Finance Exam 1

You want to purchase a new condominium which costs $329,000. Your plan is to pay 20 percent down in cash and finance the balance over 25 years at 6.25 percent. What will be your monthly mortgage payment? A. $1,736.25 B. $1,833.33 C. $1,908.16 D. $2,221.43 E. $2,406.11

A. $1,736.25 Amount financed = 0.80 x $329,000 = $263,200 OR Enter N: 300 (25*12) I/Y: 6.25 PV: 263,200 FV: 0 P/Y: 12 Solve for Pmt = $1,736.25.

The Good Life Store has sales of $79,600. The cost of goods sold is $48,200 and the other costs are $18,700. Depreciation is $8,300 and the tax rate is 34 percent. What is the net income? A. $2,904 B. $8,382 C. $11,204 D. $14,660 E. $16,682

A. $2,904 Net income = (Sales - Cost of goods sold - Other costs - Depreciation)*(1 - tax rate) = = ($79,600 - $48,200 - $18,700 - $8,300)(1 - 0.34) = $2,904

Keyser Materials paid $7,500 in dividends and $28,311 in interest over the past year while net working capital increased from $13,506 to $18,219. The company purchased $42,000 in net new fixed assets and had depreciation expenses of $16,805. During the year, the firm issued $25,000 in net new equity and paid off $11,000 in long-term debt. What is the amount of the cash flow from assets? A. $21,811 B. $30,811 C. $36,189 D. $49,811 E. $71,811

A. $21,811 Cash flow from assets = Cash flow to creditors + Cash flow to stockholders Cash flow to creditors = Interest paid - Net new borrowing = $28,311 + $11,000 Cash flow to stockholders = Dividends paid - Net new equity = $7,500 - $25,000 So CFFA = ($28,311 + $11,000) + ($7,500 - $25,000) = $21,811

Karl can afford car payments of $235 a month for 48 months. The bank will lend him money to buy a car at 7.75 percent interest. How much money can he afford to borrow? A. $9,672.48 B. $9,734.95 C. $9,899.60 D. $10,022.15 E. $10,422.09

A. $9,672.48 OR Enter N: 48 I/Y: 7.75% Pmt: -235 FV: 0 P/Y: 12 Solve for PV = $9,672.48.

The balance sheet of Retailers, Inc. has the following balances: Cash= Beginning: $21,400 Ending: $16,800 Accounts Receivable= Beginning: 47,400 Ending: 52,300 Inventory= Beginning: 83,800 Ending: 77,400 Net Fixed Assets= Beginning: 211,600 Ending: 203,800 Accounts Payable= Beginning: 54,900 Ending: 56,900 Long-term Debt= Beginning: 170,000 Ending: 185,000 What is the amount of the change in net working capital? A. -$8,100 B. -$7,400 C. $7,700 D. $8,000 E. $8,100

A. -$8,100 Current assets = Cash + Accounts receivable + Inventory Current liabilities = Accounts payable Change in net working capital = Ending net working capital - Beginning net working capital Ending net working capital = Ending current assets - Ending current liabilities = ($16,800 + $52,300 + $77,400) - 56,900 Beginning net working capital = Beginning current assets - Beginning current liabilities = ($21,400 + $47,400 + $83,800) - $54,900 So the change in net working capital is: ($16,800 + $52,300 + $77,400 - $56,900) - ($21,400 + $47,400 + $83,800 - $54,900) = -$8,100

You have been told that you need $21,600 today in order to have $100,000 when you retire 42 years from now. What rate of interest was used in the present value computation? Assume interest is compounded annually. A. 3.72 percent B. 3.89 percent C. 4.01 percent D. 4.23 percent E. 4.28 percent

A. 3.72 percent $100,000 = $21,600 (1 + r)42 r = 3.72 percent or Enter N: 42 PV: -21,600 Pmt: 0 FV: 100,000 P/Y: 1 Solve for I/Y = 3.72%.

Which one of the following statements is true concerning the price-earnings (PE) ratio? A. A high PE ratio may indicate that a firm is expected to grow significantly. B. A PE ratio of 16 indicates that investors are willing to pay $1 for every $16 of current earnings. C. PE ratios are unaffected by the accounting methods employed by a firm. D. The PE ratio is classified as a profitability ratio. E. The PE ratio is a constant value for each firm.

A. A high PE ratio may indicate that a firm is expected to grow significantly.

Letitia borrowed $6,000 from her bank 2 years ago. The loan term is 4 years. Each year, she must repay the bank $1,500 plus the annual interest. Which type of loan does she have? A. Amortized B. Blended discount C. Interest-only D. Pure discount E. Complex

A. Amortized

Margie opened a used book store and is both the 100 percent owner and the store's manager. Which type of business entity does Margie own if she is personally liable for all the store's debts? A. Sole proprietorshipB. Limited partnershipC. CorporationD. Joint stock companyE. General partnership

A. Sole Proprietorship

The present value of a lump sum future amount: A. increases as the interest rate decreases. B. decreases as the time period decreases. C. is inversely related to the future value. D. is directly related to the interest rate. E. is directly related to the time period.

A. increases as the interest rate decreases.

Cash flow to creditors is defined as: A. interest paid minus net new borrowing. B. interest paid plus net new borrowing. C. the operating cash flow minus net capital spending minus change in net working capital. D. dividends paid plus net new borrowing. E. cash flow from assets plus net new equity.

A. interest paid minus net new borrowing.

Donut Delite has total assets of $31,300, long-term debt of $8,600, net fixed assets of $19,300, and owners' equity of $21,100. What is the value of the net working capital? A. $9,800 B. $10,400 C. $18,900 D. $21,300 E. $23,200

B. $10,400 NWC = Current assets-Current Liabilities Total assets=Current assets+Net fixed assets Total assets=Total liabilities+Owners' equity, so Current assets+Net fixed assets = Current liabilities+Long-term debt+Owners' equity, then Current assets-Current liabilities = Long-term debt+Owners' equity - Net Fixed assets, so Net working capital = $8,600 + $21,100 - $19,300 = $10,400

Today, you are purchasing a 20-year, 6 percent annuity at a cost of $120,000. The annuity will pay annual payments starting one year from today. What is the amount of each payment? A. $9,511.08 B. $10,462.15 C. $10,754.40 D. $11,013.20 E. $12,208.19

B. $10,462.15 Enter N: 20 I/Y: 6% PV: -120,000 FV: 0 P/Y: 1 Solve for Pmt = $10,462.15.

Billingsley, Inc. is borrowing $60,000 for 5 years at an APR of 8 percent. The same amount of principal is to be repaid each year, with interest also paid annually. Therefore, each year's total payment will be the sum of interest and (equal) principal). Payments will be made at the end of each year. What is the total payment due for year 3 of this loan? A. $13,920 B. $14,880 C. $15,220 D. $15,840 E. $16,800

B. $14,880

Your parents spent $6,200 to buy 500 shares of stock in a new company 13 years ago. The stock has appreciated 9 percent per year on average. What is the current value of those 500 shares? A. $18,824.17 B. $19,007.99 C. $19,580.92 D. $20,515.08 E. $22,449.92

B. $19,007.99 Future value = $6,200 (1 + 0.09)13 = $19,007.99

Jodie's Fashions has just signed a $2.2 million contract. The contract calls for a payment of $0.6 million today, $0.8 million one year from today, and $0.8 million two years from today. What is this contract worth today if the firm can earn 7.2 percent on its money? A. $2,038,616.67 B. $2,042,414.79 C. $2,108,001.32 D. $2,124,339.07 E. $2,202,840.91

B. $2,042,414.79 PV = $0.6m + ($0.8m/1.072) + ($0.8m/1.0722) = $2,042,414.79

You and your brother are planning a large anniversary party 3 years from today for your grandparents' 50th wedding anniversary. You have estimated that you will need $2,500 for this party. You can earn 3.5 percent compounded annually on your savings. How much would you and your brother have to deposit today in one lump sum to pay for the entire party? A. $2,199.74 B. $2,254.86 C. $2,308.16 D. $2,334.90 E. $2,368.81

B. $2,254.86 Present value = $2,500/(1 + 0.035)3 = $2,254.86 or Enter N: 3 I/Y: 3.5% Pmt: 0 FV: 2,500 P/Y: 1 Solve for PV = $2,254.86.

The Closet Shoppe has total sales of $713,200 and a profit margin of 5.8 percent. Currently, the firm has 12,500 shares outstanding. What are the earnings per share? A. $2.98 B. $3.31 C. $3.56 D. $3.89 E. $4.02

B. $3.31 Earnings per share = Net income/Number of shares Net income = Profit margin*Sales = 0.058 $713,200 = $41,365.60 Earnings per share= $41,365.60/12,500 = $3.31

The Import Store has cash of $34,600 and accounts receivable of $54,200. The inventory cost $92,300 and can be sold today for $146,900. The fixed assets were purchased at a cost of $234,500 of which $87,900 has been depreciated. The fixed assets can be sold today for $199,000. What is the total book value of the firm's assets? A. $309,900 B. $327,700 C. $346,800 D. $382,300 E. $434,700

B. $327,700 Total book value = Cash + Accounts receivable + Book value of Inventory + Book value of fixed assets = $34,600 + $54,200 + $92,300 + $234,500 - $87,900 = $327,700

Today, Tony is investing $16,000 at 6.5 percent, compounded annually, for 4 years. How much additional income could he earn if he had invested this amount at 7 percent, compounded annually? A. $323.22 B. $389.28 C. $401.16 D. $442.79 E. $484.08

B. $389.28 Future value 6.5% = $16,000 (1 + 0.065)4 = $20,583.46 Future value 7% = $16,000 (1 + 0.07)4 = $20,972.74 Difference = $20,972.74 - $20,583.46 = $389.28

The Walters Co. has beginning long-term debt of $54,500, which is the principal balance of a loan payable to Centre Bank. During the year, the company paid a total of $16,300 to the bank, including $4,100 of interest. The company also borrowed $11,000. What is the value of the ending long-term debt? A. $45,100 B. $53,300 C. $58,200 D. $65,500 E. $85,900

B. $53,300 Ending long-term debt = Beginning LTD - Reduction in LTD + New borrowing = $54,500 - ($16,300 - $4,100) + $11,000 = $53,300

The balance sheet of a firm shows current liabilities of $46,300 and long-term debt of $189,200 as of last year. Current liabilities are $56,900 and long-term debt is $248,750 as of today, which is the end of the current year. The financial statements for the current year reflect an interest paid amount of $18,700 and dividends of $22,000. What is the amount of the net new borrowing? A. $51,450 B. $59,550 C. $64,750 D. $70,150 E. $78,250

B. $59,550 Net new borrowing = Ending long-term debt - Beginning long-term debt = $248,750 - $189,200 = $59,550

Denton, Inc. has total equity of $389,600, long-term debt of $116,400, net working capital of $1,600, and total assets of $527,600. What is the total debt ratio? A. 0.22 B. 0.26 C. 0.67 D. 1.49 E. 3.85

B. 0.26 Total debt ratio = (Total assets - Total equity)/Total assets = ($527,600 - $389,600)/$527,600 = 0.26

Swanton Foods has a book value per share of $12.68, earnings per share of $1.21, and a price-earnings ratio of 17.6. What is the market-to-book ratio? A. 1.32 B. 1.68 C. 1.99 D. 2.47 E. 2.61

B. 1.68 Market-to-book ratio = Market value per share / Book value per share Market value per share = Earnings per share * Price-earnings ratio = $1.21 x 17.6 = $21.30 Market-to-book ratio = $21.30/$12.68 = 1.68

You have $2,158 today in your savings account. How long must you wait for your savings to be worth $4,000 if you are earning 2.1 percent interest, compounded annually? A. 26.68 years B. 29.69 years C. 32.13 years D. 33.33 years E. 34.14 years

B. 29.69 years $4,000 = $2,158 (1 + 0.021)t t = 29.69 years or Enter PV: -2,158 I/Y: 2.1% Pmt: 0 FV: 4,000 P/Y: 1 Solve for N = 29.69 years.

Your parents loaned you money at 0.25 percent interest per month. What is the APR of this loan? A. 2.97 percent B. 3.00 percent C. 3.04 percent D. 4.00 percent E. 4.07 percent

B. 3.00 percent APR = 0.0025 x 12 = 3 percent

Russell's Hardware has an inventory of $218,000, equity of $421,800, total assets of $647,700, and sales of $587,200. What is the common-size percentage for the inventory account? A. 26.81 percent B. 33.66 percent C. 37.12 percent D. 49.09 percent E. 51.68 percent

B. 33.66 percent Inventory common-size percent = Inventory / Total assets = $218,000/$647,700 = 33.66 percent

The Global Network has sales of $418,700, cost of goods sold of $264,900, and inventory of $61,900. What is the inventory turnover rate? A. 1.33 B. 4.28 C. 6.76 D. 7.14 E. 8.47

B. 4.28 Inventory turnover = Cost of goods sold / Inventory = $264,900/$61,900 = 4.28

Kessler, Inc. has accounts receivable of $31,600, total assets of $311,500, cost of goods sold of $208,400, and a capital intensity ratio of 1.08. What is the accounts receivables turnover rate? A. 8.99 B. 9.13 C. 9.42 D. 9.61 E. 9.72

B. 9.13 Capital intensity ratio = 1/TATR = 1/(Sales/TATR) = Total assets/Sales = 1.08 Sales = Total assets / 1.08 = $311,500 / 1.08 = $228,426 Accounts receivable turnover = Sales / Accounts receivable = ($288,426/1.08)/$31,600 = 9.13

Which one of the following statements concerning annuities is correct? A. The present value of an annuity is equal to the cash flow amount divided by the discount rate. B. An annuity due has payments that occur at the beginning of each time period. C. The future value of an annuity decreases as the interest rate increases. D. If unspecified, you should assume an annuity is an annuity due. E. An annuity is an unending stream of equal payments occurring at equal intervals of time.

B. An annuity due has payments that occur at the beginning of each time period.

Travis is buying a car and will finance it with a loan which requires monthly payments of $265 for the next 4 years. His car payments can be described by which one of the following terms? A. Perpetuity B. Annuity C. Consol D. Lump sum E. Factor

B. Annuity

Janis just won a scholarship that will pay her $500 a month, starting today, and continuing for the next 48 months. Which one of the following terms best describes these scholarship payments? A. Ordinary annuity B. Annuity due C. Consol D. Ordinary perpetuity E. Perpetuity due

B. Annuity due

Which one of the following is most apt to align management's priorities with shareholders' interests? A. Increasing employee retirement benefits B. Compensating managers with shares of stock that must be held for 3 years before the shares can be sold C. Allowing a manager to decorate his or her own office once he or she has been in that office for a period of 3 years or more D. Increasing the number of paid holidays that long-term employees are entitled to receive E. Allowing employees to retire early with full retirement benefits

B. Compensating managers with shares of stock that must be held for 3 years before the shares can be sold

Todd and Cathy created a firm that is a separate legal entity and will share ownership of that firm on a 50/50 basis. Which type of entity did they create if they have no personal liability for the firm's debts? A. Limited partnership B. Corporation C. Sole proprietorship D. General partnership E. Public company

B. Corporation

Martha's Sweet Shop reduced its fixed assets this year without affecting the shop's operations, sales, or equity. This reduction will increase which of the following ratios? I. Capital intensity ratio II. Return on assets III. Total asset turnover IV. Return on equity A. I and II only B. II and III only C. II, III, and IV only D. I, II, and IV only E. I, II, III, and IV

B. II and III only

Which of the following will increase the sustainable rate of growth for a firm? I. Decreasing the profit margin II. Increasing the dividend payout ratio III. Decreasing the capital intensity ratio IV. Increasing the target debt-equity ratio A. I and II only B. III and IV only C. II and IV only D. I, III, and IV only E. I, II, III, and IV

B. III and IV only

Which one of the following best describes the primary intent of the Sarbanes-Oxley Act of 2002? A. Increase the costs of going public B. Increase protection against corporate fraud C. Limit secondary issues of corporate securities D. Decrease the number of publicly traded firms E. Increase the number of firms that "go dark"

B. Increase protection against corporate fraud

Terry invested $2,000 today in an investment that pays 6.5 percent annual interest. Which one of the following statements is correct, assuming all interest is reinvested? A. Terry will earn the same amount of interest each year. B. Terry could have the same future value and invest less than $2,000 initially if he could earn more than 6.5 percent interest. C. Terry will earn an increasing amount of interest each and every year even if he should decide to withdraw the interest annually rather than reinvesting the interest. D. Terry's interest for year two will be equal to $2,000 0.065 2. E. Terry will be earning simple interest.

B. Terry could have the same future value and invest less than $2,000 initially if he could earn more than 6.5 percent interest.

Tom earned $120 in interest on his savings account last year. Tom has decided to leave the $120 in his account so that he can earn interest on the $120 this year. This process of earning interest on prior interest earnings is called: A. discounting. B. compounding. C. duplicating. D. multiplying. E. indexing.

B. compounding.

Scott has $4,800 that he wants to invest for 3 years. He can invest this amount at his credit union and earn 4 percent simple interest. Or, he can open an account at Trust Bank and earn 3.65 percent interest, compounded annually. If he decides to invest at Trust Bank for 3 years, he will: A. earn $15.02 more than if he had invested with his credit union. B. earn $30.98 less than if he had invested with his credit union. C. earn the same amount as if he had invested with the credit union. D. have a total balance of $4,992 in his account after one year. E. have a total balance of $4,876 in his account after one year.

B. earn $30.98 less than if he had invested with his credit union. Credit union future value = $4,800 + ($4,800 0.04 3) = $5,376 Trust Bank future value = $4,800 (1 + 0.0365)3 = $5,345.02 Difference = $5,376 - $5,345.02 = $30.98

The accounting statement which measures the revenues, expenses, and net income of a firm over a period of time is called the: A. statement of cash flows. B. income statement. C. GAAP statement. D. balance sheet. E. net working capital schedule.

B. income statement.

Scott borrowed $2,500 today. The loan agreement requires him to repay $2,685 in one lump sum payment one year from now. This type of loan is referred to as a(n): A. interest-only loan. B. pure discount loan. C. quoted rate loan. D. compound interest loan. E. amortized loan.

B. pure discount loan.

The Medicine Cabinet has a return on equity of 18.2 percent, a profit margin of 11.6 percent, and total equity of $738,000. What is the net income? A. $85,608 B. $113,875 C. $134,316 D. $142,311 E. $149,897

C. $134,316 Return on equity = Net income / Total equity, so Net income = Return on equity * Total equity = 0.182 $738,000 = $134,316

Handy Hardware sells its inventory in 85 days, on average. Costs of goods sold for the year are $631,800. What is the average value of the firm's inventory? A. $114,706 B. $123,506 C. $147,132 D. $161,096 E. $182,513

C. $147,132 Days in inventory = 85 = 365 / Inventory turnover = 365 / (COGS/Inventory) Inventory turnover = 365/85 = 4.29412 Inventory = $631,800/4.29412 = $147,132

During the past year, Ernst Electrical Services paid $36,800 in interest along with $48,000 in dividends. The company issued $130,000 of stock and $100,000 of new debt. The company reduced the balance due on the old debt by $225,000. What is the amount of the cash flow to creditors? A. -$88,200 B. -$51,400 C. $161,800 D. $211,600 E. $231,500

C. $161,800 Cash flow to creditors = Interest paid - Net new borrowing = $36,800 - $100,000 + $225,000 = $161,800

Tom is planning to invest the following amounts at 4 percent interest. End of Year 1: $500 saved End of Year 2: $800 saved End of Year 3: $900 saved How much money will he have saved at the end of year 3? A. $2,200.00 B. $2,238.47 C. $2,272.80 D. $2,309.16 E. $2,363.71

C. $2,272.80 FV = ($500 x1.042) + ($800 x1.041) + $900 = $2,272.80

You want to have $35,000 in cash to buy a car 4 years from today. You expect to earn 8 percent, compounded annually, on your savings. How much do you need to deposit today if this is the only money you save for this purpose? A. $23,618.92 B. $24,511.68 C. $25,726.04 D. $26,013.01 E. $26,311.15

C. $25,726.04 Present value = $35,000/(1 + 0.08)4 = $25,726.04 or Notice that you need to make the deposit today, so that would be at the beginning of the period. Enter N: 4 I/Y: 8% Pmt: 0 FV: 35,000 P/Y: 1 Solve for PV = $25,726.04.

A recent alumnus of your university gifted money to the school to fund annual scholarships for needy students. The school expects to earn an average rate of return of 6.5 percent and distribute $40,000 annually in scholarships. What was the amount of the gift? A. $260,000.00 B. $328,500.00 C. $615,384.62 D. $658,929.38 E. $661,423.33

C. $615,384.62 P = $40,000/0.065 = $615,384.62

For the year, Movers United has net income of $31,800, net new equity of $7,500, and an addition to retained earnings of $24,200. What is the amount of the dividends paid? A. $100 B. $7,500 C. $7,600 D. $15,100 E. $16,700

C. $7,600 Net Income - Dividends paid = Addition to retained earnings, so Dividends paid = Net income - Addition to retained earnings = $31,800 - $24,200 = $7,600

A firm has inventory of $11,400, accounts payable of $9,800, cash of $850, net fixed assets of $12,150, long-term debt of $9,500, accounts receivable of $6,600, and total equity of $11,700. What is the common-size percentage for the net fixed assets? A. 19.60 percent B. 26.67 percent C. 39.19 percent D. 42.08 percent E. 48.75 percent

C. 39.19% NFA common-size percent = NFA / Total assets = $12,150/($850 + $6,600 + $11,400 + $12,150) = 39.19%

Stanley Enterprises is acquiring Berkley, Inc. for $899,000. Berkley has agreed to accept annual payments of $210,000 at an interest rate of 7.5 percent. How many years will it take Stanley Enterprises to pay for this purchase? A. 5.00 years B. 5.14 years C. 5.35 years D. 5.47 years E. 5.60 years

C. 5.35 years

Last year, The Pizza Joint added $4,100 to retained earnings from sales of $93,600. The company had cost of goods sold of $74,400, dividends of $2,500, and interest paid of $1,400. The tax rate was 34 percent. What was the amount of the depreciation expense? A. $7,300 B. $7,500 C. $7,800 D. $8,100 E. $8,400

C. $7,800 To calculate depreciation, we need to use several pieces of information from the income statement, and go work backwards in some cases: Sales - Cost of goods sold - Depreciation = Earnings before interest and taxes (EBIT) EBIT - Interest - Taxes = Net Income, where Taxes = Taxable income * Tax rate. Taxable Income = EBIT - Interest Net Income = Dividends + Addition to retained earnings So if we knew Sales, Cost of goods sold, and EBIT, we could calculate Depreciation as: Depreciation = Sales - Costs of goods sold - EBIT However, the questions does not provide EBIT, so we need to calculate it using information provided. The question gives us Interest paid, but not Taxes. Since Taxes = Taxable income * Tax rate, then Taxable Income = EBIT - Interest Taxes = Taxable Income * Tax rate Net Income = EBIT - Interest - Taxes, so Net Income = EBIT - Interest - (EBIT - Interest) * 0.34, or Net Income = (EBIT - Interest) * (1 - 0.34) Net Income = (EBIT - Interest) * (0.66) EBIT - Interest = Net Income / 0.66 Net Income = Dividends + Addition to retained earnings = $4,100 + $2,500 = $6,600 EBIT - Interest = $6,600 / 0.66 = $10,000 So EBIT = Interest + $10,000 = $1,400 + $10,000 = $11,400 Finally, we can find depreciation: Depreciation = Sales - Costs of goods sold - EBIT = $93,600 - $74,400 - $11,400 = $7,800

Aardvaark & Co. has sales of $291,200, cost of goods sold of $163,300, net profit of $11,360, net fixed assets of $154,500, and current assets of $89,500. What is the total asset turnover rate? A. 1.08 B. 1.11 C. 1.19 D. 1.24 E. 1.28

C. 1.19 TATR = Sales / Total assets = Sales / (Net fixed assets + Current assets) = $291,200/($154,500 + $89,500) = 1.19

The Veggie Hut has net income of $26,400, total equity of $102,700, and total assets of $189,500. The dividend payout ratio is 0.30. What is the internal growth rate? A. 7.99 percent B. 8.57 percent C. 10.81 percent D. 16.87 percent E. 21.94 percent

C. 10.81 Internal growth rate = (Return on assets * retention ratio) / (1 - Return on assets * retention ratio) Return on assets = Net income/Total assets = $26,400/$189,500 = 13.93% Retention ratio = 1 - Dividend payout ratio = 1 - 0.30 = 0.70 IGR = (13.93% * 0.7) / (1 - 13.93% * 0.7) = 10.81 percent

A credit card has a stated interest rate of 13.9 percent. What is the APR if interest is compounded monthly? A. 13.09 percent B. 13.46 percent C. 13.90 percent D. 14.56 percent E. 14.82 percent

C. 13.90 percent The stated rate is the APR.

Currently, you owe the bank $9,800 for a car loan. The loan has an interest rate of 7.75 percent and monthly payments of $310. Your financial situation recently changed such that you can no longer afford these payments. After talking with your banker and explaining the situation, he has agreed to lower the monthly payments to $225 while keeping the interest rate at 7.75 percent. How much longer will it take you to repay this loan than you had originally planned? A. 12.29 months B. 14.47 months C. 15.84 months D. 17.19 months E. 19.90 months

C. 15.84 months For the $310 payment: Enter PV: 9,800 I/Y: 7.75% / 12 Pmt: -310 FV: 0 Solve for N = 36.47 months. For the $225 payment: Enter PV: 9,800 I/Y: 7.75% / 12 Pmt: -225 FV: 0 Solve for N = 51.31 months. Difference = 51.31 - 35.47 = 15.84 months

Town Centre Market has sales of $311,800, a profit margin of 2.9 percent, and dividends of $4,500. What is the plowback ratio? A. 46.32 percent B. 49.78 percent C. 50.23 percent D. 51.15 percent E. 53.68 percent

C. 50.23 percent Profit margin = Net Income / Sales, so Net Income = Profit margin * Sales = 2.9% * $311,800 = $9,042.20 Plowback ratio = 1 - Dividend payout ratio = 1 - (Dividends/Net income) = 1 - ($4,500/$9,042.20) = 50.23 percent

The Next Life has sales of $428,300, total assets of $389,100, and a profit margin of 6.2 percent. What is the return on assets? A. 6.29 percent B. 6.54 percent C. 6.83 percent D. 7.01 percent E. 7.27 percent

C. 6.83 percent Return on assets = Net income/Total assets Profit margin = Net income/Sales, so Net income = Profit margin * Sales = 0.062 $428,300 = $26,554.60 Return on assets = $26,554.60/$389,100 = 6.83 percent

Blue Water Cafe has $28,700 in total assets, depreciation of $3,100, and interest of $1,400. The total asset turnover rate is 1.2. Earnings before interest and taxes are equal to 28 percent of sales. What is the cash coverage ratio? A. 6.33 B. 7.51 C. 9.10 D. 10.23 E. 10.98

C. 9.10 Total asset turnover ratio = Sales/Total assets = 1.2, so Sales = Total assets * TATR = $28,700 * 1.2 = $34,440 EBIT = 28% of Sales = 28% * $34,440 = $9,643.20 Cash coverage ratio = (EBIT + Depreciation) / Interest =($9,643.20 + $3,100)/$1,400 = 9.10

Which one of the following will increase the cash flow from assets for a tax-paying firm all else constant? A. An increase in net capital spending B. A decrease in the cash flow to creditors C. An increase in depreciation D. An increase in the change in net working capital E. A decrease in dividends paid

C. An increase in depreciation

Which one of the following transactions occurred in the primary market? A. Maria gave 100 shares of Alto stock to her best friend. B. Gene purchased 300 shares of Alto stock from Ted. C. South Wind Products sold 1,000 shares of newly issued stock to Mike. D. Terry sold 3,000 shares of Uno stock to his brother. E. The president of Trecco, Inc. sold 500 shares of Trecco stock to his son.

C. South Wind Products sold 1,000 shares of newly issued stock to Mike.

Lester's BBQ has $121,000 in current assets and $109,000 in current liabilities. These values as referred to as the firm's: A. capital structure.B. cash equivalents.C. working capital.D. net assets.E. fixed accounts.

C. Working Capital

The interest rate used to compute the present value of a future cash flow is called the: A. prime rate. B. current rate. C. discount rate. D. compound rate. E. simple rate.

C. discount rate.

By definition, a bank that pays simple interest on a savings account will pay interest: A. only at the beginning of the investment period. B. on interest. C. only on the principal amount originally invested. D. on both the principal amount and the reinvested interest. E. only if all previous interest payments are reinvested.

C. only on the principal amount originally invested.

Cash flow from assets is defined as: A. the cash flow to shareholders minus the cash flow to creditors. B. operating cash flow plus the cash flow to creditors plus the cash flow to shareholders. C. operating cash flow minus the change in net working capital minus net capital spending. D. operating cash flow plus net capital spending plus the change in net working capital. E. cash flow to shareholders minus net capital spending plus the change in net working capital.

C. operating cash flow minus the change in net working capital minus net capital spending.

Gallagher's Supply has sales of $387,000 and costs of $294,500. The depreciation expense is $43,800. Interest paid equals $18,200 and dividends paid equal $6,500. The tax rate is 35 percent. What is the addition to retained earnings? A. $10,775 B. $11,460 C. $13,120 D. $13,325 E. $15,450

D. $13,325 Addition to retained earnings = Net income - Dividends Net income = (Sales - Costs -Depreciation-Interest)*(1 - tax rate) = Addition to retained earnings = [($387,000 - $294,500 - $43,800 - $18,200)(1 - 0.35)] - $6,500 = $13,325

Kristi is considering an investment that will pay $5,000 a year for 7 years, starting one year from today. How much should she pay for this investment if she wishes to earn a 12 percent rate of return? A. $17,899.08 B. $18,023.88 C. $20,186.75 D. $22,818.78 E. $24,507.19

D. $22,818.78 OR Enter N: 7 I/Y: 12% Pmt: 5,000 FV: 0 P/Y: 1 Solve for PV = $22,818.78.

The Toy Store has beginning retained earnings of $28,975. For the year, the company earned net income of $4,680 and paid dividends of $1,600. The company also issued $3,000 worth of new stock. What is the value of the retained earnings account at the end of the year? A. $20,445 B. $22,695 C. $27,375 D. $32,055 E. $35,255

D. $32,055. Retained earnings = Beg. retained earnings + Net Income - Dividends =$28,975 + $4,680 - $1,600 = $32,055

Your grandfather started his own business 52 years ago. He opened a savings account at the end of his third month of business and contributed $x. Every three months since then, he faithfully saved another $x. His savings account has earned an average rate of 4.5 percent annually. Today, his account is valued at $364,209.11. How much did your grandfather save every 3 months? A. $425.15 B. $428.67 C. $431.09 D. $443.13 E. $462.25

D. $443.13

The Paper Moon has an operating cash flow of $187,000 and a cash flow to creditors of $61,400 for the past year. During that time, the firm invested $28,000 in net working capital and incurred net capital spending of $48,900. What is the amount of the cash flow to stockholders for the last year? A. -$171,500 B. -$86,700 C. $21,200 D. $48,700 E. $110,100

D. $48,700 Cash flows from assets = Cash flows to creditors + Cash flows to stockholders CF to stockholders = CFFA - CF to creditors CFFA = Operating CF - Net capital spending - Change in NWC = $187,000 - $48,900 - $28,000 = 110,100 Cash flow to stockholders = ($187,000 - $28,000 - $48,900) - $61,400 = $48,700

At the end of this month, Les will start saving $150 a month for retirement through his company's retirement plan. His employer will contribute an additional $0.50 for every $1.00 that he saves. If he is employed by this firm for 30 more years and earns an average of 10.5 percent on his retirement savings, how much will Les have in his retirement account 30 years from now? A. $389,406.19 B. $401,005.25 C. $540,311.67 D. $566,190.22 E. $603,289.01

D. $566,190.22 Total contribution = $150 + (0.5 x$150) = $225 Enter N: 360 (=30*12) I/Y: 10.5% / 12 PV: 0 Pmt: -225 Solve for FV = $566,190.22.

Pete's Warehouse has net working capital of $2,400, total assets of $19,300, and net fixed assets of $10,200. What is the value of the current liabilities? A. -$6,700 B. -$2,900 C. $2,900 D. $6,700 E. $11,500

D. $6,700 Net Working Capital = Current assets - Current Liabilities, so CL = CA - NWC Current assets = Total assets - Net fixed assets = 19,300 - 10,200 = 9,100 Current liabilities = CA - NWC = 9,100 - $2,400 = $6,700

The Corner Store currently has $3,600 in cash. The company owes $31,800 to suppliers for merchandise and $21,500 to the bank for a long-term loan. Customers owe The Corner Store $19,000 for their purchases. The inventory has a book value of $53,300 and an estimated market value of $71,200. If the store compiled a balance sheet as of today, what would be the book value of the current assets? A. $46,800 B. $55,600 C. $64,700 D. $75,900 E. $96,500

D. $75,900, Current assets = $3,600 + $19,000 + $53,300 = $75,900

The financial statements of Mark's Auto Repair reflect cash of $4,600, accounts receivable of $11,500, accounts payable of $22,900, inventory of $17,800, long-term debt of $42,000, and net fixed assets of $63,800. The firm estimates that if it wanted to cease operations today it could sell the inventory for $25,000 and the fixed assets for $49,000. The firm could also collect 100 percent of its receivables. What is the market value of the assets? A. $32,800 B. $39,900 C. $74,000 D. $90,100 E. $97,700

D. $90,100 Market value = Cash + Accounts receivable + Market value of Inventory + Market value of fixed assets = $4,600 + $11,500 + $25,000 + $49,000 = $90,100

Peter's Motor Works has total assets of $689,400, long-term debt of $299,500, total equity of $275,000, net fixed assets of $497,800, and sales of $721,500. The profit margin is 4.6 percent. What is the current ratio? A. 0.60 B. 0.91 C. 1.01 D. 1.67 E. 2.16

D. 1.67 Current ratio = Current assets / Current liabilities Current assets = Total assets - Net fixed assets = $689,400 - $497,800 = $191,600 Current liabilities = Total assets - Long-term debt - Equity = $689,400 - $299,500 - $275,000 = $114,900 So the current ratio $191,600/$114,900 = 1.67

You want to invest an amount of money today and receive back twice that amount in the future. You expect to earn 8 percent interest. Approximately how long must you wait for your investment to double in value? A. 6 years B. 7 years C. 8 years D. 9 years E. 10 years Approximate time period = 72/8 = 9 years

D. 9 years Approximate time period = 72/8 = 9 years

You are comparing two annuities. Annuity A pays $100 at the end of each month for 10 years. Annuity B pays $100 at the beginning of each month for 10 years. The rate of return on both annuities is 8 percent. Which one of the following statements is correct given this information? A. The present value of Annuity A is equal to the present value of Annuity B. B. Annuity B will pay one more payment than Annuity A will. C. The future value of Annuity A is greater than the future value of Annuity B. D. Annuity B has both a higher present value and a higher future value than Annuity A. E. Annuity A has a higher future value but a lower present value than Annuity B.

D. Annuity B has both a higher present value and a higher future value than Annuity A.

Tim has been promoted and is now in charge of all fixed asset purchases. In other words, Tim is in charge of: A. capital structure management.B. asset allocation.C. risk management.D. capital budgeting.E. working capital management.

D. Capital Budgeting

Which one of the following transactions will increase the liquidity of a firm? A. Cash purchase of new production equipment B. Payment of an account payable C. Cash purchase of inventory D. Credit sale of inventory at cost E. Cash payment of employee wages

D. Credit sale of inventory at cost

Which one of the following will increase the present value of a lump sum future amount? Assume the interest rate is a positive value and all interest is reinvested. A. Increase in the time period B. Increase in the interest rate C. Decrease in the future value D. Decrease in the interest rate E. None of the above

D. Decrease in the interest rate

Donovan Brothers, Inc. would like to increase its internal rate of growth. Decreasing which one of the following will help the firm achieve its goal? A. Return on assets B. Net income C. Retention ratio D. Dividend payout ratio E. Return on equity

D. Dividend payout ratio

Which one of the following is the maximum growth rate that a firm can achieve without any additional external financing? A. Du Pont rate B. External growth rate C. Sustainable growth rate D. Internal growth rate E. Cash flow rate

D. Internal growth rate

The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships can best be described by which one of the following terms? A. Ordinary annuity B. Annuity due C. Amortized payment D. Perpetuity E. Continuation

D. Perpetuity

Which one of the following situations is most apt to create an agency conflict? A. Compensating a manager based on his or her division's net income B. Giving all employees a bonus if a certain level of efficiency is maintained C. Hiring an independent consultant to study the operating efficiency of the firm D. Rejecting a profitable project to protect employee jobs E. Selling an underproducing segment of the firm

D. Rejecting a profitable project to protect employee jobs

The cash coverage ratio is used to evaluate the: A. liquidity of a firm. B. speed at which a firm generates cash. C. length of time that a firm can pay its bills if no additional cash becomes available. D. ability of a firm to pay the interest on its debt. E. relationship between the firm's cash balance and its current liabilities.

D. ability of a firm to pay the interest on its debt.

The financial statement that summarizes a firm's accounting value as of a particular date is called the: A. income statement. B. cash flow statement. C. liquidity position. D. balance sheet. E. periodic operating statement.

D. balance sheet.

Highly liquid assets: A. increase the probability a firm will face financial distress. B. appear on the right side of a balance sheet. C. generally produce a high rate of return. D. can be sold quickly at close to full value. E. include all intangible assets.

D. can be sold quickly at close to full value.

Cash flow to stockholders is defined as: A. cash flow from assets plus cash flow to creditors. B. operating cash flow minus cash flow to creditors. C. dividends paid plus the change in retained earnings. D. dividends paid minus net new equity raised. E. net income minus the addition to retained earnings.

D. dividends paid minus net new equity raised.

Delivery trucks are classified as: A. non-cash expenses. B. current liabilities. C. current assets. D. tangible fixed assets. E. intangible fixed assets.

D. tangible fixed assets.

Common-size financial statements present all balance sheet account values as a percentage of: A. the forecasted budget. B. sales. C. total equity. D. total assets. E. last year's account value.

D. total assets.

Which one of the following is an ordinary annuity, but not a perpetuity? A. $75 paid at the beginning of each month period for 50 years B. $15 paid at the end of each monthly period for an infinite period of time C. $40 paid quarterly for five years, starting today D. $50 paid every year for ten years, starting today E. $25 paid weekly for one year, starting one week from today

E. $25 paid weekly for one year, starting one week from today

The Pizza Parlor paid $3,500 in dividends and $17,600 in interest over the past year. Sales totaled $211,800 with costs of $167,900. The depreciation expense was $16,500. The applicable tax rate is 34 percent. What is the amount of the operating cash flow? A. $14,232 B. $15,306 C. $28,222 D. $39,988 E. $40,568

E. $40,568 EBIT = Sales - Costs - Depreciation = $211,800 - $167,900 - $16,500 = $27,400Tax = Taxable income * Tax rate = (EBIT - Interest) * Tax rate = ($27,400 - $17,600) ´ 0.34 = $3,332Operating Cash Flow = EBIT +Depreciation - Taxes = $27,400 + $16,500 - $3,332 = $40,568

Thirteen years ago, you deposited $2,400 into an account. Eight years ago, you added an additional $1,000 to this account. You earned 8 percent, compounded annually, for the first 5 years and 5.5 percent, compounded annually, for the last 8 years. How much money do you have in your account today? A. $4,666.67 B. $4,717.29 C. $5,411.90 D. $6,708.15 E. $6,946.59

E. $6,946.59 Future value = {[$2,400 (1 + 0.08)5] + $1,000} (1 + 0.055)8 = $6,946.59 or The initial deposit of $2,400, compounded annually at 8% interest, would grow to $3,526.39 at the end of 5 years: Enter N: 5 I/Y: 8% Pmt: 0 PV: -2,400 P/Y: 1 Solve for FV = $3,526.39. At the end of the 5th year, you would add $1,000 to the $3,526.39, and would have $4,526.39 in the account. If that grows at 5.5% compounded annually for 8 years, it would grow to $6,946.59: Enter N: 8 I/Y: 5.5% Pmt: 0 PV: -4,526.39 P/Y: 1 Solve for FV = $6,946.59.

The balance sheet of a firm shows beginning net fixed assets of $348,200 and ending net fixed assets of $371,920. The depreciation expense for the year is $46,080 and the interest expense is $11,460. What is the amount of the net capital spending? A. -$22,360 B. -$4,780 C. $23,720 D. $58,340 E. $69,800

E. $69,800 Net capital spending = End. NFA - Beg. NFA + Depreciation = $371,920 - $348,200 + $46,080 = $69,800

The Furniture Hut is offering a bedroom suite for $1,999. The credit terms are 60 months at $50 per month. What is the interest rate on this offer? A. 16.33 percent B. 16.50 percent C. 16.65 percent D. 17.15 percent E. 17.30 percent

E. 17.30 percent

Underwood Homes Sales has total assets of $589,900 and total debt of $318,000. What is the equity multiplier? A. 0.46 B. 0.54 C. 1.21 D. 1.85 E. 2.17

E. 2.17 Equity multiplier = Total assets/(Total assets - Total debt) = $589,900/($589,900 - $318,000) = 2.17

Last year, a firm earned $31,200 in net income on sales of $217,600. The company paid $7,500 in dividends. What is the dividend payout ratio? A. 3.45 percent B. 4.71 percent C. 14.34 percent D. 22.85 percent E. 24.04 percent

E. 24.04 percent Dividend payout ratio = Dividends/ Net Income = $7,500/$31,200 = 24.04 percent

Computer Geeks has sales of $521,000, a profit margin of 14.8 percent, a total asset turnover rate of 2.16, and an equity multiplier of 1.30. What is the return on equity? A. 8.91 percent B. 12.67 percent C. 18.28 percent D. 32.11 percent E. 41.56 percent

E. 41.56 percent Return on equity = Profit margin * Total asset turnover ratio * Equity multiplier = 0.148 x 2.16 x1.30 = 41.56 percent

Ratzell's Place has a market-to-book ratio of 2.7, net income of $68,400, a book value per share of $37, and 45,000 shares of stock outstanding. What is the price-earnings ratio? A. 24.34 B. 28.16 C. 55.10 D. 59.09 E. 65.72

E. 65.72 Price-earnings ratio = Market price per share / Earnings per share Market price per share = Book value per share * Market-to-book ratio = $37*2.7 = $99.9 Earnings per share = Net income/Number of shares = $68,400/45,000 = 1.52 Price-earnings ratio = $99.9/ 1.52= 65.72

Morrison Motors has total equity of $289,100 and net income of $64,500. The debt-equity ratio is 0.45 and the total asset turnover is 1.6. What is the profit margin? A. 3.10 percent B. 5.23 percent C. 5.67 percent D. 8.21 percent E. 9.62 percent

E. 9.62 percent Profit margin = Net income / Sales Debt-equity ratio = 0.45 and total equity = $289,100. So the debt must be 0.45*$289,100 = $130,095. Total assets = Total debt + Total equity = $289,100 + $130,095 = $419,195. Total asset turnover ratio = Sales / Total assets, so Sales = TATR * Total asset = 1.6 * $419,195 = $670,712 Profit margin = Net income / Sales = $64,500 / $670,712 =9.62 percent

When you were born, your parents opened an investment account in your name and deposited $500 into the account. The account has earned an average annual rate of return of 4.8 percent. Today, the account is valued at $36,911.22. How old are you? A. 74.47 years B. 76.67 years C. 81.08 years D. 87.33 years E. 91.75 years

E. 91.75 years $36,911.22 = $500 (1 + 0.048)t where t = 91.75 years

Which one of the following will decrease the present value of an annuity? A. Increase in the annuity's future value B. Increase in the payment amount C. Increase in the time period D. Decrease in the discount rate E. Decrease in the annuity payment

E. Decrease in the annuity payment

Which one of the following is a working capital decision? A. How should the firm raise additional capital to fund its expansion? B. What debt-equity ratio is best suited to our firm? C. What is the cost of debt financing? D. Which type of debt is best suited to finance our inventory? E. How much cash should the firm keep in reserve?

E. How much cash should the firm keep in reserve?

Which one of the following best matches the primary goal of financial management? A. Increasing the dollar amount of each sale B. Increasing traffic flow within the firm's stores C. Transforming fixed costs into variable costs D. Increasing the firm's liquidity E. Increasing the market value of a firm

E. Increasing the market value of a firm

Which one of the following indicates that a firm has generated sufficient internal cash flow to finance its entire operations for the period? A. Positive operating cash flow B. Negative cash flow to creditors C. Positive cash flow to stockholders D. Negative net capital spending E. Positive cash flow from assets

E. Positive cash flow from assets

Tressler Industries opted to repurchase 5000 shares of stock last year in lieu of paying a dividend. The cash flow statement for last year must have which one of the following assuming that no new shares were issued? A. Positive operating cash flow B. Negative cash flow from assets C. Negative cash flow to stockholders D. Negative operating cash flow E. Positive cash flow to stockholders

E. Positive cash flow to stockholders

Ted currently owns 100 shares of a publicly traded stock which he would like to sell. Which one of the following provides the most efficient means for Ted to sell his shares? A. Issuer sponsored Dutch auction B. Proxy statement C. Private placement transaction D. Stakeholder purchase E. Secondary market transaction

E. Secondary market transaction

The federal government has a tax claim on the cash flows of The Window Store. This claim is defined as a claim by one of the firm's: A. residual owners. B. shareholders. C. financiers. D. provisional partners. E. stakeholders.

E. Stakeholders

When comparing savings accounts, you should select the account that has the: A. lowest annual percentage rate. B. highest annual percent rate. C. highest stated rate. D. lowest effective annual rate. E. highest effective annual rate.

E. highest effective annual rate.

Financial leverage: A. increases as the net working capital increases. B. is equal to the market value of a firm divided by the firm's book value. C. is inversely related to the level of debt. D. is the ratio of a firm's revenues to its fixed expenses. E. increases the potential return to the shareholders.

E. increases the potential return to the shareholders.

The market value of a firm's fixed assets: A. must exceed the book value of those assets. B. is more predictable than the book value of those assets. C. in addition to the firm's net working capital reflects the true value of a firm. D. is decreased annually by the depreciation expense. E. is equal to the estimated current cash value of those assets.

E. is equal to the estimated current cash value of those assets.

A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account: A. will be less than 12.9 percent. B. can either be less than or equal to 12.9 percent. C. is 12.9 percent. D. can either be greater than or equal to 12.9 percent. E. will be greater than 12.9 percent.

E. will be greater than 12.9 percent.