 and the risk-free weight is 0.32

The risk premium for an individual security is based on which one of the following types of risk?

D. Systematic

You are assigned the task of computing the expected return on a portfolio containing several individual stocks. Which one of the following statements is correct concerning this task?

D. The summation of the return deviation from the portfolio expected return for each economic state must equal zero.

The expected rate of return on Delaware Shores, Inc. stock is based on three possible states of the economy. These states are boom, normal, and recession which have probabilities of occurrence of 20 percent, 75 percent, and 5 percent, respectively. Which one of the following statements is correct concerning the variance of the returns on this stock?

D. The variance must be positive provided that each state of the economy produces a different expected rate of return.

Portfolio diversification eliminates which one of the following?

D. Unsystematic risk

The cash coverage ratio is used to evaluate the: A. liquidity of a firm. B. speed at which a firm generates cash. C. length of time that a firm can pay its bills if no additional cash becomes available. D. ability of a firm to pay the interest on its debt. E. relationship between the firm's cash balance and its current liabilities.

D. ability of a firm to pay the interest on its debt.

The potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict? A. Organizational B. Structural C. Formation D. Agency E. Territorial

D. agency

The financial statement that summarizes a firm's accounting value as of a particular date is called the:

D. balance sheet.

The financial statement that summarizes a firm's accounting value as of a particular date is called the: A. income statement. B. cash flow statement. C. liquidity position. D. balance sheet. E. periodic operating statement.

D. balance sheet.

Highly liquid assets:

D. can be sold quickly at close to full value.

Firms that compile financial statements according to GAAP:

D. can still manipulate their earnings to some degree.

Tim has been promoted and is now in charge of all fixed asset purchases. In other words, Tim is in charge of A. capital structure management. B. asset allocation. C. risk management. D. capital budgeting. E. working capital management.

D. capital budgeting

The goal of financial management is to increase the: A. future value of the firm's total equity. B. book value of equity. C. dividends paid per share. D. current market value per share. E. number of shares outstanding.

D. current market value per share.

Cash flow to stockholders is defined as: A. cash flow from assets plus cash flow to creditors. B. operating cash flow minus cash flow to creditors. C. dividends paid plus the change in retained earnings. D. dividends paid minus net new equity raised. E. net income minus the addition to retained earnings.

D. dividends paid minus net new equity raised.

A sole proprietorship: A. provides limited liability for its owner. B. involves significant legal costs during the formation process. C. has an unlimited life. D. has its profits taxed as personal income. E. can generally raise significant capital from nonowner sources.

D. has its profits taxed as personal income.

Which one of the following forms of business organization offers liability protection to some of its owners but not to all of its owners? A. Sole proprietorship B. General partnership C. Limited partnership D. Limited liability company E. Corporation

D. limited liability company

The primary goal of financial management is to maximize which one of the following for a corporation? A. Current profits B. Market share C. Number of shares outstanding D. Market value of existing stock E. Revenue growth

D. market value of existing stock

Marti had an unexpected surprise when she ate her Lotsa Good cereal this morning. She found a piece of metal mixed in her cereal. The potential claim that Marti has against this firm is that of a(n): A. general creditor. B. debtholder. C. shareholder. D. stakeholder. E. agent.

D. stakeholder

Common-size financial statements present all balance sheet account values as a percentage of: A. the forecasted budget. B. sales. C. total equity. D. total assets. E. last year's account value.

D. total assets.

Standard deviation measures _____ risk while beta measures _____ risk.

D. total; systematic

Which one of the following is the computation of the risk premium for an individual security? E(R) is the expected return on the security, Rf is the risk-free rate, β is the security's beta, and E(RM) is the expected rate of return on the market.

D. β[E(RM) - Rf]

Which one of the following will increase the profit margin of a firm, all else constant?

Decrease in the tax rate

Delmont Movers has a profit margin of 6.2 percent and net income of $48,900. What is the common-size percentage for the cost of goods sold if that expense amounted to $379,000 for the year?

Computing the present value of a future cash flow to determine what that cash flow is worth today is called:

Discounted cash flow valuation

Todd will be receiving a $10,000 bonus one year from now. The process of determining how much that bonus is worth today is called:

Discounting

Donovan Brothers, Inc. would like to increase its internal rate of growth. Decreasing which one of the following will help the firm achieve its goal?

Dividend payout ratio

Which one of the following is a working capital decision? A. How should the firm raise additional capital to fund its expansion? B. What debt-equity ratio is best suited to the firm? C. What is the cost of debt financing? D. Which type of debt is best suited to finance the inventory? E. How much cash should the firm keep in reserve?

E, How much cash should the firm keep in reserve?

Which one of the following best match the primary goal of financial management? A. increasing the dollar amount of each sale B. increasing traffic flow within the firm's stores C. transforming fixed costs into variable costs D. increasing the firm's liquidity E. increasing the market value of the firm

E, increasing the market value of the firm

Roscoe's purchased new machinery three years ago for $1.8 million. The machinery can be sold to Stewart's today for $1.2 million. Roscoe's current balance sheet shows net fixed assets of $960,000, current liabilities of $348,000, and net working capital of $121,000. If all the current assets were liquidated today, the company would receive $518,000 cash. The book value of the firm's assets today is _____ and the market value is ____.

E. $1,429,000; $1,718,000 Book value = $960,000 + $348,000 + $121,000 = $1,429,000; Market value = $1,200,000 + $518,000 = $1,718,000

The December 31, 2013, balance sheet of Suzette's Market showed long-term debt of $638,100 and the December 31, 2014, balance sheet showed long-term debt of $574,600. The 2010 income statement showed an interest expense of $42,300. What was the firm's cash flow to creditors during 2014?

E. $105,800 Cash flow to creditors = $42,300 - ($574,600 - $638,100) = $105,800

The financial statements of Jame's Auto Repair reflect cash of $14,600, accounts receivable of $11,500, accounts payable of $22,900, inventory of $17,800, long-term debt of $42,000, and net fixed assets of $63,800. The firm estimates that if it wanted to cease operations today it could sell the inventory for $35,000 and the fixed assets for $49,000. The firm could also collect 100 percent of its receivables. What is the market value of the assets?

E. $110,100 Market value = $14,600 + $11,500 + $35,000 + $49,000 = $110,100

Bridgewater Furniture has sales of $811,000, costs of $658,000, and interest paid of $21,800. The depreciation expense is $56,100 and the tax rate is 34 percent. At the beginning of the year, the firm had retained earnings of $318,300 and common stock of $250,000. At the end of the year, the firm has retained earnings of $322,500 and common stock of $280,000. What is the amount of the dividends paid for the year?

E. $45,366 Dividends paid = [($811,000 - $658,000 - $56,100 - $21,800)(1 - 0.34)] - ($322,500 - $318,300) = $45,366

Morgantown Movers has net working capital of $11,300, current assets of $31,200, equity of $53,400, and long-term debt of $11,600. What is the amount of the net fixed assets?

E. $53,700 Net fixed assets = $11,600 + $53,400 - $11,300 = $53,700

Six months ago, Benders Gym repurchased $20,000 of its common stock. The company pays regular quarterly dividends totaling $8,500 per quarter. What is the amount of the cash flow to stockholders for the past year if no additional shares were issued?

E. $54,000 Cash flow to stockholders = ($8,500 × 4) + $20,000 = $54,000

The balance sheet of a firm shows beginning net fixed assets of $348,200 and ending net fixed assets of $371,920. The depreciation expense for the year is $46,080 and the interest expense is $11,460. What is the amount of the net capital spending? A. -$22,360 B. -$4,780 C. $23,720 D. $58,340 E. $69,800

E. $69,800

E. $69,800 Net capital spending = $371,920 - $348,200 + $46,080 = $69,800

The financial statements of Backwater Marina reflect depreciation expenses of $41,600 and interest expenses of $27,900 for the year. The current assets increased by $31,800 and the net fixed assets increased by $28,600. What is the amount of the net capital spending for the year?

E. $70,200 Net capital spending = $28,600 + $41,600 = $70,200

A stock has an expected return of 15.0 percent, the risk-free rate is 3.2 percent, and the market risk premium is 8.1 percent. What must the beta of this stock be?

E. 1.46 E(R) = 0.15 = 0.032 + β(0.081) β = 1.46

Currently, the risk-free rate is 4.0 percent. Stock A has an expected return of 9.6 percent and a beta of 1.08. Stock B has an expected return of 13.5 percent. The stocks have equal reward-to-risk ratios. What is the beta of Stock B?

E. 1.83 (0.096 - 0.04)/1.08 = (0.135 - 0.04)/βB; βB = 1.83

You would like to create a portfolio that is equally invested in a risk-free asset and two stocks. One stock has a beta of 1.15. What does the beta of the second stock have to be if you want the portfolio to be equally as risky as the overall market?

E. 1.85 1/3(0) + 1/3(1.15) + 1/3(x) = 1.0 x = 1.85

You own a portfolio of two stocks, A and B. Stock A is valued at $6,500 and has an expected return of 11.2 percent. Stock B has an expected return of 8.1 percent. What is the expected return on the portfolio if the portfolio value is $9,500?

E. 10.22 percent ValueB = $9,500 - $6,500 = $3,000 Expected return = [($6,500/$9,500) × 0.112] + [($3,000/$9,500) × 0.081] = 10.22 percent

You own a portfolio consisting of the securities listed below. The expected return for each security is as shown. What is the expected return on the portfolio? Number Price Expected Stock Of Shares Per Share Return W 300 $11 8.9% X 450 19 11.6% Y 100 48 28.4% Z 575 33 12.7%

E. 14.20 percent ValueW = 300 × $11 = $3,300 ValueX = 450 × $19 = $8,550 ValueY = 100 × $48 = $4,800 ValueZ = 575 × $33 = $18,975 ValuePort = $3,300 + $8,550 + $4,800 + $18,975 = $35,625 Expected return = [($3,300/$35,625) × 0.089] + [($8,550/$35,625) × 0.116] + [($4,800/$35,625) × 0.284] + [($18,975/$35,625) × 0.127] = 14.20 percent

A stock has a beta of 1.86, the expected return on the market is 14.72, and the risk-free rate is 4.65. What must the expected return on this stock be?

E. 23.38 percent E(R) = 0.0465 + 1.86(0.1472 - 0.0465) = 23.38 percent

Given the following information, what is the standard deviation of the returns on this stock? State.Of.Economy Prob Of S.O.E RateOfReturn Broom .04 .26 Normal .74 .17 Recession .22 -.44

E. 25.52 percent Expected return = (0.04 × 0.26) + (0.74 × 0.17) + (0.22 × -0.44) = 0.0394 Variance = 0.04(0.26 - 0.0394)2 + 0.74(0.17 - 0.0394)2 + 0.22 (-0.44 - 0.0394)2 = 0.065130 Standard deviation = √0.065130 = 25.52 percent

Bama & Co. owes a total of $21,684 in taxes for this year. The taxable income is $61,509. If the firm earns $100 more in income, it will owe an additional $56 in taxes. What is the average tax rate on income of $61,609? A. 28.00 percent B. 30.33 percent C. 33.33 percent D. 35.00 percent E. 35.29 percent

E. 35.29 percent

E. 35.29 percent Average tax rate = ($21,684 + $56)/$61,609 = 35.29 percent

Delmont Movers has a profit margin of 6.2 percent and net income of $48,900. What is the commonsize percentage for the cost of goods sold if that expense amounted to $379,000 for the year? A. 12.90 percent B. 23.50 percent C. 33.25 percent D. 41.06 percent E. 48.05 percent

E. 48.05 percent

Redneck Farm Equipment owes $48,329 in tax on a taxable income of $549,600. The company has determined that it will owe $56,211 in tax if its taxable income rises to $565,000. What is the marginal tax rate at this level of income? A. 9.95 percent B. 30.00 percent C. 30.67 percent D. 51.03 percent E. 51.18 percent

E. 51.18 percent

E. 51.18 percent Marginal tax = ($56,211 - $48,329)/($565,000 - $549,600) = 51.18 percent

Ben & Terry's has an expected return of 12.9 percent and a beta of 1.25. The expected return on the market is 11.7 percent. What is the risk-free rate?

E. 6.92 percent E(R) = 0.129 = Rf + 1.25(0.117 - Rf) Rf = 6.92 percent

Lawler's BBQ has sales of $311,800, a profit margin of 3.9 percent, and dividends of $4,500. What is the plowback ratio? A. 46.32 percent B. 49.78 percent C. 50.23 percent D. 58.09 percent E. 62.99 percent

E. 62.99 percent

Based on the capital asset pricing model, which one of the following must increase the expected return on an individual security, all else constant?

E. A decrease in the risk-free rate given a security beta of 1.06

Which one of the following statements is correct?

E. An underpriced security will plot above the security market line.

Fred is the owner of a local feed store. Which one of the following ratios should he compute if he wants to know how long the store can pay its bills given the amount of cash the store currently has? A. Current ratio B. Debt ratio C. Cash coverage ratio D. Quick ratio E. Cash ratio

E. Cash ratio

Which one of the following is the minimum required rate of return on a new investment that makes that investment attractive?

E. Cost of capital

An increase in which one of the following will increase operating cash flow for a profitable, tax-paying firm?

E. Depreciation

The recognition principle states that:

E. sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined.

E. How much cash should the firm keep in reserve?

The DuPont identity can be used to help a financial manager determine the: I. degree of financial leverage used by a firm. II. operating efficiency of a firm. III. utilization rate of a firm's assets. IV. rate of return on a firm's assets. A. II and III only B. I and III only C. II, III, and IV only D. I, II, and III only E. I, II, III, and IV

E. I, II, III, and IV

Which one of the following relates to a negative change in net working capital

E. Increase in current liabilities with no change in current assets for the period

Which one of the following best matches the primary goal of financial management? A. Increasing the dollar amount of each sale B. Increasing traffic flow within the firm's stores C. Transforming fixed costs into variable costs D. Increasing the firm's liquidity E. Increasing the market value of the firm

E. Increasing the market value of the firm

Which one of the following is included in net working capital?

E. Invoice from a supplier for inventory purchased

The sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions? A. No new external financing of any kind B. No new debt but additional external equity equal to the increase in retained earnings C. New debt and external equity in equal proportions D. New debt and external equity, provided the debt-equity ratio remains constant E. No new equity and a constant debt-equity ratio

E. No new equity and a constant debt-equity ratio

Which one of the following indicates that a firm has generated sufficient internal cash flow to finance its entire operations for the period?

E. Positive cash flow from assets

Tressler Industries opted to repurchase 5,000 shares of stock last year in lieu of paying a dividend. The cash flow statement for last year must have which one of the following assuming that no new shares were issued?

E. Positive cash flow to stockholders

Diversifying a portfolio across various sectors and industries might do more than one of the following. However, this diversification must do which one of the following?

E. Reduce the portfolio's unique risks

Which one of the following is the vertical intercept of the security market line?

E. Risk-free rate

Kelso's Pharmacy generates $2 in sales for every $1 the firm has invested in total assets. Which one of the following ratios would reflect this relationship? A. Receivables turnover B. Equity multiplier C. Profit margin D. Return on assets E. Total asset turnover

E. Total asset turnover

Which one of the following represents the amount of compensation an investor should expect to receive for accepting the unsystematic risk associated with an individual security?

E. Zero

Net working capital is defined as:

E. current assets minus current liabilities.

A firm has a current ratio of 1.4 and a quick ratio of 0.9. Given this, you know for certain that the firm: A. pays cash for its inventory. B. has more than half its current assets invested in inventory. C. has more cash than inventory. D. has more current liabilities than it does current assets. E. has positive net working capital.

E. has positive net working capital

Financial leverage:

E. increases the potential return to the shareholders.

The market value of a firm's fixed assets:

E. is equal to the estimated current cash value of those assets.

The corporate tax structure in the U.S. is based on a:

E. modified flat-rate tax.

Assume you own a portfolio of diverse securities which are each correctly priced. Given this, the reward-to-risk ratio:

E. of each security must equal the slope of the security market line.

A negative cash flow to stockholders indicates a firm:

E. received more from selling stock than it paid out to shareholders.

An income statement prepared according to GAAP:

E. records expenses based on the matching principle.

A portfolio is comprised of 35 securities with varying betas. The lowest beta for an individual security is 0.74 and the highest of the security betas of 1.51. Given this information, you know that the portfolio beta:

E. will be greater than or equal to 0.74 but less than or equal to 1.51.

Which one of the following individuals commonly use finance in the course of their job? I. chief financial officers II. accountants III. security analysts IV. strategic managers A. I and II only B. III and IV only C. I and III only D. I, II, and III only E. I, II, III, and IV

E; I, II, III and IV

Which one of the following is a measure of long-term solvency?

Equity Multiplier

Which one of the following is a measure of long-term solvency?

Equity multiplier

The DuPont identity can be totally defined by which one of the following?

Equity multiplier and return on assets

When entering the interest rate in a financial calculator, you should key in the interest rate as a decimal

False, the calculator is already programmed to interpret 10 as 10%

The ratios that are based on financial statement values and used for comparison purposes are called:

Financial Ratios

Which of the following are the primary ways used to perform financial calculations today?

Financial calculator and spreadsheet functions

Long-term solvency ratios are also known as:

Financial leverage ratios

Which of the following is not a way to amortize a loan?

Fixed interest payments only

Cash flow from assets can also be called

Free Cash Flow

The inventory turnover ratios for Proctor and Gamble over the past three years are 5.09, 5.72, and 5.92 times respectively. Explaining the upward trend in the inventory turnover ratio requires:

Further investigation

The amount an investment is worth after one or more periods is called the ___ value.

Future

Martha is investing $5 today at 6 percent interest so she can have $10 later. The $10 is referred to as the:

Future Value

Gently Used Goods has cash of $2,950, inventory of $28,470, fixed assets of $9,860, accounts payable of $11,900, and accounts receivable of $4,660. What is the cash ratio?

If the interest rate is greater than zero, the value of an annuity due is always ___ an ordinary annuity

Greater than

Given an internal growth rate of 3 percent, a firm can ___

Grow by 3 percent or less without any additional external financing

Which of the following are determinants of a firms sustainable rate of growth?

I. Amount of sales generated from each dollar invested in assets II. Amount of debt per dollar of equity III. Amount of current assets per dollar of current liabilities IV. Percent of net income distributed as dividends A. I and III only B. II and IV only ******C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV

Martha's Sweet Shop reduced its fixed assets this year without affecting the shop's operations, sales, or equity. This reduction will increase which of the following ratios?

I. Capital intensity ratio II. Return on assets III. Total asset turnover IV. Return on equity A. I and II only B. II and III only C. II, III, and IV only D. I, II, and IV only E. I, II, III, and IV

Which of the following individuals commonly use finance in the course of their job?

I. Chief financial officers II. Accountants III. Security analysts IV. Strategic managers

Which of the following will increase the sustainable rate of growth for a firm?

I. Decreasing the profit margin II. Increasing the dividend payout ratio III. Decreasing the capital intensity ratio IV. Increasing the target debt-equity ratio A. I and II only ******B. III and IV only C. II and IV only D. I, III, and IV only E. I, II, III, and IV

The T-shirt Hut successfully managed to reduce its general and administrative costs this year. This cost improvement will increase which of the following ratios?

I. Profit margin II. Return on assets III. Total asset turnover IV. Return on equity A. I and II only B. I and III only C. II, III, and IV only *******D. I, II, and IV only E. I, II, III, and IV

The Du Pont ID can be used to help a financial manager determine the:

I. degree of financial leverage used by a firm. II. operating efficiency of a firm. III. utilization rate of a firm's assets. IV. rate of return on a firm's assets. A. II and III only B. I and III only C. II, III, and IV only D. I, II, and III only ****E. I, II, III, and IV****

Which of the following will increase the future value of a lump sum investment?

II and III

Martha's Sweet Shop reduced its fixed assets this year without affecting the shop's operations, sales, or equity. This reduction will increase which of the following ratios? I. Capital intensity ratio II. Return on assets III. Total asset turnover IV. Return on equity

II and III only

Which of the following will increase the future value of a lump sum investment? I. Decreasing the interest rate II. Increasing the interest rate III. Increasing the time period IV. Decreasing the amount of the lump sum investment

II and III only

Which of the following will decrease the future value of a lump sum investment made today assuming that all interest is reinvested? Assume the interest rate is a positive value. I. Increase in the interest rate II. Decrease in the lump sum amount III. Increase in the investment time period IV. Decrease in the investment time period

II and IV only

Which of the following will increase the sustainable rate of growth for a firm? I. Decreasing the profit margin II. Increasing the dividend payout ratio III. Decreasing the capital intensity ratio IV. Increasing the target debt-equity ratio

III and IV only

A common-size balance sheet helps financial managers determine:

If changes are occurring in a firms mix of assets

Accounting Statement that measures the revenues, expenses, and net income of a firm over a period of time is called:

Income Statement

An issue of new stock would

Increase net new equity raised and decrease cash flow to stockholders

Interest on interest

Cash Flow to creditors is defined as

Interest paid - net new borrowing

Based on the DuPont Identity, an increase in sales, all else held equal, ____ ROE

May increase or decrease May not change

The concept of marginal taxation is best exemplified by which one of the following?

Mitchell's Grocer increased sales by $52,000 last year and had to pay an additional $16,000 in taxes

Which one of the following is the correct equation for computing return on assets?

Net income/ total assets

The sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions?

No new equity and constant debt-equity ratio

The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships can best be described by which one of the following terms?

Perpetuity

If you want to know how much you need to invest today at 12% compounded annually in order to have 4,000 in five years, you will need to find a ___ value.

Present

When entering variables in an excel function the "sign convention" can be critical to achieving a correct answer. The sign convention says that outflows are negative values; inflows are positive values. For which variables is this a consideration?

Present value, payment and future value

All else constant, which one of the following will decrease if a firm increases its net income?

Price-earnings ratio

Price-sales ratio

Chandler Tire Co. is trying to decide which one of two projects it should accept. Both projects have the same start-up costs. Project 1 will produce annual cash flows of $52,000 a year for six years. Project 2 will produce cash flows of $48,000 a year for eight years. The company requires a 15 percent rate of return. Which project should the company select and why?

Project 2, because the present value of the cash inflows exceeds those of Project 1 by $18,598.33

An increase in which of the following will increase net income?

Revenue

Which one of the following is the abbreviation for the U.S. government coding system that classifies a firm by its specific type of business operations?

SIC

Which of the following can be determined using the future value approach to compound growth developed in this chapter?

Sales, population and dividend growth

An interest rate expressed in terms of the interest payment made each period is called a

Stated or quoted interest rate

Which one of the following statements is correct?

The EAR, rather than the APR, should be used to compare both investment and loan options.

You are comparing three investments, all of which pay $100 a month and have an 8 percent interest rate. One is ordinary annuity, one is an annuity due, and the third investment is a perpetuity. Which one of the following statements is correct given these three investment options?

The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due.

In the excel setup of a loan amortization problem, which of the following occurs?

To find the principal payment each month, you subtract the dollar interest payment from the fixed payment. The payment is found with =PMT (rate, nper, -pv, 0)

Why is a dollar received today worth more than a dollar received in the future?

Today's dollar can be reinvested, yielding a greater amount in the future and inflation will make a dollar in the future worth less than a dollar today

Kelso's Pharmacy generates $2 in sales for every $1 the firm has invested in total assets. Which one of the following ratios would reflect this relationship?

Total asset trunover

Kelso's Pharmacy generates $2 in sales for every $1 the firm has invested in total assets. Which one of the following ratios would reflect this relationship?

Total asset turnover

A common-size balance sheet expresses accounts as a percentage of ___

Total assets

15. Given an interest rate of zero percent, the future value of a lump sum invested today will always: A. remain constant, regardless of the investment time period. B. decrease if the investment time period is shortened. C. decrease if the investment time period is lengthened. D. be equal to $0. E. be infinite in value. Refer to section 4.1.

Which one of the following terms is defined as the total tax paid divided by the total taxable income?

average tax rate

1. Martha is investing $5 today at 6 percent interest so she can have $10 later. The $10 is referred to as the: A. true value. B. future value. C. present value. D. discounted value. E. complex value. Refer to section 4.1.

16. Terry invested $2,000 today in an investment that pays 6.5 percent annual interest. Which one of the following statements is correct, assuming all interest is reinvested? A. Terry will earn the same amount of interest each year. B. Terry could have the same future value and invest less than $2,000 initially if he could earn more than 6.5 percent interest. C. Terry will earn an increasing amount of interest each and every year even if he should decide to withdraw the interest annually rather than reinvesting the interest. D. Terry's interest for year two will be equal to $2,000 × 0.065 × 2. E. Terry will be earning simple interest. Refer to section 4.1.

2. Tom earned $120 in interest on his savings account last year. Tom has decided to leave the $120 in his account so that he can earn interest on the $120 this year. This process of earning interest on prior interest earnings is called: A. discounting. B. compounding. C. duplicating. D. multiplying. E. indexing. Refer to section 4.1.

24. The relationship between the present value and the time period is best described as: A. direct. B. inverse. C. unrelated. D. ambiguous. E. parallel. Refer to section 4.3.

7. Todd will be receiving a $10,000 bonus one year from now. The process of determining how much that bonus is worth today is called: A. aggregating. B. discounting. C. simplifying. D. compounding. E. extrapolating. Refer to section 4.2.

The financial statement that summarizes a firm's accounting value as of a particular date is called the:

balance sheet

Cash flow to creditors is equal to:

beginning long-term debt minus ending long-term debt plus interest pai

13. Which of the following will increase the future value of a lump sum investment? I. Decreasing the interest rate II. Increasing the interest rate III. Increasing the time period IV. Decreasing the amount of the lump sum investment A. I and III only B. I and IV only C. II and III only D. II and IV only E. II, III, and IV only Refer to section 4.1.

5. By definition, a bank that pays simple interest on a savings account will pay interest: A. only at the beginning of the investment period. B. on interest. C. only on the principal amount originally invested. D. on both the principal amount and the reinvested interest. E. only if all previous interest payments are reinvested. Refer to section 4.1.

8. The interest rate used to compute the present value of a future cash flow is called the: A. prime rate. B. current rate. C. discount rate. D. compound rate. E. simple rate. Refer to section 4.2.

Which one of the following is an intangible fixed asset? A. Inventory B. Machinery C. Copyright D. Account receivable E. Building

c. copyright

compounding

Sixty years ago, your grandparents opened two savings accounts and deposited $200 in each account. The first account was with City Bank at 3 percent, compounded annually. The second account was with Country Bank at 3.5 percent, compounded annually. Which one of the following statements is true concerning these accounts?

county bank $397 more

Net working capital is defined as:

current assets minus current liabilities

18. Which one of the following will increase the present value of a lump sum future amount? Assume the interest rate is a positive value and all interest is reinvested. A. Increase in the time period B. Increase in the interest rate C. Decrease in the future value D. Decrease in the interest rate E. None of these Refer to section 4.2.

19. Jeff deposits $3,000 into an account which pays 2.5 percent interest, compounded annually. At the same time, Kurt deposits $3,000 into an account paying 5 percent interest, compounded annually. At the end of three years: A. Both Jeff and Kurt will have accounts of equal value. B. Kurt will have twice the money saved that Jeff does. C. Kurt will earn exactly twice the amount of interest that Jeff earns. D. Kurt will have a larger account value than Jeff will. E. Jeff will have more money saved than Kurt. Refer to section 4.3.

20. Lisa has $1,000 in cash today. Which one of the following investment options is most apt to double her money? A. 6 percent interest for 3 years B. 12 percent interest for 5 years C. 7 percent interest for 9 years D. 8 percent interest for 9 years E. 6 percent interest for 10 years Refer to section 4.3.

3. Jamie earned $180 in interest on her savings account last year. She has decided to leave the $180 in her account so that she can earn interest on the $180 this year. The interest Jamie earns this year on this $180 is referred to as: A. simple interest. B. complex interest. C. accrued interest. D. interest on interest. E. discounted interest. Refer to section 4.1.

Which one of the following will increase the present value of a lump sum future amount? Assume the interest rate is a positive value and all interest is reinvested.

decrease in interest rate

Currently, you are expecting a payment of $5,000 three years from today and you have a discount rate of 6.5 percent. Which one of the following will increase the present value of this payment, all else held constant?

decreasing the discount rate to 6 percent

An increase in which one of the following will increase operating cash flow for a profitable, tax-paying firm?

depreciation

Computing the present value of a future cash flow to determine what that cash flow is worth today is called:

discount cash flow valuation

The interest rate used to compute the present value of a future cash flow is called the:

discount rate

Calculating the present value of a future cash flow to determine its worth today is commonly called ____ valuation

discounted cash flow

Todd will be receiving a $10,000 bonus one year from now. The process of determining how much that bonus is worth today is called:

discounting

Cash flow to stockholders is defined as:

dividend paid minus net new equity raised

10. Sara is investing $1,000 today. Which one of the following will increase the future value of that amount? A. Shortening the investment time period. B. Paying interest only on the principal amount. C. Paying simple interest rather than compound interest. D. Paying interest only at the end of the investment period rather than throughout the investment period. E. Increasing the interest rate. Refer to section 4.1.

11. Sam wants to invest $5,000 for 5 years. Which one of the following rates will provide him with the largest future value? A. 5 percent simple interest B. 5 percent interest, compounded annually C. 6 percent interest, compounded annually D. 7 percent simple interest E. 7 percent interest, compounded annually Refer to section 4.1.

17. Which of the following will decrease the future value of a lump sum investment made today assuming that all interest is reinvested? Assume the interest rate is a positive value. I. Increase in the interest rate II. Decrease in the lump sum amount III. Increase in the investment time period IV. Decrease in the investment time period A. I and III only B. I and IV only C. I, II, and III only D. II and III only E. II and IV only Refer to section 4.1.

22. Centre Bank pays 2.5 percent interest, compounded annually, on its savings accounts. Country Bank pays 2.5 percent simple interest on its savings accounts. You want to deposit sufficient funds today so that you will have $1,500 in your account 2 years from today. The amount you must deposit today: A. is the same regardless of which bank you choose because they both pay compound interest. B. is the same regardless of which bank you choose because they both pay simple interest. C. is the same regardless of which bank you choose because the time period is the same for both banks. D. will be greater if you invest with Centre Bank. E. will be greater if you invest with Country Bank. Refer to section 4.1.

25. Today, Courtney wants to invest less than $5,000 with the goal of receiving $5,000 back some time in the future. Which one of the following statements is correct? A. The period of time she has to wait until she reaches her goal is unaffected by the compounding of interest. B. The lower the rate of interest she earns, the shorter the time she will have to wait to reach her goal. C. She will have to wait longer if she earns 6 percent compound interest instead of 6 percent simple interest. D. The length of time she has to wait to reach her goal is directly related to the interest rate she earns. E. The period of time she has to wait decreases as the amount she invests today increases. Refer to section 4.1.

26. Which one of the following is a correct statement, all else held constant? A. The present value is inversely related to the future value. B. The future value is inversely related to the period of time. C. The period of time is directly related to the interest rate. D. The present value is directly related to the interest rate. E. The future value is directly related to the interest rate. Refer to section 4.3.

4. Lester had $6,270 in his savings account at the beginning of this year. This amount includes both the $6,000 he originally invested at the beginning of last year plus the $270 he earned in interest last year. This year, Lester earned a total of $282.15 in interest even though the interest rate on the account remained constant. This $282.15 is best described as: A. simple interest. B. interest on interest. C. discounted interest. D. complex interest. E. compound interest. Refer to section 4.1.

9. Computing the present value of a future cash flow to determine what that cash flow is worth today is called: A. compounding. B. factoring. C. time valuation. D. simple cash flow valuation. E. discounted cash flow valuation. Refer to section 4.2.

Eric has $4,800 that he wants to invest for 4 years. He can invest this amount at his credit union and earn 4 percent simple interest. Or, he can open an account at Compass Bank and earn 3.65 percent interest, compounded annually. If he decides to invest at Compass Bank for 4 years, he will:

earn 27.89

Assume interest is compounded monthly. The ___ annual rate will express this rate as though it were compounded annually

effective

Anna pays 1.5 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded only annually, the rate would be referred to as the:

effective annual rate

Net capital spending is equal to:

ending net fixed assets minus beginning net fixed assets plus depreciation

The ratios that are based on financial statement values and used for comparison purposes are called

financial ratios

The ratios that are based on financial statement values and used for comparison purposes are called:

financial ratios.

greater with country bank

Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm's net working capital:

had to decrease

A firm has a current ratio of 1.4 and a quick ratio of .9. Given this, you know for certain that the firm:

has positive net working capital

A firm has a current ratio of 1.4 and a quick ratio of 0.9. Given this, you know for certain that the firm:

has positive net working capital.

When comparing savings accounts, you should select the account that has the:

highest effective annual rate

A common-size balance sheet helps financial managers determine:

if changes are occurring in a firm's mix of assets.

The accounting statement that measures the revenues, expenses, and net income of a firm over a period of time is called the:

income statement

The information needed to compute the profit margin can be found on the ___.

income statement

If sales increase while there is no change in accounts receivable, the receivables turnover ratio will

increase

An increase in operating cash flow will

increase cash flow from assets

All else equal, an increase in which one of the following will decrease owners' equity?

increase in accounts payable

Which one of the following relates to a negative change in net working capital?

increase in current liabilities with no change in current assets for the period

The present value of a lump sum future amount:

increases as interest decreases

Financial leverage:

increases the potential return to the shareholders

Jeff deposits $3,000 into an account which pays 2.5 percent interest, compounded annually. At the same time, Kurt deposits $3,000 into an account paying 5 percent interest, compounded annually. At the end of three years:

kurt will have a larger account value

An ordinary annuity consists of a ___ stream of cash flows for a fixed period of time

level

By definition, a bank that pays simple interest on a savings account will pay interest:

only on the principal amount originally invested.

Cash flow from assets is defined as:

operating cash flow minus the change in net working capital minus net capital spending

Which one of the following is an equity account?

paid-in surplus

Which one of the following indicates that a firm has generated sufficient internal cash flow to finance its entire operations for the period?

positive cash flow from assets

positive cash flow to stockholders

The current value of a future cash flow discounted as the appropriate rate is called the ___ value

present

With discounting, the resulting value is called the ___ value; while with compounding the result is called the ___ value

present; future

Financial statement analysis:

provides useful information that can serve as a basis for forecasting future performance.

Financial statement analysis:

provides usful information that can serve as a basis for forcasting future performance

A negative cash flow to stockholders indicates a firm:

received more from selling stock that it paid out to shareholders

An income statement prepared according to GAAP:

records expenses based on the matching principle

Given an interest rate of zero percent, the future value of a lump sum invested today will always:

remain constant

With typical interest-only loans, the entire principal is:

repaid at some point in the future

Which one of the following is included in the market value of a firm but not in the book value?

reputation of the firm

Which one of the following will increase cash flow from assets but not affect the operating cash flow?

sales of a fixed asset

The recognition principle states that:

sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined

Blooming Gardens has an inventory turnover of 16. This means the firm:

sells its inventory an average of 16 times each year.

Which one of the following statements is correct?

shareholders' equity is the residual value of a firm

If a firm has a 100 percent dividend payout ratio, then the internal growth rate of the firm is:

zero percent.

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