FI 311 Exam
What is the future value of $20,000 loan payable in full in 5 years with a 12% annual interest rate compounded monthly? >$36,333.93 > $0 > $35,246.83 > Unable to determine with the information given.
$0
The Studebaker dealership in Haslett is considering building a new showroom. The owner's grandfather bought vacant land in the city 85 years ago for $150,000 on which the new dealership could be built. However, 7-Eleven has made the owner an offer to buy the land for $300,000 if he decides not to build a dealership on the site. It would cost $850,000 to build the dealership. What would the Initial Investment (cash flow in Year 0) be for purposes of calculating whether or not to build the dealership? ~ $150,000 ~ $850,000 ~ $1,300,000 ~ $1,000,000 ~ $1,150,000
$1,150,000
What is the current price of a bond with a 7.4% coupon rate, 12.5 years until maturity, a par value of $1000. semi-annual coupon payments, and a yield-to-maturity of 7.4%? > $1150 > $740 > $1480 > $1000 > $1250
$1000
Stockbridge Sprockets, Inc. 2019 Income Statement Net Sales $11,407 Less: Cost of goods sold 7,871 Less: Depreciation 1,509 EBIT 2,027 Less: Interest paid 210 Taxable Income (EBT) $1,817 Less: Taxes 636 Net income $1,181 Stockbridge Sprockets, Inc. 2018 and 2019 Balance Sheets ($ in millions) 2018 2019 2018 2019 Cash $276 $316 Accounts Payable $1,818 $1,719 Accounts Rec. 1,415 1,068 Notes Payable 250 75 Inventory 2,104 2,690 Total CL 2,068 1,794 Total CA 3,795 4,074 Long-term debt 3,400 3,100 Net fixed assets 5,613 6,342 Total Liabilities 5,468 4,894 Common stock 2,500 3.250 Retained earnings 1,440 2,272 Total Equity 3,940 5,522 Total Assets $9,408 $10,416 Total Liab. & Equity $9,408 $10,416 Dividends Paid in 2019: $349 What is the Cash Flow From Assets in 2019? - $109 - $247 - $553 - $7065 - -$491
$109
You and a friend have decided to launch a hostile takeover of Pizza House. The company is organized as a corporation, and issued 1,000,000 shares, of which 800,000 shares have been purchased (are outstanding). You currently own 1,500 shares, and your friend owns 750 shares. The stock is currently trading at $30. It has been decided that you will purchase enough stock so that your and your friend's stock holdings will be enough to gain control of the company. At the current price, how much will this cost you? - $14,932,530 - $11,932,530 - $24,000,000 - $11,955,030
$11,932,530
You want to buy a used Dodge Dart in 2 years when you graduate. The price of the car now is $5000, but you have read that the price will drop by 5% per year during the next 2 years. If you will be able to get a 4 year loan at 16% annual interest with monthly payments, how much will the monthly payments be when you purchase the car 2 years from now? > $127.89 > $141.70 > $138.87 > $115.00 > $156.23
$127.89
Stockbridge Sprockets, Inc. 2019 Income Statement Net Sales $11,407 Less: Cost of goods sold 7,871 Less: Depreciation 1,509 EBIT 2,027 Less: Interest paid 210 Taxable Income (EBT) $1,817 Less: Taxes 636 Net income $1,181 Stockbridge Sprockets, Inc. 2018 and 2019 Balance Sheets ($ in millions) 2018 2019 2018 2019 Cash $276 $316 Accounts Payable $1,818 $1,719 Accounts Rec. 1,415 1,068 Notes Payable 250 75 Inventory 2,104 2,690 Total CL 2,068 1,794 Total CA 3,795 4,074 Long-term debt 3,400 3,100 Net fixed assets 5,613 6,342 Total Liabilities 5,468 4,894 Common stock 2,500 3.250 Retained earnings 1,440 2,272 Total Equity 3,940 5,522 Total Assets $9,408 $10,416 Total Liab. & Equity $9,408 $10,416 Dividends Paid in 2019: $349 What is the amount of the non-cash expenses in 2019? - $210 - $5719 - $5509 - $1509 - $1719
$1509
Marshall Manufacturing, Inc. is having financial difficulties, and have announced that they will be reducing their dividend by 4% per year for the foreseeable future. The stock just paid a dividend of $3 per share, and investors require a 14% annual return to hold the stock. What is the price of the stock? > $31.20 > $16.00 > $30.00 > $16.67
$16.00
Your father invested a lump sum 26 years ago at 4.25% annual interest compounded annually. Today, he gave you the proceeds of that investment which totaled $51,480.79. How much did your father originally invest? > $15,929.47 > $16,391.61 > $17,444.86 > $17,500.00 > $17,999.45
$17,444.86
Mega-Mergers-R-Us State Bank pays 4% annual interest, compounded monthly, on savings accounts. If you deposit $10,000 into an account and make no further deposits or withdrawals, how much interest will you have earned in total after 5 years? > $2,000.00 > $2,097.43 > $2,209.97 > $2,876.41 > $12,166.53
$2,209.97
The Fowlerville Fowls minor league baseball team are considering building a new stadium. They will only do so if their Senior Financial Analyst determines building the stadium would have a positive Net Present Value. Using the data below, determine what the Year 0 cash flow would be: * The land the stadium would be built on cost $1,500,000. They bought this land in 2015. * Construction costs of $2,300,000 * $25,000 for a marketing study conducted last year to determine whether more fans would come to the games if they built a new stadium * $250,000 for additional street lights, access road improvements and parking lot for the new stadium * $100,000 for an electronic video sign in front of the building and additional signage around the city * $1,000 for a trip taken by team management last year to see a similar stadium in Wooster, Ohio. ~ $2,500,000 ~ $2,300,000 ~ $2,650,000 ~ $3,800,000 ~ $2,325,000
$2,650,000
At the accounting break-even point, Company X will sell 14,600 units of a product at a price of $10 each. At this level of production, the depreciation is $58,000 and the variable cost per unit is $4. What is the amount of the fixed costs at this production level? ~ $29,600 ~ $43,400 ~ $88,000 ~ $83,267 ~ $41,900
$29,600
You have decided to buy a $20,000 car. The local bank, Loansforall Savings and Trust, is willing to give you a 4-year loan at 12% annual interest. However, they are requiring that you make a 10% down payment on the car in order to get the loan. Assuming that you make the required down payment, what will your monthly payments be? > $526.68 > $474.01 >$579.34 > $395.26
$474.01
A preferred stock pays annual dividends in the amount of $6. If investors require a 12% annual return to hold the stock, what is the price of the stock? > $8 > $6 > $50 > $20 > $10
$50
Stockbridge Sprockets, Inc. 2019 Income Statement Net Sales $11,407 Less: Cost of goods sold 7,871 Less: Depreciation 1,509 EBIT 2,027 Less: Interest paid 210 Taxable Income (EBT) $1,817 Less: Taxes 636 Net income $1,181 Stockbridge Sprockets, Inc. 2018 and 2019 Balance Sheets ($ in millions) 2018 2019 2018 2019 Cash $276 $316 Accounts Payable $1,818 $1,719 Accounts Rec. 1,415 1,068 Notes Payable 250 75 Inventory 2,104 2,690 Total CL 2,068 1,794 Total CA 3,795 4,074 Long-term debt 3,400 3,100 Net fixed assets 5,613 6,342 Total Liabilities 5,468 4,894 Common stock 2,500 3.250 Retained earnings 1,440 2,272 Total Equity 3,940 5,522 Total Assets $9,408 $10,416 Total Liab. & Equity $9,408 $10,416 Dividends Paid in 2019: $349 What is the amount of the Cash Flow to Creditors in 2019? - -$90 - $510 - -$300 - $90 - $649
$510
Building Bashers, Inc. purchased new machinery 6 years ago for $8 million, that can be sold today for $5 million. The company has taken depreciation charges on this machinery totaling $4 million to date. The company's current balance sheet shows current liabilities of $2 million, and net working capital of $1 million. If all the current assets of the company were liquidated today, it would receive $1.5 million cash. What is the market value of the firm's assets? - $6,500,000 - $13,000,000 - $7,500,000 - $7,000,000 - $5,000,000
$6,500,000
You currently have $1000 in a savings account. You plan to add $1500 to the account a year from now, $2000 two years from now, and $3000 three years from now. Assuming you will not make any deposits other than those already mentioned, how much money will you have in your account at the end of Year 6 assuming an annual interest rate of 1.5% with annual compounding? > $6,875.69 > $7,969.13 > $6,575.34 > $7,621.02 > $8,012.47
$7,969.13
At the beginning of the year, a firm had current assets of $91,807 and current liabilities of $102,343. At the end of the year, the current assets are $89,476 and the current liabilities are $92,638. What is the change in net working capital? - -$7374 - $3698 - -$3162 - $7374 - -$831
$7374
Wishfullthinking Luxury Yachts, Inc., is considering introducing a new line of budget yachts for the only slightly mega-wealthy. This new budget yacht would sell for $1 million each. The company believes it will be able to sell 1,000 of these ships globally per year. They also believe that the positive publicity generated at country clubs around the world by this new line of yacht will increase sales of its mid-sized yacht, which sell for $2 million each, by 100 units per year. However, as their clients become more budget minded, the new line of yacht will erode sales of their luxury ocean liner, which sells for $10 million; sales of the luxury liner are expected to decline by 25 units per year. What is the annual sales amount that should be used in analyzing whether the new budget yachts should be introduced? ~ $1.0 billion ~ $950 million ~ $1.45 billion ~ $1.2 billion ~ $550 million
$950 million
What is the net present value of a project that has an initial cash outflow of $34,900 and the following cash inflows? The required return is 15.35 percent. Year----------CashFlow 1-------------$12,500 2-------------$19,700 3----------------$0 4-------------$10,400 ~ -$3,383.25 ~ -$2,784.62 ~ -$2,481.53 ~ $52,311.08 ~ $66,416.75
-$3,383.25
- Stockbridge Sprockets, Inc. 2019 Income Statement Net Sales $11,407 Less: Cost of goods sold 7,871 Less: Depreciation 1,509 EBIT 2,027 Less: Interest paid 210 Taxable Income (EBT) $1,817 Less: Taxes 636 Net income $1,181 Stockbridge Sprockets, Inc. 2018 and 2019 Balance Sheets ($ in millions) 2018 2019 2018 2019 Cash $276 $316 Accounts Payable $1,818 $1,719 Accounts Rec. 1,415 1,068 Notes Payable 250 75 Inventory 2,104 2,690 Total CL 2,068 1,794 Total CA 3,795 4,074 Long-term debt 3,400 3,100 Net fixed assets 5,613 6,342 Total Liabilities 5,468 4,894 Common stock 2,500 3.250 Retained earnings 1,440 2,272 Total Equity 3,940 5,522 Total Assets $9,408 $10,416 Total Liab. & Equity $9,408 $10,416 Dividends Paid in 2019: $349 What is the amount of the Cash Flow to Shareholders in 2019? - $1099 - $349 - -$401 - $742 - -$540
-$401
# Calculate the Portfolio Beta of the following: Stock Weight Beta --Q-------20%------0.79-- --R--------30%------1.23-- --S--------35%------1.13-- --T--------15%------1.36--
1.1265 Chapter 12 - Question 8
The preferred stock of Okemos Oil, Inc. is currently priced at $40 per share. The stock pays a quarterly dividend of $1. What is the rate of return on the stock? > 10.0% > 2.5% > 20.0% > 5.0% > 4.0%
10.0%
Company R's common stock has a Beta of 1.07. If Treasury Bills are yielding 3.5%, and the expected return of the market is 10%, what is the company's cost of equity?
10.46% Chapter 13 - Question5
What is the required rate of return of a stock that is expected to pay a $3 dividend one year from now, has a current price of $60 and a dividend growth rate of 6%? > 11.0% > 11.3% > 12.3% > 14.0%
11.0%
# Suppose a stock had an initial price of $65 per share, paid dividends totaling $1.45 during the year, and had an ending share price of $71. What was the percentage total returns?
11.46% Chapter 11 - Question 8
# You own a portfolio that is 35% invested in Stock X, 20% invested in Stock Y, and 45% invested in Stock Z. The expected returns of these stocks are 9%, 15%, and 12% respectively. What is the expected return of the portfolio?
11.55% Chapter 12 - Question 6
Your recent internship has convinced you that you will land a very high-paying job at graduation, and so you have decided to buy a new BMW 7 Series car as a graduation present for yourself. However, you sensibly decide to wait until a few years after graduating to buy it. Assume the current price of the car is $86,500, you intend to buy it 4 years from now, and the price of a new car of that model is expected to rise by 4% per year until you are ready to buy it. The local bank has informed you that when you are ready to purchase the car 4 years from now, they will give you a 5-year loan for the car with monthly payments of $2354.58. What annual rate of interest are they charging you? > 11% > 12% > 13% > 14% > 15%
14%
Alphabet Inc. has a 7 percent coupon bond outstanding that matures in 13.5 years. The bond makes semiannual coupon payments. The par value of the bond is $1000, and it is currently selling on the market for $550.40. What is the bond's yield-to-maturity? > 9.57% > 14.78% > 8.68% > 19.14% > 7.39%
14.78%
# Stock W has a beta of 1.5, the market risk premium is 10%, and the risk-free rate is 1%. What is Stock W's expected return?
16% Chapter 12 - Question 12
You put $250 into an account at the end of each year for 5 years, starting at the end of this year. At the end of the 5th year the account was worth $1,750. What rate of return did you earn (use annual compounding)? > 10.0% > 12.5% > 16.9% > 17.5%
16.9%
The Cookie Haus has computed its fixed costs to be $66,000. Depreciation expense is $50,000. Operating Cash Flow is $105,860. The sales price is $1.29 cookie while the variable cost per cookie is $0.40. How many cookies must it sell to break-even on a financial basis? ~ 175,124 ~ 130,337 ~ 118,944 ~ 74,158 ~ 193,102
193,102
You own 1,000,000 shares of Haslett Airlines, Inc.. The company has issued a total of 25,000,000 million shares, of which 20,000,000 are currently outstanding. You have decided to sell ½ of your holdings in the company. After the sale, what will your percentage ownership of the company be? - 5.0% - 4.0% - 2.5% - 2.0% - 1.0%
2.5%
What is the Yield-to-Maturity of a 6.5% coupon bond with semi-annual coupon payments, a par value of $1000, 12.5 years to maturity, and a current price of $1150? > 2.44% > 5.39% > 4.88% > 10.79% > 7.22%
4.88%
A bond makes semi-annual payments of $25 each. It has 10 years until maturity, and is selling on the market at par ($1000). What is the bond's yield-to-maturity? > 2.5% > 3.8% > 5.0% > 10.0% > There is not enough information given to calculate YTM
5.0%
The bonds of Spartan Scooters have a par value of $1000, a current market value of $1200, and make semiannual coupon payments of $30 each. What is the coupon rate of these bonds? - 6.0% - 3.0% - 5.0% - 2.5% - 4.0%
6.0%
What is the Coupon Rate of a bond that makes semi-annual coupon payments, has a par value of $1000, sells on the market for $1031.40, has a yield-to-maturity of 6%, and has 8 years remaining until maturity? > 3.25% > 6.50% > 3.50% > 7.00% > 6.31%
6.50%
Given the following information for Watson Power, find its WACC: Debt: 15,000 bounds outstanding with a 5.8% coupon rate, $1,000 par value, selling for $1080, 25 years to maturity, with semiannual coupon payments. Common Stock: 575,000 shares outstanding, selling for $64 per share. The Beta is 1.09 Preferred Stock: 35,000 shares outstanding, with $2.80 in annual dividend payments, currently selling for $65 per share Market: 7% Market Risk Premium; 3.2% risk-free rate
8.92% Chapter 13 - Question 8
Kitchen Innovations, Inc., is considering introducing a new line of toaster ovens. Before proceeding with a more thorough analysis, the company wants to know what the financial break-even quantity is for the project. The data they have gathered are as follows: The company believes it will be able to produce and sell 10,000 units per year at a retail price of $100 each. Variable costs for the project are $25 per unit Fixed costs have been estimated as $200,000 per year The production equipment needed for the project will cost $500,000, which will be depreciated to 0 over its 5-year estimated life on a straight-line basis. The company's tax rate is 21% ~ 8,740 ~ 7,407 ~ 4,000 ~ 10,814 ~ 26,220
8740
Which of the following would be considered an agency problem? - The company is unlikely to make its upcoming interest payments. - A manager caps commission payouts for salespeople as a cost cutting measure. - Taylor Swift's agent is not returning her phone calls. - Current Liabilities are greater than Current Assets. - A salesperson stops working for the rest of the year when his commission payout for the year is at its limit.
A salesperson stops working for the rest of the year when his commission payout for the year is at its limit.
All else equal, which break-even analysis would a stockholder most likely be most concerned with? ~ Cash Break-even ~ Accounting Break-even ~ Financial Break-even
Accounting Break-even
Which (if any) of the following are not disadvantages to using the Payback Period method of project evaluation: ~ It ignores the time value of money ~ It ignores cash flows beyond the cutoff date (assuming a cutoff date is set) ~ It is biased against long-term projects ~ All of the above are disadvantages
All of the above are disadvantages
Which of the following, if any, describes Yield-to-Maturity? I. It's the rate that makes the present value of future cash flows equal to the current price II. It's the rate of total return an investor will receive if she holds the bond to maturity III. It's equal to the coupon rate when a bond is selling at par > I only > II only > III only > II and III only > All of them
All of them
# A stock had the following returns over the past 6 years: Year Returns 1---------- 8% 2---------- 26% 3---------- 14% 4---------- -17% 5---------- 31% 6---------- -1% Calculate the Arithmetic and Geometric Returns for the stock
Arithmetic: 10.17% Geometric: 8.92% Chapter 11 - Question 12
What is the lowest rating a bond can have and still be considered Investment Grade? - A- - B- - BBB+ - BBB- - BB+
BBB-
Eight Track Tape Entertainment, Inc., just announced that they might not be able to make their upcoming bond coupon payment, and several Wall Street analysts have just issued a report saying the danger of the company filing for bankruptcy is higher now that it was before the company's announcement. As a result, S&P cut their rating on these bonds from B+ to C. All else equal, which of the following is most likely to happen? > Bond Price will: Go up Coupon Rate will: Go down YTM will: Go down > Bond Price will: Go up Coupon Rate will: Stay the same YTM will: Go down > Bond Price will: Go down Coupon Rate will: Stay the same YTM will: Go up > Bond Price will: Go down Coupon Rate will: Go up YTM will: Go up > Bond Price will: Stay the same Coupon Rate will: Go down YTM will: Go up
Bond Price will: Go down Coupon Rate will: Stay the same YTM will: Go up
Which of the following is NOT true about bonds? - Interest payments are tax deductible to the issuing corporation. - Bondholders have a higher priority claim than stockholders on the company's assets if the firm goes into bankruptcy. - Bondholders have a vote in electing Directors to the Board. - Bondholders are entitled to receive the par value (or other amount specified in the bond indenture) of the bond if they hold it on the maturity date. - Owning a bond does not give the holder an ownership stake in the company.
Bondholders have a vote in electing Directors to the Board.
In which of the following cases is IRR unreliable? I. When looking at mutually exclusive projects II. For a project with an initial negative cash flow, positive cash flow in Year 1, but negative cash flow in Year 2 ~ Both ~ Neither ~ I only ~ II only
Both Chapter 8 Notes
In which of the following cases is the Dividend Growth Model not usable? I. When the company does not pay a dividend II. When the company's dividend growth rate is higher than the required rate of return > I only > II only > Both of them > The dividend growth model can be used for the stock of all companies.
Both of them
In the context of Time Value of Money, what is discounting? > Receiving a lower rate of interest on a loan from the bank. > A decrease in Future Value due to a rise in the interest rate. > Calculating the Present Value of future cash flows. > A sale on blueberry muffins at Starbucks.
Calculating the Present Value of future cash flows.
Which of the following is not one of the main types of decisions financial managers must make? - Capital Budgeting - Capital Spending - Capital Structure - Working Capital Management
Capital Spending
Which of the following is most important in the financial decision-making process? - Net Income - Cash Flow - Interest Expense - Tax Expense - Earnings Per Share
Cash Flow
A company needs to raise money for a spending project, and it has been unable to get a loan from a bank. It will therefore issue securities to be sold to investors, but it doesn't want to issue anything that will increase its risk of bankruptcy. What should the company issue? - Bonds - Common Stock - Nothing - Bonds or Stocks, it doesn't matter
Common Stock
Which of the following is NOT a benefit that holders of common stock have? - Right to vote for members of the Board of Directors. - Right to share proportionally in dividends paid. - Ownership stake in the company. - First priority on assets if the company goes into bankruptcy. - Ability to vote through a proxy.
First priority on assets if the company goes into bankruptcy.
Given what was discussed in class, which of the following cash flows should be excluded from discounted cash flow analysis? I. Sunk Costs II. Opportunity Costs III. Financing Costs IV. Net Working Capital Requirements ~ I only ~ II only ~ I and III only ~ I, III, and IV only ~ I and IV only
I and III only
To which of the following inputs is NPV usually rather sensitive? I. Sales II. Fixed Costs III. Variable Costs IV. Salvage Value ~ None of them ~ I only ~ II, III, and IV only ~ I and III only ~ I and II only
I and III only
What is the importance of knowing the difference between an investment-grade and non-investment-grade bond? I. Investment-grade bonds always pay all interest payments on time, whereas most non-investment-grade bonds do not II. To enable bond mutual fund buyers to have a better sense of the risk level of the fund III. Certain organizations and endowments are prohibited from buying non-investment-grade bonds IV. The price of investment grade bonds is always higher than that of non-investment-grade bonds - I, II, and III only - all of them - II, III, IV only - II and III only - III and IV only
II and III only
Which of the following statements is/are correct? I. A bond with a call provision has a lower yield than one without, all else equal II. A bond rated AA has a lower yield than a bond rated A, all else equal III. A bond with a protective covenant has a lower yield than one without, all else equal > I only > II only > III only > II and III only > All are correct
II and III only
Which of the following would result in an indirect agency cost? I. The cost of fuel when the CEO used the company jet for personal reasons II. Income not earned because a manager turned down a purchase opportunity for personal reasons when analysis showed it to likely be a profitable project. III. An outside auditor's fees for doing an unplanned audit following alleged wrong-doing by the company's CFO. - All of them - None of them - II and III only - II only - I and II only
II only
Which of the following is false when it comes to Debt in corporate finance? - Debt acts as a "lever", magnifying gains and losses. - It can increase the power of the firm's assets. - Increasing debt always lowers net income. - It can increase overall risk but also increases the potential for reward. - It can be a positive factor for the firm when used appropriately.
Increasing debt always lowers net income.
You have just matched all of the winning numbers of the recent Mega Gillions drawing. The jackpot was $100,000,000. Your choices are to receive your prize in equal annual installments over the next 20 years, or take a lump sum payment of $50,000,000 today. Leaving out the effect of taxes, and assuming a discount rate of 5% annually, which is the better option in terms of present value? > Installments > Lump Sum > The Present Value of each option is the same > Cannot determine based on the information given
Installments
You are a financial advisor at the bond dealer Yields R Us. Your client has informed you that she is on the Board of Directors of a company that needs to buy some bonds, but is only allowed to purchase investment grade bonds. You recommend the D-rated bonds of Dry Wells Oil Exploration, Inc., because, although the par value of the bonds is $1000, the current market price is only $200. Which of the following statements is False?: > Your client will not be able to purchase these bonds. > You made a very bad recommendation. > Investors clearly believe this company is in no danger of bankruptcy. > The yield-to-maturity of these bonds is higher than the coupon rate.
Investors clearly believe this company is in no danger of bankruptcy.
Which of the following is not an advantage of issuing bonds vs. issuing new stock? - Issuing too much stock can send a company into bankruptcy, which is not the case with bonds. - Bonds have a limited life, whereas stocks do not. - Coupon payments are tax deductible to the issuer, whereas dividends are not. - Issuing new bonds does not involve giving up a piece of the ownership of the company.
Issuing too much stock can send a company into bankruptcy, which is not the case with bonds.
What can be described as the MAIN goal of financial management? - Eliminate debt. - Make sure the CEO's salary is as high as possible. - Maximize the value of the existing stock. - Increase Fixed Assets as much as possible. - Enable the Chairman of the Board to be able to buy another Bugatti Veyron.
Maximize the value of the existing stock.
Which of the following currently owns a majority of the outstanding shares of corporations listed on the U.S. stock exchanges? - Wealthy individuals - Mutual fund companies and other institutional investors - The CEOs and Boards of Directors of the companies - Professional athletes and other celebrities - Sparty
Mutual fund companies and other institutional investors
When NPV and IRR produce conflicting decisions about whether to pursue a project, which one should take precedence? ~ NPV ~ IRR ~ Using either one to make the decision is equally acceptable
NPV
Which of the following is/are true regarding Present Value and Future Value? I. For a given interest rate - the longer the time period, the higher the present value II. For a given time period - the higher the interest rate, the higher the present value > I only > II only > Both are True > Neither are True
Neither are true
Which of the following is FALSE regarding Liquidity? I. More cash on the books of the company is always better than less. II. Too much liquidity tends to hurt company earnings. III. The company should always invest all of its cash to maximize earnings. - All are False - All are True - Only I is False - Only III is False - Only I and III are False
Only I and III are False
Which of the following is/are true when it comes to Net Present Value: I. It will always agree with IRR II. A negative NPV means a project should be rejected III. It should be used as the primary decision making tool when it comes to project investment decisions. ~ All are True ~ All are False ~ Only I is true ~ Only III is true ~ Only II and III are True
Only II and III are True
Which of the following is false when it comes to preferred stock? I. If a company suspends the dividend on its preferred stock, it must pay preferred stockholders all missed dividends before it can pay any dividends to common stock holders II. Preferred stock holders are ahead of bond holders in line to receive assets following a liquidation III Preferred stock dividends are guaranteed, unlike common stock dividends - All are false - None are false - Only II is false - Only III is false - Only II and III are false
Only II and III are false
Eat at State is considering buying a new food truck. It will cost $65,000, but is expected to generate $20,000 in sales each year over the next 4 years. At the end of the 4th year, the truck will be sold to Eat Like a Wolverine in Ann Arbor for $10,000 (after taxes). It will require $5,000 in additional Net Working capital that will not be recovered when the truck is sold. The Dean of Food Services will only authorize the purchase if it is cash positive by the end of the 4th year. Using the payback period method, should the truck be purchased, and why? ~ Do not purchase; the initial expenses will not be recovered in 4 years ~ Do not purchase; the initial expenses will exactly be recovered in 4 years ~ Purchase the truck; the initial expenses will be recovered in Year 3 ~ Purchase the truck; the initial expenses will be recovered + an additional $20,000 by the end of Year 4 ~ Purchase the truck; the initial expenses will be recovered + an additional $15,000 by the end of Year 4
Purchase the truck; the initial expenses will be recovered + an additional $20,000 by the end of Year 4
The Broad College's Starbucks owner has been given the option of buying a new espresso machine that works twice as fast as the existing one. The machine will allow the store to cut costs by $5275 per year over the next 3 years. The store is able to invest unused cash at a rate of 5.2% annual interest. Question 1: What is the most the store owner should be willing to pay for the machine? Question 2: Using your answer from Question 1 above, and assuming the machine can be purchased on credit at 5.2% annual interest with 3 years of monthly payments, what is the maximum monthly payment the store owner should be willing to make for the machine? Answer 1: > $14.311.47 > $16,662.16 > $15,825.00 > $12,491.84 > $18,618.36 Answer 2: > $396.74 > $430.21 > $475.71 > $486.07
Question 1: $14.311.47 Question 2: $430.21
NextGen Electronics Inc is analyzing a proposed project. The company expects to sell 2,000 smartphones. The expected variable cost per unit is $250 and the expected fixed costs are $620,000. The depreciation expense is $100,000. The sales price is estimated at $650 per unit. The tax rate is 30 percent. Question 1: What is the Operating Cash Flow for the project? Question 2: What is the accounting break-even quantity? Answer 1: ~ $56,000 ~ $24,000 ~ $80,000 ~ $156,000 ~ $180,000 Answer 2: ~ 1,800 ~ 1,875 ~ 1,000 ~ 939 ~ 2,031
Question 1: $156000 Question 2: 1800
Hawkeye Innovations is considering developing a new type of mouse trap. They have made the following estimates regarding the development of the new product: The life of the project is 7 years. The project will require additional equipment that will cost $21,000. None of the equipment will have any salvage value. Sales are expected to be 10,000 units per year at $4.50 per unit. Variable costs are expected to be $2.60 per unit. Fixed costs are expected to be $12,000 per year. The annual Depreciation expense would be $3,000. Additional Net Working Capital will be needed in Year 0 in the amount of $8,000. 60% of this will be recovered in Year 7. The company's tax rate is 34%. The Required Rate of Return on the project is 10% Question 1: What is the Year 0 Total Cash Flow? ~ -$21,000 ~ -$33,000 ~ -$29,000 ~ -$36,000 Question 2: What is the project's annual Operating Cash Flow? ~ $45,000 ~ $5,640 ~ $4,000 ~ $2,640 Question 3: What is the project's Net Present Value? ~ $8,921.04 ~ $3,164.68 ~ $921.04 ~ $3,328.22 ~ -$2,271.14
Question 1: -$29000 Question 2: $5,640 Question 3: $921.04
While on Spring Break, you have decided you have had enough of the beach, so you enter the prestigious Cancun Bond Valuation World Championship, which, being a Michigan State student, you win easily. Your grand prize is $500. However, you go a little overboard in celebrating, and you have to put $1500 on your credit card to pay for the festivities (your previous balance was 0). You still have the money that you won, which you decide to pay toward your credit card balance as soon as you get home. The annual interest rate on your credit card is 18%. Question 1: If you make monthly payments of $25, how long will it take to pay the credit card balance to zero? Question 2: How much will you have to pay per month if you want to pay off the credit card balance in 1 year (with monthly payments)? Answer 1: > 12.89 years > 5.13 years > 1.99 years > 61.54 years > 154.65 years Answer 2: > $49.92 > $99.85 > $219.16 > $137.52 > $91.68
Question 1: 5.13 years Question 2: $91.68
Spartan Skateboards, Inc., is considering buying a new piece of equipment that will quickly imprint Sparty's image on the top of the skateboard. The equipment will cost $2500, but is expected to lead to increased sales of $750 each year over the next 4 years (750 in year 1, 750 in year 2, etc.). There is no additional Net Working capital needed, nor will the equipment have any salvage value. The owner of the shop requires a return of 7.5%. Question 1: Using the NPV method (not Payback Period), should the machine be purchased? Question 2: What is the Internal Rate of Return? Answer 1: ~ Yes ~ No ~ There is not enough information given to make a determination. Answer 2: ~ 7.7% ~ 7.3% ~ 12.2% ~ 6.3% ~ IRR is not usuable for a project with this type of cash flows.
Question 1: Yes Question 2: 7.7%
An investment project has only the following cash flows: Year 0 = -2,000,000; Years 1 through 8 = 400,000 each. If the required rate of return is 12%, what decision should be made using NPV? ~ Accept; the NPV is $12,944 ~ Accept; the NPV is $6,433 ~ Reject; the NPV is -$6,433 ~ Reject; the NPV is -$12,944
Reject; the NPV is -$12,944
When the original buyer of a stock sells her stock directly to another investor, it is an example of a/an: - Agency Problem. - Primary Market. - Proxy Right. - Secondary Market. - Repurchase Agreement.
Secondary Market
# What are the weights for a portfolio that has 115 shares of Stock A that sell for $43 per share, and 180 shares of Stock B priced at $19 per share?
Stock A: 59.12% Stock B: 40.88% Chapter 12 - Question 4
Consider a project with an initial investment that has a negative cash flow and all positive future cash flows. As the discount rate is increased: ~ The IRR remains constant while the NPV increases ~ The IRR decreases while the NPV remains constant ~ The IRR remains constant while the NPV decreases ~ The IRR increases while the NPV remains constant ~ The IRR decreases while the NPV increases
The IRR remains constant while the NPV decreases
Which of the following is a type of direct agency cost? - The cost of an audit of the firm's financial statements. - Salaries paid to the firm's managers. - The costs of financing the firm. - The costs of buying insurance on the firm's assets. - The loss of potential profit because a manager made a decision in his own best interest instead of that of the company.
The cost of an audit of the firm's financial statements
When it comes to bonds, "maturity" is: > The amount you will receive when the bond contract ends (typically $1000 in the U.S.). > How many payments are remaining until the bond contract ends. > The date on which the bond contract ends. > The rate of return an investor will receive if she buys the bond today and sells it before the bond contract ends. > The rate of return an investor will receive if she buys the bond today and does not sell it before the bond contract ends.
The date on which the bond contract ends.
The bond term "coupon" is essentially what? - The commission you will have to pay to buy the bond. - The amount the bondholder will receive at maturity. - The interest payment a bond makes to its holders. - The par value of the bond. - A discount that you will receive if you buy the bond before a certain date.
The interest payment a bond makes to its holders.
If a project has a net present value equal to zero, then: ~ The total of the cash inflows must equal the initial cost of the project ~ The project earns a return exactly equal to the discount rate ~ A decrease in the project's initial cost will cause the project to have a negative NPV ~ Any delay in receiving the projected cash inflows will cause the project to have a positive NPV ~ IRR must also equal zero
The project earns a return exactly equal to the discount rate
Net Working Capital helps to evaluate what? - The resources available to manage the company's short-term obligations. - The impact of Current Assets on profitability. - The impact of Fixed Assets on profitability. - The resources available to manage the company's long-term obligations. - The market value of the company's Assets.
The resources available to manage the company's short-term obligations.
True or False: all else equal, a bond which has a quality that would be considered unattractive to investors will tend to have a lower price and higher yield.
True
Yes or No: You have a maximum of $300 per month to spend on a car payment. You found a car that you would like to buy that costs $11,814.08. The bank will give you a 5-year loan at an annual interest rate of 18%. Will you be able to afford this car?
Yes
Your broker, the leading sales generator at the firm Dewey, Cheatem and Howe, calls you with an investment opportunity. If you send him $3000 today, he will send back to you $1050 a year from now, $1300 in Year 2, and $1400 in Year 3. You require a 11% annual return. Based on the present value of these future cash flows, is this a good investment? > Yes > No > You are indifferent, since the present value is equal to the upfront investment amount > Cannot determine with the information given
Yes
All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity. > a premium; more than > a premium; equal to > a discount; more than > a discount; equal to > par; less than
a premium; more than
# Classify the following events as mostly systematic or mostly unsystematic. a) short-term interest rates rise unexpectedly b) The interest rate a company pays on its short-term debt borrowing is increased by its bank c) Oil prices unexpectedly decline d) An oil tanker ruptures, causing a large oil spill e) A manufacturer loses a multi-million dollar product liability suit f) A Supreme Court decision substantially broadens producer liability for injuries suffered by product users
a) systematic b) unsystematic c) systematic d) unsystematic e) unsystematic f) systematic Chapter 12 - Question 2
If the yield-to-maturity is more than the coupon rate, the bond: > will be valued at par. > will be valued less than par. > will be valued greater than par. > cannot be determined.
will be valued less than par.