Fin 351 exam: ch 4,5,6

The retention ratio can be computed as: 1 − Plowback ratio. Change in retained earnings/Cash dividends. 1 + Dividend payout ratio. (Change in retained earnings + Cash dividends)/Net income. 1 − (Cash dividends/Net income).

1 − (Cash dividends/Net income).

You're trying to save to buy a new $197,000 Ferrari. You have $47,000 today that can be invested at your bank. The bank pays 5.5 percent annual interest on its accounts. How long will it be before you have enough to buy the car?

26.77 years We can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will use the FV formula, that is: FV = PV(1 + r)t Solving for t, we get: t = ln (FV/PV)/ln (1 + r)t = ln ($197,000/$47,000)/ln 1.055t = 26.77 years or TVM: N=?, I=5.5%, PV= 47,000, FV=197,000

The Maybe Pay Life Insurance Company is trying to sell you an investment policy that will pay you and your heirs $20,000 per year forever. Suppose a sales associate told you the policy costs $465,000. At what interest rate would this be a fair deal? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

4.30

Which one of the following statements related to annuities and perpetuities is correct? ~An ordinary annuity is worth more than an annuity due given equal annual cash flows for 10 years at 7 percent interest compounded annually. ~A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal. ~Most loans are a form of a perpetuity. ~The present value of a perpetuity cannot be computed but the future value can. ~Perpetuities are finite but annuities are not.

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

Pursell Bank offers you a five-year loan for $53,000 at an annual interest rate of 7.75 percent. What will your annual loan payment be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Annual Payment: 13,186.84

First City Bank pays 8 percent simple interest on its savings account balances, whereas Second City Bank pays 8 percent interest compounded annually. If you made a deposit of $71,000 in each bank, how much more money would you earn from your Second City Bank account at the end of 8 years?

difference in accounts: $14,976.04 The simple interest per year is: $71,000 × .08 = $5,680 So after 8 years you will have: $5,680 × 8 = $45,440 in interest. The total balance will be $71,000 + 45,440 = $116,440. With compound interest we use the future value formula: FV = PV(1 + r)t FV = $71,000(1.08)8 FV = $131,416.04 The difference is: $131,416.04 - 116,440 = $14,976.04

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: remain constant. increase. decrease. equal $5,000. be less than $5,000.

increase

Pro forma statements:

are projections, not guarantees.

Which one of the following has the least effect on a firm's sustainable rate of growth? Capital intensity ratio Net profit margin Dividend policy Debt-equity ratio Quick ratio

quick ratio

With an interest-only loan the principal is: forgiven over the loan period; thus it does not have to be repaid. repaid in decreasing increments and included in each loan payment. repaid in one lump sum at the end of the loan period. repaid in equal annual payments. repaid in increasing increments through regular monthly payments.

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

A. At 7 percent interest, how long does it take to double your money? B. At 7 percent interest, how long does it take to quadruple your money?

A. 10.25 B.20.49 A. TVM: N=?, I=7%, PV=1, FV=2 B. TVM: N=?, I=7%, PV=1, FV=4

Which one of the following actions will increase the present value of an amount to be received sometime in the future? Increase in the time until the amount is received Increase in the discount rate Decrease in the future value Decrease in the interest rate Decrease in both the future value and the number of time periods

Decrease in the interest rate

The most common type of medium-term, amortized business loans has which one of these characteristics over its life? Equal principal payments One lump-sum principal payment Increasing principal payments Equal interest payments Declining periodic payments

Equal principal payments

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 1 than Clayton will earn. Clayton will earn more interest in Year 3 than Jayda will earn. Jayda will earn more interest in Year 2 than Clayton will earn. After five years, Clayton and Jayda will both have earned the same amount of interest. Clayton will earn compound interest.

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

firm wishes to maintain an internal growth rate of 7.3 percent and a dividend payout ratio of 40 percent. The current profit margin is 5.7 percent, and the firm uses no external financing sources. What must total asset turnover be?

TAT: 1.99 times We are given the profit margin. Remember that: ROA = PM(TAT) We can calculate the ROA from the internal growth rate formula, and then use the ROA in this equation to find the total asset turnover. The retention ratio is: b = 1 − .40b = .60 Using the internal growth rate equation to find the ROA, we get: Internal growth rate = (ROA × b)/[1 − (ROA × b)].073 = [ROA(.60)]/[1 − ROA(.60)]ROA = .1134, or 11.34% Plugging ROA and PM into the equation we began with and solving for TAT, we get: ROA = (PM)(TAT).1134 = .057(TAT)TAT = .1134/.057TAT = 1.99 times

Which one of these statements related to growing annuities and perpetuities is correct? ~You can compute the present value of a growing annuity but not a growing perpetuity. ~In computing the present value of a growing annuity, you discount the cash flows using the growth rate as the discount rate. ~The future value of an annuity will decrease if the growth rate is increased. ~An increase in the rate of growth will decrease the present value of an annuity. ~The present value of a growing perpetuity will decrease if the discount rate is increased.

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

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 interest you earn in Year 7 will equal the interest you earn in Year 14. The interest amount you earn will double in value every year. The total amount of interest you will earn will equal $6,000 × .08 × 48. The present value of this investment is equal to $6,000. The future value of this amount is equal to $6,000 × (1 + 48).08.

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

You want to have $71,000 in your savings account 11 years from now, and you're prepared to make equal annual deposits into the account at the end of each year. If the account pays 6.30 percent interest, what amount must you deposit each year? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

annual deposit: 4,667.93

Big Dom's Pawn Shop charges an interest rate of 27.5 percent per month on loans to its customers. Like all lenders, Big Dom must report an APR to consumers. a.What rate should the shop report? (Do not round intermediate calculations and enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.)b.What is the effective annual rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

a.) 330% b.) 1745.53%

Nirav just opened a savings account paying 2 percent interest, compounded annually. After four years, the savings account will be worth $5,000. Assume there are no additional deposits or withdrawals. Given this information, Nirav: ~will earn the same amount of interest each year for four years. ~will earn simple interest on his savings every year for four years. ~could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest. ~has an account currently valued at $5,000. ~could earn more interest on this account if the interest earnings were withdrawn annually.

could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest.

The financial planning method that uses the projected sales level as the basis for determining changes in balance sheet and income statement account values is referred to as the ______ method.

percentage of sales

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: single amount. future value. present value simple amount. compounded value.

present value

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: free interest. bonus income. simple interest. interest on interest. present value interest.

interest on interest.

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 × (1 − .25) Sustainable growth rate × (1 − .25) Internal growth rate Sustainable growth rate Zero percent

internal growth rate

Suppose you are committed to owning a $206,000 Ferrari. If you believe your mutual fund can achieve an annual rate of return of 11 percent and you want to buy the car in 8 years (on the day you turn 30), how much must you invest today?

invest: 89,390.32 To find the PV of a lump sum, we use: PV = FV/(1 + r)t PV = $206,000/(1.11)8 PV = $89,388.86 or TVM: n=8, I=11%, FV= 206,000

What is the future value of $2,700 in 20 years at an APR of 8 percent compounded semiannually? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.

12962.76

Assume the following ratios are constant: Total asset turnover2.7 Profit margin6.7% Equity multiplier2.0 Payout ratio22% What is the sustainable growth rate?

39.31% We must first calculate the ROE using the DuPont ratio to calculate the sustainable growth rate. ROE = (PM)(TAT)(EM)ROE = (.067)(2.7)(2.0)ROE = .3618, or 36.18% The plowback ratio is one minus the dividend payout ratio, so: b = 1 - .22b = .78 Now we can use the sustainable growth rate equation to get: Sustainable growth rate = (ROE × b)/[1 - (ROE × b)] Sustainable growth rate = [.3618(.78)]/[1 - .3618(.78)] Sustainable growth rate = .3932, or 39.32%

Which one of the following statements concerning interest rates is correct? ~Savers would prefer annual compounding over monthly compounding given the same annual percentage rate. ~The effective annual rate decreases as the number of compounding periods per year increases. ~The effective annual rate equals the annual percentage rate when interest is compounded annually. ~Borrowers would prefer monthly compounding over annual compounding given the same annual percentage rate. ~For any positive rate of interest, the annual percentage rate will always exceed the effective annual rate.

Borrowers would prefer monthly compounding over annual compounding given the same annual percentage rate.

You are scheduled to receive $20,000 in two years. When you receive it, you will invest it for eight more years at 10 percent per year. How much will you have in ten years?

FV: $42,871.78 We need to find the FV of a lump sum. However, the money will only be invested for eight years, so the number of periods is eight. FV = PV(1 + r)t FV = $20,000(1.10)8 FV = $42,871.78 or TVM: N=8, I=10%, PV=20,000

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? ~Three years from today, Matt's investment will be worth more than Lucas's investment. ~One year ago, Lucas's investment was worth less than Matt's investment. ~Matt earns a higher rate of return than Lucas. ~Matt has earned an average annual interest rate of 9.86 percent. ~Lucas has earned an average annual interest rate of 12.64 percent.

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

Imprudential, Incorporated, has an unfunded pension liability of $576 million that must be paid in 25 years. To assess the value of the firm's stock, financial analysts want to discount this liability back to the present. If the relevant discount rate is 6.9 percent, what is the present value of this liability?

PV: 108,637,523.00 To find the PV of a lump sum, we use: PV = FV/(1 + r)t PV = $576,000,000/(1.069)25 PV = $108,637,522.58 or TVM: N=25, I=6.9%, FV=576,000,000

he appropriate discount rate for the following cash flows is 8 percent compounded quarterly. YearCash Flow 1-870 2-950 3-0 4-1540 What is the present value of the cash flows? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

PV: 2,736.38

You have just received notification that you have won the $1 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100th birthday (assuming you're around to collect), 62 years from now. What is the present value of your windfall if the appropriate discount rate is 9 percent?

PV: 4,781.42 To find the PV of a lump sum, we use: PV = FV/(1 + r)t PV = $1,000,000/(1.09)62 PV = $4,781.42 or TVM: N=62, I=9%, FV=1 million

Your company will generate $77,000 in annual revenue each year for the next seven years from a new information database. If the appropriate discount rate is 6.75 percent, what is the present value? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

PV: 418,616.76

The Maybe Pay Life Insurance Company is trying to sell you an investment policy that will pay you and your heirs $37,000 per year forever. If the required return on this investment is 6.3 percent, how much will you pay for the policy? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

PV; 587,301.59

The interest earned on both the initial principal and the interest reinvested from prior periods is called: free interest. dual interest. simple interest. interest on interest. compound interest.

compound interest

Christie, Incorporated, has identified an investment project with the following cash flows. YearCash Flow 1-940 2-1170 3-1390 4-2130 a. If the discount rate is 6 percent, what is the future value of these cash flows in Year 4? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b.If the discount rate is 14 percent, what is the future value of these cash flows in Year 4? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c.If the discount rate is 21 percent, what is the future value of these cash flows in Year 4? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

a-6,037.58 b-6,627.77 c-7,190.18

You plan to deposit $5,700 at the end of each of the next 25 years into an account paying 10.3 percent interest. a.How much money will you have in the account in 25 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b.How much will you have if you make deposits for 50 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

a. 586,498.22 b. 7,388,778.27

You have just made your first $6,000 contribution to your retirement account. Assume you earn a return of 13 percent per year and make no additional contributions. a. What will your account be worth when you retire in 35 years? b. What if you wait 10 years before contributing?

a: 432,411.04 b: 127,383.25

The interest rate that is most commonly quoted by a lender is referred to as the: annual percentage rate. compound rate. effective annual rate. simple rate. common rate.

annual percentage rate

Assume the total cost of a college education will be $200,000 when your child enters college in 16 years. You presently have $73,000 to invest. What annual rate of interest must you earn on your investment to cover the cost of your child's college education?

annual rate of interest: 6.50% We can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will use the FV formula, that is: FV = PV(1 + r)t Solving for r, we get: r = (FV/PV)1/t - 1r = ($200,000/$73,000)1/16 - 1 r = .0650, or 6.50% or TVM: N=16, I=?, PV=73,000, FV: 200,000

Financial planning: ~focuses solely on the short-term outlook for a firm. ~is a process that firms employ only when major changes to a firm's operations are anticipated. ~is a process that firms undergo once every five years. ~considers multiple options and scenarios. ~provides minimal benefits for firms that are highly responsive to economic changes.

considers multiple options and scenarios.

Madelyn is calculating the present value of a bonus she will receive next year. The process she is using is called: growth analysis. discounting. accumulating. compounding. reducing.

discounting

When compiling a pro forma statement, which policy most directly affects the projection of the retained earnings account balance? Net working capital policy Capital structure policy Dividend policy Capital budgeting policy Capacity utilization policy

dividend policy

An ordinary annuity is best defined as: ~increasing payments paid for a definitive period of time. ~increasing payments paid forever. ~equal payments paid at the end of regular intervals over a stated time period. ~equal payments paid at the beginning of regular intervals for a limited time period. ~equal payments that occur at set intervals for an unlimited period of time.

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

Moreno Refurbishing is currently operating at full-capacity sales. Accordingly, sales are currently being limited by the firm's level of: net working capital. long-term debt. inventory. fixed assets. equity.

fixed assets

Pinnacle Manufacturing, Incorporated, is currently operating at only 88 percent of fixed asset capacity. Current sales are $880,000. How fast can sales grow before any new fixed assets are needed?

maximum sales growth: 13.64% To determine full capacity sales, we divide the current sales by the capacity the company is currently using, so: Full capacity sales = $880,000/.88Full capacity sales = $1,000,000 The maximum sales growth is the full capacity sales divided by the current sales, so: Maximum sales growth = ($1,000,000/$880,000) − 1Maximum sales growth = .1364, or 13.64%

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

maximum; excluding external financing of any kind

If a borrower receives money today and must repay the loan in a single lump sum on a future date, the loan is called a(n) ________ loan. amortized continuous balloon pure discount interest-only

pure discount

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

retention ratio

A perpetuity is defined as: ~a limited number of equal payments paid in even time increments. ~payments of equal amounts that are paid irregularly but indefinitely. ~varying amounts that are paid at even intervals forever. ~unending equal payments paid at equal time intervals. ~unending equal payments paid at either equal or unequal time intervals.

unending equal payments paid at equal time intervals.