Financial Management Final

Maria's Taco Shop, Inc., showed long-term debt of $2.2 million on last year's balance sheet, but this year reported long-term debt of $3.65 million. This year's income statement showed an interest expense of $280,000 and a depreciation expense of $1 million. What was the firm's cash flow to creditors?

$-1,170,000

Bully's Cowbells has a return on equity of 15 percent. The company's total asset turnover is 1.4 and the profit margin is 8 percent. If Bully's total equity is $7,000, what is the company's net income?

$1,050

Gugenheim, Inc. needs to finance the purchase of yet another masterpiece. To this end, the company is selling some bonds that were donated by a wealthy donor. The bonds have a 6.25 percent annual coupon. The yield to maturity is 3.525 percent and the bonds mature in 6 years. What is the market price of a $1,000 face value bond? Assume the next coupon is received in one year

$1,145.08

Use the following information to answer this question. Windswept, Inc. Current Income Statement ($ in millions)Net sales$ 10,300Less: Cost of goods sold7,850Less: Depreciation 360 Earnings before interest and taxes$ 2,090Less: Interest paid 96 Taxable Income$ 1,994Less: Taxes 598 Net income $ 1,396 Windswept, Inc. Balance Sheets ($ in millions) Last Year This Year Last Year This Year Cash$ 350$ 370Accounts payable$ 1,850$ 1,720Accounts rec.1,070970Long-term debt1,0501,510Inventory 1,840 1,750 Common stock$ 3,320$ 3,120Total$ 3,260$ 3,090Retained earnings 630 880 Net fixed assets 3,590 4,140 Total assets $ 6,850 $ 7,230 Total liab. & equity $ 6,850 $ 7,230 Use the change in accumulated retained earnings to held determine the dividends that the firm paid.

$1,146 million

You have just received notification that you have won the $3.0 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100th birthday (assuming you're around to collect), 62 years from now. What is the present value of your windfall if the appropriate annual discount rate is 9 percent?

$14,344.27

You borrow $6,530 to buy a car. The loan requires monthly payments for 4 years, and the interest rate is 5 percent annually with monthly compounding. What is the amount of each payment? Assume the first payment is due in one month.

$150.38

Colorado Rapids, Inc., has sales of $664,000, total costs of $205,000, a depreciation expense of $37,000, and an interest expense of $30,000. The firm's effective tax rate is 30 percent, and the firm paid out $77,000 in cash dividends. What is the addition to retained earnings?

$197,400

A zero coupon bond with a face value of $1,000 is issued with an initial price of $450.50. The bond matures in 17 years. What is the implicit interest earned, in dollars, for the first year of the bond's life?

$21.63

Sinan is considering a short term investment with the following cash flows. Given 8 percent is Sinan's required return, what is the project's profitability index? YearCash Flow0-$39,000 116,700 219,000 318,400

1.19

The common stock of Jordan's Jalopies Inc. will pay an annual dividend of $3.40 a share in one year. The company has promised to maintain a constant dividend. How much are you willing to pay for one share if you require a 10.50 percent annual return on your equity investments?

$32.38

Your firm produces popsicles. Your current income statement reports net income of $273 on total sales of $1,240. Costs are $690 and depreciation is $130. The tax rate is 35 percent. The firm does not have interest expenses. What is the operating cash flow?

$403

Your grandma will give you a graduation gift of $28,000 in exactly two years. When you receive it, you will invest it for 8 more years at 8.0 percent per year. How much will you have in 10 years?

$51,826.05

The Sunyside Co. is a new firm in a rapidly growing industry. The company plans to increase its annual dividend by 18 percent a year for the next 4 years, after which the dividend growth rate will slow to 3 percent per year. The company just paid $1.80 per share as its annual dividend. What is the current value of one share if the required annual return is 7.30 percent?

$72.25

Rosalba will save $2,000 at the end of each year. Her bank promises she'll earn 8.8 percent annually. How much will she have in her account at the end of 43 years?

$831,532

Mr. Dylan just won the grand prize in a national writing contest! This prestigious award pays the recipient $1,000 a month for 10 years. If Mr. Dylan can earn 7 percent annually with monthly compounding, what is this prize worth to him today? Assume the first payment is received at the end of the month.

$86,126.35

While note true of common stock, preferred shares (check all that apply):

*Are often associated with a sinking fund set-up by the company. *Typically don't get voting rights *Have a pre-specified dividend yield usually based on par value.

Raspu Tin Inc. is considering a short term investment with the following cash flows: Year 0 (Start-up)$36,300Year 1$11,500Year 2$21,700Year 3$0Year 4$10,400 What is the net present value if the required return is 15 percent?

-$3,945.45

Homer purchased a sculpture, the Gummy De Milo, at auction in 2011 for a price of $12,900,000. Homer sold the statue in 2015 years later for $10,800,000. What was the annual rate of return on this investment?

-4.34%

Nimoy Inc., purchased their only fixed asset, a widget machine, four years ago for $6.3 million. The same machinery can be sold today to Shatner Inc. for $4.4 million. Nimoy's current balance sheet shows net fixed assets of $2.95 million and current liabilities of $2 million. If all the current assets were liquidated today, the company would receive $1.4 million cash. Use the balance sheet identity to determine the current market value of Nimoy's total liabilities (current & long-term) given the market value of equity is $4,350,000.

1,450,000

Pepe's Paletas is considering the purchase of a small ice cream cart for $2,700. Pepe expects sales to be $1,900 a year for three years. After the three years, the cart's cooling system is expected to give out and the cart will be worthless. What is the payback period of the ice cream cart?

1.42 years

Jimmy has equally split his investments between a risk-free asset and two stocks (so Jimmy has 1/3 of his portfolio invested in each asset). One stock, Stock A, has a beta of 1.56 and the portfolio's beta is equal to one. What must the beta be for Stock B, the other stock in Jimmy's portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

1.44

A firm has sales of $1,030, net income of $207, net fixed assets of $506, and current assets of $262. The firm has $82 in inventory. What is the common-size statement value of inventory?

10.68 percent

Shares of Pablo Rada, Inc. sell for $36.53 each. The company will pay a $2.50 per share dividend next year. Investors expect Pablo Rada will increase this dividend by 4.6 percent annually in perpetuity. What is the required annual return on this stock?

11.44 percent

The Miller Crossing credit card company charges you 1.11 percent per month. What is the annual percentage rate on your account?

13.32 percent

Lionel has to pay a penalty for filing his taxes late. The IRS charges 3% in interest for each month the payment is late. Lionel's original tax bill was $1,000, but he now owes $2,427.26. How many years late is his payment?

2.5 years

Bob bought some land costing $15,990. Today, that same land is valued at $46,017. How long has Bob owned this land if the price of land has been increasing at 5 percent per year?

21.67 years

Rick, the owner of the local pawn shop, loans money at an annual rate of 23 percent, compounded daily. What is the effective annual interest rate that Rick is charging?

25.85 percent

Today you paid $352,000 for an investment that provides $12,400 a year forever (that is, in perpetuity). What rate of return are you earning on this investment? Assume the first payment is in one year.

3.52 percent

You took out a loan with an effective annual interest rate of 8 percent. What is the equivalent semi-annual (6 month) interest rate on this loan? Note: I don't want the APR, I want the EPR (the actual 6 month interest rate).

3.92%

Your Albanian treasury bond pays interest annually and has a yield to maturity of 10.00 percent. The annual inflation rate is 4 percent. What is the (annual) real rate of return on this bond?

5.77 percent

The Great Indoors sells carpet and floor coverings. The company will pay stockholders a $1.00 quarterly dividend later this afternoon. Investors anticipate that the company will increase this dividend by a constant 1.0% percent per quarter. If investors require a 20.00% annual return with quarterly compounding, what is the current stock price?

6.32

Campbell and Sons has sales revenue of $4,050 and total assets of $3,750. The company's profit margin is 5 percent and the firm has a total debt ratio of 41 percent. What is the firm's return on equity?

9.15 percent

Today, June 15, you want to buy a bond with a quoted bid price of 98.64 and a quoted ask price of 98.66. The bond pays interest on January 1 and July 1. Which one of the following is true?

98.66 is the clean price at which you could purchase this bond.

Ana Sofia invested her money in Vanity Fair three years ago. When she plots the security market line she notes that Vanity Fair lies above the line. This means that her investment in Vanity Fair has

A higher return than expected for the level of risk assumed.

An increase in which one of the following will increase a firm's quick ratio without affecting its cash ratio?

Accounts receivable.

Rosie has $13,000, She earns 5 percent interest, compounded annually. Andy also has $13,000 and earns 5 percent interest, compounded annually. Rosie will withdraw her interest earnings and spend it as soon as possible. Andy will reinvest his interest earnings into his account. Which one of the following statements is true?

Andy will earn more interest the second year than Rosie

Five different lenders quote you an annual percentage rate of 5 percent on a car loan, but each lender compounds interest on a different period/frequency. Which one of the following compounding periods provides the lowest effective annual interest rate?

Annual

The interest rate that is most commonly quoted by a lender is referred to as which one of the following?

Annual percentage rate.

The _____ tax rate is equal to total taxes divided by total taxable income.

Average.

On the statement of cash flows, which of the following are considered operating activities? I. Costs of goods sold.II. Decrease in accounts payable.III. Purchase of equipment.IV. Dividends paid.

I and II only.

Garcia and Sons has a required payback period of five years for all of its projects. The company is comparing two independent projects. Project Aracena has an expected payback period of 3.6 years and a net present value of $465,800. Project Bilbao has an expected payback period of 4.1 years with a net present value of -$400. Which projects should be accepted based on the payback decision rule?

Both Aracena and Bilbao.

Which of the following are current assets?I. CashII. TrademarkIII. Accounts receivableIV. Notes payable

I and III only.

Milo wants to know the about the standard deviation of a portfolio versus a single investment. You explain that the standard deviation of a portfolio:

Can be less than the standard deviation of the least risky security in the portfolio

Jarom and Christina are twins. Both Jarom and Christina invest $5,000 each year beginning when they are 30 years old. Jarom's investment pays 7 percent annually with semi-annual compounding, while Christina's pays 7 percent annually with monthly compounding. Both Jarom and Christina retire at age 70. Which one of the following statements is correct?

Christina will have more than Jarom when they retire.

Which one of the following types of stock receives no preferential treatment in bankruptcy proceedings?

Common

Your parents own a department store in Denver. The store's market value was the same as the book value when they first opened the store. Which one of the following is most apt to cause the market value of this store to be lower than the book value?

Construction of a new highway that routes traffic away from the store.

Crystal Lake, Inc., has a total debt ratio of 0.28.

Debt-equity ratio: .39 Equity multiplier: 1.39

Which one of the following risk-premiums, by definition, is not related to the term structure of interest rates (i.e. shape of the yield curve)?

Default risk.

Alcoa evaluates new projects each quarter. The firm's cost of capital for a new project:

Depends upon how the funds raised are going to be spent.

Coolio wants to calculate the present value of a $100,000 bonus he will receive in the two years. The interest rate used in such a calculation is often called the:

Discount rate.

Garret Freight will pay a $1 dividend next quarter, and the company is expected to increase this dividend by 5% in each subsequent quarter. A decrease in which of the following will increase the current stock value?

Discount rate.

The items included in an indenture that limit certain actions of the issuer in order to protect a bondholder's interests are referred to as the:

Protective covenants.

Brandon wants to use the dividend growth model to value the common stock of Micro Bus Inc. Helena reminds Brandon that he can't use the model if the company:

Has a retention ratio of 100 percent

According to the DuPont Identity, if a firm's return on assets is the same as the firm's return on equity then the firm:

Has an equity multiplier of 1.0.

Saul invested $900 ten years ago into a savings account at his bank. Saul expected to have $1,800 in the account after ten years. As it turns out, he only has $1,680 in his account today. Which one of the following must be true? Assume that he has not added or withdrawn any money from this account since his initial investment.

He earned less interest than he expected to earn.

You want to have $1 million in your savings account when you retire. You plan on investing a single lump sum today to fund this goal. You will earn 7.5 percent annual interest. Which of the following will reduce the amount that you must deposit today if you are to have your desired $1 million on the day you retire? I. Invest in a different account paying a higher rate of interest.II. Invest in a different account paying a lower rate of interest.III. Retire later.IV. Retire sooner.

I and III only.

Tricia is considering adding a risk-free asset or a risky asset to her portfolio. Which of the following pieces of information would she need to have to estimate the additional reward for purchasing the risky asset instead of a risk-free asset? I.Asset's standard deviation.II.Asset's beta.III.Risk-free rate of return.IV.Market risk premium.

II and IV only.

Luis is going to receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Luis and Soo Lee discount at 7 percent annually?

In today's dollars, Luis's money is worth more than Soo Lee's.

Due to monetary policy uncertainty, inflation expectations have begun to increase. This is most likely to

Increase nominal rates.

When a firm has flotation costs equal to 6.8 percent of the funding need, project analysts should:

Increase the initial project cost by dividing that cost by (1 - .068).

John doesn't understand where each cash flow goes on the statement of cash flows. You explain that an increase in long-term debt, for instance, will _____ the cash flow from _____ activities.

Increase; financing.

You'll graduate from college in three years. Your grandmother has promised to give you $5,000 at graduation. What happens to the present value of this gift if you speed up your graduation and graduate in two years?

Increases

The pretax cost of debt:

Is based on the current yield to maturity of the firm's outstanding bonds.

Net capital spending:

Is equal to zero if no fixed assets are purchased or sold.

Van Delay Inc. is a a tennis shoe wholesaler. The company's weighted average cost of capital:

Is the return investors require on the total assets of the firm.

Pearson & Sons has two divisions: A, which produces peanut butter, and B, which produces jam. When evaluating a new project, however, the company always bases the discount rate on the project's risk, not the divisional cost of capital. This practice:

May cause the firm's overall weighted average cost of capital to either increase or decrease over time

Pravda Inc. has a quarterly dividend policy that pays $0.40 per share of common stock. The firm has 1,000 shares of stock outstanding. The company:

Must still declare each dividend before it becomes an actual company liability.

Widgets-R-Us Inc.'s expansion into the Starkville widget market has an initial cost of $928,400. The market value of expanding is $1,339,060. The difference between these two values is called:

Net present value.

Which one of the following is a source of cash?

New long-term loans

Tom and Sally are the only two dealers in Widget Inc. stock. They buy and sell the stock for their own inventories, and you may phone them if you need to buy or sell the stock. This is an example of a(n) ______ market.

Over-the-counter.

Kristi wants to start training her most junior assistant, Amy, in the art of project analysis. Amy has just started college and has no experience or background in business finance. To get her started, Kristi is going to assign the responsibility for all projects that have initial costs less than $1,000 to Amy to analyze. Which method is Kristi most apt to ask Amy to use in making her initial decisions?

Payback.

The expected return on a stock given various states of the economy is equal to the

Probability weighted average of the returns for each economic state.

The expected return on a stock given various states of the economy is equal to the:

Probability weighted average of the returns for each economic state.

Bob believes that the market is efficient and all securities (stocks and bonds) are correctly priced. This implies that Bob also believes that the _____ is the same for all securities.

Reward-to-risk ratio

When calculating a common-size income statement we expresses all the firm's expenses as a percentage of:

Sales.

Emst & Frank stock is listed on NASDAQ. The firm is planning to repurchase some common shares from the general public. This repurchase will occur in which one of the following markets?

Secondary.

Marianne is confused as to why you spend so much time worrying about net working capital. You explain to her that her net working capital will decrease if she starts:

Selling inventory at a loss.

Renee invested $2,000 six years ago at 4.5 percent interest. She spends her earnings as soon as she earns any interest so she only receives interest on her initial $2,000 investment. Which type of interest is she earning?

Simple interest.

Jennifer uses the discounted payback method to evaluate any project that costs less than $1 million. Applying the discounted payback decision rule to all projects is most likely to cause:

Some positive net present value projects to be rejected.

The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the:

Spread.

Tyler is concerned about his portfiolio so he asks his best friend Tippie for some advice. Since Tippie is a certified financial advisor, he is most likely to counsel Tyler that:

Spreading an investment across many diverse assets will eliminate some of the total risk

The U.S. government coding system that classifies a firm by the nature of its business operations is known as the:

Standard Industrial Classification codes.

Five years ago Two Towers Inc. issued bonds that pay a 5 percent coupon. At issue these bonds were AAA rated, but today they were downgraded to BBB. Which of the following is most likely based on this information?

The bonds carry a larger default premium than when issued

Antonio wants to purchase Cleo's Patra Restaurant. Antonio estimates the project has an IRR of 16.3 percent, a Profitability Index of 1.49, an NPV of $19,387, and a discounted payback period of 3.21 years. Which one of the following statements is likely correct given the project has conventional cash flows?

The discount rate used in computing the net present value was less than 16.3 percent.

Alf is considering opening an inter-planetary delivery company. He has analyzed the project using the discounted payback method. Which one of these statements is true?

The discounted payback period decreases as the discount rate decreases.

If the cash flow to stockholders is positive then we know that:

The dividends paid exceeded the net new equity raised.

A bond has a market price that exceeds its face value. Which of the following must be true?

The yield to maturity is less than the coupon rate.

Which one of the following accurately defines a perpetuity?

Unending equal payments paid at equal time intervals.

Fox News just released a report about medical fraud. The report caused five stocks to suddenly drop in value by 20 percent. What type of risk does this news report best represent?

Unsystematic

Which one of the following risks is irrelevant to a well-diversified investor?

Unsystematic risk

Your local hardware store has a fixed asset turnover rate of 1.69 and a total asset turnover rate of 1.79. You notice that Home Depot has a fixed asset turnover rate of 2.61 and a total asset turnover rate of 1.34. Based on this information, your local hardware store appears to be:

Utilizing its total assets more efficiently than Home Depot.

One of your suppliers requires payment within 30 days of delivery. Which of the following ratios will your supplier focus most on when deciding to grant you credit?

cash

Sade wants to know how much money shareholders received in dividends and how much they reinvested in assets last year. She should look at the:

income statement

Sally will invest $500 today in a savings account at BancorpSouth that pays a guaranteed 5% in interest annually. Which one of the following will increase the value of this investment at Sally's retirement?

increase in the age at which Sally will retire.

Three years ago Johnsonville Inc. issued a coupon bond and a zero-coupon bond to finance a new sausage factory. Both bonds had a yield to maturity of 5 percent at issue, but now both have a 5.5 percent yield to maturity. Based on this information, we know that the coupon bond will sell at a _____ while the zero-coupon bond will sell at a _____ .

premium to par; discount to par