FIN313 - FINAL

Rogue Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Rogue's operating income is equal to

$1,100,000.

You decide to borrow $250,000 to build a new home. The bank charges an interest rate of 8% compounded monthly. If you pay back the loan over 30 years, what will your monthly payments be (rounded to the nearest dollar)?

$1,834

Nunavet Ocean Cruises sold an issue of 12-year $1,000 par bonds to build new ships. The bonds pay 4.85% interest, semiannually. Today's required rate of return is 9.7%. How much should these bonds sell for today? Round off to the nearest $1.

$660.45

Universal Financial, Inc. has total current assets of $1,200,000; long-term debt of $600,000; total current liabilities of $500,000; and long-term assets of $800,000. How much is the firm's net working capital?

$700,000

A bond issued by Liberty, Inc. 10 years ago has a coupon rate of 8% and a face value of $1,000. The bond will mature in 15 years. What is the value to an investor with a required return of 12.5%?

$701.52

Jimmy just bought a new Ford SUV for his business. The price of the vehicle was $40,000. Jimmy made a $5,000 down payment and took out an amortized loan for the rest. The car dealership made the loan at 8% interest compounded monthly for five years. He is to pay back the principal and interest in equal monthly installments beginning one month from now. Determine the amount of Jimmy's monthly payment.

$709.67

Master Craft Control Inc. has bonds that mature in 6 1/2 years with a par value of $1,000. They pay a coupon rate of 9% with semiannual payments. If the required rate of return on these bonds is 11% what is the bond's value?

$908.83

Benkart Corporation has sales of $5,000,000, net income of $800,000, total assets of $2,000,000, and 100,000 shares of common stock outstanding. If Benkart's P/E ratio is 12, what is the company's current stock price?

$96 per share

Bob invested $2,000 in an investment fund on his 21st birthday. The fund pays 7% interest compounded semiannually. Bob is celebrating his 50th birthday today. Bob decides he wants to retire on his 60th birthday and he wants to withdraw $75,000 per year, the first withdrawal on his 60th birthday and the last withdrawal on his 90th birthday. Bob expects to receive $100,000 from his employer on his 55th birthday in recognition of his long service to the company. Assume Bob has not taken any money out of his investment fund since he initially funded it on his 21st birthday, and that he will deposit the $100,000 from his employer into the investment fund on his 55th birthday. The investment fund will be used to pay for Bob's retirement. a. If Bob makes no additional deposits into his investment fund, how much will be available for retirement at age 60? b. Since the amount in (a) is insufficient to meet his retirement goals, Bob decides to deposit equal annual amounts into the investment fund beginning on his 51st birthday and ending on his 59th birthday, so that he can meet his retirement goals. How much will each deposit be?

($170,327 based on the future value of the $2,000 invested for 39 years being $29,267 at age 60 and the future value of the $100,000 from the employer invested for 5 years of $141,060.) ($63,893.50 based on the present value of an annuity due for 31 years, or $994,339 needed for retirement at age 60; this amount is the future value of a 9-year annuity due, yielding an annual payment of $63,893.50.)

Graystone bonds have a maturity value of $1,000. The bonds carry a coupon rate of 12 percent. Interest is paid semiannually. The bonds will mature in nine years. If the current market price is $976.50, a. what is the yield to maturity on the bond? b. what is the current yield on the bond?

(a. Yield to maturity = 12.44%) (b. Current yield = $120/$976.50 = 12.29%)

What is the NPV for a project whose cost of capital is 15 percent and initial after-tax cost is $5,000,000 and is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and $1,300,000 in year 4?

-$137,053

During the period 1990 to 2014, the average yield on 3-month U.S. Treasury bills was 3.04%, the average inflation rate was 2.64%, the average yield on 30-year Treasury bonds was 5.49%, and the average return on 30-year Aaa-rated corporate bonds was 6.35%. The real risk-free short-term interest rate is

0.40%.

What is the profitability index of a project that has an initial cash outflow of $600, an inflow of $250 for the next 3 years and a cost of capital of 10 percent?

1.036

RBW Corp. has cash of $48,000; short-term notes payable of $35,000, accounts receivable of $100,000; accounts payable of $120,000; inventories of $200,000; and accruals of $90,000. What is RBW's current ratio?

1.42

ABC company has the following distribution of returns: Economy Probability Investment Return Bad 0.2 -5% Normal 0.5 10% Strong 0.3 20% What is the expected return and standard deviation of Blooms' stock?

10%, 8.66%

Joe is deciding whether or not to invest $10,000 in a business that has pending lawsuits against it. If Joe invests and the business loses the lawsuits, the most Joe can lose is

10,000 if Joe is a limited partner.

A $1,000 par value 14-year bond with a 10 percent coupon rate recently sold for $965. The yield to maturity is

10.49%.

A firm has determined its cost of each source of capital and optimal capital structure, which is composed of the following sources and target market value proportions: The weighted average cost of capital is ________.

11 percent

Decker Corp. common stock has a required return of 17.5% and a beta of 1.75. If the expected risk free return is 3%, what is the expected return for the market based on the CAPM?

11.29%

A firm has common stock with a market price of $55 per share and an expected dividend of $2.81 per share at the end of the coming year. The dividends paid on the outstanding stock over the past five years are as follows: The cost of the firm's common stock equity is ________.

12.1 percent

A firm has common stock with a market price of $100 per share and an expected dividend of $5.61 per share at the end of the coming year. A new issue of stock is expected to be sold for $98, with $2 per share representing the underpricing necessary in the competitive capital market. Flotation costs are expected to total $1 per share. The dividends paid on the outstanding stock over the past five years are as follows: The cost of this new issue of common stock is ________.

12.8 percent

Wendy purchased 800 shares of Genetics Stock at $3 per share on 1/1/12. Wendy sold the shares on 12/31/12 for $3.45. Genetics stock has a beta of 1.9, the risk-free rate of return is 4%, and the market risk premium is 9%. Wendy's holding period return is

15.0%.

What would be the cost of retained earnings equity for Tangshan Mining if the expected return on U.S. Treasury Bills is 5.00%, the market risk premium is 10.00 percent, and the firm's beta is 1.3?

18.0%

Jackson Corp. common stock paid $2.50 in dividends last year (D0). Dividends are expected to grow at a 12-percent annual rate forever. If Jackson's current market price is $40.00, what is the stock's expected rate of return (nearest .01 percent)?

19.00%

Question 15 2.5 / 2.5 points A firm has determined its cost of each source of capital and optimal capital structure, which is composed of the following sources and current market value proportions: Other things remaining constant, if the firm were to shift toward a capital structure with ________ the weighted average cost of capital will be higher.

20% long-term debt, 60% common stock, and 20% preferred stock

What is the payback period for Tangshan Mining company's new project if its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3, and $1,800,000 in year 4?

3.33 years

Bill's Bike Shop has a return on assets of 12%. Anton's assets = $100 while Anton's owner's equity = $40 and its debt equals $60. What is Bill's return on equity?

30%

Marble Corp. has a beta of 2.5 and a standard deviation of returns of 20%. The return on the market portfolio is 15% and the risk-free rate is 4%. According to CAPM, what is the required rate of return on Collectible's stock?

31.5%

Stock W has the following returns for various states of the economy: Question: Stock W's standard deviation of returns is State of the Economy Probability Stock W's Return Recession 9% -72% Below Average16% -15% Average 51% 16% Above Average14% 35% Boom 10% 85%

37%.

TransSystems Inc. has a total equity of $560,000; sales of $2,250,000; total assets of $995,000; and current liabilities of $310,000. What is TransSystems Inc.'s debt ratio?

43.7

Tangshan Mining is considering issuing preferred stock. The preferred stock would have a par value of $75 and a 5.50 percent dividend. What is the cost of preferred stock for Tangshan if flotation costs would amount to 5.5 percent of par value?

5.82%

Nico Trading Corporation is considering issuing long-term debt. The debt would have a 30-year maturity and a 10 percent coupon rate. In order to sell the issue, the bonds must be underpriced at a discount of 5 percent of face value. In addition, the firm would have to pay flotation costs of 5 percent of face value. The firm's tax rate is 35 percent. Given this information, the after-tax cost of debt for Nico Trading would be ________.

7.26%

If a corporation has an average tax rate of 40 percent, the approximate, annual, after-tax cost of debt for a 15-year, 12 percent, $1,000 par value bond, selling at $950 is ________.

7.7 percent

An investor buys a 20-year Bbb-rated corporate bond with a nominal annual rate of return of 10%. The average inflation rate is expected to be 2%. The default risk premium is expected to be 5% and the maturity premium is 4%. Using Fisher effects, calculate the real rate of interest.

7.84%

The current rate of return on a one-year U.S. Government security is 4%. The rate of return on a two-year U.S. Government security is 6%. According to the expectations theory, what is the return on a one-year U.S. Government security purchased one year from today?

8.04%

You are considering an investment in a AAA-rated U.S. corporate bond but you are not sure what rate of interest it should pay. Assume that the real risk-free rate of interest is 1.0%; inflation is expected to be 1.5%; the maturity risk premium is 2.5%; and, the default risk premium for AAA rated corporate bonds is 3.5%. What rate of interest should the U.S. corporate bond pay?

8.5%

What information does a firm's income statement provide to the viewing public?

A report of revenues and expenses for a defined period of time.

General Electric (GE) has been a public company for many years with its common stock traded on the New York Stock Exchange. If GE decides to sell 500,000 shares of new common stock, the transaction will be described as

A seasoned equity offering because GE has sold common stock before.

Which of the following statements best represents the "Agency Problem"?

A) Managers might attempt to benefit themselves in terms of salary and perquisites at the expense of shareholders. B) The agency problem results from the separation of management and the ownership of the firm. C) The agency problem may interfere with the implementation of maximizing shareholder wealth. *D) all of the above*

Tangshan Mining Company is considering investing in a new mining project. The firm's cost of capital is 12 percent and the project is expected to have an initial after-tax cost of $5,000,000. Furthermore, the project is expected to provide after-tax operating cash flows of $2,500,000 in year 1, $2,300,000 in year 2, $2,200,000 in year 3, and ($1,300,000) in year 4? (a) Calculate the project's NPV. (b) Calculate the project's IRR. (c) Should the firm make the investment?

A. NPV = $(336,924) B. IRR = 6.80% C. The firm should not make the investment (Answer: No, the firm should not accept the project since it provides negative NPV., NPV=194,380; IRR=9.11%)

What information does a firm's balance sheet provide to the viewing public?

An itemization of all of a firm's assets, liabilities, and equity as of the balance sheet date

Which of the following is true if a firm wishes to collect its accounts faster by imposing stricter credit terms on its customers?

B) The firm's accounts receivable turnover might rise. C) The firm's sales might decrease. A) The firm's average collection period is likely to fall.

The Sarbanes-Oxley Act of 2002, in order to protect investors, requires a higher level of accountability for which of the following groups?

B) public accountants C) boards of directors A) corporate officers

Complete the following balance sheet using the information given. Round account balances to the nearest dollar.

Cash = $8,400 Accounts Receivable = $1,400 Inventory = $2,200 Net Fixed Assets = $8,000 Total Assets = $20,000 Accounts Payable = $5,000 Short Term Notes Payable = $1,000 Long Term Debt = 0 Common Stock = $1,500 Retained Earnings = $12,500 Total Liabilities and Equity = $20,000

Last National Bank is offering you a loan at 10%; payments on the loan are to be made monthly. Credit Onion is offering you a loan where payments are to be made semiannually; the rate on the loan is also 10%. Local Bank down the street is also offering a loan at 10% where the payments are made quarterly. Which loan has the lowest annual cost?

Credit Onion's loan

Which of the following statements concerning Economic Value Added (EVA) is MOST correct?

EVA can be negative even if operating profits are positive.

Independent projects are projects that compete with one another for a firm's resources, so that the acceptance of one eliminates the others from further consideration.

FALSE

The NPV of a project is the difference between an investment's net operating profit after taxes and the cost of funds used to finance the investment, which is found by multiplying the dollar amount of the funds used to finance the investment by the firm's weighted average cost of capital.

FALSE

The internal rate of return assumes that a project's intermediate cash inflows are reinvested at a rate equal to the firm's cost of capital.

FALSE

Accounting profits is the most relevant variable the financial manager uses to measure returns.

False

Debentures are expected to have a lower yield than secured bonds because the debentures are more risky and therefore less desirable.

False

Holding risk constant, the implementation of projects with a rate of return above the cost of capital will decrease the value of a firm, and vice versa.

False

Which of the following affect an asset's value to an investor? I. Amount of an asset's expected cash flow II. The riskiness of the cash flows III. Timing of an asset's cash flows IV. Investor's required rate of return

I, II, III, IV

Which of the following best describes cash flow from financing activities?

Increase (or minus decrease) in stock, plus increase (or minus decrease) in debt, minus interest paid, minus dividends paid.

Define interest rate risk. How does a bond's level of interest rate risk depend on its maturity?

Interest rate risk is the risk of changing (especially falling) bond prices from changing (especially rising) interest rates. If interest rates rise the bond's cash flows are discounted at a higher rate, thus the present value of its cash flows fall, thus its price falls. The longer the maturity, the greater the interest rate risk, because the distant cash flows are discounted a greater number of periods, and thus lose more value (or gain more value if interest rates fall).)

Bill, a local inventor, developed a diet pill that he believes will solve the obesity problem in the United States. Bill wants to create a new company, 50% owned by Bill and 50% owned by a major drug company. Although he believes the pills are safe, Bill is concerned about liability if someone becomes sick or dies. The best form of business organization for the new company is

Limited liability company with Bill and the drug company owning equal shares.

Which of the following goals of the firm are synonymous (equivalent) to the maximization of shareholder wealth?

Maximization of the total market value of the firm's common stock

Why should firms that own and operate multiple businesses that have different risk characteristics use business-specific, or divisional costs of capital?

Not all lines of business have equal risk and it is likely that the firm will accept projects whose returns are unacceptably low in relation to the risk involved.

Consider the following projects, X and Y, where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project Y also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 10 percent?

Project X, since it has a higher NPV than Project Y

Valley Flights, Inc. has a capital structure made up of 40% debt and 60% equity and a tax rate of 30%. A new issue of $1,000 par bonds maturing in 20 years can be issued with a coupon of 9% at a price of $1,098.18 with no flotation costs. The firm has no internal equity available for investment at this time, but can issue new common stock at a price of $45. The next expected dividend on the stock is $2.70. The dividend for the firm is expected to grow at a constant annual rate of 5% per year indefinitely. Flotation costs on new equity will be $7.00 per share. The company has the following independent investment projects available: Project Initial Outlay IRR 1 $100,000 10% 2 $10,00 8.5% 3 $50,000 12.5% Which of the above projects should the company take on?

Projects 1 and 3

The common stock of Cranberry Inc. is selling for $26.75 on the open market. Next year's dividend is expected to be $3.68, and the growth rate of this company is estimated to be 5.5%. If Richard Dean, an average investor, is considering purchasing this stock at the market price, what is his expected rate of return?

R = (D/V) + g R = ($3.68/$26.75) + .055 R = 19.26%)

Which of the following is a source of long-term funds?

Retained earnings

Which of the following statements is MOST correct concerning diversification and risk?

Risk-averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from the same industry.

You must add one of two investments to an already well- diversified portfolio. Security A Security B Expected Return = 14% Expected Return = 12% Standard Deviation of Standard Deviation of Returns = 15.0% Returns = 11% Beta = 1.5 Beta = 1.5 If you are a risk-averse investor, which one is the better choice?

Security A

Common-sized balance sheets

Show each balance sheet account as a percentage of total assets.

A sophisticated capital budgeting technique that can be computed by subtracting a project's initial investment from the present value of its cash inflows discounted at a rate equal to a firm's cost of capital is called net present value.

TRUE

Capital budgeting techniques are used to evaluate a firm's fixed asset investments which provide the basis for the firm's earning power and value.

TRUE

In capital budgeting, the preferred approaches in assessing whether a project is acceptable are those that integrate time value procedures, risk and return considerations, and valuation concepts.

TRUE

On a purely theoretical basis, NPV is the better approach to capital budgeting than IRR because NPV implicitly assumes that any intermediate cash inflows generated by an investment are reinvested at the firm's cost of capital.

TRUE

Assume that you went to Las Vegas and hit the jackpot for $5 million. Further assume that you were offered a choice to receive the $5 million today, or receive it in two years. According to one of the principles of finance, which would you take?

The $5 million today because it would be worth more than if you would receive it in two years

Which of the following is true of a zero coupon bond?

The bond makes no coupon payments

In which of the following cases will the agency problem between shareholders and managers be the greatest?

The common stock of the company is owned by many diverse shareholders, with no shareholder owning more than 1% of the outstanding stock.

Two companies have identical assets and operating activities. Which of the follow statements is true?

The company with more debt will have lower net income due to interest expense.

Jones, Inc. has a current ratio equal to 1.40. Which of the following transactions will increase the company's current ratio?

The company writes a $30,000 check to pay off some existing accounts payable.

Which of the following statements about the corporate form of business organization is true?

The corporate form has the disadvantage of double taxation relative to a sole proprietorship.

The price of DDS Corporation stock is expected to be $45 in 5 years. Dividends are anticipated to increase at an annual rate of 10 percent from the most recent dividend of $1.00. If your required rate of return is 15 percent, how much are you willing to pay for DDS stock?

The expected cash flows are the future dividends plus the future selling price, Year D PV @ 15% 1 1.10 .96 2 1.21 .91 3 1.33 .88 4 1.46 .84 5 1.61 .80 $4.39 =PV of dividends only P = $4.39 + ($68/(1.155 = 22.37) = $26.76

A 65 year-old man is retiring and can take either $500,000 in cash or an ordinary annuity that promises to pay him $50,000 per year for as long as he lives. Which of the following statements is MOST correct?

The higher the interest rate, the more likely the man will prefer the $500,000 lump sum.

Harold considers investing in an LM Corp. bond and decides not to purchase the bond. Which of the following statements is MOST correct

The intrinsic value of the bond for the investor is less than the market value of the bond.

Two bonds are identical except for their maturity. The bonds have a coupon rate that is greater than their yield to maturity. Which of the following is true when comparing the two bonds?

The longer maturity bond has a greater premium (is priced farther above par)

Which of the following is a reason that makes NPV a better approach to capital budgeting on a purely theoretical basis?

The reinvestment rate assumed by this method is reasonable.

You are considering a sales job that pays you on a commission basis or a salaried position that pays you $50,000 per year. Historical data suggests the following probability distribution for your commission income. Which job has the higher expected income? Commission Probability of Occurrence $15,000 .15 $35,000 .20 $48,000 .35 $67,000 .22 $80,000 .18

The salary of $50,000 is greater than the expected commission of $49,630.

Which of the following represents the correct ordering of returns over the period 1926 to 2014 (from lowest to highest return)?

Treasury bills, long-term government bonds, long-term corporate bonds, common stocks,

Subordinated debentures are more risky than unsubordinated debentures because the claims of subordinated debenture holders are less likely to be honored in the event of liquidation.

True

The cost of debt increases relative to the investor's required return due to flotation costs, but decreases relative to the investor's required return due to the tax deductibility of interest.

True

Using the Capital Asset Pricing Model (CAPM), the cost of common stock equity is the return required by investors as compensation for a firm's nondiversifiable risk.

True

When the constant-growth valuation model is used to find the cost of common stock equity capital, it can easily be adjusted for flotation costs to find the cost of new common stock; the capital asset pricing model (CAPM) does not provide a simple adjustment mechanism.

True

Spandra Electronics wants to raise money by selling stock. After talking to several investment banking firms, Spandra decides to hire Goldman Sachs to sell 5 million shares of its common stock. Goldman sells 4.5 million shares and returns the rest to Spandra. This is an example of

a commission or best-efforts agreement.

A firm is evaluating two independent projects utilizing the internal rate of return technique. Project X has an initial investment of $80,000 and cash inflows at the end of each of the next five years of $25,000. Project Z has an initial investment of $120,000 and cash inflows at the end of each of the next four years of $40,000. The firm should ________.

accept Project X because its IRR is higher than Project Z

A firm is evaluating a proposal which has an initial investment of $35,000 and has cash flows of $10,000 in year 1, $20,000 in year 2, and $10,000 in year 3. The payback period of the project is ________.

between 2 and 3 years

If a corporation wants a guarantee that all of its shares of stock will be sold, it should use which of the following distribution methods?

competitive bid purchase

Net working capital is equal to

current assets minus current liabilities.

All of the following will improve a firm's liquidity position EXCEPT

increase the average collection period.

As the need for capital increases beyond the optimum capital structure, the cost of debt financing will ________, ________ the firm's weighted average cost of capital.

increase; raising

Smith Corporation has earned a return on capital invested of 10% for the past two years, but an investment analyst reviewing the company has stated the company is not creating shareholder value. This may be due to the fact that

investors' required rate of return is 12%.

The yield to maturity on a bond

is the required rate of return on the bond.

When the net present value is negative, the internal rate of return is ________ the cost of capital.

less than

Suppose the following rates are averages for banks in your area: interest checking accounts pay 1%, savings accounts pay 2%, and one-year certificate of deposit pay 3%. All accounts are federally insured by the FDIC. The difference in rates can be explained mainly by

liquidity premiums

Generally, the order of cost, from the least expensive to the most expensive, for long-term capital of a corporation is ________.

long-term debt, preferred stock, retained earnings, new common stock

The ________ from the sale of a security are the funds actually received from the sale after ________.

net proceeds; reducing the flotation costs

Examples of uses of cash include

paying cash dividends to stockholders.

When evaluating projects using NPV approach, ________.

projects having higher early-year cash flows tend to be preferred at higher discount rates

The new financial analyst does not like the payback approach (Table 10.3) and determines that the firm's required rate of return is 15 percent. Based on IRR, his recommendation would be to ________. A firm is evaluating two projects that are mutually exclusive with initial investments and cash flows as follows:

reject Project A and accept Project B

The category of securities with the highest historical risk premium is

small company stocks

You have the choice of two equally risk annuities, each paying $5,000 per year for 8 years. One is an annuity due and the other is an ordinary annuity. If you are going to be receiving the annuity payments, which annuity would you choose to maximize your wealth?

the annuity due

Assuming two investments have equal lives, a high discount rate tends to favor

the investment with large cash flow early

If a corporation were to choose between issuing a debenture, a mortgage bond, or a subordinated debenture, everything else equal (such as coupon rate, maturity, etc.) which would sell for the greatest price?

the mortgage bond

The underlying cause of conflicts in ranking for projects by internal rate of return and net present value methods is ________.

the reinvestment rate assumption regarding intermediate cash flows

Stock A has a beta of 1.2 and a standard deviation of returns of 18%. Stock B has a beta of 1.8 and a standard deviation of returns of 18%. If the market risk premium increases, then

the required return on stock B will increase more than the required return on stock A.