Business Finance

You only have $690 today but need $800 to buy a new laptop. How long will you have to wait to buy the laptop if you earn 5.4 percent compounded annually on your savings?

2.81 years $800 = $690 * (1 + 0.054)^t = 2.81 years

4 A firm will need $1.8 million 5 years from now to replace some equipment. Currently, the firm has some extra cash and would like to establish a savings account for this purpose. The account pays 5.25 percent interest, compounded annually. How much money must the company deposit today to fully fund the equipment purchase?

$1,393,676.52 Present value= $1,800,000/(1 + 0.0525)5 = $1,393,676.52

5 Assume a firm spent $84,000 to refurbish its current facility. The firm borrowed 80 percent of the refurbishment cost at 9.2 percent interest for five years. What is the amount of each monthly payment?

$1,401.49 Amount borrowed= 0.80 x $84,000 = $67,200 N= 5*12 = 60 r = 9.2/12 = 0.76667 a month

5 A firm decided to save money each year for the next four years to help fund a new building. If it earns 6.5 percent on its savings, how much will the firm have saved at the end of year 4? In the following, the amount saved is provided at the end of each period:1: $20,000 2: $24,000 3: $28,000 4: $32,000

$113,200.39 FV = (($20,000*1.0653) + ($24,000*1.0652) + ($28,000*1.065) + $32,000 = $113,200.39

2. A company has the following data: Sales: $487,000 Costs: $394,500 Depreciation: $43,800 Interest: $18,200 Dividends: $6,500 Tax rate: 35% What is the addition to retained earnings?

$13,325 Net income = addition to retained earnings + dividends Addition to retained earnings = net income - dividends Net income = EBIT - Interest - Taxes = Sales - Costs - Depreciation - Interest - Taxes Net income = [($487,000 - $394,500 - $43,800 - $18,200)]*(1 - 0.35) = 30,500 Addition to retained earnings = net income - dividends = 19,825 - $6,500 = $13,325

4 You are scheduled to receive $7,500 in three years. When you receive it, you will invest it for eight more years at 7.5 percent per year. How much will you have in eleven years?

$13,376.08 Future value= $7,500 * (1 + 0.075)^8 = $13,376.08

2. A company shows the following information on its 2014 income statement: Sales: $317,800 Costs: $211,400 Other expenses: $18,500 Depreciation expense: $31,200 Interest expense: $2,100 Taxes: $18,600 Dividends: $12,000. Additionally, the firm issued $4,500 in new equity during 2014, and bought back (redeemed) $6,500 in outstanding long-term debt. If net fixed assets increased by $7,400 during the year, what was the addition to net working capital?

$14,600 CFFA = Operating Cash Flow - Net Capital Spending - Change in NWC = OCF - NCS - ΔNWC ΔNWC = OCF - NCS -CFFA OCF= EBIT + depreciation - taxes = $317,800 - $211,400 - $18,500 - $18,600 = $69,300 NCS = ending net FA- beginning net FA + depreciation = $7,400 + $31,200 = $38,600 CFFA = CFCR + CFSH CFCR = cash flow to creditors = interest paid - net new borrowing = $2,100 - (-$6,500) = $8,600 CFSH = cash flow to stock holders = dividends paid - net new equity = $12,000 - $4,500 = $7,500 CFFA = $8,600 + $7,500 = $16,100 NWC = OCF - NCS - CFA = $69,300 - $38,600 - $16,100 = $14,600

2. Suppose the following data about a company: Net income: $145,000 Dividends: $13,500 Newly issued stock: $25,000 Beginning retained earnings: $30,000 What is the value of the end-period retained earnings

$161,500 Net income = addition to retained earnings + dividends Net income = (retained earnings end period - retained earnings beginning period) + dividends Retained earnings end period = Net income + retained earnings beginning period - dividends Retained earnings end period = $145,000 + $30,000 - $13,500 = $161,500

2. A company has the following data: Sales; $79,600 Costs: $48,200 Other costs: $18,700 Depreciation: $8,300 Tax rate: 34% What is the net income?

$2,904 Net income = EBIT - Interest - Taxes = Sales - Costs - Depreciation - Interest - Taxes Net income = [($79,600 - $48,200 - $18,700 - $8,300)]*(1 - 0.34) = $2,904

2. Suppose the following data about a company: Beginning-period retained earnings: $18,670 Sales: $83,490 Costs: $68,407 Depreciation: $8,200 Dividends: $950 Interest: $478 Tax rate: 35% What is the retained earnings balance at the end of the year?

$21,883.25 Net income = EBIT - Interest - Taxes = Sales - Costs - Depreciation - Interest - Taxes Net income = [($83,490 - $68,407 - $8,200 - $478)] × (1 - 0.35) = $4,163.25 Net income = addition to retained earnings + dividends Addition to retained earnings = end-period retained earnings - beginning-period retained earnings Net income = end-period retained earnings - beginning-period retained earnings + dividends End-period retained earnings = Net income + beginning-period retained earnings - dividends End-period retained earnings = $4,163.25 + $18,670 - $950 = $21,883.25

1 Someone who is in charge of all fixed asset purchases is in charge of

capital budgeting

1 The mixture of debt and equity is referred to as the firm's

capital structure

2. Suppose the following data about a company: Total assets: $74,300 Net working capital: $22,900 Owners' equity: $38,600 Long-term debt: $23,900. What is the value of the current assets

$34,700 NWC = current assets - current liabilities Current assets = NWC + current liabilities We do not know current liabilities; however: Total liabilities = current liabilities + long-term debt + owners' equity Current liabilities = total liabilities - long-term debt - owners' equity Because total assets = total liabilities, Current liabilities = $74,300 - $23,900 - $38,600 = $11,800 Current assets = $22,900 + $11,800 = $34,700

2. Suppose the following data about a company: Sales: $581,600 Costs: $479,700 Depreciation: $32,100 Interest: $8,400. Tax rate: 42% How much net income did the firm earn?

$35,612 Net income = EBIT - interest paid - taxes EBIT = Sales - Costs - Depreciation = $581,600 - $479,700 - $32,100 = $69,800 Net income = [(69,800 - 8,400)] *(1-0.42) = $35,612

2. Suppose the following data about a company: Dividends: $30,500 Interest: $7,600 Sales: $211,800 Costs: $167,900 Depreciation: $16,500 Tax rate: 34% What is the amount of the operating cash flow?

$37,168 OCF = net income + depreciation - taxes To calculate net income: EBIT = sales - costs - depreciation = $211,800 - $167,900 - $16,500 = $27,400 Taxable income = EBIT - interest paid = 27,500 - 7,600 = 19,900 Taxes = Taxable income * tax rate = 19,900 * 0.34 = $6,732 OCF = $27,400 + $16,500 - $6,732 = $37,168

2. A company has the following data: Interest: $360,800 Dividends: $48,000 Stock issued: $230,000 Debt issued: $200,000 The company reduced the balance due on its outstanding debt by $225,000. What is the amount of the cash flow to creditors?

$385,800 CFCR = cash flow to creditors = interest paid - net new borrowing CFCR = 360,800 - $200,000 + $225,000 = $385,800

2. Suppose the following data about a company: Operating cash flow: $187,000 Cash flow to creditors: $71,400 Change in net working capital: 28,000 Net capital spending: $47,900. What is the amount of the cash flow to stockholders?

$39,700 CFFA = CFCR + CFSH CFSH = CFFA - CFCR CFFA = Operating Cash Flow - Net Capital Spending - Change in NWC = $187,000 - $28,000 - $47,900 CFFA = 111,100 CFSH = CFFA - CFCR = 111,100 - 71,400 = $39,700

You and your sister are planning a party 3 years from today for your parents' 50th wedding anniversary. You have estimated that you will need $4,500 for this party. You can earn 2.5 percent compounded annually on your savings. How much would you and your sister have to deposit today in one lump sum to pay for the entire party?

$4,178.70 PV = FV/(1+r)t = $4,500/(1+0.025)3 = $4,178.70 or 4500 FV, 3 N, 2.5 I/YR, PV

2. Suppose the following data about a company: Sales: $811,000 Costs: $658,000 Interest: $21,800 Depreciation: $56,100 Tax rate: 34% Beginning-period retained earnings: $318,300 End period-retained earnings: $322,500 Beginning-period common stock: $250,000. End-period common stock: $280,000. What is the amount of the dividends paid for the year?

$45,366 Net income = addition to retained earnings + dividends Dividends = Net income - addition to retained earnings Net income = EBIT - interest paid - taxes = Sales - Costs - Depreciation - interest paid - taxes Net income = [($811,000 - $658,000 - $56,100 - $21,800)] * (1-0.34) = $49,566 Dividends = = $49,566 - ($322,500 - $318,300) = $45,366

2. A company has the following data: Owners' equity: $18,800 Current assets: $23,100 Current liabilities: $12,200 Total assets: $36,400 What is the value of the long-term debt?

$5,400 Total liabilities = current liabilities + long-term debt + owners' equity Long-term debt = total liabilities - current liabilities - owners' equity Total assets = total liabilities Long-term debt = $36,400 - $12,200 - $18,800 = $5,400

2. Suppose the following data about a company: Cash: $60,000 Accounts receivables: $150,000 Inventory cost: $35,000 Market value of the inventory: $72,000 Book value of fixed assets: $325,000 Market value of fixed assets = $375,000 Depreciation: $63,000 What is the total book value of the firm's assets?

$507,000 Total assets book value = current assets + fixed assets - depreciation Current assets = cash + account receivables + inventory Total assets book value = $60,000 +$150,000+$35,000 + $325,000 - 63,000 =$507,000

2. Suppose the following tax rates for the given levels of taxable income: 15% - $1-50,000 25% - $50,001-75,000 34% - $75,001-100,000 39% - $100,001-335,000 34% - $335,001-10,000,000 If a company earned $177,284 in taxable income for the year, how much tax does the company owe on this income?

$52,390.76 Total tax = ($50,000)*(0.15) + ($25,000)*(0.25) + ($25,000)*(0.34) + ($177,284 - $100,000)*(0.39) = $52,390.76

2. Suppose the following data about a company: Beginning owners' equity: $58,900 Net income: $4,200 Dividends: $3,200 Stock repurchase: $6,500 What is the value of the owners' equity at year end?

$53,400 Owner equity end period - owner equity beginning period = retained earnings + common stock Owner equity end period = owner equity beginning period + retained earnings + common stock Retained earnings = net income - dividends = 4,200 - 3,200 = 1,000 Owner equity end period = $58,900 + 1,000 - $6,500 = $53,400

2. Suppose the following data about a company: Net working capital: $11,300 Current assets: $31,200 Owners' equity: $53,400 Long-term debt: $11,600 What is the amount of the net fixed assets?

$53,700 Total assets = current assets + net fixed assets Net fixed assets = total assets - current assets We do not know total assets: Total assets = total liabilities = current liabilities + long term debt + owners' equity We do not know current liabilities: NWC = current assets - current liabilities Current liabilities = current assets - NWC = $31,200 - $11,300 = $19,900 Total assets = 19,900 + 11,600 + 53,400 = 84,900 Net fixed assets = $84,900 - $31,200 = $53,700

5 A firm is considering a project that will produce cash inflows of $11,000 in year 1, $24,000 in year 2, and $36,000 in year 3. What is the present value of these cash inflows if the company assigns the project a discount rate of 12 percent?

$54,578.17 PV = ($11,000/1.12) + ($24,000/1.122) + ($36,000/1.123) = $54,578.17

2. A company has the following data: Operating cash flow: $78,460 Depreciation expense: $8,960 Taxes paid: $21,590. Additionally, the following are some of the beginning and ending balances on the company's balance sheet, respectively. Current assets: 141,680; 138,509 Next fixed assets: 687,810; 703,411 Current liabilities: 87,340; 91,516 Long-term debt: 267,000; 248,000 What is the amount of the cash flow from assets?

$61,246 CFFA = Operating Cash Flow - Net Capital Spending - Change in NWC OCF = $78,460 NCS = ending net FA- beginning net FA + depreciation = $703,411 - $687,810 + $8,960 = $24,561 ΔNWC = current assets - current liabilities = (ending-period current assets - ending-period current liabilities) - (beginning-period current assets - beginning-period current liabilities) = ($138,509 - $91,516) - ($141,680 - $87,340) = -$7,347 CFFA = $78,460 - $24,561+ $7,347 = $61,246

2. Suppose the following data about a company: Depreciation: $21,900 Sales; $811,400 Addition to retained earnings: $14,680 Interest: $9,700 Dividends: $10,100 Tax rate: 40% What was the amount of the costs incurred by the firm?

$738,500.00 EBIT = Sales - Costs - Depreciation Costs = Sales - EBIT - Depreciation We do not know EBIT, but Net income = addition to retained earnings + dividends = 14,680 + 10,100 = $24,780 Taxable income = net income/(1-t) = 24,780/0.6 = 41,300 EBIT = taxable income + interest paid = 41,300 + 9,700 = 51,000 Costs = $811,400 - $51,000 - $21,900 = $738,500

5 You just won a contest! You will receive $100,000 a year for 20 years, starting at the end of this year. If you can earn 12 percent on your investments, what are your winnings worth today?

$746,944.36 -100,000 PMT, 12 I/YR, 20 N, 0 FV, PV

2. A company has the following data: Sales: $398,600 Costs: $254,800 Depreciation: $26,400 Interest: $1,600 Tax rate: 34% What is the net income for this firm?

$76,428 Net income = EBIT - Interest - Taxes = Sales - Costs - Depreciation - Interest - Taxes Net income = [($398,600 - $254,800 - $26,400 - $1,600)]*(1 - 0.34) = $76,428

5 Karl can afford car payments of $235 a month for 48 months. The bank will lend him money to buy a car at 7.75 percent interest. How much money can he afford to borrow?

$9,672.48 r = 7.75/12 = 0.64583

1 Your firm has $50,000 in current assets, $75,000 in current liabilities, and $15,000 addition to retained earnings. The firm's working capital is

-$25,000 Working capital = current assets - current liabilities = $50,000 - $75,000 = -$25,000

5 A loan that compounds interest monthly has an APR of 14.4 percent. What is the EAR?

15.39 percent

5 Currently, you owe the bank $9,800 for a car loan. The loan has an interest rate of 7.75 percent and monthly payments of $310. Your financial situation recently changed such that you can no longer afford these payments. After talking with your banker and explaining the situation, he has agreed to lower the monthly payments to $225 while keeping the interest rate at 7.75 percent. How much longer will it take you to repay this loan than you had originally planned?

15.84 months

5 A storage charges 1.6 % interest per month. What rate of interest are its credit customers actually paying?

20.98 % EAR= (1 + 0.016)12 - 1 = 20.98 percent

2. Suppose the following data about a company: Current liabilities: $15,000 Depreciation: $5,500 Total assets: $50,200 Net fixed assets: $10,000. What is the amount of the net working capital?

25,200 Net working capital = current assets - current liabilities Current assets = total assets - fixed assets = $50,200 - $10,000 = $40,000 Net working capital = $40,000 - $15,000 = $25,200

4 You have just made your first $5,000 contribution to your individual retirement account. Assuming you earn a 5 percent rate of return and make no additional contributions, what will your account be worth when you retire in 35 years? What if you wait for 5 years before contributing?

27,580.08; 21,609.71 Future value35 = $5,000 * (1 + 0.05)35 = $27,580.08 Future value 30 = $5,000 * (1 + 0.05)30 = $21,609.71

5 A firm will pay you $2,500 a year for 10 years in exchange for $30,000 today. What interest rate will you earn on this annuity?

3.18 percent 10 N, -30000 PV, 2500 PMT, I/YR

4 Your friend claims that he invested $5,000 seven years ago and that this investment is worth $38,700 today. For this to be true, what annual rate of return did he have to earn? Assume the interest compounds annually.

33.96 percent $38,700 = $5,000 * (1 + r)^7; r = 33.96 percent

2. A company pays a total of $21,684 in taxes this year. Its taxable income was $61,509. What is the average tax rate of this firm?

35 percent Average tax rate = Taxes paid / taxable income = $21,684 / $61,509 = 35%

4 You're trying to save to buy a new $210,000 Ferrari. You have $38,000 today that can be invested at your bank. The bank pays 4.1 percent annual interest on its accounts. How long will it be before you have enough to buy the car?

42.54 years $210,000 = $38,000 x (1 + 0.041)^t, t = 42.54 years

5 Suppose a firm is acquiring another firm for $899,000. The seller has agreed to accept annual payments of $210,000 at an interest rate of 8.5 percent. How many years will it take the acquiring firm to pay for this purchase?

5.55years 899000 PV, 8.5 I/YR, 210,000 PMT, N

4 You want to invest $5,000 for 5 years. Which one of the following rates will provide you with the largest future value?

7 percent interest, compounded annually

9. A firm sells short leather jackets for $349 each and is considering selling long coats as well. The coats would sell for $689 each and the company expects to sell 900 a year. If the firm decides to carry the long coat, management feels that the sales of the short jacket will decline from 1,420 to 1,265 units. Variable costs on the jacket are $210 and $445 on the long coat. The fixed costs for this project are $42,000, depreciation is $11,000 a year, and the tax rate is 33 percent. What is the projected operating cash flow for this project using the depreciation tax shield approach? A. $108,187 B. $111,264 C. $112,212 D. $119,672 E. $120,418

A. $108,187 OCF = long coat sales - long coat costs + change in short coat sales - short coat costs - fixed cost - taxes + depreciation tax shield OCF = {[[900 × ($689 - $445)] - [(1,420-1,265) × ($349 - $210)] - $42,000] × (1 - 0.33)} + ($11,000 × 0.33) = $108,187

9. A company sells specialty equipment for mountain climbers. Its sales for last year included $238,000 of tents and $411,000 of climbing gear. For next year management has decided to sell specialty sleeping bags as well. As a result of this change, sales projections for next year are $264,000 of tents, $426,000 of climbing gear, and $51,000 of sleeping bags. How much of next year's sales are derived from the side effects of adding the new product to its sales offerings? A. $41,000 B. $20,500 C. $0 D. $51,000 E. $82,000

A. $41,000 Side effects = ($264,000 + $426,000) - ($238,000 + $411,000) = $41,000

9. A project has an initial requirement of $261,000 for fixed assets and $27,000 for net working capital. The fixed assets will be depreciated to a zero book value over the four-year life of the project and have an estimated salvage value of $78,000. All of the net working capital will be recouped at the end of the project. The annual operating cash flow is $96,200 and the discount rate is 13 percent. What is the project's net present value if the tax rate is 35 percent? A. $45,799 B. $43,333 C. $42,011 D. $47,880 E. $47,919

A. $45,799 Using the calculator: -261000 - 27000 = -288000 CF 96200 INPUT 3 CF 96200 + 27,000 + [78000 × (1-0.35)] = 173900 CF 13 I/YR NPV 45799

40. You are analyzing a project and have developed the following estimates. The depreciation is $19,800 a year and the tax rate is 34 percent. What is the best-case operating cash flow using the depreciation tax shield approach? A. $60,456 B. $62,333 C. $64,011 D. $65,650 E. $66,240

A. $60,456 For the best-case OCF, pick the highest sales and prices as well as lowest variable and fixed costs: Best-case OCF = {[4,900 × ($65 - $44) - $21,500] × [1 - 0.34]} + [$19,800 × 0.34] = $60,456

8. A project has the following cash flows. What is the payback period? -31,000, 15,600, 10,200, 8,700, 7,100 A. 2.6 years B. 2.49 years C. 2.38 years D. 3.01 years E. 3.33 years

A. 2.6 years Payback = 2 + (5,200/8,700) = 2.5977 or 2.6 years Note that 31000 -15,600 -10,200 = 5,200. It means that the original investment is not entirely paid at the end of the second year. The question is how much of Year 3 we need to payback the original investment.

8. A project has the following cash flows. What is the internal rate of return? -73000, 8400, 21900, 28300, 33300 A. 8.26 percent B. 9.11 percent C. 10.58 percent D. 11.23 percent E. 12.18 percent

A. 8.26 percent

10. Which one of the following is defined as the average compound return earned per year over a multiyear period? A. Geometric average return B. Variance of returns C. Standard deviation of returns D. Arithmetic average return E. Normal distribution of returns

A. Geometric average return

8. _______________ is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities. A. Net present value B. Profitability index C. Accounting rate of return D. Internal rate of return E. Payback

A. Net present value

9. ________________ refers to the best option that was foregone when a particular investment is selected. A. Opportunity cost B. Erosion C. Sunk cost D. Side effect E. Marginal cost

A. Opportunity cost

10. Which one of the following statements is correct concerning both the dollar return and the percentage return on a stock investment? A. The dollar return is dependent on the size of the investment while the percentage return is not. B. The dollar return is more accurate than the percentage return because the dollar return includes dividend income while the percentage return does not. C. The dollar return considers the time value of money while the percentage return does not. D. Dollar returns are based on capital gains while percentage returns are based on the total rate of return. E. Dollar returns must either be zero or a positive value while percentage returns can be negative, zero, or positive

A. The dollar return is dependent on the size of the investment while the percentage return is not.

10. Which of the following had the lowest standard deviation of returns for the period of 1926-2011? A. U.S. Treasury bill B. Inflation C. Long-term corporate bonds D. Large-company stocks E. Long-term government bonds

A. U.S. Treasury bill

10. Over the period of 1926-2011, A. long-term government bonds underperformed long-term corporate bonds. B. small-company stocks underperformed large-company stocks. C. inflation exceeded the rate of return on U.S. Treasury bills. D. U.S. Treasury bills outperformed long-term government bonds. E. large-company stocks outperformed all other investment categories.

A. long-term government bonds underperformed long-term corporate bonds.

10. The lower the standard deviation of returns on a security, the _____ the expected rate of return and the _____ the risk. A. lower; lower B. lower; higher C. higher; lower D. higher; higher E. You cannot determine anything about the expected rate of return from the standard deviation.

A. lower; lower

1. "Going dark" means that corporations

change their status in the U.S. from public to private or relocate abroad

3 . A firm has $42,900 in receivables and $211,800 in total assets. The total asset turnover rate is 1.40 and the profit margin is 5.2 percent. How long on average does it take the firm to collect its receivables?

Accounts receivable turnover = Sales/AR We don't know sales, but TAT = Sales/TA or Sales= TAT*TA = $211,800*1.40 = $296,520 Accounts receivable turnover= $296,520/$42,900 = 6.9119 Days' sales in receivables= 365/6.9119 = 52.81 days

3 A firm has sales of $923,000, cost of goods sold of $748,000, and accounts receivable of $106,700. How long on average does it take the firm's customers to pay for their purchases?

Accounts receivable turnover= ART = Sales/AR = $923,000/$106,700 = 8.65042 Days' sales in receivables = 365/ART = 365/8.65042 = 42.19 days

5You just won a scholarship that will pay you $500 at the beginning of each month, starting today, and continuing for the next 48 months. Which one of the following terms best describes these scholarship payments?

Annuity due

1. Which one of the following applies to a general partnership?

Any one of the partners can be held solely liable for all of the partnership's debt.

5 Which one of the following qualifies as an annuity?

Auto loan payment

1. Which of the following is correct about the Sarbanes-Oxley Act of 2002?

B increased senior management's involvement in the corporate annual report. C made officers of publicly traded firms personally responsible for the firm's financial statements. (B) and (C) are correct

9. Your local athletic center is planning a $1.23 million expansion to its current facility. This cost will be depreciated on a straight-line basis over a 20-year period. The expanded area is expected to generate $524,000 in additional annual sales. Variable costs are 48 percent of sales, the annual fixed costs are $79,400, and the tax rate is 35 percent. What is the operating cash flow for the first year of this project using the depreciation tax shield approach? A. $118,336 B. $147,027 C. $122,509 D. $166,667 E. $219,323

B. $147,027 OCF = sales - variable costs - fixed costs - taxes + depreciation tax shield OCF = {[$524, 000 - (0.48 × $524,000) - $79,400] × [1 - 0.35]} + [($1,230,000/20) × 0.35] = $147,027

10. Over the period of 1926-2011, which one of the following investment classes had the highest volatility of returns? A. Large-company stocks B. U.S. Treasury bills C. Small-company stocks D. Long-term corporate bonds E. Long-term government bonds

C. Small-company stocks

10. Cox Footwear pays a constant annual dividend. Last year the dividend yield was 2.5 percent when the stock was selling for $26 a share. What is the current price of the stock if the current dividend yield is 3.1 percent? A. $18.92 B. $20.97 C. $25.20 D. $26.87 E. $27.40

B. $20.97 D = dividend yield × stock price = 0.025 × $26 = $0.65 P0 = $0.65/0.031 = $20.97

8. What is the net present value of a project with the following cash flows if the discount rate is 15 percent? -59,200, 21,600, 28,300, 14,400, 7,200 A. -$8,406.11 B. -$5,433.67 C. -$3,089.16 D. $1,407.92 E. $5,433.67

B. -$5,433.67 -59200 CF 21600 CF 28300 CF 14400 CF 7200 CF 15 I/YR NPV -5433.67

9. A firm is implementing a project that will initially increase accounts payable by $4,600, increase inventory by $4,800, and decrease accounts receivable by $800. All net working capital will be recouped when the project terminates. What is the cash flow related to the net working capital? A. -$2,000 B. -$600 C. -$400 D. $200 E. $2,000

B. -$600 Net working capital recovery = -$4,600 + $4,800 - $800 = -$600

10. One year ago, Peyton purchased 3,600 shares of Broncos stock for $101,124. Today, he sold those shares for $26.60 a share. What is the total return on this investment if the dividend yield is 1.9 percent? A. -3.98 percent B. -3.40 percent C. -2.29 percent D. 1.10 percent E. 3.40 percent

B. -3.40 percent Purchase price = $101,124/3,600 shares = $28.09 a share Total return = [($26.60 - $28.09)/$28.09] + 0.019 = -3.40 percent

10. Over the past six years a stock had annual returns of 14 percent, -3 percent, 8 percent, 21 percent, -16 percent, and 4 percent, respectively. What is the standard deviation of these returns? A. 11.27 percent B. 13.05 percent C. 13.59 percent D. 15.08 percent E. 14.40 percent

B. 13.05 percent Average return = (0.14 - 0.03 + 0.08 + 0.21 - 0.16 + 0.04)/6 = 0.046667 σ2 = [(0.14 - 0.046667)2 + (-0.03 - 0.046667)2 + (0.08 - 0.046667)2 + (0.21 - 00.046667)2 + (-0.16 - 0.046667)2 + (0.04 - 0.046667)2]/(6 - 1) = 0.017027 σ = √0.017027 = 13.05 percent

8. A firm is evaluating a project with the following cash flows: Year Cash Flow 0 -$19,500 1 7,930 2 9,490 3 8,970 4 7,210 5 -3,980 The company uses a 11 percent interest rate on all of its projects. The MIRR of the project based on the combination approach is _________ percent. A. 13.28 B. 15.05 C. 9.75 D. 8.16 E. 14.12

B. 15.05 Step 1 We find the value of all cash outflows at Time 0 using the discount rate. Therefore, add the discounted future negative cash flow to the initial expense: 3980 FV; 5 N; 11 I/YR; PV 2361.94 -19500 - 2361.94 = -21,861.94 Step 2 Use the reinvestment approach and add the future value of cash flows except for $3,980, because we already accounted for it: Time 5 cash flow = $7,930(1.114) + $9,490(1.113) + $8,970(1.112) + $7,210(1.11) Or, using the calculator: 7,930 PV; 11 I/YR; 4 N; FV 12038.29 9,490 PV; 11 I/YR; 3 N; FV 12978.82 8,970 PV; 11 I/YR; 2 N; FV 11051.94 7,210 PV; 11 I/YR; 1 N; FV 8003.1 When you add up FVs, you'll find $44,072.15. Step 3 We'll discount the future value of all positive cash flows so that they are comparable to the PV of the negative cash flows. Therefore, the MIRR using the combination approach is: NPV = 0 = -$21,861.94 + $44,072.15/(1+MIRR)5 (1+MIRR)5 = $44,072.15/$21,861.94 = 2.0159 MIRR = 2.01591/5 - 1 = 1.1505 -1 MIRR = .1505 or 15.05%

10. You purchased 1,500 shares of KFC stock five years ago and have earned annual returns of 7.1 percent, 11.2 percent, 5.25 percent, -4.7 percent, and 11.8 percent, respectively. What is your arithmetic average return? A. 4.47 percent B. 6.13 percent C. 6.23 percent D. 6.47 percent E. 8.01 percent

B. 6.13 percent Arithmetic average = (0.071 + 0.112 + 0.0525 - 0.047 + 0.118)/5 = 6.13 percent

10. Last year Isaac earned 10.6 percent on her investments while U.S. Treasury bills yielded 3.8 percent and the inflation rate was 3.1 percent. What real rate of return did she earn on her investments last year? A. 6.63 percent B. 7.27 percent C. 8.56 percent D. 9.24 percent E. 10.39 percent

B. 7.27 percent Real return = (1.106/1.031) - 1 = 7.27 percent

8. The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to A. Produce a positive annual cash flow. B. Recoup its initial cost. C. Offset its fixed expenses. D. Offset its total expenses. E. Produce a positive cash flow from assets.

B. Recoup its initial cost.

9. You are analyzing a proposed project to determine how changes in the variable costs per unit would affect the project's net present value. Therefore, you are conducting a(n) _______________. A. Erosion planning B. Sensitivity analysis C. Scenario analysis D. Benefit-cost analysis E. Opportunity cost analysis

B. Sensitivity analysis

9. A cost that should be ignored when evaluating a project because it has already incurred and cannot be recouped is referred to as _______________ cost. A. Fixed B. Sunk C. Variable D. Opportunity E. Forgotten

B. Sunk

29. A firm owns several restaurants and hotels. One of the restaurants needs to be modernized. The firm is trying to decide whether to accept an offer and sell this restaurant for $1.1 million or renovate it. The projected renovation cost is $1.3 million. The restaurant would need to be shut down completely during the renovation which would cause a net operating cash flow loss of $210,000 in today's dollars. The estimated present value of the cash inflows from the renovated restaurant are $3.2 million. When analyzing the renovation project, what opportunity cost, if any, should be included for the current restaurant? Assume the restaurant is totally paid for and any future costs will be paid in cash. A. There is no opportunity cost since the current restaurant is owned free and clear. B. The opportunity cost is the value of the current offer to buy the restaurant. C. The opportunity cost is the cost of the needed improvements. D. The opportunity cost is the present value of the loss of operating cash flows while the restaurant is closed for renovation. E. The opportunity cost is the cost of the renovations plus the loss of the operating cash flows during the renovation.

B. The opportunity cost is the value of the current offer to buy the restaurant. By renovating the restaurant, the firm foregoes $1.1 (the sale price of the restaurant).

8. Which of the following statements is correct? A. A longer payback period is preferred over a shorter payback period. B. The payback period ignores the time value of money. C. The payback rule states that you should accept a project if the payback period is less than one year. D. The payback rule is biased in favor of long-term projects. E. The payback period considers the timing and amount of all of a project's cash flows.

B. The payback period ignores the time value of money.

8. The net present value A. is equal to the initial investment when the internal rate of return is equal to the required return. B. increases as the required rate of return decreases. C. method of analysis cannot be applied to mutually exclusive projects. D. is directly related to the discount rate. E. is unaffected by the timing of an investment's cash flows.

B. increases as the required rate of return decreases.

10. If the financial markets are semi-strong form efficient, then: A. only the most talented analysts can determine the true value of a security. B. only individuals with private information have a marketplace advantage. C. technical analysis provides the best tool to use to gain a marketplace advantage. D. no one individual has an advantage in the marketplace. E. every security offers the same rate of return.

B. only individuals with private information have a marketplace advantage.

10. Dan is a chemist for ABC, a major drug manufacturer. Dan cannot earn excess profits on ABC stock based on the knowledge he has related to his experiments if the financial markets are: A. weak form efficient. B. strong form efficient. C. semi-strong form efficient. D. efficient at any level. E. aware that the trader is an insider.

B. strong form efficient.

9. A firm purchased a piece of land six years ago for $299,500. At that time, the firm invested $64,000 grading the site so that it would be usable. Since the firm was not ready to use the site itself at that time, it decided to lease the land for $28,000 a year. The firm is now considering building a hotel on the site as the rental lease is expiring. The current value of the land is $355,000. The firm has no loans or mortgages on this property. What value should be included in the initial cost of the hotel project for the use of this land? A. $0 B. $299,500 C. $355,000 D. $363,500 E. $419,000

C. $355,000 The relevant cost is the opportunity cost of $355,000.

8. You are considering investing $36,000 in a project that is expected to provide cash inflows of $12,000 in each of the first two years and $18,000 for the following year. At a discount rate of zero percent this investment has a net present value of _______, but at the relevant discount rate of 17 percent the project's net present value is ________. A. $0; -$5,739 B. $0; -$3,406 C. $6,000; -$5,739 D. $6,000; -$3,406 E. $6,000; $1,897

C. $6,000; -$5,739 If R = 0% -36000 CF 12000 CF 12000 CF 18000 CF 0 I/YR NPV 6000 If R = 17% -36000 CF 12000 CF 12000 CF 18000 CF 17 I/YR NPV -5739

9. A company purchased some welding equipment six years ago at a cost of $579,000. Today the company is selling this equipment for $110,000. The tax rate is 35 percent. What is the after-tax cash flow from this sale? The MACRS allowance percentages are as follows, commencing with year 1: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent. A. $81,380 B. $96,152 C. $98,635 D. $101,540 E. $110,000

C. $98,635 OCF = $110,000 - {$110,000 - [$579,000 × (1- 0.1429 - 0.2449 - 0.1749 -0.1249 - 0.0893 - 0.0892)] × 0.35} OCF = $98,635

10. One year ago you bought a stock for $36.48 a share. You received a dividend of $1.62 per share last month and sold the stock today for $41.18 a share. What is the capital gains yield on this investment? A. 2.86 percent B. 4.70 percent C. 12.88 percent D. 15.62 percent E. 18.53 percent

C. 12.88 percent Capital gains yield = ($41.18 - $36.48)/$36.48 = 0.1288 or 12.88 percent

9. Your firm is contemplating the purchase of a new $674,000 computer-based order entry system. The system will be depreciated straight-line to zero over its six-year life. It will be worth $58,000 at that time. You will save $185,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $29,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. If the tax rate is 34 percent, what is the IRR for this project? A. 12.51 percent B. 12.79 percent C. 13.01 percent D. 13.53 percent E. 14.20 percent

C. 13.01 percent Initial cash flow = -$674,000 + $29,000 = -$645,000 OCF = net income + depreciation = [$185,000 × (1 - 0.34)] + [($674,000/6) × (0.34)] = $160,293.33 After-tax salvage value = $58,000 × (1 - 0.34) = $38,280 Using the calculator: -645000 CF 160293.33 INPUT 5 CF 160293.33 + 38280 - 29000 = 169573.33 CF IRR 13.01

10. Over the past four years, large-company stocks and U.S. Treasury bills have produced the returns stated below. During this period, inflation averaged 2.8 percent. Given this information, the average real rate of return on large-company stocks was ___ percent as compared to _____ percent for Treasury bills. A. 6.47; 0.92 B. 6.47; 1.08 C. 7.98; 0.92 D. 7.98; 1.08 E. 7.98; 1.22

C. 7.98; 0.92 Large-company stocks Average nominal return = (0.15 + 0.07 + 0.04 + 0.18)/4 = 0.11 Average real rate: r = (1.11/1.028) - 1 = 7.98 percent U.S. Treasury bills Average nominal return = (0.06 + 0.03 + 0.02 + 0.04)/4 = 0.0375 Average real rate: r = (1.0375/1.028) - 1 = 0.92 percent

10. The common stock of Hillshire Farms has yielded 16.3 percent, 7.2 percent, 11.8 percent, -3.6 percent, and 9.7 percent over the past five years, respectively. What is the geometric average return? A. 7.91 percent B. 8.03 percent C. 8.07 percent D. 8.27 percent E. 9.64 percent

C. 8.07 percent Geometric average return = (1.163 × 1.072 × 1.118 × 0.964 × 1.097)1/5 - 1 = 8.07 percent

10. An efficient capital market is best defined as a market in which security prices reflect which one of the following? A. Current inflation B. A risk premium C. Available information D. The historical arithmetic rate of return E. The historical geometric rate of return

C. Available information

9. A firm is currently producing plastic plates and silverware and considering expanding its product offerings to include plastic serving trays. Which of the following are relevant cash flows associated with the new product? I. Molds needed to form the serving trays II. Projected increase in plate and silverware sales if the trays are produced III. Production manager's current annual salary of $75,000 IV. Raw materials used in the production of the serving trays A. I and IV only B. III and IV only C. I, II, and IV only D. I, III, and IV only E. I, II, III, and IV

C. I, II, and IV only

10. New Labs just announced that it has received a patent for a product that will eliminate all flu viruses. This news is totally unexpected and viewed as a major medical advancement. Which one of the following reactions to this announcement indicates the market for New Labs stock is efficient? A. The price of New Labs stock remains unchanged. B. The price of New Labs stock increases rapidly and then settles back to its pre-announcement level. C. The price of New Labs stock increases rapidly to a higher price and then remains at that price. D. All stocks quickly increase in value and then all but New Labs stock fall back to their original values. E. The value of all stocks suddenly increase and then level off at their higher values.

C. The price of New Labs stock increases rapidly to a higher price and then remains at that price.

10. Semi-strong form market efficiency states that the value of a security is based on: A. all public and private information. B. historical information only. C. all publicly available information. D. all publicly available information plus any data that can be gathered from insider trading. E. random information with no clear distinction as to the source of that information.

C. all publicly available information.

When you want to sell your shares of a company, you will sell them in the ________ market. a. Primary b. Proxy c. Initial d. Inside e. Secondary

e. Secondary

8. If a project with conventional cash flows has a profitability index of 1.0, the project will _____________. A. never pay back B. have a negative net present value C. have an internal rate of return that equals the required return D. produce more cash inflows than outflows in today's dollars E. have a negative internal rate of return

C. have an internal rate of return that equals the required return

9. A project has annual depreciation of $16,200, costs of $87,100, and sales of $123,000. The applicable tax rate is 40 percent. What is the operating cash flow according to the depreciation tax shield approach? A. $21,540 B. $27,667 C. $27,458 D. $28,020 E. $29,878

D. $28,020 OCF = [($123,000 - $87,100) × (1 - 0.40)] + ($16,200 × 0.40) = $28,020

10. The standard deviation measures the _____ of a security's returns over time. A. average value B. frequency C. volatility D. mean E. arithmetic average

C. volatility

1 Which one of the following functions should be assigned to the treasurer rather than the controller?

Cash management

3 . A firm has cash of$3,800, accounts receivable of$8,600, inventory of$33,100, and net working capital of $1,100. What is the cash ratio?

Cash ratio = Cash/CL CL is unknown, but NWC = CA-CL CA = Cash + AR + INV = 3,800 + $8,600 + $33,100 = 45,500 CL = CA - NWC = 45,500 - 1,100 = 44,400 Cash ratio= 3,800/$44,400 = 0.0856 or 8.56%

1. The Sarbanes-Oxley Act in 2002 was prompted by which one of the following from the 1990s?

Corporate accounting and financial fraud

3 A firm has net working capital of $3,800 and current assets of $11,700. What is the current ratio?

Current ratio = CA/CL CL is unknown, but NWC = CA-CL or CL = CA-NWC = 11,700-3,800 = 7,900 Current ratio = $11,700/$7,900 = 1.48

9. A debt-free firm has net income of $228,400, taxes of $46,200, and depreciation of $21,300. What is the operating cash flow? A. $182,200 B. $103,500 C. $107,100 D. $249,700 E. $295,900

D. $249,700 Note that net income is already adjusted for taxes. OCF = net income + depreciation = $228,400 + $21,300 = $249,700

10. The rate of return on ______________ is used as the risk-free rate? A. Long-term government bonds B. Long-term corporate bonds C. Inflation, as measured by the Consumer Price Index D. U.S. Treasury bill E. Large-company stocks

D. U.S. Treasury bill

9. A company is adding a new product line to its sales lineup. Initially, the firm will stock $41,000 of the new inventory, which will be purchased on 30 days' credit from a supplier. The firm will also invest $6,000 in accounts receivable and $4,000 in equipment. What amount should be included in the initial project costs for net working capital? A. -$41,000 B. -$37,000 C. -$10,000 D. -$6,000 E. -$2,000

D. -$6,000 Note that equipment is not in NWC. Net working capital = -$41,000 + $41,000 - $6,000 = -$6,000

8. A firm is reviewing a project that has an initial cost of $71,000. The project will produce annual cash inflows, starting with year 1, of $8,000, $13,400, $18,600, $33,100, and finally in year 5, $37,900. What is the profitability index if the discount rate is 11 percent? A. 0.92 B. 0.98 C. 1.02 D. 1.07 E. 1.12

D. 1.07 To calculate the numerator, find PV of the future cash flows and add them up: 8000 FV; 1 N; 11 I/YR; PV 7207.21 13400 FV; 2 N; 11 I/YR; PV 10875.74 18600 FV; 3 N; 11 I/YR; PV 13600.16 33100 FV; 4 N; 11 I/YR; PV 21803.99 37900 FV; 5 N; 11 I/YR; PV 22491.81 These five PVs add up to $75,978.91, which is the numerator of the PI equation. Then divide it by $71,000.

8. Which of the following defines the internal rate of return for a project? A. Discount rate that creates a zero cash flow from assets B. Rate of return required by the project's investors C. Discount rate that results in a net present value equal to the project's initial cost D. Discount rate that results in a zero net present value for the project E. The project's current market rate of return

D. Discount rate that results in a zero net present value for the project

9. If a firm is unable to obtain financing for any new projects, the firm is __________________. A. Conducting contingency planning B. Engaged in soft rationing C. Conducting sensitivity analysis D. Engaged in hard rationing E. Conducting scenario analysis

D. Engaged in hard rationing

9. ____________ should be included in the analysis of a proposed investment. I. Erosion effects II. Opportunity costs III. Sunk costs IV. Side effects A. I only B. II only C. I and IV only D. I, II, and IV only E. I, II, III, and IV

D. I, II, and IV only

8. Payback is best used to evaluate which type of projects? A. High-cost, long-term B. High-cost, short-term C. Low-cost, long-term D. Low-cost, short-term E. Any size of long-term project

D. Low-cost, short-term

8. A firm requires an average accounting return (AAR) of at least 17 percent on all fixed asset purchases. Currently, it is considering purchasing new equipment costing $178,000. This equipment will have a four-year life over which time it will be depreciated on a straight-line basis to a zero book value. The annual net income from this equipment is estimated at $10,100, $10,300, $17,900, and $19,600 for the four years. Should this purchase occur based on the AAR? A. Yes, because the AAR is less than 17 percent B. Yes, because the AAR is equal to 17 percent C. Yes, because the AAR is greater than 17 percent D. No, because the AAR is less than 17 percent E. No, because the AAR is greater than 17 percent

D. No, because the AAR is less than 17 percent AAR = average net income / average book value AAR = [($10,100 + $10,300 + $17,900 + $19,600)/4]/[($178,000 + $0)/2] = 16.26 percent Because the AAR is less than the required rate, the equipment should not be purchased.

10. Which one of the following best describes an arithmetic average return? A. Total return divided by N - 1, where N equals the number of individual returns B. Average compound return earned per year over a multiyear period C. Total compound return divided by the number of individual returns D. Return earned in an average year over a multiyear period E. Positive square root of the average compound return

D. Return earned in an average year over a multiyear period

10. Which one of the following could cause the total return on an investment to be a negative rate? A. Constant annual dividend amount B. Increase in the annual dividend amount C. Stock price that remains constant over the investment period D. Stock price that declines over the investment period E. Stock price that increases over the investment period

D. Stock price that declines over the investment period

10. For the period 1926-2011, which one of the following had the smallest risk premium? A. Large-company stocks B. Small-company stocks C. Long-term corporate bonds D. U.S. Treasury bills E. Long-term government bonds

D. U.S. Treasury bills

10. Over the period of 1926-2011, A. the risk premium on large-company stocks was greater than the risk premium on small- company stocks. B. U.S. Treasury bills had a risk premium that was just slightly over 2 percent. C. the risk premium on long-term government bonds was zero percent. D. the risk premium on stocks exceeded the risk premium on bonds. E. U. S. Treasury bills had a negative risk premium.

D. the risk premium on stocks exceeded the risk premium on bonds.

2. ________________ is a tangible asset, while _______________ is an intangible asset.

Delivery trucks, copyright

1. Working capital management includes which one of the following?

Determining which customers will be granted credit

1 Which of the following is a working capital management decision?

Determining which inventory to sell

9. A company currently sells 15,000 motor homes per year at $94,000 each and 1,500 luxury motor coaches per year at $159,000 each. The company wants to introduce a low-range camper to fill out its product line and hopes to sell 6,000 of these campers per year at $14,500 each. An independent consultant has determined that if the firm introduces the new campers, it should boost the sales of its existing motor homes by 1,500 units per year, and reduce the sales of its luxury motor coaches by 450 units per year. What amount should be used as the annual sales figure when evaluating this project? A. $87,000,000 B. $97,400,000 C. $228,000,000 D. $186,750,000 E. $156,450,000

E. $156,450,000 Sales = change in sales in existing motor homes + change in sales in luxury motor homes + sales in new campers = (1,500 × $94,000) + (-450 × $159,000) + (6,000 × $14,500) = $156,450,000

8. What is the net present value of a project that has an initial cost of $85,000 and produces cash inflows of $15,000 a year for 15 years, if the discount rate is 10 percent? A. $79,802.48 B. $12,340.23 C. $13,560.39 D. $25,111.41 E. $29,091.19

E. $29,091.19 -85000 CF 15000 INPUT 15 CF 10 I/YR NPV $29,091.19

9.. Suppose a project is classified as five-year property for MACRS purposes. What is the year 2 depreciation on equipment costing $166,000? The MACRS allowance percentages are as follows, commencing with year 1: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent. A. $37,620 B. $38,200 C. $41,984 D. $48,398 E. $53,120

E. $53,120 Depreciation2 = $166,000 × 0.32 = $53,120

10. One year ago, you purchased 500 shares of stock for $12 a share. The stock pays $0.22 a share in dividends each year. Today, you sold your shares for $28.30 a share. What is your total dollar return on this investment? A. $6,222 B. $7,432 C. $8,150 D. $7,775 E. $8,260

E. $8,260 Your dollar return from investing in a stock is: Selling price - buying price + dividend Total dollar return = 500 × ($28.30 - $12 + $0.22) = $8,260

10. You bought a share of 8.5 percent preferred stock for $87.40 last year. The market price for your stock is now $88.10. What is your total return for last year? A. 7.51 percent B. 7.73 percent C. 7.86 percent D. 8.10 percent E. 10.53 percent

E. 10.53 percent (Preferred stocks are assumed to have a face value of $100) Total return = ($88.10 - $87.40 + $8.50)/$87.40 = 10.53 percent

10. You find a certain stock that had returns of 14 percent, -27 percent, 19 percent, and 21 percent for four of the last five years, respectively. The average return of the stock over this period was 9.5 percent. What is the standard deviation of the stock's returns? A. 11.67 percent B. 12.90 percent C. 14.14 percent D. 18.47 percent E. 20.59 percent

E. 20.59 percent Return in period 5: 0.095 = (0.14 - 0.27 + 0.19 + 0.21 + x)/5 x = 0.205 σ2 = [(0.14 - 0.095)2 + (-0.27 - 0.095)2 + (0.19 - 0.095)2 + (0.21 - 00.095)2 + (0.205 - 00.095)2]/(5 - 1) = 0.0424 σ = +/-0.0424 = 20.59 percent

10. Hercules Movers pays a constant annual dividend of $1.75 per share on its stock. Last year at this time, the market rate of return on this stock was 14.8 percent. Today, the market rate has fallen to 11.2 percent. What would your capital gains yield have been if you had purchased this stock one year ago and then sold the stock today? A. 18.78 percent B. 22.03 percent C. 28.16 percent D. 30.00 percent E. 32.14 percent

E. 32.14 percent P-1 = $1.75/0.148 = $11.8243 P0 = $1.75/0.112 = $15.6350 Capital gains yield = ($15.6250 - $11.8243)/$11.8243 = 0.3214 or 32.14 percent

10. Last year Paul invested $38,000 in Oil Town stock, $11,000 in long-term government bonds, and $8,000 in U.S. Treasury bills. Over the course of the year, he earned returns of 12.1 percent, 7.2 percent, and 4.1 percent, respectively. What was the nominal risk premium on Oil Town's stock for the year? A. 2.1 percent B. 4.9 percent C. 6.0 percent D. 7.8 percent E. 8.0 percent

E. 8.0 percent Nominal risk premium = 12.1 - 4.1 = 8%

10. Percentage returns I. are easy to understand. II. relay information about a security more easily than dollar returns do. III. are not affected by the amount of the investment. IV. can be easily separated into dividend yield and capital gain yield. A. II and III only B. I and III only C. I, II, and III only D. I, II, and IV only E. I, II, III, and IV

E. I, II, III, and IV

9. A company is adding a new roller coaster to its amusement park to increase its overall ticket sales and attendance at its park. With the addition of the new roller coaster, sales for its boat ride are expected to decline; however, food and beverage sales are expected to increase significantly. Which of the following are considered side effects associated with the new roller coaster? I. Ticket sales for the new roller coaster II. Change in ticket sales for the existing coaster III. Change in ticket sales for the boat ride IV. Change in food and beverage sales A. I only B. III only C. II and III only D. I, II, and III only E. II, III, and IV only

E. II, III, and IV only

8. If both Projects A and B are acceptable as independent projects and the selection of either one of these projects eliminates the option of selecting the other project, the relationship between Project A and Project B is called __________________. A. Sunk cost B. Conventional C. Erosion D. Dual return E. Mutually exclusive

E. Mutually exclusive

10. When, if ever, will the geometric average return exceed the arithmetic average return for a given set of returns? A. When the set of returns includes only risk-free rates. B. When the set of returns has a wide frequency distribution. C. When the set of returns has a very narrow frequency distribution. D. When all of the rates of return in the set of returns are equal to each other. E. Never

E. Never

8. An investment has an initial cost of $3.3 million. This investment will depreciate by $900,000 a year over the three-year life of the project. Should this project be accepted based on the average accounting rate of return (AAR) if the required rate is 10.0 percent? NI 211700, 186400, 165500 A. Yes, because the AAR is 10.0 percent B. Yes, because the AAR is less than 10.0 percent C. Yes, because the AAR is greater than 10.0 percent D. No, because the AAR is greater than 10.0 percent E. No, because the AAR is less than 10.0 percent

E. No, because the AAR is less than 10.0 percent AAR = average net income / average book value Numerator of the formula: Average net income = ($211,700 + $186,400 + $165,500)/3 = $187,866.67 Denominator of the formula (average book value): 1st year: 3.3 - 0.9 = 2.4 2nd year: 2.4 - 0.9 = 1.5 3rd year: 1.5 - 0.9 = 0.6 Therefore: Average book value = ($3.3m + $2.4m + $1.5M + 0.6m)/4 = $1.95m AAR = $187,866.67/$1,950,000 = 0.0963 or 9.63 percent The AAR is less than the requirement. The investment should be rejected.

8. Which of the following indicates that a project should be rejected? A. Average accounting return that exceeds the requirement B. Payback period that is shorter than the requirement period C. Positive net present value D. Internal rate of return that exceeds the required return E. Profitability index less than 1.0

E. Profitability index less than 1.0

8. A firm imposes a payback cutoff of 3.5 years for its international investment projects. If the company has the following two projects available, should it accept either of them? A. Accept both Projects A and B B. Accept Project A but not Project B C. Accept Project B but not Project A D. Both Project A and B are acceptable but you can select only one project E. Reject both Projects A and B

E. Reject both Projects A and B Project A 57000 - 9000 - 14800 - 18900 = 14300 Project B 61000 - 16500 - 26300 - 15600 = 2600 PaybackA = 3 + ($14,300/$19,600) = 3.73 years PaybackB = 3 + ($2,600/$4,900) = 3.53 years The firm should reject both projects.

10.Investors require a 4 percent return on risk-free investments. On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called? A. Inflation premium B. Required return C. Real return D. Average return E. Risk premium

E. Risk premium

9. A firm purchased a new coal furnace six years ago at a cost of $2.2 million. However, last year the government changed the emission requirements and this furnace does not meet the new standards. Because the company can no longer use the furnace and has not been able to locate anyone willing to purchase it, the furnace is best described as _____________ cost. A. Erosion B. Book C. Opportunity D. Market E. Sunk

E. Sunk

8. A firm is investing $650,000 in new equipment and expects its cash flows to increase by $50,000 a year for the next two years and by $100,000 a year for the following three years. How long must the firm wait until it recovers all of its initial investment? A. 3.97 years B. 4.18 years C. 4.46 years D. 4.70 years E. The project does not pay back

E. The project does not pay back The project does not pay back in the time provided, which is 5 years: 650,000 - 50,000 - 50,000 - 100,000 - 100,000 - 100,000 = 250,000

8. The modified internal rate of return is specifically designed to address the problems associated with ______________. A. Mutually exclusive projects B. Crossover points C. Long-term projects D. Negative net present values E. Unconventional cash flows

E. Unconventional cash flows

10. If the financial markets are efficient then: A. stock prices should remain constant. B. stock prices should increase or decrease slowly as new events are analyzed and the information is absorbed by the markets. C. an increase in the value of one security should be offset by a decrease in the value of another security. D. stock prices will change only when an event actually occurs, not at the time the event is anticipated. E. stock prices should respond only to unexpected news and events.

E. stock prices should respond only to unexpected news and events.

10. One year ago, you purchased 100 shares of a stock. This morning you sold those shares and realized a total return of 8.2 percent. Given this information, you know for sure the: A. stock price increased by 8.2 percent over the last year. B. stock increased in value over the past year. C. stock paid a dividend. D. dividend yield is greater than zero. E. sum of the dividend yield and the capital gains yield is 8.2 percent.

E. sum of the dividend yield and the capital gains yield is 8.2 percent.

9. The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation ______________________. A. adjustment B. credit C. erosion D. opportunity cost E. tax shield

E. tax shield

4 You have $4,800 that you want to invest for 4 years. You can invest this amount at a credit union and earn 4 percent simple interest. Or you can open an account at Compass Bank and earn 3.65 percent interest, compounded annually. If you decide to invest at Compass Bank for 3 years, you will

Earn $27.89 less than if he had invested with his credit union. FV Credit Union = $4,800 + ($4,800 * 0.04 *4) = $5,568 (simple interest rate) FV Compass Bank = $4,800 * (1 + 0.0365)4 = $5,540.11 (compounded interest rate) Difference= $5,568 - $5,540.11 = $27.89

3 . A firm has total assets of$589,900 and total debt of$318,000. What is the equity multiplier?

Equity multiplier =TA/TE What is TE? We know that TL = CL +TD +TE and therefore TE = TL - CL - TD TA = TL = 589,900 TE = 589,900-318,000 = 271,900 Equity multiplier= $589,900/$271,900 = 2.17

1 Which one of the following is a capital structure decision?

Establishing the preferred debt-equity level

4 Which one of the following is the correct formula for the future value of $500 invested today at 7 percent interest for 8 years?

FV = $500 * (1+ 0.07)^8

1. If you are employed as a commercial loan officer for a regional bank, your job falls into the area of __________________ in Finance.

Financial institutions

4 Sixty years ago, your grandparents opened two savings accounts and deposited $200 in each account. The first account was with City Bank at 3 percent, compounded annually. The second account was with Country Bank at 3.5 percent, compounded annually. Which one of the following statements is true concerning these accounts?

Future value of the Country Bank account will be $397.30 higher than that of the City Bank account. FV City bank = $200 * (1 + 0.03)^60 = $1,178.32 FV Country bank = $200 * (1 + 0.035)^60 = $1,575.62 Difference = $1,575.62 - $1,178.32 = $397.30

1 The "say on pay" portion of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires corporations to

Give shareholders a nonbinding vote on executive pay

2. Consider the income statement. Which one of the following is correct? I Depreciation lowers taxes II Depreciation has no effect on net income III Net income is distributed either to dividends or kept by the firm as retained earnings. IV Current liabilities are used to calculate net income

I and III

2. Which one of the following statements is correct? I. The market value tends to provide a better guide to the actual worth of an asset than does the book value. II. The market value of fixed assets will always exceed the book value of those assets. III. Book values represent the amount of cash that will be received if an asset is sold. IV. The current book value of equipment purchased last year is equal to the initial cost of the equipment. V. Reputation of the firm is included in the market value but not in the book value of the firm.

I and V

1. Suppose you are the sole proprietor of a supplement store. The only debt obligation that you have is an outstanding loan with the local bank. Due to an unexpected downturn in the economy, your store is unable to generate sufficient funds to make the loan payments to the bank. Which of the following options does the bank have to collect the money it is owed? I. Sell the inventory and use the cash raised to apply to the debt II. Sell the store fixtures and use the cash raised to apply to the debt III. Take funds from your personal account at the bank to pay the store's debt IV. Sell any assets that your parents own and apply the proceeds to your store's debt

I, II and III

1. Which of the following are advantages of the corporate form of organization? I. Ability to raise large sums of equity capital II. Ease of ownership transfer III. Profits taxed at the corporate level IV. Limited liability for all owners

I, II, and IV

3 A firm has sales of$238,900, total assets of$217,000, total equity of$121,300, net income of$18,700, and dividends paid of $7,000. What is the internal growth rate?

Internal growth rate= IGR = (ROA x b)/[1- (ROA x b)] ROA = NIITA = 18,700/217,000 = 0.0862 b = (NI-DIV)/NI = (18,700-7,000)/18,700 = 0.6257 IGR = (0.0862 x 0.6257)/[1- (0.0862 x 0.6257)] = 5.70 percent

1. Which one of the following forms of business organization offers liability protection to some of its owners but not to all of its owners?

Limited partnership

1. Which one of the following is an advantage of being a limited partner?

Losses limited to capital invested

3 A firm has a book value per share of $13.50, earnings per share of $1.21, and a price-earnings ratio of 17.6. What is the market-to-book ratio?

Market-to-book ratio = PPS/Book value per share PE ratio = PPS/EPS PPS = PE ratio x EPS = 17.6 x 1.21 = 21.296 MTBR = 21.296/13.50 = 1.58

1. The primary goal of financial management of a corporation is to maximize ____________.

None of the above

1. Corporate shareholders

None of the above is correct

2. Which one of the following is the tax rate that applies to the next dollar of taxable income that a firm earns?

None of the above is correct.

4 Which one of the following is the correct formula for computing the present value of$600 to be received in 6 years? The discount rate is 7 percent.

PV = $600 / (1+ 0.07)^6

3 A firm has sales of $311,800, a profit margin of 3.9 percent, and dividends of $4,500. What is the plowback ratio?

Plowback ratio = b = addition to retained earnings/NI = (NI-DIV)/NI PM = NI/Sales or NI = PM*Sales= 0.039*$311,800 = 12,160.2 Plowback ratio = (12,160.2 - 4,500)/12,160.2 = 62.99 percent

3 A firm has total assets of $710,000. There are 45,000 shares of stock outstanding with a market value of $28 a share. The firm has a profit margin of 7.I percent and a total asset turnover of 1.29. What is the price-earnings ratio?

Price-earnings ratio = PPS/EPS EPS = net income/shares outstanding Net income is not known, but PM= NI/Sales and don't know sales. TAT = sales/total assets Sales=TAT*TA= 1.29 * 710,000=915,900 NI = PM * NI = 0.071 * 915,900 = 65,028.9 EPS = 65,028.9/45,000 = 1.4451 PE ratio = $28/1.4451 = 19.38

1. When Facebook went public for the first time, the companies' stocks were sold in the ______________.

Primary market

3 . A firm has annual sales of $737,000. Earnings before interest and taxes equal 21 percent of sales. For the period, the firm paid $7,900 in interest. What is the profit margin if the tax rate is 35 percent?

Profit margin = NI/Sales NI = EBIT-Interest -Taxes = [(0.21*$737,000) - $7,900] * (1-0.35) = 95,465.50 Profit margin= $95,465.50/$737,000 = 12.95 percent

5 Find the EAR in each of the following cases: 10% quarterly Q 17% monthly M 13% daily D

Q: 10.38 % M: 18.39% D: 13.88%

1. Which one of the following situations is most apt to create an agency conflict?

Rejecting a profitable project to protect employee jobs

2. An increase in which one of the following will increase net income?

Revenue

2. Which one of the following statements is correct?

Shareholders' equity is the residual value of a firm.

5 Which one of the following statements concerning annuities is correct?

The annuity due has payments that occur at the beginning of each time period

1. Which one of the following statements correctly applies to a sole proprietorship?

The business entity has limited life

1 Which one of the following correctly defines a common chain of command within a corporation?

The controller reports directly to the chief financial officer.

1. Which one of the following statements about a limited partnership is correct?

There must be at least one general partner.

3 A firm has net income of $6,850 and interest expense of$2,130. The tax rate is 34 percent. What is the firm's times interest earned ratio?

Times interest earned ratio = EBIT/INT EBIT is before interest and taxes; therefore, add taxes and interest to net income to get EBIT: EBIT = [$6,850/(1-0.34)] + $2,130 = 12,508.79 Times interest earned ratio= $12,508.79/$2,130 = 5.87

3. A firm has total equity of$389,600, long-term debt of$116,400, net working capital of$1,600, and total assets of $627,600. What is the total debt ratio?

Total debt ratio = (TA-TE)/TA = ($627,600- $389,600)/$627,600 = 0.389

4 The relationship between the present value and the time period is best described as:

inverse

5 An insurance company is offering a new policy to its customers. A parent or a grandparent can make a specific number and amount of payments in an account for a child starting at the child's birth. Suppose the payments are made every year for 4 years only and the child will receive 350,000 when he/she is 65 years old. The relevant interest rate is 10 percent for the first 4 years and 7 percent for the subsequent years. The payments are: First and second year: $800; third and fourth year: $900. Is this policy worth buying?

Yes, because the future value of deposits is less than the contract payoff.

A firm's stock is selling for $35 a share and has a dividend yield of 4.2 percent. What is the dividend amount? a. $1.47 b. $2.45 c. $2.35 d. $3.29 e. $7.37

a. $1.47 Dividend = dividend yield × stock price = 0.042 × $35 = $1.47

A firm's stock was quoted to have a closing price of 25.62 today, which implied a net change of +2.51 from the previous day. What was the closing price on the previous trading day? a. $23.11 b. $28.13 c. $11.22 d. $15.09 e. $18.40

a. $23.11 Previous day's closing price = $25.62 - $2.51 = $23.11

A firm plans to pay an annual dividend of $2.5 per share next year, $2.00 per share a year for the following two years, and then cease paying dividends altogether. How much is one share of this stock worth to you today if you require a 15 percent rate of return? a. $5.001 b. $3.272 c. $4.284 d. $2.746 e. $2.373

a. $5.001 Calculate the PV of future cash flows: P0 = ($2.5/1.151) + ($2/1.152) + ($2/1.153) = 2.174 + 1.512 + 1.315 = $5.001

If a six-year, semiannual coupon bond is selling for $991.38, has a face value of $1,000 and a yield to maturity of 9.19 percent, the coupon rate is ______ percent. a. 9 b. 4.6 c. 6 d. 5.3 e. 8.2

a. 9 For semiannual coupon payments, divide the interest rate by 2 and multiply the periods by 2: Semiannual interest rate: 9.19/2 = 4.595% Number of periods: 6*2 = 12 1000 FV; -991.38 PV; 12 N; 2.595 I/YR; PMT When you hit the PMT key, you will get almost 45. Because we adjusted everything for semi-annual payments, this indicates $45 as each of the semi-annual payments. But we express the coupon rate on an annual basis. Therefore, 45*2 = $90 and 90/1000 = 0.09 or 9%.

When you refer to a bond's coupon, you are referring to a. Annual interest payment b. Difference between the purchase price and the face value c. Annual interest divided by the current bond price d. Difference between the bid and ask price e. Principal amount of the bond

a. Annual interest payment

You could not attend the last shareholders' meeting and granted the authority to vote on your behalf to the managers of the firm. Which of the following terms is used to describe the method by which your shares were voted? a. Proxy b. Cumulative c. Consent-form d. Straight e. In absentia

a. Proxy

Suppose you keep very good records of the annual coupon payment day of your bond and this year the payment day is today. You go to the bank and present your bond to the teller to receive your interest (coupon) payment. The type of your bond must be a ________________. a. bearer bond b. note c. debenture d. registered bond e. callable bond

a. bearer bond

An agent who buys and sells securities from inventory is called a ________. a. dealer b. floor trader c. commission broker d. broker e. floor broker

a. dealer

An upward-sloping yield curve indicates expectations reflecting a. robust economic growth and higher long-term interest rates b. robust economic growth and lower long-term interest rates c. recession and lower long-term interest rates d. recession and higher long-term interest rates e. increased default probability

a. robust economic growth and higher long-term interest rates

If a 10 percent $1,000 bond matures in 9 years, pays interest semiannually, and has a yield to maturity of 5.15 percent, the current market price of the bond is _________. a. $1,273.47 b. $1,345.83 c. $1,102.39 d. $959.60 e. $962.40

b. $1,345.83 For semiannual coupon payments, divide the coupon payment and the interest rate by 2, and multiply the period by 2: Semiannual coupon payments: (%1000 * 0.10)/2 = $50 Semiannual interest rate: 5.15/2 = 2.575% Number of periods: 9*2 = 18 1000 FV; 18 N; 2.575 I/YR; 50 PMT; PV

A firm's stock is selling for $25 a share. The company pays a constant annual dividend and has a total return of 7 percent. What is the amount of the dividend? a. $357.14 b. $1.75 c. $3.57 d. $35.71 e. $37.48

b. $1.75 This is a perpetuity where P = D/R or D = P × R D = 0.07× $25 = $1.75

43. A firm has been paying annual dividends of $3.50. The firm just announced that the dividends will grow at 10 percent in the next 5 years. After that the dividend growth rate will decline to 4 percent. If the required rate of return is 12 percent, what is the current price of the stock? a. 85.14 b. 60.57 c. 73.23 d. 83.22 e.102.33

b. 60.57 Note that the growth patterns of dividends change after the 5th period. Think about the fact that you need to calculate the stock price in period 5 and therefore need to calculate period 6 dividends. With this in mind, first calculate the dividends for the relevant future periods: D1 = 3.5 × 1.1 = 3.85 D2 = 3.85 × 1.1 = 4.235 D3 = 4.235 × 1.1 = 4.6585 D4 = 4.659 × 1.1 = 5.12435 D5 = 5.12435 × 1.1 = 5.636785 D6= 5.636785 × 1.1 = 6.2004635 Second, calculate the future stock price right before the growth pattern changes: P5 = D6/R-g = 6.2004635/(0.12-0.04) = 77.51 Third, set up the entire stock price formula: P0 = (3.85/1.12) + (4.235/1.122) + (4.659/1.123) + (5.12435/1.124) + [(5.636785+77.51)/1.125] = $60.57 Or, line up your cash flows and use your financial calculator to find the NPV of these future cash flows to calculate the stock price, noting that CF5 is 5.636785 + 77.51 = 83.15: 0 CF; 3.85 CF; 4.235 CF; 4.659 CF; 5.12435 CF; 83.15 CF; 12 I/YR; 5 N; NPV

Which one of the following types of securities has no priority in a bankruptcy proceeding? a. Convertible bond b. Common stock c. Senior debt d. Preferred stock e. Straight bond

b. Common stock

Dividends are _______________. a. Payable at the discretion of a firm's president b. Paid out of after-tax profits c. Treated as a tax-deductible expense to the paying firm d. Paid to holders of record as of the declaration date e. Only partially taxable to high-income individual shareholders

b. Paid out of after-tax profits

Which of the following terms refers to a bond's rate of return that is required by the marketplace? a. Coupon rate b. Yield to maturity c. Dirty yield d. Call yield e. Real rate

b. Yield to maturity

The yield curve shows the relationship between the yield on risk-free government securities (Treasury bills, notes, and bonds) and their _________________. a. coupon payments b. maturity c. default risk d. market price e. face value

b. maturity

The main difference between a note and a bill (such as a Treasury note and a Treasury bill) lies in ____________. a. maturity. While a note is payable within one year or less, a bill's maturity is generally within the next 10 years. b. maturity. While a note is generally payable within the next 10 years, a bill's maturity is one year or less. c. the frequency of interest (coupon) payments. d. the size of coupon rate. e. whether these financial instruments secured or not.

b. maturity. While a note is generally payable within the next 10 years, a bill's maturity is one year or less.

2. The financial statement that summarizes a firm's accounting value as of a particular date is called the

balance sheet

You just purchased a stock that will pay an annual dividend of $2.5 per share next year. You require a 15 percent rate of return and the annual dividend increases at 4 percent annually. What will your capital gain be on this stock if you sell it three years from now? a. $2.43 b. $2.51 c. $2.84 d. $2.02 e. $2.92

c. $2.84 Your capital gain is the difference between your selling price three years from now and the current price. First, calculate the current price: P0 = $2.5/(0.15 - 0.04) = $22.73 Second, go to the period where you will sell the stock and calculate the future stock price: P3 = [$2.5 × (1.04)3]/(0.15 - 0.04) = $25.57 Your capital gain = $25.57 - $22.73 = $2.84

A company has been paying annual dividends of $3.5 per share. Management just announced that future dividends will increase by 3 percent annually. What is the amount of the expected dividend in year 4? a. $14.42 b. $4.77 c. $3.94 d. $4.65 e. $5.75

c. $3.94 D4 = $3.5 × (1.03)4 = $3.94

A company will pay an annual dividend of $3 next year. The company just announced that future dividends will be increasing by 4 percent annually. How much are you willing to pay for one share of this stock if you require a 12 percent return? a. $15.14 b. $25 c. $37.5 d. $3.12 e. $14.37

c. $37.5 P0 = D1/(R-g) = $3/(0.12 - 0.04) = $37.5

A bond has a $1,000 face value, a market price of $1,065, and pays interest payments of $50 every year. The coupon rate is ____ percent. a. 6.5 b. 7 c. 5 d. 1.3 e. 65

c. 5 Coupon rate = coupon payment/face value = $50/$1,000 = 0.05 or 5 percent

A $1,000 face value bond has a 7.5 percent coupon and pay interest annually. Currently, the bonds are quoted at 95.27 and mature in 3.5 years. The yield to maturity is ______ percent. a. 7.88 b. 8.02 c. 9.14 d. 8.79 e. 8.18

c. 9.14 1000 FV; -952.7 PV; 3.5 N; 75 PMT; I/YR

What is the principal amount of a bond that is repaid at the end of the loan term called? a. Coupon b. Market price c. Face value d. Accrued price e. Dirty price

c. Face value

Which of the following terms refers to the relationship between nominal returns, real returns, and inflation? a. Call premium b. Conversion ratio c. Fisher effect d. Bid-ask spread e. Clean-dirty spread

c. Fisher effect

On which of the following dates do dividends become a liability of the issuer for accounting purposes? a. First day of the fiscal year in which the dividend is expected to be paid b. Twelve months prior to the expected dividend payment date c. On the declaration date d. On the date of record e. On the date of payment

c. On the declaration date

A firm is issuing a 15-year, unsecured bond. Based on this information, you know that this debt can be described as a _______________. a. note b. bearer form bond c. debenture d. registered form bond e. call protected bond

c. debenture

The written agreement that contains the specific details related to a bond issue is called the bond _____________. a. document b. debenture c. indenture d. registration statement e. issue paper

c. indenture

The dividend yield is defined as a. the current annual cash dividend divided by the current market price per share. b. the current annual cash dividend divided by the current book value per share. c. next year's expected cash dividend divided by the current market price per share. d. next year's expected cash dividend divided by the current book value per share. e. next year's expected cash dividend divided by next year's expected market price per share

c. next year's expected cash dividend divided by the current market price per share.

There are two open seats on the board of directors. If two separate votes occur to elect the new directors, the firm is using a type of voting that is best described as _____ voting. a. simultaneous b. proxy c. straight d. cumulative e. sequential

c. straight

2. Highly liquid assets

can be sold quickly at close to full value

4 You had $6,270 in a savings account at the beginning of this year. This amount includes both the $6,000 you originally invested at the beginning of last year plus the $270 you earned in interest last year. This year, you earned a total of $282.15 in interest even though the interest rate on the account remained constant. This $282.15 is best described as:

compound interest

4 You earned $120 in interest on your savings account last year and decided to leave the $120 in the account so that you can earn interest on the $120 this year. This process of earning interest on prior interest earnings is called:

compounding

A firm just paid its annual dividend of $2.50 a share. The firm recently announced that all future dividends will be increased by 3 percent annually. What is one share of this stock worth to you if you require a 13 percent rate of return? a. $12.56 b. $25 c. $19.81 d. $25.75 e. $22.34

d. $25.75 P0 = D1/(R-g) = [D0× (1+g)]/(R-g) = ($2.5 × 1.03)/(0.13 - 0.03) = $25.75

If the nominal interest rate is 5% and the inflation rate is 2 percent, the real interest rate is ________ percent. a. 7 b. 9 c. 5 d. 3 e. 2

d. 3 Real interest rate = nominal interest rate - inflation rate = 5 - 2 = 3

A company pays a constant annual dividend of $2 a share and currently sells for $35 a share. What is the rate of return? a. 4.56 b. 5.39 c. 5.61 d. 5.71 e. 6.91

d. 5.71 This is a perpetuity where P = D/R or R = D/P R = $2/$35 = 0.0571 or 5.71 percent

If a bond has $1,000 face value, is currently quoted at 105.2, makes semiannual payments of $30 each, and matures in 10 years, its coupon rate is __________ percent. a. 5.2 b. 10 c. 5 d. 6 e. 3.51

d. 6 Coupon rate = ($30 × 2)/$1,000 = 0.06 or 6 percent

What is the name given to the model that computes the present value of a stock by dividing next year's annual dividend amount by the difference between the discount rate and the rate of change in the annual dividend amount? a. Stock pricing model b. Equity pricing model c. Capital gain model d. Dividend growth model e. Present value model

d. Dividend growth model

Which one of the following will increase the current value of a stock? a. Decrease in the dividend growth rate b. Increase in the required return c. Increase in the market rate of return d. Increase in the expected dividend for next year e. Decrease in the capital gains yield

d. Increase in the expected dividend for next year

The principal amount of a bond is repaid at the ______________ date. a. Coupon b. Issue c. Discount d. Maturity e. Face

d. Maturity

A call provision grants the bond issuer the __________________________. a. right to contact each bondholder to determine if he or she would like to extend the term of his or her bonds b. option to exchange the bonds for equity securities c. right to automatically extend the bond's maturity date d. option of repurchasing the bonds prior to maturity at a pre-specified price e. right to repurchase the bonds on the open market prior to maturity

d. option of repurchasing the bonds prior to maturity at a pre-specified price

4 The interest rate used to compute the present value of a future cash flow is called the:

discount rate

What is the price of a $1,000 face value bond if the quoted price is 105.2? a. $105.2 b. $1,002.1 c. $1,050.02 d. $1,020.10 e. $1,052.00

e. $1,052.00

A firm's stock is selling for $32.60 a share based on a 14 percent rate of return. What is the amount of the next annual dividend if the dividends are increasing by 5 percent annually? a. $2.71 b. $2.75 c. $2.78 d. $2.86 e. $2.93

e. $2.93 From P0 = D1/(R-g), we get D1 = P0 × (R-g) = $32.60 × (0.14 - 0.05) = $2.93

An 8 percent, $1,000 face value bond is currently selling at $1,057. These bonds have 16 years left until maturity. The current yield is ______ percent. a. 7.38 percent b. 8.28 percent c. 8.00 percent d. 8.23 percent e. 7.57 percent

e. 7.57 percent Current yield = coupon payment/current price = (0.08 × $1,000)/$1,057 = 7.57 percent

The current yield on a bond is equal to the annual interest (annual coupon payment) divided by which one of the following? a. Issue price b. Maturity value c. Face amount d. Current par value e. Current market price

e. Current market price

The annual interest (or annual coupon payment) divided by the face value of a bond is referred to as the ________________. a. market rate b. call rate c. yield-to-maturity d. current yield e. coupon rate

e. coupon rate

. A protective covenant a. protects the borrower from unscrupulous practices by the lender. b. is designed to protect the bond dealer from potential legal liability related to the bond issue. c. prevents a bond from being sold at a discount. d. guarantees that a bond will be repaid in full with interest. e. limits the actions of the borrower.

e. limits the actions of the borrower.

To be a member of the NYSE, you must ______________. a. be a primary dealer b. buy a seat c. be a DMM d. be registered as a floor trader e. own a trading license

e. own a trading license

5Suppose you pay 2 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded only annually, the rate would be referred to as the:

effective annual rate

1. Which of the following is true for sole proprietorship?

has its profits taxed as personal income

2. The accounting statement that measures the revenues, expenses, and net income of a firm over a period of time is called the

income statement

1. A corporation

is a legal entity separate from its owners

1 If the federal government has a tax claim on the cash flows of a firm, this claim makes the government a __________ in this firm.

stakeholder

1. In a general partnership, each partner is personally liable for

the total debts of the partnership, even if he or she was unaware of those debts.

1. Agency conflict arises,

when management is separated from ownership

5 A credit card has an annual percentage rate of 15 % and charges interest monthly. The effective annual rate on this account:

will be greater than 15%

1 The daily financial operations of a firm primarily imply managing the ___________ of the firm.

working capital