Business Finance: Exam 1

Comparing ratios from one firm to others in the industry (or to industry average)

Comparative analysis

What are the disadvantages of a Corporation?

1. Higher regulatory costs 2. Double taxation 3. Agency costs

What are the advantages of a Corporation?

1. Easier access to capital for the firm 2. Limited liability for stockholders (owners) 3. Ability to easily diversify investments

What is meant by the magnitude, timeliness and riskiness in the primary goal of a financial management?

1. Higher cash flows are preferred to lower 2. Earlier payment is preferred over later 3. Less risk is preferred over high risk

Find the Future Value in 28 years of $5,807 to be invested today if you can earn a rate of return of 11.5%. (round to the nearest cent & enter the answer as a positive value)

122,362.44

You are considering the purchase of a new car for $19,391. You plan to make a down payment of $3,713 and borrow the rest on a 7-year loan at 2.6%. Based on this, what should you expect your monthly car payment to be? Be sure to write your answer down without a dollar sign (positive value) and round to the nearest cent.

204.34

Find the present value of the following cash flow stream if the discount rate is 12%: Years 1-10 $4000 per year Years 11-15 $6000 per year Years 16-20 $8000 per year

34,833.37

You plan to travel to Europe in exactly 2 years. At that time, the trip will cost you $4,930. Assume you can earn 10% from your savings account. How much money do you need to have in your account today so you can afford the trip? (round to the nearest cent & enter the answer as a positive value)

4,074.38

Jen is planning for retirement. She plans to work for 32 more years. She currently has $15,000 saved and, for the next 15 years, she can save $6,000 at the end of each year. Fifteen years from now, she wants to buy a weekend vacation home that she estimates will require her to withdraw $100,000. How much will she have to save in years 16 through 32 so that she has exactly $750,000 saved when she retires? Assume she can earn 9% throughout the 32-year period.

4,974.72

You have decided to establish an annual gift to a charity that will last forever. The annual gift will be $302, and the first gift will be made exactly one year from today. Assuming you anticipate earning a 5.9% rate of return on the donation, how much do you need today? Round your answer to the nearest dollar and omit the $ sign in your answer.

5,119

What is the effective annual rate of 6.27% compounded weekly. Round answer to two decimal places in percentage terms (for example enter 9.22% as 9.22, not 0.09 or 0.0922).

6.47

You are offered an investment that will pay you $215 per week for next 15 years. Assuming you want to earn an 12% rate of return, what is this investment worth today? Assume each year has 52 weeks. Be sure to write your answer down without a dollar sign (positive value) and round to the nearest cent.

77,734.35

You are offered an investment that will give you $26,927 in 17 years in exchange for $6,064 today. What is your expected rate of return on this investment? (round to 2 decimal places in percentage terms for example enter 9.22 for 9.22%)

9.17

After graduating from college you make it big — all because of your success in business finance. You decide to endow a scholarship for needy finance students that will provide $5000 per year indefinitely, beginning 1 year from now. How much must be deposited today to fund the scholarship under the following conditions. 5a. The interest rate is 10% 5b. The interest rate is 10% and the first payment is made 6 years from today instead of 1 year from today.

A) 50,000 B) 31,046.07 (n=5, FV=50000, I=10, PMT=0, PV=?)

_______ exists when one party (the principals) hires another party (the agents) to perform a task and grants the agent decision making authority

Agency Relationship

When the same exact amount will occur at the END of each period over a number of years

Annuity

What is the difference between Annuity and Annuity due?

Annuity is paid at the end of each period Annuity Due the first payment is paid today and then at the beginning of each period

Shows assets, liabilities and owners' equity A snapshot of values AT A POINT IN TIME

Balance Sheet

A structured loan (debt) Finite time horizon Fixed cash flow stream Less risk-->lower expected return

Bonds

This divides each component of the balance sheet (Assets, liabilities, owners' equity) by total assets Expressing each item as a percentage of assets

Common Size Balance Sheet

This takes each category in the income statement (revenues, expenses, profits) and divides by sales Expressing the item as a percentage of sales

Common Size Income Statement

Owned by MANY individuals (stockholders) who in most cases have little input in operating the firm Separation of ownership and managing the firm

Corporation

Which of the following business forms face(s) double taxation? Note this is a multiple answers problem and there may be more than one correct answer. Select all correct answer(s).

Corporation

What is the formula for Current Ratio?

Current assets/Current liabilities

How do you solve for Effective Annual Yield/Rate?

EFF(Nominal Rate, Compounding Periods Per Year)

Refers to the standards of conduct or moral behavior

Ethics

T/F: Because the income statement is accounting-based as opposed to cash-based, it is meaningless to investors who are more interested to the company's cash.

False

T/F: The values reported on the balance sheet are "market values" and do not necessarily represent the book value of the asset or ownership interest.

False

Shows revenues, expenses and profits Captures transactions OVER A PERIOD OF TIME

Income Statement

What is the formula for Total Debt to Total Assets?

Liabilities/Assets

When there is only one cash flow that we are discounting or compounding

Lump Sum

The primary goal of a financial management is to maximize shareholder wealth and we accomplish this by focusing on: ___________, ____________, ___________

Magnitude, timeliness and riskiness of expected cash flows

What is the formula for Price/Earnings ratio?

Market Price per Share/EPS

The primary goal of financial management is to _______________.

Maximize shareholder wealth (firm value)

What is the formula for Return on Equity?

Net Income/Owners Equity

What is the formula for Return on Assets?

Net Income/Total Assets

From the perspective of evaluating a firm's financial health, a negative value in the ___________ segment of the Statement of Cash Flows is most likely to indicate a potential problem with the firm's financial health.

Operating activities

Owned by TWO or more people who decide to do business together

Partnership

An annuity that lasts forever

Perpetuity

Refers to the concept that people prefer less risk

Risk aversion

What is the formula for Total Assets Turnover?

Sales/Total Assets

The concept that businesses should be actively concerned with the welfare of society Ex: Establishing scholarship funds, contributing to the arts, or "matching" employee's contributions to charities.

Social Responsibility

An unincorporated business by ONE individual NOT required to register with the state NO distinction between individual(owner) and business EX: Uber or Delivering for Dominos

Sole Proprietorship

Converts from accrual based net income to cash flows Reports cash flows by operating activities, investing activities, and financing activities

Statement of Cash Flows

Ownership (equity) Potentially infinite time horizon Variable cash flow stream Higher risk-->higher expected return

Stocks

Looking at ratios over a 3-5 year time period

Trend analysis

T/F: All else equal, increasing the discount rate will always lower the present value of a future positive cash flow (lump sum). (The PV of a lump sum formula can be helpful).

True

T/F: Assume you put away a fixed amount today for 20 years at a positive rate of return. You will earn more money during the last ten years than you did during the first 10 years. Hint: check out the table of monthly $250 savings in the beginning of the chapter.

True

T/F: The balance sheet represents a point in time while the income statement reflects transactions that have occurred over a period of time.

True

When you have multiple cash flows but they are not the same amount each period

Uneven Cash Flow Stream

How long will it take your money to triple given the following interest rates?: a) 5% b) 10% c) 15%

a) 22.52 b) 11.53 c) 7.86