finance 3104 test bank

John Doe purchases 200 shares of Blue Ridge Stock for $10 per share. The current dividend yield is 3%. Five years later, Mr. Doe sold Blue Ridge for $15 per share. Figure the geometric average return of this investment? What is the geometric average return on her stock if she sells it five years from today?

0.11

You are graduating from college at the end of this semester and after reading the The Business of Life box in this​ chapter, you have decided to invest $5,500 at the end of each year into a Roth IRA for the next 40 years. If you earn 7 percent compounded annually on your​ investment, how much will you have when you retire in 40 years? How much will you have if you wait 10 years before beginning to save and only make 30 payments into your retirement account? How much after 40 years:

1,098,000

Hokie Marketing plans to purchase a company that will generate the following cash flows. Year 1-5 - $25,000 Year 6 - ($50,000) Year 7-10 - $40,000 Assuming the discount rate is 15% and the compounding periods are annual, what is the present value. Round to the nearest dollar.

111,559

As a result of winning the Gates Energy Innovation​ Award, you are awarded a growing perpetuity. The first payment will occur in a year and will be for $15,000. You will continue receiving monetary awards annually with each award increasing by 4 percent over the previous​ award, and these monetary awards will continue forever. If the appropriate interest rate is 10 percent, what is the present value of this​ award?

250,000

Assume the same variables as question 43 but calculate how much will be in the retirement account but assuming the same annual end of year $500 payments BUT no initial $500 deposit is made:

383,545

If the Marifield Steel Fabrication Company earned $466,000 in net income and paid a cash dividend of $284,000 to its ​stockholders, what are the​ firm's earnings per share if the firm has 106,000 shares of stock​ outstanding? What is the earnings per share.

4.40

You have decided to invest $500 in a mutual fund today and make $500 end-of-the-year investments in the fund each year until you retire for 40 years. Assuming an opportunity cost of 12%, what do you estimate that you will have in this account at retirement?

430,071

Ronen Consulting has just realized an accounting error that has resulted in an unfunded liability of $380,000 due in 28 years. In other​ words, they will need $380,000 in 28 years. Toni Flanders, the​ company's CEO, is scrambling to discount the liability to the present to assist in valuing the​ firm's stock. If the appropriate discount rate is 8 percent, what is the present value of the​ liability?

44,047

John and Sally Smith purchase their first house for $150,000. In 5 years, they have paid down the balance on the mortgage to $105,000. In this same period, the value of the house has increased in value to $235,000. What is their current loan to value?

44.7

Considering the same variables stated in Question 40, how much will be saved if you wait 10 years and only make 30 annual payments How much after 30 years:

519,500

A stock's beta is a measure of its A) systematic risk. B) unsystematic risk. C) company-specific risk. D) diversifiable risk.

A

An investor will get maximum risk reduction by combining assets that are A) negatively correlated. B) positively correlated. C) uncorrelated. D) perfectly, positively correlated.

A

Blue's Chips Inc. has a $1,000 par value bond that is currently selling for $1,300. It has an annual coupon rate of 7%, paid semiannually, and has nine years remaining until maturity. What is the annual yield to maturity on the bond? (Round to the nearest whole percentage.) A) 3.15% B) 1.57% C) 3.12% D) 6.24%

A

In measuring value, the focus should be on... A) cash flow. B) accounting profits. C) time value of money. D) earnings per share.

A

Michael Lynch invested $10,000 in the Rearguard Fund four years ago. All earnings were reinvested in the fund. If his compound annual rate of return was 7%, what is his investment worth today (round to the nearest dollar)? A) $13,108 B) $10,700 C) $12,800 D) $763

A

Smith Corporation has current assets of $11,400, inventories of $4,000, and a current ratio of 2.6. What is Smith's quick or acid test ratio? A) 1.69 B) 0.54 C) 0.74 D) 1.35

A

Susan Bright will get returns of 18%, -20.3%, -14%, 17.6%, and 8.3% in the next five years on her investment in CoffeeTown, Inc. stock, which she purchases for $73,419.66 today. 19) What is the arithmetic average return on her stock if she sells it five years from today? A) 1.92% B) 3.98% C) 6.47% D) 7.11%

A

The debt ratio is a measure of a firm's A) leverage. B) profitability. C) liquidity. D) efficiency.

A

Which of the following financial instruments is not traded in the capital markets? A) debt with a maturity of less than one year B) bonds C) common stock D) preferred stock

A

Which of the following has a beta of zero? A) A risk-free asset B) The market C) A high-risk asset D) Both A and B

A

You are considering buying some stock in Continental Grain. Which of the following is an example of nondiversifiable risk? A) Risk resulting from a general decline in the stock market B) Risk resulting from a news release that several of Continental's grain silos were tainted C) Risk resulting from an explosion in a grain elevator owned by Continental D) Risk resulting from an impending lawsuit against Continental

A

Your firm has the following balance sheet statement items: total current liabilities of $805,000; total assets of $2,655,000; fixed and other assets of $1,770,000; and long-term debt of $200,000. What is the amount of the firm's total current assets? A) $885,000 B) $1,550,000 C) $600,000 D) $325,000

A

Investment companies are specialized financial intermediaries that provide financial services to businesses. These investment companies​ include: ​(Select all that​ apply.) A) hedge funds. B) private equity firms. C) mutual funds. D) public equity firms. E) savings and loans.

ABC

A negative coefficient of correlation implies that... A) on average, returns to such assets are negative. B) asset returns tend to move in opposite directions. C) asset return tend to move in opposite directions. D) None of the above because the coefficient of correlation cannot be negative.

B

Advantages to borrowing in the private market include A) less restrictive covenants. B) reduced initial costs. C) lower interest costs. D) avoiding future SEC registration.

B

GAAP, Inc. has total assets of $2,575,000, sales of $5,950,000, total liabilities of $1,855,062, and a net profit margin of 2.9%. What is GAAP's return on equity? Round to the nearest 0.1%. A) 8.6% B) 24.0% C) 16.4% D) 4.4%

B

How much would an investor be willing to pay today for an investment that returns $1,000 every year at year-end for five years if he wants to earn a 10% annual return on the investment? A) $1,000 B) $3,791 C) $5,000 D) $7,700

B

LIBOR last week was 1.88%, this week it is 1.91%. SC Corp. has borrowed $1,000,000 from North Pole Bank at a rate of one half a percentage point above LIBOR with cap of 2.5% and a floor of 2.0%. What interest was charged to SC last week? A) 2.48% B) 2.38%. C) 2.0% D) 2.5%

B

Marshall Manufacturing has a bond outstanding that was issued 20 years ago at a coupon rate of 9%. The $1,000 par value bond pays interest semiannually and was originally issued with a term of 30 years. If today's interest rate is 14%, what is the value of the bond today? A) $654.98 B) $735.15 C) $814.42 D) $941.87

B

Spartan Sofas, Inc. is selling for $50.00 per share today. In one year, Spartan will be selling for $48.00 per share, and the dividend for the year will be $3.00. What is the cash return on Spartan stock? A) $51.00 B) $1.00 C) $2.00 D) $3.00

B

The Blackburn Group has recently issued 20-year, unsecured bonds rated BB by Moody's. These bonds yield 443 basis points above the U.S. Treasury yield of 2.76%. The yield to maturity on these bonds is A) 4.43%. B) 7.19% C) 12.23% D) mortgage bonds.

B

What following statements are true when calculating a firm's cash flow: A) Increase in accounts receivable is a cash inflow B) Increase in inventory is a cash outflow C) Decrease in accounts payable is a cash inflow D) Increase is long term debt is a cash outflow

B

What is the reason for computing the acid test ratio in addition to the current ratio? A) inventory is the most liquid of the liquid assets. B) a firm's inventory may not be particularly liquid. C) inventory is the best collateral for short term loans. D) compared to accounts receivable, inventory balances may be difficult to verify

B

Which of the basic financial statements is best used to answer questions about changes in owner's equity that are not explained by the income statement? A) Balance sheet B) Statement of shareholder's equity C) Income statement D) Cash flow statement

B

Which of the following best measures an asset's risk? A) Expected return B) The standard deviation C) The probability distribution D) The cash return

B

Which of the following best represents operating income? A) Income after financing activities B) Earnings before interest and taxes C) Income from capital gains D) Income from discontinued operations

B

Which one of the following categories of owners enjoys limited liability? A) General partners in a limited partnership or limited liability company. B) Shareholders (common stock) of a corporation C) Sole proprietors D) Both A and B

B

Working capital management refers to A) long-term financing decisions. B) the management of cash flows. C) investing in product development. D) capital structure.

B

You just purchased a parcel of land for $10,000. If you expect a 12% annual rate of return on your investment, how much will you sell the land for in 10 years? A) $25,000 B) $31,060 C) $38,720 D) $34,310

B

Your firm has the following income statement items: sales of $50,250,000; income tax of $1,744,000; operating expenses of $10,115,000; cost of goods sold of $35,025,000; and interest expense of $750,000. What is the amount of the firm's gross profit? A) $18,000,000 B) $15,225,000 C) $5,000,110 D) $6,632,000

B

Your investment goal is to have $3,000,000 in 40 years for retirement. You decide to invest in a mutual fund today that pays 12% per year compounded monthly. How much must you invest at the end of each month to meet your investment goal? Round to the nearest $1. A) $245 B) $255 C) $285 D) $305 E) $315

B

Your parents are planning to retire in Phoenix, AZ in 20 years. Currently, the typical house that pleases your parents costs $200,000, but they expect inflation to increase the price of the house at a rate of 4% over the next 20 years. In order to buy a house upon retirement, what must they save each year in equal annual end-of-year deposits if they can earn 10% annually? A) $21,910.00 B) $7,650.94 C) $10,000.00 D) $14,715.52

B

Assuming all things are equal, in times of economic uncertainty, rising interest rates and increasing inflation, investors will move their money to what type of investments? Pick all that apply. A) Emerging market mutual funds B) U.S. Treasuries C). Municipal Bond funds D). Large cap mutual funds owning stock that pay dividends

BCD

A limited partner is liable... A) for only his or her own share of the partnership's debts. B) for his or her own share of the partnership's debts and contingently liable for the other partners shares. C) only up to the amount invested by that partner. D) for none of the partnership's debts.

C

Advantages of privately placing debt include all of the following EXCEPT A) speed. B) reduced placement costs. C) restrictive covenants. D) flexibility.

C

At 8% compounded annually, how long will it take $750 to double? A) 6.5 years B) 48 months C) 9 years D) 12 years

C

Dawn Swift discovered that 20 years ago, the average tuition for one year at an Ivy League school was $15,000. Today, the average cost is $60,000. What is the growth rate in tuition cost over this 20-year period? A) 15.5% B) 4.2% C) 7.18% D) 10.6%

C

Government bonds have lower yield to maturity than do corporate bonds of the same maturity because the ________ premium is lower for government bonds. A) interest rate risk B) inflation C) default D) maturity

C

If you invest $750 every six months at 8% compounded semi-annually, how much would you accumulate at the end of 10 years? A) $10,065 B) $10,193 C) $22,334 D) $21,731

C

In 2012, Snout and Smith, Inc. had a gross profit of $27,000 on sales of $110,000. S & S's operating expenses for 2012 were $13,000, and its net profit margin was .0585. Snout and Smith had no interest expense in 2012. What was S&S's operating profit margin? A) 0.245 B) 0.118 C) 0.127 D) 0.157

C

Jillian has purchased AAA rated corporate bonds that will mature in 20 years. She plans to sell the bonds in 10 years as she approaches retirement age. The most significant risk she faces is... A) liquidity risk. B) default risk. C) maturity risk. D) None of the above, the bonds are essentially risk-free.

C

Patriot Corporation purchased manufacturing equipment with an expected useful life of five years. The purchase of the machinery would be shown as... A) an expense on the balance sheet. B) an expense on the income statement. C) an asset on the balance sheet. D) both an expense and an asset.

C

The par value of a bond... A) never equals its market value. B) is determined by the investor. C) generally is $1,000. D) is never returned to the bondholder.

C

Which of the basic financial statements is best used to answer the question, "How profitable is the business?" A) Balance sheet B) Statement of shareholder's equity C) Income statement D) Accounts receivable aging schedule

C

Which of the following financial instruments entails the most risk and potentially the highest returns for investors? A) debt with a maturity of less than one year B) bonds C) common stock D) preferred stock

C

You are thinking of buying a miniature golf course. It is expected to generate cash flows of $40,000 per year in years one through four and $50,000 per year in years five through eight. If the appropriate discount rate is 10%, what is the present value of these cash flows? A) $285,288 B) $167,943 C) $235,048 D) $828,230

C

You have just purchased a share of preferred stock for $50.00. The preferred stock pays an annual dividend of $5.50 per share forever. What is the rate of return on your investment? A) 5.5% B) 1.0% C) 11.0 % D) 22.2%

C

You purchased the stock of Sargent Motors at a price of $75.75 one year ago today. If you sell the stock today for $89.00, what is your rate of return? A) 35.00% B) 12.50% C) 17.50% D) 25.00%

C

A firm's average collection period has decreased significantly from the previous year. Which of the following could possibly explain the results? A) Customers are paying off their accounts quicker. B) Customers are taking longer to pay for purchases. C) The firm has a stricter collection policy. D) Both A and C.

D

A(n) ________ is used to outline the issuing company's contractual obligations to bondholders. A) mortgage B) debenture C) bond rating. D) indenture

D

All of the following operate as financial intermediaries EXCEPT... A) commercial banks. B) mutual funds. C) insurance companies. D) the U. S. Treasury

D

If you were given the components of current assets and of current liabilities, what ratios could you compute? A) Profitability ratios B) Capital structure ratios C) Asset management ratios D) Liquidity ratios

D

The issuance of bonds to raise capital for a corporation. A) magnifies the returns to the stockholders. B) increases risk to the stockholders. C) is a cheaper form of capital than the issuance of common stock. D) all of the above.

D

The market for short-term debt is known as A) the bond market. B) the notes market. C) the capital market. D) the money market.

D

The true owners of the corporation are the A) holders of debt issues of the firm.B) preferred stockholders.C) board of directors of the firm. D) common stockholders.

D

What is the chief disadvantage of the sole proprietorship as a form of business organization when compared to the corporate form? A) Sole proprietorships are subject to double taxation of profits. B) The cost of formation. C) Inadequate profit sharing. D) Owners have unlimited liability.

D

What is the expected rate of return on a bond that matures in seven years, has a par value of $1,000, a coupon rate of 14%, and is currently selling for $911? Assume annual coupon payments. A) 7.81% B) 15.36% C) 15.61% D) 16.22%

D

What is the value of a bond that matures in three years, has an annual coupon payment of $110, and a par value of $1,000? Assume a required rate of return of 11%, and round your answer to the nearest $10. A) $970 B) $1,330 C) $330 D) $1,000

D

Which of the following is a characteristic of a limited partnership? A) It allows one or more partners to have limited liability. B) It requires one or more of the partners to be a general partner to whom the privilege of limited liability does not apply. C) It prohibits the limited partners from participating in the management of the partnership. D) All of the above.

D

Which of the following parties would be interested in an analysis of the firm's financial statements? A) investors B) creditors C) the firm's managers D) all of the above

D

Which of the following types of business forms is least risky to investors? A) Sole proprietorship B) Limited partnership C) General partnership D) A public corporation

D

Suppose that you wish to save for your child's college education by opening up an educational IRA. You plan to deposit $100 per month into the IRA for the next 18 years. Assume that you will be able to earn 10%, compounded monthly, on your investment. How much will you have accumulated at the end of 18 years? A) $21,600 B) $54,719 C) $33,548 D) $85,920 E) $60,056

E

ABC Corporation issued and sold 10 shares of stock to Irene Investor, a private individual. This represents a secondary market transaction.

FALSE

An amortized loan is a loan paid in unequal installments.

FALSE

Commercial banks in the U.S. often own the corporations they lend to.

FALSE

Debentures are unsecured long-term debt.

FALSE

During the 2008 financial crisis, the Federal Reserve took preemptive steps and bailed out Bear Sterns, in part, by providing financing to Barclays to purchase them.

FALSE

Established firms in need of additional capital can raise it in the secondary market. Answer:

FALSE

John and Jane Doe purchase a home for $150,000 and sell it for $235,000 five years later. When they purchased the house, they invested $30,000 and borrowed $120,000. When they sold, and prior to adjustments for closing costs, etc, their gain was $85,000. Therefore, their investment earned a return of 56.7% over five years.

FALSE

Miller Motorworks has a $1,000 par value, 8% annual coupon bond with interest payable semiannually with a remaining term of 15 years. The annual market yield on similar bonds is 6%. This bond will at a discount from par.

FALSE

The portfolio standard deviation will always be less than the standard deviation of any asset in the portfolio.

FALSE

The present value of a $100 perpetuity discounted at 5% is $1200.

FALSE

If a corporation's board approves a stock buy back program, stock is purchased from the primary market or secondary market?

SECONDARY

A portfolio containing a mix of stocks, bonds, and real estate is likely to be more diversified than a portfolio made up of only one asset class.

TRUE

A portfolio will always have less risk than the riskiest asset in it if the correlation of assets is less than perfectly positive.

TRUE

An investor who wishes to hold a stock for five years will be most interested in the geometric average rather than in the arithmetic average return.

TRUE

Convertible bonds can be exchanged for the issuing firm's common stock at a price specified at the time of issue.

TRUE

If markets are efficient, stock prices go up when there is positive information about a company, and go down when there is negative information about the company.

TRUE

Investing in foreign stocks is one way to improve diversification of a portfolio.

TRUE

Less risky investments have lower standard deviations than do more risky investments.

TRUE

Leverage is referred to as a percentage and is the relationship between the amount invested and the amount borrowed.

TRUE

One characteristic of an annuity is that an equal sum of money is deposited or withdrawn each period.

TRUE

One of the major goals of the Federal Reserve is to maintain price stability in the market place and keep inflation under control.

TRUE

Strategies that exploit market inefficiencies tend to lose their effectiveness when they become widely known.

TRUE

The concept of quantitative easing is a program where the Fed pumped liquidity into the market to stimulate investment, growth and insure stability?

TRUE

The expected rate of return is the weighted average of the possible returns for an investment.

TRUE

The financial crisis of 2008 and was caused in part by declining real estate values and defaults on mortgage payments.

TRUE

The purpose of financial markets is to bring borrowers and savers together.

TRUE

Venture capital funds play an important role in the initial financing of new businesses.

TRUE

When assets are positively correlated, they tend to rise or fall together.

TRUE