Managing Finance and Capital Exam Two

(Chapter 5) What is the present value of the following cash flow stream at a rate of 12.00%? Years: 0 1 2 3 4 CFs: $0 $75 $225 $0 $300

$436.99

Which of the following statements is CORRECT? a. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will decline. b. There is no relationship between the days' sales outstanding (DSO) and the average collection period (ACP). These ratios measure entirely different things. c. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding (DSO) will increase. d. If a security analyst saw that a firm's days' sales outstanding (DSO) was higher than the industry average and was also increasing and trending still higher, this would be interpreted as a sign of strength. e. A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio

(A) If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will decline

(Chapter 5) What's the future value of $1,950 after 5 years if the appropriate interest rate is 6%, compounded monthly? a.$2,104.21 b.$2,630.26 c.$2,840.68 d.$2,498.74 e.$1,972.69

(B) 2,630.26

(Chapter 5) Suppose you borrowed $14,000 at a rate of 10.5% and must repay it in 5 equal installments at the end of each of the next 5 years. How much interest would you have to pay in the first year? a. $1,323.00 b. $1,176.00 c. $1,470.00 d. $1,572.90 e. $1,425.90

(C) 1,470.00 (Loan Amount at Beginning) : 14,000 (Interest Rate): 10.5% 14,000 * .105 = 1,470.00

(Chapter 5) Which of the following statements is CORRECT? a.If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost. b.If you solve for I and get a negative number, then you must have made a mistake. c.To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the PV of the negative CFs. This is, essentially, a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise. d.If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows will be more than the cash flow at Time 0. e.If CF0 is positive and all the other CFs are negative, then you cannot solve for I.

(C) To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the PV of the negative CFs. This is, essentially, a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise.

What is the firm's inventory turnover ratio?

(Costs of Goods Sold) / Inventories

Your sister is thinking about starting a new business. The company would require $455,000 of assets, and it would be financed entirely with common stock. She will go forward only if she thinks the firm can provide a 13.5% return on the invested capital, which means that the firm must have an ROE of 13.5%. How much net income must be expected to warrant starting the business? a. $76,167 b. $63,268 c. $60,811 d. $61,425 e. $57,125

(D) 61,425 (455,000 x .135) = 61,425

(Chapter 5) You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment? a. The riskiness of the investment's cash flows decreases. b. The discount rate decreases. c. The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years. d. The discount rate increases. e. The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000.

(D) the discount rate increases

Taggart Technologies is considering issuing new common stock and using the proceeds to reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate Taggart pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue? a.The times-interest-earned ratio will decrease. b.The ROA will decline. c.Taxable income will decline. d.The tax bill will increase. e.Net income will decrease.

(D) the tax bill will increase

(Chapter 5) A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT? a.The periodic rate is less than 3%. b.The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually. c.The periodic interest rate is greater than 3%. d.The PV of the $1,000 lump sum has a higher present value than the PV of a 3-year, $333.33 ordinary annuity. e.The present value would be greater if the lump sum were discounted back for more periods.

(b.) The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually.

(Chapter 5) Which of the following statements is CORRECT? a.Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods. b.A time line is not meaningful unless all cash flows occur annually. c.Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts. d.Time lines are useful for visualizing complex problems prior to doing actual calculations. e.Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

(d.) Time lines are useful for visualizing complex problems prior to doing actual calculations.

(Chapter 5) Your bank offers to lend you $108,500 at an 8.5% annual interest rate to start your new business. The terms require you to amortize the loan with 10 equal end-of-year payments. How much interest would you be paying in Year 2? a. $7,740.75 b. $6,880.67 c. $8,170.79 d. $9,890.96 e. $8,600.83

(e) 8600.83

Which of the following actions is an example of "window dressing?"

Borrowing on a long-term basis and using the proceeds to retire short-term debt.

What is the firm's EPS?

Earnings Per Share = (Net Income / Shares Outstanding)

(Chapter 5) T or F: The present value of a future sum increases as either the discount rate or the number of periods per year increases, other things held constant.

False

(Chapter 5) T or F: Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.

False

(Chapter 5) T or F: The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future date.

False

T or F: Firms A and B have the same current ratio, 0.75, the same amount of sales, the same amount of cost of goods sold, and the same amount of current liabilities. However, Firm A has a higher inventory turnover ratio than B. Therefore, we can conclude that A's quick ratio must be smaller than B's.

False

T or F: The more conservative a firm's management is, the higher the firm's total debt to total capital ratio [measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + Common equity)] is likely to be.

False

What is the firm's market-to-book ratio?

Market Price Per Share / Book Value Per Share

What is the firm's profit margin?

Net Income / Sales

What is the firm's P/E ratio P/E = Price / Earnings

Price Per Share / Earnings Per Share

(Chapter 6) Assuming that the term structure of interest rates is determined as posited by the pure expectations theory, which of the following statements is CORRECT?

The maturity risk premium is assumed to be zero

(Chapter 6) Which of the following statements is CORRECT?

The pure expectations theory states that the maturity risk premium for long-term Treasury bonds is zero and that differences in interest rates across different Treasury maturities are driven by expectations about future interest rates.

(Chapter 5) T or F: Starting to invest early for retirement increases the benefits of compound interest.

True

(Chapter 5) T or F: The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the smaller the present value of a given lump sum to be received at some future date.

True

(Chapter 5) T or F: 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

T or F: Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year. Trend analysis is one method of examining changes in a firm's performance over time.

True

T or F: If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would increase.

True

T or F: If a firm's fixed assets turnover ratio is significantly higher than the average for its industry, then it could be that the firm uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets.

True

T or F: Ratio analysis involves analyzing financial statements to help appraise a firm's financial position and strength.

True

Which of the following statements is CORRECT? a. The days sales outstanding ratio tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm's credit terms to get an idea of whether customers are paying on time. b. If a firm's fixed assets turnover ratio is significantly lower than its industry average, this could indicate that it uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets. c. A decline in a firm's inventory turnover ratio suggests that it is improving both its inventory management and its liquidity position, i.e., that it is becoming more liquid. d. The more conservative a firm's management is, the higher its debt ratio is likely to be. e. In general, it's better to have a low inventory turnover ratio than a high one, as a low one indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock.

a. The days sales outstanding ratio tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm's credit terms to get an idea of whether customers are paying on time.

A firm's new president wants to strengthen the company's financial position. Which of the following actions would make the company financially stronger? a)Increase accounts payable while holding sales constant. b)Increase accounts receivable while holding sales constant. c)Increase inventories while holding sales constant. d)Increase EBIT while holding sales and assets constant. e)Increase notes payable while holding sales constant.

d) Increase EBIT while holding sales and assets constant.

(Chapter 6) Which of the following statements is CORRECT?

e. If inflation is expected to increase in the future and the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve must be upward sloping.

T or F: One problem with ratio analysis is that relationships can be manipulated. For example, we know that if our current ratio is less than 1.0, then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger.

false