Finance 3005: Exam 1

Free Cash Flow You are considering an investment in Crew Cut, Incorporated and want to evaluate the firm's free cash flow. From the income statement, you see that Crew Cut earned an EBIT of $23.09 million, paid taxes of $3.91 million, and its depreciation expense was $7.91 million. Crew Cut's gross fixed assets increased by $10.09 million from 2017 to 2018. The firm's current assets increased by $6.09 million and spontaneous current liabilities increased by $3.91 million. What is Crew Cut's operating cash flow, investment in operating capital and free cash flow for 2018, respectively in millions?

$27.09, $12.27, $14.82

Present Value of a Perpetuity What's the present value, when interest rates are 6.70 percent, of a $220 payment made every year forever?

$3,283.58

Statement of Cash Flows In 2008, Upper Crust had cash flows from investing activities of −$215,000 and cash flows from financing activities of −$157,000. The balance in the firm's cash account was $97,000 at the beginning of 2018 and $112,000 at the end of the year. What was Upper Crust's cash flow from operations for 2018?

$387,000

Compounding with Different Interest Rates A deposit of $330 earns interest rates of 7.3 percent in the first year and 10.3 percent in the second year. What would be the second year future value?

$390.56

What is the value in year 3 of a $500 cash flow made in year 5 when interest rates are 6 percent?

$445

Discounting Four Years What is the present value of a $580 payment in four years when the discount rate is 6 percent?

$459.41

If the future value of an ordinary, 11-year annuity is $5,575 and interest rates are 5.5 percent, what is the future value of the same annuity due?

$5,881.63

Balance Sheet Jack and Jill Corporation's year-end 2018 balance sheet lists current assets of $252,000, fixed assets of $802,000, current liabilities of $193,000, and long-term debt of $298,000. What is Jack and Jill's total stockholders' equity?

$563,000

Future Value Compute the future value in year 7 of a $260 deposit in year 1 and another $60 deposit at the end of year 4 using a 11% interest rate.

$568.37

Balance Sheet You are evaluating the balance sheet for Cypress Corporation. From the balance sheet you find the following balances: Cash and marketable securities = $520,000, Accounts receivable = $720,000, Inventory = $420,000, Accrued wages and taxes = $42,000, Accounts payable = $120,000, and Notes payable = $920,000. What is Cypress's net working capital?

$578,000

What is the value in year 3 of a $250 cash flow made in year 15 when interest rates are 12 percent?

$64.17

Statement of Retained Earnings Z, Corporation began the year 2018 with $2.8 million in retained earnings. The firm earned net income of $7.8 million in 2018 and paid $2.82 million to its common stockholders. What is the year-end 2018 balance in retained earnings for Z?

$7.78 million

Moving Cash Flow You are scheduled to receive a $420 cash flow in one year, a $720 cash flow in two years, and pay a $320 payment in three years. If interest rates are 12 percent per year, what is the combined present value of these cash flows?

$721.21

Suppose a U.S. Treasury bond promises to pay $9,780.13 in three years. If bonds of this type are generating a 4 percent annual return, how much would you pay for this bond today?

$8,694.50

Future Value of Multiple Annuities Assume that you contribute $160 per month to a retirement plan for 20 years. Then you are able to increase the contribution to $260 per month for another 20 years. Given a 9.0 percent interest rate, what is the value of your retirement plan after 40 years?

$815,800

Your 30-year $95,000 mortgage calls for payments to be made at the end of each month. The loan has a 5.85 percent annual interest rate. What is the remaining balance after five years?

$88,236.44

DuPont Analysis If Epic, Incorporated has an ROE = 26%, equity multiplier = 3.9, a profit margin of 12.1%, what is the total asset turnover ratio? (Round your answer to 4 decimal places.)

0.5510

Effective Annual Rate A loan is offered with monthly payments and a 10.5 percent APR. What's the loan's effective annual rate (EAR)?

11.02%

Solving for Rates What annual rate of return is earned on a $5,800 investment made in year 4 when it grows to $13,400 by the end of year 12?

11.03%

Internal Growth Rate Leash N Collar reported a profit margin of 9.9%, total asset turnover ratio of 3.4 times, debt-to-equity ratio of 0.94 times, net income of $590,000, and dividends paid to common stockholders of $390,000. The firm has no preferred stock outstanding. What is Leash N Collar's internal growth rate? (Do not round intermediate steps.)

12.8798%

A firm's net income last year was $1.5 million. Its net income grew 5 percent during the last "5" years. If that growth rate continues, how long will it take for the firm's net income to double?

14.21 years

What annual rate of return is earned on a $2,000 investment made in year 3 when it grows to $3,000 by the end of year 6?

14.47 percent

How many years will it take $1 million to grow to $3 million with an annual interest rate of 7 percent?

16.24 years

Profitability and Asset Management Ratios You are thinking of investing in Tikki's Torches, Incorporated You have only the following information on the firm at year-end 2018: net income = $640,000, total debt = $13.4 million, debt ratio = 44%. What is Tikki's ROE for 2018?

3.75%

Sustainable Growth Rate You have located the following information on Rock Company: debt ratio = 40%, capital intensity ratio = 2.25 times, profit margin = 8%, and dividend payout ratio = 25%. What is the sustainable growth rate for Rock? (Do not round intermediate steps.)

4.65%

Which of the following statements about compound frequency is not true? A)Compounding frequency can only be annual, semi-annual or quarterly.B)The higher the compound frequency, the higher the future value will be.C)The relative increase in value from increasing compounding frequency seems to diminish with increasing frequencies.D)None of the above are untrue statements.

A

Future Value At age 25 you invest $3,000 that earns 8.5 percent each year. At age 40 you invest $3,000 that earns 11.5 percent per year. In which case would you have more money at age 60?

At age 25 invest $3,000 at 8.5 percent

At age 20 you invest $1,000 that earns 7 percent each year. At age 30 you invest $1,000 that earns 10 percent per year. In which case would you have more money at age 60?

At age 30 invest $1,000 at 10 percent.

Which of the following refers to the amount of debt versus equity a firm has on its balance sheet? A)capital coverageB)capital structureC)debt structureD)financial structure

B

Which of the following statements is correct? A)The bottom line on the statement of cash flows equals the change in the retained earnings on the balance sheet.B)The reason the statement of cash flows is important is because cash is what pays the firm's obligations, not accounting profit.C)If a firm has accounting profit, its cash account will always increase.D)All of these choices are correct.

B

Which statement is true of ratio analysis: A)can provide useful information on a firm's current position but should never be used to forecast future performance.B)can provide useful information on a firm's current position and hint at future performance.C)can provide useful information on a firm's past but not current position.D)can provide useful information on a firm's past and current position, but should never be used to forecast future performance.

B

Asset Management Ratios Corn Products, Corporation ended the year 2018 with an average collection period of 33 days. The firm's credit sales for 2011 were $10.6 million. What is the approximate year-end 2013 balance in accounts receivable for Corn Products? (Consider 365 days a year.)

$0.9584 million

Say that you purchase a house for $150,000 by getting a mortgage for $135,000 and paying a $15,000 down payment. If you get a 15-year mortgage with a 6 percent interest rate, what are the monthly payments?

$1,139.21

A perpetuity pays $250 per year and interest rates are 8.5 percent. How much would its value change if interest decreased to 5.5 percent? Did the value increase or decrease?

$1,604.27; increase

Income Statement Bullseye, Incorporated's 2018 income statement lists the following income and expenses: EBIT = $706,500, Interest expense = $50,000, and Taxes = $223,500. Bullseye's has no preferred stock outstanding and 240,000 shares of common stock outstanding. What are the 2008 earnings per share? (Round your answer to 2 decimal places.)

$1.80

Statement of Retained Earnings Triplette, Corporation began the year 2018 with −$5 million in retained earnings. The firm earned net income of $10.05 million in 2018 and paid $2.05 million to its preferred stockholders and $1.05 million to its common stockholders. What is the year-end 2018 balance in retained earnings for Triplette?

$1.95 million

Future Value of an Annuity What is the future value of a $1,000 annuity payment over 8 years if the interest rates are 10 percent?

$11,435.89

Free Cash Flow Catering Corporation reported free cash flows for 2018 of $8.18 million and investment in operating capital of $2.18 million. Catering listed $0.91 million in depreciation expense and $2.18 million in taxes on its 2018 income statement. What was Catering's 2018 EBIT?

$11.63 million

Income Statement Bullseye, Incorporated's 2018 income statement lists the following income and expenses: EBIT = $509,000, Interest expense = $56,000, and Net income = $327,000. What is the 2018 Taxes reported on the income statement?

$126,000

If the present value of an ordinary, 8-year annuity is $12,500 and interest rates are 9.1 percent, what is the present value of the same annuity due?

$13,637.50

Two Years Future Value What is the future value of $13,000 deposited for two years earning 7% interest rate annually?

$14,884

Assume that you contribute $300 per month to a retirement plan for 25 years. Then you are able to increase the contribution to $500 per month for 20 years. Given a 9 percent interest rate, what is the value of your retirement plan after 45 years?

$2,355,040.91

Ten years ago, Jane invested $1,000 and locked in a 7 percent annual interest rate for 30 years (end 20 years from now). James can made a 20-year investment today and lock in a 6 percent interest rate. How much money should he invest now in order to have the same amount of money in 20 years as Jane?

$2,373.54

Present Value of an Annuity What is the present value of a $700 annuity payment over 5 years if interest rates are 12 percent?

$2,523.34

DuPont Analysis Last year, PJ's Ice Cream Parlors, Incorporated reported an ROE = 12.3%. The firm's debt ratio was 47%, sales were $38 million, and the capital intensity ratio was .88 times. What is the net income for PJ's last year? (Do not round intermediate steps.)

$2.18 million

DuPont Analysis Last year Café Creations, Incorporated had an ROA of 21%, a profit margin of 11.6%, and sales of $4.4 million. What is Café Creations's total assets?

$2.43 million

Asset Management and Profitability Ratios You have the following information on Universe It Ts, Incorporated: sales to working capital = 12 times, profit margin = 26.2%, net income available to common stockholders = $4.2 million, and current liabilities = $1.2 million. What is the firm's balance of current assets?

$2.536 million

cash flows available for payments to stockholders and debt holders of a firm after the firm has made investments in assets necessary to sustain the ongoing operations of the firm.

Free cash flow

Measures the return on the common stockholder's investment in the assets of the firm.

Return on Equity

Which of the following is the maximum growth rate that can be achieved by financing asset growth with new debt and retained earnings?

sustainable growth rate

When computing the future value of an annuity, the higher the compound frequency

the higher the future value will be

To interpret financial ratios, managers, analysts, and investors use which of the following type of benchmarks?

time series analysis

What is the difference in perspective between finance and accounting?

timing

The biggest disadvantage of the sole proprietorship is

unlimited liability

Which financial statement reports a firm's assets, liabilities, and equity at a particular point in time?

balance sheet

When interest rates are lower, borrowers can

borrow more money

A car company is offering a choice of deals. You can receive $600 cash back on the purchase, or a 2 percent APR, 4-year loan. The price of the car is $18,900 and you could obtain a 4-year loan from your credit union at 6 percent APR. What is the monthly payment of each deal?

cash back: PMT = $429.78, 2 percent APR: PMT = $410.04

These are cash inflows and outflows associated with buying and selling of fixed or other long-term assets.

cash flows from investing activities

Not all cash a company generates will be returned to the investors. Which of the following will NOT reduce the amount of capital returned to the investors?

dividends

When your investment compounds, your money will grow in a(n) __________ fashion.

exponential

Which financial statement shows the total revenues that a firm earns and the total expenses the firm incurs to generate those revenues over a specific period of time-generally one year?

income statement

This is the amount of additional taxes a firm must pay out for every additional dollar of taxable income it earns.

marginal tax rate

The overall goal of the financial manager is to

maximize shareholder wealth

A perpetuity, a special form of annuity, pays cash flows

periodically forever

If a company reports a large amount of net income on its income statement during a year, the firm could have

positive cash flow, negative cash flow, or zero cash flow

Which of these ratios show the combined effects of liquidity, asset management, and debt management on the overall operation results of the firm?

profitability

This type of business organization is entirely legally independent from its owners.

public corporations

Which type of ratio measures a firm's ability to pay off short-term obligations without relying on inventory sales?

quick or acid-test

The portion of a company's profits that are kept by the company rather than distributed to the stockholders as cash dividends is referred to as

retained earnings

Which type of ratio measures the dollars of current assets available to pay each dollar of current liabilities?

current

Which of the following activities result in an increase in a firm's cash?

decrease fixed assets

Solving for Rates What annual rate of return is earned on a $1,800 investment when it grows to $4,100 in nine years?

9.58%

Market Value Ratios Lab R Doors' year-end price on its common stock is $42. The firm has total assets of $77 million, the debt ratio is 58%, no preferred stock, and there are 4.2 million shares of common stock outstanding. Calculate the market-to-book ratio for Lab R Doors.

5.45

A $5,000 investment has doubled to $10,000 in ten years. How much longer will it take for the investment to reach $15,000 if it continues to earn the same rate?

5.85 years

Approximately how many years does it take to double a $300 investment when interest rates are 8 percent per year?

9 years

You want to retire in 40 years and you have $40,000 saved in your retirement account. You believe you will need $1,500,000 upon retirement. What rate will you need to earn on the account to achieve this goal?

9.48 percent

Which of these is the system of incentives and monitors that tries to overcome the agency problem?

Corporate Governance

All of the following are reasons that one should be cautious in interpreting financial statements EXCEPT A)firms can take steps to over- or understate earnings at various times.B)it is difficult to compare two firms that use different depreciation methods.C)financial managers have quite a bit of latitude in using accounting rules to manage their reported earnings.D)All of these choices are correct.

D

Which statement is true? A) The less liquid assets a firm holds, the less likely it is that the firm will experience financial distress. B) The lower the liquidity ratios, the less liquidity risk a firm has. C) Liquid assets generate profits for the firm. D) Extremely high levels of liquidity guard against liquidity crises, but at the cost of lower returns on assets.

D

Which of these is the term for the ease of conversion of an asset into cash at a fair value?

Liquidity

Level sets of frequent, consistent cash flows are called

annuities

is an annuity in which the cash flows occur at the beginning of each period.

annuity due

We call the process of earning interest on both the original deposit and on the earlier interest payments

compounding

From the perspective of access to capital, the best form of business organization is the

corporation

Which of these ratios measure the extent to which the firm uses debt (or financial leverage) versus equity to finance its assets?

debt management ratios

Which of these must effectively distribute capital between investors and companies?

financial institutions

The length of time of the annuity is very important in accumulating wealth within an annuity. What other factor also has this effect?

interest rate for compounding

Which ratio measures the number of dollars of sales produced per dollar of inventory?

inventory turnover

To compute the present or future value of an annuity due, one computes the value of an ordinary annuity and then

multiplies it by (1 + i)