Finance Exam 1, 2, & 3 Notes

Transient Foods announced that its current sales is $1,233,450 this year. The company forecasts a growth rate of 16 percent for the foreseeable future. How long will it take the firm to produce earnings of $3 million? A) 6 years B) 10 years C) 7 years D) 8 years

6 years

The probability mass between one standard deviation below and one standard deviation above the mean for a normal distribution of returns of Facebook is________. A) 90.29% B) 75.00% C) 68.26% D) 95.95%

68.26%

The two components of total risk associated with an investment are_____. A) Variance and standard deviation B) Covariance and correlation C) Short term risk and long term risk D) Systematic risk and diversifiable risk

Systematic risk and diversifiable risk

Which of the following is a characteristic of independent projects? A) Selecting one would automatically eliminate accepting the other. B) The cash flows are related. C) None of these. D) The cash flows are unrelated.

The cash flows are unrelated

Sundune Enterprises has the following expected dividend: $1.00 in one year, $1.15 in two years, and $1.25 in three years. After that, its dividends are expected to grow at 4% per year forever ( so that year 4's dividend will be 4% more than $1.25 and so on). If Sundune's expected rate of return is 11%, what is the current price of its stock? A) $14.27 B) $24.56 C) $16.33 D) $15.98 E) $22.45

$16.33

Sid Phillips has funded a retirement investment with $250,000 earning a return of 6.75 percent. What is the value of the payment that he can receive in perpetuity? (Round to the nearest dollar.) A) $16,875 B) $15,250 C) $12,150 D) $14,900

$16,875

Kevin Rogers is interested in buying a five-year bond that pays a coupon of 10 percent on a semiannual basis. The current market rate for similar bonds is 8.8 percent. What should be the current price of this bond? (Round to the nearest dollar.) A) $1,048 B) $965 C) $1,099 D) $982

$1,048

The preferred stock of Acme international is selling currently at $110.35. What is the dividend paid by this stock if your required rate of return is 9.75 percent? A) $8.53 B) $10.76 C) $9.75 D) $11.32

$10.76

Genaro needs to capture a return of 40 percent for his one-year investment in a property. He believes that he can sell the property at the end of the year for $150,000 and that the property will provide him with rental income of $25,000. What is the maximum amount that Genaro should be willing to pay for the property? A) $112,500 B) $125,000 C) $137,500 D) $150,000

$125,000

Biasco just paid an annual dividend of $1.63 a share. What is the price of the common stock today if the growth rate of dividend (g) is 3 percent annually forever and the required rate of return is 14 percent? A) $11.64 B) $10.54 C) $15.26 D) $12.40 E) $11.99

$15.26

Joseph Ray just received an inheritance of $35,775 from his great aunt. He plans to invest the funds for retirement. If Joseph can earn 4.75% per year with quarterly compounding for 32 years, how much will he have accumulated? (Round off to the nearest dollar.) A) $162,113 B) $71,550 C) $237,416 D) $184,622

$162,113

The Brick Company has announced the following financial information for the period ending March 31, 2017: sales of $1.4 million, cost of goods sold of $800,000, depreciation expense of $175,000, and interest expense of $90,000. Assume that the firm has an average tax rate of 40 percent. What is the company's net income? A) $203,000 B) $204,000 C) $335,000 D) $201,000 E) $220,000

$201,000

Graciela Treadwell won a lottery. She will have a choice of receiving $25,000 at the end of each year for the next 30 years, or a lump sum today. If she can earn a return of 10 percent on any investment she makes, what is the least she should be willing to accept today as a lump-sum payment? (Round to the nearest hundred dollars.) A) $334,600 B) $212,400 C) $235,673 D) $750,000

$235,673

Barry Company is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected. WACC: 12.00% Year 0 1 2 3 4 5 Cash flows -$1,100 $400 $390 $380 $370 $360 a. $250.15 b. $277.94 c. $305.73 d. $336.31 e. $369.94

$277.94

Robertsons, Inc., is planning to expand ita specialty stores into five other states and finance the expansion by issuing 15-year zero coupon bonds with a face value of $1,000. If your opportunity cost is 8 percent and similar coupon-bearing bonds will pay semiannually, what will be the price at which you will be willing to purchase these bonds? (Round to the nearest dollar.) A) $308 B) $383 C) $803 D) $866

$308

Helen Ashley is expecting cash flows of $50,000, $75,000, $125,000, and $250,000 from an inheritance over the next four years. If she can earn 11 percent on any investment that she makes, what is the present value of her inheritance? A) $434,599 B) $414,454 C) $412,372 D) $361,998

$361,998

Super Grocers, Inc., provided the following financial information for the quarter ending September 30, 2006: Depreciation and amortization - $133,414 Net income - $341,463 Increase in receivables - $ 112,709 Increase in inventory - $81,336 Increase in accounts payables - $62,411 Decrease in marketable securities - $31,225 What is the cash flow from operating activities generated during this quarter by the firm? A) $308,458 B) $374,468 C) -$374,468 D) -$308,458 E) -573,890

$374,468

Nick invested $2,000 in a bank savings account today and another $2000 a year from now. If the bank pays interest of 10 percent per year, how much money will Nick have at the end of two years? A) $4,620 B) $4,000 C) $4,200 D) $4,210

$4,620

Noel Klinger is planning to invest in an insurance company product. The product will pay $12,500 at the end of this year. Thereafter, the payments will grow annually at a 2.5 annual percent rate forever. Jack will be able to invest his cash flows at an annual rate of 5.5 percent. What is the present value of this investment cash flow stream? (Round to the nearest dollar.) A) $416,667 B) $446,667 C) $326,908 D) $312,766

$416,667

Assume Evco, Inc. has a current stock price (P0) of $46.47 and will pay a $1.95 dividend in one year (D1); its equity cost of capital (r) is 11%. What price must you expect Evco stock to sell in on year (P1) immediately after the firm pays the dividend for the year? A) $49.63 B) $21.47 C) $17.72 D) $23.58 E) $51.58

$49.63

REI sports expects to have earnings per share of $6 next year. The firm plans to pay out all of its earnings as a dividend (i.e. 100% of income ($6) is paid out as a dividend). With these expectations of no growth (g = 0) in dividend, Crane expects to earn a return of 10%. What is Crane's current share price? A) $0.6 B) $6 C) $600 D) $60

$60

John Mason decided to save $2,250 at the end of each of the next three years to pay for a vacation. If he invests it at 8 percent annually, how much will he have at the end of three years? (Round to the nearest dollar.) A) $7,403 B) $7,010 C) $6,297 D) $7,304

$7,304

Celesta Frank wants to go on a cruise in three years. She could earn 8 percent compounded monthly in an account if she deposits the money today. She needs to have $10,000 in three years. How much will she have to deposit today? (Round to the nearest dollar.) A) $7,868 B) $6,432 C) $7,763 D) $7,826

$7,868

Phosfranc Inc., is expecting the following cash flows starting at the end of the year—$133,245, $152,709, $161,554, and $200,760. If their opportunity cost of capital is 9.4 percent, find the future value of these cash flows. (Round to the nearest dollar.) A) $776,252 B) $734,731 C) $734,231 D) $756,525

$734,731

Cash $203 $197 Accounts receivable 684 726 Inventory 918 1,023 Net fixed assets 2,014 1,989 What is the amount of net working capital for 2017? A) $751 B) $1,734 C) $1,128 D) $826 E) $1,057

$826

Balance Sheet of Health Valley Company Cash $20,000 $12,000 Accounts receivable 40,000 48,000 Inventory 60,000 50,000 Total current assets $120,000 $110,000 Compute Net Cash Flow from Investing Activities for Health Valley Company in 2002. A) $20,000 B) -$20,000 C) -$30,000 D) $50,000 E) -$50,000

-$50,000

Horse Stock returns have exhibited a standard deviation of 0.57, whereas Mod T Stock returns have a standard deviation of 0.63. The correlation coefficient between the returns is 0.078042. What is the covariance of the returns? A) 0.028025 B) 0.217327 C) 0.359100 D) 0.993094

0.028025

Answer this question using information from Charter Tours' balance sheets (in millions): Cash $203 $197 Accounts receivable 684 726 Inventory 918 1,023 Net fixed assets 2,014 1,989 In 2017 Charter Tours has 10.2 million shares outstanding. The market value is $99 per share. What is the Charter Tours' market -to-book ratio in 2017? A) 0.924 B) 0.257 C) 2.250 D) 1.104 E) Cannot be determined from the information given

0.924

Turnbull Corp. is in the process of constructing a new plant at a cost of $30 million. It expects the project to generate cash flows of $13,000,000, $23,000,000, and $29,000,000 over the next three years. The cost of capital is 20 percent. What is the payback period for this project? A) 2.7 years B) 1.7 years C) 1.2 years D) 2.2 years

1.7 years

If the return distribution for the asset is described as below, what is the standard deviation for the asset's returns? (Do not round your intermediate calculations. Round your percentage answers to two decimal places.) Return - 12%, 10%, 7% Probability - 15%, 50%, 35% A) 3.19% B) 0.05% C) 2.91% D) 1.79%

1.79%

Casa Del Sol Property Development Company is refurbishing a 200-unit condominium complex at a cost of $1,875,000. It expects that this will lead to expected annual cash flows of $415,350 for the next seven years. What internal rate of return can the firm earn from this project? (Round to the nearest percent.) A) 10% B) 12% C) 14% D) 16%

12%

Shawna Carter wants to invest her recent bonus in a four-year bond that pays a coupon of 11 percent semiannually. The bonds are selling at $962.13 today. If she buys this bond and holds it to maturity, what would be her yield? (Round to the closest answer.) A) 11.5% B) 11.8% C) 12.5% D) 12.2%

12.2%

What is the expected return for a stock that has a beta of 1.5, if the risk-free rate is 6% and the market rate of return is 11%? A) 15% B) 16.5% C) 22.5% D) 13.5%

13.5%

GRITO's stock is currently selling for $46.10 (P0) a share. If the company is expected to pay a dividend of $5.60 (D1) a year from now and dividends are expected to grow at 3% (g) forever, what is the required rate of return (r) for a share of GRITO's stock? A) 8.23% B) 7.56% C) 12.15% D) None of the above are within .25 percentage points on the correct answer. E) 15.15%

15.15%

George Wilson purchased Bright Light Industries common stock for $47.50 on January 31, 2010. The firm paid dividends of $1.10 during the last 12 months. George sold the stock today (January 30, 2011) for $54.00. What is George's holding period return? Round off the nearest 0.01%. A) 16.00% B) 14.35% C) 11.28% D) 19.60%

16.00%

Use the following table to calculate the expected returns from the asset. Return - 0.1, 0.2, 0.25 Probability - 0.25, 0.5, 0.25 A) 17.50% B) 20.00% C) 15.00% D) 18.75%

18.75%

The beta of Elsenore, Inc., stock is 1.6, whereas the risk-free rate of return is 8 percent. If the expected return on the market is 15 percent, then what should investors expect as a return on Elsenore? A) 11.20% B) 24.00% C) 19.20% D) 32.00%

19.20%

Anna purchased a share of stock one year ago for $22) Today, she received a dividend of $0.97 and sold the stock for $25.30) Her total holding period return is _____ (Round your percentage answer to two decimal places.) A) 16.80% B) 3.80% C) 4.27% D) 19.40%

19.40%

Which of the following statements about the time value of money concept is true? A) A dollar to be received in the future is worth more than a dollar received today because it would have less risk associated with it. B) A dollar received today is worth more than a dollar to be received in the future because funds received today can be invested to earn a return. C) A dollar received today is worth more than a dollar to be received in the future because future dollars are not affected by inflation. D) A dollar received today is worth less than a dollar to be received in the future because future dollars are not affected by inflation.

A dollar received today is worth more than a dollar to be received in the future because funds received today can be invested to earn a return.

Which one of the following statements is true of a bond's yield to maturity? A) A bond's yield to maturity changes daily as interest rates increase or decrease. B) It is the annual yield that the investor earns if the bond is held to maturity, and all the coupon and principal payments are made as promised C) All of the above are true D) The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond.

All of the above are true.

Which one of the following statements is NOT true? A) Long-term bonds have more price volatility than short-term bonds of similar risk. B) As interest rates increase, bond prices increase. C) Interest rate risk is the risk that bond prices will change as interest rates change. D) Interest rate changes and bond prices are inversely related.

As interest rates increase, bond prices increase.

An investor will choose between Asset Q with an expected return of 6.5% and a standard deviation of 5.5%, Asset U with an expected return of 8.8% and a standard deviation of 5.5%, and Asset B with an expected return of 8.8% and a standard deviation of 6.5%. Which one should the investor prefer? A) Asset B B) Asset Q C) Cannot be determined D) Asset U

Asset U

Which of the following is the best measure of the systematic risk in a portfolio? A) Variance B) Standard deviation C) Covariance D) Beta

Beta

Which of the following business organizational form(s) subject(s) the owner(s) to unlimited liability? A) Sole proprietorship B) Both sole proprietorship and corporation C) Both sole proprietorship and general partnership D) General partnership E) Corporation

Both sole proprietorship and general partnership

Which of the following is primarily responsible for managing all financial aspects of a firm? A) Board of Directors B) External Auditors C) Chairman of the board D) CFO E) CEO

CFO

Which one of the following statements about vanilla bonds is NOT true? A) They have fixed coupon payments. B) Coupon payments are usually made quarterly. C) The bond's coupon rate is calculated as the annual coupon payment divided by the fond's face value. D) The face value, or par value, for most corporate bonds is $1,000.

Coupon payments are usually made quarterly.

Under the assumption of a constant dividend growth model, the value of a stock: A) Increases when the rate of return increases B) Decreases when the growth rate increases C) Decreases when the rate of return increases D) Always remains constant E) Decreases when the future dividend increases.

Decreases when the rate of return increases

Which of the following is NOT an example of capital budgeting? A) Dividends B) Expansion into new markets C) Mergers D) Replacement to reduce costs E) Office buildings

Dividends

The future value of an annuity due is equal to the future value of an ordinary annuity. A) True B) False

False

William invested $5,000 in an account earning 10 percent for one year. If he had left his investment in that account for another two years, he would expect the total interest earned over the three years to be higher by exactly $1,000. A) True B) False

False

Which of the following is the Use (Outflow) of CASH in the statement of cash flows? I. Increase in accounts payable II. Payment of dividends III. Sale of fixed assets IV. Increase in accounts receivables A) II only B) I and IV only C) II and IV only D) II, III, IV only E) I, II, and IV only

II and IV only

Which of the following is NOT true about capital budgeting? A) It involves identifying projects hat will add to a firm's value. B) It allows a firm to reverse the decision of large capital investments at any time. C) It involves investing large amounts of capital D) It allows a firm's management to analyze potential business opportunities and decide on which ones to undertake.

It allows a firm to reverse the decision of large capital investments at any time.

Which of the following statements is true? A) Dividends paid to preferred stockholders are not fixed. B) Preferred stockholders usually do not have voting rights. C) Preferred stockholders are considered to be the true owners of public corporations. D) Preferred stock can never be converted to common stock.

Preferred stockholders usually do not have voting rights.

The CEO and CFO of Coral Gables Corp were having a discussion about which stock to buy with the company's surplus cash. The CFO noted that it was important that the company incurs less risk for a given level of return and suggested using the Sharpe Ratio to choose between AMD and Intel. They both noted that the expected return on AMD in the next year is 12% and the average return on INTC is 9%, however the standard deviation on AMD is 0.13164 and on INTC is 0.11140. Assuming the risk-free rate Rrf is expected to be 3% what are the Sharpe Ratios of AMD and INTC, and which is the better investment based on these ratios? A) S AMD = 0.68; S INTC = 0.54; AMD B) S AMD = 0.54; S INTC = 0.68; AMD C) S AMD = 0.68; S INTC = 0.54; INTC D) S AMD = 0.54; S INTC = 0.68; INTC

S AMD = 0.68; S INTC = 0.54; AMD

Anne Morgan wants to borrow $6,000 for a period of four years. She has two choices. Her bank will lend her the amount at 7.25 percent compounded annually. She can also borrow from her firm and will have to repay a total of $8,130.93 at the end of four years. Should Anne choose her bank or the firm, and what is the interest rate if she borrows from her firm? (Round to the nearest percent.) A) She should borrow from the bank as the bunk is charging a higher interest of 9%. B) She should borrow from her firm as it is charging a lower interest of 7%. C) She should borrow from the bank as the firm is charging a higher interest of 8%. D) She should borrow from her firm as it is charging a lower interest of 6%.

She should borrow from the bank as the firm is charging a higher interest of 8%.

Which of the following is true of the future value of an investment? A) The lower the interest rate, the higher the future value of an investment. B) The higher the interest rate, the higher the future vale of an investment. C) The lower the number of compounding periods, the higher the future value of an investment. D) The lower the present value of an investment, the higher the future value of an investment.

The higher the interest rate, the higher the future vale of an investment.

Choose the answer below that does not describe the circumstances where IRR conflicts with NPV in the decision to accept a project. A) When two or more projects are mutually exclusive. B) When two or more projects are independent. C) IRR assumes that all cash flows received during the life of a project are reinvested at the IRR while the NPV method assumes that they are reinvested at the cost of capital rate. D) If the sign of the project's cash flows changes more than once during the life of a project.

When two or more projects are independent.

Direct financing occurs when: A) a lender-savers borrows from the federal government B) a borrower-spenders borrows directly from a lender-savers C) a borrower-spenders borrows from the federal government D) a lender-savers borrows directly from a borrower spenders

a borrower-spenders borrows directly from a lender-savers

Which one of the following actions by a financial manager MOST LIKELY to create an agency problem? A) a manager using too little debt within the firm's capital structure because of the additional risk associated with debt. B) refusing to lower selling prices if doing so will reduce the net profits C) refusing to borrow money when doing so will create losses for the firm D) a manager expensing a lavish dinner on the company expense report E) a manager turning down a value-contributing project because of its risks

a manager expensing a lavish dinner on the company expense report

The financial market where a new security is sold for the first time is: A) a primary market B) none of these C) an indirect financial market D) a secondary market

a primary market

Which of the following is a major participant in the direct financial market? A) all of the above B) Investment banks C) Large corporations D) Wealthy individuals

all of the above

If a bond's coupon rate is equal to the market rate of interest, then the bond will sell: A) at a price greater than its face value. B) none of the above is true. C) at a price equal to its face value. D) at a price less than its face value.

at a price equal to its face value.

Two projects are considered to be independent if A) their cash flows are unrelated. B) none of these. C) both selecting one would have no bearing on accepting the other and their cash flows are unrelated. D) selecting one does not affect whether the other is accepted or not.

both selecting one would have no bearing on accepting the other and their cash flows are unrelated.

In evaluating capital projects, the decisions using the NPV method and the IRR method may disagree if A) the projects are independent B) the cash flow pattern in unconventional C) both the cash flows pattern is unconventional the projects are mutually exclusive D) the projects are mutually exclusive

both the cash flows pattern is unconventional the projects are mutually exclusive

Which of the following are all items from the balance sheet? A) cash, accounts payable, accounts receivable B) accounts receivables, depreciation expense, long term debt C) net sales, common stock, retained earnings D) cash, accounts receivables, taxes E) net sales, inventories, notes payable

cash, accounts payable, accounts receivable

The process of converting financial securities with one set of characteristics into securities with another set of characteristics is called: A) financial intermediation B) financial disintermediation C) none of the above D) financial bundling

financial intermediation

Capital rationing implies that A) none of these. B) funding resources exceed funding needs C) funding needs equal funding resources D) funding needs exceed funding resources

funding needs exceed funding resources.

You borrowed $100 to a friend for one year at a nominal interest rate of interest at 3 percent, inflation during that year was 2 percent. How much did the purchasing power of your money change (an increase is positive and a decrease is negative)? A) increased by 1 percent B) increased by 5 percent C) decreased by 5 percent D) decreased by 1 percent

increased by 1 percent

The present value of multiple cash flows is: A) higher or lower than the cash flows depending on the interest rate B) greater than the sum of the cash flows C) equal to the sum of all the cash flows D) less than the sum of the cash flows

less than the sum of the cash flows.

Which of the following are the three advantages of a corporation? A) Unlimited liability, can borrow money easily, double taxation B) limited liability, can borrow money easily, easy transfer of ownership C) limited liability, can borrow money easily, double taxation D) limited liability, agency conflicts, double taxation E) limited liability, can borrow money easily, agency conflicts

limited liability, can borrow money easily, easy transfer of ownership

The primary goal for a firm's financial managers is to: A) maximize shareholders' wealth by maximizing share price B) minimize the price of the company's common stock C) maximize the firm's reported net income D) maximize the cost of the firm E) maximize the revenue of the firm

maximize shareholders' wealth by maximizing share price

Agency costs refer to A) the fact that managers know how to manage the firm better than stockholders B) the costs that result from default and bankruptcy of a firm C) the costs of any conflicts of interest between stockholders and management D) stockholders having unreasonable expectations about managerial performance E) the total dividends paid to stockholders over the lifetime of a firm

the costs of any conflicts of interest between stockholders and management

The cost of capital is: A) the return the firm had earned on a previous project. B) the maximum return a project can earn. C) none of the above. D) the minimum return that a capital project must earn to be accepted.

the minimum return that a capital project must earn to be accepted.

To accept a capital project when using NPV, A) the project NPV should be less than zero B) the project NPV should be greater than zero C) none of these. D) both the project NPV should be greater than zero and the project NPV should be less than zero.

the project NPV should be greater than zero

Marketability is the ability of an investor A) to sell a security quickly, at a low transaction cost, and at a price close to its fair market value. B) to sell at a profit under all circumstances. C) to sell the security above its par value. D) None of the above.

to sell a security quickly, at a low transaction cost, and at a price close to its fair market value.