C214 - Financial Management Study Guide 2023

55. A $1000 3% bond with a yield of 2.4% matures in 6 years. What is the price if the interest payments are made semiannually? a. 1,033.34 b. 950.26 c. 1,056.20 d. 981.29

a. 1,033.34

What is the Cash Flow from Investing? Beginning Net PP&E 250,000 Ending Net PP&E 300,000 Depreciation Expense 40,000 Change in Long Term Investments 100,000 Change in Short Term Investments 50,000 a. 190,000 outflow b. 150,000 inflow c. 340,000 outflow d. 90,000 inflow

a. 190,000 outflow

64. What would a dividend have to be if the investor buys a stock for $110, expects to sell the stock in a year for $120 and expects an annual return of 13%? a. 4.30 b. 10.00 c. 3.40 d. 3.30

a. 4.30

Suppose a firm has a financial leverage ratio of 2.50 which indicates the ratio that the firm's assets are financed by debt. What is percentage of the firm's assets is financed by equity? a. 40% b. 70% c. 50% d. 60%

a. 40%

42. A ten-year-old girl can put aside $45 at the end of each month for her college education. If she has eight years before she starts higher education, how much will she have in her savings if she can get 5% interest? a. 5,298.32 b. 4,929.71 c. 716.00 d. 4,321.00

a. 5,298.32

65. What would an investor be willing to pay for a stock today, if the value in a year would be $55 with a dividend of $2.24 per share and the investor wants to make 9% on the investment? a. 52.51 b. 52.76 c. 53.10 d. 57.24

a. 52.51

A basic equation for the balance sheet is: a. Equity = Assets - Liabilities b. Liabilities = Equity + Assets c. Assets = Liabilities - Equity d. Assets = Equity - Liabilities

a. Equity = Assets - Liabilities

78. What does the beta coefficient represent? a. It is a statistically-derived measure of volatility b. It is the Expected Return minus the Growth Rate c. It is the volatility of the Risk Free Return d. It is the expected return for a basket of preferred stocks

a. It is a statistically-derived measure of volatility

The matching principle in accrual accounting requires that: a. Revenues be recognized when the earnings process is complete and matches expenses to revenues recognized. b. Expenses are matched to the year in which they are incurred c. Revenues are matched to the year in which they are booked d. Revenues should be large enough to match expenses

a. Revenues be recognized when the earnings process is complete and matches expenses to revenues recognized.

46. What is the most significant characteristic of subordinated debt? a. Senior debt is paid off first b. Principal and interest are paid off simultaneously c. The interest is not tax deductible d. All the above

a. Senior debt is paid off first

If a company wishes to obtain a bank loan, will it want to have a higher current ratio or a lower current ratio? a. higher b. lower c. the same d. it doesn't matter

a. higher

What is the Cash Flow from Investing? Increase in Gross PP&E 125,000 Beginning Net PP&E 750,000 Ending Net PP&E 850,000 Depreciation Expense 25,000 a. (850,000) b. (125,000) c. 150,000 d. (75,000)

b. (125,000)

80. The market rate is .14, Treasury bonds are returning .025. A stock has a beta of .75. What is that stock's expected return? a. .3007 b. .1113 c. .1052 d. .2491

b. .1113

86. Common stock is valued at 1,000,000 and costs .20. Bonds are valued at 850,000 and costs .04, Preferred stock is valued at 500,000 and costs .06. The tax rate is 40%. What is the pre-tax WACC? a. .1229 b. .1124 c. .1404 d. .1015

b. .1124

If a company has current assets of 90 and fixed assets of 140, if it has debt of 125, what is its debt ratio? a. 1.12 b. 0.54 c. 1.36 d. 1.84

b. 0.54

50. You want to buy a semiannual bond that has 4 years left before maturity. It has a 6% coupon rate and the market yield is currently 5.2%. What is the price you are willing to pay? a. 1,253.89 b. 1,028.56 c. 1,034.13 d. 868.95

b. 1,028.56

56. What is the price of a six-year $1,000 bond with a coupon rate of 7.4% and a YTM of 6.2%? a. 1,425.70 b. 1,058.64 c. 1,003.20 d. 1,023.48

b. 1,058.64

54. You want to sell a bond for over $1,000. Can you do that if the coupon rate is 6.5% and the bond yield is 6.8%? a. Yes b. No

b. No

What is the Cash Flow from Operations given the following information? Net Income 450,000 Change in Accounts Receivable 120,000 Change in Inventory -90,000 Change in PP&E 60,000 Depreciation Expense 110,000 Change in Accounts Payable 50,000 Change in Accrued Expenses -75,000 Change in Common Stock 300,000 a. $570,000 b. $410,000 c. $505,000 d. $375,000

c. $505,000

Intel reported the following for 2014: Gross Equipment (1/1/14) 50,000 Gross Equipment (12/31/14) 65,000 Net income 100,000 Depreciation 20,000 What is the cash flow from investing activities for 2014? a. 100,000 b. 80,000 c. (15,000) d. 15,000

c. (15,000)

75. What is the expected rate of return for a stock where there is a 60% chance of a recession and a 40% chance of an expansion? The stock would return 2% during a recession and 8% in an expansionary period. Cycle Prob Stock Recession 60% .02 Expansion 40% .08 a. .050 b. .100 c. .044 d. .056

c. .044

70. The company expected to pay a dividend of $13.85 at the end of the year. Management has estimated growth at 2.75% and the stock is currently selling for $290.00. What is the expected rate of the return for this investment? a. .0411 b. .0375 c. .0753 d. .0408

c. .0753

76. There are two economic states, expansion and recession. The probability of an expansion is 70%, the probability of a recession is 30%. What is the expected return of Alpha Company's stock, if it has an expected return of 2% in a recession and 10% in an expansion? Cycle Prob Stock Recession 30% .02 Expansion 70% .10 a. .4218 b. .0314 c. .0760 d. .6000

c. .0760

89. If a company has a capital structure of $5 million common stock with a cost of 17%, $2 million bonds at 4%, $1 million of Short Term Debt with a cost of 7%, and $2 million preferred stock with a cost of 3%, what is the Weighted Average Cost of Capital? The company has a 40% tax rate. a. .1322 b. .1196 c. .1000 d. .0899

c. .1000

A woman has just found out that a rich great-aunt has bequeathed a trust fund that pays $50,000 to her and to her descendants forever. If the trust fund earns 3.5% interest, what is the amount of the trust fund? a. 1,782,425 b. 5,000,000 c. 1,428,571 d. 2,529,123

c. 1,428,571

What is the present value of a stream of cash flows of $125,000 at a discount rate of 7%? a. 875,000 b. 1,552,667 c. 1,785,714 d. 1,250,000

c. 1,785,714

A firm reported retained earnings of $300 in 12/31/2022. For 12/31/2023 the firm reports retained earnings of $400 and pays dividends of $25. What was net income in 2023? a. 300 b. 400 c. 125 d. 100

c. 125

66. What is the rate of return for a stock purchased for $89, sold in a year for $100, paying a dividend during that time period of $2.75? a. 11.00% b. 13.75% c. 15.45% d. 14.25%

c. 15.45%

92. What is the initial outlay from the following information? • Old equipment sells for (net of taxes) 55,000 • New equipment at cost 190,000 • Installation and shipping 18,000 • Working Capital 62,000 a. 208,000 b. 270,000 c. 215,000 d. 197,000

c. 215,000

96. A piece of equipment is to be sold at the end of the project. Its appraised value is 420,000. A company makes an offer for 350,000. The equipment has a book value of 75,000. The tax rate is 40%. What is the salvage value if the company accepts the offer? a. 252,000 b. 207,000 c. 240,000 d. 350,000

c. 240,000

90. What is the initial outlay given the following information: • Equipment Price 375,000 • Installation 10,000 • Power Survey 30,000 • Shipping 8,000 • Working Capital 100,000 • Project Marketing Report 15,000 a. 538,000 b. 503,000 c. 493,000 d. 488,000

c. 493,000

Financial data for Intel is given below for 2014: • EBIT 1,000,000 • Depreciation 30,000 • Change in working capital (10,000) • Net capital expenditures 15,000 • Tax rate 40% Compute the Free Cash Flow for 2014 a. 610,000 b. 675,000 c. 625,000 d. 600,000

c. 625,000

41. A person wants to put aside $500 at the beginning of each month for 10 years. If she estimates an interest rate of 5.5%, what will she have in her savings account at the end? Hint: Make the calculator inputs consistent. a. 86,437.68 b. 70,154.99 c. 80,119.33 d. 76,905.66

c. 80,119.33

63. What does a stock have to sell for one year in the future, if it currently sells for $75, has a planned dividend of $1.87 a share and an expected return of 14%? a. 71.00 b. 76.87 c. 83.63 d. 85.42

c. 83.63

53. What can cause the bond price to fluctuate? a. A change in the coupon rate b. A change in the face value c. A change in the bond rating d. None of the above

c. A change in the bond rating

Why would a company be interested in the TAT (Total Asset Turnover) ratio? a. How efficient assets are at producing income b. What the turnover of sales is to liabilities c. How efficient assets are at producing sales d. How efficient assets are to liabilities and equity

c. How efficient assets are at producing sales

77. Under the Efficient Market Hypothesis, what will companies endeavor to do? a. Maximize sales to reduce profit risk b. Maximize liquidity to match competitors liquidity c. Maximize profits for a given level of risk d. Minimize expenses to reduce use of cash

c. Maximize profits for a given level of risk

71. One of your friends is recommending a stock if it sells for more than $165.00 per share. The growth rate is 4% and the latest dividend was $6.00. You are expecting an 11% return. Why should you buy or not buy the stock? a. Buy - The dividend is higher than the return b. Not Buy - The return is higher than growth c. Not Buy - The calculated price is too low d. Buy - The calculated price is higher

c. Not Buy - The calculated price is too low

Which of the following is generally true? a. Gross Profit and Operating Income are the same b. Cost of Goods Sold + Operating Expenses = Net Income c. Operating Income and EBIT are the same d. EBIT + Income Taxes = Net income

c. Operating Income and EBIT are the same

Suppose the inventory turnover of a company is higher than the industry. Based on this observation, which of the following is most likely? a. The firm has lower liquidity than the industry average b. The firm has too much inventory thus impairing overall liquidity c. The firm has too little inventory resulting in lost sales or stock-outs d. The firm has low sales volume

c. The firm has too little inventory resulting in lost sales or stock-outs

A company has cash sales of 200 and credit sales of 750. It's average accounts receivable is 90. What is the A/R turnover? a. Turnover: 2.22 b. Turnover: 10.56 c. Turnover 8.33 d. Turnover 3.75

c. Turnover 8.33

Which is the purpose of the statement of cash flows? a. serves as the replacement for the income statement and balance sheet b. explains the change in cash balance at one point in time c. explains the change in cash over the course of the specified timeframe d. both (a) and (b) above

c. explains the change in cash over the course of the specified timeframe

A high-quality customer just purchased $500,000 worth of product from your company. The contract calls for immediate delivery of the product with a cash payment of $300,000 today and $200,000 to be paid 60 days. The expense associated with the product is $300,000 of which $100,000 has not been paid to your supplier. Under accrual based accounting system you will most likely report: a. revenues of $300,000 and expenses of $300,000 b. revenues of $300,000 and expenses of $200,000 c. revenues of $500,000 and expenses of $300,000 d. revenues of $500,000 and expenses of $200,000

c. revenues of $500,000 and expenses of $300,000

73. If a common stock is worth $75 and the growth rate is 5% with a dividend expected to pay $2.00 in a year's time, what is the expected rate of return? a. .0267 b. .0550 c. .0750 d. .0767

d. .0767

87. Capital is valued at 3,000,000 consisting of 1,600,000 of common stock, 1,000,000 of bonds, 400,000 of short-term debt. Cost of common stock is .135. Bonds before tax are .045. Short term debt costs .065. What is the after- tax WACC if the tax rate is 35%? a. .0784 b. .1007 c. .0991 d. .0874

d. .0874

45. What annual interest will be paid for a zero coupon bond? a. 5% b. 3% c. 25% d. 0%

d. 0%

The Statement of Cash Flows is: a. Calculated for the same period of time as the Income Statement b. Is calculated based on the Income Statement and the changes in the Balance Sheet c. Is one of the three basic accounting statements d. All the above

d. All the above

94. Why is depreciation expense taken out of the net income calculation, yet added back at the end? a. Because fixed assets should remain on the balance sheet b. Because depreciation is not a current asset c. Because depreciation is a non-cash liability d. Because depreciation expense is tax deductible

d. Because depreciation expense is tax deductible

Which of the following accounts are only included in Cash Flow from Financing (CFF)? a. Accounts Receivable, Accrued Expenses, Net Income b. Dividends Paid, Property Plant and Equipment, Cash c. Net Income, Common Stock, Accrued Expenses d. Common Stock, Dividends Paid, Bonds Payable

d. Common Stock, Dividends Paid, Bonds Payable

Which components are part of current assets? a. Cash, Accounts Receivable, Property Plant & Equipment b. Accounts Receivable, Accounts Payable, Inventory c. Long Term Debt, Property Plant & Equipment, Common Stock d. Inventory, Cash, Accounts Receivable, Short Term Investments

d. Inventory, Cash, Accounts Receivable, Short Term Investments

How do you calculate the change in Retained Earnings? a. Ending Retained Earnings - Change in Cash b. EBIT divided by Total Assets + Dividends c. EBIT - Change in Cash - Dividends d. Net Income - Dividends

d. Net Income - Dividends

47. If a company wants to increase its debt capital, how will they raise the funds? a. sell common stock b. sell preferred stock c. improve profitability d. sell bonds

d. sell bonds

48. What is the lowest level of investment- grade bonds? a. AAA b. BBB c. AA d. C

b. BBB

Trading on the NYSE is executed without a specialist (i.e. a market maker) True/False

False

Stocks and bonds are two types of financial instruments True/False

True

69. You are interested in buying a preferred stock and want to know what the rate of return is. The stock is selling for $85.00 and pays a dividend today of $2.25. What is the rate of return? a. .0265 b. .3176 c. .2650 d. .2250

a. .0265

88. If a company has a capital structure of $100,000 common stock, $50,000 bonds and $10,000 preferred stock and the respective rates are 15% common stock, 3% bonds and 4% preferred stock, what is the Weighted Average Cost of Capital if the tax rate is 30%? a. .1029 b. .2200 c. .0733 d. .1128

a. .1029

What is the discount rate of a stream of cash flows of 50,000 that have a present value of 450,000? a. .11 b. .10 c. .12 d. .75

a. .11

81. A stock has a beta of 1.42. The stock market is returning .11 and treasury bills are trading at a rate of .014. What is the expected return? a. .1503 b. .1562 c. .1085 d. .1240

a. .1503

82. The market rate is .09 and the risk-free rate is .015. If a stock has a beta of 1.92, what is the expected rate of return? a. .1590 b. .1728 c. .1500 d. .1275

a. .1590

100. Equipment is sold for 30,000 at the end of a project. The working capital return is 50,000. The tax rate is 40%. What is the terminal cash flow? a. 68,000 b. 50,000 c. 80,000 d. 18,000

a. 68,000

Intel reported the following for 2014: Net Income 100,000 Depreciation 20,000 Change in A/R 10,000 What is the cash flow from operating activities? a. 100,000 b. 110,000 c. 120,000 d. (130,000)

b. 110,000

60. Which of the following gives the largest effective rate (APY) a. 18.6% compounded monthly b. 18.6% compounded daily c. 18.6% compounded weekly d. 18.6% compounded yearly

b. 18.6% compounded daily

68. If you are looking for a return of at least 10%, what would you invest in a company given that it just paid a dividend of 1.80, and estimates a growth rate of 3%? a. 25.49 b. 26.49 c. 25.71 d. 28.28

b. 26.49

61. Suppose that an investment will pay 24% APR for a year and the interest will be compounded monthly. What is the expected APY for the investment? a. 24.50% b. 26.82% c. 25.41% d. 28.00%

b. 26.82%

A company has sales of 300, expenses of 200 and interest expense of 25, what is its Times Interest Earned ratio? a. 2.00 b. 4.00 c. 1.75 d. 3.00

b. 4.00

74. An investor wishes to know what the value of preferred stock, when the dividend is $3.00 per share and the expected rate of return is 6.5%? a. 72.63 b. 46.15 c. 191.45 d. 56.15

b. 46.15

44. A man has just inherited $250,000. If he invests the money at 4.5%, what can he expect to have at the end of 15 years when he retires? a. 120,254.27 b. 483,820.61 c. 519,732.04 d. 477,862.41

b. 483,820.61

What is the cash flow stream for a present value 1,000,000 at 5% paid in equal installments in the future? a. 35,000 b. 50,000 c. 500,000 d. 20,000

b. 50,000

59. An investor wants to know what the yield to maturity is for a $1,000 bond with a 5.5% coupon rate that matures in 5 years if the current market price is $955? a. 7.23 b. 6.59 c. 6.33 d. 6.62

b. 6.59

91. What is the initial outlay given the following when a new piece of equipment replaces an old one: • Old equipment sells for 125,000 • Book value of old equipment 22,000 • Tax rate 40% • New equipment cost 800,000 • Site survey 18,000 • Installation cost 20,000 a. 820,000 b. 736,200 c. 717,000 d. 695,000

b. 736,200

99. Equipment is scrapped at the end of the project and has a book value of 20,000. The tax rate is 35%. The projected started with 75,000 of working capital. What is the terminal cash flow? a. -20,000 b. 82,000 c. 55,000 d. 75,000

b. 82,000

Why is the Balance Sheet known as a permanent statement? a. Because the statement is sent to the SEC. b. Because the other statements are reset at the end of the fiscal year c. Because it is printed out and archived d. Because it persists in the minds of the shareholders

b. Because the other statements are reset at the end of the fiscal year

84. If an investor knows the idiosyncratic risk, the investor knows the: a. Profit Margin percentage b. Beta Coefficient c. Operating Leverage d. Free Cash Flow

b. Beta Coefficient

Which components are part of total assets? a. Cash, Accounts Receivable, Short Term Debt b. Cash Accounts Receivable, Inventory, Long Term Assets c. Accounts Payable, Long Term Assets, Long Term Debt d. Accounts Payable, Net Income, Equity

b. Cash Accounts Receivable, Inventory, Long Term Assets

The OIROI (Operating Income Return on Investment) uses what elements on the income statement? a. Operating Income, EBIT, Total Liabilities b. EBIT, Total Assets c. Sales, Total Assets, Equity d. Net Margin, Total Current Assets

b. EBIT, Total Assets

83. What is the Expected Rate of Return for a stock where treasury bills are returning 2.5% and the market as a whole, is returning 15%. The stock has a beta of 1.25? a. .125 b. .156 c. .181 d. .100

c. .181

Which components are part of Total Liabilities? a. Accounts Payable, Accounts Receivable, Short Term Debt b. Long Term Debt, Common Stock, Retained Earnings c. Bonds, Accounts Payable, Mortgage d. Common Stock, Long Term Debt, Short Term Investments

c. Bonds, Accounts Payable, Mortgage

When Fixed Assets increase what happens to Cash? a. Cash stays the same b. Cash increases c. Cash decreases d. Assets decrease

c. Cash decreases

57. What does a company use as security for a bond? a. Fixed assets b. Future earnings c. Credit worthiness d. Common stock

c. Credit worthiness

85. Common stock is valued at 400,000, Long-term debt is valued at 250,000, and preferred stock is valued at 50,000. What is the WACC where common stock costs .16, long-term debt costs .08, and preferred stock costs .07? The tax rate is 40%. a. .1275 b. .1495 c. .0942 d. .1135

d. .1135

79. A stock has a beta of 2.1, a market premium of .14 where the market rate is .17. What is the expected rate of return? a. .2949 b. .3571 c. .1703 d. .3240

d. .3240

A company has cash of 100, accounts receivable of 250, inventory of 300, and accounts payable of 300. What is the quick ratio? a. 0.33 b. 2.17 c. 1.00 d. 1.17

d. 1.17

If a company has current assets of 80 and fixed assets of 120, if Sales are 150 and EBIT is 35, what is the Fixed Asset Turnover? a. 5.71 b. 2.29 c. 0.80 d. 1.25

d. 1.25

62. A stock sells for 87.00 one year from now giving a total return of 8%. What is the dividend if the stock was originally purchased for 82.00. a. 5.00 b. 3.12 c. 8.06 d. 1.56

d. 1.56

What is the Cash Flow from Financing? Accounts Payable 100,000 Accrued Expenses 50,000 Increase in Mortgage Payable 300,000 Decrease in Bonds Payable 75,000 Dividends Paid 80,000 a. 505,000 b. 225,000 c. 230,000 d. 145,000

d. 145,000

98. A project is closing. Equipment is sold for 50,000 even though the book value was 75,000. The tax rate is 30%. The project started with 100,000 in working capital. What is the terminal cash flow? a. 127,500 b. 75,000 c. 152,500 d. 157,500

d. 157,500

40. A couple wants to save up for a down payment on a house. They think they need to save 100,000 in five years. If the interest rate is 4% and they start at the end of the year when they both get bonuses from their employers, what do they have to put aside annually? a. 22,096.37 b. 17,752.61 c. 15,962.84 d. 18,462.71

d. 18,462.71

Intel provides the following data for 2014: • A/R 600 • Inventory 800 • Fixed Assets 1,000 • A/P 500 • Long term debt 900 • Common Stock 400 What is the current ratio? a. 1.2 b. 1.5 c. 2.0 d. 2.8

d. 2.8

72. An investor wishes to know what the value of a common stock is if it pays a dividend of $6.00 today. The company's growth rate is 4.5% and the investor wants expects the stock to earn 7%. What is the value? a. 179.14 b. 240.00 c. 85.71 d. 250.80

d. 250.80

43. A mother wants to help her child's higher education fund. She wishes to have $15,000 available each year for six years. Her child starts college in 15 years and she can save 6% before school starts if she puts her end-of-year bonus into a trust fund and figures that the fund will earn 4% after her child begins her college education. What does she have to put aside annually if the money is withdrawn for college at the beginning of each year attending college? Hint: Two-Step problem. a. 5,802.74 b. 3,346.19 c. 4,159.87 d. 3,513.38

d. 3,513.38

52. A 5% semiannual $1,000 bond matures in 4 years. What is the YTM if the price is $1,069? a. 1.58 b. 2.92 c. 1.75 d. 3.15

d. 3.15

67. A company just paid a dividend of 2.30 to its shareholder. It estimates that future growth will be at 2%. What is the value of the stock if you are looking for an 8% return on your investment? a. 28.75 b. 38.33 c. 41.67 d. 39.10

d. 39.10

49. A company wishes to issue 10 year bonds with a face value of $1,000 and a coupon rate of 5.5%. The market has shifted before the issuance and the bonds will sell at 94% of face value. What is the YTM of the bonds when they are sold? a. 6.71% b. 5.50% c. 6.00% d. 6.33%

d. 6.33%

Last year a firm recorded Net PP&E of $4,600 while this year the same firm recorded Net PP&E of $4,500. If the depreciation expense for last year and this year are $500 and $800 respectively, what is the CFI of the company? (assume no asset disposals) a. 100 outflow b. 900 outflow c. 100 inflow d. 700 outflow

d. 700 outflow

93. A project has sales of 300,000, general expenses of 195,000 and depreciation expense of 25,000. The tax rate is 35%. What is the differential cash flow? a. 52,000 b. 105,000 c. 80,000 d. 77,000

d. 77,000

95. A project has net income of 750,000 including depreciation expense of 42,000. What is the differential cash flow? a. 750,000 b. 708,000 c. 42,000 d. 792,000

d. 792,000

97. A piece of equipment was sold at the end of the project. The project received 85,000 for the equipment that carried a book value of 75,000. The tax rate is 35%. What is the salvage value? a. 10,000 b. 26,250 c. 85,000 d. 81,500

d. 81,500

58. A bond issued with a face value of $1,000 pays a 3% coupon rate and matures in seven years. If an investor wants a yield of 4%, what is the investor willing to pay for the bond? a. 939.46 b. 1,067.04 c. 1,033.32 d. 939.98

d. 939.98

51. What is the price of a 1- year $1,000 bond with a 3% coupon rate if the YTM is 5.2%? a. 952.48 b. 1,068.17 c. 899.42 d. 979.09

d. 979.09