Ch. 4-6 Assesments
Ruiz Events has net income of $3,450 and total equity of $8,600. The debt-equity ratio is .60 and the payout ratio is 30 percent. What is the internal growth rate? 29.40% 17.78% 14.47% 33.33% 21.29%
21.29% Total assets = $8,600(1.60) Total assets = $13,760 ROA = $3,450/$13,760 ROA = .250727 Internal growth rate = [.250727(1 − .30)]/[1 − [.250727(1 − .30)] Internal growth rate = .2129, or 21.29%
Your car dealer is willing to lease you a new car for $190 a month for 36 months. Payments are due on the first day of each month starting with the day you sign the lease contract. If your cost of money is 6.5 percent, what is the current value of the lease? $7,203.14 $9,197.74 $10,331.03 $6,232.80 $11,008.31
$6,232.80 PVADue = $190[(1 − {1/[1 + (.065/12)]36})/(.065/12)][1 + (.065/12)] PVADue = $6,232.80
Assume you currently earn a salary of $50,000 per year. What will be your annual salary 17 years from now if you receive annual raises of 3.75 percent? $21,556,398 $21,609,148 $97,856 $93,491 $1,159,748
$93,491 FV = $50,000(1.037517) FV = $93,491
Cheng & Cronin Equipment has $878,000 in sales and $913,000 of total assets. The firm is operating at 93 percent of capacity. What is the capital intensity ratio at full capacity? .97 1.14 .88 1.03 .62
.97 Full-capacity sales = $878,000/.93 Full-capacity sales = $944,086.02 Capital intensity ratio = $913,000/$944,086.02 Capital intensity ratio = .97
Song Instrumentation currently has annual sales of $387,000 and is operating at 88 percent of capacity. The net profit margin of 5.5 percent and the dividend payout ratio of 30 percent are projected to remain constant. What is the projected addition to retained earnings for next year based on a sales growth rate of 4.8 percent? $12,309 $15,615 $714 $6,692 $7,890
$15,615 Projected addition to retained earnings = (.055)(1 − .30)($387,000)(1.048) Projected addition to retained earnings = $15,615
You would like to provide $125,000 a year forever for your heirs. How much money must you deposit today to fund this goal if you can earn a guaranteed 4.5 percent rate of return? $2,521,212 $2,850,000 $2,777,778 $2,858,122 $2,666,667
$2,777,778 PV = $125,000/.045 PV = $2,777,778
You hope to buy your dream car five years from now. Today, that car costs $62,500. You expect the price to increase by an average of 2.9 percent per year. How much will your dream car cost by the time you are ready to buy it? $68,666.67 $72,103.59 $69,023.16 $73,340.00 $66,818.02
$72,103.59 FV = $62,500(1.0295) FV = $72,103.59
Tanveer preferred stock has a dividend yield of 5.2 percent. The stock is currently priced at $43.40 per share. What is the amount of the annual dividend? $2.40 $1.98 $2.33 $2.26 $2.07
$2.26 C = $43.40(.052) C = $2.26
McCarty's has annual sales of $40,934, depreciation of $3,100, interest paid of $750, cost of goods sold of $22,400, taxes of $3,084, and dividends paid of $4,060. The firm has total assets of $55,300 and total debt of $32,600. The firm wants to maintain a constant payout ratio but does not want to incur any additional external financing. What is the firm's maximum rate of growth? 16.18% 9.03% 15.79% 13.97% 11.49%
15.79% Net income = $40,934 − 22,400 − 3,100 − 750 − 3,084 Net income = $11,600 Retention ratio = ($11,600 − 4,060)/$11,600 Retention ratio = .65, or 65% Internal growth rate = [($11,600/$55,300)(.65)]/{1 − [($11,600/$55,300)(.65)]} Internal growth rate = .1579, or 15.79%
Aidan deposited $8,500 in an account today. If the account earns 8.5 percent per year, compounded annually, how many years will it take for the account to reach a balance of $138,720? 6.13 years 34.23 years 46.55 years 29.78 years 16.32 years
34.23 years $138,720 = $8,500(1.085t) t = 34.23 years
Campos Restaurant Supply has a return on assets of 9 percent, a return on equity of 11.3 percent, and a payout ratio of 22 percent. What is its internal growth rate? 7.72% 8.49% 5.08% 7.55% 6.23%
7.55% Internal growth rate = [.09(1 − .22)]/[1 − .09(1 − .22)] Internal growth rate = .0755, or 7.55%
Which one of the following variables is the exponent in the present value formula? Future value Interest rate Present value Number of time periods There is no exponent in the present value formula.
Number of time periods
Which one of the following is correct in relation to pro forma statements? Net working capital is affected only when a firm's sales are expected to exceed the firm's current production capacity. Fixed assets must increase if sales are projected to increase. Long-term debt varies directly with sales when a firm is currently operating at maximum capacity. Inventory changes are not proportional to sales changes. The addition to retained earnings is equal to net income less cash dividends.
The addition to retained earnings is equal to net income less cash dividends.
When utilizing the percentage of sales approach, managers: consider the current production capacity level. estimate company sales based on a desired level of net income and the current net profit margin. assume all liability accounts will remain constant. consider only those assets that vary directly with sales. can project net income but not net cash flows.
consider the current production capacity level.
All else constant, a(n) ______ will increase the internal rate of growth. increase in the dividend payout ratio decrease in the retention ratio increase in cost of goods sold decrease in total assets decrease in net income
decrease in total assets
Jared invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his $108 investment. The extra $.64 he earned in interest the second year is referred to as: present value interest. free interest. interest on interest. bonus income. simple interest.
interest on interest.
The internal growth rate of a firm is best described as the ______ growth rate achievable ______. maximum; excluding any external equity financing, while maintaining a constant debt-equity ratio minimum; assuming a retention ratio of 100 percent minimum; if the firm maintains a constant equity multiplier maximum; excluding external financing of any kind maximum; with unlimited debt financing
maximum; excluding external financing of any kind
Suppose the first comic book of a classic series was sold in 1954. In 2020, the estimated price for this comic book was $310,000, which is an annually compounded return of 22 percent. For this to be true, what was the original price of the comic book in 1954? $1.20 $.97 $.62 $1.33 $1.00
$.62 PV = $310,000/1.2266 PV = $.62
Variety Fabrics has sales of $254,600 and a net profit margin of 5.2 percent. The firm has retained earnings of $113,200 after paying its annual dividend of $7,500. What is the pro forma retained earnings for next year if this firm grows at a rate of 3.6 percent and both the net profit margin and the dividend payout ratio remain constant? $105,921.22 $113,592.08 $119,145.81 $123,771.10 $117,704.74
$119,145.81 Pro forma retained earnings = $113,200 + [$254,600(.052) − 7,500](1.036)] Pro forma retained earnings = $119,145.81
Which one of the following statements related to annuities and perpetuities is correct? A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal. An ordinary annuity is worth more than an annuity due given equal annual cash flows for 10 years at 7 percent interest compounded annually. The present value of a perpetuity cannot be computed but the future value can. Most loans are a form of a perpetuity. Perpetuities are finite but annuities are not.
A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal.
A firm is operating at less than 100 percent of capacity. When preparing pro forma statements, this information is primarily needed to project which one of the following account values? Accounts receivable Long-term debt Cost of goods sold Fixed assets Sales
Fixed assets
You want to borrow $27,500 and can afford monthly payments of $650 for 48 months, but no more. Assume monthly compounding. What is the highest APR rate you can afford? 6.33% 6.67% 7.01% 5.82% 7.18%
6.33% PVA = $27,500 = $650[(1 − {1/[1 + (APR/12)]48})/(APR/12)] APR = .0633, or 6.33%
Yarratu Signs has sales of $84,300 net income of $16,860, total assets of $421,500, and total debt of $168,600. Assets and costs are proportional to sales. Debt and equity are not. No dividends or taxes are paid. Next year's sales are projected to be $90,201. What is the amount of the external financing needed? $29,505 $18,041 $288,643 $180,402 $11,465
$11,465 Sales growth rate = ($90,201 − 84,300)/$84,300 Sales growth rate = .07, or 7% Projected assets = $421,500(1.07) Projected assets = $451,005 Projected equity = ($421,500 − 168,600) + $16,860(1.07) Projected equity = $270,940 EFN = $451,005 − 168,600 − 270,940 EFN = $11,465
You have a savings account valued at $1,500 today that earns an annual interest rate of 8.7 percent. How much more would this account be worth if you wait to spend the entire balance in 25 years rather than in 20 years? (Assume annual compounding.) $6,907.17 $6,306.16 $4,658.77 $4,117.64 $3,311.18
$4,117.64 FV = $1,500(1.08725) FV = $12,073.41 FV = $1,500(1.08720) FV = $7,955.77 Difference = $12,073.41 − 7,955.77 Difference = $4,117.64
You just received an offer in the mail to transfer the $5,000 balance from your current credit card, which charges an annual rate of 18.7 percent, to a new credit card charging a rate of 7.9 percent. You plan to make payments of $250 a month on this debt. How many fewer payments will you have to make to pay off this debt if you transfer the balance to the new card? 2.79 payments 2.86 payments 2.63 payments 2.48 payments 3.10 payments
2.63 payments $5,000 = $250({1 − [1/(1 + .187/12)t]}/(.187/12)) t = 24.15 $5,000 = $250({1 − [1/(1 + .079/12)t]}/(.079/12)) t = 21.52 Difference = 24.15 − 21.52 Difference = 2.63 payments
What is the EAR if a bank charges you an APR of 7.65 percent compounded quarterly? 8.02% 8.11% 7.87% 7.91% 8.38%
7.87% EAR = (1 + .0765/4)4 − 1 EAR = .0787, or 7.87%
Which one of the following statements related to loan interest rates is correct? When comparing loans you should compare the effective annual rates. The more frequent the compounding period, the lower the effective annual rate given a fixed annual percentage rate. Regardless of the compounding period, the effective annual rate will always be higher than the annual percentage rate. Lenders are most apt to quote the effective annual rate. The annual percentage rate considers the compounding of interest.
When comparing loans you should compare the effective annual rates.
The financial planning process is least apt to: quantify senior manager's goals. reconcile a company's activities across divisions. consider the development of future technologies. consider factors that currently provide a negative rate of growth. involve internal negotiations among divisions.
consider the development of future technologies.
A pro forma statement indicates that both sales and fixed assets are projected to increase by 7 percent over their current levels. Given this, you can safely assume the firm: is projected to grow at the sustainable rate of growth. is projected to grow at the internal rate of growth. retains all of its net income. is currently operating at full capacity. currently has excess capacity.
is currently operating at full capacity.
Hayley won a lottery and will receive $1,000 each year for the next 30 years. The current value of these winnings is called the: single amount. compounded value. present value. future value. simple amount.
present value.
If a borrower receives money today and must repay the loan in a single lump sum on a future date, the loan is called a(n) ________ loan. pure discount amortized interest-only balloon continuous
pure discount
The entire repayment of a(n) _____ loan is calculated by computing one single future value. pure discount amortized bullet balloon
pure discount
The portion of net income that a firm reinvests in itself is measured with the: internal growth rate. dividend payout ratio. dividend yield. cash influx ratio. retention ratio.
retention ratio.
Naples Corporation has an unfunded pension liability of $327 million that must be paid in 16 years. What is the present value of this liability at a discount rate of 6.24 percent, compounded annually? $121,511,366.67 $129,803,162.22 $134,519,484.14 $124,147,723.50 $111,438,907.11
$124,147,723.50 PV = $327,000,000/1.062416 PV = $124,147,723.50
Twenty-five years from now, you would like to give your child $100,000. How much money must you set aside today if you can earn 7.5 percent per year, compounded annually, on your investment? $16,397.91 $15,388.19 $15,911.13 $17,488.37 $16,817.67
$16,397.91 PV = $100,000/1.07525 PV = $16,397.91
The Paper Mill is operating at full capacity. Assets, costs, and current liabilities vary directly with sales. The dividend payout ratio is constant. The firm has sales of $42,700, net income of $5,500, total assets of $48,900, current liabilities of $3,650, long-term debt of $18,100, owners' equity of $27,150, and dividends of $1,925. What is the external financing need if sales increase by 14 percent? $3,504 −$1,816 $2,260 $1,031 −$1,268
$2,260 EFN = 1.14($48,900) − 1.14($3,650) − $18,100 − 27,150 − ($5,500 − 1,925)(1.14) EFN = $2,260
When you retire 45 years from now, you want to have $1.25 million saved. You think you can earn an average of 7.6 percent, compounded annually, on your investments. To meet your goal, you are trying to decide whether to deposit a lump sum today, or to wait and deposit a lump sum five years from today to fund this goal. How much more will you have to deposit if you wait for five years before making the deposit? $17,414.14 $20,468.85 $13,406.78 $21,319.47 $19,891.11
$20,468.85 PV = $1,250,000/1.07645 PV = $46,276.21 PV = $1,250,000/1.07640 PV = $66,745.06 Difference = $66,745.06 − 46,276.21 Difference = $20,468.85
A student organization plans to invest annual payments of $60,000, $70,000, $75,000, and $50,000, respectively, over the next four years. The first payment will be invested one year from today. Assuming the investment earns 5.5 percent annually, how much will the organization have available four years from now? $263,025 $285,737 $328,572 $236,875 $277,491
$277,491 FV = $60,000(1.0553) + $70,000(1.0552) + $75,000(1.055) + $50,000 FV = $277,491
Jacob invested $2,550 in an account that pays 5 percent simple interest. How much money will he have at the end of four years? $3,100.26 $3,250.00 $3,060.00 $3,099.54 $2,650.00
$3,060.00 FV = $2,550 + ($2,550)(.05)(4) FV = $3,060
Javier and Alex plan on retiring 27 years from today. At that time, they plan to have saved the same amount. Javier is depositing $15,000 today at an annual interest rate of 5.2 percent. How will Alex's deposit amount vary from Javier's if Alex also makes a deposit today, but earns an annual interest rate of 6.2 percent? Alex's deposit will need to be ______ than Javier's. (Assume annual compounding on both accounts.) $3,381.39 less $3,417.09 more $4,333.33 less $4,274.12 less $4,118.42 more
$3,381.39 less FV = $15,000(1.05227) FV = $58,954.40 PV = $58,954.40/1.06227 PV = $11,618.61 Difference = $11,618.61 − 15,000 Difference = −$3,381.39
Werden's Workshop invested $225,000 today to help fund future projects. How much additional money will the firm have three years from now if it can earn an annual interest rate of 4 percent rather than 3.5 percent? (Assume annual compounding.) $3,632.88 $4,219.68 $3,008.17 $3,391.90 $3,711.08
$3,632.88 FV = $225,000(1.043) FV = $253,094.40 FV = $225,000(1.0353) FV = $249,461.52 Difference = $253,094.40 − 249,461.52 Difference = $3,632.88
You want to start a business that you believe can produce cash flows of $44,000, $61,000, and $80,000 at the end of each of the next three years, respectively. At the end of three years you think you can sell the business for $200,000. At a discount rate of 9.7 percent, what is this business worth today? $302,897 $350,957 $291,636 $151,397 $508,254
$302,897 PV = $44,000/1.097 + $61,000/1.0972 + ($80,000 + 200,000)/1.0973 PV = $302,897
You just settled an insurance claim that calls for increasing payments over a 10-year period. The first payment will be paid one year from now in the amount of $5,000. The following payments will increase by 3.5 percent annually. What is the value of this settlement to you today if you can earn 6.5 percent on your investments? $34,141.14 $41,422.89 $36,408.28 $38,008.16 $42,023.05
$41,422.89 GAPV = $5,000{[1 − (1.035/1.065)10]/(.065 − .035)} GAPV = $41,422.89
An insurance annuity offers to pay you $1,000 per quarter for 20 years. If you want to earn a rate of return of 6.5 percent compounded quarterly, what is the most you are willing to pay as a lump sum today to obtain this annuity? $34,208.16 $43,008.80 $38,927.59 $44,591.11 $32,008.24
$44,591.11 PVA = $1,000[(1 − {1/[1 + (.065/4)](20)(4)})(.065/4)] PVA = $44,591.11
Travis International has a one-time expense of $1.13 million that must be paid two years from today. The firm can earn 4.3 percent, compounded monthly on its savings. How much must the firm save each month to fund this expense if the firm starts investing equal amounts each month starting at the end of this month? $51,300.05 $38,416.20 $45,172.02 $47,411.08 $53,901.15
$45,172.02 FVA = $1.13 million = C({[1 + (.043/12)](2)(12) − 1}/(.043/12)) C = $45,172.02
Thunder Bolt has sales of $137,000, net income of $14,000, total assets of $98,000, and total equity of $45,000. The firm paid $7,560 in dividends and maintains a constant dividend payout ratio. Currently, the firm is operating at full capacity. All costs and assets vary directly with sales. The firm does not want to obtain any additional external equity. At the sustainable rate of growth, how much new total debt must the firm acquire? $6,989 $0 $8,852 $6,311 $7,207
$8,852 Dividend payout ratio = $7,560/$14,000 Dividend payout ratio = .54 Retention ratio = 1 − .54 Retention ratio = .46 Sustainable growth rate = [($14,000/$45,000)(.46)]/{1 − [($14,000/$45,000)(.46)]} Sustainable growth rate = .167012 Projected total assets = $98,000(1.167012) Projected total assets = $114,367.22 Current debt = $98,000 − 45,000 Current debt = $53,000 Projected equity = $45,000 + ($14,000)(1.167012)(.46) Projected equity = $52,515.56 New debt required = $114,367.22 − 53,000 − 52,515.56 New debt required = $8,852
You are considering a project with cash flows of $44,500, $18,000, and $33,000 at the end of each year for the next three years, respectively. What is the present value of these cash flows, given a discount rate of 8.1 percent? Multiple Choice $120,637 $75,601 $82,693 $88,344 $118,706
$82,693 PV = $44,500/1.081 + $18,000/1.0812 + $33,000/1.0813 PV = $82,693
You have just received notification that you have won the $1.25 million first prize in the Centennial Lottery. The prize will be awarded on your 100th birthday, 79 years from now. The appropriate discount rate is 6.4 percent, compounded annually. What is the present value of your winnings? $8,333.33 $11,288.16 $9,300.82 $10,500.00 $10,309.91
$9,300.82 PV = $1,250,000/(1.06479) PV = $9,300.82
You just won the magazine sweepstakes and opted to take unending payments. The first payment will be $50,000 and will be paid one year from today. Every year thereafter, the payments will increase by 2.5 percent annually. What is the present value of your prize at a discount rate of 7.9 percent? $1,350,000.00 $891,006.67 $1,348,409.50 $925,925.93 $846,918.22
$925,925.93 GPPV = $50,000/(.079 − .025) GPPV = $925,925.93
In 1903, the winner of a competition was paid $50. In 2020, the winner's prize was $235,000. What will the winner's prize be in 2040 if the prize continues increasing at the same rate? (Do not round intermediate calculations. Round your answer to the nearest $500.) $997,188 $975,678 $1,043,378 $954,327 $983,534
$997,188 $235,000 = $50[(1 + r)117] r = .0749, or 7.49% FV = $235,000(1.074920) FV = $997,188
Kroencke Freight is saving money to build a new loading platform. Three years ago, they set aside $23,000 for this purpose. Today, that account is worth $31,406. What annually compounded rate of interest is the firm earning on this investment? 9.01% 10.94% 8.23% 9.47% 8.39%
10.94% $31,406 = $23,000[(1 + r)3] r = .1094, or 10.94%
Burr Oak Homes wishes to maintain a growth rate of 9.89 percent a year, a constant debt-equity ratio of .42, and a dividend payout ratio of 40 percent. The ratio of total assets to sales is constant at 1.3. What net profit margin must the firm achieve? 8.13% 13.46% 13.73% 14.74% 14.33%
13.73% Retention ratio = 1 − .40 Retention ratio = .60 Sustainable growth rate = .0989 = [.60(ROE)]/[1 − .60(ROE)] ROE = .15, or 15% ROE = .15 = PM(1/1.3)(1.42) Net profit margin = .1373, or 13.73%
Smith & Thompson is currently operating at only 84 percent of fixed asset capacity. Current sales are $550,000. What is the maximum rate at which sales can grow before any new fixed assets are needed? 18.03% 17.23% 18.87% 17.47% 19.05%
19.05% Full-capacity sales = $550,000/.84 Full-capacity sales = $654,761.90 Maximum sales growth = ($654,761.90/$550,000) − 1 Maximum sales growth = .1905, or 19.05%
A new sports coupe costs $41,750 and the finance office has quoted you an APR of 7.7 compounded monthly for 36 months. What is the EAR? 7.81% 7.98% 8.13% 8.02% 7.94%
7.98% EAR = (1 + .077/12)12 − 1 EAR = .0798, or 7.98%
You have been investing $300 a month for the last 8 years. Today, your investment account is worth $43,262. What is your average rate of return on your investments? 7.23% 9.69% 8.41% 7.78% 9.36%
9.69% FVA = $43,262 = $300({[1 + (r/12)](8)(12) − 1}/(r/12)) r = .0969, or 9.69%
On your tenth birthday, you received $300 which you invested at 4.5 percent interest, compounded annually. Your investment is now worth $756. How old are you today? Age 31 Age 21 Age 20 Age 30 Age 23
Age 31 $756 = $300(1.045t) t = 21 years Age today = 10 + 21 Age today = 31 years
You need $25,000 today and have decided to take out a loan at 7 percent interest for five years. Which one of the following loans would be the least expensive for you? Assume all loans require monthly payments and that interest is compounded on a monthly basis. Discount loan Amortized loan with equal principal payments Amortized loan with equal loan payments Interest-only loan Balloon loan where 50 percent of the principal is repaid as a balloon payment
Amortized loan with equal principal payments
The financial planning process includes: I. determining asset requirements. II. developing contingency plans. III. establishing priorities. IV. analyzing funding options. I and III only I, II, and III only II and IV only I, III, and IV only I, II, III, and IV
I, II, III, and IV
This morning, Clayton deposited $2,500 into an account that pays 5 percent interest, compounded annually. Also this morning, Jayda deposited $2,500 at 5 percent interest, compounded annually. Clayton will withdraw his interest earnings and spend it as soon as possible. Jayda will reinvest her interest earnings into her account. Given this information, which one of the following statements is true? Jayda will earn more interest in Year 2 than Clayton will earn. Clayton will earn more interest in Year 3 than Jayda will earn. After five years, Clayton and Jayda will both have earned the same amount of interest. Jayda will earn more interest in Year 1 than Clayton will earn.
Jayda will earn more interest in Year 2 than Clayton will earn.
Four years ago, Lucas invested $500. Three years ago, Matt invested $600. Today, these two investments are each worth $800. Assume each account continues to earn its respective rate of return and interest is compounded annually. Which one of the following statements is correct concerning these investments? Lucas has earned an average annual interest rate of 12.64 percent. Three years from today, Matt's investment will be worth more than Lucas's investment. Matt earns a higher rate of return than Lucas. Matt has earned an average annual interest rate of 9.86 percent. One year ago, Lucas's investment was worth less than Matt's investment.
One year ago, Lucas's investment was worth less than Matt's investment. Lucas: $800 = $500[(1 + r)4] r = .1247, or 12.47% Matt: $800 = $600[(1 + r)3] r = .1006, or 10.06% Since both accounts have equal value today and Lucas earns the higher rate of return, his account had to be worth less than Matt's account one year ago.