Finc311 exam terms

An investor who was not as astute as he believed invested $284,000 into an account 8 years ago. Today, that account is worth $219,600. What was the annual rate of return on this account?

−3.16 percent $219,600 = $284,000(1 + r)8 r = ($219,600/$284,000)1/8 − 1 r = −.0316, or −3.16%

McClary Tires plans to save $20,000, $25,000, $27,500, and $30,000 at the end of each year for Years 1 to 4, respectively. If it earns 3.3 percent on its savings, how much will the firm have saved at the end of Year 4?

$107,130.78

You need to have $31,500 in 17 years. You can earn an annual interest rate of 5 percent for the first 5 years, 5.6 percent for the next 4 years, and 6.3 percent for the final 8 years. How much do you have to deposit today? $10,047.95 $12,169.02 $11,311.70 $12,174.25 $13,743.35

$12,174.25

What is the future value of $3,078 invested for 8 years at 6 percent compounded annually?

$4,905.86

To fund your dream around-the-world vacation, you plan to save $2,550 per year for the next 12 years starting one year from now. If you can earn an interest rate of 5.35 percent, how much will you have saved for your vacation?

$41,420.69

A project has annual depreciation of $15,028, costs of $82,592, and sales of $138,765. The applicable tax rate is 34 percent. What is the operating cash flow according to the tax shield approach?

$42,183.70

Outdoor sports paid $12,500 in dividends and $9,310 in interest over the past year. Sales totaled $361,820 with costs of $267,940. The depreciation expense was $16,500 and tax rate as 35%. What was the amount of operating cash flow?

$70,056 $77,380 (EBIT) + $16,500 - $23,824.50 = $70,056

By definition, a bank that pays simple interest on a savings account will pay interest:

only on the principal amount originally invested.

Which one of the following terms refers to the best option that was foregone when a particular investment is selected?

opportunity cost

A pro forma financial statement is a financial statement that:

projects future years' operating results.

Given an interest rate of zero percent, the future value of a lump sum invested today will always:

remain constant, regardless of the investment time period

If a firm has an inventory turnover of 15, the firm:

sells its entire inventory an average of 15 times each year.

The Shoe Box is considering adding a new line of winter footwear to its product lineup. When analyzing the viability of this addition, the company should include all of the following in its analysis with the exception of:

the research and development costs to produce the current winter footwear samples.

Consider a three-year project with the following information: initial fixed asset investment = $347,600; straight-line depreciation to zero over the three-year life; zero salvage value; price per unit = $49.99; variable costs per unit = $30.82; fixed costs per year = $187,000; quantity sold per year = 65,500 units; tax rate = 35 percent. How sensitive is OCF to an increase of one unit in the quantity sold?

$12.46

You are in talks to settle a potential lawsuit. The defendant has offered to make annual payments of $15,000, $25,000, $40,000, and $60,000 to you each year over the next four years, respectively. All payments will be made at the end of the year. If the appropriate interest rate is 3.7 percent, what is the value of the settlement offer today? $125,466.34

$125,466.34

You can invest in an account that pays simple interest or an account that pays compound interest. In either case, you plan to invest $3,500 today and both accounts have an annual interest rate of 9 percent. How much more interest will you receive in the 6th year in the account that pays compound interest?

$169.67

You need to have $30,500 in 7 years. You can earn an annual interest rate of 5 percent for the first 4 years, and 5.6 percent for the next 3 years. How much do you have to deposit today?

$21,308.40 PV = $30,500/1.0563 = $25,900.50 PV = $25,900.50/1.0504 = $21,308.40

Travis International has a debt payment of $2.3 million that it must make 6 years from today. The company does not want to come up with the entire amount at that time, so it plans to make equal monthly deposits into an account starting 1 month from now to fund this liability. If the company can earn a return of 5.13 percent compounded monthly, how much must it deposit each month?

$27,347.70 $2,300,000 = C{[(1 + .0513/12)72 − 1]/(.0513/12)} C = $27,347.70

Your grandparents would like to establish a trust fund that will pay you and your heirs $205,000 per year forever with the first payment 12 years from today. If the trust fund earns an annual return of 4 percent, how much must your grandparents deposit today?

$3,329,102.27

Travis invests $5,500 today into a retirement account. He expects to earn 9.2 percent, compounded annually, on his money for the next 13 years. After that, he wants to be more conservative, so only expects to earn 6 percent, compounded annually. How much money will he have in his account when he retires 25 years from now, assuming this is the only deposit he makes into the account?

$34,747.80

The Green Carpet has current liabilities of $72,100 and accounts receivable of $107,800. The firm has total assets of $443,500 and net fixed assets of $323,700. The owners' equity has a book value of $191,400. What is the amount of the net working capital?

$47,700 ($443,500 - $323,700) - (72,100)

For the past year, LP Gas, Inc. had cash flow from assets of $38,100 of which $21,500 flowed to the firm's stockholders. The interest paid was $2,300. What is the amount of the net new borrowing?

-$14,300 Cash flow to creditors = $38,100 -21,500 = $16,600 Net new borrowing = $2,300 - 16,600 = -$14,300

What is the effective annual rate for an APR of 11.30 percent compounded quarterly?

11.79%

A firm has net income of $197,400, a return on assets of 8.4%, and a debt-equity ratio of .72. What is the return on equity?

14.45% ROA x (1+ (debt/equity)) = .1445 = 14.45%

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

All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.

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

All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.

You are comparing two annuities. Annuity A pays $100 at the end of each month for 10 years. Annuity B pays $100 at the beginning of each month for 10 years. The rate of return on both annuities is 8 percent. Which one of the following statements is correct given this information?

Annuity B has both a higher present value and a higher future value than Annuity A.

Which one of the following can be classified as an annuity but not as a perpetuity?

Equal annual payments for life

Which one of the following can be classified as an annuity but not as a perpetuity? Increasing monthly payments forever Increasing quarterly payments for six years Equal weekly payments forever Equal annual payments for life Unequal payments each year for nine years

Equal annual payments for life

Stacey deposits $5,000 into an account that pays 2 percent interest, compounded annually. At the same time, Kurt deposits $5,000 into an account paying 3.5 percent interest, compounded annually. At the end of three years:

Kurt will have a larger account value than Stacey will.

Leo is the owner of a corner store. Which ratio should he compute if he wants to know how long the store can pay its bills given its current level of cash and accounts receivable? Assume all receivables are collectible when due?

Quick Ratio (Cash ratio without inventory)

Deep Sea Fisheries has current liabilities of $238,620, net working capital of $42,580, inventory of $262,750, and sales of $1,941,840. What is the quick ratio?

Quick ratio = ($42,580 + 238,620 - 262,750) / $238,620 = .08

Which one of the following statements is correct? The APR is equal to the EAR for a loan that charges interest monthly. The EAR is always greater than the APR. The APR on a monthly loan is equal to (1 + monthly interest rate)12 − 1. The APR is the best measure of the actual rate you are paying on a loan. The EAR, rather than the APR, should be used to compare both investment and loan options.

The EAR, rather than the APR, should be used to compare both investment and loan options.

Beginning three months from now, you want to be able to withdraw $3,500 each quarter from your bank account to cover college expenses over the next four years. If the account pays .75 percent interest per quarter, how much do you need to have in your bank account today to meet your expense needs over the next four years?

The cash flows are an annuity with four payments per year for four years, or 16 payments. We can use the PVA equation: PVA = C({1 - [1/(1 + r)t]}/r)PVA = $3,500{[1 - (1/1.0075)16]/.0075}PVA = $52,585.09

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

The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due.

Christie is buying a new car today and is paying a $500 cash down payment. She will finance the balance at 6.3 percent interest. Her loan requires 36 equal monthly payments of $450 each with the first payment due 30 days from today. Which one of the following statements is correct concerning this purchase? The present value of the car is equal to $500 + (36 × $450). The $500 is the present value of the purchase. The car loan is an annuity due. To compute the initial loan amount, you must use a monthly interest rate. The future value of the loan is equal to 36 × $450.

To compute the initial loan amount, you must use a monthly interest rate.

Suppose you are committed to owning a $205,000 Ferrari. If you believe your mutual fund can achieve an annual return of 10.7 percent, and you want to buy the car in 12 years on the day you turn 30, how much must you invest today?

To find the PV of a lump sum, we use: PV = FV/(1 + r)tPV = $205,000/(1.107)12PV = $60,531.64

Scenario analysis asks questions such as:

What is the best outcome that should reasonably be expected?

A proposed project will increase a firm's accounts payables. This increase is generally:

a cash inflow at Time zero and a cash outflow at the end of the project.

Net working capital decreases when

a dividend is paid to current shareholders.

Highly liquid assets:

can be sold quickly at close to full value

All else held constant, the present value of an annuity will decrease if you: increase the annuity's future value. increase the payment amount. increase the time period. decrease the discount rate. decrease the annuity payment.

decrease the annuity payment