FI 311 Final Exam review!!

Stockbridge Sprockets, Inc. 2019 Income Statement Net Sales $11,407 Less: Cost of goods sold 7,871 Less: Depreciation 1,509 EBIT 2,027 Less: Interest paid 210 Taxable Income (EBT) $1,817 Less: Taxes 636 Net income $1,181 Stockbridge Sprockets, Inc. 2018 and 2019 Balance Sheets ($ in millions) 2018 2019 2018 2019 Cash $276 $316 Accounts Payable $1,818 $1,719 Accounts Rec. 1,415 1,068 Notes Payable 250 75 Inventory 2,104 2,690 Total CL 2,068 1,794 Total CA 3,795 4,074 Long-term debt 3,400 3,100 Net fixed assets 5,613 6,342 Total Liabilities 5,468 4,894 Common stock 2,500 3.250 Retained earnings 1,440 2,272 Total Equity 3,940 5,522 Total Assets $9,408 $10,416 Total Liab. & Equity $9,408 $10,416 Dividends Paid in 2019: $349 What is the amount of the non-cash expenses in 2019?

$1,509

What is the current price of a bond with a 7.4% coupon rate, 12.5 years until maturity, a par value of $1000. semi-annual coupon payments, and a yield-to-maturity of 7.4%?

$1000

The Studebaker dealership in Haslett is considering building a new showroom. The owner's grandfather bought vacant land in the city 85 years ago for $150,000 on which the new dealership could be built. However, 7-Eleven has made the owner an offer to buy the land for $300,000 if he decides not to build a dealership on the site. It would cost $850,000 to build the dealership. What would the Initial Investment (cash flow in Year 0) be for purposes of calculating whether or not to build the dealership?

$1,150,000

At the beginning of the year, a firm had current assets of $91,807 and current liabilities of $102,343. At the end of the year, the current assets are $89,476 and the current liabilities are $92,638. What is the change in net working capital?

$7,374

You currently have $1000 in a savings account. You plan to add $1500 to the account a year from now, $2000 two years from now, and $3000 three years from now. Assuming you will not make any deposits other than those already mentioned, how much money will you have in your account at the end of Year 6 assuming an annual interest rate of 1.5% with annual compounding?

$7,969.13

Wishfullthinking Luxury Yachts, Inc., is considering introducing a new line of budget yachts for the only slightly mega-wealthy. This new budget yacht would sell for $1 million each. The company believes it will be able to sell 1,000 of these ships globally per year. They also believe that the positive publicity generated at country clubs around the world by this new line of yacht will increase sales of its mid-sized yacht, which sell for $2 million each, by 100 units per year. However, as their clients become more budget minded, the new line of yacht will erode sales of their luxury ocean liner, which sells for $10 million; sales of the luxury liner are expected to decline by 25 units per year. What is the annual sales amount that should be used in analyzing whether the new budget yachts should be introduced?

$950 million

The Cookie Haus has computed its fixed costs to be $66,000. Depreciation expense is $50,000. Operating Cash Flow is $105,860. The sales price is $1.29 cookie while the variable cost per cookie is $0.40. How many cookies must it sell to break-even on a financial basis?

193,102

You own 1,000,000 shares of Haslett Airlines, Inc.. The company has issued a total of 25,000,000 million shares, of which 20,000,000 are currently outstanding. You have decided to sell ½ of your holdings in the company. After the sale, what will your percentage ownership of the company be?

2.5%

What is the Yield-to-Maturity of a 6.5% coupon bond with semi-annual coupon payments, a par value of $1000, 12.5 years to maturity, and a current price of $1150?

4.88%

A bond makes semi-annual payments of $25 each. It has 10 years until maturity, and is selling on the market at par ($1000). What is the bond's yield-to-maturity?

5.0% Coupon rate = annual coupon/ par value = 50/1000 = 5% @ par value, yield to maturity is coupon rate hence YTM = 5%

Use the following information to answer questions 32 & 33: While on Spring Break, you have decided you have had enough of the beach, so you enter the prestigious Cancun Bond Valuation World Championship, which, being a Michigan State student, you win easily. Your grand prize is $500. However, you go a little overboard in celebrating, and you have to put $1500 on your credit card to pay for the festivities (your previous balance was 0). You still have the money that you won, which you decide to pay toward your credit card balance as soon as you get home. The annual interest rate on your credit card is 18%. Question 32: If you make monthly payments of $25, how long will it take to pay the credit card balance to zero?

5.13 years

The bonds of Spartan Scooters have a par value of $1000, a current market value of $1200, and make semiannual coupon payments of $30 each. What is the coupon rate of these bonds?

6.0%

What is the Coupon Rate of a bond that makes semi-annual coupon payments, has a par value of $1000, sells on the market for $1031.40, has a yield-to-maturity of 6%, and has 8 years remaining until maturity?

6.50%

Use the following information for questions 1 & 2: Spartan Skateboards, Inc., is considering buying a new piece of equipment that will quickly imprint Sparty's image on the top of the skateboard. The equipment will cost $2500, but is expected to lead to increased sales of $750 each year over the next 4 years (750 in year 1, 750 in year 2, etc.). There is no additional Net Working capital needed, nor will the equipment have any salvage value. The owner of the shop requires a return of 7.5%. Question 2: What is the Internal Rate of Return?

7.7%

Kitchen Innovations, Inc., is considering introducing a new line of toaster ovens. Before proceeding with a more thorough analysis, the company wants to know what the financial break-even quantity is for the project. The data they have gathered are as follows: The company believes it will be able to produce and sell 10,000 units per year at a retail price of $100 each. Variable costs for the project are $25 per unit Fixed costs have been estimated as $200,000 per year The production equipment needed for the project will cost $500,000, which will be depreciated to 0 over its 5-year estimated life on a straight-line basis. The company's tax rate is 21%

8,740

Which of the following would be considered an agency problem?

A salesperson stops working for the rest of the year when his commission payout for the year is at its limit.

Which of the following is NOT true about bonds?

Bondholders have a vote in electing Directors to the Board.

In which of the following cases is IRR unreliable? I. When looking at mutually exclusive projects II. For a project with an initial negative cash flow, positive cash flow in Year 1, but negative cash flow in Year 2

Both

In which of the following cases is the Dividend Growth Model not usable? I. When the company does not pay a dividend II. When the company's dividend growth rate is higher than the required rate of return

Both of them

Eight Track Tape Entertainment, Inc., just announced that they might not be able to make their upcoming bond coupon payment, and several Wall Street analysts have just issued a report saying the danger of the company filing for bankruptcy is higher now that it was before the company's announcement. As a result, S&P cut their rating on these bonds from B+ to C. All else equal, which of the following is most likely to happen? Answer. 1. A 2. B 3. C 4. D 5. E Bond Price will: 1. Go up 2. Go up 3. Go down 4. Go down 5. Stay the same Coupon Rate will: 1. Go down 2. Stay the same 3. Stay the same 4. Go up 5. Go down YTM will: 1. Go down 2. Go down 3. Go up 4. Go up 5. Go up

C

Use the following information to answer questions 32 & 33: While on Spring Break, you have decided you have had enough of the beach, so you enter the prestigious Cancun Bond Valuation World Championship, which, being a Michigan State student, you win easily. Your grand prize is $500. However, you go a little overboard in celebrating, and you have to put $1500 on your credit card to pay for the festivities (your previous balance was 0). You still have the money that you won, which you decide to pay toward your credit card balance as soon as you get home. The annual interest rate on your credit card is 18%. Question 33: How much will you have to pay per month if you want to pay off the credit card balance in 1 year (with monthly payments)?

$91.68

USE THE FOLLOWING DATA FOR QUESTIONS 23-25 Hawkeye Innovations is considering developing a new type of mouse trap. They have made the following estimates regarding the development of the new product: The life of the project is 7 years The project will require additional equipment that will cost $21,000. None of the equipment will have any salvage value. Sales are expected to be 10,000 units per year at $4.50 per unit Variable costs are expected to be $2.60 per unit Fixed costs are expected to be $12,000 per year The annual Depreciation expense would be $3,000 Additional Net Working Capital will be needed in Year 0 in the amount of $8,000. 60% of this will be recovered in Year 7 The company's tax rate is 34% The Required Rate of Return on the project is 10% Question 25: What is the project's Net Present Value?

$921.04

Two years ago, Leap Before You Think Enterprises Inc. built a factory to manufacture widgets that cost the firm $20,000,000 (which included the cost of equipment). Unfortunately, they built it at the bottom of a canyon that floods every year during the rainy season, which has made productivity rather difficult, and the company cannot manufacture enough widgets to be profitable. An outside offer has been made to purchase the factory and all its equipment for $16,000,000. Assuming the company has no other fixed assets, has not been able to find a better offer for the factory, and it has been able to take depreciation costs of a total of $5,000,000 since building the factory, what is the relationship of the market value to the book value of the company's fixed assets?

Market Value is higher than Book Value.

What can be described as the MAIN goal of financial management?

Maximize the value of the existing stock.

Consider a project with an initial investment that has a negative cash flow and all positive future cash flows. As the discount rate is increased:

The IRR remains constant while the NPV decreases

Which of the following is a type of direct agency cost?

The cost of an audit of the firm's financial statements.

When it comes to bonds, "maturity" is:

The date on which the bond contract ends.

The bond term "coupon" is essentially what?

The interest payment a bond makes to its holders.

If a project has a net present value equal to zero, then:

The project earns a return exactly equal to the discount rate

Net Working Capital helps to evaluate what?

The resources available to manage the company's short-term obligations.

True or False: all else equal, a bond which has a quality that would be considered unattractive to investors will tend to have a lower price and higher yield.

True

Exam 3

starts here

If the yield-to-maturity is more than the coupon rate, the bond:

will be valued less than par.

Which of the following is NOT a benefit that holders of common stock have?

First priority on assets if the company goes into bankruptcy.

Given what was discussed in class, which of the following cash flows should be excluded from discounted cash flow analysis? I. Sunk Costs II. Opportunity Costs III. Financing Costs IV. Net Working Capital Requirements

I and III only

To which of the following inputs is NPV usually rather sensitive? I. Sales II. Fixed Costs III. Variable Costs IV. Salvage Value

I and III only

Which of the following statements is/are correct? I. A bond with a call provision has a lower yield than one without, all else equal II. A bond rated AA has a lower yield than a bond rated A, all else equal III. A bond with a protective covenant has a lower yield than one without, all else equal

II and II only

What is the importance of knowing the difference between an investment-grade and non-investment-grade bond? I. Investment-grade bonds always pay all interest payments on time, whereas most non-investment-grade bonds do not II. To enable bond mutual fund buyers to have a better sense of the risk level of the fund III. Certain organizations and endowments are prohibited from buying non-investment-grade bonds IV. The price of investment grade bonds is always higher than that of non-investment-grade bonds

II and III only

Which of the following would result in an indirect agency cost? I. The cost of fuel when the CEO used the company jet for personal reasons II. Income not earned because a manager turned down a purchase opportunity for personal reasons when analysis showed it to likely be a profitable project. III. An outside auditor's fees for doing an unplanned audit following alleged wrong-doing by the company's CFO.

II only

Use the Stockbridge Sprockets Income Statement and Balance Sheets for the final 4 questions of the exam: Stockbridge Sprockets, Inc. 2019 Income Statement Net Sales $11,407 Less: Cost of goods sold 7,871 Less: Depreciation 1,509 EBIT 2,027 Less: Interest paid 210 Taxable Income (EBT) $1,817 Less: Taxes 636 Net income $1,181 Stockbridge Sprockets, Inc. 2018 and 2019 Balance Sheets ($ in millions) 2018 2019 2018 2019 Cash $276 $316 Accounts Payable $1,818 $1,719 Accounts Rec. 1,415 1,068 Notes Payable 250 75 Inventory 2,104 2,690 Total CL 2,068 1,794 Total CA 3,795 4,074 Long-term debt 3,400 3,100 Net fixed assets 5,613 6,342 Total Liabilities 5,468 4,894 Common stock 2,500 3.250 Retained earnings 1,440 2,272 Total Equity 3,940 5,522 Total Assets $9,408 $10,416 Total Liab. & Equity $9,408 $10,416 Dividends Paid in 2019: $349 What is the Cash Flow From Assets in 2019?

$109

You and a friend have decided to launch a hostile takeover of Pizza House. The company is organized as a corporation, and issued 1,000,000 shares, of which 800,000 shares have been purchased (are outstanding). You currently own 1,500 shares, and your friend owns 750 shares. The stock is currently trading at $30. It has been decided that you will purchase enough stock so that your and your friend's stock holdings will be enough to gain control of the company. At the current price, how much will this cost you?

$11,932,530 Must own 50% + 1 of outstanding stock to control company You + Friend currently hold 2,250 and must hold 400,001 = 397,751 * $30 = 11,932,530

You want to buy a used Dodge Dart in 2 years when you graduate. The price of the car now is $5000, but you have read that the price will drop by 5% per year during the next 2 years. If you will be able to get a 4 year loan at 16% annual interest with monthly payments, how much will the monthly payments be when you purchase the car 2 years from now?

$127.89

Use the following data for questions 34 & 35: The Broad College's Starbucks owner has been given the option of buying a new espresso machine that works twice as fast as the existing one. The machine will allow the store to cut costs by $5275 per year over the next 3 years. The store is able to invest unused cash at a rate of 5.2% annual interest. Question 34: What is the most the store owner should be willing to pay for the machine?

$14.311.47

USE THE FOLLOWING INFORMATION FOR QUESTIONS 21-22 NextGen Electronics Inc is analyzing a proposed project. The company expects to sell 2,000 smartphones. The expected variable cost per unit is $250 and the expected fixed costs are $620,000. The depreciation expense is $100,000. The sales price is estimated at $650 per unit. The tax rate is 30 percent. Question 21: What is the Operating Cash Flow for the project?

$156,000

Marshall Manufacturing, Inc. is having financial difficulties, and have announced that they will be reducing their dividend by 4% per year for the foreseeable future. The stock just paid a dividend of $3 per share, and investors require a 14% annual return to hold the stock. What is the price of the stock?

$16.00

Your father invested a lump sum 26 years ago at 4.25% annual interest compounded annually. Today, he gave you the proceeds of that investment which totaled $51,480.79. How much did your father originally invest?

$17,444.86

Mega-Mergers-R-Us State Bank pays 4% annual interest, compounded monthly, on savings accounts. If you deposit $10,000 into an account and make no further deposits or withdrawals, how much interest will you have earned in total after 5 years?

$2,209.97

Building Bashers, Inc. purchased new machinery 6 years ago for $8 million, that can be sold today for $5 million. The company has taken depreciation charges on this machinery totaling $4 million to date. The company's current balance sheet shows current liabilities of $2 million, and net working capital of $1 million. If all the current assets of the company were liquidated today, it would receive $1.5 million cash. What is the market value of the firm's assets?

$6,500,000

The Fowlerville Fowls minor league baseball team are considering building a new stadium. They will only do so if their Senior Financial Analyst determines building the stadium would have a positive Net Present Value. Using the data below, determine what the Year 0 cash flow would be: The land the stadium would be built on cost $1,500,000. They bought this land in 2015. Construction costs of $2,300,000 $25,000 for a marketing study conducted last year to determine whether more fans would come to the games if they built a new stadium $250,000 for additional street lights, access road improvements and parking lot for the new stadium $100,000 for an electronic video sign in front of the building and additional signage around the city $1,000 for a trip taken by team management last year to see a similar stadium in Wooster, Ohio

$2,650,000

At the accounting break-even point, Company X will sell 14,600 units of a product at a price of $10 each. At this level of production, the depreciation is $58,000 and the variable cost per unit is $4. What is the amount of the fixed costs at this production level?

$29,600

Use the following data for questions 34 & 35: The Broad College's Starbucks owner has been given the option of buying a new espresso machine that works twice as fast as the existing one. The machine will allow the store to cut costs by $5275 per year over the next 3 years. The store is able to invest unused cash at a rate of 5.2% annual interest. Question 35: Using your answer from Question 34, and assuming the machine can be purchased on credit at 5.2% annual interest with 3 years of monthly payments, what is the maximum monthly payment the store owner should be willing to make for the machine?

$430.21

You have decided to buy a $20,000 car. The local bank, Loansforall Savings and Trust, is willing to give you a 4-year loan at 12% annual interest. However, they are requiring that you make a 10% down payment on the car in order to get the loan. Assuming that you make the required down payment, what will your monthly payments be?

$474.01 LOAN!!! PV -18000FV #REF! RATE 12/12% NPER 48 (12*4) PMT $474.01

USE THE FOLLOWING DATA FOR QUESTIONS 23-25 Hawkeye Innovations is considering developing a new type of mouse trap. They have made the following estimates regarding the development of the new product: The life of the project is 7 years The project will require additional equipment that will cost $21,000. None of the equipment will have any salvage value. Sales are expected to be 10,000 units per year at $4.50 per unit Variable costs are expected to be $2.60 per unit Fixed costs are expected to be $12,000 per year The annual Depreciation expense would be $3,000 Additional Net Working Capital will be needed in Year 0 in the amount of $8,000. 60% of this will be recovered in Year 7 The company's tax rate is 34% The Required Rate of Return on the project is 10% Question 24: What is the project's annual Operating Cash Flow?

$5,640

A preferred stock pays annual dividends in the amount of $6. If investors require a 12% annual return to hold the stock, what is the price of the stock?

$50.00

Use the Stockbridge Sprockets Income Statement and Balance Sheets for the final 4 questions of the exam: Stockbridge Sprockets, Inc. 2019 Income Statement Net Sales $11,407 Less: Cost of goods sold 7,871 Less: Depreciation 1,509 EBIT 2,027 Less: Interest paid 210 Taxable Income (EBT) $1,817 Less: Taxes 636 Net income $1,181 Stockbridge Sprockets, Inc. 2018 and 2019 Balance Sheets ($ in millions) 2018 2019 2018 2019 Cash $276 $316 Accounts Payable $1,818 $1,719 Accounts Rec. 1,415 1,068 Notes Payable 250 75 Inventory 2,104 2,690 Total CL 2,068 1,794 Total CA 3,795 4,074 Long-term debt 3,400 3,100 Net fixed assets 5,613 6,342 Total Liabilities 5,468 4,894 Common stock 2,500 3.250 Retained earnings 1,440 2,272 Total Equity 3,940 5,522 Total Assets $9,408 $10,416 Total Liab. & Equity $9,408 $10,416 Dividends Paid in 2019: $349 What is the amount of the Cash Flow to Creditors in 2019?

$510

USE THE FOLLOWING DATA FOR QUESTIONS 23-25 Hawkeye Innovations is considering developing a new type of mouse trap. They have made the following estimates regarding the development of the new product: The life of the project is 7 years The project will require additional equipment that will cost $21,000. None of the equipment will have any salvage value. Sales are expected to be 10,000 units per year at $4.50 per unit Variable costs are expected to be $2.60 per unit Fixed costs are expected to be $12,000 per year The annual Depreciation expense would be $3,000 Additional Net Working Capital will be needed in Year 0 in the amount of $8,000. 60% of this will be recovered in Year 7 The company's tax rate is 34% The Required Rate of Return on the project is 10% Question 23: What is the Year 0 Total Cash Flow?

-$29,000

What is the net present value of a project that has an initial cash outflow of $34,900 and the following cash inflows? The required return is 15.35 percent. Year Cash flow 1. 12,500 2. 19,700 3. 0 4. 10,400

-$3,383.25

You put $250 into an account at the end of each year for 5 years, starting at the end of this year. At the end of the 5th year the account was worth $1,750. What rate of return did you earn (use annual compounding)?

16.9%

Use the Stockbridge Sprockets Income Statement and Balance Sheets for the final 4 questions of the exam: Stockbridge Sprockets, Inc. 2019 Income Statement Net Sales $11,407 Less: Cost of goods sold 7,871 Less: Depreciation 1,509 EBIT 2,027 Less: Interest paid 210 Taxable Income (EBT) $1,817 Less: Taxes 636 Net income $1,181 Stockbridge Sprockets, Inc. 2018 and 2019 Balance Sheets ($ in millions) 2018 2019 2018 2019 Cash $276 $316 Accounts Payable $1,818 $1,719 Accounts Rec. 1,415 1,068 Notes Payable 250 75 Inventory 2,104 2,690 Total CL 2,068 1,794 Total CA 3,795 4,074 Long-term debt 3,400 3,100 Net fixed assets 5,613 6,342 Total Liabilities 5,468 4,894 Common stock 2,500 3.250 Retained earnings 1,440 2,272 Total Equity 3,940 5,522 Total Assets $9,408 $10,416 Total Liab. & Equity $9,408 $10,416 Dividends Paid in 2019: $349 What is the amount of the Cash Flow to Shareholders in 2019?

-$401

What is the future value of $20,000 loan payable in full in 5 years with a 12% annual interest rate compounded monthly?

0

USE THE FOLLOWING INFORMATION FOR QUESTIONS 21-22 NextGen Electronics Inc is analyzing a proposed project. The company expects to sell 2,000 smartphones. The expected variable cost per unit is $250 and the expected fixed costs are $620,000. The depreciation expense is $100,000. The sales price is estimated at $650 per unit. The tax rate is 30 percent. Question 22: What is the accounting break-even quanitity?

1,800

The preferred stock of Okemos Oil, Inc. is currently priced at $40 per share. The stock pays a quarterly dividend of $1. What is the rate of return on the stock?

10.0%

What is the required rate of return of a stock that is expected to pay a $3 dividend one year from now, has a current price of $60 and a dividend growth rate of 6%?

11.0%

Your recent internship has convinced you that you will land a very high-paying job at graduation, and so you have decided to buy a new BMW 7 Series car as a graduation present for yourself. However, you sensibly decide to wait until a few years after graduating to buy it. Assume the current price of the car is $86,500, you intend to buy it 4 years from now, and the price of a new car of that model is expected to rise by 4% per year until you are ready to buy it. The local bank has informed you that when you are ready to purchase the car 4 years from now, they will give you a 5-year loan for the car with monthly payments of $2354.58. What annual rate of interest are they charging you?

14%

Alphabet Inc. has a 7 percent coupon bond outstanding that matures in 13.5 years. The bond makes semiannual coupon payments. The par value of the bond is $1000, and it is currently selling on the market for $550.40. What is the bond's yield-to-maturity?

14.78%

Which (if any) of the following are not disadvantages to using the Payback Period method of project evaluation:

All of the above are disadvantages -It ignores the time value of money -It ignores cash flows beyond the cutoff date (assuming a cutoff date is set) -It is biased against long-term projects

Which of the following, if any, describes Yield-to-Maturity? I. It's the rate that makes the present value of future cash flows equal to the current price II. It's the rate of total return an investor will receive if she holds the bond to maturity III. It's equal to the coupon rate when a bond is selling at par

All of them

All else equal, which break-even analysis would a stockholder most likely be most concerned with?

Accounting Break-even

What is the lowest rating a bond can have and still be considered Investment Grade?

BBB-

In the context of Time Value of Money, what is discounting?

Calculating the Present Value of future cash flows.

Which of the following is not one of the main types of decisions financial managers must make?

Capital Spending Must make: Capital Budgeting Capital Structure Working Capital Management

Which of the following is most important in the financial decision-making process?

Cash Flow

A company needs to raise money for a spending project, and it has been unable to get a loan from a bank. It will therefore issue securities to be sold to investors, but it doesn't want to issue anything that will increase its risk of bankruptcy. What should the company issue?

Common Stock

Exam 2

Start here

Which of the following is false when it comes to Debt in corporate finance?

Increasing debt always lowers net income.

You have just matched all of the winning numbers of the recent Mega Gillions drawing. The jackpot was $100,000,000. Your choices are to receive your prize in equal annual installments over the next 20 years, or take a lump sum payment of $50,000,000 today. Leaving out the effect of taxes, and assuming a discount rate of 5% annually, which is the better option in terms of present value?

Installments

You are a financial advisor at the bond dealer Yields R Us. Your client has informed you that she is on the Board of Directors of a company that needs to buy some bonds, but is only allowed to purchase investment grade bonds. You recommend the D-rated bonds of Dry Wells Oil Exploration, Inc., because, although the par value of the bonds is $1000, the current market price is only $200. Which of the following statements is False?:

Investors clearly believe this company is in no danger of bankruptcy.

Which of the following is not an advantage of issuing bonds vs. issuing new stock?

Issuing too much stock can send a company into bankruptcy, which is not the case with bonds.

Which of the following currently owns a majority of the outstanding shares of corporations listed on the U.S. stock exchanges.

Mutual fund companies and other institutional investors

When NPV and IRR produce conflicting decisions about whether to pursue a project, which one should take precedence?

NPV

Which of the following is/are true regarding Present Value and Future Value? I. For a given interest rate - the longer the time period, the higher the present value II. For a given time period - the higher the interest rate, the higher the present value

Neither are True

Which of the following is FALSE regarding Liquidity? I. More cash on the books of the company is always better than less. II. Too much liquidity tends to hurt company earnings. III. The company should always invest all of its cash to maximize earnings.

Only I and III are False

Which of the following is/are true when it comes to Net Present Value: I. It will always agree with IRR II. A negative NPV means a project should be rejected III. It should be used as the primary decision making tool when it comes to project investment decisions.

Only II and III are True

Which of the following is false when it comes to preferred stock? I. If a company suspends the dividend on its preferred stock, it must pay preferred stockholders all missed dividends before it can pay any dividends to common stock holders II. Preferred stock holders are ahead of bond holders in line to receive assets following a liquidation III Preferred stock dividends are guaranteed, unlike common stock dividends

Only II and III are false

Eat at State is considering buying a new food truck. It will cost $65,000, but is expected to generate $20,000 in sales each year over the next 4 years. At the end of the 4th year, the truck will be sold to Eat Like a Wolverine in Ann Arbor for $10,000 (after taxes). It will require $5,000 in additional Net Working capital that will not be recovered when the truck is sold. The Dean of Food Services will only authorize the purchase if it is cash positive by the end of the 4th year. Using the payback period method, should the truck be purchased, and why?

Purchase the truck; the initial expenses will be recovered + an additional $20,000 by the end of Year 4

An investment project has only the following cash flows: Year 0 = -2,000,000; Years 1 through 8 = 400,000 each. If the required rate of return is 12%, what decision should be made using NPV?

Reject; the NPV is -$12,944

When the original buyer of a stock sells her stock directly to another investor, it is an example of a/an:

Secondary Market.

Use the following information for questions 1 & 2: Spartan Skateboards, Inc., is considering buying a new piece of equipment that will quickly imprint Sparty's image on the top of the skateboard. The equipment will cost $2500, but is expected to lead to increased sales of $750 each year over the next 4 years (750 in year 1, 750 in year 2, etc.). There is no additional Net Working capital needed, nor will the equipment have any salvage value. The owner of the shop requires a return of 7.5%. Question 1: Using the NPV method (not Payback Period), should the machine be purchased?

Yes

You have a maximum of $300 per month to spend on a car payment. You found a car that you would like to buy that costs $11,814.08. The bank will give you a 5-year loan at an annual interest rate of 18%. Will you be able to afford this car?

Yes

Your broker, the leading sales generator at the firm Dewey, Cheatem and Howe, calls you with an investment opportunity. If you send him $3000 today, he will send back to you $1050 a year from now, $1300 in Year 2, and $1400 in Year 3. You require a 11% annual return. Based on the present value of these future cash flows, is this a good investment?

Yes

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.

a premium; more than