Quiz Questions Chapters 1-7 Practice

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You feel that you will need $1.7 million in your retirement account and when you reach that amount, you plan to retire. You feel you can earn an APR of 9.7 percent compounded monthly and plan to save $230 per month until you reach your goal. How many years will it be until you reach your goal and retire?

$1,700,000 = $230{[1 - 1/(1 + .0970/12)t]/.0970} t = 510.10 months t = 510.10/12 = 42.51 years

If you earn an annual interest rate of 9.7 percent, how many years will it take to double your money?

$2 = $1(1.097)t t = 7.49 years N: Solve Excel: =Nper(IY, PMT,PV, FV,0) I/Y: 9.7 PV: $1 PMT: FV: -$2

Travis International has a debt payment of $2.31 million that it must make 3 years from today. The company does not want to come up with the entire amount at that time, so it plans to make equal monthly deposits into an account starting 1 month from now to fund this liability. If the company can earn a return of 5.18 percent compounded monthly, how much must it deposit each month?

$2,310,000 = C{[(1 + .0518/12)36 − 1]/(.0518/12)} C = $59,448.11 N: 3*12 I/Y: 5.18%/12 PV: PMT: Solve Excel: =PMT(IY,Nper,PV,0,1) FV: -2,310,000

You want to buy a house and will need to borrow $245,000. The interest rate on your loan is 5.77 percent compounded monthly and the loan is for 30 years. What are your monthly mortgage payments?

$245,000 = C[1 − (1/(1 + .0577/12)360)/(.0577/12)] C = $1,432.87 N: 30*12 I/Y: 5.77%/12 PV: -$245,000 PMT: Solve Excel: =PMT(IY,Nper,PV,0,1) FV:

Rick deposited $2,800 into an account 10 years ago for an emergency fund. Today, that account is worth $3,980. What annual rate of return did Rick earn on this account assuming no other deposits and no withdrawals?

$3,980 = $2,800(1 + r)10 r = ($3,980/$2,800)1/10 − 1 r = .0358, or 3.58% N: 10 I/Y: Solve Excel: =RATE(Nper, PMT,PV, FV,0) PV: $2,800 PMT: FV: -$3,980

Gerritt wants to buy a car that costs $30,250. The interest rate on his loan is 5.61 percent compounded monthly and the loan is for 5 years. What are his monthly payments?

$30,250 = C[1 − (1/(1 + .0561/12)60)/(.0561/12)] C = $579.35 N: 5*12 I/Y: 5.61%/12 PV: -30,250 PMT: Solve Excel: =PMT(IY,Nper,PV,0,1) FV:

Blinding Light Co. has a project available with the following cash flows: Year Cash Flow 0 −$31,870 1 8,570 2 10,370 3 14,960 4 16,410 5 11,540 What is the project's IRR?

0 = −$31,870 + $8,570/(1 + IRR) + $10,370/(1 + IRR)^2 + $14,960/(1 + IRR)^3 + $16,410/(1 + IRR)^4 + $11,540/(1 + IRR)^5 IRR = .2470, or 24.70%

A project with an initial cost of $72,400 is expected to generate annual cash flows of $15,920 for the next 8 years. What is the project's internal rate of return?

0 = −$72,400 + $15,920(PVIFAIRR, 8) IRR = .1459, or 14.59%

Thomas invests $118 in an account that pays 6 percent simple interest. How much money will Thomas have at the end of 4 years?

Balance Year 4 = $118 + ($118 × 0.06 × 4) = $146.32

Which one of the following statements concerning liquidity is correct?

Balance sheet accounts are listed in order of decreasing liquidity.

Carland, Inc., has a project available with the following cash flows. If the required return for the project is 8.3 percent, what is the project's NPV? Year Cash Flow 0 −$262,000 1 71,100 2 94,800 3 119,800 4 72,500 5 −12,400

NPV = −$262,000 + $71,100/(1 + .083) + $94,800/(1 + .083)^2 + $119,800/(1 + .083)^3 + $72,500/(1 + .083)^4 − $12,400/(1 + .083)^5 NPV = $23,168.66

Rossdale Flowers has a new greenhouse project with an initial cost of $365,000 that is expected to generate cash flows of $48,600 for 10 years and a cash flow of $64,000 in Year 11. If the required return is 8.4 percent, what is the project's NPV?

NPV = −$365,000 + $48,600(PVIFA8.40%, 10) + $64,000/(1 + .084)^11 NPV = −$18,338.06

_____ refers to the difference between a firm's current assets and its current liabilities.

Net working capital

_____ refers to the changes in net fixed assets.

Cash flow from investing activities

CDB stock is currently priced at $66. The company will pay a dividend of $4.01 next year and investors require a return of 10.1 percent on similar stocks. What is the dividend growth rate on this stock?

Dividend yield = $4.01/$66 = 6.08% Dividend growth rate = 10.10% − 6.08% = 4.02%

What is the formula for computing operating cash flow?

EBIT + Depreciation − Current taxes

Gnomes R Us just paid a dividend of $1.89 per share. The company has a dividend payout ratio of 65 percent. If the PE ratio is 16.8 times, what is the stock price?

EPS = $1.89/.65 = $2.91 P = $2.91(16.80) = $48.85

Flex Co. just paid total dividends of $825,000 and reported additions to retained earnings of $2,475,000. The company has 615,000 shares of stock outstanding and a benchmark PE of 16.3 times. What stock price would you consider appropriate?

EPS = ($825,000 + 2,475,000)/615,000 = $5.37 P = $5.37(16.30) = $87.46

The value of the following cash flows four years from today is $8,001.52. The interest rate is 4.8 percent. What is the value of the Year 3 cash flow? Year Cash Flow 1 1,585 2 1,752 3 ? 4 2,765

FV = $1,585(1.048)3 + $1,752(1.048)2 + $2,765 = $6,513.60 Difference = $8,001.52 − 6,513.60 = $1,487.92 PV = $1,487.92/1.048 = $1,419.77

Bob has saved $500 each month for the last 4 years to make a down payment on a house. The account earned an interest rate of .27 percent per month. How much money is in Bob's account?

FV = $500[1.00274×12 − 1)/.0027] = $25,587.81 N: 4*12 I/Y: .27% PV: PMT: -500 FV: Solve Excel: =FV(IY, Nper, PMT,PV)

You just purchased two coins at a price of $850 each. Because one of the coins is more collectible, you believe that its value will increase at a rate of 7.4 percent per year, while you believe the second coin will only increase at 6.8 percent per year. If you are correct, how much more will the first coin be worth in 25 years?

FV = $850 × 1.07425 = $5,064.38 FV = $850 × 1.06825 = $4,402.51 Difference = $5,064.38 − 4,402.51 = $661.87 N: 25 I/Y: 7.4% PV: -$850 PMT: FV: Solve Excel: =FV(IY, Nper, PMT,PV) = 5,064.38 N: 25 I/Y: 6.8% PV: -$850 PMT: FV: Solve Excel: =FV(IY, Nper, PMT,PV) = 4,402.51

The most recent census for a city indicated that there were 857,382 residents. The population of the city is expected to increase at an annual rate of 3.1 percent each year for the next 7 years. What will the population be at that time?

FV = 857,382 × 1.031^7 = 1,061,659 N: 7 I/Y: 3.1% PV: -857,382 PMT: FV: Solve Excel: =FV(IY, Nper, PMT,PV)

Which one of these parties cannot be a stakeholder of a firm?

Firm's creditors

A change in which one of these accounts will appear as an investing activity in an accounting statement of cash flows?

Fixed assets

Agency costs refer to

the costs of any conflicts of interest between stockholders and management.

The issuance of new equity shares is a cash flow from

the financial markets to a firm.

The Securities Act of 1933 focuses on

the issuance of new securities.

Ratios that measure how efficiently a firm uses its assets to generate sales are known as _____ ratios.

utilization

A "make-whole" call provision on a bond provides for

a call price equal to the bond's approximate market value at the time of call.

Dividends are a cash flow from

a firm to the financial markets.

When making financial decisions related to assets, you should

always consider market values.

Bonds issued by the U.S. government

are considered to be default-free.

Protective covenants

are primarily designed to protect bondholders from future actions of the bond issuer.

The rules by which corporations govern themselves are called

bylaws.

A current asset is best defined as

cash and other assets owned by the firm that should convert to cash within the next year.

All of the following are financial leverage ratios

cash coverage ratio. total debt ratio. times interest earned ratio. equity multiplier. except current ratio (not a financial leverage ratio)

The upper and lower limits on the coupon rate of a floating-rate bond are referred to as the bond's

collar

Net working capital is best defined as

current assets minus current liabilities.

The quick ratio is calculated as

current assets minus inventory, divided by current liabilities.

Kindzi Co. has preferred stock outstanding that is expected to pay an annual dividend of $4.04 every year in perpetuity. If the required return is 4.09 percent, what is the current stock price?

P0 = $4.04/.0409 = $98.78

Michael's, Inc., just paid $2.60 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 5.6 percent. If you require a rate of return of 9.8 percent, how much are you willing to pay today to purchase one share of the company's stock?

P0 = [$2.60 × (1 + .056)]/(.098 - .056) = $65.37

You are considering purchasing stock in Canyon Echo. You feel the company will increase its dividend at 4.4 percent indefinitely. The company just paid a dividend of $3.29 and you feel that the required return on the stock is 10.6 percent. What is the price per share of the company's stock?

P0 = [$3.29 × (1 + .044)]/(.106 - .044) = $55.40

McKerley Corp. has preferred stock outstanding that will pay an annual dividend of $4.45 per share with the first dividend exactly 13 years from today. If the required return is 3.75 percent, what is the current price of the stock?

P12 = $4.45/.0375 = $118.67 P0 = $118.67/(1 + .0375)12 = $76.29

POD has a project with the following cash flows: Year Cash Flows 0 −$249,000 1 147,100 2 164,600 3 129,700 The required return is 8.4 percent. What is the profitability index for this project?

PI = [$147,100/(1 + .084) + $164,600/(1 + .084)^2 + $129,700/(1 + .084)^3]/$249,000 PI = 1.516

You want to have $12,000 in 10 years for a dream vacation. If you can earn an interest rate of .9 percent compounded monthly, how much will you have to deposit today?

PV = $12,000/1.009^10×12 = $4,094.88 N: 10*12 I/Y: .9% PV: Solve Excel: =PV(IY,Nper,PMT,FV,0) PMT: FV: -$12,000

What is the present value of $13,000 to be received 4 years from today if the discount rate is 5 percent?

PV = $13,000/1.054 = $10,695.13 N: 4 I/Y: 5% PV: Solve Excel: =PV(IY,Nper,PMT,FV,0) PMT: FV: -$13,000

Your crazy uncle left you a trust that will pay you $21,000 per year for the next 11 years with the first payment received one year from today. If the appropriate interest rate is 5.4 percent, what is the value of the payments today?

PV = $21,000[(1 −1/1.054011)/.0540] = $170,827.48 N: 11 I/Y: 5.4% PV: Solve Excel: =PV(IY,Nper,PMT,FV,0) PMT: -$21000 FV:

Your bank will pay you an interest rate of .102 percent compounded weekly. You want to have $22,500 in 10 years. How much will you have to deposit today? Assume 52 weeks per year.

PV = $22,500/1.00102^10×52 = $13,241.89 N: 10*52 I/Y: .102% PV: Solve Excel: =PV(IY,Nper,PMT,FV,0) PMT: FV: -$22,500

George Jefferson established a trust fund that will provide $227,500 per year in scholarships. The trust fund earns an annual return of 4 percent. How much money did Mr. Jefferson contribute to the fund assuming that only income is distributed?

PV = $227,500/.04 = $5,687,500.00

Todd can afford to pay $335 per month for the next 5 years in order to purchase a new car. The interest rate is 5.7 percent compounded monthly. What is the most he can afford to pay for a new car today?)

PV = $335[(1 −1/(1 + .057/12)5×12)/(.057/12)] = $17,453.72 N: 5*12 I/Y: 5.7%/12 PV: Solve Excel: =PV(IY,Nper,PMT,FV,0) PMT: -335 FV:

You just paid $435,000 for a policy that will pay you and your heirs $17,300 per year forever with the first payment in one year. What rate of return are you earning on this policy?

R = $17,300/$435,000 = .0398, or 3.98%

A prominent alumnus of your university has just donated $1,800,000 to fund a scholarship that will distribute $74,000 per year forever beginning in one year. For this to be true, what rate of return is expected on the donation?

R = $74,000/$1,800,000 = .0411, or 4.11%

Blitz Corp. had total sales of $2,930,000 last year and has 104,000 shares of stock outstanding. The benchmark PS is 1.56 times. What stock price would you consider appropriate?

Sales per share = $2,930,000/104,000 = $28.17 P = $28.17(1.56) = $43.95

You can invest in an account that pays simple interest or an account that pays compound interest. In either case, you plan to invest $3,400 today and both accounts have an annual interest rate of 8 percent. How much more interest will you receive in the 7th year in the account that pays compound interest?

Simple interest: Interest per year = $3,400 × .08 = $272 Compound interest: Value after 6 years = $3,400 × 1.08^6 = $5,395.37 Interest in Year 7 = $5,395.37 × .08 = $431.63 Difference = $431.63 − 272 = $159.63

The cash flow of a firm, also referred to as cash flow from assets, must be equal to the cash flow to

equity holders plus the cash flow to debt holders.

A crossover bond is a bond that

has both an investment-grade and a low-grade rating.

EBITDA is the abbreviation for earnings before

interest, taxes, depreciation, and amortization.

Short-term finance

is concerned with managing net working capital.

The carrying value or book value of assets

is determined under GAAP and is based on the cost of the assets.

A sinking fund

is managed by a trustee.

Your _____ tax rate is the percentage of the next taxable dollar of income you earn that is payable as a tax.

marginal

Ratio analysis works best when evaluating the financial statements of two firms

of differing sizes in the same industry.

A bond with both a face value and a market value of $1,000 is called a _____ bond.

par value

Newspaper bond quotes are least apt to list a bond's

par value.

A stakeholder is best described as any

person or entity, other than a stockholder or creditor, who potentially has a claim on a firm's cash.

Municipal bonds

primarily appeal to high tax-bracket investors.

Long-term debt securities that are issued but not offered to the general public are referred to as

privately placed.

A deferred call provision is designed to

prohibit the calling of a bond prior to a certain date.

The term structure of interest rates reflects the

pure time value of money for various lengths of time.

Which one of the following statements concerning a sole proprietorship is correct?

The life of the firm is limited to the life span of the owner.

Which formula computes the actual real rate of return on an investment?

r = (1 + R ) / (1 + h) - 1

If Textile Cloth stockholders want to know how much net profit the firm is making on a percentage basis on their investment in that firm, the shareholders should refer to the

return on equity.

A total asset turnover measure of 0.84 means that a firm has $0.84 in

sales for every $1 in total assets.

A common-size income statement expresses dividends as 3.6 percent. This means that dividends represent 3.6 percent of

sales.

Bonds backed by assets with long-term payments are referred to as

securitized bonds.

A convertible bond can be exchanged for

shares of company stock.

You are evaluating two projects with the following cash flows: Year Project X Project Y 0 −$539,400 −$510,000 1 219,900 209,600 2 229,800 219,400 3 237,000 227,300 4 196,700 188,100 What is the crossover rate for these two projects?

0 = −$29,400 + $10,300/(1 + IRR) + $10,400/(1 + IRR)^2 + $9,700/(1 + IRR)^3 + $8,600/(1 + IRR)^4 IRR = .1276, or 12.76%

Enterprise value is computed as

Market capitalization + Market value of interest-bearing debt - Cash

Assume a firm is operating at full capacity. Which one of these accounts is least apt to vary directly with sales?

Long-term debt


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