Finance exam final

Apisco Tiger Inc. stock is currently selling for $72.00 a share. The stock has a dividend yield of 3.50 percent. How much dividend income will you receive per year if you purchase 500 shares of this stock?

$1,260 Dividend per share = 0.035 x 72 = $2.52 Dividend income = 2.52 x 500 = $1,260

Johnson Investment's portfolio performed relatively well in the past five years, and the annual return are as follows. Assume the beginning portfolio value is $1,200,000, what is the portfolio value after the five-year period? Year 1 2 3 4 5 Return 6% -4% 11% 15% 9%

$1,699,048 Portfolio value at the end period = $1,200,000 [ 1.06 (0.96) (1.11) (1.15) (1.09) ] = $1,699,048

Mary's Quilts is considering a project that will require additional inventory of $172,000, increase accounts payable by $77,000 and increase accounts receivables by $11,000. What is the net working capital requirement?

$106,000 NWC requirement = 172,000 - 77,000 + 11,000 = $106,000

Kustom Cars just purchased a fixed asset for $309,000. The asset will be depreciated on a straight line basis over 5 years to a zero salvage value. If the asset is sold after two years at a price of $150,000, what will be the net after-tax cash flow from the sale if the tax rate is 21 percent?

$157,434 Depreciation per year = 309,000/5 = 61,800 Accumulated depreciation = 61,800 x 2 = $123,600 Book value Year 2 = 309,000 - 123,600 = $185,400 Aftertax salvage value = $150,000 - .21($150,000 - $185,400) = $157,434

A project will produce an operating cash flow of $78,900 a year for five years. The initial cash outlay for equipment will be $137,000. The net after-tax salvage value of $32,000 will be received at the end of the project. The project requires $7,000 of net working capital that will be fully recovered at the end of the project. What is the net present value of the project if the required rate of return is 12 percent?

$162,546.49 NPV = -137,000 - 7,000 +78900{(1-1.12-5)/0.12} + (32,000 + 7,000)/1.125 = $162,546.49

Ghanata Oil has a well that will produce an annual cash flow of $236 million next year. The cash flow is expected to increase by 3.5 percent per year indefinitely. What is the well worth today if the discount rate is 15 percent?

$2,052 million PV = 236 million/(0.15 - 0.035) = 2,052.17 million

A project will increase sales by $90,000 and cash expenses by $63,000. The project will cost $60,000 and be depreciated using straight line depreciation to a zero book value over the four-year life of the project. The company has a marginal tax rate of 35 percent. What is the operating cash flow of the project?

$22,800 OCF = [(90000 - 63000) x (1 - 0.35)] + 0.35 x (60000/4) = $22,800

Soft Feet sells customized shoes. Currently, it sells 26,000 pairs of shoes annually an an average price of $93 a pair. The company is considering adding a lower-priced line of shoes that will sell for $32 a pair. Soft Feet estimates it can sell 12,000 pairs of the lower-priced shoes but will sell 1,300 less pairs of the higher-priced shoes by doing so. What is the amount of the sales that should be used when evaluating the addition of the lower-priced shoes?

$263,100 Incremental sales = 12000x32 - 1300x93 = $263,100

Your grandmother just gave you $17,000 as a gift for your stellar academic performance. You immediately invested the amount in an account that pays an interest rate of 5.8 percent per year. How much will you have in your account 9 years from today?

$28,237.09 FV = 17,000(1.058)9 = 28,237.09

A firm reported sales of $10,000,000 and net income of $2,702,432 in 2022. The firm's tax rate is 21 percent. The firm paid interest expense of $370,900. Calculate the firm's earnings before interest and taxes (EBIT).

$3,791,700 Taxable income x (1 - 0.21) = net income Taxable income = net income/ (1 - 0.21) = 2,702,432/0.79 = $3,420,800 EBIT - interest expense = Taxable income EBIT = Taxable income + interest expense = $3,420,800 + $370,900 = $3,791,700

A firm's balance sheets as of December 31, 2021, and 2022 show the following items: 2021: Cash = $7,916,500; Account Receivable = $7,000,000; Inventory = $3,100,000; Gross Fixed Assets = $8,834,000; Accumulated Depreciation = $817,000; Retained Earnings = $1,991,500; Capital Surplus = $9,612,000; Common Stock ($0.50 par) = $4,250,000; Notes Payable = $2,569,000; Long term debt = $2,700,000; Accounts Payable = $4,811,000. 2022: Cash = $11,098,000; Account Receivable = $7,600,000; Inventory = $5,200,000; Gross Fixed Assets = $13,774,000; Accumulated Depreciation = $1,675,000; Retained Earnings = $2,826,700; Capital Surplus = $12,784,500; Common Stock ($0.50 par) = $4,980,800; Notes Payable = $7,773,000; Long term debt = $1,500,000; Accounts Payable = $6,132,000. Calculate the total proceeds from sale of new shares of common stock in 2022.

$3,903,300 Proceeds from sale of new common stock are added to the common stock and capital surplus lines. Total proceeds from sale = (4980800 - 4250000) + (12,784,500 - 9612000) = $730,800 + $3,172,500 = $3,903,300

A stock had annual returns of 45%, -60%, 78%, 30%, and -77% over a five-year period. If you invested $100,000 in this stock at the beginning of the five-year period, how much was your investment worth at the end of the five-year period?

$30,869 100,000 x (1+0.45)(1-0.60)(1+0.78)(1+0.30)(1-0.77) = 100,000(0.3086876) = $30,868.76

The equity portions of a company's balance sheets for end of 2021 and 2022 are shown below: 2021 2022 Common Stock ($0.40 par) $14,480,000 $15,160,000 Capital Surplus $62,600,000 $119,870,000 Retained Earnings $211,967,500 $224,492,000 Calculate the average price per share at which new shares were sold in 2022.

$34.09/share Number of new shares sold in 2022 = (15,160,000 - 14,480,000)/0.40 = 1,700,000 shares. Total proceeds from sale = (119,870,000 - 62,600,000) + (15,160,000 - 14,480,000) = 57,950,000 Average price per share = $57,950,000 / 1,700,000 shares = $34.09/share

The equity portions of a company's balance sheets for end of 2021 and 2022 are shown below: 2021 2022 Common Stock ($0.40 par) $14,480,000 $15,160,000 Capital Surplus $62,600,000 $119,870,000 Retained Earnings $211,967,500 $224,492,000 Additional information: The firm's net income for 2022 is equal to $16,721,800 Calculate the dividend paid in 2022.

$4,197,300 Amount retained in 2022 = change in retained earnings = $224,492,000 - $211,967,500 = $12,524,500. Net income = dividends paid + amount retained $16,721,800 = dividends paid + $12,524,500 Dividends paid = $16,721,800 - $12,524,500 = $4,197,300

The project below has a net present value of $2,300,000. Find the missing cash flow, if the discount rate is 12 percent. YearCash Flow0-$5,500,000 1$2,000,000 2$2,000,000 3$2,000,000 4??????

$4,714,795 The present value of the missing cash flow is determined as follows: 2000000/1.12 + 2000000/1.122 + 2000000/1.123 + PV (missing cash flow) - 5,500,000 = 2,300,000 PV (missing cash flow) = 2,300,000 + 5,500,000 - 4803662.54 = $2,996,337.46 Missing Cash Flow = 2,996,337.46 x (1.124) = $4,714,795.01

A project will increase annual sales by $237,000 and annual cash expenses by $95,000 for four years. The project has an initial cost of $126,000 for equipment that will be depreciated on a straight line basis for four years to a zero salvage value. The company has a marginal tax rate of 21 percent. What is the annual depreciation tax shield?

$6,615 Annual depreciation tax shield = 1/4 x $126,000 x 0.21 = $6,615

One year ago, you purchased 200 shares of QMC Industries stock at a price of $18.97 a share. The stock pays an annual dividend of $1.42 per share. Today, you sold all of your shares for $17.86 per share. What is your total dollar return on this investment?

$62 Total dollar return = ($17.86 − 18.97 + 1.42) (200) = $62 Total dollar return = $62

A project has profitability index of 1.92 and requires an initial investment of $719,400. Calculate the net present value of the project.

$661,848 Profitability Index = PV (Project's Cash Flows)/Initial Investment. 1.92 = PV (Cash Flows)/719400. PV (Cash Flows) = 1.92 * 719400 = $1,381,248 NPV = 1,381,248 - 719,400 = $661,848

Six months ago, you purchased 200 shares of stock in SPG at a price of $23.68 a share. The stock pays a quarterly dividend of $0.12 a share. Today, you sold all of your shares for $27.11 per share. What is your total dollar return on this investment?

$734 Total dollar return = 0.12 (2) (200) + (27.11 - 23.68) (200) = 734

I invested $1,000,000 in a stock for two years. The return of the stock in the first year was 50% and the return of the stock in the second year was -50%, bringing my arithmetic average annual return to 0%. How much was my investment worth at the end of the two-year period?

$750,000 End-of-period worth = $1,000,000 x 1.50 x 0.50 = $750,000

A firm has net working capital of $22,506. Long-term debt is $33,772, total assets are $141,880, and net fixed assets are $71,934. What is the amount of the total liabilities?

$81,212 Current assets = total assets - net fixed assets = 141,880 - 71,934 = $69,946 Net working capital = Current assets - Current liabilities. Thus, Current Liabilities = Current assets - Net working capital = 69,946 - 22,506 = $47,440 Total liabilities = current liabilities + Long term debt = 47,440 + 33,772 = $81,212

Find the net present value of a project with initial cost of $5,876,000 and produces the following cash flows: $3,200,000 at the end of year 1; $2,973,000 at the end of year 2; and $2,525,000 at the end of year 3. The required rate of return for the project is 15 percent.

$814,852 NPV = -5876000 + 3200000/1.15 + 2973000/1.152 + 2525000/1.153 = $814,852.31

You plan on taking a vacation touring Asia 7 years from today. The vacation is estimated to cost $15,300 at the time of traveling, and you have decided to invest in an investment instrument that pays 7.2 percent per year, to fund it. How much should you invest today to achieve your objective?

$9,404.33 PV = 15,300/1.0727 = $9,404.33

Downtown Bicycles is analyzing a project with sales of $560,000, depreciation of $50,000, and a net working capital requirement of $56,000. The firm has a tax rate of 21 percent and a profit margin of 8 percent. The firm has no interest expense. What is the amount of the operating cash flow?

$94,800 OCF = NI + Depreciation = (0.08 x 560000) + 50,000 = $94,800

The following information is available for QDC Devices Inc. Use this information to answer the question below: Category 2021 ($) 2022 ($) Accounts payable 750 800 Accounts receivable 700 950 Cash 100 300 COGS 600 650 Common stock 2,500 3,900 Depreciation expense 10 40 Interest expense 70 90 Inventories 1,300 1,100 Long-term debt 2,000 1,700 Net fixed assets 5,950 7,150 Notes payable 200 400 General & Adm. expenses 80 110 Retained earnings 2,600 2,700 Revenue/Sales 1,000 1,200 Taxes 95 120 Calculate the net cash flow from investing activities in 2022.

- $1,240 Net cash flow from investing activities = - {Ending net fixed assets - Beginning net fixed assets + depreciation expense for 2022} = - ($7,150 - $5,950 + $40) = - $1,240 ** The firm spent $1,240 to acquire fixed assets in 2022 **

One year ago, you purchased a stock at a price of $30.44 a share. Today, you sold the stock and realized a total loss of 2.35 percent on your investment. Your dividend income was $1.57 a share. What was your capital gains yield?

-7.51% Total percentage return = dividend yield + capital gains yield Total percentage return - dividend yield = capital gains yield -2.35% - ($1.57/$30.44) = -7.51%

Calculate the debt-equity ratio by using the information below. ITEM 2022 Accounts Payable $729,500 Long Term Debt $1,283,900 Common Stock ($1 par) $2,184,000 Retained Earnings $3,227,100

0.37 (729,500+1,283,900)/(2,184,000+3,227,100)

A stock had the following returns over a seven year period. The risk-free rate over that period was 4.5 percent. What was the stock's risk premium? YearReturn 1 2 3 4 5 6 7 10% 0% 17% -20% 15% 23% -10%

0.50% Arithmetic average annual return = (10%+0%+17%-20%+15%+23%-10%)/7 = 35%/7 = 5% Risk premium = 5% - 4.5% = 0.5%

The returns of a stock follow the normal distribution, with average return of 13.2% and standard deviation of 23.7%. What is the probability that in any given year, the stock's return will be between -16.4% and +38.3%?

0.75 Probability that the return is between -16.4% and +38.3% is given by NORMDIST(38.3,13.2,23.7,1) - NORMDIST(-16.4,13.2,23.7,1) = 0.855216 - 0.105843 = 0.749373 That is, the percentage of all possible returns expected to be less than 38.3% minus the percentage of all possible returns expected to fall below -16.4%.

The returns of a stock follow the normal distribution, with average return of 13.2% and standard deviation of 23.7%. What is the probability that in any given year, the stock's return will be between -34.2% and +36.9%? Assume the following: the one standard deviation probability range is 0.68; the two standard deviation probability range is 0.95; and the three standard deviation probability range is 0.99.

0.815 -34.2% is two standard deviations below the mean return. Z = (-34.2 - 13.2)/23.7 = -57.4/23.7 = -2 95 percent of all possible returns lie within two standard deviations of the mean. Thus, (1 - 0.95)/2 = 0.025 or 2.5% of all possible returns are expected to be below -34.2% (that is, half of all the possible returns outside the two standard deviation range). 36.9% is one standard deviation above the mean return. Z = (36.9% - 13.2%)/23.7% = 23.7%/23.7% = 1. 68 percent of all possible returns lie within one standard deviations of the mean. Thus, (1 - 0.68)/2 = 0.16 or 16% of all possible returns are expected to be above 36.9% (that is, half of all the possible returns outside the two standard deviation range). It also means 84% (100% - 16%) of all possible returns are expected to fall below 36.9%. Therefore, 84% - 2.5% = 81.5% of all possible returns are expected to fall between -34.2% and 36.9%

A firm's balance sheets as of December 31, 2021, and 2022 show the following items: 2021: Cash = $7,916,500; Account Receivable = $7,000,000; Inventory = $3,100,000; Gross Fixed Assets = $8,834,000; Accumulated Depreciation = $817,000; Retained Earnings = $1,991,500; Capital Surplus = $9,612,000; Common Stock ($0.50 par) = $4,250,000; Notes Payable = $2,569,000; Long term debt = $2,700,000; Accounts Payable = $4,811,000. 2022: Cash = $11,098,000; Account Receivable = $7,600,000; Inventory = $5,200,000; Gross Fixed Assets = $13,774,000; Accumulated Depreciation = $1,675,000; Retained Earnings = $2,826,700; Capital Surplus = $12,784,500; Common Stock ($0.50 par) = $4,980,800; Notes Payable = $7,773,000; Long term debt = $1,500,000; Accounts Payable = $6,132,000. Calculate the number of new shares issued in 2022.

1,461,600 shares Number of new shares issued = (4980800 - 4250000)/0.50 = 1,461,600

Assume a project has cash flows of -$891,300, $408,200, $237,380, $392,600, and $214,700 for years 0 to 4, respectively. What is the profitability index given a required return of 12.3. percent?

1.08 Find the present value of the cash inflows from Year 1 to Year 4. C01 = 408,200; F01 = 1; C02 = 237,380; F02 = 1; C03 = 392,600; F03 = 1; C04 = 214,700; F04 = 1; NPV. I = 12.3. CPT. You will get 963,923.73 Profitability Index = 963,923.73/891300 = 1.08.

A project costs $4,769,500 initially and produces the following cash flows: $1,000,000 at the end of year 1; $1,500,000 at the end of year 2; $1,860,000 at the end of year 3; and $2,000,000 at the end of year 4. Calculate the project's internal rate of return.

11.23 percent Input: CF0 = -4769500; C01 = 1,000,000; F01 =1; C02 = 1,500,000; F02 =1; C03 = 1,860,000; F03 = 1; C04 = 2,000,000; F04 = 1. IRR. CPT. IRR = 11.23 percent.

During 2022, Kayman Inc. had sales of $15,214,000. Depreciation, Administrative and General Expenses, and Cost of Goods Sold were $1,220,000, $2,183,800, and $7,630,100, respectively. In addition, the company had interest expense of $980,000 and a tax rate of 21 percent. What is Kayman's profit margin?

16.62% Net income = Sales - COGS - Administrative and General Expenses - Depreciation - Interest - Taxes Net income = (Sales - COGS - Administrative and General Expenses - Depreciation - Interest)*(1 - tax rate) Net income = EBT*(1 - tax rate) Net income = (15,214,000 - 7,630,100 - 2,183,800 - 1,220,000 - 980,000)*(1 - 0.21) Net income = 2,528,079 Profit margin = (Net income)/Sales Profit margin = 2,528,079/15,214,000

On the balance sheet of Bearcat Inc., you notice "Common Stock ($0.25 par)" of $1,000,000, "Capital Surplus" of $5,000,000, and "Retained Earnings" of $15,000,000. If Bearcat Inc. has Sales of $30,000,000 and a profit margin of 12%, what is the return on equity (ROE) of the firm if their stock is currently selling for $20.00 per share?

17.14 OE = (net income)/(total equity) ROE = (profit margin * sales)/(common stock + capital surplus + retained earnings) ROE = (0.12*30,000,000)/(1,000,000+5,000,000+15,000,000)

You are analyzing a mature company and decided to use multiples to help aid you in valuing the company. You've identified four comparable firms in the same industry whose NTM (Next Twelve Month) P/E ratios are: 8.9, 19.54, 18.05, and 17.24. What is the median NTM P/E ratio that you should use for your valuation multiple?

17.65 Reorder in ascending order: 8.9, 17.24, 18.05, 19.54 Average the middle two: Median = (17.24+18.05)/2

A project has an initial cost of $9,800 and produces cash inflows of $4,100, $4,800, and $5,600 over Years 1 to 3, respectively. What is the payback period if the required rate of return is 12 percent

2.16 years On a payback period basis, the project recovers the initial investment between 2 and 3 years. Payback Period = 2 + (9800 - 8900)/5600 = 2.16 years.

A stock had returns of 12%, 10%, 7%, 0%, -8%, and -5% over the past six years. What is the geometric average return for this time period?

2.39% Geometric average return = [1.12 (1.10) (1.07) (1) (.92) (.95)]^1/6 - 1 = 0.0239 or 2.39%

Baxter's Market is considering opening a new location with an initial cost of $548,700. This location is expected to generate cash flows of $242,400, $201,500, $187,800, and $241,000 in Years 1 to 4. What is the payback period?

2.56 years Payback period = 2 + {548,700 - (242,400 + 201,500)}/187,800 = 2.558

A firm has a profit margin of 22.3%, a total assets turnover ratio of 0.55 and an equity multiplier of 1.75. What is the firm's return on equity (ROE)?

21.46% Use the Dupont Identity to solve: ROE = profit margin * total assets turnover * equity multiplier ROE = 0.223*0.55*1.75 ROE = 21.46%

One year ago, you purchased 200 shares of XP stock at a price of $32.19 a share. The company pays an annual dividend of $2.31 per share. Today, you sold for the shares for $36.97 a share. What is your total percentage return on this investment?

22.03% Total percentage return = ($36.97 - 32.19 + 2.31)/$32.19 = 22.03%

Three months ago, you purchased 200 shares of stock in SPG at a price of $23.68 a share. The stock pays a quarterly dividend of $0.12 a share. Today, you sold all of your shares for $27.11 per share. What is the total amount of your dividend income on this investment?

24 Dividend income = 0.12 (1) (200) = $24

One investor has a stock with annual returns for the past five years as follows. The arithmetic average of these returns is: YearReturn 1 5%2 6% 3 10% 4 -5% 5 0%

3.20% Arithmetic Average Return = (5+6+10+(-5)+0)/5 = 3.20%

You purchased 700 shares of a stock at a price of $62.50 per share. After one year, you received total dividend of $2,240 and then sold all your shares at a price of $61.70 per share. What was the total percentage return of your investment?

3.84% Total investment = 700 x 62.50 = $43,750 End of year investment value = $2,240 + 700x61.70 = 2240+43190 = $45,430 Total Percentage Return = (45,430 - 43,750)/43,750 = 0.0384 = 3.84%

Calculate the interest coverage ratio using the information below. Category 2022 ($) Accounts payable 800 Accounts receivable 950 Cash 300 COGS 650 Common stock 3,900 Depreciation expense 40 Interest expense 90 Inventories 1,100 Long-term debt 1,700 Net fixed assets 7,150 Notes payable 400 General & Adm. expenses 110 Retained earnings 2,700 Revenue/Sales 1,200 Taxes 120

4.44 EBIT = Sales - COGS - Gen. & Adm. Expenses - Depreciation EBIT = 1200 - 650 - 110 -40 EBIT = $400 Interest coverage ratio = EBIT/(interest expense) Interest coverage ratio = 400/90

A stock had annual returns of 49%, -60%, 78%, 40%, and -68% over a five-year period. The arithmetic average annual return was _______ and the geometric average annual return was ________.

7.8 percent; -13.8 percent Arithmetic average return = ( 49% + -60% + 78% + 40% + -68%)/5 = 39%/5 = 7.8% Geometric average return = [(1+ 0.49)(1 - 0.60)(1+0.78)(1+0.40)(1-0.68)]1/5 - 1 = -0.1382 = -13.82%

A project has the cash flows given in the table below. The project has required rate of return of 12.4 percent and Net Present Value (NPV) of -$96,700. Calculate the project's internal rate of return (IRR). YearCash Flow 0 Not Given 1 $246,000 2 $246,000 3 $253,000 4 $253,000 5 $253,000

8.37 percent Find the present value of the project's cash flows using the CF keys. C01 = 246000; F01 =2; C02 = 253000; F02 =3; NPV. I = 12.4; CPT. PV (Cash flows) = $891,274.43 Since the NPV is given as -$96,700, the initial project cost = 891,274.43 - (- 96,700) = $987,974. Now, use this figure or amount as CF0 and find the IRR. CF0 = -987,974; C01 = 246000; F01 =2; C02 = 253000; F02 =3; IRR. CPT IRR = 8.3695 percent

You purchased 100 shares of AACL stock for $12.02 a share last year. You have received a total of $118 in dividends and $1,301 in proceeds from selling the shares. What is your dividend yield on this stock?

9.82% Dividend yield = ($118/100)/$12.02 = 9.82%

The equity portion of the balance sheet for BusFinance Inc. for the year 2022 is shown in the table below. If the stock price of BusFinance Inc. is $25 per share, calculate the market to book ratio. Equity Portion of BusFinance Inc. Balance Sheet, 2022 Common stock ($0.25 par) $2,500,000 Capital surplus $4,000,000 Retained earnings $3,555,000

Book value of equity = common stock + capital surplus + retained earnings Book value of equity = 2,500,000 + 4,000,000 + 3,555,000 Book value of equity = 10,055,000 Shares outstanding = (common stock)/(par value per share) Shares outstanding = 2,500,000/0.25 Shares outstanding = 10,000,000 shares Book value per share = (book value of equity)/(shares outstanding) Book value per share = 10,055,000/10,000,000 Book value per share = 1.0055 Market to book ratio = (market value per share)/(book value per share) Market to book ratio = 25/1.055 Market to book ratio = 24.86

You are considering borrowing money from a bank. You have received the following quotations from four banks. Which bank should you borrow from? Bank A: APR of 4.78 percent compounded annually Bank B: APR of 4.73 compounded semi-annually Bank C: APR of 4.70 compounded monthly Bank D: APR of 4.71 percent compounded daily

Calculate the effective annual rates and select the bank with the lowest effective annual rate. Bank A. Effective annual rate = 4.78 percent Bank B. Reffective = (1 + 0.0473/2)2 - 1 = 4.786 percent Bank C: Reffective = (1 + 0.0470/12)12 - 1 = 4.803 percent Bank D: Reffective = (1 + 0.0471/365)365 - 1 = 4.822 percent. Bank A has the lowest effective annual rate.

You are analyzing a firm's financial statements and you notice they have sales of $1,500,000, total equity of $10,000,000, total liabilities of $6,000,000, and cost of goods sold of $1,000,000. What is the common size amount of the cost of goods sold?

Common size COGS = COGS/Sales Common size COGS = $1,000,000/$1,500,000 Common size COGS = 0.6667 Common size COGS = 66.67%

You are analyzing a firm's financial statements and you notice they have sales of $1,500,000, total equity of $10,000,000, total liabilities of $6,000,000, and plant, property, and equipment (PP&E) of $1,000,000. What is the common size amount of the PP&E? Correct!

Common size PP&E = PP&E/(Total Assets) Total Assets = total equity + total liabilities Total Assets = $10,000,000 + $6,000,000 Total Assets = $16,000,000 Common size PP&E = $1,000,000/$16,000,000 Common size PP&E = 6.25%

You are buying your first home using a 30-year mortgage. The mortgage rate is 3.25 percent, and the purchase price of the home is $126,000. Your down-payment is 10 percent of the purchase price. Calculate your monthly mortgage payment (of principal and interest).

Down payment = 0.1*126,000 = $12,600 Amount borrowed = 126,000 - 12,600 = $113,400 N = 360; I/Y = 3.25/12 = 0.270833333; PV = -113,400; FV = 0; CPT PMT. PMT = 493.52

Find the future value of $85,000 invested for 14 years at an interest rate of 7.4 percent per year compounded monthly.

FV = 85,000x(1 + 0.074/12)12x14 = $238,762.6578 Alternatively, first find the effective annual rate. reff = (1 + 0.074/12)12 - 1 = 7.6562147% Then FV = 85,000x(1.076562147)14 = $238,762.6578 Using the Financial Calculator is also an option N = 168 (12 x 14); PV = -85,000; PMT = 0; I/Y = 0.616666667 (7.4/12); CPT FV. FV = $238,762.6578

____ is the process of evaluating a firm's financial position by analyzing its financial statements, so that better business and investment decisions are made.

Financial statement analysis

Seabiscuit Industries needs to raise $24.59 million to fund a new project. The company will sell bonds that have a coupon rate of 19 percent paid semiannually and that mature in 16 years. The bonds will be sold at an initial YTM of 21.25 percent and have a par value of $2,000. How many bonds must be sold to raise the necessary funds?

First find PV of one bond on your financial calculator, PMT = 0.19/2 * 2000 I/Y = 21.25/2 N = 16*2 FV = 2000 PV = CPT = $1,796.60 --> this is actually shown as a negative number, but for next step make it positive Now, find how many of these bonds you need to sell until you reach the threshold of $24.59 million to fund a new project. 24,590,000/1,796.60 = 13,686.96 but you cannot sell part of a bond, so round up to 13,687

You borrow $365,000 to buy a house. The mortgage rate is 2.85 percent. The loan is to be repaid in equal monthly payments over 15 years. All taxes and insurance premiums are to be paid separately. How much of the 34th (monthly) payment applies to the principal balance?

First, determine the monthly payment. N = 180 (15x12); I/Y = 2.85/12 = 0.2375; PV = -365,000; FV = 0; CPT PMT. PMT = $2,494.37 Next, find the principal balance at the beginning of the thirty-fourth month. That is, at time t = 33. N = 33; I/Y = 0.2375; PV = -365,000; PMT = 2494.37; CPT FV. Loan Balance = $309,200.63. Interest portion of the 34th payment = 0.2375% x 309,200.63 = $734.35 Principal Component = $2,494.37 - $734.35 = $1,760.02

_____ is an all-important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. _____ can be defined simply as the discounted value of the cash that can be taken out of a business during its remaining life.

Intrinsic value

____ measure a firm's ability to meet short term (up to one year) cash outflows (obligations) with short term cash inflows.

Liquidity ratios

You just took up a 30-year mortgage loan of $330,000 to buy your dream home, at a mortgage rate of 3.50 percent. You immediately decided that you will pay an additional amount of $620 (you prefer this to a 15-year mortgage because of its flexibility) every month to pay off the loan earlier. If you are able to do this each month, by how many years will you shorten the length of time it will take to pay off your loan?

N = 360; I/Y = 3.5/12 = 0.291666667; PV = -330,000; FV = 0; CPT PMT. PMT = $1,481.84747 You have decided to add $620 each month to this monthly payment. Thus, new monthly payment = 1,481.84747 + 620 = $2,101.85 Calculate the number of months it will take to pay off your loan, now. I/Y = 0.291666667; PV = -330,000; FV = 0; PMT = 2,101.85.85; CPT N. N = 210.26 You have shortened the length of time by 360 - 210.26 = 149.74 = 149.74/12 = 12.48 years.

Your business finance course has motivated you to begin investing for retirement in your company's 401K plan. Your first $370 monthly investment will be made one month from today and you plan to retire 43 years from today. How much more will you have to invest each month, if you wait for 15 years before starting to invest to end up with the same amount of money at retirement? Assume a rate of return of 0.60 percent per month for your investments.

N = 516 (43x12); I/Y = 0.60; PV = 0; PMT = -370; CPT FV. FV = $1,289,187.68 If you wait 15 years before starting to invest, you have 28 years to retirement. N = 336 (28x12); I/Y = 0.60; PV = 0; FV = -1,289,187.68; CPT PMT. PMT = $1,196.81 Now, you need to save $1,196.81 per month, instead of $370 per month, to obtain the same amount of $1,289,187.68. The additional amount needed per month = 1,196.81 - 370 = $826.81

Your employer contributes $82 a week to your retirement plan. Assume you work for your employer for 30 years and the applicable interest rate is 7.8 percent. Given these assumptions, what will this employee benefit amount to on the day you leave the company? (Assume exactly 52 weeks in a year).

N = 52x30 = 1,560; I/Y = 7.8/52 = 0.15; PV = 0; PMT = 82; CPT FV. FV = -511,846.82

You want to borrow $52,700 and can afford monthly payments of $1,041 for 60 months, but no more. Assume monthly compounding. What is the highest APR rate you can afford?

N = 60; PV = - 52,700; FV = 0; PMT = 1,041; CPT I/Y. I/Y = 0.574870576. APR = 0.57487x12 = 6.898 percent.

You are analyzing a 28-year, 1,000 par value bond which has a yield to maturity of 10.36 percent from The Glam Company. If the bond is quoted at 92.87 percent of face value, what must be the coupon rate for this annual-pay bond?

On your financial calculator, N = 28 FV = 1000 I/Y = 10.36 PV = -0.9287*1000 PMT = CPT = 95.7143 Coupon payment = (coupon rate * face value)/(payments in a year) 95.7143 = (coupon rate * 1000)/(1) coupon rate = 95.7143*(1)/1000 coupon rate = 0.0957143 = 9.57%

The Chauncey Corporation currently has a bond outstanding with a coupon rate of 6 percent and annual payments. The bond is currently selling for $1,109.51. The bond matures in 18 years and has a par value is $1,000. What is the yield to maturity (YTM) of The Chauncey Company's bonds?

On your financial calculator, PMT = 0.06*1000/1 PV = -1109.51 FV = 1000 N = 18 I/Y = CPT 5.06%

The Chauncey Company currently has a bond outstanding with a coupon rate of 10 percent and semiannual payments. The bond is currently selling for $866.85. The bond matures in 17 years and has a par value is $1,000. What is the yield to maturity (YTM) of The Chauncey Company's bonds?

On your financial calculator, PMT = 0.10*1000/2 FV = 1000 PV = -866.85 N = 17*2 I/Y = CPT = 5.91794769 Then to compute for the YTM: 5.91794769% * 2 for the YTM as an APR = 11.84%

The Procter & Gamble Company offers a bond which pays a coupon of 19 percent with semiannual payments. The bonds have a yield to maturity of 15.78 percent and they mature in 13 years. If the bonds have a face value of $5000 what is the current yield of the bond?

On your financial calculator, PMT = 0.19*5000/2 I/Y = 15.78/2 FV = 5000 N = 13*2 PV = CPT = 5878.6317 Current yield = (annual coupon)/price Current yield = (0.19*5000)/5878.6317 Current yield = 16.16%

CGJ Bicycles, Incorporated, is currently selling bonds with an annual coupon of 12 percent. The yield to maturity for these bonds is 6.7 percent and they will mature in 29 years. What should be the current market price of each bond if they each have a face value of $1,000?

On your financial calculator: PMT = 0.12*1000/1 = 120 I/Y = 6.7 FV = 1000 N = 29 PV = CPT $1,670.42

Bearcat Corporation is offering bonds to the market with a coupon of 20 percent. The bonds make semiannual payments and currently have a yield to maturity of 16.78 percent. The bonds will mature in 17 years and have a face value of $1,000. What should be the current market price of each bond?

On your financial calculator: PMT = 0.20*1000/2 = 100 I/Y = 16.78/2 N = 17*2 FV = 1000 PV = CPT $1,179.49

A stock expects to pay dividends of $5.69 per share one year from today, $6.44 per share two years from today, and $7.19 per share three years from today. The stock can be sold for $147.89 three years from today, after the year thress dividend has been paid. If the appropriate discount rate for the stock is 16.12 percent, what should be the price of one share of this stock today?

P0 = D1/(1+R)^1 + D2/(1+R)^2 + (D3+P3)/(1+R)^3 P0 = 5.69/1.1612^1 + 6.44/1.1612^2 + (71.9+147.89)/(1.1612)^3 $108.72

A stock is currently selling for $90.60 per share in the market. If the stock is forecasted to pay a dividend of $10.57 per share in one year and investors require a rate of return of 15.85 percent per year, what constant growth rate must apply to this security?

P0 = D1/(R-G) G = R - D1/P0 G = 0.1585 - 10.57/90.60 4.18%

A firm paid its annual dividend of $3.30 per share on its stock yesterday. The dividend is expected to grow at a constant rate of 1.33 percent per year into the foreseeable future. The expected rate of return on this stock is 16.05 percent. What is the value of one share of this stock today?

P0 = D1/(R-G) P0 = (D0*(1+G))/(R-G) P0 = (3.30*(1.0133))/(0.1605-0.0133) $22.72

A firm expects to pay an annual dividend of $2.01 per share on its stock one year from today. Based on the historical dividend payment pattern, an analyst assumed the dividend will grow at a constant rate of 2.42 percent per year indefinitely. The appropriate discount rate for this stock is 15.56 percent. What is the value of one share of this stock today?

P0 = D1/(R-G) P0 = 2.01/(0.1556-0.0242) $15.30

A stock is currently priced in the market at $117.49 per share. The stock is expected to pay a dividend of $7.50 per share next year. The dividend growth rate is steady at 3.94 percent per year. What is the expected return on this stock, assuming it is correctly priced in the marketplace?

P0 = D1/(R-G) R = D1/P0 + G R = 7.50/117.49 + 0.0394 10.32%

A company has been paying the same amount of dividend each year for the past several years and is expected to continue with that level of dividend payment indefinitely. The stock is selling today for $79.92 per share. If the appropriate annual discount rate for this stock is 9.92 percent, how much is the annual dividend amount?

P0 = D1/R D1 = P0*R D1 = 79.92*0.0992 $7.93

A preferred stock pays an annual dividend of $2.87 per share indefinitely. Investors require a 11.45 percent rate of return on this preferred stock. What should the price of one share of this stock be today?

P0 = D1/R P0 = 2.87/0.1145 $25.07

A mature company has been paying a constant dividend of $9.36 per share on its stock every year and is expected to continue paying this amount perpetually. The stock is selling today for $81.23 per share. What is the expected rate of return on this stock?

P0 = D1/R R = D1/P0 R = 9.36/81.23 11.52%

A firm paid its annual dividend of $2.74 per share on its stock yesterday. The dividend is expected to grow at a rate of 3.88 percent per year into the foreseeable future. The expected rate of return on this stock is 18.74 percent. What is the expected price of the stock three years from today?

P3 = D4/(R-G) P3 = (D0*(1+G)^4)/(R-G) P3 = (2.74*(1.0388)^4)/(0.1874-0.0388) $21.47

An insurance company is trying to sell you an investment policy that will pay you and your heirs $90,000 per year forever. If the required return on this investment is 6.0 percent, how much will you pay for the policy?

PVperpetuity = C/r = 90,000/0.06 = $1,500,000

A stock expects to pay a dividend of $2.37 per share one year from today. After paying the dividend, the stock can be sold for $123.14 per share. If the appropriate discount rate for the stock is 19.79 percent, how much is one share of the stock worth today?

P_0 = (D_1 + P_1)/(1+R)^1 P_0 = (2.37+123.14)/(1.1979)^1 $104.78

This branch of finance is specific to an individual or a family's situation.

Personal finance

____ measure how well a firm generates profits from its operations.

Profitability ratios

You are considering the following two mutually exclusive projects. The required rate of return is 10 percent for project A and 8 percent for project B. Based on the NPV, which project should be chosen? Why or why not? Year Project A Project B 0 -$320,000 -$525,000 1 $292,000 $396,000 2 $165,000 $319,000 3 $107,000 $204,000

Project B; because the NPV of Project B is greater than the NPV of Project A. NPV of Project A: Input the cash flows in the CF system. NPV = $162,208.87 NPV of project B = $277,099.53 Choose B because it has higher positive NPV than A.

Find Cavendish Incorporated's return on equity (ROE) if they have a profit margin of 15.55%, return on assets of 20.20%, and an equity multiplier of 2.

ROE = (net income)/(total equity) ROE = (return on assets)*(equity multiplier) ROE = (net income / total assets)*(total assets / total equity) ROE = 0.2020 * 2 ROE = 40.40%

A microfinance company in a developing country charges petty traders interest rate of 7.5 percent per month. What is the effective annual rate being charged the petty traders?

Reffective = (1 + 0.075)12 - 1 = 1.3818 = 138.18 percent

Which if the following ratios is not a financial leverage ratio?

Return on assets

When calculating a common size income statement, all line items are divided by:

Sales or Revenues

On the balance sheet of Bearcat Inc., you notice "Common Stock ($0.25 par)" of $1,000,000, "Capital Surplus" of $5,000,000, and "Retained Earnings" of $15,000,000. If Bearcat Inc. has Sales of $30,000,000 and a profit margin of 12%, what is the price/earnings (P/E) ratio of the firm if their stock is currently selling for $20.00 per share?

Shares = common stock / (par value per share) Shares = 1,000,000/0.25 Shares = 4,000,000 Net income (earnings) = Sales * (profit margin) Net income = 30,000,000*(0.12) Net income = 3,600,000 Price/earnings ratio = (price per share)/(earnings per share) Price/earnings ratio = 20/(3,600,000/4,000,000) Price/earnings ratio = 22.22

Cecilia purchased a stock last year and sold it today for $4 a share more than her purchase price. She received a total of $1.15 per share in dividends. Which one of the following statements is correct in relation to this investment?

The capital gains yield is positive.

When valuing a financial asset, we need to consider which cash flow elements?

Timing, risk, and magnitude

Using the Fisher Equation, if the nominal interest rate is 8% and the expected inflation rate is 3%, what is the approximate real interest rate?

Use Fisher Eqn: 1+r = (1+R)/(1+h) Where R = nominal interest rate ; h = expected inflation rate ; r = real interest rate 4.85%

What is Alpha Corporation's return on equity (ROE) if their profit margin is 24%, their total assets turnover ratio is 0.60, and their debt-equity ratio is 2.5?

Use the Dupont Identity to solve: ROE = profit margin * total assets turnover * equity multiplier ROE = profit margin * total assets turnover * (1 + debt-equity ratio) ROE = 0.24*0.60*(1+2.5) ROE = 50.40%

You are going to loan a friend $20,000 for one year at an interest rate of 9.5 percent, compounded annually. How much additional interest could you have earned if you had compounded the rate continuously rather than annually?

With interest compounded annually, effective annual rate = 9.5 percent and interest for one year = 0.095*20,000 = $1,900. Effective annual rate with interest compounded continuously = e0.095 - 1 = 9.9658855 percent. Interest received in one year = 0.099658855*20,000 = $1,993.18 Additional interest = 1,993.18 - 1,900 = $93.18

The incremental cash flows of a project are best defined as:

any change in a firm's cash flows resulting from the addition of the project including opportunity costs.

Two key weaknesses of the internal rate of return rule are the:

failure to correctly analyze mutually exclusive projects and the multiple rate of return problem.

To convince investors to accept greater volatility, you must:

increase the risk premium.

The cash flows for a project include the:

incremental operating cash flow, as well as the capital spending and net working capital requirements.

Erosion can best be explained as the:

loss of current sales due to a new project being implemented.

Assume an asset cost $72,800 and has a current book value of $42,760. The asset is sold today for $32,900 cash. The firm's tax rate is 21 percent. As a result of this sale, the firm's net cash flow:

will increase by more than $32,900. Consider the after-tax salvage value. After-tax salvage value = 32,900 - 0.21(32,900 - 42760). Because the equipment was sold for less than the book value, the after-tax salvage value/cash flow is higher than the sales proceeds.

A stock had annual returns of 11.3 percent, 9.8 percent, −7.3 percent, and 14.6 percent for the past four years. Based on this information, what is the 95 percent probability range of returns for any one given year?

−12.5 percent to 26.7 percent Average return = (.113 + .098 − .073 + .146)/4 Average return = .071, or 7.1% σ = {[1/(4 − 1)] [(.113 − .071)2 + (.098 − .071)2 + (−.073 − .071)2 + (.146 − 0.071)].5 σ = .0981, or 9.81% 95% probability range = .071 ± 2 (.0981) 95% probability range = −12.5 to 26.7%