FIN 300 Exam 1 Chapter practices
Williamsburg Markets has an operating cash flow of $4,267 and depreciation of $1,611. Current assets decreased by $1,356 while current liabilities decreased by $2,662, and net fixed assets decreased by $382 during the year. What is free cash flow for the year?
$1732 Change in NWC = -$1,356 - (-$2,662) Change in NWC = $1306 NCS = -$382 + 1,611 NCS = $1,229 FCF = CFA = $4,267 - 1,306 - 1,229 FCF = $1,732
First City Bank offers an APR of 7.65 percent on its loans. What is the maximum rate the bank can actually earn based on the quoted rate?
7.95 percent EAR = e^(.0765) − 1 EAR = .0795, or 7.95%
Which one of the following statements is correct?
Corporations can have an unlimited life.
which one of the following is a working capital management decision
Should the firm pay cash for a purchase or use the credit offered by the supplier?
You have just received an offer in the mail from Friendly Loans. The company is offering to loan you $4,250 with low monthly payments of $90 per month. If the interest rate on the loan is an APR of 15.3 percent compounded monthly, how long will it take for you to pay off the loan?
72.74 $4,250 = $90{[1 − 1/(1 + .153/12)^(t)]/.153/12} t = 72.74 months
Which one of the following will produce the lowest present value interest factor?
8 percent interest for 10 years
JJ Enterprises has inventory of $11,600, fixed assets of $22,400, total liabilities of $12,900, cash of $1,900, accounts receivable of $8,700, and long-term debt of $6,500. What is the net working capital?
$15,800 NWC = $1,900 + 8,700 - ($12,900 - 6,500) NWC = $15,800
You just invested $49,000 that you received as an insurance settlement. How much more will this account be worth in 40 years if you earn an average return of 7.6 percent rather than just 7.1 percent?
$155,986.70PV = $310,000/1.2263 PV = $1.12 FV = $49,000(1.076^(40)) FV = $917,670.84 FV = $49,000(1.071^(40)) FV = $761,684.14 Difference = $917,670.84 − 761,684.14 Difference = $155,986.70
Your local pawn shop loans money at an annual rate of 24 percent and compounds interest weekly. What is the actual rate being charged on these loans?
27.05 percent EAR = (1 + .24/52)52 − 1 EAR = .2705, or 27.05%
Assume the average vehicle selling price in the United States last year was $36,420. The average price five years earlier was $31,208. What was the annual increase in the selling price over this time period?
3.14 percent $36,420 = $31,208[(1 + r)^(5)] r = .0314, or 3.14%
You feel that you will need $3.2 million in your retirement account and when you reach that amount, you plan to retire. You feel you can earn an APR of 10.7 percent compounded monthly and plan to save $455 per month until you reach your goal. How many years will it be until you reach your goal and retire?
39.00 years $3,200,000 = $455{[1 - 1/(1 + .1070/12)^(t)]/.1070} t = 467.98 months t = 467.98/12 = 39.00 years
You grandfather invested $16,600 years ago to provide annual payments of $700 a year to his heirs forever. What is the rate of return?
4.22 Percent r = $700/$16,600 r = .0422, or 4.22%
You want to have $3.15 million when you retire in 35 years. You feel that you can save $775 per month until you retire. What APR do you have to earn in order to achieve your goal?
10.26% $3,150,000 = $775{[(1 + r)^(420) − 1] / r} r = .0086, or .86% r = .86% × 12 = 10.26%
What is the EAR of 18.9 percent compounded continuously?
20.80 percent EAR = e^(.189) − 1 EAR = .2080, or 20.80%
What is the relationship between the present value and future value interest factors?
The factors are reciprocals of each other.
The articles of incorporation:
describe the purpose of the firm and set forth the number of shares of stock that can be issued.
The process of determining the present value of future cash flows in order to know their value today is referred to as:
discounted cash flow valuation.
At the beginning of the year, Vendors, Inc., had owners' equity of $50,240. During the year, net income was $6,500 and the company paid dividends of $4,440. The company also repurchased $8,640 in equity. What was the cash flow to stockholders for the year?
$13,080 Cash flow to stockholders = $4,440 + 8,640 = $13,080
For the past year, Kayla, Inc., has sales of $47,552, interest expense of $4,322, cost of goods sold of $17,709, selling and administrative expense of $12,336, and depreciation of $7,285. If the tax rate is 40 percent, what is the operating cash flow?
$15,147 EBIT = $47,552 − 17,709 − 12,336 − 7,285 = $10,222 EBT = $10,222 − 4,322 = $5,900 Taxes = $5,900(.40) = $2,360 OCF = $10,222 + 7,285 − 2,360 = $15,147
Adison Winery had beginning long-term debt of $38,496 and ending long-term debt of $43,871. The beginning and ending total debt balances were $47,611 and $52,592, respectively. The company paid interest of $4,255 during the year. What was the company's cash flow to creditors?
-$1,120 Cash flow to creditors = $4,255 − ($43,871 − 38,496) = −$1,120
Troy will receive $7,500 at the end of Year 2. At the end of the following two years, he will receive $9,000 and $12,500, respectively. What is the future value of these cash flows at the end of Year 6 if the interest rate is 8 percent?
$36,121.08 FV = $7,500(1.08^(4)) + $9,000(1.08^(3)) + $12,500(1.08^(2)) FV = $36,121.08
Red Sun Rising Corp. has just signed a lease for its new manufacturing facility. The lease agreement calls for annual payments of $1,950,000 for 30 years with the first payment due today. If the interest rate is 3.59 percent, what is the value of this liability today?
$36,736,615.14 PV = $1,950,000(1.0359)[(1 − 1/1.035930) / 0.0359] PV = $36,736,615.14
Teddy's Pillows had beginning net fixed assets of $458 and ending net fixed assets of $524. Assets valued at $306 were sold during the year. Depreciation was $16. What is the amount of net capital spending?
$82 Net capital spending = $524 (ending net fixed assets) + 16 (Depreciation) - 458 (beginning net fixed assets) Net capital spending = $82
You have just received notification that you have won the $1.25 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100th birthday, 79 years from now. The appropriate discount rate is 6.4 percent. What is the present value of your winnings?
$9,300.82 PV = $1,250,000/(1.064^(79)) PV = $9,300.82
Twelve years ago, your parents set aside $8,000 to help fund your college education. Today, that fund is valued at $23,902. What rate of interest is being earned on this account?
9.55 percent $23,902 = $8,000[(1 + r)^12] r = .0955, or 9.55%
On your tenth birthday, you received $300 which you invested at 4.5 percent interest, compounded annually. Your investment is now worth $756. How old are you today?
Age 31 $756 = $300(1.045^(t)) t = 21 years Age today = 10 + 21 Age today = 31 years
The interest rate that is most commonly quoted by a lender is referred to as the:
Annual percentage rate
Which one of the following is an expense for accounting purposes but is not an operating cash flow for financial purposes?
interest expense
A perpetuity is defined as:
unending equal payments paid at equal time intervals.
Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This transaction:
was facilitated in the secondary market.
An example of a capital budgeting decision is deciding:
whether or not to purchase a new machine for the production line.
The Daily News has projected annual net income of $272,600, of which 28 percent will be distributed as dividends. Assume the company will have net sales of $75,000 worth of common stock. What will be the cash flow to stockholders if the tax rate is 21 percent?
$1,328 CFS = .28($272,600) - $75,000 CFS = $1,328
You invested $6,500 at 6 percent simple interest. How much more could you have earned over a 10-year period if the interest had compounded annually?
$1,240.51 FVSimple = $6,500 + ($6,500)(.06)(10) FVSimple = $10,400 FVCompound = $6,500(1.06^(10)) FVCompound = $11,640.51 Difference = $11,640.51 − 10,400 Difference = $1,240.51
Which one of the following terms is defined as the management of a firm's long-term investments?
Capital Budgeting
Which one of the following terms is defined as the mixture of a firm's debt and equity financing?
Capital Structure
Noncash items refer to:
Expenses which do not directly affect cash flows
A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a:
General Partnership
Which one of the following statements is correct?
Income from both sole proprietorships and partnerships that is taxable is treated as individual income.
Deprecation for a tax-pay firm:
Increases expenses and lowers taxes.
The interest earned on both the initial principal and the interest reinvested from prior periods is called:
Processing Cost Reports
A business owned by a solitary individual who has unlimited liability for the firm's debt is called a:
Sole Proprietorship
The decision to issue additional shares of stock is an example of:
a capital structure decision
Financial managers should strive to maximize the current value per share of the existing stock to:
best represent the interests of the current shareholders.
The interest earned on both the initial principal and the interest reinvested from prior periods is called:
compound interest.
Which one of the following statements related to loan interest rates is correct?
When comparing loans you should compare the effective annual rates.
Galaxy Interiors income statement shows depreciation of $1,611, sales of $21,415, interest paid of $1,282, net income of $1,374, and costs of goods sold of $16,408. What is the amount of the noncash expenses?
$1,611 Noncash expenses = Depreciation = $1,611
Smashed Pumpkins Co. paid $168 in dividends and $596 in interest over the past year. The company increased retained earnings by $498 and had accounts payable of $642. Sales for the year were $16,405 and depreciation was $736. The tax rate was 35 percent. What was the company's EBIT?
$1,621 Net income = $168 + 498 = $666 EBT = $666/( 1 − .35) = $1,025 EBIT = $1,025 + 596 = $1,621
You have just leased a car that has monthly payments of $345 for the next 3 years with the first payment due today. If the APR is 6.36 percent compounded monthly, what is the value of the payments today?
$11,339.70 PV = $345(1.0053)[(1 −1/1.0053^(36)) / .0053] = $11,339.70
Andre's Bakery has sales of $487,000 with costs of $263,000. Interest expense is $26,000 and depreciation is $42,000. The tax rate is 21 percent. What is the net income?
$123,240 Net income = ($487,000 − 263,000 − 26,000 − 42,000)(1 − .21) Net income = $123,240
You will receive $15,000 in two years when you graduate. You plan to invest this at an annual interest rate of 6.5 percent. How much money will you have 8 years from now?
$21,887.13 FV = $15,000(1.065^(8 − 2)) FV = $21,887.13
Nielsen Auto Parts had beginning net fixed assets of $218,470 and ending net fixed assets of $209,411. During the year, assets with a book value of $6,943 were sold. Depreciation for the year was $42,822. What is the amount of net capital spending?
$33,763 Net Capital Spending = $209,411 - 218,470 + 42,822 Net Capital = $33,763
A balance sheet has total assets of $1,892, fixed assets of $1,306, long-term debt of $692, and short-term debt of $233. What is the net working capital?
$353 Net working capital = ($1,892 − 1,306) − $233 = $353
What is the present value of $45,000 to be received 50 years from today if the discount rate is 8 percent?
$959.46 PV = $45,000/(1.08^(50)) PV = $959.46
The 2017 balance sheet of Kerber's Tennis Shop, Inc., showed long-term debt of $2.9 million, and the 2018 balance sheet showed long-term debt of $3.2 million. The 2018 income statement showed an interest expense of $100,000. What was the firm's cash flow to creditors during 2018?
Cash flows to creditors = -200,000 Cash flow to creditors = Interest paid - New New borrowing Cash flow to creditors = interest paid - (LTDend - LTDbeg) Cash flow to creditors = $100,000 - ($3,200,000- 2,900,000) Cash flow to creditors = -$200,000
Corporate bylaws
Determine how a corporation regulates itself.
Your grandmother has promised to give you $10,000 when you graduate from college. If you speed up your graduation by one year and graduate two years from now rather than the expected three years, the present value of this gift will:
Increase.
Sally and Alicia are equal general partners in a business. They are content with their current management and tax situation but are uncomfortable with their unlimited liability. Which form of business entity should they consider as a replacement to their current arrangement assuming they wish to remain the only two owners of the business?
Limited Liability Company
Which one of the following best states the primary goal of financial management?
Maximize the current value per share
Which one of the following is a primary market transaction?
Sales of a new share of stock to an individual investors
Public offerings of a debt and equity must be registered with the:
Securities and exchange commission
Which one of the following parties has ultimate control of a corporation?
Shareholders
Which one of the following statements is correct concerning the NYSE?
The listing requirements for the NYSE are more stringent than those of NASDAQ.
Which one of these statements related to growing annuities and perpetuities is correct?
The present value of a growing perpetuity will decrease if the discount rate is increased.
Suppose the first comic book of a classic series was sold in 1954. In 2017, the estimated price for this comic book was $310,000, which is an annual return of 22 percent. For this to be true, what was the original price of the comic book in 1954?
$1.12 PV = $310,000/(1.22^(63)) PV = $1.12
What is the EAR if a bank charges you an APR of 7.65 percent, compounded quarterly?
7.87 percent EAR = (1 + .0765/4)^(4) − 1 EAR = .0787, or 7.87%
Griffin's Goat Farm, Inc., has sales of $644,000, costs of $225,000, depreciation expense of $49,000, interest expense of $32,000, and a tax rate of 22 percent. What is the net income for this firm?
$263,640 The income statement for the company is: Income Statement Sales $644,000 Costs (225,000) Depreciation (49,000) EBIT $370,000 Interest (32,000) EBT $338,000 Taxes (22%) (74,360) Net income $263,640
Today, you earn a salary of $31,000. What will be your annual salary ten years from now if you receive annual raises of 2.2 percent?
$38,536.36 FV = $31,000(1.022^(10)) FV = $38,536.36
Gerritt wants to buy a car that costs $26,750. The interest rate on his loan is 5.33 percent compounded monthly and the loan is for 7 years. What are his monthly payments?
$382.24 $26,750 = C[1 − (1/(1 + .0533/12)^(84))/(.0533/12)] C = $382.24
Your grandparents would like to establish a trust fund that will pay you and your heirs $145,000 per year forever with the first payment 7 years from today. If the trust fund earns an annual return of 2.8 percent, how much must your grandparents deposit today?
$4,387,845.05 PV = $145,000/.028 = $5,178,571.43 PV = $5,178,571.43/(1.028)^(6) = $4,387,845.05
At the beginning of the year, Trees Galore had current liabilities of $15,932 and total debt of $68,847. By year end, current liabilities were $13,870 and total debt was $72,415. What is the amount of net new borrowing for the year?
$5,630 Net new borrowing = ($72,415 - 13,870) - ($68,847 - 15,932) Net New Borrowing = ($5,630)
Webster World has sales of $13,800, costs of $5,800, depreciation expense of $1,100, and interest expense of $700. What is the operating cash flow if the tax rate is 23 percent?
$6,574 EBIT = $13,800 − 5,800 − 1,100 EBIT = $6,900 Taxable income = $6,900 − 700 Taxable income = $6,200 Tax = .23($6,200) Tax = $1,426 OCF = $6,900 + 1,100 − 1,426 OCF = $6,574
Rousey, Inc., had a cash flow to creditors of $17,055 and a cash flow to stockholders of $7,685 over the past year. The company also had net fixed assets of $49,755 at the beginning of the year and $57,190 at the end of the year. Additionally, the company had a depreciation expense of $12,300 and an operating cash flow of $51,270. What was the change in net working capital during the year?
$6,795 Cash flow from assets = $17,055 + 7,685 = $24,740 Net capital spending = $57,190 − 49,755 + 12,300 = $19,735 Change in net working capital = $51,270 − 19,735 − 24,740 = $6,795
Your employer contributes $65 at the end of each week to your retirement account. The account will earn a weekly interest rate of .15 percent. How much will the account be worth when you retire in 35 years?
$619,734.11 FV = $65[1.0015^(35×52) − 1)/.0015] = $619,734.11
One disadvantage of the corporate form of business ownership is the:
Double Taxation of distributed profits
Net working capital is defined as:
current assets minus current liabilities
An ordinary annuity is best defined as:
equal payments paid at the end of regular intervals over a stated time period.