FIN 300 Exam 1

Which type of business organization has all the respective rights and privileges of a legal person?

Corporation

Which one of the following terms is defined as the mixture of a firm's debt and equity financing? A. working capital management B. cash management C. cost analysis D. capital budgeting E. capital structure

E.

Which of the following are correct assumptions and conditions of the growing perpetuity present value formula? I. The first periodic cash flow (or payment) occurs today. II. g can be higher or lower than r. III. g needs to be less than r IV. The number of time periods is finite. A. I and II only B. I and III only C. I, II, and IV only D. I, III, and IV only E. III only

E. (g<r for growing perpetuity; Statement I is incorrect because first cash flow occurs the next period; Statement IV is incorrect because the number of time periods is infinite for perpetuity.)

Suppose the first comic book of a classic series was sold in 1954. In 2015, the estimated price for this comic book in good condition was about $310,000. This represented a return of 22 percent per year. For this to be true, what was the original price of the comic book in 1954?

$1.67

Which one of the following represents the most liquid asset? $100 account receivable that is discounted and collected for $96 today. $100 of inventory which is sold today on credit for $103. $100 of inventory which is discounted and sold for $97 cash today. $100 of inventory that is sold today for $100 cash. $100 accounts receivable that will be collected in full next week.

$100 of inventory that is sold today for $100 cash.

Which one of the following is a capital budgeting decision?

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

You are scheduled to receive $15,000 in two years. When you receive it, you will invest it for six more years at 7.1 percent per year. How much will you have in eight years?

$22,637.48

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

$398,148

What is the effective annual rate of 11.9 percent compounded continuously?

12.64%

Today, you are retiring. You have a total of $289,416 in your retirement savings. You want to withdraw $2,500 at the beginning of every month, starting today and expect to earn 4.6 percent, compounded monthly. How long will it be until you run out of money?

12.71 Years

You have been investing $10 per week for the past 15 years. Today, your investment account is worth $60,762.53. Interest is compounded weekly. Which of the following is closest to the (quoted) annual rate of return (APR) of your investment? (Assume 52 weeks in a year. Keep six decimal places in your calculation.)

21.92% N = 15*52 PMT = -10 FV = 60.762.53 Solve for I/YR: I/YR = 0.4216% (This is a weekly rate) APR = 0.004216 × 52 = 21.92%

You grandfather invested $20,000 years ago to provide annual payments of $750 a year to his heirs forever. What is the rate of return?

3.75%

The 2013 balance sheet of Greystone, Inc., showed current assets of $3,145 and current liabilities of $1,585. The 2014 balance sheet showed current assets of $3,000 and current liabilities of $1,500. Which of the following is the company's 2014 change in net working capital?

A decrease of $60 Change in NWC = ($3,000 - 1,500) - ($3,145 - 1,585) = $1,500 - 1,560 = -$60

You have just obtained a 6-year pure discount loan in the amount of $275,000 at 5.78 percent interest, compounded semiannually. Which of the following is closest to the amount you will have to repay at the end of the six years? A. $387,088.88 B. $370,370.00 C. $384,219.16 D. $385,260.13 E. $372,100.84

A. A pure discount loan has no interest payment. This is in chapter 6. FV = $275,000 × [1 + (.0578/2)]^(6 × 2) = $387,088.88 TVM solution: N=12, I/Y = 5.78/2; PV= -275,000 solve for FV: FV = 387,088.88

You desperately need some money now and one of your friends agrees to provide the loan, if you make payments of $20 a month for the next six months. He also requires that the first payment be made today and charges you 1.5 percent interest per month. How much money are you borrowing today? A. $115.65 B. $116.56 C. $113.94 D. $126.46 E. $114.96

A. PV of Annuity Due = PV of ordinary annuity *(1+r) = $20{[1 - 1/(1.015)6]/.015} × 1.015 = $115.65 Calculator solution: Set the calculator in annuity due mode before calculation N= 6, I% =1.5, PMT=-20, Solve for PV: PV = 115.65

Peggy Grey's Cookies has net income of $360. The firm pays out 40 percent of the net income to its shareholders as dividends. During the year, the company sold $80 worth of common stock. What is the cash flow to stockholders?

A. $64 Cash Flow to shareholders = Dividends Paid - Net New Equity Dividends Paid = $360*0.4=$144 Net New Equity = $80 Cash Flow to Stockholders = $144-$80= $64

A stakeholder is:

Any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm.

Into Eternity Ltd. established a trust fund 20 years ago. The fund is designed to provide $225,000 in scholarships each year forever by earning an annual return of 4.63 percent. How much money did the firm contribute to the fund, assuming that only the interest income is distributed? A. $5,291,613.13 B. $4,859,611.23 C. $556,297.39 D. $532,897.04 E. $9,100,348.24

B . PV = $225,000/.0463 = $4,859,611.23

A project is expected to provide a cash flow of $15,600 next year with annual increases of 4.5 percent for a total of 12 cash flows. After that, the project will be worthless. What is the present value of this project at a discount rate of 13 percent, compounded annually? A. $91,987.56 B. $111,723.56 C. $63,206.07 D. $103,008.67 E. $89,407.11

B. Use the growing annuity formula: PV = $15,600{[1 - (1.045/1.13)12]/(.13 - .045)} = $111,723.56 (You won't be able to solve a growing annuity problem through the TVM functions.)

Based on the tax rates in the table below, what is the average tax rate for a firm with taxable income of $129,013? A. 20.00% B. 26.02% C. 39.00% D. 36.92% E. 28.51% Taxable Income Tax Rate $0 - 50,000 15% 50,001 - 75,000 25% 75,001 - 100,000 34% 100,001 - 335,000 39%

B. Taxes paid = 0.15($50,000) + 0.25($75,000 - 50,000) + 0.34($100,000 - 75,000) + 0.39($129,013 - 100,000) = $33,565.07 Average tax rate = $33,565.07 / $129,013 = 26.02%

Thomas invests $123 in an account that pays 4 percent simple interest. How much money will Thomas have at the end of 6 years? A. $147.60 B. $152.52 C. $149.65 D. $157.44 E. $155.63

B. Total Balance = Principal + interest = $123 + ($123 × 0.04 × 6) = $152.52

The cash flow of a firm that is available for distribution to the firm's creditors and stockholders is called the ____________ A. Operating cash flow. B. Cash flow from assets. C. Net capital spending. D. Net working capital. E. Cash flow to stockholders.

B. Cash flow from assets

Which one of the following is a primary market transaction? A. sale of currently outstanding stock by a dealer to an individual investor B. sale of a new share of stock to an individual investor C. stock ownership transfer from one shareholder to another shareholder D. gift of stock from one shareholder to another shareholder E. gift of stock by a shareholder to a family member

B. sale of a new share of stock to an individual investor

Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This transaction ___________ A. Took place in the primary market. B. Occurred in a dealer market. C. Was facilitated in the secondary market. D. Involved a proxy. E. Was a private placement.

C.

The percentage of the next dollar you earn that must be paid in taxes is referred to as the _____ tax rate. A. Mean. B. Residual. C. Marginal. D. Total. E. Average.

C.

Which of the following are advantages of the corporate form of business ownership? I. limited liability for firm debt II. double taxation III. ability to raise capital I V. unlimited firm life A. I and II only B. III and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV

C.

What is the present value of $12,500 to be received 4 years from today if the discount rate is 5 percent? A. $10,797.97 B. $10,274.09 C. $10,283.78 D. $7,500.00 E. $10,716.74

C. PV = $12,500 / 1.05^4 = $10,283.78 Calculator solution: N=4, I/Y = 5, FV = 12,500, solve for PV: PV = $10,283.78

Some time ago, Julie purchased eleven acres of land costing $36,900. Today, that land is valued at $214,800. How long has she owned this land if the price of the land has been increasing at 6 percent per year? A. 28.33 years B. 29.98 years C. 30.23 years D. 31.29 years E. 32.08 years

C. $214,800 = $36,900 × (1 + .06)^t; t = ln(FV / PV) / ln(1 + r) = ln (214,800/36,900) / ln(1+0.06) = 30.23 years Calculator solution: I/Y=6, PV = -36,900, FV = 214,800, solve for N: N = 30.23 Note the opposite signs of PV and FV input in the calculator TVM functions.

Bank Omega wants to earn an effective annual return on its loans of 10 percent per year. The bank uses daily compounding on its loans. What must be the APR of daily compounding reported to the borrowers, assuming 365 days in a year? A. 9.23 percent B. 9.38 percent C. 9.53 percent D. 9.72 percent E. 10.00 percent

C. (Very similar to practice questions and lecture notes problem of APR calculation in chapter 6) Based on Equation 6.7 on the formula sheet: EAR = [1 + (APR/m)]m - 1 we can solve for the APR as APR = m[(1 + EAR)1/m - 1] (See lecture notes slide 104 for the detailed steps) APR = 365 × [(1 + 0.10)1/365 - 1] = 9.53%

Which of the following is closest to the effective annual rate of 16.5 percent, compounded continuously? A. 16.96% B. 17.43% C. 17.94% D. 18.21% E. 18.57%

C. EAR = e^.165 - 1 = .1794, or 17.94%

Angela expects to save $4,000 a year and earn an average annual return of 7.5 percent. How much will her savings be worth 25 years from now? A. $259,317.82 B. $260,702.57 C. $271,911.45 D. $274,868.92 E. $286,063.66

C. FV = $4,000[(1.07525 - 1)/.075] = $271,911.45 TVM Solution: N =25, I% = 7.5, PMT = -4,000, solve for FV: FV = 271,911.45

Suppose an investment offers to quadruple your money in 24 months. What is the quarterly return offered? A. 5.95% B. 12.25% C. 18.92% D. 25.99% E. 41.42%

C. r = (FV / PV)1/t - 1 = 4^(1/8) -1 = 0.1892 Calculator solution: N = 24/3 = 8, PV = -1, FV = 4, Solve for I/Y: quarterly return= 0.1892

Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers A. Articles of incorporation. B. Corporate breakdown. C. Agency problem. D. Bylaws. E. Legal liability

C. Agency Problem

The decision to issue additional shares of stock is an example of which one of the following?

Capital Structure Decision

Which one of the following terms is defined as the management of a firm's long-term investments?

Capital budgeting

Which of the following best defines an annuity ____ A. It has less value than a comparable perpetuity. B. It is either an equal or an unequal stream of payments that occur in equal time periods for a finite period. C. It is a stream of payments that fluctuate with current market interest rates. D. It is a stream of equal payments that occur in equal periods of time for a finite period. E. It has a longer life span than a perpetuity.

D.

Mr. Miser loans money at an annual rate of 25%. Interest is compounded daily. Which of the following is the actual annual rate Mr. Miser is charging on his loans? A. 28.45% B. 28.77% C. 28.02% D. 28.39% E. 28.00%

D. EAR = [1+(0.25/365)]^365 - 1 = 0.2839

What is the future value of $2,968 invested for 9 years at 4.9 percent compounded annually? A. $3,680.90 B. $6,884.70 C. $3,690.38 D. $4,565.03 E. $7,021.38

D. FV = $2,968 × 1.049^9 = $4,565.03 Calculator solution: N=9, I/Y = 4.9, PV = -2,968, solve for FV: FV = $4,565.03

You just won the lottery. As your prize you will receive $1,500 a month for 100 months starting at the end of this month. If you can earn 8%APR, compounded monthly, how much is the prize worth to you today? A. $64,647.53 B. $65,940.48 C. $109,953.46 D. $109,225.29 E. $118,741.48

D. PV = $1,500({1 - 1/[1 + (.08/12)]100}/(.08/12)) = $109,225.29 Or, N = 100, I/Y = 8/12, PMT = 1,500, Solve for PV: PV = 109,225.29

Discounting cash flows involves____ A. taking the cash discount offered on trade merchandise. B. estimating only the cash flows that occur in the first four years of a project. C. discounting only those cash flows that occur at least ten years in the future. D. multiplying expected future cash flows by the cost of capital. E. adjusting all expected future cash flows to their current (i.e., present) value.

E.

You are scheduled to receive annual payments of $10,600 for each of the next 25 years. Your discount rate is 9 percent. What is the difference in the present value if you receive these payments at the beginning of each year rather than at the end of each year? A. $9,969 B. $10,600 C. $11,554 D. $10,340 E. $9,371

E. PV of ordinary annuity = $10,600 × {1 - [1 / (1 + 0.09)25]} / 0.09 = $104,119.34 PV of annuity due = $104,119.34 × (1 + 0.09) = $113,490.08 Difference = $113,490.08 - $104,119.34 = $9,370.74 = $9,371

You invested $1,400 in an account that pays 5 percent simple interest. How much more could you have earned over a 20-year period if the interest had compounded annually? A. $749.22 B. $830.11 C. $882.19 D. $901.15 E. $914.62

E. PV with Simple interest = $1,400 + $1,400 × .05 × 20 = $2,800 PV with annual compounding interest = $1,400 × (1.05)^20 = $3,714.62 Difference = $3,714.62 - $2,800 = $914.62

A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a:

General Partnership

Which one of the following functions should be the responsibility of the controller rather than the treasurer?

Income Tax Returns

You have some property for sale and have received two offers. The first offer is for $89,500 today in cash. The second offer is the payment of $35,000 today and an additional guaranteed $70,000 two years from today. If the applicable discount rate is 11.5 percent, which offer should you accept and why?

You should accept the second offer because it has the larger net present value.

Corporate bylaws:

determine how a corporation regulates itself.

Which one of the following best states the primary goal of financial management?

maximize the current value per share