FINA 3770 Final Review

Rogue Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Rogue's operating income is equal to

$1,100,000.

Southeast Compositions, Inc. is considering a project with the following cash flows: Initial Outlay = $126,000 Compute the net present value of this project if the company's discount rate is 14%.

$1,193

Given the information below, calculate the company's cash balance at the end of the year.

$1,880,000

DYI Construction Co. is considering a new inventory system that will cost $750,000. The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one, $325,000 in year two, $150,000 in year three, and $180,000 in year four. DYI's required rate of return is 8%. What is the net present value of this project?

$104,089

The December 31, 2009 balance sheet shows net fixed assets of $150,000 and the December 31, 2010 balance sheet shows net fixed assets of $250,000. Depreciation expense for 2009 is $25,000 and depreciation expense for 2010 is $35,000. Based on this information, the cost of fixed assets purchased during 2010 is

$135,000

A corporation has annual sales of $18 million, total assets of $4 million, a debt ratio of 40%, depreciation expense of $200,000, and a tax rate of 40%. The corporation's total stockholders' equity is equal to

$2,400,000

A machine that costs $1,500,000 has a 3-year life. It will generate after-tax annual cash flows of $700,000 at the end of each year. It will be salvaged for $200,000 at the end of year 3. If your required rate of return for the project is 13%, what is the NPV of this investment?

$291,417

Based on the information in Table 3-3, calculate the cash flow from operations. Assume that there were no changes in any other asset or liability accounts, and that the ending cash balance for 2009 was $100.

$41,000

Raindrip Corp. can purchase a new machine for $1,875,000 that will provide an annual net cash flow of $650,000 per year for five years. The machine will be sold for $120,000 after taxes at the end of year five. What is the net present value of the machine if the required rate of return is 13.5%.

$447,292

Siskiyou Corp. has cash of $75,000; short-term notes payable of $100,000; accounts receivables of $275,000; inventories of $350,000; and accrued expenses of $75,000. What is the firm's net working capital?

$525,000

Given the following financial statements for ACME Corporation, what amount did the company pay in dividends for 2010? ...

$80,000

Siskiyou, Inc. has total current assets of $1,200,000; total current liabilities of $500,000; long-term assets of $800,000; and long-term debt of $600,000. How much is the firm's total equity?

$900,000

Given the following financial statements for ARGON Corporation, and assuming that ARGON paid a common dividend of $80,000 in 2010, what is the company's financing cash flow for 2010?

-$20,000

Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two. Project B costs $120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000 in year three, and $45,000 in year four. Lithium, Inc.'s required rate of return for these projects is 10%. The profitability index for Project A is

1.27

Given the following annual net cash flows, determine the internal rate of return to the nearest whole percent of a project with an initial outlay of $750,000.

11%

DYI Construction Co. is considering a new inventory system that will cost $750,000. The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one, $325,000 in year two, $150,000 in year three, and $180,000 in year four. DYI's required rate of return is 8%. What is the modified internal rate of return of this project?

11.57%

DYI Construction Co. is considering a new inventory system that will cost $750,000. The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one, $325,000 in year two, $150,000 in year three, and $180,000 in year four. DYI's required rate of return is 8%. What is the internal rate of return of this project?

15.13%

DYI Construction Co. is considering a new inventory system that will cost $750,000. The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one, $325,000 in year two, $150,000 in year three, and $180,000 in year four. DYI's required rate of return is 8%. What is the payback period of this project?

2.5 years

What is the payback period for a project with an initial investment of $180,000 that provides an annual cash inflow of $40,000 for the first three years and $25,000 per year for years four and five, and $50,000 per year for years six through eight?

5.2 years

A project requires an initial investment of $389,600. The project generates free cash flow of $540,000 at the end of year 4. What is the internal rate of return for the project?

8.5%

All of the following statements about agency problems are true EXCEPT

Agency costs are paid by the managers who do not act in the shareholders' best interest.

Which of the following statements best represents the "Agency Problem"?

All of the above

A general partnership, unlike a limited partnership, is an entity that legally functions separate and apart from its owners.

False

Because the NPV and PI methods both yield the same accept/reject decision, a company attempting to rank capital budgeting projects for funding consideration can use either method and get the same results.

False

Changes in depreciation expense do not affect operating income because depreciation is a non-cash expense

False

Earnings available to common shareholders is equal to a corporation's positive net cash flow over a given period, typically one year.

False

Investors will be indifferent between two investments if both investments have the same expected return.

False

Profits represent money that can be spent, and as such, form the basis for determining the value of financial decisions.

False

The retained earnings balance on IBM's balance sheet at the end of 2010 is equal to IBM's 2010 net income minus dividends paid in 2010.

False

The risk-return trade-off implies that the return on a riskless asset must be zero.

False

Two projects are mutually exclusive if the accept/reject decision for one project has no impact on the accept/reject decision for the other project.

False

Which of the following best describes cash flow from financing activities?

Increase (or minus decrease) in stock, plus increase (or minus decrease) in debt, minus interest paid, minus dividends paid

The five basic principles of finance include all of the following EXCEPT

Incremental profits determine value

Your company is considering an investment in one of two mutually exclusive projects. Project 1 involves a labor intensive production process. Initial outlay for Project 1 is $1,495 with expected after-tax cash flows of $500 per year in years 1-5. Project 2 involves a capital intensive process, requiring an initial outlay of $6,704. After-tax cash flows for Project 2 are expected to be $2,000 per year for years 1-5. Your firm's discount rate is 10%. Which project(s) should you take on?

Project 2

An efficient market is one where the prices of assets traded in that market fully reflect all available information at any instant in time.

True

Determining how a firm should raise money to fund its long-term investments is referred to as capital structure decisions.

True

If a project's internal rate of return is greater than the project's required return, then the project's profitability index will be greater than one.

True

If two companies have the same revenues and operating expenses, their net incomes will still be different if one company finances its assets with more debt and the other company with more equity.

True

It is possible for two companies to have the same financial performance, but their financial statements can be different, depending on how and when the managers choose to report certain transactions.

True

S-type corporations and limited liability companies are taxed like partnerships, but have the advantage of limited liability for their owners.

True

The corporation is a legal entity separate from its owners; thus it is possible for the corporation to continue even upon the death of one or more shareholders.

True

The owners of a corporation enjoy limited liability.

True

The root cause of agency problems is conflicts of interest.

True

When making financial decisions, managers should always look at marginal, or incremental cash flows.

True

The principle of risk-return trade-off means that

a rational investor will only take on higher risk if he expects a higher return.

When evaluating an investment project, which of the following best describes the financial information needed by the decision maker?

after-tax incremental cash flows to the company as a whole

Which of the following are characteristics of a limited partnership?

all of the above

The net present value method

all of the above -is consistent with the goal of shareholder wealth maximization -recognizes the time value of money -uses all of a project's cash flows

The expected return on a riskless asset is greater than zero due to

an expected return for delaying consumption.

All of the following statements about balance sheets are true EXCEPT

balance sheets show average asset balances over a one-year period.

Which of the following categories of owners have unlimited liability?

both A and B

The three basic types of issues addressed by the study of finance are

capital budgeting, capital structure decisions, and working capital management.

A company borrows $2,000,000 and uses the money to purchase high technology machinery for its operations. These are examples of

cash flow from financing and cash flow from investing.

Which of the following forms of organizations have earnings that are taxed twice, once as business income and once as personal income as the earnings are distributed to the owners in the form of dividends?

corporations

We compute the profitability index of a capital budgeting proposal by

dividing the present value of the annual after-tax cash flows by the cash investment in the project.

For the net present value (NPV) criteria, a project is acceptable if NPV is ________, while for the profitability index a project is acceptable if PI is ________.

greater than or equal to zero; greater than or equal to one

Working capital management is concerned with

how a firm can best manage its cash flows as they arise in its day-to-day operations.

All of the following are criticisms of the payback period criterion EXCEPT

it deals with accounting profits as opposed to cash flows.

Which of the following is an advantage of the sole proprietorship?

no significant legal requirements for starting the business

Suppose XYZ Corporation is traded on the New York Stock Exchange. XYZ's closing price on Monday is $20 per share. After the market closes on Monday, XYZ makes a surprise announcement that it has obtained a major new customer. XYZ's stock will likely

open above $20 because the positive news will result in a higher valuation even though the stock has not yet traded.

Examples of uses of cash include

paying cash dividends to stockholders

Which of the following categories of owners have limited liability?

shareholders of a corporation

The Colorado Jet Boat Company had a cash balance of $3 million at the beginning of 2010. During 2010, Sales were $8 million and expenses were $7 million. Therefore,

the cash balance at the end of 2010 cannot be determined from the information given.

Which of the following methods of evaluating investment projects can properly evaluate projects of unequal lives?

the equivalent annual annuity

Joe, a risk-averse investor, is trying to choose between investment A and investment B. If investment A is riskier than investment B and Joe selects investment A anyway, then

the expected return for investment A will be higher than the actual return for investment B.

The CEO of High Tech International decides to change an accounting method at the end of the current year. The change results in reported profits increasing by 5%, but the company's cash flows are not changed.

the stock price will not be affected by the accounting change.