FINA 320 FINAL EXAM Mock Quizzes

The Corner Bar & Grill is in the process of taking a five-year loan of $50,000 at an annual interest rate of 8% with First Community Bank. The loan requires 5 equal payments at the end of each year inclusive of interest and part of the principal. Find the total interest payments over the life of the loan.

$12,614

The monthly mortgage payment on your house is $821.69. It is a 30-year mortgage at 6.5% annual interest rate, compounded monthly. How much did you borrow?

$130,000

What is the future value (at the end of year 5) of a 5-year ordinary annuity with annual payments of $200, evaluated at a 15 percent interest rate?

$1348.48

A company reports the following: tax rate = 35%; SG&A = $400; Revenue = $1,600; COGS = $750; Interest expense = $50; Net Income = $162.50. What is the depreciation expense?

$150

The Wonder Products Company is expanding fast and therefore will not pay any dividends for the next 3 years. After that, starting at the end of year 4, it will pay a dividend of $0.75 per share to its common shareholders and increase it by 12% each year forever. If an investor wants to earn 15% per year on this investment, how much should he pay for the stock?

$16.44

You are depositing $4,500 today at an annual interest rate of 7.2 percent, compounded annually. How much additional interest will you earn if you leave the money invested for 45 years instead of 40 years?

$30,185

Jim is saving for a new motorcycle, which he wants to buy in 3 years for $25,000. He opens a savings account with an annual interest rate of 12% and interest paid monthly. How much does he have to invest each month to be able to purchase the motorcycle in 3 years?

$574.61

What is the present value of receiving $100 monthly for two years, followed by $200 monthly for the next three years, payments? Assuming that the annual interest rate is 13%, compounded monthly.

$6,687

Last year, the Harvest Time Corporation sold $40,000,000 worth of 7.5% coupon, 15-year maturity, $1,000 par value per unit, and AA-rated bonds to finance its business expansion. Currently, investors are demanding a yield of 8.5% on similar bonds. If you own one of these bonds and want to sell it, how much money can you expect tor receive from it.

$919.03

What is the approximate variance of returns if over the past 3 years an investment returned 8.0%, -12.0%, and 15.0%?

0.0196

The common stock of Jensen Shipping has an expected return of 15.4 percent. The return on the market is 11.2 percent, the inflation rate is 3.1 percent, and the risk-free rate of return is 3.6 percent. What is the beta of this stock?

1.55

Calculate the risk premium on stock C given the following information: risk-free rate = 5%, market return = 13%, stock C beta = 1.3.

10.4%

Strong Growth Inc. just had its earnings call. It released earnings and reported $2.5 of earnings per share. Because analysts expected EPS to be $3, the price of the stock dropped from $33 to $29.5 after the earnings release. What is Strong Growth Inc. current P/E ratio?

11.80

A firm is expected to pay a dividend of $3.50 per share in one year. This dividend, along with the firm's earnings, is expected to grow at a rate of 7% forever. If the current market price for a share is $67, what is the cost of equity.

12.22%

Compute Megaframe's profit margin.

13.2%

Company ABC has 10 million shares of common stock outstanding. The company reports a net income of $20 million and pays $12 million dividend to shareholders. The company is expected to increase its net income by 4% per year forever and maintain the payout ratio of 60%.

2.6

An investor is considering investing in Tawari Company for one year. He expects to receive $2 in dividends over the year and feels he can sell the stock for $30 at the end of the year. To realize a return on the investment over the year of 14%, the price the investor would pay for the stock today is closest to:

28

Assume that at the end of the next year, Company A will pay a $2.00 dividend per share, an increase from the current dividend of $1.50 per share. After that, the dividend is expected to increase at a constant rate of 5%. If an investor requires a 12% return on the stock, what is the value of the stock?

28.57

The State of Confusion wants to change the current retirement poly for state employees. To do so, however, the state must pay the current pension fund members the present value of their promised future payments. There are $240,000 current employees in the state pension fund. The average employee is twenty-two years away from retirement, and the average promised future retirment benefit is $400,000 per employee. If the state has a discount rate of 5% on all its funds, how much money will the state have to pay to the employees before it can start a new pension plan?

32.818 million

Cooley Landscaping Company needs to borrow $30,000 for a new front-end dirt loader. The bank is willing to loan the funds at 8.5% interest with annual payments at the end of the year for the next ten years. The loan is fully amortized, i.e., the loan will be fully paid off at the end of year ten. What is the annual payment on this loan for Cooley Landscaping?

4,572.5

Lewis, Shultz, and Nobel Development Corp. has an after-tax cost of debt of 4.5%. With a tax rate of 21%, what is the yield to maturity on the debt?

5.70%

Buying your own home is often mentioned as "the best investment you can make." In 1930, the average home sale price was $3,845. By 1990, the average home sale price had risen to $123,000. What was the average annual rate of return of investing in house over this time period?

5.95% per year

You are interested in a corporate bond with the current market price of $973.36 and yield to maturity of 7%. The bond carries a coupon rate of 6%, paid semi-annually. If you buy the bond today, how many semi-annual coupon payments will you receive until the final maturity.

6

Below are items in company ABC's income statement. There is no other income or expense.

6%

Benson Biometrics, Inc. has outstanding $1,000 face value 8% coupon bonds that make semiannual payments and have fourteen years remaining to maturity. If the current price for these bonds is $1,118.74, what is the annualized yield to maturity?

6.68%

Standard Insurance is developing a long-life insurance policy for people who outlive their retirement nest egg. The policy will pay out $250,000 on your eighty-fifth birthday. You must buy the policy on your sixty-fifth birthday. The insurance company can earn 7% on the purchase price of your policy. What is the minimum purchase price the insurance company should charge for this policy?

64,604.5

A firm has total assets of $3,000,000 and stockholders equity is $1,000,000. What is the debt ratio?

67%

Assume that a 10-year regular annuity has a present value of $3,755.50 when evaluated at an interest rate of 0%. Determine the interest rate that would give this same annuity a future (compounded) value of $5,440.22 at Year 10.

8%

Mr. Malone wants to change the overall risk of his portfolio. Currently, his portfolio is a combination of risky assets with a beta of 1.25 and an expected return of 14%. He will add a risk-free asset (U.S. Treasury bill) to his portfolio. If he wants a beta of 1.0, what percent of his wealth should be in the risky portfolio and what percentage should be in the risk-free asset? If he wants a beta of 0.75? If he wants a beta of 0.50? If he wants a beta of 0.25? Is there a pattern here?

80

A company has the following capital structure:

9.84%

Which of the following is the most appropriate decision rule for mutually exclusive projects?

Accept the project with the highest positive NPV

Which of the following statements is most correct?

All of the statements are correct

Which of the following is a function of the secondary market?

All of these are correct (Price discovery, provide liquidity, lower transaction costs, and information dissemination)

The present value of an annuity stream of $100 per year is $614 when valued at a 10% rate. By approximately how much would the value change if these were annuities due?

An increase of $61

Bond A has a market price of $960, a yield to maturity of 10%, and a maturity of 5 years. Bond A pays coupon semi-annually. Bond B has a current price of $1010, a yield to maturity of 6.5%, and 3 years to maturity. Bond B makes coupon payments annually. Which bond has higher annual coupon payments and by how much?

Bond A by $20.86

The company has a target capital structure of 40% debt and 60% equity. The company is a constant growth firm that just paid a dividend of $2.00, sells for 27.00 per share, and has a growth rate of 8%. The company's bonds pay 10% coupon, mature in 20 years and sell for $849.54. The company's stock beta is 1.2. The company's marginal tax rate is 40%. The risk-free rate is 4%. The market risk premium is 10%. The cost of equity using the capital asset pricing model and the constant growth model is:

CAPM: 16% CGM: 16%

_______ is the area of finance concerned with activities such as borrowing funds to finance projects such as plant expansions or new product launches

Corporate Finance

Lasten Company will release earnings soon. Current earnings per share is $2.12 and the P/E ratio is 9.56. Analysts expect EPS to be $2.22 for this quarter. Lasten Company's management is confident that it can beat analysts' EPS expectations by 10% and stock price will increase to $23.45.

Current price = $20.27; Future P/E = 9.60

Which of the following would be considered a capital budgeting decision?

Deciding to expand into a new line of products, at a cost of $5 million

The income statement begins with revenue and subtracts various operating expenses until arriving at ___________

EBIT

Which of the following is the best indication of the profitability of a firm's assets and its operating for a firm with both debt and equity in its capital structure?

Earnings before interest and taxes (EBIT)

How many of the following items are found on the balance sheet, rather than the income statement?

Five of these items

How many of the following items decrease cash flow in the statement of cash flows?

Five of these items decrease cash flow

Which of the following is a correct interpretation of a total asset turnover of 3.0?

For each $1 of assets owned by the firm it generates $3 in sales

Which of the following statements about the constant growth dividend model is FALSE

For the constant growth dividend model to work, the growth rate must exceed the required return on equity

Dividend models suggest that _________ determine the value of a financial asset to which the owner is entitled while holding the asset.

Future cash flows

As $1,000 par value, 10% coupon bond with 15 years to maturity is priced at $951. The bond pays coupon annually. The bond's yield to maturity is:

Greater than its current yield

Having ownership of the company through common stocks provides the stockholders with: I. A share in the net profits of the company II. Voting rights III. Immediate claim to all assets and cash flows

I and II

Which of the following are examples of diversifiable risk? I. An earthquake damages an entire town II. The federal government imposes a $100 fee on all business entities III. Employment taxes increase nationally IV. All toymakers are required to improve their safety standards

I and IV only

The expected return on a portfolio: I. can never exceed the expected return of the best performing security in the portfolio II. can never be lower than the expected return of the worst performing security in the portfolio III. is independent of the unsystematic risks of the individual securities held in the portfolio IV. is independent of the allocation of the portfolio amongst individual securities

I, II, and III, only

A firm is considering an investment in a project whose risk is greater than the current risk of the firm, based on any method for assessing risk. In evaluating this asset, the decision make should:

Increase the total cost of capital used to evaluate the project to reflect the project's higher risk

Which of the following actions are likely to reduce agency conflicts between stockholders and managers?

Increasing the threat of corporate takeover

What would you recommend to an investor who is considering an investment that, according to its beta, plots above the security market line (SML)?

Invest; return is high relative to risk

Your financial team has done a detailed analysis of a proposed 10-year project and reported that the project NPV is $456 at a discount rate of 10%. A later review by the marketing team suggests that the project requires an additional $2,000 of inventory at year 0, which will be maintained throughout the life the project but liquidated at the end of project. How does the requirement for additional inventory impact the estimated project NPV?

It will decrease the NPV by $1,228.91

Financial information about PepsiCo, Coca-Cola and McDonald's is given in the following data.

McDonalds; PepsiCo; PepsiCo

Which of the following statements is false?

NPV and IRR are both similar and different. They are similar in that they are both additive and can be divided into component parts. They are different in that they always lead to differing accept/reject decisions for mutually exclusive projects

Nan and Neal are twins. Both start to save for retirement at age 25. Nan invests $5,000 per year while Neal invests $4,000 per year. Suppose both can earn a compound annual interest rates of 7% on their investments. Their goal is to return when their nest egg reaches $1,000,000. Which of the following statements is true?

Neal has to work 3 more years than Nan OR 8.66% OR $7,317 Nan will have more money than Neal at any age between 25 and 60

A firm has $600,000 in current assets and $150,000 in current liabilities. Which of the following is correct if it uses ash to pay off $50,000 in accounts payable.

Net working capital will not change

What is the expected return on the market portfolio at a time when Treasury bills yield 6% and a stock with a beta of 1.4 is expected to yield 18%?

None of these are correct

Your company just started a new project, and you would like to analyze different scenarios associated with this project. The 4-year project has an initial investment of $1 million in equipment which will be depreciated based on the MACRS 5-year schedule. The plan is to sell the equipment at the end of the fourth year to receive an after-tax salvage value of $400,000. What must be the market value of the equipment at the end of year 4? Assume a tax rate of 30%?

None of these are correct

In a statement of cash flows, which category includes depreciation expense?

None of these; depreciation is a noncash expense

KLS Excavating needs a new crane. It has received two proposals from suppliers.

Project A

Allied, Inc. is considering Project A and Project B, which are two mutually exclusive. Project A is an eight- year project that has an initial outlay or cost of $180,000, its future cash inflows for years 1 through 8 are $38,000. Project B is also an 8 year project that has an initial outlay or cost of $160,000 . Its future cash inflows for years 1 through 8 are the same at $34,500. The appropriate discount rate for both project is 7.5%. Which project should Allied accept?

Project A because it has a higher NPV

The financial manager at Johnson & Smith estimates that its required rate of return is 11%. Which of the following independent projects should Johnson & Smith accept?

Project C

Which one of the following is least effective in reducing the unsystematic risk of a portfolio?

Reducing the number of stocks held in a portfolio

Datem Corp. has an expected return of 11%. With a risk-free rate of 3%, a market risk premium of 7% and a beta of 0.8, you can estimate its required return. What is the required return, and would Datem plot above or below the security market line (SML)?

Required return = 8.6%, plots above the SML

New projects or products can have a side effect on the firm as well as a direct effect. Which of the following appears to be side effect of launching a new product?

Sales of a similar product of your firm's will decline

Ashlyn Lutz makes the following statements to her supervisor, Paul Ulring, regarding the basic principles of capital budgeting: Statement 1: The timing of expected cash flows is crucial for determining the profitability of a capital budgeting project. Statement 2: Capital budgeting decisions should be based on the after-tax net income produced by the capital project. Which of the following regarding Lutz's statements is most accurate?

Statement 1 is correct and statement 2 is incorrect

Companies A and B are very similar in many respects. Both companies have an earnings per share of $2 and a payout ratio of 0.5. Both companies are expected to maintain the same payout ratio well into the future. The required rate of return is 10% for both stocks. However, investors expect company A to grow its EPS at a rate of 4% per year, while the growth rate of company's EPS is expected to be 2% per year forever. Which of the following is true about price-to-earnings rations of the two companies?

The P/E ratio of company A is about 30% higher than that of company B

Which of the following statements about the discounted payback period is least accurate?

The discounted payback period is generally shorter than the regular payback

Which of the following statements below is false?

The discounted payback period method is the time it takes to recover the initial investment in future dollars.

A two-year investment of $3500 is made today at an annual interest rate of 5.75%. Which of the following statements is true?

The future value would be greater if the interest rate was higher

Which of the following is not an example of annuity cash flows?

The grocery bill that changes every week

If two constant growth stocks have the same required rate of return and the same price, which of the following statements is most correct?

The stock with the higher dividend yield will have a lower dividend growth rate

Which of the statements below is FALSE?

The times interest earned ratio tells us the number of times a company has resorted to debt financing over the year.

What must be the profitability index of a project that has an initial investment of $60,000, annual cash inflows of $20,000 for 4 years, and an IRR of 12.6%?

There is not enough information to solve the problem

Tapley Acquisition, Inc., is considering the purchase of Tangent Company. The acquisition would require an initial investment of $190,000, but Tapley's after-tax net cash flows would increase by $30,000 per year and remain at this new level forever. Assume a cost of capital of 15%. Should Tapley buy Tangent?

Yes, because the NPV = $10,000

You are interested in buying an antique car. Your friend is a car enthusiast. Therefore, you ask him for help with estimating the value of the old-timer. Your friend estimates the value of the car at $58,000. The dealer offers the car to you for $30,000 down and $1,000 monthly payments for the next two years. Assume an annual interest rate of 6% should you take that offer?

Yes, because the PV of the offer is less than the estimated value of the car.

A higher discount rate or required rate of return would

all of these options are true

The systematic risk of the market is measured by a:

beta of 1

A year ago a company issued a bond with a face value of $1,000 with an 8% coupon. Now the prevailing market yield is 10%. What happens to the bond? The:

bond is traded at a market price of less than $1,000

The return standard deviation of a portfolio:

can be less than the return standard deviation of the least risky security in the portfolio

When the management of a business is conducted by individuals other than the owners, the business is more likely to be a:

corporation

An increasing percentage of ownership of public corporations by large investors is expected to

create more pressure on public companies to manage their firms more efficiently

An increase in depreciation expense will (other things equal):

decrease net income

Capital budgeting is primarily concerned with

evaluating investment alternatives

The standard deviation of individual stocks are generally higher than the standard deviation of the market portfolio because individual stocks:

have more diversifiable risk

Sunk costs are _______ in estimating an investment's cash flow, since sunk costs are _________

ignored, not recoverable

The overall goal of capital budgeting projects should be to:

increase the wealth of the firm's shareholders

Dividends that are expected to be paid far into the future have:

lesser impact on current stock price due to discounting

Asset accounts on the balance sheet are listed in order of

liquidity

The constant-growth dividend discount model would typically be most appropriate in valuing a stock of a:

moderate growth, "mature" company

When firms develop a WACC for individual projects based on the cost of capital for other firms in similar lines of business as the project, the firm is utilizing a

pure play approach

The principle of diversification tells us that:

spreading an investment across many diverse assets will eliminate some of the total risk

Agency theory would imply that conflicts are more likely to occur between management and shareholders when?

the compensation of the chief executive office (CEO) mainly consists of fixed annual salary

For a firm paying 5% for a new debt, the higher the firm's tax rate

the lower the after-tax cost of debt

Prices of existing bonds move _______ as yields to maturity move _________

up; down

The value of a common stock is based on its

value of future benefits to the holder

The discount rate that makes the present value of a bond's payments equal to its price is termed the:

yield to maturity

The true measure of the return on a bond is its

yield to maturity