FINA 320 FINAL

A company has the following ratios: Which of the following is a correct statement?

The company is carrying less inventory (relative to cost of goods sold) than in previous years

Which of the following statements about preferred stock is false?

The dividends on preferred stocks could be increased or decreased

How much will be accumulated in an account with an initial deposit of $100, and which earns 10% interest compounded quarterly for 3 years?

$134.49

The Savory Corporation Income Statement Accounts for the year ending December 31, 2014 What is the net income for the Savory Corporation for 2014

$135,900

Your company is faced with an investment project. The following information is associated with this project Determine the project's net present value

$295,574.29

What is the present value of a four-year annuity of $100 per year that begins 2 years from today if the discount rate is 9%

$297.22

You are considering a major expansion of your design-shoe business from the current one-shoe edition to two-shoe edition. To prepare for the business expansion, you attended a workshop recently to sharpen your business skill, costing $2,000. During the workshop, you made the following estimates. If you decide to expand from one-shoe edition to two-shoe edition, what is the required initial cash outflow?

$3,000

What are the annual sales for a firm with $400,000 in debt, a total debt ratio of 0.4, and an asset turnover of 3.0?

$3,000,000

Bertha plans to purchase 500 shares of preferred stock in five years and wants to know how much she must save each year to make the purchase. The preferred stock pays a $6 dividend per share and has a 16% required return. Bertha can deposit her money in an account paying 7% interest rate. How much must Bertha save at the end of each of the next five years to have enough money to purchase the 500 shares at the end of year 5?

$3,001 to $5,000

How much must be saved annually, beginning 1 year from now, in order to accumulate $50,000 over the next 10 years, earning 9% annually?

$3,291

Anthony, Ltd. purchases a duplicating machine for $15,000. This machine qualifies as a five-year recovery asset under MACRS. The company has a tax rate of 33%. If the company sells the machine at the end of four years for $4,000, what is the cash flow from disposal?

$3,535.36

How much must be invested today in order to generate a 5-year annuity of $1,000 per year, with the first payment 1 year from today, at an interest rate of 12%?

$3,604.78

An asset fitting into the 7-year MACRS category was purchased two years ago for $72,000. The book value of this asset is now ________.

$44,064

Listed below are the financial statement numbers for Shick, Inc., for the year 2016. They are listed in alphabetical order, NOT in the order they appear on the statement themselves. The applicable tax rate is 40%. What is Shick's cash coverage ratio for 2016, and is Shick better able or less able to cover its interest charges than its peer group, which has a cash coverage of 21 times

18.5; peer group better able to cover interest expense

A lottery ticket states that you will receive $250 every year for the next ten years. What is the present value of the winning lottery ticket if the discount rate is 6% and it is an ordinary annuity?

1840

A proposed new investment has projected sales of $700,000. Variable costs are 60 percent of sales, and fixed costs are $175,000; depreciation is $75,000. Prepare a pro forma income statement assuming a tax rate of 35 percent. What is the projected net income?

19,500

Marie has a $1,000,000 investment portfolio, and she wishes to spend $87,500 per year as an ordinary annuity. If the investment account earns 6% annually, how long will her portfolio last?

19.86 years

For the cash flows below, what is the NPV at a discount rate of zero percent? Round your answer to the nearest dollar

2,500

The following data pertains to a common stock: If an investor requires a 17% return on this stock, what will they be willing to pay for this stock now?

7.31

Roxie Inc has just paid a dividend of $4.00. It's stock is now selling for $65 per share, and the required rate of return on a stock like Roxie inc. is 14%. Assuming Roxie is a constant growth stock, determine the implied growth rate for Roxie's dividends.

7.4%

Given the following historical returns, what is the standard deviation? Year 1 = 30%; year 2 = 15%; year 3 = -10%; year 4 = 18%; year 5 = -2%

about 16%

Most businesses, for tax purpose, prefer to depreciate assets using _____ because _____

accelerated depreciation; it effectively defers some tax expense to future years

Risk may be integrated into capital budgeting decisions by

adjusting the discount rate

A bond is trading at a premium if its:

all of the above

Companies that have higher risk than a competitor in the same industry will generally have

all of the options

The contract between bondholders and the issuing corporation that outlines the bond covenants and duties of the issuing corporation is called

an indenture

The price and yield to maturity on a bond have:

an inverse relation

In capital budgeting analysis, an increase in working capital can be shown as:

an outflow at the beginning and an equal inflow at the end of the project

Investors and financial analysts wanting to evaluate the operating efficiency of a firm's managers would primarily look at the firm's

asset management ratios

Two of the elements of a balance sheet are:

assets and equity

Which of the following ratios could capture a firm's ability to service its loans?

both B and C

The ______ indicate(s) whether value is expected to be created for shareholders

both PI and NPV

As the interest rate increases, the present value of a future cash flow

decreases

Bond rating, ranging from AAA to C, measures a bond's

default risk

The NPV profile is a graphical representation of the change in net present value relative to a change in the:

discount rate

Select the best answer. Present value involves ___ future cash flow whereas future value involves ____ cash flow today

discounting; compounding

The cost of preferred stock is equal to the preferred stock dividend:

divided by the market price

As illustrated using the dividend growth model, the total return on a share of common stock is comprised of a _____

dividend yield and a capital gains yield

The current yield of a bond can be calculated by:

dividing the annual coupon payments by the price

The advantage of MACRS over straight-line depreciation is that you can write off more of your capital costs in the _____ year(s)

earlier

By efficiently diversifying, an investor can:

eliminate most unsystematic risk

Capital budgeting is primarily concerned with

evaluating investment alternatives

The weighted average of betas of all individual assets is:

exactly 1

Valuation of financial assets requires knowledge of

expected future cash flows of the asset and an appropriate discount rate

A stock's risk premium is equal to the:

expected market risk premium times beta

Although non-systematic risk is present in differing amounts, individual stocks are:

exposed to differing amounts of systematic risk also

If a firm uses NPV or IRR for capital budgeting, as the cost of capital increases

fewer projects are accepted

If a project has a cost of $50,000 and a profitability index of 0.4 then:

its NPV is $20,000

If a bond is priced at par value, then:

its coupon rate equals its yield to maturity.

The _____ is the market of first sale in which companies first sell their authorized shares to the public

primary market

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

principal-agent problem

When firms develop a WACC for individual projects based on the cost of capital for other firms in similar lines of business as the project, the firm is utilizing a:

pure play approach

To estimate a company's liquidity, assuming inventory cannot be converted to cash quickly at fair market value, us the ____ ratio

quick

When calculating the weighted average cost of capital (WACC) an adjustment is made for taxes because:

the interest on debt is tax deductible

A characteristic of capital budgeting is that

the internal rate of return must be greater than the cost of capital.

For a firm paying 5% for new debt, the higher the firm's tax rate

the lower the after-tax cost of debt

Value of a common stock does not directly depend on _____

the maturity date of common stock

Increasing the number of periods will increase all of the following except:

the present value of $1 received in the future

The company cost of capital (WACC) may be an inappropriate discount rate for a capital budgeting proposal if:

the proposal has a different degree of risk

The intercept point of the security market line is the rate of return which corresponds to:

the risk-free rate

If projects are mutually exclusive

the selection of one alternative precludes the selection of other alternatives.

Under the constant dividend growth model for common stock, if the price of a stock (P0) goes up (and nothing changes)

then estimated cost of equity goes down

Total asset turnover indicates the firm's

ability to use its assets to generate sales

What is the price of a bond with a 5.44% yield to maturity, 10% annual coupon rate, and a current yield of 6%?

$1,666.67

An asset turnover ratio of 1.75 can be interpreted as:

$1.75 in sales are generated for every $1.00 of assets

Investments with low return variances usually:

Have realized returns close to expected returns

Which of the following profitability ratios are shareholders of a company most interested in?

Return on equity

The value of a proposed capital budgeting project depends on the:

incremental cash flows produced

If a security plots below the security market line, it is:

offering too little return to justify the risk

Current period depreciation expense is listed:

on the income statement

In a general sense, operating cash flow can be said to equal

operating profit minus taxes plus depreciation

Endicott Enterprises, Inc. has issued thirty-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 14% and the current yield to maturity is 8%, what is the firm's current price per bond?

$1,678.70

Biogenetics, Inc. plans to retain and reinvest all of their earnings for the next 30 years. Beginning in year 31, the firm will begin to pay a $30 per share dividend. The dividend will not subsequently change. Given a required return of 18%, what should the stock sell for today?

$1.16

As the discount rate becomes higher and approaches infinity, the present value of $100 to be received in N years approaches

$0

Calculate the EBIT for a firm with $4 million total revenues, $3.5 million cost of goods sold, $500,000 depreciation expense, and $120,000 interest expense.

$0

MacAfee Company will make contributions to a pension plan for 20 years what quarterly contributions must be made for the next 20 years to meet their obligation?

$1,030

J&J Manufacturing just issued a bond with a $1,000 face value and a coupon rate of 8%. If the bond has a life of 20 years, pays annual coupons, and the yield to maturity is 7.5%, what is the total present value of the bond's coupon payments?

$1,050.97

Approximately how much must be saved for retirement in order to withdraw $100,000 per year for the next 25 years if the balance earns 8% annually, and the first payment occurs 1 year from now?

$1,067,000

You deposited $1,000 in a savings account that pays 8 percent interest, compounded quarterly, planning to use it to finish your last year in college. Eighteen months later, you decide to go to the Rocky Mountains to become a ski instructor rather than continue in school, so you close out your account. How much money will you receive?

$1,126

Braxton Ltd issued a 30-year 10% coupon bond ten years ago. Braxton bonds have a maturity value of $1,000 and make semiannual interest payments. If investors require an 8% nominal annual return on bonds with the same risk rating as Braxton, at what price should the bonds be selling for currently?

$1,197.93

What is the total future value, to the nearest dollar, six years from now of $80 received in one year, $300 received in two years, and $700 received in six years if the discount rate is 7%.

$1,205

What is the future value of a 5-year ordinary annuity with annual payments of $200, evaluated at a 15 percent interest rate?

$1,348.48

How much more is a perpetuity of $1,000 worth than an annuity of the same amount for 20 years? Assume an interest rate of 10% and cash flows at the end of each period.

$1,486.44

If a firm generates $2,000 in sales and has a $500 increase in accounts receivables during an accounting period, based on these two categories cash flow will increase by:

$1,500

if a firm generates $2000 in sales and has a $500 increases in AR during an accounting period, then, based on these two categories, cash flow will increase by:

$1,500

Assume that a firm takes on a project that requires an initial investment in Year 0 of $20,000. Also assume that the project produces cash inflows of $1,8000 in all future years. If the required rate of return for this project is 6 percent, then what is the net present value for this project?

$10,000

A firm has revenue of $50,000, the cost of goods sold is $23,000, other expenses (from selling and administration) are $14,000, interest expenses are $4,000 and depreciation is $5,000. What is the EBIT?

$10,360

The current quarterly dividend on the common shares of your company is $0.30, the risk-adjusted annual discount rate if 16%, and the management of the firm believes that the dividends will increase by 1.2% per quarter. What is the current share price of this company?

$10.84

Fishermen's Corp. is considering purchasing a boat. If purchased, the boat is expected to generate $20,000 at the end of the first year, $40,000 at the end of the second year, and $60,000 at the end of the third year. What is the boat worth to Fishermen's Corp today, assume an 8% discount rate.

$100,442

What is the present value of $100 to be deposited today into an account paying 8%, compounded semiannually for 2 years?

$100.00

John Doeber borrowed $150,000 to buy a house. His loan cost was 16% annually because of his bad credit score. He promised to repay the loan in 5 years on a quarterly basis. How much are the quarterly payments?

$11,037

Assume that you will receive $2,000 a year in Years 1 through 5, $3,000 a year in Years 6 through 8, and $4,000 in Year 9, with all cash flows to be received at the end of the year. If you require a 14 percent rate of return, what is the present value of these cash flows?

$11,714

Assume that you plan to buy a share of XYZ stock today and to hold it for 2 years. Your expectations are that you will not receive a dividend at the end of Year 1, but you will receive a dividend of $9.25 at the end of Year 2. In addition, you expect to sell the stock for $150 at the end of Year 2. If your expected rate of return is 16 percent, how much should you be willing to pay for this stock today?

$118.35

Your company has invested $5 million in R&D self-driving car technology. As a consequence of the investment, you acquired a patent on the technology. What is the initial cash flow of the self-driving car manufacturing project at year 0?

$12 million cash outflow

Given the following balance sheet data, calculate net working capital: cash = $25, accounts receivable = $80, inventory = $120, net fixed assets = $400, accounts payable = $15, short term debt = $90, and long-term debt = $225

$120

With $1.5 million in an account expected to earn 8% annually over the retiree's 30 years of life expectancy, what annual annuity can be withdrawn, beginning today?

$123,371

From the following income statement accounts, find the net income of the year

$137,000

You have $21,600 to invest in a stock portfolio. Your choices are Stock X with an expected return of 14.3 percent and Stock Y with an expected return of 8.1 percent. Your goal is to create a portfolio with an expected return of 12.5 percent. All money must be invested. How much will you invest in Stock X?

$15,329

A company reports the following: tax rate = 35%; SG&A = $400; Revenue = $1,600; COGS = $750; Interest expense = $50; Net income = $162.50. What is the depreciation expense?

$150

You are going to withdraw $5,000 at the end of each year for the next four years from an account that pays interest at a rate of 9% compounded annually. How much must there be in the account today in order for the account to reduce to a balance of zero after the last withdrawal?

$16,198.60

An investment promises a payoff of $195 two and half years from today. At a discount rate of 7.5% per year, what is the present value of this investment?

$162.75

How much does the $1,000 to be received upon a bond's maturity in 30 years add to the bond's price if the appropriate discount rate is 6%, compounded semi-annually

$169.73

A corporation declares $25 million in net income, $1 million in interest expenses, $1 million in preferred stock dividends, and $7 million in common stock dividends. By how much will shareholders' equity increase on the balance sheet?

$17 million

Your parents plan to spend $20,000 on a car for you upon graduation from college. If you will graduate in three years and your parents can earn 4.125% annually on their investment, how much money must they set aside today for your car?

$17,716

Mack Industries just laid a dividend of $1.00 per share (DIV0 = $1.00). Analysts expect the company's dividend to grow 20 percent this year and 15 percent next year. After two years the dividend is expected to grow at a a constant rate of 5 percent. The required rate of return on the company's stock is 12 percent. What should be the company's current stock price?

$18.67

Mark industries just paid a dividend of $1.00 per share. Analysts expect the company's dividend to grow 20 percent this year and 15 percent next year. After two years the dividend is expected to grow at a constant rate of 5 percent. The required rate of return on the company's stock is 12 percent. What should be the company's current stock price?

$18.67

Suppose that sales and profits of Oly Enterprises are growing at a rate of 30% per year. At the end of four years, the growth rate will drop to a steady 6%. At the end of year 5, Oly will issue its first dividend in the amount of $3 per share. If the required return is 15%, what is the value of a share of stock? Assume dividends grow at the same rate as earnings after year 4.

$19.06

The concept of compound interest refers to:

payment of interest on previously earned interest

Netscrape Inc. just paid a dividend of $1.00 per share. The dividends are expected to grow at 20% rate for the next three years and then level off to a 4% rate indefinitely. If the required return is 12%, what is the value of the stock today?

$19.44

Company XYZ is evaluating a project and here is some information for the project. The unit sales price is projected to be $40 and sales volume to be 1,000 units in year 1, 1,250 units in year 2, and 1,325 units in year 3. The project has a 3 year life. Variable costs amount to $22.5 per unit and fixed costs are $10,000 per year. The project requires an initial investment of $16,500, which is depreciated straight-line to zero over the 3 year project life. The actual market value of the initial investment at the end of year 3 is $3,500. Initial net working capital investment of $7,500 and NWC will maintain a level equal to 20% of sales each year thereafter. The tax rate is 34% and the required return on the project is 10%. What is EBIT for the project in the first year?

$2,000

Given the following info the Soprano Pizza Co., calculate the depreciation expense.

$2,415

Harry decided he was tired of being a poor college student when he visited a local electronics store and experienced its finest home theatre system. He determined that he would invest today a portion of the remaining money he earned last summer cleaning animal cages at the veterinary clinic. He plans to invest the money into an international mutual fund for 3.5 years and expects to earn an average annual rate of return of 15%. If Harry wants to have $4,000 in the account at the end of this time, how much must he invest today?

$2,453

Your firm had $4,000,000 of retained earnings on its balance sheet at the end of 2021. One year later, at the end of 2002, the firm had $5,250,000 of retained earnings on its balance sheet. The firm has 750,000 shares of common stock outstanding, and it paid a dividend of $0.45 per share in 2002. What were the firm's approximate earnings per share in 2002?

$2.12

Allen Lumber Company had earnings after taxes of $750,000 in the year 2015 with 300,000 shares outstanding on December 31, 2015. On January 1, 2016, the firm issued 50,000 new shares. The company took the proceeds from these new shares as well as other operating improvements and earned $937,500 earnings after taxes in 2016. Earnings per share for the year 2016 were

$2.68

You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. The project has a 3-year life. You estimate the revenue for the next three years are as follows: $400,000 in year 1, $500,000 in year 2, and $530,000 in year 3. The cash expenses are expected to be $325,000 in year 1, $381,250 in year 2, and $398,125 in year 3. The project requires an initial investment of $165,000, which is depreciated straight-line to zero over the 3-year project life. The actual market value of the initial investment at the end of year 3 is $35,000. Initial net working capital investment is $75,000 (at year 0) and NWC will maintain a level equal to 20% of sales each year thereafter. The tax rate is 34% and the required return on the project is 10%. What is the EBIT for the project in the first year?

$20,000

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck. The truck's basic price is $50,000, and will cost another $10,000 to modify it for special use by your firm. The truck falls in the MACRS 3-year class, and it will be sold after three years for $20,000. Use of the truck will require an increase in net operating working capital of $2,000. The truck will have no effect on revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 40 percent. What is the operating cash flow in Year 1?

$20,000

Use the information below for the Greek Corporation to answer the following question. The value of total assets for the year-end is ______

$20,940

An investment opportunity, in year 3, is forecast to create revenue of $120,000 and cost of goods sold 40% of revenue. SG&A is expected to be $30,000. Depreciation will be $15,000. Tax rate is 40%. Working capital will increase by $10,000 during year 3. What is net cash flow projected for year 3?

$21,200

You will receive $15,000 in two years when you graduate. Your plan to invest this amount at an annual interest rate of 6.5%. How much money will you have 8 years from now?

$21,887

An issue of preferred stock is paying an annual dividend of $1.50. The growth rate for the firm's common stock is 5%. What is the preferred stock price if the required rate of return is 7%?

$21.43

Your parents agree to pay half of the purchase price of a new car when you graduate from college. You will graduate and buy the car two years from now. You have $6,000 to invest today and can earn 10% on invested funds. If your parents match the amount of money you have in two years, what is the maximum you can spend on the new car?

$22,579

Boomer Products, Inc. manufactures "no-inhale" cigarettes. As their target customers age and pass on, sales of the product are expected to decline. Thus, demographics suggest that earnings and dividends will decline at a rate of 5% annually forever. The firm just paid a dividend of $4; given a required rate of return is 10%, the price of the stock in 2 years will be:

$22.86

Your company is considering investing in a new system that will cost $160,000 What is the total cash outflow in year 0?

$225,000

If $120,000 is borrowed for a home mortgage, to be repaid at 9% interest over 30 years with monthly payments of $965.55, how much interest is paid over the life of the loan?

$227,597

The Wet Corp. has an investment project that will reduce expenses by $25,000 per year for three years. The project's cost is $55,000. If the asset is part of the three-year MACRS category and the company's combined tax rate is 25%, what is the cash flow from the project in year 1?

$23,287

Ambrin Corp. expects to receive $2,000 at the end of each year for 10 years. Then the corporation expects to receive $3,500 per year for the following 10 years, at the end of each year. What is the approximate present value of this 20-year cash flow? Use an 8% discount rate.

$24,298

Assume your firm has an unused machine that originally cost $75,000, has a book value of $20,000, and is currently worth $25,000. Ignoring taxes, the correct opportunity cost for this machine in capital budgeting decisions is:

$25,000

Suppose you purchase a zero-coupon bond with par value of $1,000, maturing in 25 years, for $180. If the yield to maturity on the bond remains unchanged, what will the price of the bond be 5 years from now?

$253.64

Ben and Jerry are saving for the future How much does Jerry need to invest in the year 5 so that he has the same amount of money as Ben?

$253.87

Your company is considering and expansion into a new product area. The company has collected the following information about the proposed product What is the total cash flow in year 5?

$260,000

If a 5-year ordinary annuity has a present value of $1,000, and if the interest rate is 10 percent, what is the amount of each annuity payment?

$263.80

You are considering buying a new car. The sticker price is $15,000 and you have $2,000 to put toward a down payment. If you can negotiate a nominal annual interest rate of 10 percent and you wish to pay for the car over a 5-year period, what are your monthly car payments?

$276.21

You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of 2.2 percent per year, compounded monthly for the first six months, increasing thereafter to 17.1 percent compounded monthly. Assuming you transfer the $10,500 balance from your existing credit card and make no subsequent payments, how much interest will you owe at the end of the first year?

$279.30

Your company is considering investing in a new system that will cost $160,000 What is the after-tax salvage value at the end of year 5?

$28,608

What would you pay today for a stock that is expected to make a $2 dividend in one year if the expected dividend growth rate is 5% forever and you require a 12% return on your investment?

$28.57

You have an annuity of equal end-of-year cash flows of $500 that begin two years from today and last for a total of ten cash flows. Using a discount rate of 4%, what are those cash flows worth in today's dollars?

$3,899.47

Assume the total expense for your current year in college equals $20,000. Approximately how much would your parents have needed to invest 21 years ago in an account paying 8% compounded annually to cover this amount?

$3,973

The BBM Corp. is considering the expansion into the production of Wuk, a revolutionary new product. The firm has forecasted the following information with the expansion and without. The firm is in the 35% marginal tax bracket

$3.5 million to 4.2 million

AFB Power Company has preferred shares .... what should its shares be selling for in today's market?

$30

You are depositing $4,500 today at an annual interest rate of 7.2 percent, compounded annually. How much additional interest will you earn if you leave the money invested for 45 years instead of 40 years?

$30,185

Compute the cash flows from operations using the indirect method if Star Corporation has $250,000 in net income, $30,000 in depreciation expense, a decrease of $20,000 in accounts receivables, and an increase in bonds payable of $50,000

$300,000

The State of Confusion wants to change the current retirement policy for state employees. How much money will the state have to pay to the employees before it can start a new pension plan?

$32,818 million

Trot, Inc. had $1,500,000 in owner's equity at the beginning of 2016. At the beginning of 2016, Trot, Inc. had 100,000 outstanding shares of stock. During the year, Trot sold 10,000 additional shares for $10 each. Trot declared and paid dividends of $2 a share at year end to all shareholders on December 31, 2016. How much was Trot's net income for 2016? Trot ended the year with owner's equity of $1,700,000

$320,000

Approximately how much should be accumulated by the beginning of retirement to provide a $2,500 monthly check that will last for 25 years, during which time the fund will earn 8% interest with monthly compounding?

$323,900.00

Elgin Battery Manufacturers had sales of $1,000,000 in 2015 and their cost of goods sold is $700,000. Selling and administrative expenses were $100,000. Depreciation expense was $80,000 and interest expense for the year was $10,000. The firm's tax rate is 30 percent. What is the dollar amount of taxes paid in 2015?

$33,000

Your company is considering an expansion into a new product area. what is the operating cash flow in year 2 (T=2)

$330,000

Depreciable assets were purchased for $70,000 five years ago. Accumulated depreciation is $37,000. The asset is sold for $40,000. If the company faces a 40% tax rate, how much total net after-tax cash will the sale of these assets generate?

$37,200

Edwin Inc.'s most recent annual dividend paid ... What is the intrinsic value of Edwin's stock today?

$37.14

ABC common stock is expected to have extraordinary growth of 20% per year for two years, at which time the growth rate will settle into a constant 6%. If the discount rate is 15% and the most recent dividend was $2.50, what should be the current share price?

$37.39

Your firm intends to finance the purchase of a new construction crane. The cost is $1,500,000. The loan has an annual interest rate of 8.5% and requires annual installment payment. If the loan is to be completely paid off by the end of year five, what should be the annual payment?

$380,649

You are interested in saving money for your first house. Your plan is to make regular deposits into a brokerage account that will earn 14 percent. Your first deposit of $5,000 will be made today. You also plan to make four additional deposits at the beginning of each of the next four years. Your plan is to increase your deposits by 10 percent a year. How much money will be in your account right after the last deposit is made?

$39,363

The revenue is $24,000, the cost of goods sold is $12,000, other expenses (from selling and administration) are $6,000, and depreciation is $2,000. What is the EBIT?

$4,000

You have a savings account valued at $1,500 today that earns an annual interest rate of 8.7 percent. How much more would this account be worth if you wait to spend the entire balance in 25 years rather than in 20 years?

$4,117.64

An investor receives a 15% total return by purchasing a stock for $40 and selling it after one year with a 5% capital gain. How much was received in dividend income during the year?

$4.00

If a stock's P/E ratio is 13.5 at a time when earnings are $3 per share, what is the stock's current price?

$40.50

A "Name That Tune" contest has a grand prize of $500,000. However, the contest stipulates that the winner will receive just $200,000 immediately, and $30,000 at the end of each of the next 10 years. Assuming that one can earn 8% on their money, how much has the contest winner actually won?

$401,302

What is the NPV of the following set of cash flows if the required return is 15%?

$408.27

The present value of $100 to be received 10 years from today, assuming an opportunity cost of capital of 9 percent, is

$42

Sedgwick, Inc. has a 12% required rate of return. It does not expect to initiate dividends for fifteen years, at which time it will pay $2.00 per share in dividends. At that time, Sedgwick expects its dividends to grow at 7% forever. If you currently own the stock and will sell it following the first dividend, what is your estimated selling price at T15?

$42.80

Eastern Inc. purchases a machine for $70,000. This machine qualifies as a five-year recovery asset under MACRS with the fixed depreciation percentages as follows: year 1 = 20.00%; year 2 = 32.00%; year 3 = 19.20%; year 4 = 11.52%. Eastern has a tax rate of 40%. If the machine is sold at the end of two years for $50,000, what is the cash flow from disposal?

$43,440

A firm expects to pay a dividend over each year of the next four years of $2.00, $1.50, $2.50, and $3.50. If growth is then expected to level off at 8% per year, and if you require a 14% rate of return, then how much should you be willing to pay for this stock?

$43.97

Two rival football fans have made the following wager: if one fan's college football team wins the conference title outright, the other fan will donate $1,000 to the winning school. Both schools have had relatively unsuccessful teams, but are improving each season. If the two fans must put up their potential donation today and the discount rate is 8% for the funds, what is the required upfront deposit if both expect a team to win the conference title in five years? Ten years? Twenty years?

$463.19

You need to borrow $23,000 to buy a truck. The current loan rate is 7.9% compounded monthly and you want to pay the loan off in equal monthly payments over 5 years. What is the size of your monthly payment?

$465.26

Trudeau Technologies common stock currently trades at $40 per share. What is the expected price of the stock five years from today

$48.67

Mr. Blochirt is creating a college investment fund for his daughter. He will put in $1,000 per year for the next 5 years beginning one year from now and expects to earn a 6% annual rate of return. How much money will his daughter have when she starts college by the end of the fifth year?

$5,637

The Jones Company has decided to undertake a large project. Consequently, there is a need for additional funds. The financial manager plans to issue preferred stock with a perpetual annual dividend of $5 per share. If the required return on this stock is currently 10 percent, what should be the stock's market value?

$50

A firm generates sales of $250,000, depreciation expense of $50,000, taxable income of $50,000, and has a 35% tax rate. By how much does net cash flow deviate from net income?

$50,000

You are evaluating whether to retire your current computer modem product and replace it with a new modem that incorporates new features. Which of the following would not be relevant to your decision-making process?

$50,000 spent on research and development costs over time on the older modem

Your company is considering investing in a new system that will cost $160,000 What is the operation cash flow in year 3?

$51,360

As a financial analyst, you are estimating the value of a stock, ABC. You expect that the stock will not pay any dividend for the next five years, and then start to pay $10 dividend for the next 20 years. After that, the stock is expected to stop paying dividend forever and the company's assets will be worth nothing. If the required rate of return of the stock is 10%, what is your best estimate of the value of the stock today?

$52.86

Which of the following statements is true for a stock that sells now for $60, pays an annual dividend of $4.00, and experienced a 20% return on investment over the past year? Its price one year ago was:

$53.33

How much more would you be willing to pay today for an investment offering $10,000 in 4 years rather than in 5 years? Your discount rate is 8%.

$544.47

You have purchased a savings bond that will pay $10,000 to your newborn child in fifteen years. If the bank discounts this bond at a rate of 3.875% per year, what is today's price for this bond?

$5654

Jim is saving for a new motorcycle, which he wants to buy in 3 years for $25,000. He opens a savings account with an annual interest rate of 12% and interest paid monthly. How much does he have to invest each month to be able to purchase the motorcycle in 3 years

$574.61

The last dividend paid by the Brim Company was $3.50. Brim's dividend growth rate is expected to be a constant 20% for two years, after which dividends are expected to grow at a rate of 5% forever. Brim's required rate of return on common stock is 13%. At what price should Brim shares sell for currently?

$59.47

Your company is considering a project that has the following cash flows The project has a payback period of 1.5 years. The firm's cost of capital is 10 percent. Determine the project's NPV

$6,125

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

Your car loan requires payments of $200 per month for the first year and payments of $400 per month during the second year. The annual interest rate is 12% and payments begin in one month. What is the present value of this 2-year loan?

$6,245.34

Use the information below for the Greek Corporation to answer the following question The value of net working capital at the year-end is ______

$6,450

You have the opportunity to buy a perpetuity that pays $1,000 annually. Your required rate of return on this investment is 15 percent. You should be essentially indifferent to buying or not buying the investment if it were offered at a price of

$6,666.67

What is the present value of receiving $100 monthly for two years, followed by $200 monthly for the next three years, payments? Assuming that the annual interest rate is 13%, compounded monthly.

$6,687

A wealthy woman just died and left her pet cats the following estate: $50,000 per year for the next fifteen years, with the first cash flow today. At a discount rate of 3.2%, what is the feline estate worth in today's dollars?

$607,180.14

A firm paid a $3.00 dividend last year and dividends are expected to grow at 15% for the next 5 years and 5% thereafter. If the required return is 13%, what is the value of a share of stock?

$61.8 or 58.8

Determine the value of Coldron shares. The last dividend paid was $3.20, and dividends are expected to grow at 4% indefinitely. Coldron has a beta of 0.9, the risk free rate is 3 percent and the risk premium is 7 percent.

$62.79

What is the book value per share for a firm with 2 million shares outstanding at a price of $50, a market-to-book ratio of .75, and a dividend payout ratio of 50%?

$66.67

You require an internal rate of return of 8% to accept a project. If the project will yield $10,000 per year for 10 years, what is the maximum amount that you would be willing to invest in the project?

$67,100

Cash and equivalents are $1561; short-term investments are $1052; accounts receivables are $3616; accounts payable are $5173; short-term debt is $288; inventories are $1816; other current liabilities ae $1401; and other current assets are $707. What is the amount of total current liabilities?

$6862

You purchased a machine for $20,000 and depreciated it to zero on a five-year straight-line schedule. If the machine is sold at the end of the fourth year for $10,000, what are the after-tax proceeds from the sale, assuming your tax rate is 35%

$7,900

You own a bond issued by the Canadian Pacific railroad that promises to pay the holder $50 annually forever. You plan to sell the bond 10 years from now. If similar investments yield 7% at that time, how much will the bond be worth in year 10 when you try to sell it?

$714.29

Your company is considering and expansion into a new product area. The company has collected the following information about the proposed product What is the total cash flow in year 0

$750,000 cash outflow

Marty received an offer for an injury settlement of $10,000 payable in three years. He wants to know what the present value of the injury settlements is if his opportunity cost is 5% (The opportunity cost is the interest rate in this problem.)

$8,638

What is the net present value of an investment with an initial cost of $50,000, and cash inflows at the end of years 1, 2 and 3 of $20,000, $35,000 and $40,000 respectively. The required return is 25%. Is this an investment that would go in the acceptable group to the evaluating company, or not or do not know? What is the best answer?

$8,880; it would be acceptable as it is expected to create shareholder value

The BBM Corp. is considering the expansion into the production of Wuk, a revolutionary new product. The firm has forecasted the following information with the expansions and without. The firm is in the 35% marginal tax bracket. The net cash outflow in year 0 from the production of Wuk is:

$8.3 million

How much interest is earned in just the third year on a $1,000 deposit that earns 7% interest compounded annually?

$80.14

You deposit $1,000 in your bank account. The bank pays 4% annual interest rate, compounded annually. In ten years, how much of your earnings will be interest on interest?

$80.24

Gerry Co. has a gross profit of $1,200,000 and depreciation expenses of $400,000. Selling and administrative expense is $250,000. Given that the tax rate is 21 percent, compute the cash flow from operations for Gerry Co.

$834,500

Assume you are given the following information about a 2-year project and its profitability index What must be the cash flow in Year 2?

$87,687.5

An investment has the following expected cash inflows: The discount rate is 8 percent. Determine the investment's present value

$89,676.97

Your older sister deposited $2,500 today at an annual interest rate of 6.5% for 15 years, compounded annually. However, you ca only earn a 6.25% annual interest rate. How much more money must you deposit today than your older sister did if you are to have the same amount saved at the end of the 15 years?

$89.70

Company XYZ is evaluating a project and here is some information for the project. The unit sales price is projected to be $40 and sales volume to be 1,000 units in year 1, 1,250 units in year 2, and 1,325 units in year 3. The project has a 3 year life. Variable costs amount to $22.5 per unit and fixed costs are $10,000 per year. The project requires an initial investment of $16,500, which is depreciated straight-line to zero over the 3 year project life. The actual market value of the initial investment at the end of year 3 is $3,500. Initial net working capital investment of $7,500 and NWC will maintain a level equal to 20% of sales each year thereafter. The tax rate is 34% and the required return on the project is 10%. What is the operating cash flow for the project in year 2?

$9,708

For the next 8 years, an investor will deposit $1,000 every year into a special investment funds. The fund pays an annual interest rate of 10% for the first 3 years. After that, the annual interest rate drops to 5% per year. What is the account balance of the investor at the end of year 8? Assume that each deposit is made at the end of year.

$9,750.12

Dr. J. wants to buy a Dell computer that will cost $3,000 three years from today. He would like to set aside an equal amount at the end of each year in order to accumulate the amount needed. He can earn an 8% annual return. How much should he set aside beginning a year from now?

$924

Randy Harris is contemplating whether to add a bond to his portfolio. It is a semiannual, 6.5% bond with 7 years to maturity. He is concerned about the charge in value due to interest rate fluctuations and would like to know the bonds value given various scenarios. At a yield to maturity of 7.5% or 5.0%, the bonds fair value is closest to:

$946.30 at 7.5% or $1,087.68 5%

The stock of MTY Golf World currently sells for $89.92 per share. The firm has a constant dividend growth rate of 6% and just paid a dividend of $5.09. If the required rate of return is 12%, what will the stock sell for one year from now?

$95.32

A real estate investment has the following expected cash flows: The discount rate is 8 percent. What is the investment's present value?

$96,110

You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. The project has a 3-year life. You estimate the revenue for the next three years are as follows: $400,000 in year 1, $500,000 in year 2, and $530,000 in year 3. The cash expenses are expected to be $325,000 in year 1, $381,250 in year 2, and $398,125 in year 3. The project requires an initial investment of $165,000, which is depreciated straight-line to zero over the 3-year project life. The actual market value of the initial investment at the end of year 3 is $35,000. Initial net working capital investment is $75,000 (at year 0) and NWC will maintain a level equal to 20% of sales each year thereafter. The tax rate is 34% and the required return on the project is 10%. What is the operating cash flow for the project in year 2?

$97,075

Your company just sold a product with the following payment plan: $50,000 today, $25,000 next year, and $10,000 the following year. If your firm places the payments into an account earning 10% per year, how much money will be in the account after collecting the last payment?

$98,000

Jasmine has already been in the workplace for 1.5 years and just switched jobs which led to an increase in her salary. Her goal is to do a vacation tour through Europe 2.5 years from now. She estimates that the trip is going to cost $12,000. Her mother promises to pay $1,250 for her trip. To be able to go on vacation, how much money does she need to set aside every quarter if the annual interest rate is 8%?

$982

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck. The truck's basic price is $50,000, and will cost another $10,000 to modify it for special use by your firm. The truck falls in the MACRS 3-year class, and it will be sold after three years for $20,000. Use of the truck will require an increase in net operating working capital of $2,000. The truck will have no effect on revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 40 percent. What is the cash flow at year 0?

-$62,000

The Terra Corporation purchased Lycos, an internet search engine company, for $12,000,000, and five years later sold it for $76,000. What annual compounded rate of loss, as a percent, did Terra suffer on this investment?

-63.7%

Although appealing to more refined tastes, art as a collectible has not always performed so profitably. During 2003, Sotheby's sold the Edgar Degas bronze sculpture Petite Danseuse de Quatorze Ans at auction for a price of $10,311,500. Unfortunately for the previous owner, he had purchased it in 1999 at a price of $12,377,500. What was his annual rate of return on this sculpture?

-7.53

The beta of an investment in U.S. Treasury bills is:

0.0

What is the approximate variance of returns if over the past 3 years an investment returned 8.0%, -12.0%, and 15.0%?

0.0196

The profitability index for a project costing $40,000 and returning $15,000 annually for 4 years at an opportunity cost of capital of 12% is:

0.139

Find the debt ratio of a firm with total debt equal to $800,000 and total shareholders equity of $2,400,000

0.25

An investor divides her portfolio equally into three parts, with one part in Treasury bills, one part in a market index, and one part in a diversified portfolio with beta of 1.50. What is the beta of the investor's overall portfolio?

0.83

Assume a portfolio is made up of the following three stocks: Selecting the closest answer, the beta for this portfolio is:

0.92

Reginal is about to lease an apartment for the year. The landlord wants him to make the lease payments at the start of the month. The twelve monthly payments are $1,300 per month. The landlord says he will allow Reginal to prepay the rent for the entire year with a discount. The one-time annual payment due at the beginning of the lease is $14,778. What is the implied monthly discount rate for the rent? If Reginal is earning 1.5% on his savings monthly, should he pay by month or make the single annual payment?

1%; monthly payments

Mullineaux Co. issued 11-year bonds one year ago at a coupon rate of 8.6 percent. The bonds make semiannual payments. If the YTM on these bonds is 7.5 percent, what is the current bond price?

1,076.5

A lottery ticket states that you will receive $250 ever year for the next ten years. What is the present value of the winning lottery ticket if the discount rate if 6% and it is an ordinary annuity?

1,840

MEGAFRAM COMPUTER COMPANY Megaframe's quick ratio is _____

1.0

What should be the beta of a replacement stock if an investor wishes to achieve a portfolio beta of 1.0 by replacing stock C in the following equally weighted portfolio: stock A = .9 beta; stock B = 1.1 beta; stock C = 1.35 beta?

1.00

What is the value of systematic risk (as measured by beta for a portfolio with 2/3 of the funds invested in A and 1/3 of the funds invested in B?

1.067

You hold a diversified portfolio worth $10,000. The portfolio consists of 20 different common stocks. The portfolio beta is equal to 1.2. You have decided to sell one of your stocks that has a beta equal to 1.4. You plan to use the proceeds to purchase another stock that has a beta equal to 0.7. What can possibly be the beta of the new portfolio?

1.165

SDJ, Inc., has net working capital of $1,050, current liabilities of $4,300, and inventory of $1,300. What is the current ratio? What is the quick ratio?

1.24; 0.94

You own a stock portfolio invested 25 percent in Stock Q, 20 percent in Stock R, 15 percent in Stock S, and 40 percent in Stock T. The betas for these four stocks are .9, 1.4, 1.1 and 1.8 respectively. What is the portfolio beta?

1.39

An investment has expected cash flows of $-200, $100, $220, $90 and $45 at the end of years 0 through 4, respectively. The required return is 8.5% Estimate the payback period for this investment

1.45 years

Your friend is asking you for help. He would like to know the standard deviation of the returns of his portfolio. However, a couple of daily returns are missing, as shown below:

1.5%

The common stock of Jensen Shipping has an expected return of 15.4 percent. The return on the market is 11.2 percent, the inflation rate is 3.1 percent, and the risk-free rate of return is 3.6 percent. What is the beta of this stock?

1.55

Bethesda Co. had additions to retained earnings for the year just ended of $275,000. The firm paid out $150,000 in cash dividends, and it has ending total equity of $6 million. If Bethesda currently has 125,000 shares of common stock outstanding, what are earnings per share? Dividends per share? Book value per share? If the stock currently sells for $95 per share, what is the market to book ratio? The price earnings ratio?

1.98; 27.9

Your grandfather will sell you a piece of beachfront property for $72,500. He says the price is firm whenever you can pay him cash. You know your finances will allow you to save only $5,000 a year and you can make 8% on your investment. If you invest faithfully every year at the end of the year, how many years will it take you to accumulate the necessary $72,500 future cash for the beachfront property? Round your answer to the nearest year.

10

A bond was issued 5 years ago. You would like to purchase it today for a price of $857.88. The yield to maturity is 7% and the coupon rate is 5%, paid semi-annually. How many years are left to the maturity of the bond?

10 years

Company A's stock has an estimated beta of 1.4, and its required rate of return is 13 percent. Company B's stock has a beta of 0.8, and the risk-free rate is 6 percent. Determine the required rate of return on Company B's stock

10%

If Randolph Corp. has sales of $3,000,000, net income of $200,000, and total asset turnover of 1.5, what is its return on assets?

10%

Your assistant has estimated the cash flows of a new proposed 4-year project as follows: Somehow, he forgot to report cash flow in year 4. However, he did report that the project NPV is $0 at a discount rate of 10%. What is the IRR of the project?

10%

Your firm sold a 25-year bond at par value 19 years ago. The bond has a $1,000 face value and a coupon rate of 6%. The coupons are paid annually. The bond currently sells for $825. What is the firm's before-tax cost of debt?

10.02%

You are a financial analyst for a company in Downtown Chicago

10.23%

Given the following information for Dunhill Power Co. find the WACC. Assume the company's tax rate is 35 percent.

10.25

A stock has an expected return of 10 percent, its beta is .9 and the risk-free rate is 6 percent. What must the expected return on the market be?

10.45

What is the ROA of a firm with $150,000 in average receivables, which represents 60 days sales, average assets of $750,000, and a profit margin of 9%?

10.95%

Interest rates have fallen over the seven years since a $1,000 par, 10-year bond was issued with a coupon of 7%. What is the present value of this bond if the required rate of return is currently 4.5%

1068.72

An investor purchased a 6-year 10% coupon bond one year ago. The coupons were paid annually and the par value was $1,000. At the time she purchased the bond, the yield to maturity was 8 percent. The amount paid for this bond one year ago was:

1092.46

Assume you invested $1,000 in stocks 10 years ago, and that your account is now worth $2,839.42. Determine the annual rate of return that you have earned on this investment.

11%

In a year in which common stocks offered an average return of 18%, Treasury bonds offered 10% and Treasury bills offered 7%, the risk premium for common stocks was:

11%

A smooth used-car salesman who smiles considerably is offering you a great deal on a "preowned" car. He says, "For only six annual payments of $2,500, this beautiful 2008 Honda Civic can be yours." If you can borrow money at 8%, what is the price of this car?

11,557.5

Assume that a corporate bond has a par value of $1,000 and 15 years until it matures. Also assume that investors require an annual rate of return of 12%, that coupon interest is paid semi-annually, and that the current price of for this bond is $931.18. What is the annual coupon rate on this bond?

11.0%

What is the WACC for a firm using 55% equity with a required return of 15%, 35% debt with a required return of 8%, 10% preferred stock with a required return of 10%, and a tax rate of 35%?

11.07%

Shocking Co. is expected to maintain a constant 7 percent growth rate in its dividends, indefinitely. If the company has a dividend yield of 4.2 percent, what is the required return on the power company's stock?

11.2

What is the expected return on asset A if it has a beta of 0.6, the expected market return is 15%, and the risk-free rate is 6%?

11.4%

Titan Mining Corporation has 8 million shares of common stock outstanding, 5 million shares of preferred stock outstanding, and 100,000 units of 9 percent semiannual bounds outstanding, par value $1,000 each. The preferred stock pays a dividend of $6 per share. The common stock currently sells for $32 per share and has a beta of 1.15, the preferred stock currently sells for $67 per share, and the bonds have 15 years to maturity and sell for 91 percent of par. The market risk premium is 10 percent, T-bills are yielding 5 percent, and Titan Mining's tax rate is 35 percent. If Titan Mining is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows? Round your answer to the nearest basis point, or hundredth of percent. (NOTE: enter your answer as percent without the percentage sign. For example, if your answer is 5.45%, enter 5.45).

11.48

You own a portfolio that has $2,800 invested in Stock A and $3,250 invested in Stock B. The expected returns on these stocks are 14.7 percent and 9.3 percent, respectively. What is the expected return on the portfolio?

11.8%

What is the portfolio expected return and the portfolio beta is you invest 35% in A, 45% in B, and 20% in the risk-free asset?

11.8%; 0.78

Strong Growth Inc. just had its earnings call. It released earnings and reported $2.5 of earnings per share. Because analysts expected EPS to be $3, the price of the stock dropped from $33 to $29.5 after the earnings release. What is Strong Growth Inc. current P/E ratio?

11.80

What are you getting in terms of interest rate if you are willing to pay $15,000 today for an annual stream of payments of $2,000 for the next twenty years?

11.93

Kevin would like to increase the balance of his savings account by 300%. If the interest rate on the bank account is 12%, approximately how long would it take to achieve Kevin's goal?

12 years

An analyst has gathered the following information about a firm: What is the firm's profit margin?

18%

A firm is expected to pay a dividend of $3.50 per share in one year. This dividend, along with the firm's earnings, is expected to grow at a rate of 7% forever. If the current market price for a share is $67, what is the cost of equity?

12.22%

Suppose that you have just purchased a share of stock for $40. The most recent dividend was $2 and dividends are expected to grow at a rate of 7% indefinitely. What must your required return be on the stock?

12.35%

Using the following data, calculate the standard deviation of returns of X. Round your answer to the nearest basis point, or hundredth of percent

12.7

Massey Co. has 12 percent coupon bonds making annual payments with YTM of 9 percent. The current yield on these bonds is 9.80 percent. How many years do these bonds have left until they mature?

12.99

Below are items in company ABC's income statement. There is no other income or expense. The firm's times interest earned ratio is:

13

A firm has a debt ratio of 25%, total liabilities of $250,000, and a net income of $100,000. The return on equity is

13%

Julian was given a gold coin originally purchased for $1 by his great-grandfather 50 years ago. Today the coin is worth $450. The rate of return realized on the sale of this coin is approximately equal to ________.

13%

An analyst gathered the following data about a company: Assuming a 40% tax rate, what after-tax rate of return must the company earn on its investments?

13.0%

Stock in Parrothead Industries has a beta of 1.10. The market risk premium is 8 percent, and T-bills are currently yielding 5.5 percent. Parrothead's most recent dividend was $2.20 per share, and dividends are expected to grow at a 5 percent annual rate indefinitely. If the stock sells for $32 per share, what is your best estimate of Parrothead's cost of equity?

13.25

Given the following information, what is the WACC? Common Stock: 1 million shares outstanding, $40 per share, $1 par value, beta = 1.3 Bonds: 10,000 bonds outstanding, $1,000 face value each, 8% annual coupon (paid annually), 22 years to maturity, market price = $1,101.23 per bond Market risk premium = 8.6%, risk-free rate = 4.5%, marginal tax rate = 34%

13.30%

What is the expected return on this portfolio? (Choose the closest answer)

13.42%

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

13.55 years

What is the standard deviation of a portfolio's returns if the mean return is 15%, the variance of returns if 0.0184, and there are three stocks in the portfolio?

13.56%

Approximately how long must one wait for an initial investment of $1,000 to triple in value if the investment earns 8% compounded annually?

14 years

A stock has a current value of $37.45 and just paid $4 in dividends, which are growing at a constant rate of 3%. Given that the ROE is 6%, what rate of return do investors require for this stock?

14%

What is the approximate standard deviation of returns if over the past 4 years an investment returned 8.0%, -12.0%, -12.0%, and 16.0%?

14%

What is the required return for a stock that has a 6% constant-growth rate, a price of $25, an expected dividend of $2 next year, and a P/E ratio of 10?

14%

You would like to create an equally weighted portfolio of Stock X, Stock Y, and Stock Z. Stock X has an expected return of 11% and Stock Z's expected return is 10.5%. You have a total of $60,000 to invest. What must be the expected return of Stock Y, so that the portfolio has an expected return of 12%?

14.5%

Dizzy Corp. bonds bearing a coupon rate of 12%, pay coupons semiannually, have 3 years remaining to maturity, and are currently priced at $940 per bond. What is the yield to maturity?

14.54%

Below are items in company ABC's income statement. There is no other income or expense. The firm's cash coverage ratio is:

15

What rate of return should an investor expect for a stock that has a beta of 1.25 when the market is expected to yield 14% and Treasury bills offer 6%?

16.0%

You bought a 30-year bonds many years ago. The bond has a par value of $1,000 and coupon rate of 12%, paid semi-annually. The current price of the bond is $1,137.99 and the yield to maturity is 10%. How many years ago did you buy the bond?

18 years ago

Below are items in company ABC's annual income statement. There is no other income or expense. If shareholders' equity is $35,000 and total liability is $15,000, ABC's total asset turnover ratio is _____

2.00

What is a company's times interest earned ratio, if its total interest expenses are $20,000, sales are $220,000, and its profit margin is 6%? Assume a tax rate of 40%

2.1

Emma just graduated and started her new job. How many years will it take her to have enough money to purchase the car if she can earn 6% on her savings

2.17 years

Last year's asset turnover ratio was 2.0. Sales have increased by 25% and average total assets have increased by 10% since that time. What is the current asset turnover ratio?

2.27

Your company's after-tax cost of debt is 3.6%. The yield to maturity, coupon rate and current yield of its outstanding bonds are 4.5%, 4.8%, and 4.24%, respectively. What must be your company's tax rate?

20%

An investor purchased a 10-year zero-coupon bond with a yield to maturity of 10% and a par value of $1,000. What would her rate of return be at the end of the year if she sells the bond? Assume the yield to maturity on the bond is 9% at the time it is sold and semi-annual compounding periods are used.

20.15%

Suppose Massey Ltd. just issued a dividend of $.68 per share on its common stock. The company paid dividends of $.40, $.45, $.52 and $.60 per share in the last four years. If the stock currently sells for $12, what is your best estimate of the company's cost of equity capital?

20.65

Your credit card has a balance of $3,000. The bank requires a minimum monthly payment of $64.90 and states that it will take 100 months to pay off the balance if you only make minimum payment every month and do NOT make additional charges on the card. What is the annual interest rate charged by your credit card?

21.60%

Company X has 2 million shares of common stock outstanding at a book value of $2 per share. The stock trades for $3 per share. It also has $2 million in face value of debt that trades at 90% of par. What is the weight of debt for WACC purposes?

23.1%

An investment with a cost of $5,000 is expected to have cash inflows of $3,000 in year 1, and $4,000 in year 2. The internal rate of return (IRR) for this investment is closest to:

24%

What is the IRR of the following set of cash flows?

25.43

An analyst has gathered the following information about a company What is, approximately, the days' sales in inventory?

253 days

Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years, because the firm needs to plow back its earnings to fuel growth. The company will then pay a dividend of $15 per share 10 years from today and will increase the dividend by 5 percent per year thereafter. If the required return on this stock is 14 percent, what is the current share price?

26.95

Listed below are the financial statement numbers for Shick, Inc., for the year 2016. They are listed in alphabetical order, NOT in the order they appear on the statement themselves. The applicable tax rate is 40%. What is the Days Sales in Receivables for Shick Inc. in 2016, and if Shick's peer group has a DSR of 30 days, who is better at collecting account receivables--Shick or its peer group?

27.4 days; Shick better at collecting

An investor is considering investing in Tawari Company for one year. He expects to receive $2 in dividends over the year and feels he can sell the stock for $30 at the end of the year. To realize a return on the investment over the year of 14%, the price the investor would pay for the stock today is closest to:

28

When you were born, your grandparents opened a savings account on your behalf and deposited $1,000. Neither additional deposit nor withdrawal has ever been made since. The account pays an annual interest rate of 5%. The account balance today is $3,920.1. How old are you now

28 years old

Market Enterprises would like to issue $1,000 bonds and needs to determine the approximate rate it would need to pay investors. ... At what rate would Market Enterprises expect to issue bonds, assuming annual interest payments?

3%

Mercer Shaved Ice Co. has identified an investment project with the following cash flows. If the discount rate is 10 percent, what is the present value of these cash flows?

3,227.5

A project costs $100 and has cash flows of $40 per year for the next seven years. If the discount rate is 15%, what is the discounted payback period?

3.38 years

You have $100,000 to invest. Your bank offers one-year certificates of deposit with a stated rate of 3.50% compounded quarterly. What rate compounded semiannually would provide you with the same amount of money at the end of one year?

3.515%

In how many years will a bond mature, given its current price of $948, face value of $1,000, coupon of 8.5%, and required return of 10.3%? The bond makes coupon payments semi-annually.

3.52 years

Suppose you know that a company's stock currently sells for $60 per share and the required return on the stock is 14 percent. You also know that the total return on the stock is evenly divided between a capital gain yield and a dividend yield. If it's the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share?

3.95

On your tenth birthday, you received $300 which you invested at 8.4 percent interest, compounded annually. Your investment is now worth $1,740 How old are you today?

31 years old

An investment offers $4,100 per year for 15 years, with the first payment occurring one year from now. If the required return is 10 percent, what is the value of the investment?

31,185

Your company is considering two mutually exclusive projects. The projects have the following cash flows:

31.92%

Your company is considering two mutually exclusive projects. The projects have the following cash flows: If the cost of capital for both of these projects is 10%, then what is the IRR for the project that has the higher NPV?

31.92%

Grady Precision Measurement has forecasted the following sales and costs for a new GPS system: annual sales of 48,000 units at $18 a unit, production costs at 37% of sales price, annual fixed costs for production at $180,000, and straight-line depreciation expense of $240,000 per year. The company tax rate is 35%. What is the annual operating cash flow of the new GPS system?

320,808

What is the ROE for a firm with a times interest earned ratio of 2, a tax liability of $1 million, and interest expense of $1.5 million if equity equals $1.5 million?

33.33%

Winnebagel Corp. currently sells 20,000 motor homes per year at $45,000 each, and 8,000 luxury motor coaches per year at $78,000 each. The company wants to introduce a new portable camper to fill out its product line. It hopes to sell 16,000 of these campers per year at $12,000 each. An independent consultant has determined that if Winnebagel introduces the new campers, it should boost the sales of its existing motor homes by 5,000 units per year, and reduce the sales of its motor coaches by 1,000 units per year. What is the amount that should be used as the annual sales figure when evaluating this project?

339

You want to create a portfolio equally as risky as the market, and you have $1,000,000 to invest. The portfolio contains stocks A, B, C and a risk free asset. Given this information, find how much must your investment in stock C.

365,625

Your goal is to have $1 million when you retire at the age of 65. You plan to invest $10,000 every year (at the beginning of each year) and your financial advisor estimates that your annual rate of return will be 8.28%. At what age should you start to invest for your retirement?

37 years old

Antiques R Us is a mature manufacturing firm. The company just paid a $9 dividend, but management expects to reduce the payout by 8 percent per year, indefinitely. If you require a 14 percent return on this stock, what will you pay for a share today?

37.5

Assume that a stock is expected to pay a $3.50 dividend next year, which is then expected to grow at a constant annual rate. The stock is currently selling at $43.75 and investors require a 12 percent rate of return for this stock. What is the expected growth rate of the dividend?

4%

The Stack has just written and recorded the single greatest rock song ever made. The boys in the band believe that the royalties from this song will pay the band a handsome $200,000 every year forever. The record studio is also convinced that the song will be a smash hit and the royalty estimate is accurate. The record studio wants to pay the band up front and not make any more payments for the song. What should the record studio offer the band if it uses a 5% discount rate?

4,000,000

Assume that a share of stock, priced at $52.5 per share, just paid a dividend of $2. The dividend is expected to grow at a along-run constant rate. The required rate of return is 4% higher than the dividend growth rate. Given this information, determine the dividend yield of the stock

4.00%

If the future value of an annuity due is $25,000 and $24,000 is the future value of an ordinary annuity that is otherwise similar to the annuity due, what is the implied discount rate?

4.17%

Ferryville Radar Technologies has five-year, 7.5% bonds outstanding that trade at a yield to maturity of 6.8%. The company's marginal tax rate is 35%. Ferryville plans to issue new five-year notes to finance an expansion. Ferryville's after-tax cost of debt capital is closest to:

4.4%

A firm sold a 10 - year bond issue 3 years ago. The bond has a 6.45% annual coupon and a $1,000 face value. The coupons are paid semi-annually. If the current market price of the bond is $951.64 and the tax rate is 35%, what is the after-tax cost of debt?

4.77%

As a financial analyst, you would like to estimate the dividend growth rate for company XYZ stock. The company just paid a dividend of $3.5 per share and its stock is currently priced at $51. You believe the dividend will grow at a constant rate forever. If the investors require a rate of return of 12%, what is the dividend growth rate?

4.81%

What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate if 8%?

43.75

How much should you pay for a share of stock that offers a constant-growth rate of 10%, requires a 16% rate of return, and is expected to sell for $50 one year from now?

45.45

What is the internal rate of return of an investment with an initial cost of $50,000, and cash inflows at the end of years 1, 2 and 3 of $30,000, $35,000 and $40,000 respectively. Is this an investment that would go in the acceptable group to the evaluating company, or not or don't know? What is the best answer?

45.7%; cannot tell with the information provided whether it would be acceptable

Kiessling Corp. pays a constant $9 dividend on its stock. The company will maintain this dividend for the next eight years and will then cease paying dividends forever. If the required return on this stock is 11 percent, what is the current share price?

46.5

Some years ago, James purchased two rare Pokemon cards, costing $1,000 then. Today, the cards are valued at $590. Today, the cards are valued at $590. How long has he owned the cards if the price of the cards has been decreasing by 10% per year?

5.0 years

The expected return on JK stock is 16.28 percent while the expected return on the market is 11.97 percent. The stock's beta is 1.63. What is the risk-free rate of return?

5.13%

A company has a bond issue outstanding that has an 8% coupon, pays semiannual interest, matures in 7 years at face value of $1,000. The bonds currently trade at a price of $940. The company's tax rate is 40% and its stock beta is 1.3. The risk-free rate is 3% and the risk premium is 7%. For purposes of estimating its weighted average cost of capital, what after-tax cost of debt should the company use?

5.51%

Jiminy's Cricket Farm issued a 30-year, 9 percent annual coupon bond 8 years ago. The bond makes coupon payments semiannually. The par value of the bond is $1,000. The bond currently sells for 105 percent of its face value. The company's tax rate is 35 percent. What is the after-tax cost of debt?

5.55

Lewis, Schultz, and Nobel Development Corp. has an after-tax cost of debt of 4.5%. With a tax rate of 21%, what is the yield to maturity on the debt

5.70%

Your grandfather placed $5,000 in a trust fund for you. In 12 years the fund will be worth $10,000. What is the rate of return on the trust fund?

5.95%

You own the following portfolio of stocks. What is the portfolio weight of Stock C?

52.18%

Super Growth Co. is growing quickly. Dividends are expected to grow at a 32 percent rate for the next three years, with the growth rate falling off to a constant 7 percent thereafter. If the required return is 15 percent and the company just paid a $2.25 dividend, what is the current share price?

54.5

MEGAFRAME COMPUTER COMPANY Refer to the tables above. The firm's debt ratio is _____

55.6%

You would like to combine a risky stock with a beta of 1.76 with U.S. Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market. Approximately what percentage of the portfolio should be invested in the risky stock?

57%

You are interested in a corporate bond with the current market price of $973.36 and yield to maturity of 7%. The bond carries a coupon rate of 6%, paid semi-annually. If you buy the bond today, how many semi-annually coupon payments will you receive until the final maturity?

6

Kelvin has $2,500 but needs $5,000 to purchase a new golf cart. If he can invest his money at a rate of 12% per year, approximately how many years will it take the money in Kelvin's account to grow to $5,000? Use the Rule of 72 to determine your answer.

6 years

After winning the lottery, you state that you are indifferent between receiving twenty $500,000 end of the year payments (first payment one year from today) and receiving a lump sum payment of $5,734,961 today. What interest rate are you using in your decision making process such that you are indifferent between the two choices?

6%

County Ranch Insurance Company wants to offer a guaranteed annuity in units of $500, payable at the end of each year for twenty-five years. The company has a strong investment record and can consistently earn 7% on its investments after taxes. If the company wants to make 1% on this contract, what price should it set on it? Use 6% as the discount rate. Assume it is an ordinary annuity and the price is the same as present value.

6,391.5

Both assets A and B plot on the SML. Asset A has an expected return of 15% and a beta of 1.7, and asset B has an expected return of 12% and a beta of 1.1. What is the risk-free rate of return?

6.5%

The market price of a bond is $1,119.90; it has 4 years to maturity, a $1,000 par value, and pays a coupon of $100 every year. What is the yield to maturity?

6.50%

Clapper Corp. issued 12-year bonds 2 years ago at a coupon rate of 7.8 percent. The bonds make semiannual payments. If these bonds currently sell for 108 percent of par value, what is the YTM?

6.68

What is the total return to an investor who buys a bond for $1,100 when the bond has a 9% coupon rate and 5 years remaining until maturity, then sells the bond after 1 year for $1,085?

6.82%

Your company has the following balance sheet: What is the company's debt ratio?

60%

What is the value of a preferred stock that is expected to pay a $5.00 annual dividend per year forever if similar risk securities are now yielding 8%?

62.50

Barely Heroes Corporation has bonds on the market with 14.5 years to maturity, YTM of 9 percent, and a current price of $850. The bonds make semiannual payments. What must the coupon rate be on Barely Heroes' bonds?

7.13

Assume that you just bought a house and took out a 30-year mortgage loan of $225,000 and must make monthly payments of $1,527.28. Given this information, determine the annual interest rate on your mortgage

7.20%

The market price of a bond is $1,236.94, it has 14 years to maturity, a $1,000 face value, and pays an annual coupon of $100 in semiannual installments. What is the yield to maturity?

7.27%

Your firm has preferred stock outstanding that pays a current dividend of $3.00 per year and has a current price of $39.50. You anticipate the economy will grow steadily at a rate of 3.00% per year for the foreseeable future. What is the market required rate of return on your firm's preferred stock?

7.60%

A bond with a 7% coupon with an original maturity of 20 years was issued 4 years ago. If the bond is currently selling for $940, what is its yield to maturity? (The bond pays coupons annually)

7.66%

A firm has $100 million in equity and $300 million in debt. The firm recently issued bonds at the market required rate of return of 9%. The firm's beta is 1.125, the risk-free rate is 6%, and the expected return in the market is 14%. Assume the firm is at their optimal capital structure and the firm's tax rate is 40%. What is the firm's weighted average cost of capital (WACC)?

7.80%

You have $10,000 to invest in a stock portfolio. Your choices are Stock X with a return of 15 percent and Stock Y with a return of 10 percent. If your goal is to create a portfolio with a return of 13.5 percent, how much money will you invest in Stock X? Round your answer to the nearest dollar

7000

The Canadian government decided to issue a consol .... What should this consol bond sell for in the market?

769.5

A zero-coupon bond matures three years from today, has a par value of $1,000 and a yield to maturity of 8.5%. What is the current value of this issue?

779.01

Assume that a 10-year regular annuity has a present value of $3,755.50 when evaluated at an interest rate of 0%. Determine the interest rate that would give this same annuity a future (compounded) value of $5,440.22 at Year 10

8%

What is the coupon rate for a bond with 3 years until maturity, a price of $1,053.46, and a yield to maturity of 6%?

8%

What is the current yield of a bond with a 6% coupon, 4 years until maturity, and a price of $750?

8.0%

Dr. Stein has just invested $10,000 for his son (age 7). The money will be used for his son's education 10 years from now. He calculates that he will need $21,598 for his son's education by the time the boy goes to school. What rate of return will Dr. Stein need to achieve this goal? Choose the closest answer.

8.00%

South Penn Trucking is financing a new truck with a loan of $10,000 to be repaid in 5 annual end-of-year installments of $2,504.56. What annual interest rate is the company paying?

8.00%

Tobin's Barbeque has a bank loan at 8% interest and an after-tax cost of debt of 6%. What will the after-tax cost of debt be if a new loan is taken out yielding 11%.

8.25%

Ten years ago, Jackson Supply set aside $125,000 in case of a financial emergency. Today, that account has increased in value to $278,592. What rate of interest is the firm earning on this money?

8.34%

Your company's stock is selling for $40 today and its beta is 0.8. The market risk premium is 6 percent and the risk-free rate is 9 percent. Assume that the most recent dividend was $2 and that dividends are expected to grow at a constant rate. Determine the dividend growth rate for the stock

8.38%

A company has the following data associated with it:What is the weighted average cost of capital (WACC)?

8.46%

Cost of debt = 5%; cost of preferred = 8%; cost of equity = 10%. What is the weighted average cost of capital?

8.6%

The weighted-average cost of capital, after tax, for a firm with a 65/35 debt/equity split, 8% cost of debt, 15% cost of equity, and a 35% tax rate would be:

8.63%

Nan and Neal are twins. Nan starts to invest $5,000 per year for retirement at age 25. Neal waits until age 30 to start saving for retirement. He also invests $5,000 per year. Nan chooses a relatively safe investment product that offers an annual interest rate of 7%. Both twins plan to retire at age 65 and do not withdraw funds prior to retirement. If Neal would like to have the same amount of money as Nan by their retirements, what annual interest rate must his investment earn?

8.66%

ABC Corporation's common stock dividend yield is 3.61%, it just paid a dividend of $2.75, and is expected to pay a dividend of $2.89 one year from now. Dividends are expected to grow at a constant rate indefinitely. What is the required rate of return on ABC stock?

8.7%

Mr. Malone wants to change the overall risk of his portfolio. Currently, his portfolio is a combination of risky assets with a beta of 1.25 and an expected return of 14%. He will add a risk-free asset (U.S. Treasury bill) to his portfolio. If he wants a beta of 1.0, what percent of his wealth should be in the risky portfolio? Round your answer to the nearest percent. (NOTE: enter your answer as percent without the percentage sign. For example, if your answer is 5.45%, enter 5).

80

The times interest earned ratio is 5.0. Based on this ratio, a creditor knows that EBIT must decline by more than _____ before the firm will be unable to cover its interest expense

80%

Suppose the common stock of United Industries has a beta of 1.28 and an expected return of 15.47 percent. The risk-free rate of return is 3.7 percent while the inflation rate is 4.2 percent. What is the expected market risk premium?

9.20%

What is the yield to maturity of a bond with the following characteristics? 8% coupon rate is with annual payments, $1000 par value and current price of $960, 3 years until maturity.

9.60%

Lifehouse Software has 10 percent coupon bonds on the market with 7 years to maturity. The bonds make semiannual payments and currently sell for 104 percent of par. What is the current yield on Lifehouse's bonds? The YTM?

9.62

Bush Boomerang, Inc., is considering a new three year expansion project that requires an initial fixed asset investment of $2.1 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $1,900,000 in annual sales, with costs of $850,000. If the tax rate is 35%, what is the OCF for this project?

927,500

Assume that a corporate bond has a par value of $1,000 and 8 years until it matures. This bond also has an annual coupon rate of 7.5%, but it pays interest every 6 months. If investors require an annual rate of return of 8.6%, then what should be the current price of this bond?

937.31

You have just made your first $2,000 contributions to your individual retirement account. Assuming you earn a 9% rate of return and make no additional contributions, what will your account be worth when you retire in 45 years? Round your answer to the nearest dollar

96,654.5

Which of the following bonds would be considered to be of investment grade?

A Baa-rated bond

Which of the following is a characteristic of beta?

A beta of less than 1.0 has less risk than the market

Straight line depreciation takes the same deduction for each year in the depreciable life of an asset, whereas MACRS is the standard form of accelerated depreciation, resulting in larger deductions in early years and smaller deductions in later years. Both methods result in the same total deductions. What is the most accurate statement about depreciation that follows?

A business will prefer MACRS because it will maximize the present value of project cash flows

Which of the following is the reason for double taxation AND limited liability of a corporation?

A corporation is a separate legal entity from its investors

Which one of the following indicates a portfolio is being effectively diversified?

A decrease in the portfolio beta

Which of the following would likely have the greatest amount of systematic risk?

A portfolio half invested in the market portfolio and half invested in stocks with betas = 1.50.

An investor buys a new stock offering of LinkedIn shares through LinkedIn's investment banker. This is most accurately described as:

A primary market transaction

A stock investor owns a diversified portfolio of 15 stocks. What will be the most likely effect on the portfolio's standard deviation if one more stock is added?

A slight decrease will occur

In which of the following organization would agency problems be least likely to occur?

A sole proprietorship

Which of the following statements about zero-coupon bonds is FALSE?

A zero coupon bond may sell at a premium to par when interest rates decline

Which of A and B has the least total risk? The least systematic risk?

A; B

Last year, ABC and XYZ both had the same level of cost of goods sold, but ABC turned its inventory over 8 times during the year while XYZ turned its inventory over every 55 days. If the objective is to keep inventory as low as possible on average, which of the following is true?

ABC did a better job since its inventory turnover was higher

An Aa2 bond is considered to be riskier than an ___ bond

Aa1

A firm pays an annual dividend of $1.15 today. The risk-free rate (Rf) is 2.5%, and the risk premium for the stock is 7%. What is the value of the stock, if the dividend is expected to remain constant?

About $12.11

How much would an investor lose if she purchased a 30-year zero-coupon bond with a $1,000 par value and 10% yield to maturity, only to see market interest rates increase to 12% 1 year later?

About $19.48

By how much will a bond increase in price over the next year if it currently sells for $925, has 5 years until maturity, and an annual coupon rate of 7%? Assume the coupons are paid semi-annually and the yield to maturity does not change.

About 12.53

Mr. Darden is selling his house for $200,000. He bought it for $164,000 10 years ago. What is the annual return on his investment?

About 2%

Consider the following four-year project. The initial outlaw or cost is $180,000. The respective cash inflows for years 1, 2, 3 and 4 are: $100,000, $80,000, $80,000 and $20,000. What is the discounted payback period if the discount rate is 11%?

About 2.427 years

Mr. Bubble wants to sell his bubble machine for $1,000,000, but it might take awhile before it is valued that high. He bought it for $149,000 and is earning annual interest of 10% on the machine. How long will Mr. Bubble have to wait before the machine is valued at $1,000,000?

About 20 years

Given the following information, what is your best estimate for the firm's cost of equity on January 2, 2012, if the stock sells for $42 on that day?

About 25%

Kathy has $50,000 to invest today and would like to determine whether it is realistic for her to achieve her goal of buying a home for $150,000 in 10 years with this investment. What return must she achieve in order to buy her home in 10 years?

Above 10%

Which of the following statements about depreciation is true regarding its impact on the project NPV?

Accelerated depreciation leads to higher NPV than straight-line depreciation

Sarah Kelley, CFA, is analyzing two mutually exclusive investment projects. Kelley has calculated the net present value and internal rate of return for each project Kelley should make which of the following recommendations concerning the two projects?

Accept Project 2 only

An analyst has gathered the following data about a company with a 12% cost of capital If Projects P and Q are mutually exclusive, what should the company do?

Accept Project P and reject project Q

Jack Smith, CFA, is analyzing independent investment projects X and Y. Smith has calculated the net present value (NPV) and internal rate of return (IRR) for each project: Smith should make which of the following recommendations concerning the two projects?

Accept both projects

When a company is evaluating two mutually exclusive projects that both have positive NPV but have conflicting NPV and IRR project rankings, the company should:

Accept the project with the higher net present value

Which of the following is the most appropriate decision rule for mutually exclusive projects?

Accept the project with the highest positive NPV

Which of the following best explains the combination of a high level of sales combined with a low cash flow during an accounting period?

Acquisition of equipment

Assume a project has normal cash flows (that is, the initial cash flow is negative, and all other cash flows are positive). Which of the following statements is most correct?

All else equal, a project's NPV increases as the cost of capital declines

A higher discount rate or required rate of return would

All of these options are true

The concept of time value of money is important to financial decision making because

All of these options are true

Which of the following will result in a future value of greater than $100?

All the future values are greater than $100

Which of the following would represent a use of funds and, indirectly, a reduction in cash balances?

An increase in inventories

If a company generates net profits and does not pay out all net profits as dividends, then which of the following MUST happen to the balance sheet?

An increase in retained earnings from the previous period

Which of the statements below is true?

An increase in working capital can be brought about by an increase in inventory or accounts

The present value of an annuity stream of $100 per year is $614 when valued at a 10% rate. By approximately how much would the value change if these were annuities due?

An increase of $61

The discounted payback rule can be best stated as:

An investment is acceptable if its discounted payback period is less than some prespecified number of years.

The total asset turnover ratio indicates:

Annual sales for every dollar of total assets

A financial contract that pays $2,000 at the beginning of each year for 50 years is called a(n) _____ and has a value today of $______ at a required return of 12%.

Annuity due; $18,602

A company is considering a new project. The company s CFO plans to calculate the project's NPV by discounting the relevant cash flows at the company's cost of capital. Which of the following factors should the CFO include when estimating the relevant cash flows?

Any opportunity costs associated with the project

You have an $80,000 investment portfolio of Apple and Amazon stocks with an expected return of 8.5% and 6%, respectively. The portfolio expected return is 7%. What is the dollar value of each stock in the portfolio?

Apple = $32,000; Amazon = $48,000

Ark Corporation reports the following: Which of the following statements is true?

Ark is becoming less liquid, but is still slightly more liquid than its peers

Marie is 65 years old and ready to retire. She has a 1 million nest egg and wishes to spend 90,000 per year as an ordinary annuity. If her investment portfolio earns 6% annually, at what age will she run out of money?

Around 84 years old

How would the salvage value be treated in a net present value calculation?

As a positive cash flow (or cash inflow) in the year the asset is disposed of

How would the salvage value be treated in a capital budgeting analysis

As a positive cash flow in the year the asset is disposed of

Which of the following is false concerning diversification? Assume that the securities being considered for selection into a portfolio are not perfectly correlated.

As more securities are added to the portfolio, the systematic risk of the portfolio declines

A firm is considering purchasing two assets. Asset A ... Asset B ... Which asset will have a greater annual straight-line depreciation?

Asset A has $30,000 more in depreciation per year

Which of the following statements is true?

Assets with returns that are totally uncorrelated, if included in an investment portfolio, provide some risk reduction

The market risk premium can be found by:

subtracting the risk-free rate of return from the market rate of return

The financial statement that shows what a company owns and what is owes is called the

Balance sheet

To calculate changes in net working capital from one period to the next, we need which of the following:

Balance sheet

Joe Nautilus has $210,000 and wants to retire. What approximate return must his money earn so that he may receive annual benefits of $30,000 for the next 10 years?

Between 6% and 8%

Debreu Beverages has an optimal capital structure that is 70% common equity, 20% debt, and 10% preferred stock. Debreu's pretax cost of equity is 9%. Its pretax cost of preferred equity is 7%, and its pretax cost of debt is also 5%. If the corporate tax rate is 35%, what is the weighted average cost of capital?

Between 7% and 8%

Mr. Fish wants to build a house in ten years. He estimates that the total cost will be $150,000. If he can put aside $10,000 at the end of each year, what rate of return must he earn in order to have the amount needed?

Between 8% and 10%

Winnie would like to invest in bonds and has two options. Which bond has the lowest price?

Bond B

Your friend is asking you for advice. He wants to purchase a bond and has three options. Bond A is a discount bond selling at $915.32 with a yield to maturity of 6% and a coupon rate of 5%, paid semi-annually. Bond B is a premium bond with a market price of $1098.99, a yield to maturity of 5%, and a coupon rate of 6%. Bond B makes coupon payments annually. Bond C is a part bond with a coupon rate of 5.5%. Your friend would like to invest in a bond with the earliest maturity date. What bond will you NOT recommend for sure?

Bond B

A $900 bond with a 10-year maturity has a coupon rate of 10%. Bond X makes coupon payment annually. Another $900 bond has 12 years to maturity and a coupon rate of 10%. However, bond Y pays coupons on a semiannual basis. Which of the following statements regarding the current yields of the two bond is true?

Bonds X and Y have the same current yield because they have the same annual payments and prices

A current ratio greater than 1 can tell us that the company must ____

Both A and B

Which of the following is a typical reason for differences between profit and cash flow?

Both A and C

Firms that make investment decisions based on the payback rule may be biased toward rejecting projects:

Both B and C

Which of the following is likely to be correct for a CCC-rated bond, compared to a BBB-rated bond?

Both B and C

The sunnyside corporation has calculated the following information for the projects Y and Z: Project Initial Cost NPV at 16% Y 125,000 15,000 Z 125,000 18,500 Both projects have conventional cash flow patterns. Which of the following must be true?

Both projects' IRRs are higher than 16%

Which of the following statements regarding the internal rate of return (IRR) is most accurate?

Both statements B and C are correct

Which of the following actions could improve a firm's current ratio if it is now less than 1.0?

Buy inventory on credit

A company has a target capital structure of 40% debt and 60% equity. The company is a constant growth firm that just paid a dividend of $2.00, sells for $27.00 per share, and has a growth rate of 8%. The company's bonds pay 10% coupon (semi-annual payment), mature in 20 years, and sell for $849.54. The company's stock beta is 1.2. The company's marginal tax rate is 40%. The risk-free rate is 4%. The market risk premium is 10%.The cost of equity using the capital asset pricing model (CAPM) and the constant growth model is:

CAPM: 16.0%; CGM: 16.0%

You believe that the required return on Dynegy stock is 16% and that the expected dividend growth rate is 12%, which is expected to remain constant for the foreseeable future. Is the stock currently overvalued, undervalued, or fairly priced?

Cannot tell without more information

____ is at the heart of corporate finance because it is concerned with making the best choices about project selection

Capital budgeting

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

Capital structure

___ refers to the way a company finances itself through some combination of loans, bond sales, preferred stock sales, common stock sales, and retention of earnings.

Capital structure

Assume that you have the following information of a project that your company is trying to invest in: The initial investment of the project is $10,000. What must be the minimum amount of cash flow in year 2 to make this project acceptable

Cash Flow in year 2 must be at least $566.96

Which accounts are affected and will the transaction increase or decrease the amount? Pay $100 owed on a short-term bank note

Cash down $100; current liability down $100

Which of the statements below is FALSE?

Cash flow is an accounting measure of performance during a specific period of time

Which of the following will occur in a statement of cash flows as a result of paying cash dividends?

Cash flows from financing will decrease

Level of net working capital of a new project for periods 0, 1, 2 and 3 is expected to be $50, $70, $100, $0. The cash flow effect of this for year 2 would be recorded as:

Cash outflow of $30

Which of the following factors is fixed an thus cannot change for a specific perpetuity?

Cash payment of a perpetuity

Which of the following factors is fixed and thus cannot change for a specific perpetuity

Cash payment of a perpetuity

You would like to buy your first apartment. ... What option should you choose?

Choose alternative 2 since the present value of the payments is lower

Ben, your best friend, just won a competition. He can choose between two prizes. Option 1 is perpetuity of $200 per year. What would you recommend?

Choose option 2 because the PV of its cash flows is higher than the PV of the option 1 cash flows

Which of the following choices best describes the role of taxes on the after-tax cost of capital in the U.S. from the different capital sources?

Common equity: no effect; preferred equity: no effect; debt: decrease

Which of the following would decrease a portfolio's systematic risk?

Common stock with positive beta is sold and replaced with Treasury bills

Preferred stocks are different from common stocks in that

Common stockholders have voting rights while preferred stockholders do not

Companies A and B have the same tax rate, total assets, and EBIT. Both companies have positive net incomes. Company A has a higher debt ratio, and therefore, higher interest expense than Company B. Which of the following statements is most correct?

Company A has a lower times interest earned (TIE) ratio than Company B

Which of the following two companies has the higher dividend growth rate? Assume both companies maintain a constant dividend growth rate forever?

Company XYZ with a growth rate of 6.73%

____ is the area of finance concerned with activities such as borrowing funds to finance projects such as plant expansions or new product launches

Corporate Finance

Which of the following is fixed for the life of a given bond?

Coupon rate

____ are those expected to be turned into cash in the near future, while ____ are those expected to be fulfilled in the near future, and the difference between the two is

Current assets; current liabilities; net working capital

A firm's fixed assets = $100,000, total assets = $400,000, inventory = $50,000 and current liabilities = $200,000. What are the firm's current ratio and quick ratio?

Current ratio = 1.5; quick ratio = 1.25

Which of the following stocks is correctly priced according to CAPM if the risk-free rate of return is 3.4 percent and the market risk premium is 7.4 percent?

D

Dan would like to save $1,500,000 by the time he retires in 30 years and believes he can earn an annual return of 8%. How much does he need to invest in each of the following years to achieve his goal?

Dan needs to invest about 20% more than if the annual return is 8%

Two mutual fund managers, Martha and David, have been discussing whose fund is the top performer. Martha states that investors bought shares in her mutual fund ten years ago for $21 and those shares are now worth $65. David states that investors bought shares in his mutual fund for only $3 six years ago and they are now worth $7.30 which mutual fund manager had the higher growth rate for the management period?

David's fund

As a senior financial advisor at a major brokerage firm, you are reviewing the investment portfolios of five clients.

Debby

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

Decrease the interest rate

Which of the following will increase the present value of an annuity, other things equal?

Decreasing the interest rate

Which of the following expense categories is subtracted from the total revenues to help arrive at a firm's EBIT?

Depreciation expense

Which statement is FALSE about depreciation?

Depreciation is irrelevant in capital budgeting because it is a non-cash expense

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

Discount

The present value of a perpetuity can be determined by:

Dividing the payment by the interest rate

Drysdale Financial Company and Commerce financial Company have the same total assets turnover, and the same return on equity. However, Drysdale has a higher return on assets than commerce. Which of the following can explain these ratios?

Drysdale has a higher profit margin and a lower debt ratio tha Commerce

Dweller, Inc. is considering a four-year project that has an initial after-tax outlay or after-tax cost of $80,000. The future after-tax cash inflows from its project are $40,000, $40,000, $30,000, and $30,000 for years one, two, three, and four, respectively. Dweller uses the NPV method and has a discount rate of 12%. Will Dweller accept the project?

Dweller accepts the project because the NPV is greater than $28,000

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 _____ for the period.

EBT, or taxable income

The income statement begins with revenue and subtracts various operating expenses until arriving at _____

Earnings before interest and taxes (EBIT)

Which of the following is the best indication of the profitability of a firm's assets and its operation for a firm with both debt and equity in its capital structure?

Earnings before interest and taxes (EBIT)

Ed Lawrence has $100,000 invested. Of that, $30,000 is invested in IBM stock, $25,000 is invested in T-bills, and the remainder is invested in corporate bonds. Which of the following is true regarding his portfolio?

Ed has 30% of his portfolio invested in stocks

If a stock consistently goes down (up) by 1.6% when the market portfolio goes down (up) by 1.2%, then its beta.

Equals 1.33

What is the present value of a stream of annual end-of-the-year annuity cash flows if the discount rate is 0%, and the cash flows of $50 last for 20 years?

Exactly $1,000

How many of the following items are found on the balance sheet, rather than the income statement?

Five of these items

How many of the following items decrease cash flow in the statement of cash flows?

Five of these items decrease cash flow

Which of the following is a correct interpretation of a total asset turnover of 3.0?

For each $1 of assets owned by the firm it generates $3 in sales.

Which of the following statements about the internal rate of return (IRR) and net present value (NPV) is least accurate?

For mutually exclusive projects, if the NPV rankings and the IRR rankings give conflicting signals, you should select the project with the higher IRR

Which of the following statements about the constant growth dividend model is FALSE?

For the constant growth dividend model to work, the growth rate must exceed the required return on equity

Dividend models suggest that ______________ determine the value of a financial asset to which the owner is entitled while holding the asset.

Future cash flows

Which of the following would correctly differentiate general partners from limited partners in a partnership?

General partners have unlimited personal liability

A $1,000 par value, 10% coupon bond with 15 years to maturity is priced at $951. The bond pays coupon annually. The bond's yield to maturity is:

Greater than its current yield

Which of the following would be considered an example of systematic risk?

Greater unemployment rate than expected

Lisa is 58 years old and would like to retire at the age of 63 .... How long will her 401(k) last from the date of her retirement, if her assumptions are all correct?

Her fund will last forever and never run out of money

Given a set future value, which of the following will contribute to a lower present value?

Higher discount rate

If the beta of your portfolio is between 1.5 and 1.85, what does this imply about your portfolio's systemic risk relative to that of the market portfolio?

Higher than the systemic risk of the market portfolio

You invested 40% of your money in a fully diversified mutual fund, 50% in a stock called Macrohard, and the rest in Treasury Securities. After reviewing your investment portfolio, a financial advisor informs you that the portfolio has higher systemic risk than the market. Which of the following could be the beta of Macrohard

I and II

Which of the following statements about the present value of a lump sum of money received in n years is/are false, all else the same? I. Present values increase as the discount rate (r) increases. II. Present values increase as n increases. III. Present values are always smaller than future values when both r and n are positive

I and II only

Which of the following statements concerning risk are correct?

I and II only

Which of the following are examples of diversifiable risk? I. An earthquake damage and entire town II. The federal government imposes a $100 fee on all business entities III. Employment taxes increase nationally IV. All toymakers are required to improve their safety standards

I and IV only

Mr. Right just started investing and is not yet familiar with the concept of diversification. He is considering the following stocks to form a three-stock portfolio.

Intel, Apple, and Microsoft

Forming a well-diversified portfolio can reduce which of the following: I. Idiosyncratic risk II. market risk III. Liquidity risk IV Systematic risk V. Non-systematic risk

I and V

Which of the following calculations ignores the impact of the time value of money? I. Payback II. IRR III. Profitability index

I only

Investments are concerned with: I. Financial Asset Valuation II. Risk and Return III. Working Capital Management IV. Capital Budgeting

I, II

A chief financial officer is the top finance officer in a firm. Which function is CFO involved with?

I, II and III

If dividends on a common stock are expected to grow at a constant rate forever, and if you are told the most recent dividend paid, the dividend growth rate, and the appropriate discount rate today, you can calculate ______

I, II, and III

The expected return on a portfolio:

I, II, and III only

Why is the after-tax cost of debt normally lower than the after-tax cost of preferred stock?

Interest on debt is tax-deductible

Project A has lower internal rate of return than project B. Both project A and project B have positive NPV when the cost of capital is 10%. You are given the following cash flows for each project Which of the followings are possible cash flow in year 4 for project A?

II and III

You are considering forming a portfolio of the following six assets. Your goal is to create a portfolio with a beta of 1.0. Which of the following are possible options for you to achieve this goal?

II and III

A _____ can lose, in the extreme cash, her entire personal net worth

II and III only

Which of the following is/are false regarding the balance sheet and income statement? I. The income statement reflects a summary of activity that occurs over some period of time while the balance sheet is a snapshot taken at a single point in time. II. Both represent a summary of activity that occurs over some time period. III. The two statements, taken together, give an accurate estimate of the firms cash flows and market value

II and III only

Given the following: the risk-free rate is 8% and the market risk premium is 8.5%. Which projects should be accepted if the firm's beta is 1.2?

II only

The financial manager at Genesis Company is looking into the purchase ... What is the respective internal rate of return and net present value on this project?

IRR = 7.0% and NPV = -53,765

Consider a project with an initial investment and positive future cash flows. As the discount rate is decreased the ______.

IRR remains constant while NPV increases

Which of the following statements is NOT true?

If a stock has a required rate of return R = 12%, and its dividend grows at a constant rate of 5%, this implies that the stock's dividend yield is 5%

Which of the following statements is true?

If a stock's dividend is expected to grow at a constant rate, then the growth rate of its price is exactly the same as the growth rate of its dividends

Which of the following statements is most correct?

If an asset to be used by a potential project is already owned by the firm, and if that asset could be leased to another firm if the new project were not undertaken, then the net rent that could be obtained should be charged as a cost to the project under consideration.

Which is not a step in the estimation of after-tax cash flow at disposal?

If book value is less than selling price: selling price + tax credit on loss.

Which of the following statements regarding making investment decisions using net present value (NPV) and internal rate of return (IRR) is least accurate?

If projects are mutually exclusive, one should always choose the project with the highest IRR

Which of the following statements is incorrect (least correct)?

If the discount (or interest) rate is positive, the future value of an annuity due will always be less than the future value of an equivalent regular annuity, and the present value of an annuity due will always be less than the present value of an equivalent regular annuity

Which of the following statements is most correct? (Assume that the risk-free rate remains constant)

If the market risk premium increases by 1 percentage point, then the required return will increase by 1 percentage point for a stock that has a beta equal to 1.0

Which of the following regarding preferred stock is true?

If the required rate of return increases, the price decreases

You are helping your aging parents, who had taken out a fixed-interest rate mortgage loan many years ago. The most recent mortgage statement shows a remaining balance of $100,000 and a monthly payment of $1,760.16. Your parents told you that the annual interest rate on the mortgage loan is 6%. They would like to know when the mortgage loan will be completely paid off. Your answer is

In 67 months

The financial statement that displays how much profit a business earned or lost is referred to as the

Income statement

If a firm sells inventory for cash for a profit, then the current ratio will always:

Increase

Which of the following changes will result in an increase in cash flows?

Increase in accounts payable

You are trying to estimate the operating cash flow of a new project. You expect the revenues to increase by $10,000 while non-depreciation expenses to decrease by $2,000. Depreciation is expected to be constant at $2,250. Taxes are expected to increase from by 20% from last year's $1,000. Assume all the expected changes are the results of the new project. What is the operating cash flows of the new project?

Increase of $11,800 in OCF

The December 31, 2001, balance sheet of Venus's Tennis Shop, Inc., showed current assets of $1,200 and current liabilities of $720. The December 31, 2002, balance sheet showed current assets of $1,440 and current liabilities of $525. What was the company's 2002 change in net working capital, or NWC?

Increase of $435

A firm is considering an investment in a project whose risk is greater than the current risk of the firm, based on any method for assessing risk. In evaluating this asset, the decision maker should

Increase the cost of capital used to evaluate the project to reflect the project's higher risk

The future value of one dollar today in five years _____ as the interest rate increases

Increases

Which of the following actions are likely to reduce agency conflicts between stockholders and managers?

Increasing the threat of corporate takeover

A bond sold five weeks ago for $1,100. The bond is worth $1,150 in today's market. Assuming no changes in risk, which of the following is true?

Interest rates must be lower now than they were five weeks ago

In a net present value (NPV) profile, the internal rate of return is represented as the:

Intersection of the NPV profile with the horizontal axis

What would you recommend to an investor who is considering an investment that, according to its beta, plots above the security market line (SML)?

Invest; return is high relative to risk

The sale of obsolete equipment would be classified in the cash flow statement as:

Investing cash flow

What of the following two investments accumulates more interest in a year? Investment A: $100 compounded semiannually at an annual interest rate of 15%. Investment B: $100 compounded daily at an annual interest rate of 14.5%?

Investment B

Assume a $6,500 investment and the following cash flows for two alternatives If the decision rule is to accept the project with the shortest payback period, which of the following is true?

Investment X should be selected

Which of the following statements regarding investment in working capital is incorrect?

Investment in working capital, unlike investment in plant and equipment, represents a positive cash flow

Which one of the following is an example of systematic risk?

Investor panic causing security prices around the globe to fall precipitously

Analysts worldwide have revised their projections for Datron Corp. They just announced in a press release that they expect return on Datron shares is 8%, and Datron's required rate of return is 6%. This should result in:

Investors will buy Datron, pushing up its stock price until its expected return equals the 6% required return

Several years ago, you opened a checking account with a $3,000 initial deposit. Since then, you have not written any check, withdrawn any cash or used your debit card. You have not deposited more money into the account either. Indeed, you have forgotten about the account until recently. Upon inquiry, the bank informed you that the current balance of the checking account is $3,000. How many years has it been since you opened the account?

It cannot be determined because the interest rate on the account is zero

Which of the following statements about the internal rate of return (IRR) for a project with the following cash flow pattern is CORRECT?

It has two IRRs of approximately 38.2% and 261.8%

What happens to expected portfolio return if the portfolio beta increases from 1.0 to 1.5, the risk-free rate decreases from 5% to 4%, and the market risk premium increases from 8% to 9%?

It increases from 13 to 17.5%

Which of the following statements regarding dividend yields is true?

It is analogous to the current yield for a bond

Which of the following combinations MUST lead to a higher bond current yield?

Lower bond price and higher coupon rate

Kleen Corp owns equipment purchased a few years ago. Who is right--is this a sunk cost or something else? Select the best answer.

It is opportunity cost and should be charged to the start-up division

Your financial team has done a detailed analysis of a proposed 10-year project and reported that the project NPV is $456 at a discount rate of 10%. A later review by the marketing team suggests that the project requires an additional $2,000 of inventory at year 0, which will be maintained throughout the life the project but liquidated at the end of the project? How does the requirement for additional inventory impact the estimated project NPV?

It will decrease the NPV by $1,228.91

Consider a 10%, 10-year bond sold to yield 8%. One year passes and interest rates remained unchanged at 8%. What will have happened to the bond's price during this period? Assume the bond pays coupons semi-annually

It will have decreased

If profit margin increases by 7%, asset turnover decreases by 4%, and the equity multiplier increases by 9%, by how much, approximately, will the ROE change?

It will increase by 12%

When Tri-C Corp. compares its ratios to industry averages, it has a higher current ratio, an average quick ratio, and a low inventory turnover. What might you assume about Tri-C?

Its average inventory is too high

Which of the following is most directly affected by the level of systematic risk in a security?

Its expected rate of return

Which of the following statements is true for a project with $20,000 initial cost, cash inflows of $5,800 per year for 6 years, and a discount rate of 15%?

Its payback period is roughly 3 1/2 years.

What will happen to a stock that offers a lower risk premium than predicted by the CAPM?

Its price will decrease until the expected return is increased

Which of the following statements is false about junk bonds?

Junk bonds must be bad investment and should be avoided

If a firm suffers reduced profits to the point of moving into a lower tax bracket, one would expect the depreciation tax shield, all else the same, to become

Less valuable

Which of the following is not a characteristic of common stock?

Like bonds, common stocks always make regular and fixed payments in the form of dividends to the owners.

A firm that uses its WACC as a cutoff without consideration of project risk

Likely will see its WACC rise over time

Which of the following is not an advantage of a sole proprietorship?

Limited liability

The Dammon Corp. has the following investment opportunities: If the decision rule is to accept the project with the shortest payback period, which machine(s) would Dammon Corp choose?

Machine A

If Treasury bills are yielding 10% at a time when the market risk premium is 6%, then the:

Market portfolio should yield 16%

EV Pace Inc. is having a bad day at the market What effect do the news have on the firm's market-to-book ratio

Market-to-book value decreases by 10%

What should be the primary goal of financial management?

Maximizing shareholders' wealth

Financial information about PepsiCo, Coca-Cola and McDonald's is given in the following table.

McDonald's; PepsiCo; PepsiCo

Which of the following is a major credit rating agency in the US?

Moody's

Given an optimal capital structure that is 50% debt and 50% common stock, calculate the weighted average cost of capital for Stone Corp given the following additional information: Bond coupon rate....................8% Bond yield to maturity..............6% Dividend, expected.................$5 Price, common......................$80 Growth rate.........................5% Corporate tax rate..................30%

More than 7% and less than 8%

Edelman Engineering is considering including an overhead pulley system in this year's capital budget. The cash outlay for the pulley system is $22,430. The firm's cost of capital is 14%. After-tax cash flows are $7,500 for each of the next 5 years. Calculate the internal rate of return and the net present value for the project, and indicate the correct accept/reject decision.

NPV = $3,318; IRR = 20%; Accept

A company is considering the purchase of a copier that costs $5,000. Assume a cost of capital of 10 percent and the following cash flow schedule: Determine the project's NPV and IRR

NPV = $883 and IRR = 20.6%

Which of the following statement is false?

NPV and IRR are both similar and different. They are similar in that they are both additive and can be divided into component parts. They are different in that they always lead to differing accept/reject decisions for mutually exclusive projects

A new, more efficient machine will last 4 years and allow inventory levels to decrease by $100,000 during its life. At a cost of capital of 13%, how does the net working capital change affect the project's NPV?

NPV will increase

Which of the following statements is most correct?

One of the disadvantages of the sole proprietorship form of organization is that there is unlimited liability

Nan and Neal are twins. Both start to save for retirement at age 25. Nan invests $5,000 per year while Neal invests $4,000 per year. Suppose both can earn a compound annual interest rates of 7% on their investments. Their goal is to retire when their nest egg reaches $1,000,000. Which of the following statement is true? Who will have more by retirement?

Nan will have about $67,174 more than Neal by retirement

Which one of the following is an example of unsystematic risk?

National decrease in consumer spending on entertainment

Nan and Neal are twins. Both start to save for retirement at age 25. Nan invests $5,000 per year while Neal invests $4,000 per year. Suppose both can earn a compound annual interest rates of 7% on their investments. Their goal is to retire when their nest egg reaches $1,000,000. Which of the following statement is true?

Neal has to work 3 more years than Nan.

A company is launching a new service. The service is expected to reduce sales of two existing services the company offers. We would characterize the expected effect on other services as:

Negative side effect

As the director of capital budgeting for Denver Corporation, you are evaluating two mutually exclusive projects with the following net cash flows: Project X Project Z Year Cash Flow Cash Flow 0 -$100,000 -$100,000 1 50,000 10,000 2 40,000 30,000 3 30,000 40,000 4 10,000 60,000 If Denver's cost of capital is 15 percent, which project would you choose?

Neither project

Which of the following would indicate an accurate statement of cash flows?

Net cash flow is equal to the change in the cash balance in the balance sheet

Which of the following asset account items is generally considered the least liquid?

Net fixed assets

A firm is considering a project which would increase accounts receivable by $10,000, accounts payable by $55,000, and inventory by $30,000. Which of the following is true?

Net working capital has decreased

You are given the following information from the financial statements: What is the change in net working capital from year 2023 to 2024?

Net working capital increases by $1,000

From year 3 to year 4, Company International Inc. had the following changes on their financial statements: Revenues increased by $1,5000, interest expense decreased by $500, accounts receivables increased by $250, cash increased by $2,000, retained earnings decreased by $750, notes payable increased by $500, accounts payable decreased by $1,000, and value of its patents increased by $2,000. What is the change in net working capital from year 3 to year 4

Net working capital increases by $2,750

When estimating cash flows, should you include interest expense on money expected to be borrowed to finance the investment?

No because it is a financing cost

A firm has dividends forecast to be $3.00 and $3.20 at the end of the next two years. Analysts also project its stock price in 2 years to be $55. If comparable risk companies have a required investor return estimated at 12%, and the stock is currently selling for $53, should an investor buy this stock?

No, the current price of $53 is too high

A cash-strapped young professional offers to buy your car with four, equal annual payments of $3,000, beginning 2 years from today. Assuming you're indifferent to cash versus credit, that you can invest at 10%, and that you want to receive $9,000 for the car, should you accept?

No; present value is $9,510

What is the expected return on the market portfolio at a time when Treasury bills yield 6% and a stock with a beta of 1.4 is expected to yield 18%?

None

Which one of the following statements is correct concerning a portfolio beta?

None

What is the future value of the following set of cash flows 4 years from now? Assume an interest rate of 6.5% and you receive the cash flow at the end of the year. Year Cash flow 0 -700 1 300 2 600 3 400 4 500

None of the above

Stocks A and B have the same required rate of return and the same expected year-end dividend. Stock A's dividend is expected to grow at a constant rate of 10 percent per year, while Stock B's dividend is expected to grow at a constant rate of 5 percent per year. Which of the following statements is most correct?

None of the statements above is correct

A firm is considering a $5,000 project that will generate an annual cash flow of $1,000 for the next 8 years. The firm has the following financial data: Determine the project's net present value (NPV) and whether or not to accept it

None of these are correct

A project will generate $1 million net cash flow annually in perpetuity. If the project costs $7 million, what is the lowest WACC shown below that will make the NPV negative?

None of these are correct

An investment earned the following returns 1998 through 2001: 30%, 40%, 15%, and 7%. What is the variance of returns for this investment?

None of these are correct

Given no change in required returns, preferred stock prices will:

None of these are correct

Stock A has a beta of 0.8 and Stock B has a beta of 1.2. 50 percent of Portfolio P is invested in Stock A and 50 percent is invested in Stock B. If the market risk premium were to increase but the risk-free rate remained constant, which of the following would occur?

None of these are correct

Which one of the following statements is correct concerning unsystematic risk?

None of these are correct

Your company is considering investing in a new system that will cost $160,000 What is the depreciation expense in year 2?

None of these are correct

Your company just started a new project, and you would like to analyze different scenarios associated with this project. The 4-year project has an initial investment of $1 million in equipment which will be depreciated based on the MACRS 5-year schedule. The plan is to sell the equipment at the end of the fourth year to receive an after-tax salvage value of $400,000. What must be the market value of the equipment at the end of year 4? Assume a tax rate of 30%?

None of these are correct

Your firm has a total book value of equity of $300,000, a market to book ratio of 3, and a book value per share of $8.00. What is the total market value of the firm's equity?

None of these are correct

___________ involve(s) a cash flow that never occurs, but we need to add it as a cost or outflow of a new project

Opportunity costs

The question "What is the current value of an amount of cash that will be received at a specific time in the future?" is best answered by which form of the TVM equation?

PV = FV/(1+r)^n

Assume a firm's current ratio equals 3.5. Which of the following actions would increase it?

Paying off a short-term bank loan with the proceeds from new long-term debt

Of the following, which is NOT one of the three main areas of finance?

Personal financial planning

Which of the following would not be classified as a current asset?

Plant property and equipment

Which one of the following statements related to risk is correct?

Portfolio beta can be effectively lowered by adding T-bills to the portfolio

Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which of the following?

Portfolio weight of Wise Man Foods

Davis is considering adding a new product line to his business portfolio. Currently, he has two product lines. Which of the following cash flows should not be taken into consideration in year 0 when he is making the decision of whether to add a new product line?

Potential cannibalization of sales of existing product lines

In agency theory, the owners of the business are _____ and the managers are ______

Principals, agents

Which of the following could be calculated with only the use of an income statement?

Profit margin

Which of the following would be considered an advantage of the sole proprietorship form of organization?

Profits taxed at only one level

Quark industries has four potential projects determine which project Quark should accept

Project 2

Which of the following projects have multiple internal rates of return?

Project 4 only

Which mutually exclusive project would you select, if both are priced at $1,000 and your required return is 15%: Project A with three annual cash flows of $1,000; or Project B, with 3 years of zero cash flow followed by 3 years of $1,500 annually?

Project A

Allied, Inc. is considering Project A and Project B, which are two mutually exclusive. Project A is an eight- year project that has an initial outlay or cost of $180,000, its future cash inflows for years 1 through 8 are $38,000. Project B is also an 8 year project that has an initial outlay or cost of $160,000 . Its future cash inflows for years 1 through 8 are the same at $34,500. The appropriate discount rate for both project is 7.5%. Which project should Allied accept?

Project A because it has a higher NPV

Project A requires an initial investment of $80,000 and generates a cash flow of $10,000 in year 1. The cash flow is expected to grow by $5,000 per year for the next 5 years. Project B requires an initial investment of $50,000 and year 1 cash flow is forecasted to be $20,000. Management expects project B's cash flow to grow by 20% annually for the next 2 years. Assume that the cost of capital is 10%. Which project is more attractive?

Project A because it has a higher NPV

Apple industries, a firm with unlimited funds, is evaluating five projects. Projects A and B are independent and Project C, D, and E are mutually exclusive. The projects are listed with their rate of return and NPV. Assume that the applicable discount rate is 10%. Which projects should the firm select?

Project A, Project B, and Project C

The financial manager at Johnson & Smith estimates that its required rate of return is 11%. Which of the following independent projects should Johnson & Smith accept?

Project C

The financial manager at IBFM, a farm implement distributor, is contemplating the following three mutually exclusive projects. IBFM's required rate of return is 9.5%. Based on the information provided, which should the financial manager select and why?

Project C with the highest net present value

A firm is evaluating two mutually exclusive projects of the same risk class, Project X and Project Y. Both have the same initial cash outlay and both have positive NPVs. Which of the following is a sufficient reason to choose Project X over Project Y?

Project Y has a lower profitability index than Project X

Project selection ambiguity can arise if one relies on IRR instead of NPV when:

Project cash flows are not convention

Takelmer Industries has a different WACC for each of three types of projects. Low-risk projects have an 8% WACC, average-risk projects a 10% WACC, and high-risk projects a 12% WACC. Which of the following projects do you recommend that the firm accept?

Projects A, D, E, F, and G

If the total assets of a firm increase while all other components of ROE remain unchanged, you would expect the firm's

ROE to remain unchaged

A bond with 10 years until maturity, an 8% coupon, and an 8% yield to maturity increased in price to $1,107.83 yesterday. What apparently happened to interest rates?

Rates decreased by about 1.5%

Two investments, C and D are being evaluated. They are mutually exclusive. Investment C has a higher NPV using any discount rate between zero and 9%, which D has a higher NPV using any discount rate between 9.1% and 15%. Which investment do you recommend the company undertake? The initial investment of both opportunities is the same. Which of the following is the BEST answer?

Recommend C if the required return is between 0% and 9%

The major benefit of diversification is to:

Reduce the expected risk

Which one of the following is least effective in reducing the unsystematic risk of a portfolio?

Reducing the number of stocks held in a portfolio

Hanson Aluminum, Inc. is considering whether to build a mill based around a new rolling technology the company has been developing. Management views this project as being riskier than the average project the company undertakes

Reject, because the project reduces the value of the company when its risk is taken into account

Datem Corp. has an expected return of 11%. With a risk-free rate of 3%, a market risk premium of 7% and a beta of 0.8, you can estimate its required return. What is the required return, and would Datem plot above or below the security market line (SML)?

Required return = 8.6%, plots above the SML

New projects or products can have a side effect on the firm as well as a direct effect. Which of the following appears to be a side effect of launching a new product?

Sales of a similar product of your firm's will decline

Company XYZ is evaluating a project and here is some information for the project. The unit sales price is projected to be $40 and sales volume to be 1,000 units in year 1, 1,250 units in year 2, and 1,325 units in year 3. The project has a 3 year life. Variable costs amount to $22.5 per unit and fixed costs are $10,000 per year. The project requires an initial investment of $16,500, which is depreciated straight-line to zero over the 3 year project life. The actual market value of the initial investment at the end of year 3 is $3,500. Initial net working capital investment of $7,500 and NWC will maintain a level equal to 20% of sales each year thereafter. The tax rate is 34% and the required return on the project is 10%. What is the effect of the $3,500 salvage value on year 2 cash flows?

Salvage value does not affect incremental cash flow until year 3

Which of the following statements about depreciation is false?

Since depreciation is a non-cash expense, the firm does not need to know the rate of depreciation when calculating operating cash flows

How many of the following balance sheet items are classified as current assets or current liabilities? -Retained earnings -Account payables -Plant and equipment -Inventory -Common stock -Short-term notes (maturity <1 year) payable -Wages payable -Accounts receivable -Preferred stock -Marketable securities

Six of these items

The balance sheet is most likely to provide an analyst with information about a firm's:

Solvency

Ashlyn Lutz makes the following statements to her supervisor, Paul Ulring, regarding the basic principles of capital budgeting: Statement 1: The timing of expected cash flows is crucial for determining the profitability of a capital budgeting project. Statement 2: Capital budgeting decisions should be based on the after-tax net income produced by the capital project. Which of the following regarding Lutz's statements is most accurate?

Statement 1 is correct and statement 2 is incorrect

At a recent Haggerty Semiconductors Board of Directors meeting, Merle Haggerty was asked to discuss the topic of the company's weighted average cost of capital (WACC). At the meeting Haggerty made the following statements about the company's WACC: Statement 1: A company creates value by producing a higher return on its assets than the cost of financing those assets. As such, the WACC is the cost of financing a firm's assets and can be viewed as the firm's opportunity cost of financing its assets Statement 2: since a firm's WACC reflects the average risk of the projects that make up the firm, it is not appropriate for evaluating all new projects. It should be adjusted upwards for projects with greater-than-average risk and downward for projects with less-than-average risk Are Statement 1 and Statement 2, as made by Haggerty CORRECT

Statement 1: correct; statement 2: correct

Last year Thatcher Industries had a current ratio of 1.2 a quick ratio of 0.8, and current liabilities of $500,000. Which of the following statements is most correct?

Statements A and B are correct

Which of the following risks would be classified as non-systematic risk for an auto manufacturer?

Steel prices

You are given the following information: Which stock has higher total risk?

Stock A because its return standard deviation is higher

Which of the following statements is more likely to be correct concerning the statement, "Stock A has a higher expected return than stock B"?

Stock A has a higher beta

Stock A has a beta coefficient of 0.9, and stock B has a beta coefficient of 1.2. Which of the following statements is false regarding these two stocks?

Stock A necessarily must have a lower standard deviation of returns than stock B.

Holding everything else equal, which one of the following should earn the highest risk premium based on CAPM?

Stock with a beta of 1.38

Stocks are different from bonds because

Stocks, unlike bonds, represent ownership

Which of the following statement is FALSE?

Systematic risk can be almost eliminated in a well-diversified portfolio

Your company just invested $7,500 into a new project, which is expected to generate $2,000 in cash flows in the first year. The cash flow will grow at a rate of 2% per year for the next 4 years. What is the internal rate of return? If the company's cost of capital was 11%, should the project be accepted?

The IRR is 11.84%. Accept because the IRR is higher than the cost of capital

Flynn, Inc. is considering a four-year project that has an initial after-tax outlay or after-tax cost of $80,000. The future after-tax cash inflows from its project for years one, two, three, and four are $40,000, $40,000, $30,000, and $30,000, respectively. Flynn uses the internal rate of return method to evaluate projects. What is the approximate IRR for this project?

The IRR is about 28.89%

Which is greater, the present value of a $1,000 five-year ordinary annuity discounted at 10%, or the present value of a $1,000 five-year annuity due discounted at 10%?

The PV of annuity due is worth $379.08 more

-Assume that the Security Market Line (SML) is based on a risk=free rate of 5% and a market return of 11%. What will happen to the SML if the risk-free rate is expected to increase and investors become more risk averse?

The SML will shift up and have a steeper slope

Which of the following is true regarding the WACC?

The WACC is the required return on any investment a firm makes that has a level of risk equal to that of present operations

The common stock of Alpha Manufacturers has a beta of 1.24 and an actual expected return of 13.25 percent. The risk-free rate of return is 3.7 percent and the market rate of return is 11.78 percent. Which one of the following statements is true given this information?

The actual expected stock return indicates the stock is currently overpriced

The current yield on a bond is equal to:

The annual coupon payment divided by the current market price.

The rate of return required by investors in the market for owning a bond is called the:

Yield to maturity

Which of the following is not a characteristic of a zero-coupon bond? (assuming bond yield to maturity is positive)

The bond's price does not change during the life of the bond

Which of the following statements is correct for a 10% coupon bond that has a current yield of 7%?

The bond's yield to maturity is less than 10%

You want to start saving for future and your goal is to have as much money as possible at the end of the 8th year. You have two options. One bank offers the option for you to invest $900 annually over the next 8 years at the end of each year. At the other bank, you can invest $1,100 annually at the end of each year but for only 6 years. You do not need to invest additional money after year 6, but the account balance will keep on earning interest for the next two years. Both banks offer an annual interest rate of 11%. Which option will result in a larger balance at the end of year 8?

The balance of option 2 is about $51 higher

Last year, your firm had positive net cash flow from operation, yet cash on the balance sheet decreased. Which of the following could explain the firm's financial performance?

The company purchased a lot of new fixed assets

St. John's Paper is considering purchasing equipment today that has a depreciable cost of $1 million. The equipment will be depreciated on a MACRS 5-year basis, which implies the following depreciation schedule: Assume that the company sells the equipment after three years for $400,000 and the company's tax rate is 40 percent. What would be the tax consequences resulting from the sale of the equipment?

The company would have to pay $44,000 in taxes

Double taxation refers to which of the following scenarios?

The corporation pays taxes on its earnings, and shareholders pay taxes on dividend received

Your colleague has just resigned and left you the following information about a one-year investment project. Your boss would like to know what cost of capital your colleague has used in the project evaluation. Your answer to your boss is:

The cost of capital is 15%

In calculating the weighted average cost of capital (WACC), which of the following statements is least accurate?

The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt

Which of the following is false regarding the estimation of a firm's cost of equity capital?

The cost of equity is equal to the weighted average cost of capital

A bond sold five weeks ago for $1,100. The bond is worth $1,150 in today's market. Assuming no changes in risk, which of the following is false?

The coupon payment of the bond must have decreased

A firm has two bonds outstanding. Bond A has 7 years to maturity and a current market price of $923. Bond B has 9 years to maturity and is selling at $1040. The yields to maturity of the two bonds are the same. Both bonds make semi-annual coupon payments. Which bond must have a higher coupon rate and why?

The coupon rate for B must be higher because it is a premium bond while A is a discount bond

What happens to the coupon rate of a bond that pays $80 annually in interest if yield to maturity changes from 9% to 10%

The coupon rate remains at 8%

Which of the following statements about the discounted payback period is least accurate?

The discounted payback period is generally shorter than the regular payback

Which of the statements below is false?

The discounted payback period method is the time it takes to recover the initial investment in future dollars.

Which of the following statements about the "discounted payback period method" is true?

The discounted payback period method uses discounted cash-flow techniques

Emma would like to estimate the dividend growth rate of the company that she is working for. .... What is she most likely going to find out?

The dividend growth rate is 0.64% and it will be higher if the stock price is 10% higher

Which of the following describes a stock that plots above the security market line?

The expected return of the stock is too high

What will happen to the expected return on a stock with a beta of 1.5 and a market risk premium of 9% if the Treasury bill yield increases from 3 to 5%

The expected return will increase by 2.0%

How would you interpret an inventory turnover ratio of 10.7?

The firm has sufficient inventories to maintain sales for 34.1 days

Which of the following CANNOT be calculated?

The future value of a perpetuity

A two-year investment of $3500 is made today at an annual interest rate of 5.75%. Which of the following statements is true?

The future value would be greater if the interest rate was higher

Which of the statements below is true?

The graphic plot of project NPV against discount rate is called the NPV profile

What is the typical relationship between the return standard deviation of an individual common stock and the return standard deviation of a diversified portfolio of common stocks?

The individual stock's return standard deviation is higher

If the cost of capital is 10% and the profitability index is 1.5, what must be the initial investment of a project that has annual cash inflows of $10,000 for two years?

The initial investment is $6,942.15

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 $8.00 and the interest earned in year two is $8.64

Which of the following statements about independent projects is least accurate?

The internal rate of return and net present value methods can yield different accept/reject decisions for independent projects

Which of the following statements regarding bond pricing is true?

The lower the yield to maturity, the more valuable the bond is

Firm ABC has a bond outstanding with a market price of $918.89 and a yield to maturity of 8%. Bond coupons are paid semi-annually, and the annual coupon rate is 6%. Due to the changing need of financing, the firm renegotiated the bond term with bond investors, and the two parties agreed to change the maturity date of the bond. After the news announcement, the price of the bond increased to $932.67. Assume the yield to maturity and coupon rate on the bond remain unchanged. Which of the following must be true?

The maturity of the bond decreased by 1 year

Which of the following statement about the payback period is NOT correct?

The payback method considers all cash flows throughout the entire life of a project if the cutoff year is shorter than the project life

Which of the following statements about the "payback period method" is true?

The payback period method does not consider the time value money

If the market portfolio is expected to offer returns of 16%, then what can be said about a portfolio expected to return 13%?

The portfolio's beta is less than 1.

What happens when a bond's expected cash flows are discounted at a rate lower than the bond's coupon rate?

The price of the bond is higher than the par value

Assume that a newly introduced project at Top Technology Inc. required an initial investment of $10 million in equipment, which will be depreciated over 10 years. At the end of year 8, management made the decision to sell the equipment for $4 million. What must be the after-tax salvage value of this equipment at the end of year 8?

The problem cannot be solved because the tax rate is not given

Which of the following is not a capital budgeting question?

The proper mix of stocks and bonds to hold for financing assets

Which of the following is false regarding risk and return?

The reward for bearing risk is known as the standard deviation

Which of the following statement about equity beta is true?

The slope of the security market line measures a security's beta (non-diversifiable risk) and beta can change whenever there is a change in investors' expectations of inflation and/or their degree of risk aversion

The standard deviation for historical stock returns can be calculated as:

The square root of the variance

Your firm disposes of an asset which is worthless in the open market, but still has remaining un-depreciated book value. The tax benefit to the firm from the write-off of this asset is equal to:

The tax rate multiplied by the remaining book value.

Investors consider which of the following to be the most important measures of bond returns?

The yield to maturity

A discount bond has a coupon rate of 8%. What must have happened to the yield of maturity if the price suddenly changes to par value and everything else remains unchanged?

The yield to maturity must have decreased

You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. The project has a 3-year life. You estimate the revenue for the next three years are as follows: $400,000 in year 1, $500,000 in year 2, and $530,000 in year 3. The cash expenses are expected to be $325,000 in year 1, $381,250 in year 2, and $398,125 in year 3. The project requires an initial investment of $165,000, which is depreciated straight-line to zero over the 3-year project life. The actual market value of the initial investment at the end of year 3 is $35,000. Initial net working capital investment is $75,000 (at year 0) and NWC will maintain a level equal to 20% of sales each year thereafter. The tax rate is 34% and the required return on the project is 10%. Given the $75,000 initial investment in NWC, what changes occurs for NWC during year 1?

There is a $5,000 increase in NWC

Company XYZ is evaluating a project and here is some information for the project. The unit sales price is projected to be $40 and sales volume to be 1,000 units in year 1, 1,250 units in year 2, and 1,325 units in year 3. The project has a 3 year life. Variable costs amount to $22.5 per unit and fixed costs are $10,000 per year. The project requires an initial investment of $16,500, which is depreciated straight-line to zero over the 3 year project life. The actual market value of the initial investment at the end of year 3 is $3,500. Initial net working capital investment of $7,500 and NWC will maintain a level equal to 20% of sales each year thereafter. The tax rate is 34% and the required return on the project is 10%. Given the $7,500 initial investment in NWC, what change occurs for NWC during year 1?

There is a $500 increase in NWC

What must be the profitability index of a project that has an initial investment of $60,000, annual cash inflows of $20,000 for 4 years, and an IRR of 12.6%?

There is not enough information to solve the problem

Before leaving the company, your colleague has completed a capital budgeting analysis of a newly proposed project and provided you with the following information. For some reason, the expected cash flow in year 3 is missing. -Three-year project -Profitability Index is 1.2 -Initial Investment is $50,000 -Cash Flow in year 1 is $20,000 -Cash Flow in Year 2 is $25,000 -Cash Flow in Year 3 is unknown

There is not enough information to solve the problem.

Which of the following statements about yield to maturity and bond price is true?

They move in the opposite direction.

Under which of the following conditions will a future value calculated with simple interest exceed a future value calculated with compound interest at the same rate?

This is not possible with positive interest rates

By the time Tom retires, the balance in his 401K plan is $1.5 million

Tom could expect to receive about 36% more than the annuity payment

On a common-size balance sheet, which line item must have a value of 100%?

Total assets

A news flash just appeared that caused about a dozen stocks to suddenly increase in value by 12 percent but did not affect the prices of other stocks. What type of risk does this news flash best represent?

Unsystematic

The type of risk that we can diversify away is _____

Unsystematic risk

Levenworth Industries has the following capital structure on December 31, 2006:

Weight on debt: 0.41; Weight on preferred stock: 0.06

Deighton Industries has 200,000 bonds outstanding. The par value of each corporate bond is $1,000, and the current market price of the bonds is $965. Deighton also has 6 million common shares outstanding, with a market price of $28 per share. At a recent board of directors meeting, Deighton board members decided not to change the company's capital structure in a material way for the future. To calculate the weighted average cost of Deighton's capital, what weights should be assigned to debt and to equity?

Weight on debt: 53.46%; weight on equity: 46.54%

Select the statement that is most correct

When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are tax deductible

If XYZ's account receivable turnover ratio is 4, what does that mean?

XYZ is able to collect its receivables every 91.25 days, or 4 times a year

Two bonds, both with face value of $1,000, are being evaluated. Bond Y is currently trading for $980, and Bond Z is trading for $1,250. What must be true of these bond investments?

Y is trading at a discount and Z is trading at a premium

A home buyer is considering a 20-year, 8% mortgage loan of $72,500. The loan agent is offering an alternative. The buyer can pay $2,500 today to lower the loan interest rate to 7.5%. The mortgage loan requires annual payments. Should the buyer pay $2,500 to lower the loan interest rate?

Yes

An investment has expected cash flows of -$200, $100, $220, $90, and $45 at the end of years 0 through 4, respectively. The required return is 8.5%. Estimate the investment's profitability index, and is this expected to create shareholders value?

Yes because PI equals 0.91

Simpson, Inc. is considering a five-year project that has an initial after-tax outlay or after-tax cost of $48,000. The respective future cash inflows from its project for years 1, 2,3 4, and 5 are: $15,000, $25,000, $35,000, $45,000, and -$70,000. The appropriate discount rate for this project is 9%. Should Simpson accept the project?

Yes because the NPV is positive

Tapley Acquisition, Inc., is considering the purchase of Tangent Company. The acquisition would require an initial investment of $190,000, but Tapley's after-tax net cash flows would increase by $30,000 per year and remain at this new level forever. Assume a cost of capital of 15%. Should Tapley buy Tangent?

Yes, because the NPV = $10,000

Your neighbor owns a perpetuity of $100 per year that has a discount rate of 6% per year. He offers to sell to you all but the next 20 cash flows (the first to be received one year from today) for $500. In other words, he keeps the first 20 cash flows of his perpetuity and you get all of the rest. Is this a good price for you if the appropriate discount rate is 6%?

Yes, because the present value of the remaining cash flows is $519.68 and you are buying them for only $500

Brenden is evaluating a project with the following cash flows. The cost of capital is 8.5%. Should he accept the project?

Yes, because the project NPV is positive

Consider a 6-year $1,000 par bond priced at $1,011. The coupon rate is 7.5% paid semiannually. Six-year bonds with comparable credit quality have a yield to maturity of 6%. Should an investor purchase this bond?

Yes, the bond is undervalued by about $64

The last annual dividend of Comptron Inc. was of $4. Its stock beta is 1.1 and its dividend is expected grow at a constant annual rate of 2%. The risk-free rate and market premium are 2.5% and 6%, respectively. The new CEO wants to launch new initiatives for growth. In discussing the plans with the CFO, the new initiatives boil down to an increased growth rate of dividend to 5%, but at the cost of increasing beta to 1.4. Should the initiatives be undertaken?

Yes--new stock price should move to $71,19, an increase over its current price.

You and your best friend are both 20 years old and recently graduated from NIU to start well-paid jobs in Chicago. Who will have more money at retirement and by how much?

You will have $1,198,812.45 more than your friend

You want to use a building your company owns to develop a new investment opportunity. You have checked with property management in your company, and have consulted a few commercial brokers. The indication is that there is no demand from outsiders at this time to rend the building since the market is currently in a situation of excess capacity for building space. What best describes how this should be treated in your preparation relevant cash flows for your new investment?

Your project should not be charged for using the space since there is no ready market to rent it out. It is a sunk cost.

An all-equity firm is considering the following projects?

Z

The coupon rate of a bond equals:

a percentage of its face value

A stream of equal cash payments lasting forever is termed:

a perpetuity

An annuity may best be defined as

a series of consecutive payments of equal amounts

A bond that has a "yield to maturity" greater than its coupon interest will sell for a price

below par

The systematic risk of the market is measured by a:

beta of 1

A year ago a company issued a bond with a face value of $1,000 with an 8% coupon. Now the prevailing market yield is 10%. What happens to the bond? The:

bond is traded at a market price of less than $1,000

Unsystematic risk:

can be effectively eliminated by portfolio diversification

The cost of debt capital for a firm

can be estimated even if the firm's bonds are not publicly traded, by looking at the yield to maturity on bonds outstanding from peer groups firms with similar ratings and maturity.

The return standard deviation of a portfolio:

can be less than the return standard deviation of the least risky security in the portfolio

When managers' compensation plans are tied in a meaningful manner to the profits of the firm, agency problems:

can be reduced

Which of the following statements is correct for a firm in which depreciation expense exceeds EBIT? The firm:

can still have a positive net income

A stock has been held for one year, during which time its dividend yield was greater than its capital gains yield. For this stock, the percentage return:

cannot be determined

The process of planning, evaluating, selecting, and managing the financing of long-term operating projects of the company is termed _____

capital budgeting

The most rigorous test of a firm's ability to pay its short-term obligations is its

cash ratio

Skippy had been offered two alternative payment options to pay for his new speed boat. Alternative 1 involves an initial payment of $3,000 and monthly payments of $250 for 3 years. Alternative 2 involves $0 initial payment but monthly payment of $500 for 2 years. For both alternatives, the first monthly occur at the end of month 1. Assume the discount rate is 9%, compounded monthly. In today's dollars, alternative 1 is:

cheaper by about $83

You are attempting to value a stock in a mature industry that is steadily shrinking in size. Of the stock valuation models studied, the most appropriate is the ____

constant growth model

An increasing percentage of ownership of public corporations by large investors is expected to

create more pressure on public companies to manage their firms more efficiently

An item, which is expected to be converted to cash within one year, is generally classified as a

current asset

The annual dollar interest received divided by the market price of the bond is called the

current yield

Julius, Inc., is in a 40% marginal tax bracket. The firm can raise as much capital as needed in the bond market at a cost of 10% yield to maturity. The preferred stock has a fixed dividend of $4.00. The price of preferred stock is $31.50. The after-tax costs of debt and preferred stock are closest to:

debt: 6.0%; preferred stock: 12.7%

One of the basic principles of capital budgeting is that:

decisions are based on cash flows, not accounting income

Holding all else equal, if the beta of a stock increases, the stock's price will:

decrease

Suppose that the Federal Reserve takes action that cause the risk-free rate to fall. All else the same (that is, the market risk premium and stock beta remain unchanged), we would expect a firm's cost of equity to

decrease if we are using the SML

An increase of $100,000 in inventory would result in a(n)

decrease of net cash flow

If a company's stock price (P0) goes up, and nothing else changes, Ke (the required rate of return) should

gone down

The net present value profile

graphically portrays the relationship between the discount rate and the net present value

If the calculated net present value (NPV) is negative, which of the following must be CORRECT. The discount rate used is:

greater than the internal rate of return

A project whose NPV equals zero ____

has a discounted payback period that exactly matches the life of the project

A firm with negative net working capital

has more current liabilities than current assets

The standard deviations of individual stocks are generally higher than the standard deviation of the market portfolio because individual stocks:

have more diversifiable risk

The ___ the beta coefficient the ____ the expected return, on average

higher; higher

Sunk costs are ____ in estimating an investment's cash flow, since sunk costs are ____

ignored, not recoverable

The modified accelerated cost recovery system (MACRS) allows an increase:

in annual depreciation during earlier years

Addition to retained earnings results from:

income not paid to shareholders

For a given level of profitability as measured by profit margin, the firm's return on equity will

increase as its debt ratio increases

The overall goal of capital budgeting projects should be to:

increase the wealth of the firm's shareholders

The building of the project's _____ cash flow is the cornerstone of the financial decision models

incremental

Your goal is to have $1 million in your retirement savings on the day you retire. To fund this goal, you will make one lump sum deposit today. If you plan to retire _____ rather than _____ and earn a _____ rate of interest, then you can deposit a smaller lump sum today.

later; sooner; higher

The key to efficient diversification is to build a portfolio of securities that are:

less than perfectly correlated with one another

Dividends that are expected to be paid far into the future have:

lesser impact on current stock price due to discounting

The slope of an asset's security market line is the

market risk premium

The expected rate of return on a stock portfolio is a weighted average of expected returns of each stock in the portfolio, where the weights are based on the:

market value of the investment in each stock

The primary purpose of portfolio diversification is to:

minimize idiosyncratic risk

The constant-growth dividend discount model would typically be most appropriate in valuing a stock of a:

moderate growth, "mature" company

If a project has some negative cash flow during its life or at the end of its life, the project most likely has:

more than one internal rate of return

Landen, Inc. uses several methods to evaluate capital projects. An appropriate decision rule for Landen would be to invest in a project if it has a positive:

net present value

The ___ model is usually considered the best of the capital budgeting decision-making models.

net present value (NPV)

Which of the following is not accurate in depicting cash flows from operations?

net profit + depreciation + tax paid

An NPV of zero implies that an investment _____

none of the above

Net income is ___

not cash flow

Assuming a tax rate of 21%, depreciation expenses of $500,000 will

reduce taxes by $105,000

Assets whose returns are negatively correlated

reduce the return standard deviation of the portfolio

Assume a firm uses a constant WACC to select investment projects rather than adjusting the projects for risk. If so, the firm will tend to:

reject profitable, low-risk projects and accept unprofitable, high-risk projects

Asset management ratios

relate balance sheet assets to income statement sales

What must happen to asset turnover to leave ROE unchanged from its original 16% level if the profit margin is reduced from 8% to 6% and the equity multiplier increases from 1.2 to 1.6? Asset turnover must:

remain constant

All items on a common-size income statement are shown as a percentage of _____.

sales

New York Stock exchange and NASDAQ are examples of

secondary markets

Over the past 75 years, which of following investments has provided the largest average return?

small company stocks

A bond's indenture least likely specifies the

source of funds for repayment

The principle of diversification tells us that

spreading an investment across many diverse assets will eliminate some of the total risk

Corporations are referred to as public companies when their:

stock is publicly traded

The CFO of Axis Manufacturing is evaluating the introduction of a new product. The costs of a recently completed marketing study for the new product and the possible increase in the sales of a related product made by Axis are best described (respectively) as:

sunk cost; positive side effect

A chief financial officer would typically:

supervise both the treasurer and controller.

The relevant risk for the fair market pricing of financial securities is the _______________.

systematic risk

The accelerated depreciation of capital investments in MACRS depreciation provides a taxable expense that reduces taxes at a faster rate than with straight-line depreciation. Therefore, according to _____ concepts, we can surmise that lower tax expenses in the earlier years and higher tax expenses in the later years are better than a steady tax expense each year.

tame-value of money

A quick ratio that is much smaller than the current ratio indicates

that a large portion of current assets is in inventory

An increasing days' sales in accounts receivables indicates that

the company is becoming less efficient in collecting its account receivables

Agency theory would imply that conflicts are more likely to occur between management and shareholders when

the compensation of the chief executive officer mainly consists of fixed annual salary

An indenture is

the contract between the bond issuing corporation and bondholders

A call provision allows

the corporation to redeem the bond before the maturity date.

As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means that

the default risk decreases and the required rate of return decreases

The value of common stock will likely decrease if:

the discount rate increases

To convert a balance sheet into a common-size balance sheet statement, we restate all the numbers as percentages of _______.

total assets

You wish to know how well a company is managing its accounts receivables and inventory. Which of the following ratios should you examine?

turnover ratios

A company's stock plots above the security market line. This means the company is:

undervalued and expected return is higher than the required return

Prices of existing bonds move ___ as yields to maturity move ___

up; down

Suppose that interest rates increase. This does NOT change the capital budgeting choices a firm would make if it

uses the payback period analysis

The value of a common stock is based on its

value of future benefits to the holder

The variance of an investment's return is a measure of the:

volatility of the rates of return

All else the same, a higher corporate tax rate

will decrease the WACC of a firm with some debt in its capital structure

The true measure of the return on a bond is its

yield to maturity

A bond that makes no coupon payments and is initially priced at a deep discount is called a _____ bond.

zero coupon