BUS 330 Midterm Practice Questions
Without referring to the preprogrammed function on your financial calculator, use the basic formula for future value along with the given interest rate, r, and the number of periods, n, to calculate the future value of $1 in the case shown in the following table. Interest rate, r 9% Number of periods, n 1
$1.09 n(1+r)
Future value You have $800 to invest. If you put the money into an account earning 8% interest compounded annually, how much money will you have in 7 years? How much money will you have in 7 years if the account pays 8% simple interest?
$1371.06 (800*(1.08)^7)----compound $1248 (800 * (1 + (0.08 * 7))----simple
You receive $1,000 in 1 year, $1,200 in 2 years, and $1,300 in 3 years. The present value today of these future receipts is ________ if the opportunity cost is 7 percent.
$3044 1000/(1.07) + 1200/(1.07)^2 + 1300/(1.07)^3
How much money would you have to deposit today to create an income stream that pays $10,000 one year from today and continues to make annual payments forever, with payments after the first $10,000 growing at 4% per year? Assume money that you invest today to fund this income stream earns a 7% rate of return.
$333,333
The future value of an ordinary annuity of $2,000 each year for 10 years, deposited at 12 percent, is
$35097
A certain investment promises to pay you $2,500 per year forever with the first payment starting 5 years from now. If you can earn a 5% return on similar investments, what's the most you would pay for this investment today?
$41,135 (2500 * 100) / 5 = 50000 50000/(1.05)^(5-1)
Find the future value at the end of year 3 of the following stream of cash flows received at the end of each year, assuming the firm can earn 8 percent on its investments. Year Amount 1: 10,000 2: 16,000 3: 19,000
$47,944 10000(1.08)^2 + 16000(1.08) + 19000
A certain investment promises to pay you $2,500 per year forever with the first payment starting next year. If you can earn a 5% return on similar investments, what's the most you would pay for this investment today?
$50,000 (2500 * 100) / 5 = 50000
Find the present value of the following stream of cash flows assuming an opportunity cost of 14 percent. Year Amount 1: 10,000 2: 35,000 3: 24,000
$51903 10000/(1.14) + 35000/(1.14)^2 + 24000/(1.14)^3
Single Cash flow = $200 Interest rate = 14% Deposit period = 9 years Find future value
$650.39 200(1+0.14)^9
Find the present value of the following stream of cash flows assuming an opportunity cost of 9 percent. Year Amount 1−5: 10,000/yr. 6−10: 16,000/yr.
$79345
Net Current Asset Investment (NCAI)
(new total current asset - old total current asset) - (new accounts payable + new accruals - old accounts payable - old accruals)
Future value calculation Without referring to the preprogrammed function on your financial calculator, use the basic formula for future value along with the given interest rate, r, and the number of periods, n, to calculate the future value of $1 in the case shown in the following table. Interest rate, r 12% Number of periods, n 2
1.254 (p * (1+r)^n)
Time value Personal Finance Problem You can deposit $15,000 into an account paying 11% annual interest either today or exactly 10 years from today. How much better off will you be 20 years from now if you decide to make the initial deposit today rather than 10 years from today?
20 Years = $120935 10 years = $42591 Difference = $78344
Single-payment loan repayment Personal Finance Problem A person borrows $310 that he must repay in a lump sum no more than 8 years from now. The interest rate is 8.6% annually compounded. The borrower can repay the loan at the end of any earlier year with no prepayment penalty. a. What amount will be due if the borrower repays the loan after 1 year? b. How much would the borrower have to repay after 3 years? c. What amount is due at the end of the eighth year?
310(1.086)^n n=1, $336.66 n=3, $397.06 n=8, $599.79
Net Operating Profit after Taxes
= EBIT * (1-T)
Operating Cash Flow (OCF)
= EBIT * (1-T) + Depreciation
FCF
= OCF - (new gross fixed assets - old gross fixed assets) - [(new total current asset - old total current asset) - (new accounts payable + new accruals - old accounts payable - old accruals)
Firm's Free Cash Flow (FCF)
= OCF - Net Fixed Asset Investment (NFAI) - Net Current Asset Investment (NCAI)
Will the statement of cash flows for Baker Corporation show a $0 cash inflow resulting from the change in stockholders' equity every year, or are other values possible? Explain how Baker's statement of cash flows could show a positive cash inflow resulting from a change in stockholders' equity in some future year?
A positive cash inflow will result from a change in stockholders' equity when more money is flowing into the company than out. Receiving cash from issuing stocks could result in a positive cash inflow.
Depreciation and Recovery year
Asset = n dollars recovery years is y each year multiply n by the depreciation percentage at year y based on the chart
Classifying inflows and outflows of cash Classify each of the following items as an inflow (I) or an outflow (O) of cash, or neither (N). Item Change ($) Item Change ($) Cash Balance −280 Accounts receivable +1,750 Accounts payable −1,120 Net profits +830 Notes payable +1,600 Depreciation +1,100 Long-term debt +1,100 Repurchase of stock +980 Inventory +130 Cash dividends +710 Fixed assets +470 Sale of stock
Cash Balance - Inflow Accounts Payable - Outflow Notes Payable - Inflow Long-term debt - Inflow Inventory - Outflow Fixed Assets - Outflow Accounts Receivable - Outflow Net Profit - Inflow Depreciation - Inflow Repurchase of Stock - Outflow Cash Dividends - Outflow Sale of Stock - Inflow In general, a decrease in an Asset account or an increase in a Debt or Equity account is an inflow (source) of cash. An increase in an Asset account or a decrease in a Debt or Equity account is an outflow (use) of cash. Note: No change (positive or negative) in an account would not be classified as neither an outflow nor an inflow.
Depreciation and other noncash charges serve as a tax shield against income, ___________ annual cash flow.
Increasing
Present value calculation Without referring to the preprogrammed function on your financial calculator, use the basic formula for present value, along with the given discount rate, r, and the number of periods, n, to calculate the present value of $1 in the case shown in the following table. Opportunity cost, r 18% Number of periods, n 8
Present value = FV/(1+r)^n PV = 1/(1.18)^8
Financial managers rely more on ________ value approach because they typically make decisions at the __________ of a project.
Present, Beginning
Income statement preparation On December 31, 2019, Cathy Chen, a self-employed certified public accountant (CPA), completed her first full year in business. During the year, she charged her clients $366,000 for her accounting services. She had two employees, a bookkeeper and a clerical assistant. In addition to her monthly salary of $7,980, Ms. Chen paid annual salaries of $48,100 and $36,200 to the bookkeeper and the clerical assistant, respectively. Employment taxes and benefit costs for Ms. Chen and her employees totaled $34,200 for the year. Expenses for office supplies, including postage, totaled $10,900 for the year. In addition, Ms. Chen spent $17,100 during the year on tax-deductible travel and entertainment associated with client visits and new business development. Lease payments for the office space rented (a tax-deductible expense) were $2,700 per month. Depreciation expense on the office furniture and fixtures was $15,300 for the year. During the year, Ms. Chen paid interest of $15,100 on the $117,000 borrowed to start the business. She paid an average tax rate of 30% during 2019. a. Prepare an income statement for Cathy Chen, CPA, for the year ended December 31, 2019. b. Evaluate her 2019 financial performance.
Sales Revenue - $366000 Less: Operating Expenses Salaries - $180060 Travel and Entertainment - $17100 Depreciation Expense - $15300 Supplies - $10900 Employment Taxes and Benefits - $34200 Lease Payment - $32400 Total Operating Expense $289960 Operating Profits(EBIT) - $76040 Interest Expense - $15100 Net Profit Before Taxes - $60940 Taxes - $18282 Net Profit After Taxes - $42658
Cash
Statement: Balance Sheet Type of Account: Current Asset
Inventories
Statement: Balance Sheet Type of Account: Current Asset
Marketable Securities
Statement: Balance Sheet Type of Account: Current Asset
Accounts Payable
Statement: Balance Sheet Type of Account: Current Liability
Accounts receivable
Statement: Balance Sheet Type of Account: Current Liability
Accruals
Statement: Balance Sheet Type of Account: Current Liability
Notes Payable
Statement: Balance Sheet Type of Account: Current Liability
Accumulated Depreciation
Statement: Balance Sheet Type of Account: Fixed Asset
Buildings
Statement: Balance Sheet Type of Account: Fixed Asset
Equipment
Statement: Balance Sheet Type of Account: Fixed Asset
Land
Statement: Balance Sheet Type of Account: Fixed Asset
Machinery
Statement: Balance Sheet Type of Account: Fixed Asset
Vehicles
Statement: Balance Sheet Type of Account: Fixed Asset
Long-Term debt
Statement: Balance Sheet Type of Account: Long-term Debt
Common Stock (at par)
Statement: Balance Sheet Type of Account: Stockholder's Equity
Paid-in Capital in Excess of Par
Statement: Balance Sheet Type of Account: Stockholder's Equity
Preferred Stock
Statement: Balance Sheet Type of Account: Stockholder's Equity
Retained Earnings
Statement: Balance Sheet Type of Account: Stockholder's Equity
Administrative Expense
Statement: Income Statement Type of Account: Expense
Cost of Goods Sold
Statement: Income Statement Type of Account: Expense
Depreciation Expense
Statement: Income Statement Type of Account: Expense
General Expense
Statement: Income Statement Type of Account: Expense
Interest Expense
Statement: Income Statement Type of Account: Expense
Preferred Stock Dividends
Statement: Income Statement Type of Account: Expense
Selling Expense
Statement: Income Statement Type of Account: Expense
Taxes
Statement: Income Statement Type of Account: Expense
Sales Revenue
Statement: Income Statement Type of Account: Revenue
Operating Expense
Statement: Income Statement Type of Account: Expense
In comparing an ordinary annuity and an annuity due, which of the following is true?
The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity.
The Baker Corporation statement of cash flows shows a $0 cash inflow resulting from changes in stockerholders' equity, yet the balance sheet shows that stockholders' equity increased by $157 in 2019. Can you explain this apparent contradiction?
The stockholders' equity increased by $157 as a result of an increase in retained earnings. Retained earnings are excluded in the statement of cash flows, because their change is actually reflected in the combination of the "Net profits after taxes" and the "Dividends paid" entries.
Transaction costs In late December you decide, for tax purposes, to sell a losing position that you hold in Twitter, which is listed on the NYSE, so that you can capture the loss and use it to offset some capital gains, thus reducing your taxes for the current year. However, since you still believe that Twitter is a good long-term investment, you wish to buy back your position in February the following year. To get this done you call your Charles Schwab brokerage account manager and request that he immediately sell your 1,100 shares of Twitter and then in early February buy them back. Charles Schwab charges a commission of $4.95 for online stock trades and for broker-assisted trades there is an additional $25 service charge, so the total commission is $29.95. a. Suppose that your total transaction costs for selling the 1,100 shares of Twitter in December were $59.95. What was the bid/ask spread for Twitter at the time your trade was executed? b. Given that Twitter is listed on the NYSE, do your total transaction costs for December seem reasonable? Explain why or why not. c. When your February statement arrives in the mail, you see that your total transaction costs for buying the 1,100 shares of Twitter were $47.95. What was the bid/ask spread for Twitter at the time your trade was executed? d. What are your total round-trip transaction costs for both selling and buying the shares, and what could you have done differently to reduce the total costs?
a. $0.05 Transaction cost = shares*(.5 bid/ask spread) + commission cost b. TRUE c. $0.03 Transaction cost = shares*(.5 bid/ask spread) + commission cost d. $107.90 d pt.2. Costs could have been reduced by placing both trades online with a request for routing to the NYSE where the chance of crossing with other public orders is greatest. Had no market maker been necessary, total costs would have been only the $4.95 Schwab commission per trade.
Calculation of EPS and retained earnings Everdeen Mining, Inc., ended 2019 with net profits before taxes of $436,000. The company is subject to a 21% tax rate and must pay $64,600 in preferred stock dividends before distributing any earnings on the 174,000 shares of common stock currently outstanding. a. Calculate Everdeen's 2019 earnings per share (EPS). b. If the firm paid common stock dividends of $0.85 per share, how many dollars would go to retained earnings?
a. $1.61 ((436000 * (1-.21) - 64600)/174000 b. $131950 ((436000*.79)-64000) - (174000 * 0.85)
Initial public offering On April 13, 2017, Yext Inc. completed its IPO on the NYSE. Yext sold 10,500,000 shares of stock at an offer price of $13 with an underwriting discount of $0.77 per share. Yext's closing stock price on the first day of trading on the secondary market was $13.44, and 85,489,470 shares were outstanding. a. Calculate the total proceeds for Yext's IPO. b. Calculate the percentage underwriter discount. c. Calculate the dollar amount of the underwriting fee for Yext's IPO. d. Calculate the net proceeds for Yext's IPO. e. Calculate Yext's IPO underpricing. f. Calculate Yext's market capitalization.
a. $136500000(13 * 10500000) b.5.92% (0.77/13)*100 c. $8085000 (.77 * 10500000) d. 128415000 (a-c) e. 3.4% (13.44 - 13)/13 f. $1148978477 (13.44 * 85489470
Conrad Air, Inc. Balance Sheet as of December 31, 2019 Assets Cash $115,000 Marketable securities 38,000 Accounts receivable 48,000 Inventories 125,000 Current assets $326,000 Equipment $2,965,000 Buildings 1,595,000 Fixed assets $4,560,000 Total assets $4,886,000 Liabilities and Stockholders' Equity Accounts payable $65,000 Short-term notes 51,000 Current liabilities $116,000 Long-term debt $2,682,000 Total liabilities $2,798,000 Common stock $504,000 Retained earnings 1,584,000 Stockholders' equity $2,088,000 Total liabilities and equity $4,886,000 Effect of net income on a firm's balance sheet Conrad Air, Inc., reported net income of $1,374,000 for the year ended December 31, 2020. Show how Conrad's balance sheet would change from 2019 to 2020 depending on how Conrad "spent" those earnings as described in the scenarios that appear below. a. Conrad paid no dividends during the year and invested the funds in marketable securities. b. Conrad paid dividends totaling $496,000 and used the balance of the net income to retire (pay off) long-term debt. c. Conrad paid dividends totaling $496,000 and invested the balance of the net income in building a new hangar. d. Conrad paid out all $1,374,000 as dividends to its stockholders.
a. $1374000 $1412000 $2958000 b. $878000 $1804000 $2462000 c. $878000 $2473000 $2462000 d. $0 $1584000
Initial Public Offering. A Brazilian company called Netshoes completed its IPO on April 12, 2017, and listed on the NYSE. Later, Netshoes sold 8,250,000 shares of stock to primary market investors at an IPO offer price of $17.59, with an underwriting discount of 6.8%. Secondary market investors, however, were paying only $15.61 per share for Netshoes' 31,025,936 shares of stock outstanding. a. Calculate the total proceeds for Netshoes' IPO. b. Calculate the dollar amount of the underwriting fee for Netshhoes' IPO. c. Calculate the net proceeds for Netshoes' IPO. d. Calculate market capitalization for Netshoes' outstanding stock. e. Calculate IPO underpricing for Netshoes' IPO. f. Explain the IPO underpricing for Netshoes.
a. $145117500 (17.59*8250000) b. $9867990 (a*0.068) c. $135249510 (a-b) d. $484314861 (15.61*31025936) e. -11.26% (15.61-17.59)/17.29 f. Negative underpricing indicates secondary market investors are not willing to pay as much for existing shares as primary market investors were for new shares - a rare case of primary market investors losing money on IPO shares.
Ken Allen, capital budgeting analyst for Bally Gears, Inc., has been asked to evaluate a proposal. The manager of the automotive division believes that replacing the robotics used on the heavy truck gear line will produce total benefits of $560,000 (in today's dollars) over the next 5 years. The existing robotics would produce benefits of $400,000 (also in today's dollars) over that same time period. An initial cash investment of $220,000 would be required to install the new equipment. The manager estimates that the existing robotics can be sold for $70,000. Show how Ken will apply marginal cost-benefit analysis techniques to determine the following: a. The marginal benefits of the proposed new robotics. b. The marginal cost of the proposed new robotics. c. The net benefit of the proposed new robotics. d. What should Ken recommend that the company do? Why? e. What factors besides the costs and benefits should be considered before the final decision is made?
a. $160000 b. $150000 c. $10000 d. replace since net profit is positive e. consider energy consumption, additional training, and if better robot will be available soon
Transaction costs You would like to purchase one Class A share of Berkshire Hathaway through your Scottrade brokerage account. Scottrade charges a $7 commission for online trades. You log into your account, check the real-time quotes for Berkshire Hathaway (you see a bid price of $262,850 and an ask price of $263,730) and submit your order. a. What is the current bid/ask spread for Berkshire Hathaway Class A shares? b. If Scottrade routes your buy order to the NYSE, where Berkshire Hathaway is listed, what's the potential minimum your total transaction costs will be? c. If, instead, Scottrade routes your buy order to NASDAQ, where Berkshire Hathaway is not listed, what's the potential maximum your total transaction costs will be? d. Regardless of how your trade is executed, based on the bid/ask spread, what is the market value of your trade?
a. $880 b. $7 c. $447 (.5 * bid/ask spread) + commission) d. $263290 (bid price + .5(bid/ask spread)
Using a time line The financial manager at Starbuck Industries is considering an investment that requires an initial outlay of $27,000 and is expected to produce cash inflows of $2,000 at the end of year 1, $5,000 at the end of years 2 and 3, $10,000 at the end of year 4, $9,000 at the end of year 5, and $6,000 at the end of year 6. a. Select the time line option that represents the cash flows associated with Starbuck Industries' proposed investment. b. Which of the approaches—future value or present value—do financial managers rely on most often for decision making? Why?
a. -$27000 > $2000 > $5000 > $5000 > $10000 > $9000 > $6000 b.
Marginal cost-benefit analysis and the goal of the firm Ken Allen, capital budgeting analyst for Bally Gears, Inc., has been asked to evaluate a proposal. The manager of the automotive division believes that replacing the robotics used on the heavy truck gear line will produce total benefits of $525,000 (in today's dollars) over the next 5 years. The existing robotics would produce benefits of $388,000 (also in today's dollars) over that same time period. An initial cash investment of $210,000 would be required to install the new equipment. The manager estimates that the existing robotics can be sold for $65,000. Show how Ken will apply marginal cost-benefit analysis techniques to determine the following: a. The marginal benefits of the proposed new robotics. b. The marginal cost of the proposed new robotics. c. The net benefit of the proposed new robotics. d. What should Ken recommend that the company do? Why? e. What factors besides the costs and benefits should be considered before the final decision is made?
a. 525000 - 388000 =$137000 b. 210000-65000 = $145000 c. -$8000 (a-b) d. Do not replace robots because net profit would be negative e. consider additional training, if newer robots will be available soon, and energy consumption
Corporate taxes Tantor Supply, Inc., is a small corporation acting as the exclusive distributor of a major line of sporting goods. During 2018 the firm earned $93,700 before taxes. a. Calculate the firm's tax liability using a flat tax rate of 25%. b. How much are Tantor Supply's 2018 after-tax earnings?
a. 93700*.25 = $23425 b. 93700 - 23425 = $70275
Liability comparisons Merideth Harper has invested $25,000 in Southwest Development Company. The firm has recently declared bankruptcy and has $60,000 in unpaid debts. Explain the nature of payments, if any, by Merideth in each of the following situations. a. Southwest Development Company is a sole proprietorship owned by Ms. Harper. b. Southwest Development Company is a 50-50 partnership of Merideth Harper and Christopher Black. c. Southwest Development Company is a corporation.
a. Ms. Harper has unlimited liability, which means creditors can claim against her personal assets. b. Ms. Harper has unlimited liability, which means creditors can claim against her personal assets. c. Ms. Harper has limited liability, which guarantees that she cannot lose more than the $25,000 she invested.
Identifying agency problems, costs, and resolutions Explain why each of the following situations is an agency problem and what costs to the firm might result from it. Suggest how the problem might be handled short of firing the individual(s) involved. a. The front desk receptionist routinely takes an extra 20 minutes of lunch time to run personal errands. b. Division managers are padding cost estimates so as to show short-term efficiency gains when the costs come in lower than the estimates. c. The firm's chief executive officer has had secret talks with a competitor about the possibility of a merger in which she would become the CEO of the combined firms. d. A branch manager lays off experienced full-time employees and staffs customer service positions with part-time or temporary workers to lower employment costs and raise this year's branch profit. The manager's bonus is based on profitability.
a. The front desk receptionist is being compensated for unproductive time., The company could install a time clock that would result in either (1) her returning on time or (2) reducing the cost to the firm. , The management could bring the situation to the attention of the receptionist. The extra emphasis on meeting her duties may be all that is required. b. One agency cost is that money budgeted to cover the project proposal is not available to fund other projects that may help to increase shareholder wealth., One way to reduce the agency cost is to base the reward system on how close the employee's estimates come to the actual cost rather than having them come in below cost., A reward system based on increasing shareholder wealth might motivate the division managers to make more accurate estimates in order to be able to take on additional profitable projects. Your answer is correct. c. One agency cost is that the CEO may negotiate a deal with the merging competitor that is extremely beneficial to herself at the expense of selling the firm for less than its fair market value. Your answer is correct. , A good way to reduce the loss of shareholder wealth would be to open the firm up for purchase bids from other firms once the manager makes it known that the firm is willing to merge. Your answer is correct. , An open bidding process may encourage other firms to offer a price closer to the fair market value of the firm. d. Generally part-time or temporary workers are not as productive as full-time employees. These workers have not been on the job as long to increase their work efficiency. Your answer is correct. , This manager is getting rid of good employees to increase short-term profits. Your answer is correct. , One approach to reducing the problem would be to give the manager performance share if certain stated goals are met. Your answer is correct. , Implementing a stock incentive plan tying management compensation to share price would also encourage the manager to retain quality employees.
Time value Personal Finance Problem As part of your financial planning, you wish to purchase a new car 6 years from today. The car you wish to purchase costs $15,000 today, and your research indicates that its price will increase by 2% to 4% per year over the next 6 years. a. Estimate the price of the car at the end of 6 years if inflation is (1) 2% per year and (2) 4% per year. b. How much more expensive will the car be if the rate of inflation is 4% rather than 2%? c. Estimate the price of the car if inflation is 2% for the next 3 years and 4% for 3 years after that.
a. p(1 + ir)^n 2% = $16892.44 4% = %18979.79 b. $2087.35 c. $17905.72
Time value Personal Finance Problem You have $2,500 to invest today at 9% interest compounded annually. a. Find how much you will have accumulated in the account at the end of (1) 2 years, (2) 4 years, and (3) 6 years. b. Use your findings in part a to calculate the amount of interest earned in (1) the first 2 years (years 1 to 2), (2) the second 2 years (years 3 to 4), and (3) the third 2 years (years 5 to 6). c. Compare and contrast your findings in part b. Explain why the amount of interest earned increases in each succeeding 2-year period.
a. p(1+r)^n 2 year= $2970.25 4 year= $3528.95 6 year= $4192.75 b. year 1-2= $470.25 year 3-4= $558.70 year 5-6= $663.80 c. According to the findings in part b,the amount of interest earned increases in each succeeding 2-year period due to compounding ,the earning of interest on previous interest earned.
EBIT
earnings before interest and taxes
annuity that deposits n amount at rate r for y years
n(1+r)^y + n(1+r)^(y-1) + n(1+r)^(y-2) + n(1+r)^(y-3) + ... + n(1+r)^1
Net Fixed Asset Investment (NFAI)
new gross fixed assets - old gross fixed assets
Time Value Personal Finance Problem Misty needs to have $17,000 in 6 years to fulfill her goal of purchasing a small sailboat. She is willing to invest a lump sum today and leave the money untouched for 6 years until it grows to $17,000, but she wonders what sort of investment return she will need to earn to reach her goal. Use your calculator or spreadsheet to figure out the approximate annually compounded rate of return needed if she can invest $11,200 today.
r = (17000/11200)^(1/6) - 1 = 7.2%
