Financial Management All Exams

(5 points) Asset A was purchased six months ago for $20,000 and has generated $1,500 cash flow during that period. What is the asset's rate of return if it can be sold for $22,750 today?

($22,750 - 20,000 +1,500) / 20,000 = 21.25%

$100 is received at the end of year 1, $200 is received at the end of year 2, and $300 is received at the end of year 3. If the opportunity cost is 12 percent, their combined present value today is __________. A) $600 B) $462 C) $1,245 D) $1,536

B

A downward-sloping yield curve that indicates generally cheaper long-term borrowing costs than short-term borrowing costs is called A) normal yield curve. B) inverted yield curve. C) flat yield curve. D) none of the above.

B

A feature that gives the issuer the opportunity to repurchase bonds at a stated price prior to maturity is called A) stock purchase warrants. B) call feature. C) conversion feature. D) None of the above.

B

At year end, Tangshan China Company balance sheet shows 1,000,000 shares of common stock outstanding. Next year, Tangshan is projecting that it will have net income of $1.5 million. If the average PE multiple in Tangshan's industry is 15, what should be the price of Tangshan's stock? A) $15.00 B) $22.50 C) $52.50 D) $75.00

B

Bob plans to fund his individual retirement account (IRA) with the maximum contribution of $5,000 at the end of each year for the next 15 years. If Bob can earn 10 percent on his contributions, how much will he have at the end of the fifteenth year? A) $144,104 B) $158,862 C) $38,030 D) $14,938

B

Darlene wishes to accumulate $50,000 by the end of 10 years by making equal annual end-of-year deposits over the next 10 years. If Darlene can earn 5 percent on her investments, how much must she deposit at the end of each year? A) $5,000 B) $3,975 C) $4,513 D) $6,475

B

Indicate which of the following is true about annuities. A) An ordinary annuity is an equal payment paid or received at the end of each period, that increases by an equal amount each period. B) An annuity due is an equal payment paid or received at the beginning of each period. C) An ordinary annuity is an equal payment paid or received at the beginning of each period. D) An annuity due is a payment paid or received at the beginning of each period, that increases by an equal amount each period.

B

Johnson, Inc. has just ended the calendar year making a sale in the amount of $10,000 of merchandise purchased during the year at a total cost of $7,000. Although the firm paid in full for the merchandise during the year, it has yet to collect at year end from the customer. The net profit and cash flow from this sale for the year are A) $3,000 and $10,000, respectively. B) $3,000 and -$7,000, respectively. C) $7,000 and -$3,000, respectively. D) $3,000 and $7,000, respectively.

B

Return and risk A) have no effect on share price. B) have an inverse effect on share price. C) adversely affect share price. D) have the same effect on share price.

B

The ________ ratio may indicate the firm is experiencing stockouts and lost sales. A) average payment period B) inventory turnover C) average collection period D) quick

B

The key variables in the owner wealth maximization process are A) earnings per share and risk. B) cash flows and risk. C) earnings per share and share price. D) profits and risk.

B

Using the DuPont system, a decrease in total asset turnover will result in ________ in the return on equity. A) an increase B) a decrease C) no change D) an undetermined change

B

What is the payback period for Tangshan Mining company's new project if its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4? A) 4.33 years. B) 3.33 years. C) 2.33 years. D) None of the above.

B

21) At a base sales level of $400,000, a firm has a degree of operating leverage of 2 and a degree of financial leverage of 1.5. The firm's degree of total leverage is __________.

B) 3.0

25) __________ risk is the risk of being unable to cover financial costs.

B) Financial

16) If a firm's variable costs per unit increase, the firm's operating break-even point will

B) increase.

The purpose of adding an asset with a negative or low positive correlation is to

B) reduce risk

The relevant portion of an asset's risk attributable to market factors that affect all firms is called

B) systematic risk.

A college received a contribution to its endowment fund of $2 million. They can never touch the principal, but they can use the earnings. At an assumed interest rate of 9.5 percent, how much can the college earn to help its operations each year? A) $95,000 B) $19,000 C) $190,000 D) $18,000

C

A firm has an outstanding issue of 1,000 shares of preferred stock with a $100 par value and an 8 percent annual dividend. The firm also has 5,000 shares of common stock outstanding. If the stock is cumulative and the board of directors has passed the preferred dividend for the prior two years, how much must the preferred stockholders be paid prior to paying dividends to common stockholders? A) $ 8,000 B) $16,000 C) $24,000 D) $25,000

C

A firm has experienced a constant annual rate of dividend growth of 3 percent on its common stock and expects the dividend per share in the coming year to be $2.70. The firm can earn 12 percent on similar risk investments. The value of the firm's common stock is _____. A) $22.50/share B) $9/share C) $30/share D) $90/share

C

As a form of financing, equity capital A) has priority over bonds. B) has a maturity date. C) is only liquidated in bankruptcy. D) is temporary.

C

As the interest rate increases for any given period, the future value of an amount will A) decrease. B) remain unchanged. C) increase. D) move toward 1.

C

If the required return is less than the coupon rate, a bond will sell at A) par. B) a discount. C) a premium. D) book value.

C

Retained earnings on the balance sheet represents A) net profits after taxes. B) cash. C) net profits after taxes minus preferred and common stock dividends. D) the cumulative total of earnings paid out to the owners.

C

Securities exchanges create efficient markets that do all of the following EXCEPT A) ensure a market in which the price reflects the true value of the security. B) allocate funds to the most productive uses. C) control the supply and demand for securities through price. D) allow the price to be determined by supply and demand of securities.

C

The goal of profit maximization would result in priority for A) cash flows available to stockholders. B) risk of the investment. C) earnings per share. D) timing of the returns.

C

The present value of $500 received four years from now if your opportunity cost is 8 percent (paid semiannually) is __________. A) $684 B) $456 C) $365 D) $500

C

The three summary ratios basic to the DuPont system of analysis are A) net profit margin, total asset turnover, and return on investment. B) net profit margin, total asset turnover, and return on equity. C) net profit margin, total asset turnover, and financial leverage multiplier. D) net profit margin, financial leverage multiplier, and return on equity.

C

What is the IRR for the following project if its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4? A) 15.57%. B) 0.00%. C) 13.57%. D) None of the above.

C

What is the NPV for the following project if its cost of capital is 15 percent and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4? A) $1,700,000. B) $371,764. C) ($137,053). D) None of the above.

C

What is the current price of a $1000 par value bond maturing in 10 years with a coupon rate of 14 percent, paid semiannually, that has a YTM of 15 percent? A) $1,050 B) $604 C) $949 D) $1,088

C

What is the yield to maturity, to the nearest percent, for the following bond: current price is $908, coupon rate is 11 percent, $1,000 par value, interest paid annually, eight years to maturity? A) 14 percent B) 11 percent C) 13 percent D) 12 percent

C

Which of the following statements is false? A) If the payback period is less than the maximum acceptable payback period, accept the project. B) If the payback period is greater than the maximum acceptable payback period, reject the project. C) If the payback period is less than the maximum acceptable payback period, reject the project D) Two of the above.

C

12) A firm expects to have available $500,000 of earnings in the coming year, which it will retain for reinvestment purposes. Given the following target capital structure, at what level of total new financing will retained earnings be exhausted? Target market Source of capital proportions Long-term debt 40% Preferred stock 10 Common stock equity 50

C) $1,000,000

22) A firm has interest expense of $145,000, preferred dividends of $25,000, and a tax rate of 40 percent. The firm's financial break-even point is __________.

C) $186,667

11) A firm has determined its cost of each source of capital and optimal capital structure, which is composed of the following sources and target market value proportions: Target market Source of capital proportions After-tax cost Long-term debt 40% 6% Preferred stock 10 11 Common stock equity 50 15 The weighted average cost of capital is

C) 11 percent.

A firm has determined its cost of each source of capital and optimal capital structure, which is composed of the following sources and target market value proportions: Target market Source of capital proportions After-tax cost Long-term debt 40% 6% Preferred stock 10 11 Common stock equity 50 15 The weighted average cost of capital is

C) 11 percent.

2) A firm has issued preferred stock at its $125 per share par value. The stock will pay a $15 annual dividend. The cost of issuing and selling the stock was $4 per share. The cost of the preferred stock is

C) 12.4 percent.

A firm has issued preferred stock at its $125 per share par value. The stock will pay a $15 annual dividend. The cost of issuing and selling the stock was $4 per share. The cost of the preferred stock is

C) 12.4 percent.

3) If a corporation has an average tax rate of 40 percent, the annual after-tax cost of debt for a 15-year, 12 percent, $1,000 par value bond, selling at $950 is

C) 7.6 percent.

If a corporation has an average tax rate of 40 percent, the annual after-tax cost of debt for a 15-year, 12 percent, $1,000 par value bond, selling at $950 is

C) 7.6 percent.

18) __________ results from the use of fixed-cost assets or funds to magnify returns to the firm's owners.

C) Leverage

24) In theory, the firm should maintain financial leverage consistent with a capital structure that

C) maximizes the owner's wealth.

Since for a given increase in risk, most managers require an increase in return, they are

C) risk-averse

13) A firm has determined its cost of each source of capital and optimal capital structure which is composed of the following sources and target market value proportions. Target Market Source of Capital proportions After-tax Cost Long-term Debt 35% 9% Preferred Stock 10 14 Common Stock Equity 55 20 The firm is considering an investment opportunity, which has an internal rate of return of 10 percent. The project

C) should not be considered because its internal rate of return is less than the weighted average cost of capital.

4) Debt is generally the least expensive source of capital. This is primarily due to

C) the tax deductibility of interest payments.

Debt is generally the least expensive source of capital. This is primarily due to

C) the tax deductibility of interest payments.

8) In calculating the cost of common stock equity

C) the use of the constant growth valuation model is often preferred, because the data required are more readily available.

1) In order to recognize the interrelationship between financing and investments, the firm should use __________ when evaluating an investment.

C) the weighted average cost of all financing sources

14) The investment opportunity schedule combined with the weighted marginal cost of capital indicates

C) which projects are acceptable given the firm's cost of capital.

A firm had year end 2011 and 2012 retained earnings balances of $560,000 and $670,000, respectively. The firm paid $10,000 in dividends in 2012. The firm's net profit after taxes in 2012 was ________. A) -$100,000 B) -$120,000 C) $110,000 D) $120,000

D

A firm has an issue of $1,000 par value bonds with a 9 percent stated interest rate outstanding. The issue pays interest annually and has 20 years remaining to its maturity date. If bonds of similar risk are currently earning 8 percent, the firm's bond will sell for __________ today. A) $1,000 B) $716.67 C) $840.67 D) $1,098.18

D

ABC Corp. extends credit terms of 45 days to its customers. Its credit collection would be considered poor if its average collection period was A) 30 days. B) 36 days. C) 44 days. D) 57 days.

D

Among solutions to the agency problem in publicly-held corporations are all of the following EXCEPT A) stock options. B) performance shares. C) cash bonuses tied to goal achievement. D) bonuses based on short-term results.

D

Corporate bonds typically have A) a face value of $5,000. B) a market price of $1,000. C) a specified coupon rate paid annually. D) a par value of $1,000.

D

Gross profits are defined as A) operating profits minus depreciation. B) operating profits minus cost of goods sold. C) sales revenue minus operating expenses. D) sales revenue minus cost of goods sold

D

Nico Corporation's common stock is expected to pay a dividend of $3.00 forever and currently sells for $21.42. What is the required rate of return? A) 10% B) 12% C) 13% D) 14%

D

Shares of stock that have been repurchased by the corporation are called A) authorized. B) issued. C) outstanding. D) treasury shares.

D

The implementation of a pro-active ethics program is expected to result in A) a positive corporate image and increased respect, but is not expected to affect cash flows. B) an increased share price resulting from a decrease in risk, but is not expected to affect cash flows. C) a positive corporate image and increased respect, but is not expected to affect share price. D) a positive corporate image and increased respect, a reduction in risk, and enhanced cash flow resulting in an increase in share price.

D

Which of the following legal forms of organization's income is NOT taxed under individual income tax rate? A) Sole proprietorships. B) Partnerships. C) Limited partnership. D) Corporation.

D

23) A firm has a current capital structure consisting of $400,000 of 12 percent annual interest debt and 50,000 shares of common stock. The firm's tax rate is 40 percent on ordinary income. If the EBIT is expected to be $200,000, the firm's earnings per share will be __________.

D) $1.82

17) A firm has fixed operating costs of $10,000, the sale price per unit of its product is $25, and its variable cost per unit is $15. The firm's operating break-even point in units is __________ and its breakeven point in dollars is __________.

D) 1,000; $25,000

20) A firm has fixed operating costs of $650,000, a sales price per unit of $20, and a variable cost per unit of $13. At a base sales level of 500,000 units, the firm's degree of operating leverage is __________.

D) 1.23

A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.DEBT: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotation cost of 2 percent of the face value would be required in addition to the discount of $40. PREFERRED STOCK: The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is $3 per share. COMMON STOCK: A firm's common stock is currently selling for $18 per share. The dividend expected to be paid at the end of the coming year is $1.74. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was $1.50. It is expected that to sell, a new common stock issue must be underpriced $1 per share in floatation costs. Additionally, the firm's marginal tax rate is 40 percent. The weighted average cost of capital up to the point when retained earnings are exhausted is

D) 11.0 percent.

6) A firm has common stock with a market price of $100 per share and an expected dividend of $5.61 per share at the end of the coming year. A new issue of stock is expected to be sold for $98, with $2 per share representing the underpricing necessary in the competitive capital market. Flotation costs are expected to total $1 per share. The dividends paid on the outstanding stock over the past five years are as follows: Year Dividend 1 $ 4.00 2 4.28 3 4.58 4 4.90 5 5.24 The cost of this new issue of common stock is

D) 12.8 percent.

5) A firm has a beta of 1.2. The market return equals 14 percent and the risk-free rate of return equals 6 percent. The estimated cost of common stock equity is

D) 15.6 percent.

A firm has a beta of 1.2. The market return equals 14 percent and the risk-free rate of return equals 6 percent. The estimated cost of common stock equity is

D) 15.6 percent.

19) With the existence of fixed operating costs, a decrease in sales will result in __________ in EBIT.

D) a more than proportional decrease

15) At the operating break-even point, __________ equals zero.

D) earnings before interest and taxes

9) Generally, the order of cost, from the least expensive to the most expensive, for long-term capital of a corporation is

D) long-term debt, preferred stock, retained earnings, new common stock.

Generally, the order of cost, from the least expensive to the most expensive, for long-term capital of a corporation is

D) long-term debt, preferred stock, retained earnings, new common stock.

(5 points) Compute the value of a share of common stock of a company whose most recent dividend was $2.50 and is expected to grow at 6 percent per year for the next 2 years, after which the dividend growth rate will decrease to 3 percent per year indefinitely. Assume a 10 percent required rate of return.

D0 = $2.50 D1 = $2.50 x 1.06 = $2.65 D2 = $2.65 x 1.06 = $2.81 D3 = $2.81 x 1.03 = $2.89 $2.89 / (.10 - .03) = $41.29 CF0 = $0 C01 = $2.65 C02 = $2.81 + $41.29 = $44.10 CPT NPV at 10% = $38.85

(10 points) The H&H Computer Company has an outstanding issue of bond with a par value of $1,000, paying 12 percent coupon rate semi-annually. The bond was issued 25 years ago and has 5 years to maturity. What is the value of the bond assuming 14 percent market interest rate?

N=10, I/Y=7, PMT=60, FV=1000, CPT PV=$929.76

(5 points) Marc has purchased a new car for $15,000. He paid $2,500 as down payment and he paid the balance by a loan from his hometown bank. The loan is to be paid on a monthly basis for two years charging 12 percent interest. How much are the monthly payments? How much interest will he pay in his first monthly payment?

N=24, I/Y=1, PV = 15,000 - 2,500 = $12,500, FV=$0, CPT PMT = $588.42 Interest: $12,500 x 1% = $125

(5 points) To buy his favorite car, Larry is planning to accumulate money by investing his Christmas bonuses for the next five years in a security which pays a 10 percent annual rate of return. The car will cost $20,000 at the end of the fifth year and Larry's Christmas bonus is $3,000 a year. Will Larry accumulate enough money to buy the car? How much additional will he either need or have?

N=5, I/Y=10, PV=0, PMT=3,000, CPT FV=$18,315.30 No, Larry will still need $1,684.70

A firm has determined its cost of each source of capital and optimal capital structure which is composed of the following sources and target market value proportions. Target Market Source of Capital proportions After-tax Cost Long-term Debt 35% 9% Preferred Stock 10 14 Common Stock Equity 55 20 The firm is considering an investment opportunity, which has an internal rate of return of 10 percent. The project

should not be considered because its internal rate of return is less than the weighted average cost of capital.

Combining two assets having perfectly positively correlated returns will result in the creation of a portfolio with an overall risk that

stabilizes to a level between the asset with the higher risk and the asset with the lower risk.

The higher an asset's beta,

the more responsive it is to changing market returns.

In order to recognize the interrelationship between financing and investments, the firm should use __________ when evaluating an investment.

the weighted average cost of all financing sources

Consider the following projects, X and Y, where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project Y also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 10 percent? A) Project X. B) Project Y. C) Neither. D) Not enough information to tell.

A

Generally, long-term loans have higher interest rates than short-term loans because of A) the general expectation of higher future rates of inflation. B) greater demand for short-term rather than long-term loans relative to the supply of such loans. C) lender preferences for longer-term, less liquid loans. D) all of the above.

A

If a United States Savings bond can be purchased for $14.60 and has a maturity value at the end of 25 years of $100, what is the annual rate of return on the bond? A) 8 percent B) 9 percent C) 7 percent D) 6 percent

A

If expected return is above the required return on an asset, rational investors will A) buy the asset, which will drive the price up and cause expected return to reach the level of the required return. B) sell the asset, which will drive the price down and cause the expected return to reach the level of the required return. C) sell the asset, which will drive the price up and cause the expected return to reach the level of the required return. D) buy the asset, since price is expected to decrease.

A

Marion makes annual end‑of‑year payments of $6,260.96 on a five‑year loan with an 8 percent interest rate. The original principal amount was A) $25,000. B) $20,000. C) $31,000. D) $30,000.

A

Which of the following capital budgeting techniques ignores the time value of money? A) Payback. B) Net present value. C) Internal rate of return. D) Two of the above

A

When the net present value is positive, the internal rate of return is ________ the cost of capital.

A) greater than

(5 points) Promo Pak has compiled the following financial data: Source of Capital Book Value Market Value Cost Long-term debt $10,000,000 $ 8,500,000 5.0% Preferred stock 1,000,000 1,500,000 14.0 Common stock equity 9,000,000 15,000,000 20.0 ------------ ------------ $20,000,000 $25,000,000 a. Calculate the weighted average cost of capital using book value weights. b. Calculate the weighted average cost of capital using market value weights.

A) (0.50 x 5.0) + (0.05 x 14.0) + (0.45 x 20.0) = 12.2% B) (0.34 x 5.0) + (0.06 x 14.0) + (0.60 x 20.0) = 14.54%

(10 points) The following historical returns have been reported for Best Buy: 2002 10% 2003 12% 2004 5% 2005 8% 2006 10% A) What was the average return for Best Buy during this five year period? B) What is the standard deviation of Best Buy's returns for this period? C) What is the coefficient of variation of Best Buy?

A) (10+12+5+8+10)/5 = 9% B) 2.65% C) 2.65 / 9 = .2944

FIGURE 5.02 You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows: 8) The beta of the portfolio in Figure 5.02, containing assets X, Y, and Z, is

A) 1.6.

Last year Mike bought 100 shares of Dallas Corporation common stock for $53 per share. During the year he received dividends of $1.45 per share. The stock is currently selling for $57.75 per share. What rate of return did Mike earn over the year?

A) 11.7 percent.

. (5 points) A capital project has an initial investment of $100,000 and cash flows in years 1-6 of $25,000, $10,000, $50,000, $10,000, $10,000, and $60,000, respectively. Given a 15 percent cost of capital, (a) compute the net present value. (b) compute the internal rate of return (c) should the project be accepted? Why or why not?

A) NPV = $98,850.33 - $100,000 = -$1,194.67 B) IRR = 14.60% C) No, the project should be rejected since the NPV is negative and the IRR < cost of capital

7) Since retained earnings are viewed as a fully subscribed issue of additional common stock, the cost of retained earnings is

A) less than the cost of new common stock equity.

The ______ the coefficient of variation, the ______ the risk.

A) lower, lower

10) When discussing weighing schemes for calculating the weighted average cost of capital, the preferences can be stated as

A) market value weights are preferred over book value weights and target weights are preferred over historic weights.

When discussing weighing schemes for calculating the weighted average cost of capital, the preferences can be stated as

A) market value weights are preferred over book value weights and target weights are preferred over historic weights.

A firm has common stock with a market price of $100 per share and an expected dividend of $5.61 per share at the end of the coming year. The dividends are expected to grow at a constant rate of 7% per year. A new issue of stock is expected to be sold for $97 after $2 per share and $1 per share flotation costs are deducted from the market price. The cost of this new issue of common stock is

12.8 percent

A firm with a total asset turnover that is lower than industry standard but with a current ratio which meets industry standard must have excessive A) fixed assets. B) inventory. C) accounts receivable. D) debt.

A

A group formed by an investment banker to share the financial risk associated with underwriting new securities is a(n) A) underwriting syndicate. B) selling group. C) investment banking consortium. D) broker pool.

A