Managing Finance and Capital Exam 2

What's the present value of $16,000 discounted back 5 years if the appropriate interest rate is 4.5%, compounded semiannually?

$12,808.16

Meyer Inc's total invested capital is $555,000, and its total debt outstanding is $185,000. The new CFO wants to establish a total debt to total capital ratio of 55%. The size of the firm will not change. How much debt must the company add or subtract to achieve the target debt to capital ratio?

$120,250

Helmuth Inc's latest net income was $1,050,000, and it had 225,000 shares outstanding. The company wants to pay out 45% of its income. What dividend per share should it declare? Do not round your intermediate calculations.

$2.10

You just deposited $7,500 in a bank account that pays a 4.0% nominal interest rate, compounded quarterly. If you also add another $5,000 to the account one year (4 quarters) from now and another $7,500 to the account two years (8 quarters) from now, how much will be in the account three years (12 quarters) from now?

$21670

You want to quit your job and go back to school for a law degree 4 years from now, and you plan to save $6,500 per year, beginning immediately. You will make 4 deposits in an account that pays 5.7% interest. Under these assumptions, how much will you have 4 years from today?

$29,922.27

Suppose you have $2,450 and plan to purchase a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures?

$2909.83

ohn and Daphne are saving for their daughter Ellen's college education. Ellen just turned 10 (at t = 0), and she will be entering college 8 years from now (at t = 8). College tuition and expenses at State U. are currently $14,500 a year, but they are expected to increase at a rate of 3.5% a year. Ellen should graduate in 4 years--if she takes longer or wants to go to graduate school, she will be on her own. Tuition and other costs will be due at the beginning of each school year (at t = 8, 9, 10, and 11). So far, John and Daphne have accumulated $14,000 in their college savings account (at t = 0). Their long-run financial plan is to add an additional $5,000 in each of the next 4 years (at t = 1, 2, 3, and 4). Then they plan to make 3 equal annual contributions in each of the following years, t = 5, 6, and 7. They expect their investment account to earn 9%. How large must the annual payments at t = 5, 6, and 7 be to cover Ellen's anticipated college costs?

$2970.41

Suppose a U.S. treasury bond will pay $4,150 five years from now. If the going interest rate on 5-year treasury bonds is 4.25%, how much is the bond worth today?

$3,370.29

Brookman Inc's latest EPS was $2.75, its book value per share was $22.75, it had 215,000 shares outstanding, and its debt/total invested capital ratio was 44%. The firm finances using only debt and common equity, and its total assets equal total invested capital. How much debt was outstanding? Do not round your intermediate calculations.

$3,843,125

ou sold a car and accepted a note with the following cash flow stream as your payment. What was the effective price you received for the car assuming an interest rate of 17.0%? 0 - $0 1 - $1000 2 - $2000 3 - $2000 4 - $2000​

$4632

How much would $5,000 due in 35 years be worth today if the discount rate were 5.5%?

$767.60

The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. Balance Sheet (Millions of $)Assets 2021 Cash and securities $4,500 Accounts receivable 12,500 Inventories 13,000 Total current assets $30,000 Net plant and equipment $20,000 Total assets $50,000 Liabilities and Equity Accounts payable $13,330 Accruals 8,170 Notes payable 6,000 Total current liabilities $27,500 Long-term bonds $9,000 Total liabilities $36,500 Common stock $3,915 Retained earnings 9,585 Total common equity $13,500 Total liabilities and equity $50,000 Income Statement (Millions of $)2021Net sales $55,000 Operating costs except depreciation 51,150 Depreciation 1,100 Earnings before interest and taxes (EBIT) $2,750 Less interest 900 Earnings before taxes (EBT) $1,850 Taxes (25%) 463 Net income $1,388 Other data: Shares outstanding (millions) 500.00 Common dividends (millions of $) $485.63 Int. rate on notes payable & L-T bonds 6% Federal plus state income tax rate 25% Year-end stock price $33.30 ​ ​What is the firm's current ratio? Do not round your intermediate calculations.

1.09

Suppose the yield on a 10-year T-bond is currently 5.05% and that on a 10-year Treasury Inflation Protected Security (TIPS) is 3.05%. Suppose further that the MRP on a 10-year T-bond is 0.90%, that no MRP is required on a TIPS, and that no liquidity premium is required on any T-bond. Given this information, what is the expected rate of inflation over the next 10 years? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

1.1%

If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 9.8%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?

3.2%

Faldo Corp sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $395,000, and its year-end receivables were $60,000. If its DSO is less than the 45-day credit period, then customers are paying on time. Otherwise, they are paying late. By how much are customers paying early or late? Base your answer on this equation: DSO - Credit Period = Days early or late, and use a 365-day year when calculating the DSO. A positive answer indicates late payments, while a negative answer indicates early payments. Assume all sales to be on credit. Do not round your intermediate calculations.

10.44

You are considering investing in a bank account that pays a nominal annual rate of 7%, compounded monthly. If you invest $3,000 at the end of each month, how many months will it take for your account to grow to $460,000?

110 months

Bob has $2,500 invested in a bank that pays 4.2% annually. How long will it take for his funds to double?

16.85 years

Your father's employer was just acquired, and he was given a severance payment of $342,500, which he invested at a 7.5% annual rate. He now plans to retire, and he wants to withdraw $35,000 at the end of each year, starting at the end of this year. How many years will it take to exhaust his funds, i.e., run the account down to zero?

18.31 years

The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. Balance Sheet (Millions of $)Assets 2021 Cash and securities $4,500 Accounts receivable 12,500 Inventories 13,000 Total current assets $30,000 Net plant and equipment $20,000 Total assets $50,000 Liabilities and Equity Accounts payable $13,330 Accruals 8,170 Notes payable 6,000 Total current liabilities $27,500 Long-term bonds $9,000 Total liabilities $36,500 Common stock $3,915 Retained earnings 9,585 Total common equity $13,500 Total liabilities and equity $50,000 Income Statement (Millions of $)2021Net sales $55,000 Operating costs except depreciation 51,150 Depreciation 1,100 Earnings before interest and taxes (EBIT) $2,750 Less interest 900 Earnings before taxes (EBT) $1,850 Taxes (25%) 463 Net income $1,388 Other data: Shares outstanding (millions) 500.00 Common dividends (millions of $) $485.63 Int. rate on notes payable & L-T bonds 6% Federal plus state income tax rate 25% Year-end stock price $33.30 ​​ Refer to Exhibit 4.1. What is the firm's inventory turnover ratio? Assume that the firm's cost of goods sold is 65% of sales. Do not round your intermediate calculations.

2.75

Suppose the real risk-free rate is 3.25%, the average future inflation rate is 4.35%, and a maturity risk premium of 0.07% per year to maturity applies to both corporate and T-bonds, i.e., MRP = 0.07%(t), where t is the number of years to maturity. Suppose also that a liquidity premium of 0.50% and a default risk premium of 2.50% apply to A-rated corporate bonds but not to T-bonds. How much higher would the rate of return be on a 10-year A-rated corporate bond than on a 5-year Treasury bond? Here we assume that the pure expectations theory is NOT valid. Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

3.35%

Suppose the U.S. Treasury offers to sell you a bond for $3,000. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $4,600. What interest rate would you earn if you bought this bond at the offer price?

4.37%

Suppose the real risk-free rate is 2.50% and the future rate of inflation is expected to be constant at 2.20%. What rate of return would you expect on a 5-year Treasury security, assuming the pure expectations theory is valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

4.70%

You are considering an investment in a Third World bank account that pays a nominal annual rate of 18%, compounded monthly. If you invest $5,000 at the beginning of each month, how many months would it take for your account to grow to $300,000? Round fractional months up.

43

What's the rate of return you would earn if you paid $1,480 for a perpetuity that pays $85 per year?

5.74%

The real risk-free rate is 3.05%, inflation is expected to be 3.90% this year, and the maturity risk premium is zero. Ignoring any cross-product terms, i.e., if averaging is required, use the arithmetic average, what is the equilibrium rate of return on a 1-year Treasury bond?

6.95%

Suppose the real risk-free rate is 3.00%, the average expected future inflation rate is 4.40%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the number of years to maturity. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is NOT valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

7.50%

Which of the following bank accounts has the lowest effective annual return?

An account that pays 7% nominal interest with monthly compounding.

Amram Company's current ratio is 2.0. Considered alone, which of the following actions would lower the current ratio?

Borrow using short-term notes payable and use the proceeds to reduce long-term debt.

Companies HD and LD have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power. Both firms finance using only debt and common equity, and total assets equal total invested capital. Both companies have positive net incomes. Company HD has a higher total debt to total capital ratio and therefore a higher interest expense. Which of the following statements is CORRECT?

Company HD pays less in taxes.

Which of the following would be most likely to lead to a higher level of interest rates in the economy?

Corporations step up their expansion plans and thus increase their demand for capital.

If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change.

FALSE

It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all of the firms being compared have the same proportion of fixed assets to total assets.

FALSE

Suppose all firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets. However, firms face different operating conditions because, for example, the grocery store industry is different from the airline industry. Under these conditions, firms with high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios.

FALSE

The basic earning power ratio (BEP) reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects.

FALSE

The four most fundamental factors that affect the cost of money are (1) production opportunities, (2) time preferences for consumption, (3) risk, and (4) the skill level of the economy's labor force.

FALSE

The return on common equity (ROE) is generally regarded as being less significant, from a stockholder's viewpoint, than the return on total assets (ROA)

FALSE

Assuming the pure expectations theory is correct, which of the following statements is CORRECT?

If 2-year Treasury bond rates exceed 1-year rates, then the market must expect interest rates to rise.

Which of the following statements is CORRECT?

If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same.

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

If an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater than 10%

Which of the following statements is CORRECT, other things held constant?

If expected inflation increases, interest rates are likely to increase

Assume that inflation is expected to decline steadily in the future, but that the real risk-free rate, r*, will remain constant. Which of the following statements is CORRECT, other things held constant?

If the pure expectations theory holds, the Treasury yield curve must be downward sloping.

Which of the following investments would have the highest future value at the end of 10 years? Assume that the effective annual rate for all investments is the same and is greater than zero.

Investment A pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).

Assume that the current corporate bond yield curve is upward sloping, or normal. Under this condition, we could be sure that

Maturity risk premiums could help to explain the yield curve's upward slope

Assume that the current corporate bond yield curve is upward sloping. Under this condition, then we could be sure that...

Maturity risk premiums could help to explain the yield curve's upward slope.

A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio?

Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable.

If investors expect the rate of inflation to increase sharply in the future, then we should not be surprised to see an upward sloping yield curve.

TRUE

If the demand curve for funds increased but the supply curve remained constant, we would expect to see the total amount of funds supplied and demanded increase and interest rates in general also increase

TRUE

If the pure expectations theory is correct, a downward sloping yield curve indicates that interest rates are expected to decline in the future.

TRUE

One of the four most fundamental factors that affect the cost of money as discussed in the text is the availability of production opportunities and their expected rates of return. If production opportunities are relatively good, then interest rates will tend to be relatively high, other things held constant.

TRUE

Other things held constant, the more debt a firm uses, the lower the firm's return on total assets will be.

TRUE

The Federal Reserve tends to take actions to increase interest rates when the economy is very strong and to decrease rates when the economy is weak.

TRUE

The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets.

TRUE

The risk that interest rates will increase, and that increase will lead to a decline in the prices of outstanding bonds, is called "interest rate risk," or "price risk."

TRUE

When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage increases in the loan's later years.

TRUE

Profitability ratios show the combined effects of liquidity, asset management, and debt management on a firm's operating results.

TRUE`

Which of the following statements is CORRECT?

The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company's operating efficiency is that the BEP does not reflect the effects of debt and taxes.

Which of the following statements is CORRECT?

The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.

If the CEO of a large and diversified firm were filling out a fitness report on a division manager (i.e., "grading" the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant.

The division's basic earning power ratio is above the average of other firms in its industry.

A $150,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?

The proportion of each payment that represents interest versus repayment of principal would be higher if the interest rate were higher.

The real risk-free rate is expected to remain constant at 3% in the future, a 2% rate of inflation is expected for the next 2 years, after which inflation is expected to increase to 4%, and there is a positive maturity risk premium that increases with years to maturity. Given these conditions, which of the following statements is CORRECT?

The yield on a 5-year Treasury bond must exceed that on a 2-year Treasury bond.