Financial Management Final

Coolio wants to calculate the present value of a $100,000 bonus he will receive in the two years. The interest rate used in such a calculation is often called the

Discount rate.

The cash coverage ratio directly measures the ability of a firm to meet which one of its following obligations?

Payment of interest owed to lenders

Shares of Pablo Rada, Inc. sell for $44.78 each. The company will pay a $3.20 per share dividend next year. Investors expect Pablo Rada will increase this dividend by 5.3 percent annually in perpetuity. What is the required annual return on this stock?

$1,252.39

Bully's Cowbells has a return on equity of 24 percent. The company's total asset turnover is 2.3 and the profit margin is 7 percent. If Bully's total equity is $7,600, what is the company's net income?

$1,824

You've been awarded a scholarship that pays $250 a month for 5 years while you are in college. At a 5 percent annual discount rate with monthly compounding, what are these payments worth to you when you first start college? Assume the first payment will be received at the end of the month.

$13,247.68

George Jefferson just established a trust fund that provides $178,500 in scholarships each year in perpetuity. Assuming the trust fund earns a 5 percent annual rate of return, how much money did Mr. Jefferson contribute to the fund?

$3,570,000

Lionel has to pay a penalty for filing his taxes 21 months late. The IRS charges 45% annual interest on late payments. How much was Lionel's original tax bill if his current tax bill is $17,243.94?

$9,000

You have just received notification that you have won the $2.5 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100th birthday (assuming you're around to collect), 68 years from now. What is the present value of your windfall if the appropriate annual discount rate is 10 percent?

$3,830.34

A zero coupon bond with a face value of $1,000 is issued with an initial price of $420.50. The bond matures in 11 years. What is the implicit interest earned, in dollars, for the first year of the bond's life?

$34.36

Pedro's Pipas, Inc. paid $490 in dividends and $590 in interest this past year. Looking at the Balance Sheet you note that common stock increased by $200 but accumulated retained earnings decreased by $126. What is the net income for the year?

$364

Exactly 8 years ago Bob put $3,048 in a bank to save for his grandson's wedding. How much money does Bob have in his account if he earned 5.7 percent annually?

$4,749.14

Michael's, Inc. just paid this morning an annual dividend of $1.80. Simultaneously, the company announced that future dividends will be increasing by 4.00 percent per year. If you require an annual return of 8.2 percent, how much are you willing to pay to purchase one share of Michael's stock?

$44.57

Andre's Bakery has sales of $613,000 with costs of $479,000. Interest expense is $26,000 and depreciation is $42,000. The tax rate is 25 percent. What is the net income?

$49,500

The Sunyside Co. is a new firm in a rapidly growing industry. The company plans to increase its annual dividend by 15 percent a year for the next 4 years, after which the dividend growth rate will slow to 4 percent per year. The company just paid $1.50 per share as its annual dividend. What is the current value of one share if the required annual return is 7.00 percent?

$76.59

While note true of common stock, preferred shares (check all that apply)

1. Are often associated with a sinking fund set-up by the company 2. Typically don't get voting rights 3. Have a pre-specified dividend yield usually based on par value.

Crystal Lake, Inc., has a total debt ratio of 0.29.

1.Debt-equity ratio=debt/equity =0.29total assets/0.71total assets =0.41(Approx). 2.equity multiplier=Total assets/Total equity = Total assets/0.71Total assets =1.41(Approx).

You took out a loan with an effective annual interest rate of 7 percent. What is the equivalent 18-month interest rate on this loan? Note: I don't want the APR, I want the EPR (the actual interest rate charged over 18 months).

10.68%

Todd's Tuxedos began the year with net fixed assets of $469 and ended with net fixed assets of $546. The firm also sold $317 in assets during the year. Depreciation was $38 and interest expenses were $20. What is the firm's net capital spending for the year?

115

The Miller Crossing credit card company charges you 1.11 percent per month. What is the annual percentage rate on your account?

13.32 Percent

The Great Indoors Inc. has $10,400 in sales revenue for the year. The company's profit margin is 4 percent and there are 4,600 shares of stock outstanding. If the market price per share is $1.80, what is the price-earnings ratio?

19.90

Rick, the owner of the local pawn shop, loans money at 23 percent annually with weekly compounding. What is the effective annual interest rate that Rick is charging? Assume there are 52 weeks in the year.

25.80 Percent

The Blue Marlin is owned by a group of five shareholders who all vote independently and who all want personal control over the firm. What is the minimum percentage of the outstanding shares one of these shareholders must own if he or she is to gain personal control over this firm given that the firm uses straight voting?

50 percent plus one vote

The average price of Yankee season tickets behind home plate was $28,858 in 2012. 5 years earlier, the average price was $21,008. What was the annual increase in price?

6.56%

Campbell and Sons has sales revenue of $4,150 and total assets of $3,850. The company's profit margin is 4 percent and the firm has a total debt ratio of 40 percent. What is the firm's return on equity?

7.19 percent

Sinan is considering investing in a project with an initial cost of $68,000 and a four-year life span. Sinan will depreciate the assets to zero on a straight-line basis over those four years. The projected net income from the project is $2,700, $2,200, $2,600, and $4,500 a year for the next four years, respectively. What is the project's average accounting return?

8.82%

Today, June 15, you want to buy a bond with a quoted bid price of 98.64 and a quoted ask price of 98.66. The bond pays interest on January 1 and July 1. Which one of the following is true?

98.66 is the clean price at which you could purchase this bond.

Today, June 1, you want to buy a bond with a quoted bid price of 98.64 and a quoted ask price of 98.66. The bond pays interest on January 1 and July 1. Which one of the following is true?

98.66 percent of par plus 5/6 of the coupon payment is the actual cost to purchase this bond

Bob is a pessimist and he expects the required rate of return to increase across the board on all equity securities. From this we can infer that Bob expects:

A decrease in all stock values

Which one of the following is the best example of a diversifiable risk?

A firm's sales decrease.

Aesop has to choose between two mutually exclusive projects that have 5-year lives and conventional cash flows. Project Lion has an NPV of $73,406 and a payback period of 3.48 years. Project Lamb has a payback period of only 2.22 years and an IRR of 13.22 percent. The required return for Project Lion is 16 percent while it is 14 percent for Project Lamb. Which project, if any, should Aesop recommend?

Accept Project Lion since it has a higher NPV.

An increase in which one of the following will increase a firm's quick ratio without affecting its cash ratio?

Accounts receivable.

Rosie has $13,000, She earns 5 percent interest, compounded annually. Andy also has $13,000 and earns 5 percent interest, compounded annually. Rosie will withdraw her interest earnings and spend it as soon as possible. Andy will reinvest his interest earnings into his account. Which one of the following statements is true?

Andy will earn more interest the second year than Rosie.

Five different lenders quote you an annual percentage rate of 5 percent on a car loan, but each lender compounds interest on a different period/frequency. Which one of the following compounding periods provides the lowest effective annual interest rate?

Annual

The interest rate that is most commonly quoted by a lender is referred to as which one of the following?

Annual Percentage Rate

The capital structure weights used in computing a firm's cost of capital on existing assets:

Are based on the market values of the firm's debt and equity securities

Preston Industries has two separate divisions. Each division is in a separate line of business. Division A is the largest division and represents 70 percent of the firm's overall sales. Division A is also the riskier of the two divisions. Division B is the smaller and least risky of the two. When management is deciding which of the various divisional projects should be accepted, the managers should:

Assign appropriate, but differing, discount rates to each project and then select the projects with the highest net present values.

Billy Bob wants to know the accounting value of a firm's equity. He should look at the:

Balance sheet.

Susan owns investments spread across several countries and in many different industries. When evaluating her portfolio's risk she can use the portfolio weighted average of the assets':

Beta

If the cash flow to stockholders is positive then we know that:

Both the cash flow to assets and the cash flow to creditors must be positive.

Jarom and Christina are twins. Both Jarom and Christina invest $5,000 each year beginning when they are 30 years old. Jarom's investment pays 7 percent annually with semi-annual compounding, while Christina's pays 7 percent annually with monthly compounding. Both Jarom and Christina retire at age 70. Which one of the following statements is correct?

Christina will have more than Jarom when they retire.

Which one of the following best describes NASDAQ?

Computer network of securities dealers.

Your parents own a department store in Denver. The store's market value was the same as the book value when they first opened the store. Which one of the following is most apt to cause the market value of this store to be lower than the book value?

Construction of a new highway that routes traffic away from the store.

Net working capital is defined as:

Current assets minus current liabilities.

Which one of the following is a use of cash?

Decrease in accounts payable.

Which one of the following is a source of cash?

Decrease in inventory

The Corner Hardware has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit also remained constant. This accomplishment will be reflected in the firm's financial ratios in which one of the following ways?

Decrease in the day's sales in inventory.

Steve just computed the present value of a $10,000 bonus he will receive in the future. The interest rate he used in this process is referred to as which one of the following?

Discount Rate

Which of the following statements are correct concerning diversifiable risks? I.Diversifiable risks can be essentially eliminated by investing in 30 unrelated securities. II.There is no reward for accepting diversifiable risks .III.Diversifiable risks are generally associated with an individual firm or industry. IV.Beta measures diversifiable risk

I, II and III only.

An ordinary annuity is best defined by which one of the following?

Equal payments paid at the end of regular intervals over a fixed time period.

Nagla'a has invested her money in Widget Inc.'s common stock. She estimates that the stock has a beta of 1.32, and the expected return on the market is 10 percent. Given that the risk-free rate is 3.5 percent, what is the stock's expected return?

Expected return =12.08%

Christina borrowed $3,000 five years ago and pays a fixed 2 percent interest rate each period on her loan. Which one of the following results in lower total interest on her loan over the course of one year?

Getting charged compound interest over the year instead of simple interest.

According to the DuPont Identity, if a firm's return on assets is the same as the firm's return on equity then the firm

Has an equity multiplier of 1.0.

Saul invested $900 ten years ago into a savings account at his bank. Saul expected to have $1,800 in the account after ten years. As it turns out, he only has $1,680 in his account today. Which one of the following must be true? Assume that he has not added or withdrawn any money from this account since his initial investment.

He earned less interest than he expected to earn.

Tricia is considering adding a risk-free asset or a risky asset to her portfolio. Which of the following pieces of information would she need to have to estimate the additional reward for purchasing the risky asset instead of a risk-free asset? I.Asset's standard deviation. II.Asset's beta. III.Risk-free rate of return. IV.Market risk premium.

II and IV only.

Which of the following are included in current liabilities?I. Note payable to a supplier in 13 months.II. Amount due from a customer last week.III. Account payable to a supplier that is due next week.IV. Loan payable to the bank in 10 months.

III and IV only.

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

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

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

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

Due to monetary policy uncertainty, inflation expectations have begun to increase. This is most likely to:

Increase nominal rates.

Bob's Burgers is considering renovating their restaurants and adding salad bars. The company believes that it will need to finance the project externally. Incorporating flotation costs into the analysis of the project will:

Increase the initial cash outflow of the project.

John doesn't understand where each cash flow goes on the statement of cash flows. You explain that an increase in long-term debt, for instance, will _____ the cash flow from _____ activities.

Increase; financing.

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

Increases

You've been asked to create a report on the proposed purchase of an internet startup. Which one of the following will decrease the net present value of this project?

Increasing the project's initial cost at time zero

You observe that the yield on one-year U.S. Treasury debt is higher than the yield on five-year U.S. Treasury debt. This could be the case because:

Investors expect inflation will be decreasing.

The risk-free rate is currently three percent and Elaina believes the market return will be eleven percent. She also believes that Luscious Lips Inc. stock has ten percent less systematic risk than the market. If Elaina believes Luscious Lips will return twelve percent, then she believes the company:

Is underpriced.

Mike uses the payback method to evaluate investments in NWC. Which two characteristics likely explain why he has chosen to use the payback method?

Liquidiity bias, ease of use

All Hype Inc. uses its WACC as the discount rate when evaluating new projects. This means that the company will tend to do all of the following except:

Lower the average risk level of the firm over time.

The percentage of the next dollar you earn that must be paid in taxes is referred to as the _____ tax rate

Marginal.

Pravda Inc. has a quarterly dividend policy that pays $0.40 per share of common stock. The firm has 1,000 shares of stock outstanding. The company:

Must still declare each dividend before it becomes an accrual company liability

You've found a new job and must move to Madrid. You have two options for your house: sell it or rent it. In terms of calculating the profitability index, these two options are considered to be:

Mutually Exclusive

Widgets-R-Us Inc.'s expansion into the Starkville widget market has an initial cost of $928,400. The market value of expanding is $1,339,060. The difference between these two values is called:

Net present value

Kristi wants to start training her most junior assistant, Amy, in the art of project analysis. Amy has just started college and has no experience or background in business finance. To get her started, Kristi is going to assign the responsibility for all projects that have initial costs less than $1,000 to Amy to analyze. Which method is Kristi most apt to ask Amy to use in making her initial decisions?

Payback

The items included in an indenture that limit certain actions of the issuer in order to protect a bondholder's interests are referred to as the:

Protective covenants.

Your boss has asked you to calculate the cost of preferred stock. You're most likely to compute the cost the same as you would the:

Rate of return on a perpetuity.

John wants to know how to calculate the premium he gets for holding a risky asset. John can calculate this as the expected return on the asset minus the:

Risk-free rate

Samantha earns 3.5 percent interest, compounded annually. She estimates it will take her four years until she has $5,000. If she doesn't make any withdrawals or deposits, which of the following statements is true?

Samantha could have deposited less money today and still had $5,000 in four years if she could have earned a higher rate of interest

Pepsi's Popcicles, Inc., has current assets of $5,000, net fixed assets of $23,000, current liabilities of $3,500, and long-term debt of $7,900.

Shareholders Equity $16,600 Net Working Capital $1500

Tyler is concerned about his portfiolio so he asks his best friend Tippie for some advice. Since Tippie is a certified financial advisor, he is most likely to counsel Tyler that:

Spreading an investment across many diverse assets will eliminate some of the total risk.

The U.S. government coding system that classifies a firm by the nature of its business operations is known as the:

Standard Industrial Classification codes.

Fox News just released a report about the expected impact of the Federal Reserve's decision to increase interest rates. What type of risk does this news report best represent?

Systematic

Five years ago Two Towers Inc. issued bonds that pay a 5 percent coupon. At issue these bonds were AAA rated, but today they were downgraded to BBB. Which of the following is most likely based on this information?

The bonds carry a larger default premium than when issued.

In one year your wealthy younger sister will begin depositing $5,000 each year into a savings account for your retirement. The account will compound interest at 5 percent annually and you can't withdraw any money from the account until you retire in 40 years. Which of the following statements is correct?

The interest you earn 6 years from now will equal the interest you earn 10 years from now.

Garcia and Sons is considering two mutually exclusive projects, Projects Aracena and Project Bilbao. The company's CFO has determined that the crossover rate for these projects is 14 percent. Given this you know that:

The preferred project at a discount rate of 11 percent will not be preferred at a discount rate of 15 percent.

Brian is considering opening a McDonalds in Mumbai. His advisors believe the project has a net present value of zero. Which one of the following must be true?

The project's expected cash inflows equal its cash outflows in current (present value) dollar terms

When preparing a common-size balance sheet we express all accounts for the current year as a percentage of:

Total assets for the current year

Caskets R Us evaluates five new project's each year. The primary determinant of the cost of capital for each projects is the:

Use of the funds

You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?

Voting by proxy

Bill's Blouses has financed its assets with both debt and equity. The weighted average of the firm's cost of equity and after tax cost of debt where the weights are based on the firm's capital structure is called the:

Weighted Avg cost of capital

The bond market requires a return of 9.8 percent on the five-year bonds issued by JW Industries. The 9.8 percent is referred to as which one of the following?

Yield to maturity

Net capital spending:

ending net fixed assets - beginning net fixed assets + depreciation