FIN 2303 OU Exam 1 Study Guide

Which of the statements below is TRUE?

Accounting Identity is: Assets ≡ Liabilities + Owners' Equity.

The fundamental starting point of all the accounting statements is the ________.

Accounting identity

________ is the name given to the processes surrounding recognition of the principal-agent problem and ways to align agents with the interests of the principals.

Agency theory

Which of the following investments has a larger future value: A $100 investment earning 10% per year for 5 years or a $100 investment earning 5% per year for 10 years?

An investment of $100 invested at 5% per year for 10 years because it has a future value of $162.89

A series of equal periodic finite cash flows that occur at the beginning of the period are known as a/an ________.

Annuity due

William wishes to save enough money to purchase a retirement lake cabin. He is willing to spend $200,000 for the cabin and he can save $20,000 per year and invest the money into an account earning 7.00% per year. If his investments come in the form of equal annual end-of-the-year cash flows and the first cash flow is in exactly one year, how long will it take him to save enough money to buy the lake cabin?

Between 7 and 8 years

Which of the following is the CORRECT formula for calculating the future value?

FV = PV × (1 + r)n

Which of the following is NOT an example of an equity market transaction?

Grant contacts his broker and requests a purchase of IBM bonds. This is a debt market transaction.

________ is the area of finance concerned with the activities of buying and selling financial assets such as stocks and bonds.

Investments

You currently have $67,000 in an interest-earning account. From this account, you wish to make 10 year-end payments of $8,500 each. What annual rate of return must you make on this account to meet your objective?

4.58%

You currently have $3,500 invested at an annual rate of 8%. How long will it take for this investment to grow to a value of $5,000?

4.63 years

You have the opportunity to purchase mineral rights to a property in Wyoming with expected annual cash flows of $8,000 per year for ten years. If you discount these cash flows at a rate of 12% per year, what are these cash flows worth today if the cash flows occur at the end of each period?

45,201.78

Your employer has agreed to place year-end deposits of $1,000, $2,000 and $3,000 into your retirement account. The $1,000 deposit will be one year from today, the $2,000 deposit two years from today, and the $3,000 deposit three years from today. If your account earns 5% per year, how much money will you have in the account at the end of year three when the last deposit is made?

6,202.50

You dream of endowing a chair in finance at the local university that will provide a salary of $250,000 per year forever, with the first cash flow to be one year from today. If the university promises to invest the money at a rate of 4% per year, how much money must you give the university today to make your dream a reality?

6,250,000

You have a choice between a lottery lump sum payout of $5,509,253.62 today or a series of twenty annual annuity payments of $500,000 each (first cash flow one year from today). At what discount rate are you indifferent between the two choices?

6.50%

Your department at work places $8,000 every year-end into an account earning 5%. The money is used when the corporate office fails to fully finance your profitable projects. The money has not been touched since the first deposit was made exactly six years ago. If the most recent deposit was made today, how much money is currently in the account?

65,136.07 (N= 7, I=5, PV=0, PMT=8000, FV=?)

You have just won the Publisher's Clearinghouse lottery of $50,000 per year for twenty years, with the first payment today followed by nineteen more start-of-the-year cash flows. At an interest rate of 4%, what is the present value of your winnings?

706,696.97

Stocks are bought and sold in ________ markets.

Equity

If you can earn 5.25% per year on your investments, how long will it take to double your money?

13.55 years

Refer to the Canary Cruises Corporation Corporation Income Statement Accounts. What is the net income for the Canary Cruises Corporation for 2017?

135,900 (Revenue-COGS-SGA-Depreciation-interest expenses-taxes)

You wish to make a substantial down payment on a lake cottage and you currently have $15,725 invested at an annual rate of 2.50%. How much money will be in the account in 3 years and 6 months if it continues to earn at its present rate?

17,144.47 (N=3.5, I=2.5, PV=15725, PMT=0, FV=?)

By choosing to attend college today, you have agreed to pay $17,000 per year in tuition and fees for the next five years. (What... you really thought that you would graduate in four years?) In addition to the tuition and fees, you have also given up the ability to work full time and earn $23,000 per year for the next five years. If your required rate of return is 5% (the U.S. long-run average rate of inflation plus an average real rate of return), what is the total cost in today's dollars of your college degree, assuming that all of the aforementioned cash flows are ordinary annuities?

173,179.07 (N=5, I=5, PV=?, PMT=40000, FV=0)

Your finance professor suggests that you should have $3,000,000 in your retirement portfolio before you even THINK about retiring. Recently, your aunt sold valuable California real estate and handed you a check for $387,500. (This is the amount you have after paying taxes. She is now your favorite aunt.) How much of the $387,500 must you set aside today if you invest a portion of the money at an annual rate of 7.5% and you wish to retire in 38 years with the amount suggested by your finance professor?

192,131.96 (N=38, I=7.5, PV=?, PMT=0, FV= 3,000,000)

Refer to the Canary Cruises Corporation Corporation Income Statement Accounts. What is the EBIT for the Canary Cruises Corporation for 2017?

272,000 (Revenue-COGS-SGA-Depreciation)

You have just turned 27 and may now spend a portion of the trust fund your parents established for you. The terms of the trust fund allow you to withdraw 50 beginning-of-the-year cash flows of $40,000 each. An investment firm has offered to pay you cash for all of the fund today. If the rate they use to discount the cash flows is 14% per year, what is their offer price today for your pension fund?

325,249.13 (N=50, I=14, PV=?, PMT=40000, FV=0) =285,306.26x(1+14%)

Refer to the Canary Cruises Corporation Corporation Income Statement Accounts. What is the operating cash flow for the Canary Cruises Corporation for 2017?

340,900 (EBIT+Depreciation-Taxes)

You intend to buy a vacation home in eight years and plan to have saved $75,000 for a down payment. How much money would you have to place today into an investment that earns 9% per year to have enough for your desired down payment?

37,640

The means by which a company is financed refers to the firm's ________.

Capital structure

________ is the typical title of the corporate executive charged with determining the best repayment structure for borrowed funds to ensure timely repayment and sufficient cash for daily operations.

Chief Financial Officer (CFO)

________ is simply the interest earned in subsequent periods on the interest earned in prior periods.

Compound interest

Bonds are bought and sold in ________ markets.

Debt

Which of the following actions will INCREASE the present value of an investment?

Decrease the interest rate.

To determine the present value of a future amount, one should ________ the future cash flows.

Discount

The income statement begins with revenue and subtracts various operating expenses until arriving at Earnings Before Interest and Taxes. Next, interest expense is subtracted to find the taxable income for the period. Then the appropriate taxes are calculated and subtracted. We finally arrive at the ________, the so-called bottom line of the income statement.

Net income

The sale of "used" securities, where the financial asset is being traded from one individual to another and the proceeds do not go to the original issuer of the security, is said to take place in the ________ market.

Second

Maximizing the market value of firm equity and which of the following are mutually exclusive?

None of the above is mutually exclusive with maximizing the value of market equity.

Net income is ________.

Not cash flow

Which of the following identities is TRUE?

Operating Cash Flow = EBIT + Depreciation - Taxes

A never-ending stream of equal periodic, end-of-the-period cash flows is called a/an ________.

Perpetuity

The sale of "new" securities, where the financial asset is being traded for the very first time, is said to take place in the ________ market.

Primary

The problem of motivating one party to act in the best interest of another party is known as the ________.

Principal-agent problem

In agency theory, the owners of the business are referred to as ________, and the managers are referred to as ________.

Principals, agents

Sale of new common stock in the primary market is regulated by the ________, and a sale of used common on the secondary market is regulated by the ________.

SEC;SEC

Financial markets can be classified by which of the following?

type of asset traded, owner of financial asset, maturity of the financial asset

Which of the following compensation packages is likely to work best for executive managers?

Stock options

An investment of $100 today is worth $116.64 at the end of two years if it earns an annual interest rate of 8%. How much interest is earned in the first year and how much in the second year of this investment?

The interest earned in year one is 8 and the interest earned in year two is 8.64 (100x.08=8; 108x0.08=8.64)

Your grandmother places $13,000 into an account earning an interest rate of 7% per year. After 5 years the account will be valued at $18,233.17. Which of the following statements is CORRECT?

The principal is $13,000, the time period is 5 years, the future value is $18,233.17, and the interest rate is 7%

Capital budgeting is best defined by which of the following questions?

What business are we in?

Managing the firm's short-term financing activities is known as ________.

Working capital management

A home improvement firm has quoted a price of $14,700 to fix up Eric's backyard. Five years ago, Eric put $12,500 into a home improvement account that has earned an average of 4.75% per year. Does Eric have enough money in his account to pay for the backyard fix-up?

Yes; Eric has $15,764.50 in his home improvement account.

One of the key components to making financial decisions is to ________.

understand the timing and amount of cash flow

Which of the following can lead to increased expected cash flow over time to the firm?

greater customer satisfaction, open and collaborative relations with the community, qualified and motivated employees

The movement of money from lender to borrower and back again is known as ________.

the cycle of money

Cash flow is ________.

the increase or decrease in cash for the period