FIN HW 1-6

B

Which one of the following best indicates a firm is utilizing its assets more efficiently than it has in the past? A. A decrease in the total asset turnover B. A decrease in the capital intensity ratio C. An increase in days' sales in receivables D. A decrease in the profit margin

D

Which one of the following functions is generally a responsibility assigned to the corporate treasurer? A. Data processing B. Corporate taxes C. Financial accounting D. Capital expenditures

C

Jamie is analyzing the estimated net present value of a project under various conditions by revising the sales quantity, sales price, and the cost estimates. The type of analysis that Jamie is doing is best described as: A. Sensitivity analysis B. Erosion planning C. Scenario analysis D. Benefit planning

C

Red's Tractors owes $52,311 in taxes on a taxable income of $608,606. The company has determined that it will owe $56,211 in tax if its taxable income rises to $620,424. What is the marginal tax rate at this level of income? A. 39 percent B. 35 percent C. 33 percent D. 34 percent

A

Sheet Metals has an outstanding loan that calls for equal annual payments of $12,600.47 over the life of the loan. The original loan amount was $72,000 at an APR of 8.15 percent. How much of the third loan payment is interest? A. $4,725.89 B. $4,896.48 C. $5,009.16 D. $4,687.53

B

Spiral Staircase is offering preferred stock which is referred to as 10-10 stock. This stock will pay an annual dividend of $10 a share starting 10 years from now. What is this stock worth to you today if you require a rate of return of 9.5 percent? A. $66.70 B. $46.51 C. $49.63 D. $120.52

D

The Corner Market has decided to expand its retail store by building on a vacant lot it currently owns. This lot was purchased four years ago at a cost of $299,000, which the firm paid in cash. To date, the firm has spent another $38,000 on land improvements, all of which was also paid in cash. Today, the lot has a market value of $329,000. What value should be included in the analysis of the expansion project for the cost of the land? A. The sum of the cash paid to date for both the lot and the improvements B. The original purchase price only C. The current market value of the land plus the cash paid for the improvements D. The current market value of the land

B

The Egg House just borrowed $660,000 to build a new restaurant. The loan terms call for equal annual payments at the end of each year. The loan is for 15 years at an APR of 8.35 percent. How much of the first annual payment will be used to reduce the principal balance? A. $21,311.62 B. $23,653.18 C. $18,211.08 D. $48,911.08

A

The Embroidery Shoppe had beginning retained earnings of $18,670. During the year, the company reported sales of $83,490, costs of $68,407, depreciation of $8,200, dividends of $950, and interest paid of $478. The tax rate is 34 percent. What is the retained earnings balance at the end of the year? A. $21,947.30 B. $22,193.95 C. $22,233.24 D. $23, 783.24

D

The Pretzel Factory has net sales of $821,300 and costs of $698,500. The depreciation expense is $28,400 and the interest paid is $8,400. What is the amount of the firm's operating cash flow if the tax rate is 34 percent? A. $87,620 B. $89,540 C. $91,220 D. $93,560

C

The balance sheet of a firm shows beginning net fixed assets of $348,200 and ending net fixed assets of $371,920. The depreciation expense for the year is $46,080 and the interest expense is $11,460. What is the amount of the net capital spending? A. -$22,360 B. -$4,780 C. $69,800 D. $58,340

C

The manager of Gloria's Boutique has approved Carla's application for 24 months of credit with maximum monthly payments of $70. If the APR is 14.2 percent, what is the maximum initial purchase that Carla can buy on credit? A. $1,006.90 B. $1,300.00 C. $1,455.08 D. $1,184.75

B

The market value: A. Of accounts receivable is generally higher than the book value of those receivables B. Of an asset tends to provide a better guide to the actual worth of an asset than does the book value C. Of fixed assets will always exceed the book value of those assets D. Of an asset is reflected in the balance sheet

A

The net present value: A. Decreased as the required rate of return increases B. Is equal to the initial investment when the internal rate is equal to the required return C. Method of analysis cannot be applied to mutually exclusive projects D. Ignores cash flows that are distant in the future

D

The primary goal of financial management is to maximize: A. Current profits B. Market share C. Current dividends D. The market value of existing stock

C

The sustainable growth rate is based on the premise that: A. An additional dollar of debt will be acquired only is an additional dollar in equity is issued B. No additional equity will be added to the firm C. The debt-equity ratio will be held constant D. The dividend payout ratio will be zero

C

Today, you are buying a $1,000 face value bond at an invoice price of $987. The bond has a coupon rate of 6 percent and pays interest semiannually. There are two months until the next coupon date. What is the clean price of this bond? A. $947 B. $957 C. $967 D. $977

D

Wes Motors has total assets of $98,300, net working capital of $11,300, owner's equity of $41,600, and long-term debt of $38,600. What is the value of the current assets? A. $21,600 B. $18,100 C. $28,900 D. $29,400

B

What is the net present value of the following set of cash flows at a discount rate of 5 percent? At 15 percent? A. $722.09; -$628.30 B. $1,620.17; -$2,618.99 C. $1,620.17; -$525.13 D. $722.09; -$418.05

C

What is the value today of $3,600 received at the end of each year for eight years if the first payment is paid at the end of Year 4 and the discount rate is 12 percent? A. $11,694.21 B. $12,484.57 C. $12,729.12 D. $15,089.23

C

Which of the following create cash inflows from net working capital? A. Decrease in accounts payable and increase in accounts receivable B. Decrease in both accounts receivable and accounts payable C. Increase in accounts payable and decrease in inventory D. Increase in both accounts receivable and inventory

C

Which one of the following actions will increase the current ratio, all else constant? Assume the current ratio is greater than 1.0 A. Cash purchase of inventory B. Cash payment on an account receivable C. Cash payment of an account payable D. Credit sale of inventory at cost

B

A. $26,359 B. $47,949 C. $61, 487 D. $43,909

B

A bond trader just purchased and resold a bond. The amount of profit earned by the trader from this purchase and resale is referred to as the: A. Market yield B. Bid-ask spread C. Yield-to-call D. Current yield

C

A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as a(n): A. Fixed cost B. Forgotten cost C. Sunk cost D. Opportunity cost

D

A firm has a current ratio of 1.4 and a quick ratio of .9. Given this, you know for certain that the firm: A. Pays cash for its inventory B. Has more than half its current assets invested in inventory C. Has more cash than inventory D. Has positive net working capital

A

A firm has adopted a policy whereby it will not seek any additional external financing. Given this, what is the maximum growth rate for the firm if it has net income of $32,600, total equity of $294,000, total assets of $503,000, and a 25 percent dividend payout ratio? A. 5.11 percent B. 4.88 percent C. 6.62 percent D. 7.67 percent

A

A firm has an equity multiplier of 1.5. This means that the firm has a: A. Total debt ratio of .33 B. Debt-equity ratio of .33 C. Total debt ratio of .67 D. Debt-equity ratio of .67

A

A firm's liquidity level decreases when: A. Inventory is purchased with cash B. Inventory is sold on credit C. Inventory is sold for cash D. An accounts receivable is collected

B

A limited liability company (LLC): A. Is a hybrid between a sole proprietorship and a partnership B. Prefers its profits be taxed as personal income to its owners C. That meets the IRS criteria to be an LLC will be taxed like a corporation D. Provides limited liability for some, but not all, of its owners

B

A local magazine is offering a $2,500 grand prize to one lucky winner. The prize will be paid in four annual payments of $625 each, starting one year after the drawing. How much would this prize be worth to you if you can earn 9 percent on your money? A. $1,848.18 B. $2,024.82 C. $1,934.24 D. $2,450.14

C

A project has expected cash inflows, starting with Year 1, of $900, $1,200, $1,500, and finally in Year 4, $2,000. The profitability index is 1.11 and the discount rate is 12 percent. What is the initial cost of the project? A. $3,899.16 B. $4,098.24 C. $3,692.71 D. $3,211.06

D

A protective covenant: A. Protects the borrower from unscrupulous practices by the lender B. Guarantees the interest and principal payments will be paid in full on a timely basis C. Prevents a bond from being called D. Limits the actions of the borrower

D

A sole proprietorship: A. Provides limited financial liability for its owner B. Involves significant legal costs during the formation process C. Has an unlimited life D. Has its profits taxed as personal income

A

A. $5,600; $300 B. $5,600; $15,100 C. $6,300; $300 D. $6,300; $14,500

C

A. $86,311.20 B. $85,140.90 C. $68,390.90 D. $69,998.20

D

A. A; B; A; A; B B. A; A; B; B; A C. A; A; B; B; B D. B; A; B; A; A

C

An agency issue is most apt to develop when: A. A firm encounters a period of stagnant growth B. A firm downsizes C. The control of a firm is separated from the firm's ownership D. The firm's owner is also its key manager

C

An increase in which one of the following will increase operating cash flow for a profitable, tax-paying firm? A. Fixed expenses B. Marginal tax rate C. Depreciation D. Net capital spending

B

Andre's Dog House had current assets of $67,200 and current liabilities of $71,100 last year. This year, the current assets are $82,600 and the current liabilities are $85,100. The depreciation expense for the past year is $9,600 and the interest paid is $8,700. What is the amount of the change in net working capital? A. -$2,800 B. $1,400 C. -$1,400 D. $2,800

D

Anne plans to save $40 a week, starting next week,for ten years and earn a rate of return of 4.6 percent, compounded weekly. After the ten years, she will discontinue saving and invest her account at 6.5 percent, compounded annually. How long from now will it be before she has accumulated a total of $50,000? A. 10.32 years B. 21.14 years C. 11.14 years D. 20.32 years

C

Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as: A. Eroded cash flows B. Deviated projections C. Incremental cash flows D. Directly impacts flows

A

Assume an all-equity firm has positive net earnings. The operating cash flow of this firm: A. Increases when the tax rate decreases B. Ignores both depreciation and taxes C. Must be negative D. Is equal to net income minus depreciation

A

Atlas Home Supply has paid a constant annual dividend of $2.40 a share for the past 15 years. Yesterday, the firm announced the dividend will increase next year by 10 percent and will stay at that level through Year 3, after which time the dividends will increase by 2 percent annually. The required return on this stock is 12 percent. What is the current value per share? A. $25.52 B. $26.08 C. $24.57 D. $26.02

C

Bamp;C Co. has net income of $48,200, sales of $947,100, a capital intensity ratio of .87, and an equity multiplier of 1.53. What is the return on equity? A. 6.77 percent B. 5.93 percent C. 8.95 percent D. 12.21 percent

A

Business Solutions is expected to pay its first annual dividend of $.84 per share in Year 3. Starting in Year 6, the company plans to increase the dividend by 2 percent per year. What is the value of this stock today, Year 0, at a required return of 14.4 percent? A. $5.01 B. $8.09 C. $8.29 D. $7.03

A

Changes in interest rates affect bond prices. Which one of the following compensates bond investors for this risk? A. Interest rate risk premium B. Taxability risk premium C. Default risk premium D. Real rate of return

C

Companies can list their stock on which one of the following without having to meet listing requirements or filing financial statements with the SEC? A. NASDAQ Capital Market B. Over-the-Counter Bulletin Board C. Pink sheets D. NASDAQ Global Market

B

Dockside Warehouse has net working capital of $42,400, total assets of $519,300, and net fixed assets of $380,200. What is the value of the current liabilities? A. $61,700 B. $96,700 C. $102,900 D. $111,500

D

Donovan's would like to increase its internal rate of growth. Decreasing which one of the following will help the firm achieve its goal? A. Return on assets B. Net income C. Retention ratio D. Dividend payout ratio

A

First Bank offers personal loans at 7.7 percent compounded monthly. Second Bank offers similar loans at 7.4percent compounded daily. Which one of the following statements is correct concerning these loans? Assume a 365-day year. A. The First Bank loan has an effective rate of 7.98 percent B. The Second Bank loan has an effective rate of 8.01 percent C. The annual percentage rate for the Second Banks loans is 7.68 percent D. Borrowers should prefer the loans offered by First Bank

D

Gamma Corp. is expected to pay the following dividends over the next four years: $7.50, $8.25, $15, and $1.80. Afterward, the company pledges to maintain a constant 4 percent growth rate in dividends, forever. If the required return is 14 percent, what is the current share price? A. $31.06 B. $34.90 C. $32.30 D. $35.20

A

Good Foods has net income of $82,490, total equity of $518,700, and total assets of $1,089,500. The dividend payout ratio is .30. What is the internal growth rate? A. 5.60 percent B. 2.32 percent C. 3.57 percent D. 2.87 percent

B

Horseshoe Stables is losing significant market share and thus its managers have decided to decrease the firm's annual dividend. The last annual dividend was $.86 a share but all future dividends will be decreased by 3.5 percent annually. What is a share of this stock worth today at a required return of 17.8 percent? A. $3.06 B. $3.90 C. $3.41 D. $3.59

B

Ignoring the option to wait: A. May overestimate the internal rate of return on a project B. May underestimate the net present value of a project C. Is the same as ignoring all strategic options D. Ignores the value of discontinuing a project early

B

Jeffries & Sons is borrowing $95,000 for four years at an APR of 7.05 percent. The principal is to be repaid in equal annual payments over the life of the loan with interest paid annually. Payments will be made at the end of each year. What is the total payment due for Year 3 of this loan? A. $28,224.90 B. $27,098.75 C. $25,424.38 D. $30,447.50

B

KBJ has total assets of $613,000. There are 21,000 shares of stock outstanding with a market value of $13 a share. The firm has a profit margin of 6.2 percent and a total asset turnover of 1.08. What is the price-earnings ratio? A. 6.38 B. 6.65 C. 7.99 D. 7.41

C

Lacey will receive $135,000 a year for 5 years, starting today. If the rate of return is 8.9 percent, what are these payments worth today? A. $568,346.72 B. $531,019.80 C. $573,323.90 D. $564,009.27

C

Mistletoe Gifts has $93,840 in total assets, depreciation of $2,106, and interest of $1,214. The total asset turnover rate is .94. Earnings before interest and taxes are equal to 19 percent of sales. What is the cash coverage ratio? A. 6.33 B. 7.51 C. 15.54 D. 10.23

D

Net present value involves discounting an investment's: A. Assets B. Liabilities C. Costs D. Future cash flows

D

Net working capital increases when: A. Fixed assets are purchased for cash B. Inventory is purchased on credit C. Inventory is sold at cost D. Inventory is sold at a profit

D

One advantage of the corporate form of organization is the: A. Taxation of the corporate profits B. Unlimited liability for its shareholders C. Double taxation of profits D. Ability to raise larger sums of equity capital than other organizational forms

C

One example of a primary market transaction would be the: A. Sale of 100 shares of stock by Maria to her best friend B. Purchase by Theo of 5,000 shares of stock from his father C. Sale of 1,000 shares of newly issued stock by Alt Company to Miquel D. Sale of 5,000 shares of stock owned by a corporate CEO to his son

C

One year ago, Alpha Supply issued 15-year bonds at par. The bonds have a coupon rate of 6.5 percent, paid semiannually, and a face value of $1,000. Today, the market yield on these bonds is 7.2 percent. What is the percentage change in the bond price over the past year? A. 5.94 percent B. 5.38 percent C. -6.11 percent D. -5.87 percent

D

Outdoor Gear reduced its general and administrative costs this year. This cost improvement will increase which of the following ratios? I. Profit margin II. Return on assets III. Total asset turnover IV. Return on equity A. I and II only B. I and III only C. II, III, and IV only D. I, II, and IV only

C

Pizza Pie maintains a constant debt-equity ratio of .55. The firm had net income of $14,800 for the year and paid $12,000 in dividends. The firm has total assets of $248,000. What is the sustainable growth rate? A. 3.38 percent B. 2.27 percent C. 1.78 percent D. 3.62 percent

B

Precision Engineering invested $125,000 at 6 percent interest, compounded annually for 3 years. How much interest on interest did the company earn over this period of time? A. $1,284 B. $1,377 C. $1,317 D. $1,369

B

Which one of the following applies to a general partnership? A. The firm's operations must be controlled by a single partner B. Any one of the partners can be held solely liable for all of the partnership's debts C. The profits of the firm are taxed as a separate entity D. Each partner's liability for the firm's debts is limited to each partner's investment in the firm

D

Which one of the following bonds is the most sensitive to changes in market interest rates? A. 5-year, zero coupon B. 5-year, 5 percent coupon C. 10-year, 5 percent coupon D. 10-year, zero coupon

C

Which one of the following forms of business organization offers liability protection to some of its owners but not to all of its owners? A. Sole proprietorship B. General proprietorship C. Limited partnership D. Limited liability company

C

Which one of the following is an advantage of being a limited partner? A. Nontaxable share of any profits B. Control over the daily operations of the firm C. Losses limited to capital invested D. Unlimited profits without risk of incurring a loss

D

Which one of the following is included in the market value of a firm but not in the book value? A. Raw materials B. Partially built inventory C. Long-term debt D. Reputation of the firm

A

Which one of the following is most apt to align management's priorities with shareholder's interests? A. Compensating managers with shares of stock that must be held for a minimum of three years B. Paying a special management bonus on every fifth year of employment C. Increasing the number of paid holidays that long term employees are entitled to receive D. Allowing employees to retire early with full retirement benefits

C

Which one of the following occupations best fits into the corporate area of finance? A. Mortgage broker B. Treasury bill analyst C. Chief financial officer D. Insurance risk manager

D

Which one of the following should be assigned to the corporate treasurer rather than to the controller? A. Data processing B. Cost accounting C. Tax management D. Cash management

A

Which one of the following situations is most apt to create an agency conflict? A. Basing management bonuses on the length of employment B. Compensating a manager based on his or her division's net income C. Giving all employees a bonus if a certain level of efficiency is maintained D. Hiring an independent consultant to study the operating efficiency of the firm

A

Which one of the following statements about a limited partnership is correct? A. There must be at least one general partner B. All partners have their losses limited to their capital investment in the partnership C. All partners are treated equally D. Equity financing is easy to obtain and unlimited

A

Which one of the following statements is correct? A. NASDAQ has more listed stocks than does the NYSE B. The NYSE is a dealer market C. The NASDAQ is an auction market D. NASDAQ has the most stringent listing requirements of any US exchange

D

Which one of the following statements is correct? A. Peer group analysis is easier when a firm is a conglomerate versus when it has only a single line of business B. Peer group analysis is easier when seasonal firms have different fiscal years C. Peer group analysis is simplified when firms use varying methods of depreciation D. Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory

D

Which one of the following statements is correct? A. The NYSE was created by the National Association of Securities Dealers in the early 1930s B. The Chicago Stock Exchange is a dealer market C. OTC markets have a physical trading floor generally located in either New York City or Chicago D. The primary purpose of the NYSE is to match buyers with sellers

D

Which one of the following statements is true? A. The yield to maturity on a premium bond exceeds the bond's coupon rate B. The current yield on a premium bond is equal to the bond's coupon rate C. A premium bond has a current yield that exceeds the bond's coupon rate D. A discount bond has a coupon rtae that is less than the bond's yield to maturity

A

Which one of the following terms refers to the best option that was foregone when a particular investment is selected? A. Opportunity cost B. Side effect C. Erosion D. Sunk cost

B

Which one of the following will increase the current value of a stock? A. Decrease in the dividend growth rate B. Increase in the capital gains yield C. Decrease in the expected dividend for next year D. Increase in the required return

B

Which one of the following will occur when the internal rate of return equals the required return? A. The average accounting return will equal 1.0 B. The profitability index will equal 1.0 C. The profitability index will equal 0 D. The net present value will equal the initial cash outflow

A

Which one of these statements is true concerning the price-earnings (PE) ratio? A. A high PE ratio may indicate that a firm is expected to grow significantly B. A PE ratio of 16 indicates that investors are willing to pay $1 for every $16 of current earnings C. PE ratios are unaffected by the accounting methods employed by a firm D. The PE ratio is classified as a profitability ratio

D

Which statement is true? A. All else equal, an ordinary annuity is more valuable than any annuity due B. All else equal, a decrease in the number of payments increases the future value of an annuity due C. An annuity with payments at the beginning of each period is called an ordinary annuity D. All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity

A

Which statement is true? A. From a legal perspective, preferred stock is a form of corporate equity B. All classes of stock must have equal voting rights per share C. Preferred dividends provide tax-free income to individual investors D. Preferred shareholders prefer noncumulative dividends over cumulative dividends

C

You are comparing three investments, all of which pay $100 a month and have an interest rate of 8 percent. One is ordinary annuity, one is an annuity due, and the third investment is a perpetuity. Which one of the following statements is correct given these three investment options? A. The be the perpetuity, the payments must occur on the first day of each monthly period B. The ordinary annuity would be more valuable than the annuity due if both had a life of 10 years C. The present value of the perpetuity has to be higher than the present value of either the ordinary annuity of the annuity due D. The future value of all three investments must be equal

D

You are comparing two annuities. Annuity A pays $100 at the end of each month for 10 years. Annuity B pays $100 at the beginning of each month for 10 years. The rate of return on both annuities is 8 percent. Which one of the following statements is correct given this information? A. The present value of Annuity A is equal to the present value of Annuity B B. Annuity B will pay one more payment that Annuity A will C. The future value of Annuity A is greater than the future value of Annuity B D. Annuity B has both a higher present value and a higher future value than Annuity A

A

You are making an investment of $110,000 and require a rate of return of14.6 percent. You expect to receive $48,000 in the first year, $52,500 in the second year, and $55,000 in the third year. There will be a cash outflow of $900 in the fourth year to close out the investment. What is the net present value of this investment? A. $7,881.55 B. $4,305.56 C. $1,879.63 D. $633.33

C

You contacted your stock broker this morning and placed an order to sell 300 shares of a stock that trades on the NYSE. This sale will occur in the: A. Dealer market B. Over-the-counter market C. Secondary market D. Primary market

A

You want to buy a new sports car from Roy's Cars for $51,800. The contract is in the form of a 48-month annuity due at an APR of7.8 percent, compounded monthly. What would be your monthly payment? A. $1,251.60 B. $1,109.29 C. $1,245.70 D. $1,152.98

A

You want to purchase a new condominium that costs $287,500. Your plan is to pay 25 percent down in cash and finance the balance over 15 years at 3.75 percent. What will be your monthly mortgage payment including principal and interest? A. $1,568.07 B. $1,333.33 C. $1,708.16 D. $1,221.43