Fin 380 Final

Chapter 10

10

Chapter 4

4

The unearned revenue increased during the year. This is a _____ of cash reported in the ______ section of the statement of cash flows

Answer: Source; operating

Beatrix plans to retire with $722,530 in the the bank. The appropriate rate of return is 6.55% . If Beatrix saves $13,200 every year, how soon can Beatrix retire?

Answer: 24 years N=CPT I/y= 6.55 PMT= FV=

The risk return relationship indicates that higher returns over time comes with higher risk

True

The security market line is a graph of the CAPM equation

True

We prefer a low WACC to a high WACC, everything else equal.

True

A share of preferred stock pays an annual dividend of $3.00. What is the required rate fo return of the stock if the current market price is $28?

answer: 10.71 R=D/P 3.00/28

A bond with serval years to maturity has a coupon rate that is less than its yield to maturity. The bond will:

be priced at a discount

descending order

NASDAQ Comp, S&P 500, DJIA

IF current stock prices reflect all publicly available information, then the market is _______.

semi-stron form efficient

convertible preferred stock may be converted into

shares of common stock

Chapter 2

2

Chapter 3

3

Chapter 5

5

Chapter 6

6

Chapter 7

7

Chapter 8

8

Chapter 9

9

What is the future value six years from n ow of $1000 invested at 5% interest compounded annually:

Anser 1340.10 N= 6 I/Y=5 PV=1000 FV=CPT

A share of preferred stock pays an annual dividend of $2.00. What is the price fo the preferred stock if the required rate of return is 10%

Answer $20.00 2.00/.10

What is the present value of $10,000 to be received seven years form now discounted at 8% APR compounded annually?

Answer 5,834.90 N= 7 I/y=8 FV= 10,000 PV=CPT

Assume that JQH's returns are normally distributed. The expected return for JQH is 10% and standard deviation of 5%. What is the probability of a return below 15%

Answer 84%

Find the APR on a loan of $83,770 for 16 years that has a payment of $840 every month

Answer 9.30% n=12*16 pv= 83,770 pmt= 840 +/- I/y=CPT; then times 12 to get APR

A company repaid $8,000 worth of long term bonds.

Answer: Debit: Bonds Payable for $8,000; Credit: Cash for $8,000 Repaid bonds means decreased bonds payable (liability) and decreased cash (asset).

A company sold $1,500 work fo goods and received immediate payment (COGS was $1,200)

Answer: Debit: Cash for $1,500;Credit Revenue for $1,500 Debit: COGS for $1,200;Credit Inventory for $1,200

A company declared dividend of $1.50/share when there was 8,000 shares fo stock outstanding. The dividends will be paid one month from now. Prepare the general journal entry to record the declaration of the dividends.

Answer: Debit: Dividends for $12,000; Credit: Dividends payable for $12,000 1.5*8000=12000 since its not paid yet, so NO cash is involved

A company received $18,000 from a customer on December 1, 20X1 for future work to be performed and recorded the receipt fo cash and the liability to complete the work (credit unearned revenue). As of the year ended December 31, 20X1, one-third fo the work has been completed

Answer: Debit: Unearned Revenue for $6,000; Credit: Revenue for $6,000 18000/3

At the end of the year, there is $6,800 worth of employee wages that have been earned by the employees, but not yet paid. Record the adjusting journal entry

Answer: Debit: Wage Expense for $6,800;Credit: Wages Payable for $6,800 Sine wages have not been paid yet.

A company sold $800 worth of goods on account (the cost of goods sold was $600). Prepare a journal entry

Answer: Debit: accounts receivable fro $800; Credit: Revenue for $800; Debit: COGS fro $600; Credit: Inventory fro $600 "sold on account" means increase revenue; and increase account receivable (asset) by $800. Increase cost of goods sold (expense) by $600; and decrease inventory (asset) by $600.

A company purchased a building three years ago for $150,000 and is using straight-line depreciation to depreciate it over 20 years. The salvage value of the building is $50,000. Prepare the adjusting entry to record the depreciation expense for the current year

Answer: DEBIT: depreciation Expense for $5,000, Credit: Accumulated Depreciation for $5,000 (cost- savage value)/ useful life= annual depreciation

A four year insurance policy in the amount of $20,000 was purchased two years ago. What is the adjusting entry to record insurance expense for the current year.

Answer: Debit: insurance expense for $5,000; Credit: Prepaid insurance for $5,000

What is the present value of an annuity of $25 to be received each month for 12 years if the discount rate is 6% APR?

Answer: $2561.87 N=12*12 I/y= 6/12 PMT= 25 PV= CPT

In the current year a company paid interest of $40,000, had net capital expenditures of $300,000 and issued net new debt fo $75,000. In addition, the company reported cash flow from operating activities of $600,000, Cash flow from investing activities of ($250,000), and cash flow from financing activities of $65,000. The marginal tax rate is 35%. Compute the free cash flow to equity holders.

Answer: $375,000 Free cash flow to Equity= CFO- CAPEX+ Net Borrowing 600,000- 300,00+75,000=

Consider an interest-only loan with an interest rate of 6% and monthly payments. What is the monthly payment if the loan amount if $200,000

Answer: 1,000 Interest payment per period = principle* interest rate per payment period 200,000*.06/12

A stock is expected to pay a divided of $3.00 next year. Dividend are expected to grow at an annual rate of 4%. What is the required rate of return on the stock I the current market price is $50.00?

Answer: 10% R= 3.00/50.00 +.04

A stock just paid a dividend of $1,00. Dividends are expected to grow at an annual rate of 5%. What is the price of the stock if the required rate of return is 15%

Answer: 10.50 Po=Do x (1+g)/ (rcs-g) $1.00* (1+.05)/(.15-.05)= 10.50

What is the yield to maturity of a bond with apartment value of $1,000 a coupon rate of 7% with annual payments and 9 years to maturity if the bond sells for $800?

Answer: 10.55% N= 9 Pv= +/- 800 Pmt= 70 FV= 1000 I/y= CPT

Nancy has a portfolio of two stocks. Stock A has an expected return of 10% and stock B has an expected return of 12% Her funds are allocated with 54% in stock A and 46% in Stock B. What is the portfolio expected return?

Answer: 10.92 .54* 10+.46*12

A company has forecasted net income to be $540,000. Net income was $425,000 in the prior year, when they also paid dividends of $80,000. What are forecasted dividends if the company wants to keep the payout ratio constant?

Answer: 101,647 Payout ratio= 80,000/425,000= 0.188235 0.188235*540,000 or 540,000/425,000 * 80,000

You borrow $200,000 for 15 years at 6% APR with monthly payments. What is the total interest paid over the life of the loan?

Answer: 103,787.80 Step 1: n= 15*12 I/y= 6/12 pv= 200,000 PMT= CPT= 1687.71 Step 2: PMT*N =303,787.80 Step 3: 303,787.80- 200,000

Returns on ABC Inc are forecast to be the following: State. Probability. Return Boom. .25. 30%. Bormal. .65. 15% Bust. .10. -12% What is the standard deviation of this company stock?

Answer: 11.32 Step 1 Sum of probability times return .25*30+.65*15-.1*12 =16.05 Step 2 .25*(30-16.05)^2+.65*(15-16.05)^2+ .1*(-12-16.05)^2 =128.0475 Step 3 square root of step 2

ABC bonds have a 7%coupon rate paid quarterly. The par value is $1,000 and the bonds mature in 18 years. If the bonds currently sell for $640, what is the pre-tax cost of debt?

Answer: 11.86 n= 18*4 pv= -640 PMT= 70/4 FV = 1000 I/y= CPT*4

What is the price of a bond with a par value of $1,000 an 8% coupon rate paid annually and a yield to maturity of 6% if the bond matures in 9 years?

Answer: 1136.03 N=9 I/y= 6 PMT= 80 FV=1000 PV=CPT

What is the present value of $1,800 to be received nine years from now discounted at 5% APR compounded quarterly?

Answer: 1150.94 N=9*4 I/y= 5/4 Fv= 1800 PV= CPT

Calculate XYZ's WACC if the firm is financed 52% by debt, 29% by common stock and 19% by preferred stock. the component costs of capital are RdA.T. =12% Rcs=14.4 Rps=9%

Answer: 12.13 .52*12+.29*14.4+ .19*9

What is the price of a bond with a par value of $1,000, 11 years to maturity and a 7% coupon rate with semi-annual coupon payments if the bond has a yield to maturity of 4%

Answer: 1264.87 n= 11*2 I/y= 4/2 PMT= 70/2 FV= 1000 PV=CPT

A company has dividend of $15,000, generated total sales fo $845,000 and incurred total expenses of $792,000 in the current year. IF ending retained earnings is $165,000 what was beginning retained earnings?

Answer: 127,000 Ending RE=Beginning RE+ Net income-Dividends Net income =total sales-total expenses 845,000-792,000= 53,000

Using the information below compute the net income fo the company: Interest expense: 2,000 Operating Expense: 22,000 Tax expense:3,000 Cash: 7,000 Sales Revenue: 125,000 GOGS: 85,000

Answer: 13,000 Net income = Sales revenue - COGS - Operating Expenses - interest expense -Tax expense

Calculate the present value of $400 to be received at the beginning of each year for four years if the discount rate is 11%

Answer: 1377.49 n= 4 I/y= 11 PMT= 400 PV= CPT then times 1.11

How much will you accumulate if you deposit $100 each month for 10 years into an account earning 3.6% APR?

Answer: 14,418.57 N= 10*12 I/y= 6/12 PMT= 100 FV= CPT

What is the yield to maturity of a bond with a par value $1,000 a 6% coupon rate with semi-annual payments and 5 years to maturity if the bond sells for $700?

Answer: 14.46 n= 5*2 PV= -700 Pmt= 60/2 FV= 1000 I/y=CPt = 7.34*2

A four-year investment requires annual deposits of $300 at the beginning of each year. The deposits earn 9% per year. what if the investments future value?

Answer: 1495.41 N= I/y= PMT= FV= CPT then times 1.09

PQR corporation has a beta fo 1.5. The risk-free rate is 6% and the market risk premium is 8%. What is the required rate of return of PQR?

Answer: 18% CAPM equation 6+1.5*8= 18

For the current year sales are $1,400,000, current assets are $101,524, and current liabilities are $85,265. IF sales are forecasted to increase 12% next year and all current assets and current liabilities vary proportionally with sales, what is the forecasted amount of net working capital next year

Answer: 18,210 NWC= CA - CL Next years NWC= NWC * 1.12 (101,524-85,265)*1.12

An investment provides you with $1,000 after six years and $2,000 after nine years. What is the present value of these cash flows if you require a 6% rate of return (discount the cash flows at that rate)?

Answer: 1888.76 Calculate the PV of these two FV separately then add them up. cashflow 1; cashflow 2 : n=6; 9 I/y= 6;6 FV=1000; 2000 Pv= CPT

XYZ Co has 2,350 bonds with a price of $925, 15,000 shares of preferred stock with a price of $55 and 250,000 shares of common stock with a selling price of $32. Calculate the capital structure weights of bonds, preferred stock and common stock, respectively.

Answer: 19.8%, 7.5%, 72.7% Bonds: 2350*925= 2,173,750 PS= 15000*55= 825,000 CS= 250,000*32= 8,000,000 Total firm value: 10,998,750 Divide each component by firm value

What is the monthly payment on a 30 year fully amortized loan of $400,00 with an interest rate of 4.75%

Answer: 2,086.59 n= I/y= PV= PMT =CPT

Consider a 20 year loan for $200,000 with annual payments of interest plus equal principal reduction. What is the first year's payment amount if the interest rate is 5%

Answer: 20,000 annual equal principle payment = $200,000/20 years= 10,000 1st interest= principle *interest rate= 200,000*.05 = 10,000 10,000+10,000

Josh has a portfolio of two stocks, Stocks a has a Beta of 2.4 and stock B has a Beta of .9. Funds are allocated with 60% in Stock A and 40% I Stock B. If the T-bill rate is 4% and the market expected return is 13% what is the required return on the portfolio?

Answer: 20.20 Beta portfolio: .6* 2.4+ .4*.9=1.8 Portfolio return: 4+ 1.8* (13-4)=20.20

Salary expense was 15.5% of sales this year. If sales this year are $1,300,000 and are forecasted to be $1,400,000next year, what is forecasted salary expense next year if all expense maintain a constant precent of sales?

Answer: 217,000 1,400,000 * .155

Consider a loan for $300,000 with 20 annual payments and an interest rate of 5%. What is the payment amount with a balloon payment of $60,000?

Answer: 22,258.22 n=20 I/y= 5 pv= 300,000 fv= +/- 60,000 pmt= CPT

Suppose a firm generated $20 million in sales revenue while operating at 86% of existing capacity. What would be thee maximum level fo sales that could be achieved with the existing asset base?

Answer: 23,255,814 20,000,000/.86

A two-year investment requires monthly deposits fo $90 at the beginning of each month. The deposits earn 6% per year. Calculate the investments future Value

Answer: 2300.32 N= 2*12 I/y= 6/12 PMT= 90 FV=CPT then times (1+ .06/12)

What is the balance after the first annual payment on a $260,000 loan for 20 years with a 6% interest rate and a payment of $22,667.98?

Answer: 252,932.02

A $20,000 investment compounds monthly for 120 months and grows into $27,000. What is the APR earned by this investment?

Answer: 3.00% N= PV= FV= I/y=CPT CPT answer*12

A stock provides the following returns Year 1 6% Year 2 10% Year 3. -5% What is the geometric average return?

Answer: 3.47 Turn into decimal format Then add (1) to decimal format

A stock is expected to pay a dividend of $2.50 next year. Dividends are expected to grow at an annual rate of 6%. What is the price of the stock if the required rate fo return is 14%

Answer: 31.25 p=D1/(R-g) 2.50/ (.14-.06)

What is the annual payment on a 20 year fully amortized loan fo $500,000 with an interest rate of 3%?

Answer: 33,607.85 n=20 I/y=3 pv= 500,000 FV= 0 (cause fully amortized) pmt=CPT

What is the pre-tax equivalent yield for a municipal bond with a 4.5% yield if an investor has a tax rate of 10%

Answer: 5% X * (1-.10)= 4.50% X= 5.00

An investment of $20,000 grows into $35,000 over a period of 10 years. What is the APR? Remember, when compounding period is not given we assume annual compounding.

Answer: 5.76% 10 N; 20,000 PV; 35,000+/- FV; CPT I/Y

IF you want to have $3,000,000 at retirement in 44 years how much money must you put in a retirement savings each month? Assume the account pays 8.4% APR compounded monthly.

Answer: 541.65 N= 44*12 I/y= 8.4/12 FV= 3,000,000 PMT=CPT

ABC co has $100 par value preferred stock that sells for $108 and has a stated dividend of 6.5% of par value. What is the cost of preferred stock?

Answer: 6.02% 6.5/108= .0602

XYZ Co issues $1,000 par value, 5.6% annual coupon bonds, with 15 years to maturity. The company sells the bonds for $655. Find the after-tax cost of debt assuming a tax rate of 35%

Answer: 6.62 N= pv= -655 PMT= 56 FV= 1000 I/y =CPT = 10.18 (1-.35)* 10.18= 6.62

What is the current yield for a bond with a par value of $1,000 and a 6% coupon rate if the the bond sells for $1,100?

Answer: 60/1100= 5.45

What are the dividend yield, capital gains yield, and total required rate fo return based on the following Po= $15 D1= $1.20 P1= $17.00

Answer: 8%, 13.33% 21.33% dividend yield = 1.20/15 =8% capital gains yield= (17-15)/15= 13.33 8%+13.33%= 21.33%

XYZ Co stock sells for $42 and just paid a dividend of $1.75. Dividends are expected to grow at a rate fo 4% forever. What is the cost of common equity?

Answer: 8.33 1.75* ( 1 +.04)/42+ .04

The CEO of XYZ Co has demanded a new calculation of the WACC for the company. The capital structure consists of 65% equity and 35% debt. The cost of equity is 13% and the pre-tax cost of debt is 4.5%. With a marginal tax rate of 39% what is the WACC?

Answer: 9.41 WACC = WdRd * (1-T) + WcsRcs +WpsRps WACC= .35*4.5*(1-.39)+.65*13

XYZ bonds sell for $900. They have a $1,000 par value, 8% coupon rate with semiannual coupons, and 8 years to maturity. What is the pre-tax cost of debt?

Answer: 9.83 Pre-tax cost of debt is YTM n= 8*2 pv= -900 Pmt= 40 FV= 1000 I/y=CPT*2

You borrow $100,000 for 10 years. the loan has an APR of 5% with monthly payments. you will make a $20,000 balloon payment at the end of the 10 year term. What is the monthly payment?

Answer: 931.86 n= 10*12 I/y= 5/12 pv= 100,000 fv= 20,000 +/- PMT= CPT

If the discount rate is 9.4%, what would you be willing to pay for receiving a payment of $900 every year forever?

Answer: 9574.47 PV=C/r 900/.094

How many years does it take for $10,000 to grow to into $46,010.21 if the investment earns 8% APR compounded semi-annually?

Answer: N=40 years 8/2 = I/Y; 10,000 PV; 48,010.21 +/- FV; CPT N

A bond with a par value of $1,000 has a 6% coupon rate with semi-annual coupon payments made on July 1 and January 1. If the bond changes hands on August 1, which of the following is true with respect to accrued interest?

Answer: The buyer will pay the seller $5 of accrued interest

Which of the following lists the series in descending order of returns over the past 90+ years

Answer: small stocks, large stocks, government bonds

To decrease an expense account, you need to __________ the account

Credit

The risk that the currency in which a bond is denominated may decline versus the bondholders home currency is referred to as

Currency risk

To decrease a liability, you need to _______ the account

Debit

What is the future value ten years from now of $2,500 invested at 3% APR compounded monthly?

N= 10*12 I/Y= 3/12 PV= 2500 FV= CPT Answer: 3373.38

A stock with a low Beta would have a

Regression line with a low (relatively flat) slope

The risk that interest rates may decline and the bondholder will earn a lower rate as they invest the coupon payments that they will receive is referred to as

Reinvestment risk