Finance

Balance Sheet 2015 2016 Shareholders equity 1000 1380 Total liabilities and Stockholders equity 1300 ______ Current Assets 500 ______ Total Assets ______ 1730 Fixed Assets ______ 1080 Current Liabilities 190 ______ Long term debt 110 220 Income Statement 2016 Sales (Revenue) 1500 Interest 200 Depreciation 450 Taxes (0.40) ______ COGS 550 Other expense 0 EBIT ______ EBT ______ Net Income (NI) 180 #1. Which of the following correctly filled out the missing information from above financial statements? #2. What is the Cash flow from assets using the above information? Answers: #1. Fixed assets of year 2015 = $750 #1. Taxes of year 2016 = 150 #1. EBIT of year 2016 = 600 #1. Current liabilities of year 2016 = 130 #2. CF from assets = 110 #2. CF from assets = -110 #2. CF from assets = 450 #2. CF from assets = -450

#1. Current liabilities of year 2016 = 130 #2. CF from assets = -110 CFA = OCF - NCS - CHANGE IN NWC OCF = EBIT - TAX + DEP = 500 - 120 + 450 = 830 NCS = CHANGE IN FA + DEP = (1080 - 800) + 450 = 730 CHG IN NWC = (650 - 130) - (500 - 190) = 210 HENCE CFA = 830 - 730 -210 = -110

Kaylor Equipment Rental paid $75 in dividends and $511 in interest expense. The addition to retained earnings is $418 and net new equity is $500. The tax rate is 35 percent. Sales are $15,900 and depreciation is $680. What are the earnings before interest and taxes? Multiple Choice $589.46 $1,269.46 $1,331.54 $1,951.54 $1,949.46

$1,269.46

COGS $4878 Interest 238 Dividends 420 Depreciation 789 Change in Retained Earnings 631 Tax Rate 34% What is the operating cash flow for 2011? Multiple Choice $2,078.00 $2,122.42 $2,462.58 $2,662.00 $2,741.42

$2,078.00

The Lakeside Inn had operating cash flow of $48,450. Depreciation was $6,700 and interest paid was $2,480. A net total of $2,620 was paid on long-term debt. The firm spent $24,000 on fixed assets and decreased net working capital by $1,330. What is the amount of the cash flow to stockholders? Multiple Choice $5,100 $7,830 $18,020 $19,998 $20,680

$20,680

Crandall Oil has total sales of $1,349,800 and costs of $903,500. Depreciation is $42,700 and the tax rate is 34 percent. The firm does not have any interest expense. What is the operating cash flow? Multiple Choice $129,152 $171,852 $179,924 $281,417 $309,076

$309,076

KMJ Inn reported an operating cash flow of $120,000 in 2017 operations. Their net capital spending was $65,000, and 2017 net working capital was $50,000 higher than 2016's NWC. If their cashflow to shareholders was $5,000 and their interest expense was $5,000, where did KMJ Inn obtain the financing for their 2017 dividend of $6,000? What was the amount of this financing? No net new long-term debt was issued but $1,000 of net new equity was issued $5,000 of net new long-term debt and $1,000 of net new equity were issued $3,000 of net new long-term debt and $8,000 of net new equity was issued $5,000 of net new long-term debt and $8,900 of net new equity was issued

$5,000 of net new long-term debt and $1,000 of net new equity were issued

A firm has net working capital of $640. Long-term debt is $4,180, total assets are $6,230, and fixed assets are $3,910. What is the amount of the total liabilities? Multiple Choice $2,050 $2,690 $4,130 $5,590 $5,860

$5,860

A firm has a debt-equity ratio of 62%, a total asset turnover of 1.24, and a profit margin of 5.1%. The total equity is $489,600. What is the amount of the net income? USE AT LEAST 4 DECIMAL PLACES $50,159 $19,197 $40,451 $28,079

$50,159 RETURN ON EQUITY = 0.051*1.24*(1+0.62) = 0.1024 NET INCOME = 489600 * 0.1024 = 50159

Suppose you are given the following information for Bayside Bakery: sales = $30,000; costs = $15,000; addition to retained earnings = $4,221; dividends paid = $469; interest expense = $1,300; tax rate = 30 percent. What is the amount of the depreciation expense? Multiple Choice $4,820 $5,500 $7,000 $8,180 $9,500

$7,000

Beach Front Industries has sales of $546,000, costs of $295,000, depreciation expense of $37,000, interest expense of $15,000, and a tax rate of 32 percent. The firm paid $59,000 in cash dividends. What is the addition to retained earnings? Multiple Choice $76,320 $81,700 $95,200 $103,460 $121,680

$76,320

What is the future value of $12,000 a year for 40 years at 11.5 percent interest?

$8,014,195 P/Y = 112,000 = PMT40 = N11.5 = I/YCPT FV =$8,014,195.28

Jensen Enterprises paid $1,300 in dividends and $920 in interest this past year. Common stock increased by $1,200 and retained earnings decreased by $310. What is the net income for the year? Multiple Choice -$210 $990 $1,610 $1,910 $2,190

$990

Duke's Garage has cash of $68, accounts receivable of $142, accounts payable of $235, and inventory of $318. What is the value of the quick ratio? 1.35 0.89 0.71 2.25

0.89 QUICK RATIO = (68+142) / 235 = 0.89

Log-term liabilities represent obligations of the firm lasting over _________. Choose one: 6 months 1 month 90 days 1 year

1 year

Coulter Supply has a total debt ratio of 0.46. What is the equity multiplier? USE AT LEAST 4 DECIMAL PLACES 0.85 1.45 0.45 1.85

1.85 DEBT RATIO = TD/ TA = 0.46= 46/100 IF TD = 46, THEN TA MUST BE 100 TO MAINTAIN 0.46 RATIO (ABOVE). AS REGARDS, PER ACCOUNTING IDENTITY, TE SHOULD BE = TA - TD = 100-46 = 54 HENCE, D/E =46/54 = 0.85185 THEREFORE, EM = 1+ D/E = 1.85185

A firm has 200,000 shares of stock outstanding, sales of $2million, net income of $125,000, a price-to-earnings (P/E) ratio of 25.0, and a book value per share of $8.22. What is the market-to-book ratio? *use at least 4 decimals for an accurate answer 1.25 1.90 2.90 2.25

1.90 EPS = 125,000 / 200,000 = 0.625 P/E = PRICE / EPS = PRICE/ 0.625 = 2.50 HENCE PRICE = 15.625 THEREFORE, M/B = PRICE/BOOK VALUE PER SHARE = 15.625/8.22 = 1.90

Suppose you are given the following information for Bayside Bakery: Sales = $40,000; costs of goods sold = $15,000; addition to retained earnings = $5,221; dividends paid = $1,469; interest expense = $1,300; tax rate = 40% . What is the amount of the depreciation expense? *Note: assume expenses other than costs of goods sold and depreciation are not incurred 15,350 13,150 12,550 7,550

12,550 DIV + ADD TO RE = NI >> HENCE, NI= 1469+5221 = 6690 EBT - EBT*t = EBT*(1-t) = NI >> EBT*(1-0.4) = 6690 >> HENCE, EBT = 11150 EBIT = EBT + INT = 11150+1300 = 12450 SALES - COGS - DEP - OTHER EXP = EBIT >> 40000 - 15000 - DEP - 0 = 12450 HENCE, DEP = 25000-12450 = 12550

MBM estimates its expansion cost at $18.63 million and wants it fully funded upfront. Management has decided to save $1.1 million a quarter for this purpose. The firm earns 6.25 percent, compounded quarterly, on its savings. How long does the firm have to wait before expanding its operations?

15.143 quarters, or 3.79 years P/Y = 4‐1.1M = PMT6.25 = I/Y18.63M = FVCPT N = 15.14 (QTRS) = 15.14 / 4 = 3.79 YEARS

The Lakeside Inn had operating cash flow of $55,550 and firm's net capital spending was $14,000. Also, the firm decreased net working capital by $2,500 from prior year. Depreciation was $8,700 and interest paid was $18,800. No new long-term debt was issued. What is the amount of the cash flow to stockholders? 25,250 14,550 17,800 20,250

20,250 CFA = OCF - NCS - CHG IN NWC >> CFA = 55,550-14,000-2500 = 39050 CFA = CFSH + CFBH = CFSH + (18800 - 0) THEREFORE, CFSH = 39050-18800 = 20250

Suppose that when your child turns 8years old, you invest $40,000 into a college fund account for your child. Further assume that you can earn 15% annual return compounded WEEKLY on your investment. If you estimate that you will need $400,000 to pay for college, at approximately what age can your child attend college? 28 years old 186 years old 24 years old 18 years old

24 years old P/Y = 52 PV = -40,000 FV = 400,000 I/Y = 15 CPT N = 799.38(WEEKS) = 799.38/52 = 15.37 YEARS HENCE, 8+15.37 YEARS = 23.37 YEARS. AT APPROXIMATELY 24 YEARS OLD, YOUR CHILD CAN ATTEND COLLEGE.

Your most recent credit card bill just came in the mail; you own a total of $4500. If Discover charges you an effective annual rate (EAR) of 26.825% that took monthly compounding into consideration. You plan to make just the minimum monthly payment of $100, how long will it take to pay off your entire balance?

2ND ICONVEAR = 26.825 C/Y = 12CPT NOM = 24.00% THEN, USE THIS APR IN I/Y IN CALCULATOR: P/Y = 12PMT = 100PV = ‐4500 I/Y = 24CPT N = 116.28 MONTHS = 9.69 YEARS (ANSWER)

McKeown and Company currently has an equity multiplier of 2.50, a total asset turnover of 0.75, and a profit margin of 8%. The president is unhappy with the current ROE, and he thinks it could be doubled. This could be accomplished(1) by increasing the profit margin to 10%, and (2) by increasing debt utilization.Total asset turnover will not change. What new equity multiplier along with the 10% profit margin is required to double the return on equity? *USE at least 4 DECIMAL PLACES for an accurate answer 1.75 0.75 3.0 4.0

4.0 CURRENT ROE = PM X TAT X EM = 0.08*0.75*2.5 = 0.15(15%) TARGET ROE' = 2XROE = 2X0.15 = 0.30 (30%) TO ACHIEVE THE TARGET ROE OF 30%, UTILIZE NEW RATIOS: = PM' X TAT X EM' = 0.10 * 0.75 * EM' = 0.30 SOLVE FOR EM' EM' = 0.30/(0.1*0.75) = 4

The BABO Corporation had 2015 net fixed assets were $1,300K, current assets of $220K, long-term liabilities of $390K and shareholder's equity of $950K. The 2016 net fixed assets of $1,345K, current assets $260K, current liabilities of $180K and shareholder's equity of $775K. What was the change in net working capital for BABO in 2016? -40K -20K 20K 40K

40K SOLUTION CL2016 = 1520 - 950 - 390 = 180 CHANGE IN NWC = [260-180]-[220-180] = 80-40=40

Today, you turn 23. Your birthday wish is that you will be a millionaire by your 40th birthday. In an attempt to reach this goal, you decide to save $75 a day, every day, until you turn 40. You open an investment account and deposit your first $75 today. What rate of return must you earn to achieve your goal?

8.09 percent ANNUITY DUE (... SINCE FIRST PAYMENT IS MADE IMMEDIATELY/TODAY, A KEYWORD TO RECOGNIZE AS AN ANNUITY DUE PROBLEM) CHANGE CALCULATOR SETTINGS TO "BGN" P/Y = 365FV = 1MN = (40‐23) *365 =6,205 PMT = ‐75 CPT I/Y = 8.09

Deltamax Corp. has $900,000 in sales. The profit margin is 5% and the firm has 10,000 shares of stock outstanding. The market price per share is $40. What is the price-to-earnings (P/E) ratio? 8.89 8.05 4.89 4.50

8.89 P/E = PRICE / EPS EPS = NI / # OF SHARES OUTSTANDING PM = NI / SALES >>0.05 = NI / 900,000 HENCE, NI = 900000*0.05 = 45,000 NOW PLUG NI INTO EPS FORMULA , EPS = 45,000 / 10,000 = 4.5 THEREFORE, P/E = 40/4.5 = 8.89

Coulter Supply has a total debt ratio of 0.32. What is the equity multiplier? USE AT LEAST 4 DECIMAL PLACES A. 1.47 B. 0.68 C. 1.18 D. 0.57

A. 1.47 DEBT RATIO = TD/ TA = 0.32 = 32/100 IF TD = 32, THEN TA MUST BE 100 TO MAINTAIN DEBT RATIO OF 0.32 HENCE, TE = 100-32 = 68 (SINCE TA = TD+TE) THEREFORE, EM = TA/TE = 100/68 = 1.47

Suppose you are given the following information for Bayside Bakery: Sales = $40,000; costs of goods sold = $15,000; addition to retained earnings = $5,221; dividends paid = $2,237; interest expense = $1,300; tax rate = 40% . What is the amount of the depreciation expense? *Note: assume expenses other than costs of goods sold and depreciation are not incurred A. 11,270 B. 15,369 C. 13,169 D. 7,569 E. 9,569

A. 11,270 NI = ADD TO RE + DIV = 5221 + 2237 = 7458 EBT *(1-t) = NI >> EBT*0.6 = 7458 >> THEREFORE, EBT = 12430 EBIT - INT = EBT >> EBIT - 1300 = 12430 >> HENCE, EBIT = 12430+1300 = 13730 SALES - COGS - DEP = EBIT >> 40000-15000-DEP = 13730 >> HENCE, DEP = 11270

As treasurer of TBM, you are considering different investment accounts. Assume you have $500,000 to invest for five years, which of the following investment accounts is the highest yielding? A. 7.99% compounded monthly B. 8.10% compounded semi-annually C. 7.96% compounded daily D. 8.01% compounded quarterly

A. 7.99% compounded monthly P/Y = 12 PV = -500,000 N =5*12=60 I/Y = 7.99 CPT FV = 744,552.95 P/Y = 2 PV = -500,000 N =5*2=10 I/Y = 8.10 CPT FV = 743,688.13 P/Y = 365 PV = -500,000 N =5*365=1825 I/Y = 7.96 CPT FV = 744,389.71 P/Y = 4 PV = -500,000 N =5*4=20 I/Y = 8.01 CPT FV = 743,337.99

You won a 1.5 million lottery. You are given the following options to get paid on your winnings. : OPTION A: receive $20,000 per month at the end of each month until 60th month, & $30,000 per month from 61st month until 70th month OPTION B: receive 60% of your winning today as a lump sum payment (40% is used toward taxes) OPTION C: receive ALL of the winnings in lump sum five years from today OPTION D: receive 25,000 per month for the next 5 years If you can earn 12% annual rate with monthly compounding on your investments, which option would you choose? A. Option D B. Option B C. You are indifferent between option A and D as they both have equal values and higher than other options. D. Option A E. Option C

A. Option D OPTION A: CF0 = 0 CO1 = 20,000 FO1 = 60 CO2 = 30,000 FO2 = 10 PRESS NPV I = 12/12 = 1% (MONTHLY INTEREST RATE) NPV CPT = 1,055,505.05 OPTION B: 1.5MILLION *0.60 = 0.9MILLION OPTION C: P/Y = 12 I/Y = 12 FV = 1.5M N = 60 CPT PV = 825,674.42 OPTION D: P/Y = 12 I/Y = 12 PMT = 25,000 N = 60 CPT PV = 1,123,876 HENCE, OPTION D IS A BETTER DEAL

According to the Rule of 72, how long would it take for $2500 to become $80,000? A. approx. 50 years at 7.2% interest B. approx. 40 years at 7.2% interest C. approx. 30 years at 14.4% interest D. approx. 96 years at 6% interest E. approx. 54 years at 12% interest

A. approx. 50 years at 7.2% interest 72/7.2% = 10YEARS TO DOUBLE 2500>5000 10YEARS 5000>10,000 ANOTHER 10YEARS 10,000 > 20,000 ANOTHER 10YEARS 20,000 > 40,000 ANOTHER 10YEARS 40,000 > 80,000 ANOTHER 10YEARS TOTAL 50YEARS

Glenn Robinson recently signed a contract: receiving 12,500 every MONTH for the following 7 years. Then, receive 15,000 per MONTH for 2years following. How much is the contract worth in today's dollars, assuming an annual discount rate of 12%? A. approx. 846,246 B. approx. 1.21 million C. approx. 1.47 million D. approx. 980,224 E. approx. 755,872

A. approx. 846,246 CF0 = 0 CO1 = 12,5000 FO1 = 7X12 = 84 CO2 = 15,000 FO2 = 2X12 = 24 NPV I = 12/12 = 1% NPV CPT = 846,245.72

You just won the grand prize in a national writing contest! As your prize, you will receive $1,000 a month for 10 years. If you can earn 7 percent on your money, what is this prize worth to you today?

ANNUITY PROBLEM P/Y = 121000 = PMT120 = N 7 = I/YCPT PV = 86,126.35

Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers? Multiple Choice Articles of incorporation. Corporate breakdown. Agency problem. Bylaws. Legal liability.

Agency problem.

In 2010, Intel issued $1,000 face bonds with an 8.5% semi‐annual coupon. The bonds mature in 2040. Exactly 5 years later a company financially similar to Intel, is preparing to issue 25 year $1,000 face bonds with a 7% semi‐annual coupon. How will this affect the price of Intel bonds? That is, what is the price of the Intel bonds in year 2015?

Answer: $1175.92 p/y= 2fv=1000i/y=7pmt=85/2=42.5 n=50 CPTPV=1175.92

You need some money today and the only friend you have that has any is your miserly friend. He agrees to loan you the money you need, if you make payments of $30 a month for the next six months. In keeping with his reputation, he requires that the first payment be paid today. He also charges you 2 percent interest per month. How much money are you borrowing?

Answer: 171.40 APR = 2*12 = 24% (.... MONTHLY INTEREST MUST BE CHANGED TO APR TO CORRECTLY ENTER INTO YOUR I/Y IN TVM FUNCTION KEYS) CHG YOUR CALCULATOR SETTINGS TO ACCOUNT FOR ANNUITY DUE: "BGN"P/Y = 1230 = PMT 6=N24 = I/YCPT PV = 171.40 (... AMOUNT YOU BORROWED TODAY) OR CAN SOLVE A REGULAR ORDINARY ANNUITY, THEN MULTIPLY 1+INTEREST RATE PER PERIOD P/Y =12PMT = 30N=6 I/Y = 2*12 = 24%CPT PV = 168.04HENCE, ANNUITY DUE = 168.04*(1+0.02) = 171.40

As the beneficiary of a life insurance policy, you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. If you can earn 6 percent on your money, which option should you take and why?

Answer: You should accept the $200,000 because the payments are only worth $195,413 to you today. P/Y = 121400 =PMT20*12 = 240 =N6 = I/YCPT PV = 195,413.08

Liquidity refers to the ease of changing ______________ Liabilities to assets Assets to cash Cash into other assets Cash to liabilities

Assets to cash

Your firm has current assets of $1700, total assets of $4900, long- term debt of $2900, and a short-term debt (current liabilities) of $1400. What is the amount of net working capital? Choose one: A. -$100 B. $300 C. $600 D. $1700 E. $1800

B. $300

You have a financial goal to reach: $2,000,000 when you retire. You are currently 20 years old and you plan to retire at 60yrs old If you can earn 11% return on your retirement account,How much do you need to invest today? CPT PV = 30,768.82 A. APPROX. 25,520 B. APPROX. 30,770 C. APPROX. 41,030 D. APPROX. 17,940

B. APPROX. 30,770 SOLUTION 2,000,000 = FV 60-20 = 40 = N 11 = I/Y

You received a grand prize at the Oscars. As your prize, you are expected receive $35,000 every week for the next 5 years. Your first payment will be made immediately. If you can earn 5% return on your investment, what is this prize worth to you today? A. approx. $8,148,246 B. approx. $8,055,985 C. approx. $9,970,056 D. approx. $7,462,155

B. approx. $8,055,985 CHANGE THE CALCULATOR SETTINGS TO "BGN" P/Y = 52 PMT = 35,000 N = 5*52 = 260 (WEEKS) I/Y = 5 CPT PV = 8,055,984.92 OR FIND THE PV OF ORIDNARY ANNUITY P/Y = 52 PMT = 35,000 N = 5*52 = 260 (WEEKS) I/Y = 5 CPT PV = 8,048,246.22 HENCE, PV OF ANNUITY DUE = 8,048,246.22 *(1+0.05/52) = 8,055,984.92

Why should financial managers strive to maximize the current value per share of the existing stock? Multiple Choice Doing so guarantees the company will grow in size at the maximum possible rate. Doing so increases employee salaries. Because they have been hired to represent the interests of the current shareholders. Because this will increase the current dividends per share. Because managers often receive shares of stock as part of their compensation.

Because they have been hired to represent the interests of the current shareholders.

Today's year is 2018. You are planning to invest your tax refunds at an account that pays 10% annual rate with annual compounding. Following are your estimated tax refunds each year: year 2018: $2,000 year 2019: $2,500 year 2020: $2,500 year 2021: $2,800 How much will you have in your account in year 2021? A. $8,253 B. $10,485 C. $11,237 D. $9,368 E. $12,556

C. $11,237 FV of multiple cash flows: utilizing CF worksheet CF0 = 2000 CO1 = 2500 FO1 = 2 CO2 = 2800 FO2 =1 CPT NPV @ I =10 NPV = 8442.52 THEN PV = -8442.52 I/Y = 10 N = 2021-2018 = 3 CPT FV = 11,237 OR DO ONE BY ONE PV = -2000 I/Y = 10 N= 3 CPT FV = 2662 PV = -2500 I/Y = 10 N=2 CPT FV = 3025 PV = -2500 I/Y = 10 N=1 CPT FV = 2750 LAST ONE IS ALREADY IN FV OF YEAR 2021 = 2800 THEN ADD ALL = 2662+3025+2750+2800 = 11237

You invested $10,500 in an account that pays 10 percent simple interest. How much more could you have earned over a 15-year period if the interest had compounded annually? A. $31,914 B. $29,001 C. $17,611 D. $26,345 E. $11,749

C. $17,611 Simple interest = $10,500 + ($10,500 × .1 × 15) = $26,250Annual compounding = USING FINANCIAL CALCULATOR END BALANCE IS: PV = -10500 N = 15 I/Y = 10 CPT FV = 43861.11 Difference = $43,861.11 - $26,250 = $17,611.11

Which of the following statement is true? A. As compounding frequency increases, FV decreases B. As compounding frequency increases, PV increases C. As compounding frequency increases, PV decreases D. As compounding frequency increases, PV does not change E. As compounding frequency increases, FV does not change

C. AS COMPOUNDING FREQUENCE INCREASES, PV DECREASES. AS COMPOUNDING FREQUENCE INCREASES, FV INCREASES.

You are looking at the car that is currently selling at $65,000. Classic Autos is offering free credit (i.e. no interest charged on the borrowed amount) on the car. You pay $10,000 down today and then pay the remaining balance at the end of 6years. Premium Motors next door does not offer credit, but will give you $20,000 off the list price if you pay cash now. Assume annual compounding with 9% discount rate. Which of the following statement is TRUE? A. Premium autos is offering a better deal since its PV of cost is approximately 2,400 lower than that of Premium Motors. B. Classic autos is offering a better deal since its PV of cost is approximately 600 lower than that of Premium Motors. C. Classic autos is offering a better deal since its PV of cost is approximately 2,200 lower than that of Premium Motors. D. Premium autos is offering a better deal since its PV of cost is approximately 500 lower than that of Premium Motors.

C. Classic autos is offering a better deal since its PV of cost is approximately 2,200 lower than that of Premium Motors. CLASSIC AUTOS, PAY 10,000 NOW. FV = 65000 - 10,000 = 55,000 N = 6 I/Y = 9% CPT PV =32,794.70 TODAY'S COST = 32,794.70+10,000 = 42,794.70 PREMIUM AUTOS, TODAY'S COST = 65000 - 20000 = 45,000 since PV of cost of CLASSIC AUTOS is lower by $2205.30, CLASSIC AUTOS is offering a better deal

Kurt won a lottery and will receive $1,000 a year for the next 50 years. The value of his winnings today discounted at his discount rate is called which one of the following? A. Single amount B. Future value C. Present value D. Simple amount E. Compounded value

C. Present value

Which of the statement is FALSE? A. Interest rate (I/Y) and investment period (N) have inverse relationship when other things are fixed. B. As the length of the compounding period increases, small differences in discount rates can lead to large differences in future value C. Simple interest assumes accumulated interest is reinvested, and hence interest earns interest . D. Interest rate (I/Y) and present value (PV) have inverse relationship, when everything else is fixed.

C. Simple interest assumes accumulated interest is reinvested, and hence interest earns interest .

What would be your account balance at the end of 15 years from now if you invest $15,000 today at an account that earns 15% per year? A. approx. $195,500 B. approx. $225,056 C. approx. $122,056 D. approx. $145,506 E. approx. $245,500

C. approx. $122,056 PV = -15,000 N = 15 I/Y = 15 CPT FV = 122,055.92

Which would you prefer : $1,000 today or $2,200 five years from today? A. $1000 today B. $2200 five years from today C. cannot determine without further information

C. cannot determine without further information Without knowing the interest rate, we cannot compare fairly of different value of cash flows that are in different time unit.

Assume you are comparing interest rates on car loans. Which is the most expensive loan? Loan A has a stated rate of 8.5% with semi‐annual compounding Loan B has a stated rate of 8.48% with monthly compounding Loan C has a stated rate of 8.43% with daily compounding

CHAPTER 6 EARA:NOM=8.5 C/Y=2 EFFCPT=8.68% B:NOM=8.48 C/Y=12 EFFCPT=8.82% C:NOM=8.43 C/Y=365 EFFCPT=8.79%

Which one of the following terms is defined as the management of a firm's long-term investments? Multiple Choice Working capital management. Financial allocation. Agency cost analysis. Capital budgeting. Capital structure.

Capital budgeting.

Which one of the following terms is defined as the mixture of a firm's debt and equity financing? Multiple Choice Working capital management. Cash management. Cost analysis. Capital budgeting. Capital structure.

Capital structure.

Which form of business structure is most associated with agency problems? Multiple Choice Sole proprietorship. General partnership. Limited partnership. Corporation. Limited liability company.

Corporation.

Which one of the following statements is correct? Multiple Choice The majority of firms in the U.S. are structured as corporations. Corporate profits are taxable income to the shareholders when earned. Corporations can raise large amounts of capital generally easier than partnerships can. Stockholders face no potential losses related to their corporate investment. Corporate shareholders elect the corporate president.

Corporations can raise large amounts of capital generally easier than partnerships can.

Net working capital equals _________. Choose one: Current liabilities minus current assets Fixed assets minus long-term liabilities Current assets minus current liabilities Total assets minus total liabilities

Current assets minus current liabilities

The original Barbie doll was introduced in 1972 and sold for approximately $3.00. In year 2015, a mint-condition doll in its original box would be listed on EBay at approximately $700.00. What average annual rate of return would the seller realize if she had been the original purchaser of this 'investment'? A. 14.95% B. 19.84% C. 9.71% D. 13.52% E. 10.47%

D. 13.52% PV = -3 FV = 700 N = 2015 - 1972 = 43 CPT I/Y = 13.52%

20 years ago, your parents set aside $10,000 to help fund your college education. Today, that fund is valued at $50,000. What rate of interest was being earned on this account on average with monthly compounding? A. 7.61% B. 10.78% C. 11.22% D. 8.07%

D. 8.07% P/Y = 12 PV = -10,000 FV = 50,000 N = 20*12 = 240 (MONTHS) CPT I/Y = 8.07%

You want to have $100,000 in 2 years. If you found an investment account that pays you 9% annual rate with monthly compounding, how much do you need to deposit today? A. 84,168 B. 83,693 C. 84,593 D. 83,583 E. 85,168

D. 83,583 P/Y = 12 FV = 100,000 I/Y = 9 N = 2x12 = 24 CPT PV = 83583.14

Suppose that when your child turns FIVE years old, you invest $10,000 into a college fund account for your child. Further assume that you can earn 12% return compounded MONTHLY on your investment. If you estimate that you will need $200,000 to pay for college, at what age can your child attend college? A. AGE 22 B. AGE 28 C. AGE 25 D. AGE 30

D. AGE 30 P/Y = 12 PV = -10,000 FV = 200,000 I/Y = 12 CPT N= 301.07 (MONTHS) = 301.07 / 12 (YEARS) = 25.09 YEARS SINCE THE PARENTS STARTED TO INVEST WHEN THE CHILD TURNED 5 YEARS OLD, AND IT TOOK APPROX 25.09 YEARS TO REACH THE GOAL, THE CHILD CAN ATTEND COLLEGE AT 5+25.09 = 30.09 YEARS OLD = APPROX. 30 YEARS OLD.

Which statement is TRUE? A. Shareholders of corporations face unlimited liability for firm debt. B. PV of ordinary annuity is always greater than PV of annuity due, assuming interest rate is positive. C. As compounding frequency increases, future value decreases. D. It is easy to transfer ownership in corporations compared to partnerships.

D. It is easy to transfer ownership in corporations compared to partnerships.

Which one of the following is a capital budgeting decision? Multiple Choice Determining how many shares of stock to issue. Deciding whether or not to purchase a new machine for the production line. Deciding how to refinance a debt issue that is maturing. Determining how much inventory to keep on hand. Determining how much money should be kept in the checking account.

Deciding whether or not to purchase a new machine for the production line.

Which one of the following is a working capital management decision? Multiple Choice Determining the amount of equipment needed to complete a job. Determining whether to pay cash for a purchase or use the credit offered by the supplier. Determining the amount of long-term debt required to complete a project. Determining the number of shares of stock to issue to fund an acquisition. Determining whether or not a project should be accepted.

Determining whether to pay cash for a purchase or use the credit offered by the supplier.

You are scheduled to receive annual payments of $3,600 for each of the next 12 years. The discount rate is 8 percent. What is the difference in the present value if you receive these payments at the beginning of each year rather than at the end of each year?

Difference = $29,300.27 - 27,129.88 = $2,170.39 FIND THE PV OF ORDINARY ANNUITY =27129.88 FIND THE PV OF ANNUITY DUE = 29300.27 THEN TAKE A DIFFERENCE = 2170.39 FIND THE PV OF ORDINARY ANNUITY = 27129.88THEN MULTIPLY INTEREST RATE PER PERIOD = 27129.88*0.08 = 2170.39 THAT WOULD BE THE DIFFERENCE = 2170.39 DIFFERENCE BETWEEN ORDINARY ANNUITY VS ANNUITY DUE ORDINARY ANNUITY P/Y = 1 PMT = 3600 N = 12 I/Y = 8 CPT PV = 27,129.88 ANNUITY DUE PV = ORDINARY ANNUITY * (1+interest rate per period) = 27,129.88*(1+0.08) = 29,300.27 HENCE DIFFERENCE = 29,300.27 ‐ 27,129.88 = 2,170.39 OR DIFFERENCE = ORDINARY ANNUITY PV * interest rate per period = 27,129.88*0.08 = 2,170.39

Interest earned on both the initial principal and the interest reinvested from prior periods is called: E. Free interest F. Dual interest G. Simple interest H. Multiple Interest I. Compound interest

E. Free interest

Your father invested a lump sum 30 years ago at 3% interest. Today, he gave you the proceeds of that investment which totaled $60,000. How much did your father originally invest?

FV=60,000 N=30 I/Y=3 CPT PV = 24,719.21

A firm can increase its ROA by increasing its payout ratio. True False

False A firm can increase its ROA by increasing PROFIT MARGIN AND/OR TOTAL ASSET TURNOVER.

You just settled an insurance claim. The settlement calls for increasing payments over a five‐year period. The first payment will be paid one year from now in the amount of $7,000. The following payments will increase by 3.5 percent annually. What is the value of this settlement to you today if you can earn 6.5 percent on your investments?

GROWING ANNUITY PROBLEM USE PVGA FORMULAn=5c1 = 7000 g = 0.035i = 0.065PVGA = GAPV = $7000/ (0.065‐0.035) *[1‐{(1+0.035)/(1+0.065)}^5] = $31,063.79

You just won the magazine sweepstakes and opted to take unending payments. The first payment will be $21,500 and will be paid one year from today. Every year thereafter, the payments will increase by 2.5 percent annually. What is the present value of your prize at a discount rate of 7.9 percent?

GROWING PERPETUITY PROBLEM C1 = 21,500g = 0.025i = 0.079 use PV of growing perpetuity formula PVGP = 21500 / (0.079‐0.025) = 398,148

Which of the following statement is FALSE? If current ratio is lower than 1, it implies that net working capital (NWC) is lower than zero. A big drop from the current ratio to the quick ratio often signifies a problem with an inventory account. Total asset turnover indicates how effectively a firm is utilizing all of its assets to generate sales. Higher receivables turnover ratio indicates a liberal credit policy.

Higher receivables turnover ratio indicates a liberal credit policy.

Which of the following are advantages of the corporate form of business ownership? I. Limited liability for firm debt.II. Double taxation.III. Ability to raise capital.IV. Unlimited firm life. Multiple Choice I and II only. III and IV only. I, III, and IV only. II, III, and IV only. I, II, III, and IV.

I, III, and IV only.

Which of the following are included in current liabilities? Note payable to a supplier in 13 months Amount to be received from a customer last week Account payable to a supplier that is due next week Loan payable to the bank in 10 months Choose one: I and III only III and IV only I, II, and III only II, III, and IV only All of them

III and IV only

Which statement is TRUE? If a firm stock price is higher than the book value of an equity per share, it implies that firm's M/B ratio will be equal to 1. If the cash flow to creditors is positive, then the firm must have borrowed more money than it repaid. Balance sheet summarizes a firm's revenue and expenses over a period of time. If a firm has an equity multiplier higher than 1, it implies that ROE will be higher than ROA.

If a firm has an equity multiplier higher than 1, it implies that ROE will be higher than ROA.

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time? Income statement Balance sheet Cash flow statement Market value report

Income statement

Which Statement is FALSE? Operating cash flow (OCF) tells us whether a firm's cash inflows from its operations are sufficient to cover its everyday cash outflows. Dividends is not tax-deductible whereas interest expense is tax-deductible. Income statement is written in the order of liquidity. Net Capital Spending (NCS) represents investment in fixed assets over a period.

Income statement is written in the order of liquidity.

Which one of the following actions by a financial manager is most apt to create an agency problem? Multiple Choice Refusing to borrow money when doing so will create losses for the firm. Refusing to lower selling prices if doing so will reduce the net profits. Refusing to expand the company if doing so will lower the value of the equity. Agreeing to pay bonuses based on the market value of the company stock rather than on the firm's level of sales. Increasing current profits when doing so lowers the value of the firm's equity.

Increasing current profits when doing so lowers the value of the firm's equity.

A big drop from the current ratio to the quick ratio often signifies a problem with what account? Inventory Accounts receivables Accounts payables Long-term debt Cash

Inventory

Which statement is TRUE about business organizations in the U.S.? Shareholders of corporations face unlimited liability for firm debt. Sole proprietorship is not responsible for all of the firm's debts. It is hard to transfer its ownership in partnerships compared to corporations. Sole proprietorships are most associated with agency problems.

It is hard to transfer its ownership in partnerships compared to corporations.

The Sarbanes-Oxley Act of 2002 is a governmental response to: Multiple Choice Decreasing corporate profits. The terrorists attacks on 9/11/2001. A weakening economy. Deregulation of the stock exchanges. Management greed and abuses.

Management greed and abuses.

What is financial manager's primary goal? Maximize current dividends per share Maximize current stock price Increase cash flow and reducing risk Maximize current profits

Maximize current stock price

Which one of the following best states the primary goal of financial management? Multiple Choice Maximize current dividends per share. Maximize the current value per share. Increase cash flow and avoid financial distress. Minimize operational costs while maximizing firm efficiency. Maintain steady growth while increasing current profits.

Maximize the current value per share.

You just received an insurance settlement offer related to an accident you had six years ago. Suppose you can earn 12% on your investment. (APR) The offer gives you a choice of one of the following three offers: $2000 a month for 60 months $3000 per quarter for 10 years $100,000 as a lump sum payment today Which option should you choose?

OPTION C SOLUTION OPTION A: P/Y = 12 2000 = PMT 60 = N 12 = I/YCPT PV = 89,910.08 OPTION B: P/Y = 43000 = PMT 10*4 = 40 = N 12 = I/Y CPT PV = 69,344.32 OPTION C:PV = 100,000 CHOOSE

VARIATION QUESTION: What would be your account balance at the end of 20 years from now if you invest $15,000 today at an account that earns 15% per year, compounded monthly? (chap.6)

P/Y = 12 PV = ‐15,000 N = 20*12 = 240 (MONTHS) I/Y = 15 CPT FV = 295,732.40

Travis International has a one‐time expense of $2.86 million that must be paid three years from now. Since the firm cannot raise that amount in one day, it wants to save an equal amount each month over the next three years to fund this expense. If the firm can earn 2.1 percent on its savings, how much must it save each month?

P/Y = 122.86M = FV2.1 = I/Y3*12 = 36 =NCPT PMT = $77,037.69

VARIATION: What is the future value of $12,000 per quarter for 40 years at 11.5 percent interest?

P/Y = 4 12,000 = PMT40*4 = 160 = N11.5 = I/YCPT FV =$38,497,794.85

Variation: You just won the grand prize in a national writing contest! As your prize, you will receive $1,000 a week for 10 years. If you can earn 7 percent on your money, what is this prize worth to you today?

P/Y = 52 PMT = 1000 N = 520 I/Y = 7 CPT PV = 373,791.51

A preferred stock pays an annual dividend of $4.10. What is one share of this stock worth today if the rate of return is 9.68 percent?

PERPETUITY PROBLEMPV OF PERPETUITY = C1 / i = 4.10/0.0968 = $42.36

You just paid $750,000 for an annuity that will pay you and your heirs $36,000 a year forever. What rate of return are you earning on this policy?

PERPETUITYPV OF PERPETUITY = C1 / i 750,000 = 36,000 / iSolve for "i"i = 36,000 / 750,000 = 0.048 (4.8%)

What would be your account balance at the end of 20 years from now if you invest $15,000 today at an account that earns 15% per year?

PV = ‐15,000 N = 20 I/Y = 15 CPT FV = 245,498.06

In 1901, Cornelius Vanderbilt bought a block of land in mid‐town Manhattan for $65. The land today (year 2016) is valued at approximately $800 million. What is the rate of return that the Vanderbilt have achieved with this investment? *ADDITIONAL QUESTION, WOULD IT HAVE BEEN BETTER OFF, IF VANDERBUILT HAD INVESTED IN STOCK MARKET, WHERE IT EARNED 10% PER YEAR ON AVERAGE?

PV = ‐65 N = 2016 - 1901 = 115 FV = 800,000,000 CPT I/Y = 15.25% *ADDITIONAL QUESTION ANSWER: NO, SINCE AVERAGE INTEREST RATE EARNED BY INVESTING IN LAND IS 15.25% WHILE STOCK MARKET EARNED ON AVERAGE OF 10%

Which one of the following is not a characteristic of a corporation? Limited liability for business debts Transfer of ownership is easy Easy to raise capital Separation of ownership and management Relatively easy to start a corporation than starting a partnership

Relatively easy to start a corporation than starting a partnership

Which one of the following parties has ultimate control of a corporation? Multiple Choice Chairman of the board. Board of directors. Chief executive officer. Chief operating office. Shareholders.

Shareholders.

Which one of the following statements concerning a sole proprietorship is correct? Multiple Choice A sole proprietorship is designed to protect the personal assets of the owner. The profits of a sole proprietorship are subject to double taxation. The owner of a sole proprietorship is personally responsible for all of the company's debts. There are very few sole proprietorships remaining in the U.S. today. A sole proprietorship is structured the same as a limited liability company.

The owner of a sole proprietorship is personally responsible for all of the company's debts.

Which statement is FALSE? The primary goal of financial management is to maximize current dividends per share. Agency problem is defined as a conflict of interest between the corporate shareholders and corporate managers. Working capital is defined as a firm's short-term assets and its short-term liabilities. Capital budgeting is defined as the management of a firm's long-term assets.

The primary goal of financial management is to maximize current dividends per share.

If current ratio value is lower than 1, it always implies that NWC (net working capital) value is always negative. A. True B. False

True

Assume a 1,000 face value bond with 20 years left til maturity. If the coupon rate is 10%, paid semi‐annually, and the current yield is 8.85%, what should be the yield to maturity on this bond?

USING CURRENT YIELD, FIND THE BOND PRICE FIRST CURRENT YIELD = 0.0885 = 100 / BOND PRICE HENCE, BOND PRICE = 100/0.0885 = 1129.9435 NOW USING THE BOND PRICE AND OTHER INFORMATION FROM THE QUESTION, SOLVE FOR YTM P/Y = 2FV = 1000N=20 X2=40PMT = 1000 X 0.10 X 1⁄2 = 50PV = ‐1129.9435CPT I/Y = 8.63%HENCE, THE YTM IS 8.63% (ANSWER)

Which one of the following is defined as a firm's short-term assets and its short-term liabilities? Multiple Choice Working capital. Debt. Investment capital. Net capital. Capital structure.

Working capital.

As treasurer of Toys B Me, you are considering different investment accounts. These accounts will be used to manage both the short-term and longer term cash accounts of the company. Assuming you have $100,000 to invest for three years, which of the following investment accounts is the highest yielding? a) 8% compounded quarterly b) 7.9% compounded monthly c) 7.8% compounded daily

a) 8% compounded quarterly a) P/Y=4-10,000 = PV3*4 = 12 = N 8=I/YCPT FV =12682.42 b) P/Y = 12 -10,000 = PV 3*12 = 36 = N 7.9=I/Y CPT FV =12664.57 c) P/Y = 365-10,000 = PV3*365 = 1095 = N7.8=I/YCPT FV =12636.13HENCE, OPTION A IS YIELDING THE HIGHEST FV

The cash flow of a firm which is available for distribution to the firm's creditors and stockholders is called the: Multiple Choice operating cash flow. net capital spending. net working capital. cash flow from assets. cash flow to stockholders.

cash flow from assets.