C214 Financial Management OA

#9 A company sold goods in 2011 for $20,000 and collected the cash and 2012. In 2011 The company incurred and paid $10,000 in expenses related to the goods sold how much income should this company report in 2011 under the ACCRUAL basis of accounting $0 $10 ($10,000) $10,000

$ GOOD SOLD-expenses = 20000-10000= 10,000

#43 projected total assets are 1 million with projected total liabilities of 500,000 and projected owner's equity of 100,000 which amount of discretionary financing is needed. 400,000 600,000 1.4 million 1.6 million

1,000,000-500,000-100,000= $400,000

present value of $125,000 at 7% discount rate

125,000/0.07 =1,705

#39 Which advantage does the Gordon growth model have compared to the capital asset pricing model CAPM. It is highly accurate in predicting future growth. It requires assumptions about growth that benefit castes, fast growing companies. It provides an EASIER to understand and relatively accurate forecast when growth rates are stable. It requires the use of accurate known known factors such as future growth rates

39. Which advantage does the Gordon Growth Model have compared to the capital asset pricing model (CAPM)? A. It requires assumptions about growth that benefit fast-growing companies B. It requires the use of accurate known factors, such future as growth rates. C. It is highly accurate in predicting future growth D. It provides an easier to understand and relatively accurate forecast when growth rates are stable

#45 The financial data for a company are as follows: Net income: $4,000,000 Sales $20,000,000 Assets: $8,000,000 Dividends $2,000,000 Equity $5,000,000 Liabilities $3,000,000 What is the sustainable growth rate for this company? A- 40% B- 50% C- 60% D- 100% The correct alternative is Option A. "40%" Explanation: The following is the calculation of the sustainable growth rate (SGR) of the company: SGR = (Net income/Equity) x (1-Dividend as a percent of net income) SGR = ($4,000,000/$5,000,000) x (1-50%) SGR = 40% Working note: Dividend as a percent of net income = (Dividend/Net Income)x100 Dividend as a percent of net income = $2,000,000/$4,000,000 Dividend as a percent of net income = 50%

45. The financial data for a company is as follows. Net Income $4,000,000 Sales $20,000,000 Assets $8,000,000 Dividends $2,000,000 Equity $5,000,000 Liabilities $3,000,000 What is the sustainable growth rate for this company? A. 40% B. 50% C. 60% D. 100%

#46 Which three changes would affect an estimate of differential cash flows? Choose 3 answers A- An increase in the marginal tax rate of a company B-A decrease in the projected annual revenue D-A revision in the depreciation schedule C-An increase in the overhead allocation E- An increase in the estimated value of the new machine at the end of the project

46. A firm is evaluating a new product. If adopted, estimated sales will increase by $14,500,000 per year. Incremental variable and fixed costs are estimated to be $2,350,000. In addition, the new machine has an annual depreciation expense of $1,100,000. What is the estimated differential cash flow in year 1 if the tax rate is 40%? A. $6,280,000 B. $6,630,000 C. $7,290,000 D. $7,730,000

#8 a company reported an increase in accounts payable of $2,000. For the current year half of this amount is expected to be paid next period. How will this change in accounts payable be reported on the statement statement of cash flows? The change will increase cash flow from operations by 1000. The change will increase cash flow from operations by 2000. The change will decrease cash flows from operations by 2000. The change will decrease cash flows from operations by 1000

8. A company reported an increase in accounts payable of $2,000 for the current year. Half of this amount is expected to be paid next period. How will this change in accounts payable be reported on the statement of cash flows? A The change will increase cash flows from operations by $1,000 B The change will decrease cash flows from operations by $1,000 C The change will increase cash flows from operations by $2,000 D The change will decrease cash flows from operations by $2,000

#31 The figure below represents the level of market efficiency. which investment options should be selected, assuming a prudent investor wants to maximize the expected return. A ( quadrant 1) B C D E

A Quadrant 1 should be selected as this quadrant offers maximum expected returns at the lowest risk

15. Firms A and B are in the same industry. For the year 2013, Firm A has a gross margin of .45 and Firm B has a gross margin of .36. Which conclusion would an analyst draw when comparing Firm A to Firm B? A. Firm A has a more efficient production process B. Firm A has higher depreciation expense C. Firm A has lower depreciation expense D. Firm A has less efficient production process

A= 0.45 B=0.36 A>B

A company has a total market value of $100 million. $30 million of which is short-term debt. The cost of that short-term debt was 4.5%. The company has a marginal tax rate of 40%. What is the after tax cost of short-term debt for the company? 30.1% 4.5% 1.35% 0.81%

After taxcost of debt = Before tax( 1-t) = 4.5(1-.40) = 2.7% weight of debt : 30/100=.30 After tax cost = 2.7*.30=.81% correct option is"D"

67. The market rate of return is 8%. The face value of the bond is $1000, the coupon rate is 12% with annual compounding, and the bond matures in 10 years. What is the value of the bond?

Annual coupon=1000*12%=120 Hence value of bond=Annual coupon*Present value of annuity factor(8%,10)+$1000*Present value of discounting factor(8%,10) =120*6.710081399+1000*0.463193488 =$1268.40(Approx). NOTE: 1.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate =120[1-(1.08)^-10]/0.08 =120*6.710081399 2.Present value of discounting factor=1000/1.08^10 =1000*0.463193488

#53 A company has a high degree of business risk what will be affected on this company's EBIT? If this company suffers a slight decrease in sales? large increase in EBIT, large decrease in EBIT, small decrease in EBIT small increase in EBIT.

Business risk is the possibility that due to unforseen events can lead to a fall in the profits of the company or losses taking place in the business. The effect of a fall in sales in the company's EBIT is : So, in this case the unforeseen event is the falling sales and it's effect would be, since there is a high degree if business risk. This can lead to a large decrease in the EBIT of the company.

#33 Which security type includes the right to vote for a board of directors? 1- Bonds 2- Prefered stock 3- Money market funds 4- Common stock

Common stock gives its holders the right to vote for a board of directors. Bonds are a form of debt and do not give any voting rights. money market funds are form of investment and will not give any voting rights. Preferred stock holders get preference in dividend and assets at the time of winding up, but does not give any voting rights.

Why do companies prefer equity finance over debt finance as a source of finance even though equity is more expensive than debt?

Companies prefer equity financing because it is a long term capital and does not require any cash flow obligation to the firm. Using debt as a financing option, the firm is obliged to pay regular interest payment and adhere to various covenants

#52 Financial data associated with a company is listed below: Sales: $1,350,000 Variable Costs: $375,000 Fixed Costs: $450,000 Interest Expense: $123.000 Depreciation Expense: $0 What is this company's degree of financial leverage? a - 1.0 B- 1.1 C- 1.2 D- 1.3

Degree of financial leverage= Earnings before interest and tax(EBIT)/(EBIT-interest) EBIT= Sales-variable costs-fixed costs = 1,350,000-375,000-450,000 = $525,000 Degree of financial leverage=525,000/(525,000-123,000) = 1.3 times.

#41 a corporation has $125 million in assets on the balance sheet. Total liabilities are $94 million and owner's equity is currently $14 million. what is the corporation's external discretionary financing need (DFN)? a. $14 million b. $17 million c. $32 million d. $80 million

Discretionary Financing Need (DFN) can be calculated as Total Assets - Total Liabilities - Owner's Equity $125 million - $94 million - $14 million $17 million

a corporation has $125 million in assets on the balance sheet. Total liabilities are $94 million and owner's equity is currently $14 million. what is the corporation's external discretionary financing need (DFN)? a. $14 million b. $17 million c. $32 million d. $80 million

Discretionary Financing Need (DFN) can be calculated as Total Assets - Total Liabilities - Owner's Equity $125 million - $94 million - $14 million $17 million

a firm is evaluating a new project. if adopted, estimated sales will increase by 14500000 per year. Incremental variable and fixed costs are eastimated to be 2350000. The new machine has an annual depreciation expense of 1100000. what is the estimated differential cash flow in year 1, if tax rate is 40%? =$7,730,000

Estimated differential cash flow=(Sales-Costs)(1-tax rate)+Tax savings on depreciation expenses =(14500000-2350000)(1-0.4)+(0.4*1100000)

#17 A person won $50,000 as a game show contestant and invest this money for two years and three months at an interest rate of 4% simple interest. How much will this person have in principal and interest at the end of the investment period 4500 50,000 54,080 54,500 = 1,102,500

I= P x R x T = 50,000 *.04*2.25 =4500 50,000+4500= 54,500

A person won $900,000 as a game show contestant and invests this money for 4 years and 6 months at an interest rate of 5% (simple interest). How much will the person have in principal and interest at the end of the investment? 1,102,500

I= P x R x T I = Simple interest P = Principal invested R = Rate of interest T = Time in years Note that time is given as 4 years and 6 months, which means 4 and one-half years. Or 4.5 years. Therefore, I = 900,000 * 5% * 4.5 = 202,500 Therefore, amount at the end of the investment period, = Principal invested + Interest = 900,000 + 202,500 = 1,102,500

if a bonds coupon rate is greater than market, then the bond will sell at price MORE than its face value. these are called PREMIUM bonds

If coupon rate is higher than market rate means Investors will get more than the required return. SO Investors has to pay more than the face value.

The market rate of return is 6%. The face value of the bond is 1000$. The coupon rate is 10% annual compounding, and the bond matures in 10 years. What is the value of the bond? $467.67.

Market rate of return= 6% Face Value of bond = $1000 Coupon rate= 10% Bond matures in = 10 years So, Here Interest is paid annually then I= $1000X 6%= $60. Formula of value of bond= I( 1-(1+K)-n)/K Where I= Interest Paid K = Annual rate N = Mature period of Bond So, PVA= $60(1-(1+0.05)10)/0.05 = $467.67.

You own a car and are trying to decide whether or not to trade it in and buy a new car. Which of the following costs is an opportunity cost in this situation? the trip to Cancun that you will not be able to take if you buy the car the cost of the car you are trading in the cost of your books for this term the cost of your car insurance last year

Opportunity cost is the cost of an alternative that must be given up in order to pursue a certain action.

A banker wants to retire 20 years from today and would like to have an annual income $300,000 withdraw at the end of each year for 10 years starting in exactly 20 years. The discount rate is 6%. What is the present value, today? A- $688,473 B- $2,208,026 C- $3,000,000 d- $3,441,000

PV = $11,565,000 / (1 + 0.6)^20 PV = $688,473 To calculate the present value of the future income, we need to use the formula for the present value of an ordinary annuity. The formula is as follows: PV = PMT * [(1 - (1 + r)^-n) / r] Where: PV is the present value PMT is the annual payment (in this case, $300,000) r is the discount rate (in this case, 6% or 0.06) n is the number of periods (in this case, 10 years) However, since the payments start 20 years from now, we need to discount the calculated present value back to today. This can be done using the formula for the present value of a single sum: PV = FV / (1 + r)^n Where: FV is the future value (the present value we calculated earlier) r is the discount rate (again, 6% or 0.06) n is the number of periods (in this case, 20 years) Let's calculate: First, calculate the present value of the annuity at the end of 20 years: PV = $300,000 * [(1 - (1 + 0.06)^-10) / 0.06] = $2,208,026 Then, discount this value back to today: PV = $2,208,026 / (1 + 0.06)^20 = $688,473 So, the present value of the future income today is approximately $688,473. Therefore, the correct answer is A- $688,473.

The value of a bond is calculated by discounting the future cash flows, which are the coupon payments and the face value at maturity, to the present using the market rate of return as the discount rate. The formula for the present value of a bond is: PV = C * (1 - (1 + r)^-n) / r + FV / (1 + r)^n where: PV is the present value or price of the bond C is the annual coupon payment (face value * coupon rate) r is the market rate of return n is the number of years to maturity FV is the face value of the bond Given the values in the question: C = $1000 * 10% = $100 r = 6% = 0.06 n = 15 years FV = $1000 Substituting these values into the formula: PV = $100 * (1 - (1 + 0.06)^-15) / 0.06 + $1000 / (1 + 0.06)^15 Calculating this gives: PV = $100 * (1 - 0.4173) / 0.06 + $1000 / 2.3966 PV = $100 * 0.5827 / 0.06 + $1000 / 2.3966 PV = $970.45 + $417.35 PV = $1387.80 So, the value of the bond is approximately $1387.80.

PV = C * (1 - (1 + r)^-n) / r + FV / (1 + r)^n

#18 A doctor will receive $9,000 per year at the end of the year for 10 years. The annual interest earned on this investment is 6%. What is the present value of this doctor's investment? 64,240 66,241 90,000 118,627

PV of Annuity = Cash Flow * [ 1 - [(1+r)^-n]] /r r - Int rate per period n - No. of periods PV of Annuity = Cash Flow * [ 1 - [(1+r)^-n]] /r= $ 9000 * [ 1 - [(1+0.06)^-10]] /0.06= $ 9000 * [ 1 - [(1.06)^-10]] /0.06= $ 9000 * [ 1 - [0.5584]] /0.06= $ 9000 * [0.4416]] /0.06= $ 66240.78Value today is $ 66241

An investor anticipates receiving $72,000 in 6 years. Assuming an annual discount rate of 9%, what is the present value of this money? A- $42,616 B- $42,931 C- $66,055 D- $60,000

Present value=Cash flow*Present value of discounting factor(rate%,time period) =72000/1.09^6 =72000*0.596267327 =$42931(Approx).

Economists forecast the probability of recession at 22%. During periods of recession, returns for a company have been -2%. Returns for the company have been 18% during an expansionary period. What is the forecast probability of an expansionary period? 80% 78% 76% 82%

Probability for expansionary = total probability -probability of recession = 1- .22 = .78

#34 Economists forecast the probability of recession at 22%. During periods of recession, returns for a company have been -2%. Returns for the company have been 18% during an expansionary period. What is the forecast probability of an expansionary period? 80% 78% 76% 82%

Probability for expansionary = total probability -probability of recession = 1- .22 = .78 correct option is "B"

#29 a broker purchases a stock that pays $1.15 annual dividend as a price of $16. The broker expects a 15% rate of return what is the total actual return if this broker sells this stock after one year for $19 15.5% 18.4% 20.2% 25.9%

Purchase Price =$16.00 Annual Dividend=$1.15 Expected Return =15% Selling Price=$19.00 Holding Period Return =(SP + Div - CP)/CPx100 =(19+1.15-16)/16*100 =4.15/16*100 = 25.9375% And which is more than expected figure of 15%

#38 a company is considering using discretionARY internal cash to finance 100% of a six months wardroom project, the expected return for the project is 12.62%. The current risk free rate of return is 1%. What is the short term financing costs for this project? 12% 6.62% 5.62% 0%

Short term financing cost = (12.62 + 1) / 2 = 6.81 It is also considered as the cost of equity and being close to 6.62,We can say that the correct option is B 6.62%

A company is considering using discretionary internal cash to finance 100% of a 6-month short-term project. The expected return for the project is 12.62%. the current risk-free rate of return is 1%. What is the short-term financing cost for this project? 12% 6.62% 5.62% 0%

Short term financing cost = (12.62 + 1) / 2 = 6.81 It is also considered as the cost of equity and being close to 6.62,We can say that the correct option is B 6.62%

#48 How will the value of a $1,000,000 capital budgeting investment be impacted, assuming the inflation rate is 2%? The investment will be worth $980,000 in one year. The investment will be worth $1,000,000 in one year. The investment will be worth $1,020,000 in one year. The investment will be worth $1,200,000 in one year.

Since the inflation has increased by 2%, it means the value per dollar has decreased by 2%. which would lead to this increase in worth of this investment.

The _Standard deviation__ is an absolute measure of risk, and the _standard deviation, coefficient of variation ______ is a relative measure of risk. a. systematic risk, unsystematic risk b. standard deviation, coefficient of variation c. correlation, covariance d. security market line, characteristic line

Standard deviation is an absolute measure of risk. It measures the dispersion or variability of a set of data points (or returns in the context of investment). It provides an absolute measure because it is expressed in the same units as the original data, independent of the mean. Coefficient of variation, on the other hand, is a relative measure of risk. It's calculated as the standard deviation divided by the mean. The coefficient of variation allows for comparison of risk per unit of return. It is a useful statistic for comparing the degree of variation from one data series to another, even if the means are drastically different from each other.

A company reported an increase in accounts receivable of $5,000 during the recent period. Half of this amount is expected to be collected next period.How will this change in accounts receivable affect the cash flows from the operating activities section?

The change will decrease cash flows from operations by $5,000

A company reported an increase in accounts payable of $2000 for the current year. Half of this amount isexpected to be paid next period.How will this change in accounts payable be reported on the statement of cash flows?

The change will increase cash flow from operations by $2000

#20 What is the coupon rate (yield) of a bond? A- The interest accrued on the bond through expiration B- The sum of money that the corporation promises to pay upon expiration of the bond C- The interest rate of the bond that is contractually set upon issuance D- The interest rate of the bond that can be changed at any time during the life of the bond

The coupon rate is the interest paid on a bond the issuer issues the bond the issuer decides the interest

Hurricane Wings has budgeted the following costs for a month in which 24,000 wings will be cooked and sold. Wings, breading, and sauce$4,900 Direct labor (Variable)3,500 Rent1,100 Depreciation900 other fixed costs400 Each wing sells for $0.80 each. What is the budgeted fixed cost per unit? $0.80 $0.17 $0.10 $0.35

Total fixed costs=(1100+900+400)=$2400 Hence budgeted fixed cost per unit=($2400/24000) which is equal to =$0.10

#24 Which securities are issued by the US Federal Government and are taxable at the federal level? Corporate bonds treasury bonds municipal bonds euro bonds

Treasury bonds are issued by the US federal government and are taxable at the federal level

What is WACC?

Weightage average cost of capital means calculation of cost of capital of the organization by providing weight to diffrent capital.In this case cost of common stock,prefered stock ,bond etc is included in calculation of weighted average cost of capital. WACC is widely used as discount rate for discounted cashflow method of project evaluation technique.

#7 Selected Data for 20x2 for ABC Inc Net income $1,000 depreciation expense 300 change in operating assets 600 change in net profit plant and equipment 5000 changes in long term liabilities 1000 dividends paid 200 What is the firm's cash flow from operating activities using the data above 700 in flow 400 in flow 1000 in flow 1300 in flow

What is the firm's cash flow from financing, using the data above? Net Income $1000 Depreciation Expense $300 Change in operating assets $600 Change in net profit plant $5000 Change in long-term Liabilities $1000 Dividends Paid $200 A. $200 outflow B. $800 outflow C. $800 inflow D. $1,000 inflow

#23 A company issued bonds at a market price of $1,100. The face value is $1,000. The bond mature in 10 years and the coupon rate is 6% compounded annually. What is the yield to maturity on this company's bonds? 12.46% 10% 6% 4.72%

YTM =rate(years,coupon,-price,par value) =rate(10,60,-1100,1000) =4.72% Face Value = $1,000 Current Price = $1,100A nnual Coupon Payment = $1,000*6% = $60 Maturity in 10 years.Let Annual YTM be i%1,100 = 60*PVIFA(i%, 10) + 1,000*PVIF(i%, 10)i% = 4.72%

#25 What is the current price of the bond, if the required rate of return on the bond is the same as the coupon rate? A- Greater than the par value of the bond B- The current prevailing market price of the bond C- Equal to the par value of the bond D- Less than the par value of the bond

bond sells at par value when coupon rate is equal to yield to maturity of bond

What does net income measure that the cash flow from operating activities does NOT? a- Payments made to employees or other expenses b- payments made to suppliers of goods and services C- Credit sales to customers D- Depreciation expenses

credit sales - customer pays at a later time so it doesnt count

#12 which measure of cash flow is commonly used to evaluate the change in revenue and costs. free cash flow to equity, cash flow from operating activities free cash flow to the firm cash flow from financing activities

explains the source and use of cash from ongoing regular business activities in a given period.

What makes the "efficient frontier" efficient? 1- It always produces the minimum risk 2- It disregards risk to produce the maximum return 3- It provides the highest level of risk for a given return 4- It maximizes the ratio of expected return of risk

helps to identify the highest expected return for the set defined risk level. of the investor

#30 A company recently paid a $2 dividend per share of stock which is expected to grow 10% annually. A broker's required return is 12% What is the highest price this broker should be willing to pay for one share of this company today? $18.33 $21 $46.45 $110.

highest price to be paid = dividend just paid*(1+growth rate) / (required return - growth rate) =>$2*(1.10) / (0.12-0.10) =>$110.00

#6 What is the basis used to compute a company's income tax expense? 1- Net operating income 2- pretax accounting income 3- TAXABLE INCOME 4- Taxes payable

income tax expense is calculated by multiplying taxable income by the effective tax rate.me tax expense

#5 what do the content and structure of an income statement report the revenues and expenses for a period of time the expenses and liabilities at a point in time, the assets and expenses for a period of time the Assets Liabilities and Equity at a point in time.

income tax report = revenue and expense

A company recently paid $2 dividend per share of stock, which is expected to grow 10% annually. A broker's required return is 12%. What is the highest prices the broker should be willing to pay for one share of the company? - $18.33 - $21.00 - $46.45 - $110.00

is expected to grow steadily at 10 percent. The required return is 12 percent. Based on the dividend growth model, we can say that the current price is: P0 =D1/(R -g) g--->growth R--->Return D1=dividend we have D1=D0(1+g) P0 =D0 (1 +g)/(R -g) =$2(1+.10)/.12-.10 =2*(1.1)/0.02 P0 =$110 option D $110

#66 What is the primary intent of the Sarbanes-Oxley Act to reduce the fees associated with financial transactions to control the rise in the rate of executive compensation to ensure honest audit and counting procedures to impose requirements on stockholders of public companies.

protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes. This is achieved by ensuring honest audit and accounting procedures.

#1 what is one way a firm maximizes shareholder value by avoiding investments that costs more money than they bring in By switching inventory methods by reducing the firm's labor force by outsourcing the production of the firm's core product

shareholder value = avoiding

#21 The market rate of return is 4%. The face value of the bond is $1,000. The coupon rate is 2%. with annual compounding and the bond matures in 10 years what is the value of this bond? 838 1000 1,020 1,181

value of bond= Pv of coupon payments+pv of par value =20*[1-(1+4%)^-10]/.04+1000/(1+4%)^10 =838

#28 When is a company that has strong operating revenues and competent management a good investment? When the current stock price is currently equal to the intrinsic value When the intrinsic value of the price per share is lower than the current stock price When the current stock price is overvalued relative to the intrinsic value When the intrinsic value of the price per share is higher than the current price

when Intrinsic value is higher than current market price then as per analyst valuation shares should be highly priced but market has not price the share correctly so when the market correction happen the investor will benifit.Currently share is undervalued so it should be purchased and when it reaches its intrinsic value it shall be sold Intrinsic value>share price=undervalued

#22 At what will a bond sell if it's coupon rate is higher than the market rate of return? at a risk free rate at a discount at par at a premium

when coupon rate is higher than market return then bond will sell at a price higher than its par value hence it is selling at a premium