Busi Fin Exam 2

Common-sized income statements A) assist in the comparison of companies of different sizes. B) show each income statement account as a percentage of total assets. C) compare companies with the same level of total sales. D) compare companies with the same level of net income.

A

Progressive Corporation issued callable bonds. The bonds are most likely to be called if A) interest rates decrease. B) interest rates increase. C) Shafer Corporation needs additional financing. D) Shafer Corporation's stock price increases dramatically.

A

The interest on corporate bonds is typically paid A) semiannually. B) annually. C) quarterly. D) monthly.

A

Which of the following bond provisions will make a bond more desirable to investors, other things being equal? A) The bond is convertible. B) The bond is callable. C) The coupon rate is lower. D) The bond is subordinated.

A

Which of the following is true of a zero coupon bond? A) The bond makes no coupon payments. B) The bond sells at a premium prior to maturity. C) The bond has a zero par value. D) The bond has no value until the year it matures because there are no positive cash flows until then.

A

While checking the Wall Street Journal bond listings you notice that the price of an AT&T bond is the same as the price of a K-Mart bond. Based on this information you know that A) the bond with the lower coupon rate will have the lower current yield. B) both bonds have the same yield to maturity. C) both bonds will have the same bond rating. D) the bond with the longest time to maturity will have the highest yield to maturity.

A

If a firm were to experience financial insolvency, the legal system provides an order of hierarchy for the payment of claims. Assume that a firm has the following outstanding securities: mortgage bonds, common stock, debentures, and preferred stock. Rank the order in which investors that own mortgage bonds would have their claim paid? A) first B) second C) third D) fourth

A 1. Mortgage bonds 2. Debentures 3. Preferred stocks 4. Common stock

Assume that Bunch Inc. has an issue of 18-year $1,000 par value bonds that pay 7% interest, annually. Further assume that today's expected rate of return on these bonds is 5%. How much would these bonds sell for today? Note: Payments are made annually on this bond. A) $1,233.79 B) $1,201.32 C) $1,134.88 D) $1,032.56

A N=18 PMT= (.07*1000)=70 i/y=5 FV=1000 PV=? -1,233.79

LRQ Inc. issued bonds on July 1, 2006. The bonds had a coupon rate of 5.5%, with interest paid semiannually. The face value of the bonds is $1,000 and the bonds mature on July 1, 2021. What is the intrinsic value of an LRQ Corporation bond on July 1, 2012 to an investor with a required return of 7%? A) $901.08 B) $902.27 C) $1,000.00 D) $1,104.28

A N=9*2 i/y=7/2=3.5 FV=1,000 PMT= (.055*1,000)/2=27.5 PV=? -901.08

Treasury bills pay you 7% interest rates, while your municipality pays you 5% interest rates if you buy the bonds issued by them. You are in 30% tax brackets, which bond should you invest in?

After tax treasury rate: .07*(1-.30)= .049 municipality pays more (tax free)

Which of the following statements concerning Economic Value Added (EVA) is MOST correct? A) the higher the cost of capital, the higher the EVA, other things being held constant B) EVA can be negative even if operating profits are positive. C) A company with positive net income will have positive EVA. D) Higher operating return on assets will result in lower EVA for a company with a debt ratio over 50%.

B EVA=(r-k)A

WRJ has a debt ratio of .4, current liabilities of $18,000, and total assets of $120,000. What is the level of WRJ's total liabilities? A) $22,000 B) $48,000 C) $58,000 D) $63,934

B LTD (long-term debt)= x .4=(18,000+x)/120,000 18,000+x=.4*120,000 x=30,000 TL (total liabilities)= 18,000+30,000 =48,000

Anna lent $20,000 to an attorney firm and was promised that she will be paid 6% annual return compounded continuously. If the business paid Anna the interest amount as well as the principal at the end of 5 years, how much in total did she get? If she had a choice of lending to a friend who would pay her 6% compounded weekly did she make a right choice by lending to the attorney firm rather than to her friend? Round it to the nearest 100. A) $26,000, No B) $27,000, Yes C) $27,000, No D) Get me outta here!

B N= 5*52 PMT=0 i/y=6/52 PV= -20,000 FV=? 26,992.51 or FV= 20,000(e^.06*5)

What is the expected rate of return on a bond that matures in 5 years, has a par value of $1,000, a coupon rate of 11.5%, and is currently selling for $982? Assume annual coupon payments. A) 12.5% B) 12.0% C) 12.7% D) 13.4%

B N=5 PMT=(.115*1,000)=115 PV= -982 FV=1,000 i/y=? 11.999

Jimmy just bought a new Ford SUV for his business. The price of the vehicle was $40,000. Jimmy made a $5,000 down payment and took out an amortized loan for the rest. The car dealership made the loan at 8% interest compounded monthly for five years. He is to pay back the principal and interest in equal monthly installments beginning one month from now. Determine the amount of Jimmy's monthly payment. A) $634.56 B) $709.67 C) $745.87 D) $809.33

B N=60 i/y=8/12 PV= -35,000 FV=0 PMT=? 709.67

The Johnson Corporation issues a bond which has a coupon rate of 10.20%, a yield to maturity of 10.55%, a face value of $1,000, and a market price of $850. Therefore, the annual interest payment is A) $101.75. B) $102. C) $105.50. D) $120.0.

B PMT= (.1020*1000)=102

If a corporation were to choose between issuing a debenture, a mortgage bond, or a subordinated debenture, everything else equal (such as coupon rate, maturity, etc.) which would sell for the greatest price? A) the debenture B) the mortgage bond C) the subordinated debenture D) All of the above types of bonds would sell for the same price.

B mortgage bond is least risky therefore lower required ROR so higher price

In the present value bond valuation model, risk is generally incorporated into the A) maturity amount. B) timing of cash flows (assuming more risky cash flows are received early). C) discount rate or required return. D) cash flows (making some smaller if they are more risky).

C

Speculative, or non-investment-grade, bonds have an S&P bond rating of A) C or less. B) CCC or less. C) BB or less. D) BBB or less.

C

The present value of the expected future cash flows of an asset represents the asset's A) liquidation value. B) book value. C) price/intrinsic value. D) par value.

C

Which of the following is FALSE concerning bonds? A) The claim of shareholders get paid last. B) Mortgage bonds are secured by assets such as real estate. C) Debentures are secured by specific assets other than real estate. D) Subordinated debentures are riskier than unsubordinated debentures.

C

Which of the following statements is true regarding convertible bonds? A) The holder has the right to sell these bonds back to the issuer if the bonds don't perform well. B) The holder can convert these bonds into an equal number of new bonds if they choose to do so. C) These bonds are convertible into common stock of the issuing firm at a prespecified price. D) Each bond will be converted into a stock at the par value of the bond.

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) 0.055 B) 0.010 C) 0.110 D) 0.220

C 50= 5.5/i i= .11

How much would you be willing to pay (rounded to the nearest dollar) for a 20-year annuity due if the payments are $4,500 per year and you want to earn a rate of return equal to 5.5% per year? A) $84,500 B) $63,445 C) $56,734 D) $53,777

C BGN mode PMT= 4,500 i/y= 5.5 N=20 FV=0 PV=?

You just invested $50,000 into an account that earns 7 percent compounded annually. At the beginning of each year you can withdraw $4,971. How many years can you continue to make the withdrawals (rounded to nearest year)? A) 12 B) 10 C) 16 D) 18

C BGN mode PV= -50,000 FV=0 i/y=7 PMT= 4,971 N=?

Messenger, Inc. bonds have a 4% coupon rate with semiannual coupon payments and a $1,000 par value. The bonds have 11 years until maturity, and sell for $925. What is the current yield for Messinger's bonds? A) 2.16% B) 3.45% C) 4.32% D) 5.52%

C Current yield= (.04*1000)/925= .0432

What is the yield to maturity of a bond that pays a 5% coupon rate with annual coupon payments, has a par value of $1,000, matures in 15 years, and is currently selling for $769? A) 2.4% B) 5.7% C) 7.6% D) 9.5%

C N=15 FV=1,000 PV= -769 PMT= (.05*1000)=50 i/y=? 7.64

D'Anthony borrowed $50,000 today that he must repay in 15 annual end-of-year installments of $5,000. What annual interest rate is D'Anthony paying on his loan? A) 2.222% B) 3.333% C) 5.556% D) 33.33%

C N=15 PV= -50,000 FV=0 PMT=5,000 i/y=?

PR Corporation just issued $1,000 par 20-year bonds. The bonds sold for $936 and pay interest semiannually. Investors require a rate of 7.00% on the bonds. What is the amount of the semiannual interest payment on the bonds? A) $64.50 B) $55.00 C) $32.00 D) $21.75

C N=20*2=40 FV=1,000 i/y= 7/2=3.5 PV=? 32.00

Your parents are complaining about the price of items today compared to what they cost years ago. If an automobile that cost $12,000 in 1980 costs $42,000 in 2010, calculate the annual growth rate in the automobile's price. A) 5.33% B) 4.93% C) 4.26% D) 8.4%

C PV= -12,000 FV= 42,000 N=30 PMT=0 i/y=?

Manny and Irene will be retiring in fifteen years and would like to buy a Mexican villa. The villa costs $500,000 today, and housing prices in Mexico are expected to increase by 6% per year. Manny and Irene want to make fifteen equal annual payments into an account, starting next year, so there will be enough money to purchase the villa in fifteen years. If the account earns 10% per year, what is the amount of each deposit? A) $79,885 B) $72,623 C) $37,714 D) $32,947

C Step 1: PV= -500,000 i/y= 6 N= 15 PMT= 0 FV=? 1,198,279.097 Step 2: PV=0 (start with no money saved) FV= 1,198,279.097 i/y= 10 N= 15 PMT=? 37,714.37

Charlie Corporation has two bonds outstanding. Both bonds mature in 10 years, have a face value of $1,000, and have a yield to maturity of 8%. One bond is a zero coupon bond and the other bond has a coupon rate of 8%. Which of the following statements is true? A) Both bonds must sell for the same price if markets are in equilibrium. B) The zero coupon bond must have a higher price because of its greater capital gain potential. C) The zero coupon bond must sell for a lower price than the bond with an 8% coupon rate. D) All rational investors will prefer the 8% bond because it pays more interest.

C because of the timing of the "interest payments"

If a corporation were to choose between issuing a debenture, a mortgage bond, or a subordinated debenture, which would have the highest yield to maturity, everything else equal? A) the debenture B) the mortgage bond C) the subordinated debenture D) all of the above

C subordinated debenture is most risky

Fred and Ethel are both considering buying a corporate bond with a coupon rate of 8%, a face value of $1,000, and a maturity date of January 1, 2025. Which of the following statements is MOST correct? A) Because both Fred and Ethel will receive the same cash flows if they each buy a bond, they both must assign the same value to the bond. B) If Fred decides to buy the bond, then Ethel will also decide to buy the bond C) Fred and Ethel will only buy the bonds if the bonds are rated BBB or above implying low default risk. D) Fred may determine a different value for a bond than Ethel because each investor may have a different level of risk tolerance, and hence a different required return.

D

Bryant Inc. just issued $1,000 par 30-year bonds. The bonds sold for $1,107.20 and pay interest semiannually. Investors require a rate of 7.75% on the bonds. What is the bonds' coupon rate? A) 9.333% B) 7.750% C) 4.125% D) 8.675%

D N=30*2= 60 FV= 1,000 PV= -1,107.20 i/y=7.75/2=3.875 PMT=? 43.38 Corporate rate= (43.38*2)/1000= .08675

Awesome Inc. has issued a $1,000 par 4% annual coupon bond that is to mature in 18 years. If your required rate of return is 6.5%, what price would you be willing to pay for the bond?

FV= 1,000 N=18 PMT= 40 i/y= 6.5 PV=? -739.19

A company with a current ratio higher than industry average must also have a quick ratio higher than industry average because both ratios measure liquidity.

False

An investment earning simple interest is preferred over an investment earning compound interest because the simplicity adds value

False

Financial ratios are useful for evaluating performance but should not be used for making financial projections.

False

Financial ratios are useful for measuring performance because maximizing the return on equity for common shareholders is the primary goal of financial managers.

False

If two bonds have the same yield to maturity, they also have the same current yield

False

In general, interest on bonds may be deferred until a later date at the discretion of management, making debt financing more appealing to corporate managers.

False

The present value of an annuity increases as the discount rate increases

False

Unlike market value, the intrinsic value of an asset is estimated independently of risk.

False

When repaying an amortized loan, the interest payments increase over time due to the compounding process.

False

A bond issued by UNT Inc. can be converted into 30 stocks. Answer the following: I) What is the conversion ratio of this bond. II) What is the conversion price? III) If the market price of the bond is $40, would you convert? How much is your profit/loss if you did convert? IV) If the market price of the bond is $25, would you convert? How much is your profit/loss if you did convert?

I. 30 II. 1000/30= 33.33 III. Yes; profit= (40*33.33)*30= 200 IV. No; loss = (25-33.33)*30= -250

For the same bond above (Break and Crack), say the market interest rate is 13%, do you think the firm would call away the bond? Why/Why not?

No, it is advantageous for a firm to call a bond if interest rates fall well below the coupon rate

A common protective provision in a bond indenture is the limitation of dividends on the issuing firm's common stock.

True

A firm's bond rating would be favorably affected if they have low financial leverage (debt).

True

A mortgage bond is secured by a lien on real property.

True

A timeline identifies the timing and amount of a stream of cash flows, along with the interest rate it earns.

True

Bonds generally have a maturity date while preferred stocks do not

True

If a bond has a market value that is higher than its par value, then the required return on the bond must be less than the bond's coupon rate.

True

If a bond sells for its par value, the coupon interest rate and yield to maturity are equal.

True

Junk bonds are also called high-yield bonds.

True

Market value of a bond is expected to be higher than its liquidation value

True

Ratios that examine profit relative to investment are useful in evaluating the overall effectiveness of the firm's management.

True

Subordinated debentures are more risky than unsubordinated debentures because the claims of subordinated debenture holders are less likely to be honored in the event of liquidation.

True

The expected yield on junk bonds is higher than the yield on AAA-rated bonds because of the higher default risk associated with junk bonds.

True

The par value of a corporate bond indicates the payment that the issuer promises to make to the bondholder at maturity

True

The present value of a deferred annuity (e.g., an annuity that starts 10 years from today) can be calculated in two steps: (1) calculate the present value of the annuity, and (2) calculate the present value of the amount determined in step (1).

True

The time value of money involves the opportunity cost of passing up the earning potential of a dollar today.

True

The value of a bond is inversely related to changes in the investor's present required rate of return.

True

Theoretically, market values of assets are better for evaluating the creation of shareholder wealth than accounting numbers, but accounting numbers are used because they are more readily available.

True

To determine the periodic interest payments that a bond makes, multiply the bond's stated coupon rate by its par value and divide by the number of coupon payments per year.

True

When solving a problem involving an annuity due, you must select the "beg" or beginning mode on your financial calculator.

True

Artificially low interest rates helped create the housing bubble because low interest rates (r value) create higher values (higher PVs)

True PV=FV/(1+i)^n

You bought Break and Crack bond at $1,100, with 20 years to maturity; it pays a 12% coupon annually. The bond was called in 6 years at a price of $1,150. The face value of the bond is $1,000. Calculate both the Yield to Call and Yield To Maturity (YTM) on the bond.

YTC: N=6 PMT=120 PV= -1,100 FV= 1,150 i/y=? 11.48 YTM: N=20 PMT=120 PV=-1100 FV=1,000 i/y=?10.76

A zero coupon bond is selling for $476. The bond has a face value of $1,000 and matures in 8 years. Your friend asks you if she should buy the bond. She tells you her required return is 9 percent. Would you recommend she buy the bond or not? Explain your answer.

Yes FV= 1000 N=16 PV= -476 PMT=0 i/y=? 4.75*2= 9.5

What is the present value of the following perpetuities? a. $200 per year discounted at 6% annually b. $500 per year discounted at 9% annually

a. 200/.06= 3,333.33 b. 500/.09= 5,555.56

The current ratio of a firm would be increased by which of the following? A) Land held for investment is sold for cash. B) Equipment is purchased, financed by a long-term debt issue. C) Inventories are sold for cash. D) Inventories are sold on a credit basis.

A

Two sisters each open IRAs in 2011 and plan to invest $3,000 per year for the next 30 years. Mary makes her first deposit on January 1, 2011, and will make all future deposits on the first day of the year. Jane makes her first deposit on December 31, 2011, and will continue to make her annual deposits on the last day of each year. At the end of 30 years, the difference in the value of the IRAs (rounded to the nearest dollar), assuming an interest rate of 7% per year, will be A) $19,837. B) $12,456. C) $6,300. D) $210

A Mary: BGN N=30 PMT=3,000 i/y=7 PV=0 FV=? 303,219.12 Jane: ordinary N=30 PMT= 3,000 i/y=7 PV=0 FV=? 283,382.36

You borrow $25,000 to buy a car, and agree to make 48 monthly payments of $607.39 to repay the loan. What annual rate of interest, which is being compounded monthly, are you being charged? A) 7.75% B) 6.45% C) 0.64% D) Is this course over yet?

A N= 48 PV= -25,000 FV=0 PMT= 607.39 i/y= ? .64581 *12= 7.75

Your daughter is born today and you want her to be a millionaire by the time she is 35 years old. You open an investment account that promises to pay 12% per year. How much money must you deposit each year, starting on her 1st birthday and ending on her 35th birthday, so your daughter will have $1,000,000 by her 35th birthday? A) $2,317 B) $3,455 C) $5,777 D) $9,450

A N=35 FV=1,000,000 PV=0 i/y=12 PMT=?

You have two very similar investment options with same level of risks. Investment A brings in $5,000 every year for 7 years. Investment B brings in 56,000 in 7 years. What is the interest rate implicit in these two investment options? A) More than 15% B) More than 16% C) Less than 15% D) Cannot be calculated from the information given

A N=7 FV= 56,000 PV=0 PMT= -5,000 i/y=? 15.39

You charged $1,000 on your credit card for Christmas presents. Your credit card company charges you 26% annual interest, compounded monthly. If you make the minimum payments of $25 per month, how long will it take (to the nearest month) to pay off your balance? A) 94 months B) 79 months C) 54 months D) 40 months

A PV= -1,000 PMT= 25 i/y= 26/12= 2.166 FV=0 N=?

At 6 percent compounded monthly, how long will it take to triple your money? A) 221 months B) 175 months C) 102 months D) 48 months

A PV= -100 FV= 300 i/y= 6/12= .5 PMT= 0 N=?

At what rate must $287.50 be compounded annually for it to grow to $650.01 in 14 years? A) 6 percent B) 5 percent C) 7 percent D) 8 percent

A PV= -287.50 FV= 650.01 N= 14 PMT=0 I/Y= ?

Charlie wants to retire in 15 years, and he wants to have an annuity of $50,000 a year for 20 years after retirement. Charlie wants to receive the first annuity payment the day he retires. Using an interest rate of 8%, how much must Charlie invest today in order to have his retirement annuity (round to nearest $10)? A) $167,130 B) $200,450 C) $256,890 D) $315,240

A Step 1: BGN mode N=20 PMT=50,000 i/y=8 PV= ? 530,179.96 Step 2: N=15 FV= 530,179.96 i/y= 8 PV=? 167,135

You have the choice of two equally risky annuities, each paying $5,000 per year for 8 years. One is an annuity due and the other is an ordinary annuity. If you are going to be receiving the annuity payments, which annuity would you choose to maximize your wealth? A) the annuity due B) the ordinary annuity C) Since we don't know the interest rate, we can't find the value of the annuities and hence we cannot tell which one is better. D) either one because they have the same present value

A b/c receive money earlier

When comparing inventory turnover ratios, other things being equal A) a lower inventory turnover is preferred in order to keep inventory costs low. B) a higher inventory turnover is preferred to improve liquidity. C) higher inventory turnover results from old or obsolete inventory increasing the inventory balance on the balance sheet. D) higher inventory turnover results from an increase in the selling price of the product.

B

Which of the following ratios would be the most useful to assess the risk associated with a firm being able to pay off its short-term line of credit? A) return on equity B) the acid test ratio C) the operating profit margin D) I am not a financial analyst yet dude!

B

You plan to go to Asia to visit friends in three years. The trip is expected to cost a total of $10,000 at that time. Your parents have deposited $5,000 for you in a Certificate of Deposit paying 6% interest annually, maturing three years from now. Uncle Lee has agreed to pay for all remaining expenses. If you are going to put Uncle Lee's gift in an investment earning 10% over the next three years, how much must he deposit today, so you can visit your friends three years from today? A) $3,757 B) $3,039 C) $5,801 D) $3,345

B

If you put $100 in a savings account at the beginning of each month for 10 years, how much money will be in the account at the end of the 10th year? Assume that the account earns 12% compounded monthly. A) $1,755 B) $23,234 C) $671,399 D) $23,004

B BGN mode N=10*12=120 PMT= 100 i/y= 12/12= 1 PV= 0 FV=?

Your grandparents deposit $2,000 each year on your birthday, starting the day you are born, in an account that pays 7% interest compounded annually. How much will you have in the account on your 21st birthday, just after your grandparents make their deposit? A) $101,802 B) $98,012 C) $86,058 D) $79,640

B BGN mode N=21 i/y=7 PMT= 2,000 PV=0 FV=? 96,011.48+2,000

Baker Corp. is required by a debt agreement to maintain a current ratio of at least 2.5, and Baker's current ratio now is 3. Baker wants to purchase additional inventory for its upcoming Christmas season, and will pay for the inventory with short-term debt. How much inventory can Baker purchase without violating its debt agreement if their total current assets equal $15 million? A) $0.50 million B) $1.67 million C) $4.50 million D) $6.00 million

B CA/CL=3... CA=15 therefore CL=5 2.5=(15+x)/(5+x) 15+x= 2.5(5+x) 15+x=12.5+2.5x 2.5=1.5x x=1.67

Benkart Corporation has sales of $5,000,000, net income of $800,000, total assets of $2,000,000, and 100,000 shares of common stock outstanding. If Benkart's P/E ratio is 12, what is the company's current stock price? A) $60 per share B) $96 per share C) $240 per share D) $360 per share

B P/E= P/(800,000/100,000) P/8=12 P=12*8 P=96

Biff deposited $9,000 in a bank account, and 10 years later he closes out the account, which is worth $18,000. What annual rate of interest has he earned over the 10 years? A) 6.45% B) 7.18% C) 9.10% D) 10.0%

B PV= =9,000 FV= 18,000 N= 10 PMT= 0 I/Y=?

I need your help! I have $15,000 that I can deposit in the Bank of Pandora and earn 4% interest rate compounded semi-annually or in the Bank of Titanic and earn 4% interest rate compounded continuously. If I can keep the deposit for 3 years, where should I deposit? By how much is this amount higher than if I deposited in the other bank? A) Bank of Pandora, $20 B) Bank of Titanic, $20 C) Bank of Pandora, $16.91 D) Doesn't matter where as I am receiving the same interest rate and investing for the same period of time

B Pandora: PV= -15,000 i/y=4/2 N= 3*2 PMT=0 FV=? 16,892.44 Titanic: FV= 15,000(e^.04*3) ? 16,912.45 Differences: 20.01

SNL has sales of $2,250,000; a gross profit of $825,000; total operating costs of $620,000; income taxes of $74,800; total assets of $995,000; and interest expense of $18,000. What is SNL's times interest earned ratio? A) 1.3 B) 11.4 C) 8.1 D) 45.8

B TIE= operating profit/interest expense =(825,000-620,000)/18,000 =11.38

U.S. Savings Bonds are sold at a discount. The face value of the bond represents its value on its future maturity date. Therefore A) the current price of a $50 face value bond that matures in 10 years will be greater than the current price of a $50 face value bond that matures in 5 years. B) the current price of a $50 face value bond that matures in 10 years will be less than the current price of a $50 face value bond that matures on 5 years. C) the current prices of all $50 face value bonds will be the same, regardless of their maturity dates because they will all be worth $50 in the future. D) the current price of a $50 face value bond will be higher if interest rates increase.

B due to TVM

An investment is expected to yield $300 in three years, $500 in five years, and $300 in seven years. What is the present value of this investment if our opportunity rate is 5%? A) $735 B) $864 C) $885 D) $900

B i/y= 5

Financial analysis A) uses historical financial statements and is thus useful only to assess past performance. B) relies on generally accepted accounting principles to make comparisons between companies valid. C) uses historical financial statements to measure a company's performance and in making financial projections of future performance. D) is accounting record-keeping using generally accepted accounting principles

C

Which of the following transactions will increase a corporation's operating return on assets? A) sell stock and use the money to pay off some long-term debt B) sell 10-year bonds and use the money to pay off current liabilities C) negotiate a new contract that lowers raw material costs by 10% D) increase sales by 10%

C A/B do not change total asset D change in operating profit is uncertain: COGS could go up, marketing expense etc

A financial advisor tells you that you can make your child a millionaire if you just start saving early. You decide to put an equal amount each year into an investment account that earns 7.5% interest per year, starting on the day your child is born. How much would you need to invest each year (rounded to the nearest dollar) to accumulate a million for your child by the time he/she is 35 years old? (Your last deposit will be made on his/her 34th birthday.) A) $6,525 B) $7,910 C) $6,030 D) $20,347

C BGN mode N=35 PV=0 i/y=7.5 FV= 1,000,000 PMT=?

Last National Bank is offering you a loan at 10%; payments on the loan are to be made monthly. Credit Onion is offering you a loan where payments are to be made semiannually; the rate on the loan is also 10%. Local Bank down the street is also offering a loan at 10% where the payments are made quarterly. Which loan has the lowest annual cost? A) Last National Bank's loan B) Local Bank's loan C) Credit Onion's loan D) All of the loans will have the same annual cost

C LNB= monthly (12) CO= semiannually (2) LB= quarterly (4)

You borrow $25,000 to be repaid in 12 monthly installments of $2,292.00. The annual interest rate is closest to A) 1.5 percent. B) 12 percent. C) 18 percent. D) 24 percent.

C N=12 PV= -25,000 FV=0 PMT= 2,292 i/y=? 1.50 monthly 1.50*12= 18

The present value of $1,000 to be received in 5 years is ________ if the discount rate is 12.78%. A) $368 B) $494 C) $548 D) $687

C N=5 I/Y=12.78 FV=1000 PMT=0 PV=?

You can buy a $50 savings bond today for $25 and redeem the bond in 10 years for its full face value of $50. You could also put your money in a money market account that pays 7% interest per year. Which option is better, assuming they are of equal risk? A) The money market account is better because it pays more interest. B) The money market account is better because it requires a smaller investment. C) The savings bond is better because it earns a higher interest rate. D) The money market and savings bond both earn 7% interest, so they are equal in value.

C Option 1: N=10 PV= -25 FV= 50 PMT= 0 i/y=? 7.18 Option 2: i/y= 7

You decide you want to be a millionaire. You deposit $50,000 in an investment account that earns 9% per year. The money in the account will be distributed to you whenever the total reaches $1,000,000. If you are 27 now, how old will you be when you get the money (rounded to the nearest year)? (Hint: to know how old you will be, you need to know for how long your money should be invested in) A) 49 years B) 53 years C) 62 years D) 66 years

C PV= -50,000 FV=1,000,000 I/Y=9 PMT=0 N=? 34.76 27+34.76= 61.76

Denver Systems has total assets of $1,000,000; common equity of $400,000; a gross profit of $800,000; total operating expenses of $620,000; interest expense of $20,000; income taxes of $74,000; and preferred dividends of $30,000. What is Denver Systems' return on equity? A) 7.5% B) 20.0% C) 21.5% D) 14.0%

C ROE= Net Income/Common equity 1st find NI-- Gross Income-oper exp-int exp-income tax 800,000-620,000-20,000-74,000= 86,000 2nd ROE equation 86,000/400,000=.215

Ryan borrowed $400,000 to buy a house; the annual interest rate is 5% and has a 25 year mortgage, paying monthly. It has been 7 years since he took the loan, and wants to refinance it. In order to do so, he first needs to know how much he still owes on the home so that he can pay that off and take a new loan (refinance) at the lower prevailing rate. How much does Ryan still owe to the bank? A) $226,632 B) $331,762 C) $332,610 D) $341,611

C Step 1: N=300 PV= -400,000 i/y= 5/12 FV= 0 PMT=? 2,338.36 Step 2: AMORT P1= 84 P2= 84 Bal= ? 332,610

A deferred annuity will pay you $500 at the end of each year for 10 years, however the first payment will not be made until three years from today (payments will be made at the end of years 3 through 12). What amount will you have to deposit today to fund this deferred annuity? Use an 8% discount rate and round your answer to the nearest $100. A) $2,200 B) $2,400 C) $2,900 D) $3,400

C Step 1: N=10 PMT=500 FV=0 i/y= 8 PV= ? 3,355.04 Step 2: FV= 3,355.04 i/y= 8 PMT=0 N=2 PV=? 2,876

You estimate you'll need $200,000 per year for 25 years starting on your 65th birthday to live on during your retirement. Today is your 50th birthday and you want to make equal deposits into an account paying 9% interest per year, the first deposit today and the last deposit on your 64th birthday. How much must each deposit be (rounded to the nearest $10)? A) $99,920 B) $85,840 C) $66,910 D) $49,380

C Step 1: BGN N=25 PMT= 200,000 FV= 0 i/y= 9 PV=? 2,141,322 Step 2: BGN N=15 FV= 2,141,322 PV=0 i/y= 9 PMT=?

An inventory turnover ratio of 7.2 compared to an industry average of 5.1 is likely to indicate that A) the firm has higher sales than the industry average. B) the firm is selling a product mix that includes more high margin items. C) the firm is managing its inventory inefficiently. D) the firm's products are in inventory for fewer days before they are sold than is average for the industry.

D

HighLev Incorporated borrows heavily and uses the leverage to boost its return on equity to 30% this year, nearly 10% higher than the industry average. However, HighLev's stock price decreases relative to its industry counterparts. How is this possible? A) Markets are inefficient and fail to recognize the benefits of leverage. B) The increased debt resulted in interest payments that made HighLev's operating income drop even though return on equity increased. C) Shareholders are not interested in return on equity. D) the high levels of debt increased the riskiness of HighLev relative to its competitors.

D

What is the present value of an annuity of $4,000 received at the beginning of each year for the next eight years? The first payment will be received today, and the discount rate is 9% (round to nearest $1). A) $36,288 B) $35,712 C) $25,699 D) $24,132

D BGN Mode N=8 PMT= 4,000 i/y= 9 FV=0 PV=?

Today is your 20th birthday and your bank account balance is $25,000. Your account is earning 6.5% interest compounded semiannually. How much will be in the account on your 50th birthday? A) $159,795 B) $162,183 C) $163,823 D) $170,351

D N= 30*2= 60 PV= -25,000 i/y= 6.5/2= 3.25 PMT= 0 FV=?

AutoLoans Corp. loans you $24,000 for four years to buy a car. The loan must be repaid in 48 equal monthly payments. The annual interest rate on the loan is 9 percent. What is the monthly payment? A) $500.92 B) $543.79 C) $563.82 D) $597.24

D N=12*4= 48 i/y= 9/12= .75 PV= -24,000 FV= 0 PMT=?

What is the present value of $11,463 to be received 7 years from today? Assume a discount rate of 3.5% compounded annually and round to the nearest $1. A) $5,790 B) $6,508 C) $7,210 D) $9,010

D N=7 I/Y= 3.5 FV=11,463 PMT=0 PV=?

A zero coupon bond pays no annual coupon interest payments. When it matures at the end of 7.5 years it pays out $1,000. If investors wish to earn 2.35% per year on this bond investment, what is the current price of the bond? (Round to the nearest dollar.) A) $533 B) $561 C) $875 D) $840

D N=7.5 FV=1,000 PV=? i/y=2.35 PMT=0

How much would you be willing to pay (rounded to the nearest dollar) for a 20-year ordinary annuity if the payments are $4,500 per year and you want to earn a rate of return equal to 5.5% per year? A) $84,500 B) $63,445 C) $56,734 D) $53,777

D PMT= 4,500 i/y= 5.5 N=20 FV= 0 PV=?

Assume you are to receive a 10-year annuity with annual payments of $1000. The first payment will be received at the end of Year 1, and the last payment will be received at the end of Year 10. You will invest each payment in an account that pays 9 percent compounded annually. Although the annuity payments stop at the end of year 10, you will not withdraw any money from the account until 25 years from today, and the account will continue to earn 9% for the entire 25-year period. What will be the value in your account at the end of Year 25 (rounded to the nearest dollar)? A) $48,359 B) $35,967 C) $48,000 D) $55,340

D Step 1: N=10 i/y= 9 PMT= 1,000 PV= 0 FV=? 15,192.92972 Step 2: PV= 15,192.93 N=15 i/y=9 PMT=0 FV=?

Which of the following investments has the highest effective annual return (EAR)? (Assume that all CDs are of equal risk.) A) a bank CD that pays 7.00 percent interest compounded daily B) a bank CD that pays 7.10 percent compounded monthly C) a bank CD that pays 7.30 percent annually D) a bank CD that pays 7.25 percent compounded semiannually

D EAR= [[1+(quoted rate/m)]^m] -1 a. 7.25 b. 7.34 c. 7.30 d. 7.38

You are thinking of buying a craft emporium. It is expected to generate cash flows of $30,000 per year in years 1 through 5, and $40,000 per year in years 6 through 10. If the appropriate discount rate is 8%, what amount are you willing to pay for the emporium? A) $135,288 B) $167,943 C) $215,048 D) $228,476

D CF0= 0 CF1= 30,000 F1=5 CF2=40,000 F2=5 i/y= 8 NPV= ?228,476

John has to pay $1,000 per month for his mortgage for another 5 years, but he is considering paying the mortgage off in one lump sum. John cannot calculate the present value of the payments using the annuity formulas because his payments are monthly and not once per year.

False can use PV of annuity formula, need to adjust N and I to monthly

Debentures are expected to have a lower yield than secured bonds because the debentures are more risky and therefore less desirable.

False debentures are riskier therefore higher yield

It is commonly accepted that the industry average for a ratio is the ideal goal for a financial manager to achieve.

False; a limitation of ratio analysis is that the industry average may not provide a desirable target ratio

Ratios of almost all companies are easily comparable because all public companies prepare their financial reports based upon generally accepted accounting principles.

False; same industry is best

Financial ratios cannot be used to evaluate the creation of shareholder wealth because they are based on accounting numbers that reflect historical cost and not current market values.

False; what about P/B, P/E, EVA

$10,000 invested at 10% per year for 5 years earns interest equal to $6,105.10; therefore, $10,000 invested at 10% per year for 10 years will earn interest equal to $12,210.20 (2 times $6,105.10).

False; what about compound interest

Other things held equal, a bond with a call provision is worth more to investors than a bond without a call provision.

False; worth more to issuing firm

Borrowing more money will always increase a company's return on equity because the company is using financial leverage, but it also adds to the riskiness of the company.

False; yes in good economy or favorable business conditions , no in bad

You decide to borrow $250,000 to build a new home. The bank charges an interest rate of 8% compounded monthly. If you pay back the loan over 30 years, what will your monthly payments be (rounded to the nearest dollar)? A) $1,123 B) $1,237 C) $1,687 D) $1,834

N= 30*12=360 PV= -250,000 i/y= 8/12= .66

Convertible bonds are debt securities that can be converted into a firm's stock at a prespecified price.

True

Financial ratios are often reported by industry or line of business because differences in the type of business can make ratio comparisons uninformative or even misleading.

True

If we invest money for 10 years at 8 percent interest, compounded semiannually, we are really investing money for 20 six-month periods, and receiving 4 percent interest each period.

True

If you only earned interest on your initial investment, and not on previously earned interest, it would be called simple interest.

True

When using a financial calculator, cash outflows generally have to be entered as negative numbers, because a financial calculator sees money "leaving your hands."

True

If the future value of an annuity is known, then the present value of the annuity can be found using the present value of a lump sum formula, even if the amount of each annuity payment is unknown.

True FV/(1+i)^n

Tim has $100 in a bank account paying 2% interest per year. At the end of 5 years, Tim's bank account balance will be $110 if interest is not compounded, but will be greater than $110 if interest is compounded.

True FV=100(1.02)^5=110.41 Compound FV= 100+[(100*.02)*5]=110 simple

The present value of a single future sum of money is inversely related to both the number of years until payment is received and the discount rate

True PV= FV/(1+i)^n

The future value of an annuity will increase if the interest rate goes up, but the present value of the same annuity will decrease as the interest rate goes up

True Fundamental TVM concept (relationship between PV and FV)

If the interest rate is positive, then the future value of an annuity due will be greater than the future value of an ordinary annuity

True money gets in your hands faster

A rational investor would prefer to receive $1,200 today rather than $100 per month for 12 months

True bc of TVM (no calculation needed)

To evaluate or compare investment proposals, we must adjust the value of all cash flows to a common date.

True either PV or FV

The value of a bond investment, which provides fixed interest payments, will increase when discounted at an 8% rate rather than at an 11% rate.

True higher interest--lower PV

A certificate of deposit that pays 9.8% compounded monthly is better than a similar certificate of deposit that pays 10% compounded only once per year

True; EAR= [[1+(.098/12)]^12]-1 =.1025

At an annual interest rate of 9%, an initial sum of money will double approximately every 8 years.

True; Rule of 72: 72/9=8 years

The future value of an annuity due is greater than the future value of an otherwise identical ordinary annuity

True; get money earlier