FIN 351 Exam 2

When preparing pro forma statements, which one of the following is an analyst most likely to estimate first?

Projected sales

When constructing pro forma financial statements with the percentage of sales approach, we use _______ as the driving factor.

Sales growth

Which one of the following statements related to annuities and perpetuities is correct?

A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal.

An ordinary annuity is best defined as:

equal payments paid at the end of regular intervals over a stated time period.

A firm is currently operating at full capacity. Net working capital, costs, and all assets vary directly with sales. The firm does not wish to obtain any additional equity financing. The dividend payout ratio is constant at 40 percent. If the firm has a positive external financing need, that need will be met by:

long-term debt.

Your credit card charges you .85 percent interest per month. This rate when multiplied by 12 is called the ____ rate.

annual percentage

Which of the following questions are appropriate to address during the financial planning process? I. Should the firm merge with a competitor? II. Should additional shares of stock be sold? III. Should a particular division be sold? IV. Should a new product be introduced?

I, II, III, and IV

This morning, Clayton deposited $2,500 into an account that pays 5 percent interest, compounded annually. Also this morning, Jayda deposited $2,500 at 5 percent interest, compounded annually. Clayton will withdraw his interest earnings and spend it as soon as possible. Jayda will reinvest her interest earnings into her account. Given this information, which one of the following statements is true?

Jayda will earn more interest in Year 2 than Clayton will earn.

Which one of the following has the least effect on a firm's sustainable rate of growth?

Quick ratio

The interest earned on both the initial principal and the interest reinvested from prior periods is called:

compound interest.

A firm's external financing need is met by:

debt and/or equity.

Andrew just calculated the present value of a $15,000 bonus he will receive next year. The interest rate he used in his calculation is referred to as the:

discount rate.

A perpetuity is defined as:

unending equal payments paid at equal time intervals.

The most common type of medium-term, amortized business loans has which one of these characteristics over its life?

Equal principal payments

Four years ago, Lucas invested $500. Three years ago, Matt invested $600. Today, these two investments are each worth $800. Assume each account continues to earn its respective rate of return and interest is compounded annually. Which one of the following statements is correct concerning these investments?

One year ago, Lucas's investment was worth less than Matt's investment.

Which one of these statements related to growing annuities and perpetuities is correct?

The present value of a growing perpetuity will decrease if the discount rate is increased.

The retention ratio can be computed as:

1 − (Cash dividends/Net income)

Which ratio identifies the amount of total assets a firm needs in order to generate $1 in sales?

Capital intensity ratio

Which one of the following policies most directly affects the projection of the LT debt balance to be used on a pro forma statement?

Capital structure policy

Which one of the following actions will increase the present value of an amount to be received sometime in the future?

Decrease in the interest rate

Caroline is going to receive a award of $20,000 six years from now. Jiexin is going to receive an award of $20,000 nine years from now. Which one of the following statements is correct if both individuals apply a discount rate of 7 percent?

In today's dollars, Caroline's award is worth more than Jiexin's.

Wei Bridal is a profitable firm with a dividend payout ratio of 25 percent. The firm does not want to issue additional equity shares nor increase its long-term debt. Which one of the following defines the maximum rate at which this firm can currently grow?

Internal growth rate

Assume you deposited $6,000 into a retirement savings account today. The account will earn 8 percent interest per year, compounded annually. You will not withdraw any principal or interest until you retire in 48 years. Which one of the following statements is correct?

The present value of this investment is equal to $6,000.

Which one of the following statements related to loan interest rates is correct?

When comparing loans you should compare the effective annual rates.

Your aunt has promised to give you $5,000 when you graduate from college. You expect to graduate three years from now. If you speed up your plans to enable you to graduate two years from now, the present value of the promised gift will:

increase.

Jared invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his $108 investment. The extra $.64 he earned in interest the second year is referred to as:

interest on interest.

The internal growth rate of a firm is best described as the ______ growth rate achievable ______.

maximum; excluding external financing of any kind

Hayley won a lottery and will receive $1,000 each year for the next 30 years. The current value of these winnings is called the:

present value.

The entire repayment of a(n) _____ loan is calculated by computing one single future value.

pure discount

With an interest-only loan the principal is:

repaid in one lump sum at the end of the loan period.

The portion of net income that a firm reinvests in itself is measured with the:

retention ratio.