Fin SB 3
What is the future value of $100 compounded for 50 years at 10 percent annual interest?
$11,739.09
Dot's financial planning model shows assets are projected to increase by $800,000 but liabilities and equity increase by $395,000. What is the external financing need (EFN)?
$405,000 Reason: EFN = $800,000 - $395,000 = $405,000
True or false: Financial planning addresses all the basic elements of firm value. True false question.
False
True or false: The financial planning process will not change from firm to firm.
False
How is the price-earnings (PE) ratio computed?
Market price per share/Earnings per share
True or false: Given the same rate of interest, more money can be earned with compound interest than with simple interest.
T
The present value interest factor for an annuity with an interest rate of 8 percent per year over 20 years is ____.
[1 − (1/1.0820)]/.08
The future value factor for a(n)___________ is found by taking the future value factor and subtracting one, then dividing this number by the interest rate.
annuity
Growth, by itself, (is/isn't) a good financial goal.
isn't
Financial planning is a(n) _____ process. Multiple choice question.
iterative
The concept of the time value of money is based on the principle that a dollar today is worth __________ a dollar promised at some time in the future. Multiple choice question.
more than
By combining common-size and base year analysis, we eliminate the effect of the _____. Multiple choice question.
overall growth
The original loan amount is called the _____.
principal
The profit margin is equal to net income divided by ______.
profit margin = net income / sales
The percentage of _______________ approach is a financial planning method in which accounts are varied depending on a firm's predicted sales level.
sales
When the future value formula is used to calculate growth rates, the assumption is that _____ growth rate is achieved each year.
the same
Weston's financial planning model shows assets are projected to increase by $2.7 million while liabilities and equity increase by $1.5 million. What is the external financing need (EFN)?
$1.2 million $2.7m - 1.5m = $1.2m
Alpha Omega's percentage of sales model forecasts sales growth of 20 percent next year. If cost of good sold are proportionate at 80 percent of sales, then cost of good sold will increase by: Multiple choice question.
20%
Which formula will you enter into a spreadsheet cell to determine how long it will take $40 to grow to $240 at an interest rate of 6.53% compounded annually? Multiple choice question.
=NPER(0.0653,0,−40,240)
________ financial statements provide for comparison of firms that differ in size.
Standardized
In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _____ of each period.
end
Which of the following is the formula for the future value of an annuity?
FV = C((1+r)t−1r)
Future value is the Blank______ value of an investment at some time in the future.
cash
The present value of a series of future cash flows is the amount you would need today to _____.
exactly duplicate those future cash flows
A lack of effective long-range planning is commonly cited as a reason for _____.
financial distress
A growing annuity has a(n) ____.
finite number of growing cash flows
All else equal, when the rate of growth in sales or assets in a financial plan is higher, external financing needs will be
greater
Given an internal growth rate of 3 percent, a firm can: Multiple choice question.
grow by 3 percent or less without any additional external financing.
Given the same APR, more frequent compounding results in _____.
higher EARs
A(n) Blank______ in net profit margin will increase ROE.
increase reason ROE = net profit margin X total asset turnover X equity multiplier. An increase in net profit margin will increase ROE.
A perpetuity is a constant stream of cash flows for a(n) ______ period of time.
infinite
The ___________ growth rate tells us the maximum growth rate that can be achieved with no external financing of any kind.
internal
Across firms, the financial planning process _____.
is different for each firm
Whenever__________ information is available, it should be used instead of accounting data.
market
The price-earnings (PE) ratio is a ______ ratio.
market value
The price-earnings (PE) ratio is a ______ ratio. Multiple choice question.
market value
The basic present value equation underlies many of the _____. Multiple choice question.
most important ideas in corporate finance
The aggregation process determines the total _____.
needed investment
Growth, by itself, is:
not an appropriate goal
One method of calculating future values for multiple cash flows is to compound the accumulated balance forward _____ at a time.
one year
The loan __________ amorition , Incorrect Unavailable_ amortization loans declines so slowly because the payments are mostly interest.
partial
The ___________ value is the current value of future cash flows discounted at the appropriate discount rate.
present
The formula for the ______ value interest factor of an annuity is {1-[1/(1+r)t]r}/r
present
The percentage of sales approach separates accounts on the pro forma income statement and balance sheet into those that change directly with ____ and those that do not.
sales
Interest paid twice a year is known as ______ compounding. Multiple choice question.
semiannual
An effective annual rate of 7.12 percent is equal to 7 percent compounded ______.
semiannually For semiannual compounding, EAR = (1 + 0.07/2)2 - 1 = 7.12%
Interest earned on the original principal amount invested is called _____.
simple interest
Interest earned only on the original principal amount invested is called
simple interest
The difference between _______ interest and compound interest is that the amount of compound interest earned gets (bigger or smaller) ___________ every year.
simple; bigger
Common-size statements are used for comparing firms with differing ____.
sizes
At the most fundamental level, firms generate cash and:
spend it
The discount rate is also called the rate of
to return
Because of __________ and _________, interest rates are often quoted in many different ways. Multiple choice question.
tradition; legislation
The formula for the present value interest factor for annuities is: Annuity present value factor = {1-[1/(1+r)t]}/ r
true
A firm has a total debt ratio of 0.30 times. This means the firm has ___ in total debt for every $1 in total assets.
$0.30
What is the present value of an ordinary annuity that pays $100 per year for 20 years if the interest rate is 10 percent per year?
$100{[1 - (1/(1.10)20)]/0.10}
You will receive a bonus of $5,000 in one year's time, and would like to take a loan against it now. What is the formula that shows how much you can borrow if you plan to use the entire amount to pay back the loan and your interest rate is 3%?
$5,000/1.03
A typical investment has a large cash (inflow/outflow) at the beginning and then a cash (inflows/outflows) for many years.
1. outflow 2. inflow
Which formula below represents a present value factor? Multiple choice question. 1/(1 + N)r (1 + r)/t 1/(1 + r)t 1/N + 1/r
1/(1 + r)t
Suppose you want to save $10,000 to buy a car. You have $6,000 to deposit today and you can earn 6% on your investments. You want to know when you'll have enough to buy the car. Which of the following spreadsheet functions will solve the problem?
=NPER(0.06,0,−6000,10000)
Which of the following should be valued using a perpetuity formula? An amortized loan with a set amount over a period of time A consol (bond that pays interest only and does not mature) Preferred stock Cash flows from a product whose sales are expected to remain constant forever
A consol (bond that pays interest only and does not mature) Preferred stock Cash flows from a product whose sales are expected to remain constant forever
Which compounding interval will result in the lowest future value assuming everything else is held constant?
Annual
Which of the following processes can be used to calculate future value for multiple cash flows?
Calculate the future value of each cash flow first and then add them up Compound the accumulated balance forward one year at a time pg. 158
EAR
Choice The interest rate stated as though it were compounded once per year.
How frequently does continuous compounding occur?
Every instant
True or false: A deteriorating time trend in a financial ratio is always a bad sign.
F
True or false: Given external financing needs in a financial plan, the firm must borrow both long- and short-term funds.
False
The present value of a series of _____________ cash flows is the amount you would need today to exactly duplicate those future cash flows.
Future
Which of the following are annuities? Multiple select question. Tips to a waiter Monthly grocery bill Installment loan payments Monthly rent payments in a lease
Installment loan payments Monthly rent payments in a lease
Which of the following payment methods amortizes a loan?
Interest plus fixed amount Fixed payments that result in a zero loan balance
Which of the following are real-world examples of annuities?
Mortgages Pensions
The basic present value equation is:
PV = FVt/(1 + r)t
Which of the following can be determined using the future value approach to compound growth developed in this chapter? Multiple select question.
Sales growth Dividend growth
Which of the following is true about a growing annuity?
The cash flows grow at a constant rate. The cash flows grow for a finite period.
APR
The interest rate per period multiplied by the number of periods in the year.
The formula for a present value factor is 1/(1+r)t
True
True or false: Given the same rate of interest, more money can be earned with compound interest than with simple interest.
True
Because we are almost always unable to obtain all of the market information we want, we rely on________ numbers for much of our financial information.
accounting
The smaller investment proposals of each operational unit are added up, and the sum is treated as one big project, which is called
aggregation
A useful way of standardizing financial statements is to choose a ____ and then express each item relative to the _____.
base year; base amount
The alternative sustainable growth rate formula, growth equals ROE times b, is correct only when total equity is taken from the _____.
beginning of period balance sheet
The current ratio shows the relationship between ____.
current assets and current liabilities
A common-base year financial statement presents items relative to a certain base, which is the _____.
dollar amount of each item during a common base year
An annuity ____________ is an annuity for which the cash flows occur at the beginning of each period.
due
A commonly cited reason for financial failure is a lack of _____.
effective long-range planning
In the standard present and future value tables, and in all the default settings on a financial calculator, the assumption is that cash flows occur at the ___________________ (beginning/end) of each period.
end
True or False: There is only one method for preparing the statement of cash flows.
false
Pro __________statements are one of the key elements of financial planning.
forma
A financial plan looks at what needs to be done in the _____.
future
____________ value is the cash value of an investment at some time in the _______________
future
The information needed to compute the profit margin can be found on the ____.
income statement
It is typically assumed that total assets (increase/decrease) with increased sales because additional working capital and fixed assets are needed to support growth.
increase
A dollar received one year from today has _____ value than a dollar received today.
less
When valuing cash flows, you can either value multiple cash flows or a single sum, also known as a(n) _____ sum.
lump
A single cash flow is also known as a:
lump sum
Most investments involve _____ cash flows.
multiple
Given a firm requires external financing, the firm has multiple options including short- and long-term borrowing, and _____.
new equity
Suppose present value is $100, future value is $1,000, and N is 10 years. Which formula below is used to find the (decimal) interest rate? Multiple choice question.
r = (1000/100)(1/10) - 1
Which of the following is true about the sustainable growth rate?
It is the maximum rate of growth a firm can maintain without increasing its financial leverage
Which of the following are sources of cash? (Check all that apply.) Multiple select question. A decrease in notes payable Purchasing an asset A decrease in accounts receivable An increase in notes payable
A decrease in accounts receivable An increase in notes payable
In a financial plan using the percentage of sales approach, why is it assumed that assets increase with sales?
Additional working capital and fixed assets are needed to support growth
Which of the following are traditional financial ratio categories? Multiple select question. Asset management ratios Real options ratios Market value ratios Profitability ratios
Asset management ratios Market value ratios Profitability ratios
Which of the following are likely to be accomplished with financial planning?
Avoiding surprises Exploring options
Which of the following investments would result in a higher future value?Investment A - 12% APR for 10 year Investment B - 12% APR for 12 years
B
How is the inventory turnover ratio computed?
Cost of goods sold/Inventory
Which three of the following are most apt to create problems when comparing financial statements for multiple firms? Differing accounting methods Seasonality Differing levels of cash Differing fiscal years
Differing accounting methods Seasonality Differing fiscal years
What are the common elements of a financial planning model?
Economic assumptions Sales forecast Pro forma statements
Which of the following is the correct mathematical formula for calculation of the future value of $100 invested today for 3 years at 10% per year?
FV = $100 × (1.10)3
Assume Zoe Corporation's plant capacity will allow for sales of $250 million and last year's sales were $180 million. Zoe's current gross plant and equipment total is $340 million. You project sales growth of 20% in the upcoming year.What total should you forecast for Zoe's plant and equipment on your pro forma balance sheet?
$340 million With $216 million in sales (180 X 1.2), Zoe is not at plant capacity, so it will not need to increase its plant and equipment amount to accommodate its new level of sales.
True or false: All other things staying the same, the lower the rate of growth in sales or assets, the greater will be the need for external financing.
False Reason: All other things staying the same, the higher the rate of growth in sales or assets, the greater will be the need for external financing.
True or false: The multi-period formula for future value using compounding is FV = (1 + r)t.
False Reason: FV = PV × (1 + r)t
______ are the prime source of information about a firm's financial health.
Financial statements
Which one of the following does not affect ROE according to the DuPont identity?
Investor sentiment
________ financial statements provide for comparison of firms that differ in currency type. Multiple choice question.
Standardized
True or false: In one way or another, the basic problem with financial statement analysis is that there is no underlying theory to help us identify which quantities to look at and to use in establishing benchmarks.
T
One advantage to well-executed financial planning is that the firm can _____.
avoid surprises
At the most fundamental level, firms generate ______ and spend it.
cash
When combining common-size and common-base year analysis, the effect of overall growth in assets can be eliminated by first forming the:
common-size statements
The idea behind ______ is that interest is earned on interest.
compounding
The process of leaving your money and any accumulated interest in an investment for more than one period, thereby reinvesting the interest, is called
compounding
The inventory turnover ratios for Proctor and Gamble over the past three years are 5.09, 5.72, and 5.92 times, respectively. Explaining the upward trend in the inventory turnover ratio requires:
further investigation
The alternative sustainable growth rate formula, where growth is equal to ROE times b, should only be applied when using total equity from the ______________ (end/beginning) of period balance sheet.
start
The inventory is ____________calculated as the COGS divided by the inventory.
turnover
A pro forma balance sheet indicates that total assets will increase by $300,000. If a debt-equity ratio of 0.5 is maintained, then debt must increase by:
$100,000. Reason: If D/E =0.5, an increase of $300k in assets will be financed with $100k of debt and $200k of equity.
The _________ identity can help to explain why two firms with the same return on equity may not be operating in the same way.
DuPont
Which of the following can be determined using the future value approach to compound growth developed in this chapter?
Sales growth Dividend growth
The _______ growth rate is the maximum rate of growth a firm can maintain without increasing its financial leverage.
sustainable
The statement of cash flows summarizes the sources and uses of cash, though which of the following is true of the statement?
There are different methods of preparing it.
Which formula shows the present value of an ordinary annuity that pays $100 per year for three years if the interest rate is 10 percent per year? Multiple choice question. $1,100{[1 − (1/(1.10)3)]/0.20} $100{[1 − (1/(1.10)3)]/1.20} $1,000/{[1 − (1/(1.10)3)]/0.10} $100{[1 − (1/(1.10)3)]/0.10}
$100{[1 − (1/(1.10)3)]/0.10}
You invest $500 at 10 percent interest. At the end of 2 years with simple interest you will have ____ and with compound interest you will have ____. Multiple choice question.
$605; $600 Reason: With simple interest you will earn $500 X 0.10 = $50 each year. Your total will be $500+100=$600. With compound interest, you will have $500(1.10)2 = $605 at the end of the two years. Given the same rate of interest, the FV will always be higher with compound interest.
Which of the following is the correct representation of the total debt ratio? Multiple choice question.
(Total assets - Total equity)/(Total assets)
Alpha Omega's percentage of sales model forecasts sales growth of 20 percent next year. If cost of good sold are proportionate at 80 percent of sales, then cost of good sold will increase by:
20%
Galting Corporation is operating at 80% of capacity. This means that the current sales level is:
80% of the full capacity sales level
Which of the following items are among the items used to compute the current ratio?
Accounts payable Cash
Which of the following are sources of cash?
An increase in notes payable A decrease in accounts receivable
Which of the following are often left out of most financial planning models?
Cash flow size, risk, and timing
An annuity due is a series of payments that are made ____.
at the beginning of each period
Which of the following are correct spreadsheet functions? Interest rate = DISCOUNT(nper,pmt,pv,fv) Present value = PV(rate,nper,pmt,fv) Future value = FV(rate,nper,pmt,pv) Discount rate = RATE(nper,pmt,pv,fv)
Present value = PV(rate,nper,pmt,fv) Future value = FV(rate,nper,pmt,pv) Discount rate = RATE(nper,pmt,pv,fv)
If $100 earns compound interest for 2 years at 10 percent per year, the future value will be ____.
Reason: FV = $100 × 1.10 2 = $121 121
The formula for the annuity present value factor for a 30-year annuity with an interest rate of 10 percent per year is ______.
[1 − (1/1.1030)]/.10]
The ROE equals the net profit margin multiplied by the total ___________ turnover multiplied by the equity multiplier.
asset
Which one of the following is one way in which financial managers use a common-size balance sheet?
To track changes in a firm's capital structure
Why is a dollar received today worth more than a dollar received in the future?
Today's dollar can be reinvested, yielding a greater amount in the future.
The five categories of financial ratios include short-term solvency, long-term solvency, asset management, profitability, and _____________value ratios.
market
Given a firm requires external financing, the firm has multiple options including short- and long-term borrowing, and _____. Multiple choice question.
new equity
If you want to know how much you need to invest today at 12 percent compounded annually in order to have $4,000 in five years, you will need to find a(n) _______ value.
present
Which of the following are uses of cash? (Check all that apply.) Increases in property, plant and equipment Decreases in accounts payable Increases in inventory Decreases in property, plant and equipment Decreases in accounts receivable
Increases in property, plant and equipment Decreases in accounts payable Increases in inventory
