Final Exam - Sample FINA 320
1. Calculate the value of cost of goods sold for the firm given the following information: Current liabilities = $55,000; Quick ratio = 1.6; Inventory turnover = 6.0; Current ratio = 2.5. a. $297,000 b. $320,000 c. $385,000 d. Not enough information to solve the problem e. None of the above
a. $297,000 Current ratio = CA/CL=2.5 CA=2.5*CL =2.5*55,000 = 137,500 Quick Ratio = (CA-Inventory)/CL =1.6 137,500 - Inventory =1.6*55,000 Inventory = $49,500 Inventory turnover = COGS/Inventory = 6 COGS = Inventory*6 = 49,500*6 = 297,000
1. You hold a diversified portfolio worth $10,000. The portfolio consists of 20 different common stocks. The portfolio beta is equal to 1.2. You have decided to sell one of your stocks that has a beta equal to 1.4. You plan to use the proceeds to purchase another stock that has a beta equal to 0.7. What can possibly be the beta of the new portfolio? a. 1.165 b. 1.235 c. 1.250 d. cannot be determined None of the above
a. 1.165 We cannot find precisely the new portfolio beta due to lack of information. However, given that a higher beta stock (1.4) is replaced by a lower beta (0.7) stock, we know the portfolio beta (which is a weighted average of betas of all assets in the portfolio) must go down. The original portfolio beta is 1.2. Thus, the new portfolio beta must be less than 1.2. Of all the choices, A is a possible portfolio beta as it is less than 1.2
1. Haig Aircraft is considering a project that requires some initial investment today (t = 0). The project will generate positive cash flows of $60,000 a year at the end of each of the next five years (from t=1 to t=5). The project's NPV is $75,000 and the company's WACC is 10 percent. What is the project's regular payback? a. 2.54 years b. 3.08 years c. 3.79 years d. Cannot be solved because the initial investment is not given e. None of the above
a. 2.54 years First, we need to find the cost of the project, C0, as follows: NPV=C0 +60k/(1+10%) +60k/(1+10%)2 +60k/(1+10%)3 +60k/(1+10%)4 +60k/(1+10%)5 75,000 = C0 + 227,447.21 C0 =-152,447.21 To find payback, we subtract annual cash flow from initial cost: 152,447.21 - 60,000 = 92,447.21. After 1 year, $92,447.21 yet to recover 92,447.21 - 60,000 = 32,447.21. After 2 year, $32,447.21 yet to recover. 32,447.21/60,000 = 0.54 Thus, the regular payback = 2.54 years.
1. Your firm has an inventory period of 45 days, an accounts payable period of 22 days, and an accounts receivable period of 28 days. The CFO wants to implement a discount plan in order to reduce the receivables period to 18 days. What will happen to your company's operating cycle? a. It will fall from 73 days to 63 days. b. It will fall from 51 days to 41 days. c. It will be unaffected by the change in policy. d. It will rise from 45 days to 55 days. e. It will rise from 73 days to 83 days.
a. It will fall from 73 days to 63 days.
1. As the director of capital budgeting for Denver Corporation, you are evaluating two mutually exclusive projects with the following net cash flows: Project X / Project Z Year Cash Flow 0 -$100,000 / -$100,000 1 50,000 / 10,000 2 40,000 / 30,000 3 30,000 / 40,000 4 10,000 / 60,000 If Denver's cost of capital is 15 percent, which project would you choose? a. Neither project. b. Project X, since it has the higher IRR. c. Project Z, since it has the higher total sum of positive cash flows d. Cannot be determined because of lack of information e. None of the above
a. Neither project. Entering the cash flows of project X into cash flow key and I=15, we can find NPV of X = -832.97. Entering the cash flows of project Z into cash flow key and I=15, we can find NPV of Z = -8,014.19 Since both projects have negative NPV, neither project should be accepted.
1. Assume that you plan to buy a share of XYZ stock today and to hold it for 2 years. Your expectations are that you will not receive a dividend at the end of Year 1, but you will receive a dividend of $9.25 at the end of Year 2. In addition, you expect to sell the stock for $150 at the end of Year 2. If your expected rate of return is 16 percent, how much should you be willing to pay for this stock today? a. $111.47 b. $118.35 c. $137.28 d. $159.25 e. None of the above
b. $118.35 P = (9.25 + 150)/(1+16%)^2 = 118.35
Use the following information to answer the next four questions A firm reported sales of $20,000 in November, $30,000 in December, and projects sales of $40,000 for January, $50,000 for February, and $35,000 for March. The firm's purchases of inventory every month is equal to 75% of the next month's sales. The firm collects its receivables in 60 days and pays its payables in 30 days. The firm begins January 1 with $50,000 in cash. All sales and purchases are on credit. (assume there are 30 days in a month and no account receivables will become uncollectable.) 1. What are the total cash collections for February? a. $20,000 b. $30,000 c. $40,000 d. $50,000 e. $70,000
b. $30,000 Since it takes the firm 60 days to collect its receivables, it will collect account receivables due to December sales in February, or $30,000.
1. A firm is expected to pay a dividend of $3.50 per share in one year. This dividend, along with the firm's earnings, is expected to grow at a rate of 7% forever. If the current market price for a share is $67, what is the cost of equity? a. 7.00% b. 12.22% c. 15.64% d. 14.00% e. 13.46%
b. 12.22% 67 = 3.5/(r - 7%) Solving for r, we get r= 12.22%
1. An insurance company promises to pay Jane $1 million on her 65th birthday in return for a one-time payment of $125,000 today. (Jane just turned 30.) At what rate of interest would Jane be indifferent between accepting the company's offer and investing the premium on her own? (hint: there are 35 years between today and Jane's 65thbirthday.) a. 3.06% b. 6.12% c. 7.18% d. Cannot be solved due to lack of information e. None of the above
b. 6.12% PV = -125,000, FV=1,000,000, N=35, PMT=0, => I/Y = 6.12
1. An investor is forming a portfolio by investing $50,000 in stock A that has a beta of 1.50, and $25,000 in stock B that has a beta of 0.90. The return on the market is equal to 6 percent and Treasury bill has a yield of 4 percent. What is the required rate of return on the investor's portfolio? a. 6.4% b. 6.6% c. 7.8% d. 11.8% e. None of the above
b. 6.6% Weight of A= 50,000/(50,000 + 25,000) = 0.667 Weight of B= 25,000/(50,000+25,000) = 0.333 Port. Beta = 0.667*1.5 + 0.333*0.9 =1.3 Port return = Rf + beta(Rm - Rf) = 4% + 1.3 *( 6% - 4% ) = 6.6%
1. Which of the following statements about the present value of a lump sum of money received in n years is/are false, all else the same? I. Present values increase as the discount rate (r) increases. II. Present values increase as n increases. III. Present values are always smaller than future values when both r and n are positive. a. I only b. I and II only c. III only d. I, II and III e. None of the above
b. I and II only
1. All else the same, which of the following would increase the length of a firm's cash cycle? Consider each in isolation of one another. I. Inventory turnover increases II. Accounts receivable period increases III. Accounts payable period increases a. I only b. II only c. III only d. I and III only e. II and III only
b. II only
1. Given the following: the risk-free rate is 8% and the market risk premium is 8.5%. Which projects should be accepted if the firm's beta is 1.2? Project/Beta/Expected return I/0.65/12% II/0.90/17% III/1.40/19% a. I only b. II only c. III only d. I and II only e. None of the projects are acceptable
b. II only Using CAMP, we can find the required rate of return of the three projects as follows: R(I) = 8% + 0.65*8.5% = 13.53% > 12% R(II) = 8% + 0.9*8.5% = 15.65% < 17% R(III) = 8% + 1.4*8.5% = 19.90% > 19% Only project has expected return greater than required return and, thus, should be accepted.
1. Which of the following is false regarding risk and return? a. The risk-free asset earns the lowest rate of expected return. b. The reward for bearing risk is known as the standard deviation. c. Based on historical data, there are rewards for bearing risk. d. An increase in systematic risk of an investment results in an increased risk premium. e. In general, the higher the systematic risk the higher the expected return.
b. The reward for bearing risk is known as the standard deviation.
1. J&J Manufacturing just issued a bond with a $1,000 face value and a coupon rate of 8%. If the bond has a life of 20 years, pays annual coupons, and the yield to maturity is 7.5%, what will the bond sell for? a. $ 950.91 b. $1000.00 c. $1,050.97 d $1,051.38 e. None of the above
c. $1,050.97 N = 20,I/Y = 7.5, PMT=80, FV = 1000, => PV = -1,050.97.
1. Netscrape Inc. just paid a dividend of $1.00 per share. The dividends are expected to grow at 20% rate for the next three years and then level off to a 4% rate indefinitely. If the required return is 12%, what is the value of the stock today? a. $15.00 b. $16.20 c. $19.44 d. $22.45 e. None of the above
c. $19.44 D1 = D0*(1+20%) =1*(1+20%) = 1.2 D2 = D1*(1+20%) = 1.2*(1+20%) = 1.44 D3 = D2*(1+20%) = 1.44*(1+20%) = 1.728 D4 = D3*(1+4%) = 1.728*(1+4%) = 1.797 P3 = D4/(r-g) = 1.797/(12% - 4%) =22.4625 P0 = 1.2/(1+12%) + 1.44/(1+12%)^2 + 1.728/(1+12%)^3 + 22.4625/(1+12%)^3 = 19.44
Use the following information to answer the next four questions A firm reported sales of $20,000 in November, $30,000 in December, and projects sales of $40,000 for January, $50,000 for February, and $35,000 for March. The firm's purchases of inventory every month is equal to 75% of the next month's sales. The firm collects its receivables in 60 days and pays its payables in 30 days. The firm begins January 1 with $50,000 in cash. All sales and purchases are on credit. (assume there are 30 days in a month and no account receivables will become uncollectable.) 1. What is the accounts payable balance at the end of January? a. $26,250 b. $30,000 c. $37,500 d. $45,250 e. $50,000
c. $37,500 January purchase = 75%*Feb. sales = 75%*50,000 = 37,500 Since it takes the firm 30 day to pay its payable, all purchases in January become account payable at the end of January, or $37,500.
Use the following information to answer the next four questions A firm reported sales of $20,000 in November, $30,000 in December, and projects sales of $40,000 for January, $50,000 for February, and $35,000 for March. The firm's purchases of inventory every month is equal to 75% of the next month's sales. The firm collects its receivables in 60 days and pays its payables in 30 days. The firm begins January 1 with $50,000 in cash. All sales and purchases are on credit. (assume there are 30 days in a month and no account receivables will become uncollectable.) What is the cash balance at the end of January? a. $20,000 b. $30,000 c. $40,000 d. $50,000 e. $70,000
c. $40,000 Collection of A/R in January = $20,000 (Nov. sales) Payment on A/P = 75%*40,000 = 30,000 (Purchases made in Dec.) Ending Cash balance = 50,000 +20,000 - 30,000 = 40,000
1. A "Name That Tune" contest has a grand prize of $500,000. However, the contest stipulates that the winner will receive just $200,000 immediately, and $30,000 at the end of each of the next 10 years. Assuming that one can earn 8% on their money, how much has the contest winner actually won? a. $ 1,302 b. $201,302 c. $401,302 d. $500,000 e. None of the above
c. $401,302 First, find the PV of the 10 annual payment of $30,000 as follows: N=10, I/Y = 8, PMT=30,000, FV = 0, => PV = -201,302. Then add the $200,000 lump payment, we have $201,302 + 200,000 = $401,302
1. A project has an initial investment of $25,000, with $6,500 annual inflows for each of the subsequent 5 years. If the required return is 12%, what is the NPV? a. -$6,500.00 b. -$2,447.02 c. -$1,568.95 d. $ 215.46 e. $1,763.81
c. -$1,568.95 CF0 = -25,000, CF1= 6,500, F1 = 5, I = 12, => NPV = -1,568.95
1. You have a balance of $2,000 on your credit card and your monthly minimum payment is $35. The credit card company charges an APR of 18%, compounded monthly. If you just make the minimum payment and do not add additional charges on the card, how long it takes you to pay the balance off? (round to the nearest month) a. 42 months b. 58 months c. 131 months d. Never e. None of the above
c. 131 months PV= 2000 PMT= -35 I/Y = 18/12 = 1.5 FV=0, Solving for N = 130.70
1. Albright Motors is expected to pay a year-end dividend of $3.00 a share (D1 = $3.00). The stock currently sells for $30 a share. The required (and expected) rate of return on the stock is 16 percent. If the dividend is expected to grow at a constant rate, g, what is g? a. 13.00% b. 10.00% c. 6.00% d. 5.33% e. None of the above
c. 6.00% 30 = 3/(16% - g) Solving for g, we get g= 6%
1. Billick Brothers is estimating its WACC. The company has collected the following information: · Its capital structure consists of 40 percent debt and 60 percent common equity. · The company has 20-year bonds outstanding with a 9 percent annual coupon that are trading at par. · The company's tax rate is 40 percent. · The risk-free rate is 5.5 percent. · The market risk premium is 5 percent. · The stock's beta is 1.4. What is the company's WACC? a. 5.88% b. 8.94% c. 9.66% d. 10.26% e. None of the above
c. 9.66% Since the bond trading at par, its yield to maturity = coupon rate = 9% Using CAPM, we can find the cost of equity as follows: Re = 5.5% + 1.4*5% = 12.5% WACC = We*Re + Wd*Rd*(1-t) = 60%*12.5% + 40%*9%*(1-40%) = 7.5% +2.16% = 9.66%
1. A type of short-term loan where the borrower sells its receivables to the lender up-front, but at a discount to face value, is called: a. Assigned receivables financing. b. A letter of credit. c. Factored receivables financing. d. Trade credit e. None of the above
c. Factored receivables financing.
1. Which of the following statements is most correct? (Assume that the risk-free rate remains constant.) a. If the market risk premium increases by 1 percentage point, then the required return on all stocks will rise by 1 percentage point. b. If the market risk premium increases by 1 percentage point, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0. c. If the market risk premium increases by 1 percentage point, then the required return will increase by 1 percentage point for a stock that has a beta equal to 1.0. d. Statements a and c are correct. e. None of the statements above is correct.
c. If the market risk premium increases by 1 percentage point, then the required return will increase by 1 percentage point for a stock that has a beta equal to 1.0.
1. Stock A has a beta of 1.5 and Stock B has a beta of 0.5. Which of the following statements must be true about these securities? (Assume the market is in equilibrium.) a. Stock B would be a more desirable addition to a portfolio than Stock A. b. Stock A would be a more desirable addition to a portfolio than Stock B. c. The expected return on Stock A will be greater than that on Stock B. d. The expected return on Stock B will be greater than that on Stock A. None of the above.
c. The expected return on Stock A will be greater than that on Stock B.
1. Given the following historical returns, what is the standard deviation? Year 1 = 30%; year 2 = 15%; year 3 = -10%; year 4 = 18%; year 5 = -2%. a. about 3% b. about 10% c. about 16% d. about 32% e. None of the above
c. about 16% Mean = (0.3 + 0.15 - 0.1 + 0.18 - 0.02)/5 = 0.102 Var. =[(0.3-0.102)2 + (0.15-0.102)2 + (-0.1-0.102)2 + (0.18-0.102)2 +(-0.02-0.102)2]/4 = 0.02582 Std. Dev= sqrt(0.02582) = 16%
1. There are a variety of ways to produce pro forma statements, but they usually rely on two primary inputs. One of these primary inputs is ________. a. the projected sales for the current year b. the projected sales for the past year c. the prior year's financial statements d. this year's financial statements e. None of the above
c. the prior year's financial statements
1. The Jones Company has decided to undertake a large project. Consequently, there is a need for additional funds. The financial manager plans to issue preferred stock with a perpetual annual dividend of $5 per share. If the required return on this stock is currently 20 percent, what should be the stock's market value? a. $150 b. $100 c. $ 30 d. $ 25 e. None of the above
d. $ 25 P = 5/20% = 25
1. You purchased a machine for $20,000 and depreciated it based on a five-year straight-line. If the machine is sold at the end of the fourth year for $10,000, what are the after-tax proceeds from the sale, assuming your tax rate is 35%? a. $ 2,100 b. $ 3,900 c. $ 6,500 d. $ 7,900 e. $10,000
d. $ 7,900 Annual depreciation = 20,000/5 = 4,000 Accumulated depreciation at year 4 = 4,000*4 = 16,000 Book value at year 4 = 20,000 -16,000 = 4,000 Capital gain tax = (10,000 - 4,000)*35% = 2,100 After tax salvage value = 10,000 - 2,100 = 7,900.
Use the following information to answer the next four questions A firm reported sales of $20,000 in November, $30,000 in December, and projects sales of $40,000 for January, $50,000 for February, and $35,000 for March. The firm's purchases of inventory every month is equal to 75% of the next month's sales. The firm collects its receivables in 60 days and pays its payables in 30 days. The firm begins January 1 with $50,000 in cash. All sales and purchases are on credit. (assume there are 30 days in a month and no account receivables will become uncollectable.) 1. What is the accounts receivable balance at the end of January? a. $30,000 b. $40,000 c. $50,000 d. $70,000 e. $90,000
d. $70,000 Since it takes the firm 60 days to collect its receivables, all credit sales made in December and January are not collected by the end of January. Thus, the A/R balance at the end of January = 30,000 + 40,000 = 70,000
1. Your firm sold a 25-year bond at par 19 years ago. The bond pays a 6% annual coupon, has a $1,000 face value, and currently sells for $825. What is the firm's before-tax cost of debt? a. 6.0% b. 8.2% c. 9.5% d. 10.0% e. 11.3%
d. 10.0% PV= -825 PMT= 60 N = 25-19 = 6 FV=1000, Solving for I/Y = 10
1. The times interest earned ratio is 5.0. Based on this ratio, a creditor knows that EBIT must decline by more than before the firm will be unable to cover its interest expense. a. 33% b. 67% c. 75% d. 80% e. 90%
d. 80%
1. A ___________ can lose, in the extreme case, her entire personal net worth. I. limited partner II. general partner III. sole proprietor a. I only b. II only c. III only d. II and III only e. I and III only
d. II and III only
1. Of the following, which is NOT one of the three main areas of finance? a. Financial market and institution b. Corporate finance c. Investments d. Personal financial planning e. All are considered main areas of finance.
d. Personal financial planning
1. Which of the following CANNOT be calculated? a. The interest rate on a perpetuity given the present value and payment amount. b. The present value of an annuity due. c. The future value of an annuity due. d. The future value of a perpetuity. e. none of the above
d. The future value of a perpetuity.
1. Your required return is 15%. Should you accept a project with the following cash flows? Year 0 1 2 3 Cash Flow -$25 $10 $10 $25 a. No, because the IRR is 5%. b. No, because the IRR is 10%. c. Yes, because the IRR is 20%. d. Yes, because the IRR is 30%. e. Yes, because the IRR is 40%.
d. Yes, because the IRR is 30%. CF0=-25 CF1=10 CF2=10 CF3=25 => IRR = 30
1. When developing a pro forma income statement, depreciation, unlike sales, tends to ________ each year with the Modified Asset Cost Recovery System (MACRS). a. go up b. remain the same c. increase exponentially d. go down e. none of the above
d. go down
1. Stock A has a beta of 0.8 and Stock B has a beta of 1.2. 50 percent of Portfolio P is invested in Stock A and 50 percent is invested in Stock B. If the market risk premium were to increase but the risk-free rate remained constant, which of the following would occur? a. The required return will decrease by the same amount for both Stock A and Stock B. b. The required return will increase for both stocks but the increase will be greater for Stock A than for Stock B. c. The required return will increase for Stock B but will decrease for Stock A. d. The required return on Portfolio P will remain unchanged. e. None of the above
e. None of the above
1. What is the future value of the following set of cash flows 4 years from now? Assume an interest rate of 6.5% and you receive the cash flow at the end of the year. Year 0 1 2 3 4 Cash Flow -$700, $300, $600, $400, and $500 respectively. a. $830.49 b. $1,074.82 c. $1,137.84 d. $2,869.45 e. None of the above ($1068.40)
e. None of the above ($1068.40) First, find the PV, using the cash flow keys as follows: CF0=-700 CF1=300 CF2=600 CF3=400 CF4=500 I=6.5 => NPV= 830.49 Then convert the PV to FV as follows: PV = 830.49, I/Y = 6.5, PMT=0, N=4, => FV = - 1,068.40