Corporate Finance Final Exam

Calculate a firm's free cash flow if it has net operating profit after taxes (NOPAT) of $60,000, depreciation expense of $10,000, net fixed asset investment requirement of $40,000, a net current asset requirement of $30,000 and a tax rate of 30%.

$0

A firm had the following accounts and financial data for 2005. Sales Revenue $3,060 Cost of Goods Sold $1,800 Acct Receivable 500 Preferred Stock Dividends $ 18 Interest Expense 126 Tax Rate 40% Total operating expenses 600 No. of shares of common stock outstanding 1,000 Accounts payable 240 The firm's earnings per share, rounded to the nearest center, for 2005 was _____.

$0.3024

A beach house in southern California now costs $350,000. Inflation is expected to cause this price to increase at 5 percent per year over the next 20 years before Eric and Karinna retire from successful careers in commercial art. How large an equal annual end-of-year deposit must be made into an account paying an annual rate of interest of 13 percent in order to buy the beach house upon retirement?

$11,471

A firm has an expected dividend next year of $1.20 per share, a zero growth rate of dividends, and a required return of 10 percent. The value of a share of the firm's common stock is ________.

$12

If you expect to retire in 30 years, are currently comfortable living on $50,000 per year and expect inflation to average 3% over the next 30 years, what amount of annual income will you need to live at the same comfort level in 30 years?

$121,363

Colin would like to send her parents on a cruise for their 25th wedding anniversary. She has priced the cruise at $15,000 and she has 5 years to accumulate this money. How much must Janice deposit annually in an account paying 10 percent interest in order to have enough money to send her parents on the cruise?

$2,457

A corporation had year end 2004 and 2005 retained earnings balances of $320,000 and $400,000, respectively. The firm reported net profits after taxes of $100,000 in 2005. The firm paid dividends in 2005 of ________.

$20,000

Find the future value at the end of year 3 of the following stream of cash flows received at the end of each year, assuming the firm can earn 17 percent on its investments. Year Amount 1 $3,000 2 6,000 3 9,000

$20,127

Under MACRS, an asset which originally cost $100,000, incurred installation costs of $10,000, and has an estimated salvage value of $25,000, is being depreciated using a 5-year normal recovery period. What is the depreciation expense in year 1?

$22,000

The future value of $200 received today and deposited at 8 percent compounded semi-annually for three years is

$253

A generous benefactor to the local ballet plans to make a one-time endowment which would provide the ballet with $150,000 per year into perpetuity. The rate of interest is expected to be 5 percent for all future time periods. How large must the endowment be?

$3,000,000

The current price of DEF Corporation stock is $26.50 per share. Earnings next year should be $2 per share and it should pay a $1 dividend. The P/E multiple is 15 times on average. What price would you expect for DEF's stock in the future?

$30.00

A firm had the following accounts and financial data for 2005. Sales Revenue $3,060 Cost of Goods Sold $1,800 Acct Receivable 500 Preferred Stock Dividends $ 18 Interest Expense 126 Tax Rate 40% Total operating expenses 600 No. of shares of common stock outstanding 1,000 Accounts payable 240 The firm's earnings available to common shareholders for 2005 were ________.

$302.40

A firm has just ended its calendar year making a sale in the amount of $150,000 of merchandise purchased during the year at a total cost of $112,500. Although the firm paid in full for the merchandise during the year, it has yet to collect at year end from the customer. The net profit and cash flow from this sale for the year are

$37,500 and -$112,500, respectively

Indicate which of the following is true about annuities a. An ordinary annuity is an equal payment paid or received at the beginning of each period b. An annuity due is a payment paid or received at the beginning of each period that increases by an equal amount each period c. An annuity due is an equal payment paid or received at the beginning of each period d. An ordinary annuity is an equal payment paid or received at the end of each period that increases by an equal amount each period

An annuity due is an equal payment paid or received at the beginning of each period

The depreciable value of an asset, under MACRS, is

An annuity due is an equal payment paid or received at the beginning of each period

A financial manager must choose between four alternative Assets: 1, 2, 3, and 4. Each asset costs $35,000 and is expected to provide earnings over a three-year period as described below. Assets Year 1 Year 2 Year 3 1 $21,000 $15,000 $6,000 2 9,000 15,000 21,000 3 3,000 20,000 19,000 4 6,000 12,000 12,000 Based on the profit maximization goal, the financial manager would choose

Asset 2

The ABC company has two bonds outstanding that are the same except for the maturity date. Bond D matures in 4 years, while Bond E matures in 7 years. If the required return changes by 15 percent

Bond E will have a greater change in price

A financial manager must choose between three alternative investments. Each asset is expected to provide earnings over a three-year period as described below. Based on the wealth maximization goal, the financial manager would Year Asset 1 Asset 2 Asset 3 1 $21,000 $9,000 $15,000 2 15,000 15,000 15,000 3 9,000 21,000 15,000 $45,000 $45,000 $45,000

Choose Asset 1

________ is a term used to describe the magnification of risk and return introduced through the use of fixed cost financing such as preferred stock and long-term debt.

Financial leverage

The wealth of the owners of a corporation is represented by

Share value

________ generally reflect(s) the anticipated financial impact of planned long-term actions.

Strategic financial plans

________ is a stipulation in a long-term debt agreement that subsequent or less important creditors agree to wait until all claims of the ________ are satisfied before having their claims satisfied.

Subordination; senior debt

Which of the following is false? a. The common stock of a corporation can only be publicly owned b. Firms often issue common stock with no par value c. Preemptive rights help to prevent a dilution of ownership on the part of existing shareholders d. A firm's corporate charter indicates how many authorized shares it can issue.

The common stock of a corporation can only be publicly owned

According to the efficient market theory

prices of actively traded stocks do not differ from their true values in an efficient market

The ________ market is where securities are initially issued and the ________ market is where pre-owned securities (not new issues) are traded.

primary; secondary

The DuPont system merges the income statement and balance sheet into two summary measures of profitability:

return on total assets and return on equity

Financial managers evaluating decision alternatives or potential actions must consider

risk, return and impact on share price

The dividend exclusion for corporations receiving dividends from another corporation has resulted in

stock investments being relatively more attractive relative to bond investments made by one corporation in another corporation

The key participants in financial transactions are individuals, businesses, and governments. Individuals are net ________ of funds, and businesses are net ________ of funds.

suppliers; demanders

The market price of outstanding issues often varies from par because

the market rate of interest has changed

The key input to any cash budget is

the sales forecast

One way often used to insure that management decisions are in the best interest of the stockholders is to

tie management compensation to the performance of the company's common stock price.

The strict application of the percent-of-sales method of preparing the pro forma income statement assumes all costs are

variable

The ________ is/are a graphic depiction of the term structure of interest rates.

yield curve

The ________ is the annual rate of interest earned on a security purchased on a given date and held to maturity.

yield to maturity

________ yield curve reflects lower expected future rates of interest

A downward sloping

The key inputs to the valuation process include

cash flow, cash flow timing, and risk

The key aspects of the financial planning process are

cash planning and profit planning

Key differences between common stock and bonds include all of the following EXCEPT a. common stockholders have a voice in management; bondholders do not b. common stockholders have a senior claim on assets and income relative to bondholders c. bonds have a stated maturity but stock does not d. interest paid to bondholders is tax-deductible but dividends paid to stockholders are not

common stockholders have a senior claim on assets and income relative to bondholders

When the amount earned on a deposit has become part of the principal at the end of a specified time period the concept is called

compound interest

The cash flows from operating activities section of the statement of cash flows considers

cost of raw materials

In a ________ market, the buyer and seller are not brought together to trade securities directly but instead have their orders executed on the ________.

dealer; over-the-counter market

Cash disbursements (on the cash budget) may include all of the following EXCEPT a. tax payments b. rent payments c. depreciation expense d. fixed asset outlays

depreciation expense

In the present value model, risk is generally incorporated into the

discount rate

Operating profits are defined as

earnings before interest and taxes

The 2002 Sarbanes-Oxley Act was designed to

eliminate the many disclosure and conflict of interest problems of corporations

Firms that require funds from external sources can obtain them in one of the following ways EXCEPT a. financial institution b. financial markets c. government d. private placement

government

The less certain a cash flow, the ________ the risk, and the ________ the present value of the cash flow.

higher; lower

A firm has just ended the calendar year making a sale in the amount of $200,000 of merchandise purchased during the year at a total cost of $150,500. Although the firm paid in full for the merchandise during the year, it has yet to collect at year end from the customer. One possible problem this firm may face is

insolvency

The value of a bond is the present value of the

interest payments and maturity value

Managerial finance

involves tasks such as budgeting, financial forecasting, cash management, and funds procurement

The cost of long-term debt generally ________ that of short-term debt.

is greater than

The theory suggesting that for any given issuer, long-term interest rates tends to be higher than short-term rates is called

liquidity preference theory

The primary economic principle used in managerial finance is

marginal cost-benefit analysis

The primary goal of the financial manager is

maximizing wealth

The disadvantages of issuing common stock versus long-term debt include all of the following EXCEPT a. the potential dilution of earnings. b. high cost c. no maturity date on which the par value of the issue must be repaid d. the market perception that management thinks the firm is over-valued, causing a decline in stock price.

no maturity date on which the par value of the issue must be repaid

If bankruptcy were to occur, common stockholders would have prior claim on assets over

no one

The ________ rate of interest is the actual rate charged by the supplier and paid by the demander of funds.

nominal

An upward-sloping yield curve that indicates generally cheaper short-term borrowing costs than long-term borrowing costs is called

normal yield curve

Cash flows directly related to production and sale of the firm's products and services are called

operating flows

Shares of stock currently owned by the firm's shareholders are called

outstanding

The ________ value of a bond is also called its face value. Bonds which sell at less than face value are priced at a ________, while bonds which sell at greater than face value sell at a ________.

par; discount; premium

All of the following are financing cash flows EXCEPT a. sale of stock b. payment of bonuses c. increasing debt d. repurchasing stock

payment of bonuses

What is the nominal rate of return on an IBM bond if the real rate of interest is 3 percent, the inflation risk premium is 2 percent, the U.S. T-bill rate is 5 percent, the maturity risk premium on the IBM bond is 3 percent, the default risk premium on the IBM bond is 2 percent, and the liquidity risk premium on the bond is 1 percent?

11%

How many years would it take for Jughead to save an adequate amount for retirement if he deposits $2,000 per month into an account beginning today that pays 12 percent per year if he wishes to have a total of $1,000,000 at retirement?

15.0 years

The average tax rate of a corporation with ordinary income of $105,000 and a tax liability of $24,200 is

23 percent

If a United States Savings bond can be purchased for $29.50 and has a maturity value at the end of 25 years of $100, what is the annual rate of return on the bond?

5%

A decrease in total asset turnover will result in ________ in the return on equity

a decrease

Generally, an increase in risk will result in ________ required return or interest rate.

a higher

In comparing an ordinary annuity and an annuity due, which of the following is true? a. The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity b. The future value of an ordinary annuity is always greater than the future value of an otherwise identical annuity due. c. The future value of an annuity due is always less than the future value of an otherwise identical ordinary annuity, since one less payment is received with an annuity due. d. All things being equal, one would prefer to receive an ordinary annuity compared to an annuity due.

a. The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity

The analyst should be careful when conducting ratio analysis to ensure that a. the overall performance of the firm is not judged on a single ratio b. the dates of the financial statements being compared are the same c. audited statements are used. d. the same accounting procedures were used e. all of the above

all of the above

Using the DuPont system of analysis and holding other factors constant, an increase in financial leverage will result in ________ in the return on equity.

an increase

A corporation sold a fixed asset for $100,000. This is

an investment cash flow and a source of funds

A firm has actual sales in November of $1,000 and projected sales in December and January of $3,000 and $4,000, respectively. The firm makes 10 percent of its sales for cash, collects 40 percent of its sales one month following the sale, and collects the balance two months following the sale. The firm's total expected cash receipts in January

are $2,100