Finance Final

Waldo expects to save the following amounts: Year 1 = $50,000; Year 2 = $28,000; Year 3 = $12,000. If he can earn an average annual return of 10.5 percent, how much will he have saved in this account exactly 25 years from the time of the first deposit?

$1,033,545

Roadside Markets has 8.45 percent coupon bonds outstanding that mature in 10.5 years. The bonds pay interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 7.2 percent?

$1,091.00

Sue plans to save $4,500, $0, and $5,500 at the end of Years 1 to 3, respectively. What will her investment account be worth at the end of the Year 3 if she earns an annual rate of 4.15 percent?

$10,381.25

Three Corners Markets paid an annual dividend of $1.42 a share last month. Today, the company announced that future dividends will be increasing by 1.3 percent annually. If you require a return of 14.6 percent, how much are you willing to pay to purchase one share of this stock today?

$10.82

KNJ Companies is preparing to pay annual dividends of $1.48, $1.60, and $1.75 a share over the next three years, respectively. After that, the annual dividend will be $1.90 per share indefinitely. What is this stock worth to you per share if you require a return of 14.6 percent?

$12.32

Friendly Companies has an unfunded pension liability of $327 million that must be paid in 16 years. What is the present value of this liability at a discount rate of 6.24 percent?

$124,147,723.50

The common stock of Water Town Mills pays a constant annual dividend of $2.25 a share. What is one share of this stock worth at a discount rate of 16.2 percent?

$13.89

You just invested $49,000 that you received as an insurance settlement. How much more will this account be worth in 40 years if you earn an average return of 7.6 percent rather than just 7.1 percent?

$155,986.70

You would like to give your child $100,000 to start a career 25 years from now. How much money must you set aside today for this purpose if you can earn 7.5 percent on your investments?

$16,397.91

How much are you willing to pay for one share of LBM stock if the company just paid an annual dividend of $2.24, the dividends increase by 2.3 percent annually, and you require a return of 14.8 percent?

$18.33

When you retire 45 years from now, you want to have $1.25 million saved. You think you can earn an average of 7.6 percent on your investments. To meet your goal, you are trying to decide whether to deposit a lump sum today, or to wait and deposit a lump sum five years from today to fund this goal. How much more will you have to deposit if you wait for five years before making the deposit?

$20,468.85

You just won the grand prize in a national writing contest! As your prize, you will receive $500 a month for 50 months. If you can earn 7 percent on your money, what is this prize worth to you today?

$21,629.93

You will receive $15,000 in two years when you graduate. You plan to invest this at an annual interest rate of 6.5 percent. How much money will you have 8 years from now?

$21,887.13

A project has an initial cash outflow of $42,600 and produces cash inflows of $17,680, $19,920, and $15,670 for Years 1 through 3, respectively. What is the NPV at a discount rate of 12 percent?

$219.41

Winn Corp. currently sells 9,820 motor homes per year at $45,500 each, and 3,680 luxury motor coaches per year at $89,700 each. The company wants to introduce a new portable camper to fill out its product line. It hopes to sell 4,000 of these campers per year at $14,750 each. An independent consultant has determined that if the new campers are introduced, sales of its existing motor homes will most likely increase by 250 units per year while the sales of its motor coaches will probably decline by 368 units per year. What is the amount that should be used as the annual sales figure when evaluating the portable camper project?

$37,365,400

Today, you earn a salary of $31,000. What will be your annual salary ten years from now if you receive annual raises of 2.2 percent?

$38,536.36

What is the future value of $8,500 a year for 40 years at 10.8 percent interest, compounded annually?

$4,681,062.12

Overland purchased $387,950 of fixed assets that are classified as three-year property for MACRS. The MACRS rates are .3333, .4445, .1481, and .0741 for Years 1 to 4, respectively. What is the amount of the depreciation expense in Year 3 assuming no bonus depreciation is taken?

$57,455.40

You are considering two savings options. Both options offer a rate of return of 7.6 percent. The first option is to save $2,500, $2,500, and $3,000 at the end of each year for the next three years, respectively. The other option is to save one lump sum amount today. You want to have the same balance in your savings account at the end of the three years, regardless of the savings method you select. If you select the lump sum method, how much do you need to save today?

$6,890.89

Assume a 1-year loan for $6,000 has an interest rate of 4.5 percent, compounded annually. How much additional interest would be charged if the rate had compounded continuously rather than annually?

$6.17

A firm has $680 in inventory, $2,140 in fixed assets, $210 in accounts receivables, $250 in accounts payable, and $80 in cash. What is the amount of the net working capital?

$720

Mullineaux Corporation has a target capital structure of 46 percent common stock, 5 percent preferred stock, and the balance in debt. Its cost of equity is 15.8 percent, the cost of preferred stock is 8.3 percent, and the aftertax cost of debt is 6.8 percent. What is the WACC given a tax rate of 23 percent?

11.02 percent

The Dry Dock is considering a project with an initial cost of $107,400 and cash inflows for Years 1 to 3 of $37,200, $54,600, and $46,900, respectively. What is the IRR?

13.41 percent

Street Corporation's common stock has a beta of 1.33. The risk-free rate is 3.4 percent and the expected return on the market is 10.97 percent. What is the cost of equity?

13.47 percent

Your credit card company charges you 1.15 percent interest per month. What is the APR?

13.80 percent

A project has cash flows of −$152,000, $60,800, $62,300, and $75,000 for Years 0 to 3, respectively. The required rate of return is 13 percent. Based on the internal rate of return of ________ percent, you should ________ the project.

13.96; accept

You are paying an EAR of 16.78 percent on your credit card. The interest is compounded monthly. What is the annual percentage rate on this account?

15.61 percent

The Shoe Outlet has paid annual dividends of $.58, $.66, $.72, and $.75 per share over the last four years, respectively. The stock is currently selling for $10.08 a share. What is the cost of equity?

17.13 percent

It will cost $9,600 to acquire an ice cream cart that is expected to produce cash inflows of $3,600 a year for three years. After the three years, the cart is expected to be worthless. What is the payback period?

2.67 years

A credit card company quotes you an APR of 18.9 percent. What is the actual rate of interest you are paying if interest is computed monthly?

20.63 percent

What is the EAR of 18.9 percent compounded continuously?

20.80 percent

At 5 percent interest, how long would it take to triple your money?

22.52 years

Your local pawn shop loans money at an annual rate of 24 percent and compounds interest weekly. What is the actual rate being charged on these loans?

27.05 percent

The next dividend payment by HG Enterprises will be $1.82 per share with future increases of 2.8 percent annually. The stock currently sells for $38.70 per share. What is the dividend yield?

4.70 percent

Fashion Wear has bonds outstanding that mature in 11 years, pay interest annually, and have a coupon rate of 6.45 percent. These bonds have a face value of $1,000 and a current market price of $994. What is the company's aftertax cost of debt if its tax rate is 21 percent?

5.16 percent

New Homes has a bond issue with a coupon rate of 5.5 percent that matures in 8.5 years. The bonds have a par value of $1,000 and a market price of $1,022. Interest is paid semiannually. What is the yield to maturity?

5.18 percent

You will receive $4,000 at graduation 3 years from now. You plan on investing this money at 5 percent annual interest until you have accumulated $50,000. How many years from today will it be when this occurs?

54.77 years

The Downtowner has 168,000 shares of common stock outstanding valued at $53 a share along with 13,000 bonds selling for $1,008 each. What weight should be given to the debt when the company computes its weighted average cost of capital?

59.54 percent

The common stock of Dayton Repair sells for $47.92 a share. The stock is expected to pay $2.28 per share next year when the annual dividend is distributed. The company increases its dividends by 1.65 percent annually. What is the market rate of return on this stock?

6.41 percent

A new sports coupe costs $41,750 and the finance office has quoted you an APR of 7.7 compounded monthly, for 36 months. What is the EAR?

7.98 percent

Holdup Bank has an issue of preferred stock with a stated dividend of $7 that just sold for $87 per share. What is the bank's cost of preferred?

8.05 percent

Ten years ago, Jackson Supply set aside $125,000 in case of a financial emergency. Today, that account has increased in value to $278,592. What rate of interest is the firm earning on this money?

8.34 percent

Bonner Metals wants to issue new 20-year bonds. The company currently has 8.5 percent bonds on the market that sell for $994, make semiannual payments, and mature in 7 years. What should the coupon rate be on the new bonds if the firm wants to sell them at par?

8.62 percent

Kaiser Industries has bonds on the market making annual payments, with 14 years to maturity, a par value of $1,000, and a current price of $1,108.60. At this price, the bonds yield 7.5 percent. What is the coupon rate?

8.78 percent

The Uptowner will pay an annual dividend of $3.26 a share next year with future dividends increasing by 2.8 percent annually. What is the market rate of return if the stock is currently selling for $49.10 a share?

9.44 percent

Twelve years ago, your parents set aside $8,000 to help fund your college education. Today, that fund is valued at $23,902. What rate of interest is being earned on this account?

9.55 percent

A company's current cost of capital is based on:

both the returns currently required by its debtholders and stockholders.

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as ________ ratios.

profitability

The cost of preferred stock is computed the same as the:

rate of return on a perpetuity.

Pro forma financial statements can best be described as financial statements:

showing projected values for future time periods.

If a project has a net present value equal to zero, then:

the project earns a return exactly equal to the discount rate.

Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This transaction:

was facilitated in the secondary market.

An example of a capital budgeting decision is deciding:

whether or not to purchase a new machine for the production line.

A firm's short-term assets and its short-term liabilities are referred to as the firm's:

working capital.

A project has a required return of 12.6 percent, an initial cash outflow of $42,100, and cash inflows of $16,500 in Year 1, $11,700 in Year 2, and $10,400 in Year 4. What is the net present value?

−$11,748.69

A project will produce an operating cash flow of $56,200 a year for 5 years. The initial fixed asset investment in the project will be $238,900. The net aftertax salvage value is estimated at $67,000 and will be received during the last year of the project's life. What is the net present value of the project if the required rate of return is 15.2 percent?

−$18,374.86

A project will require $543,000 for fixed assets, $118,000 for inventory, and $142,000 for accounts receivable. Short-term debt is expected to increase by $65,000. The project has a six-year life. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. No bonus depreciation will be taken. The project is expected to generate annual sales of $905,000 with costs of $730,000. What is the project's cash flow at Time 0?

−$738,000

Which one of the following represents the most liquid asset?

$100 of inventory that is sold today for $100 cash

You want to start a business that you believe can produce cash flows of $5,600, $48,200, and $125,000 at the end of each of the next three years, respectively. At the end of three years you think you can sell the business for $250,000. At a discount rate of 16 percent, what is this business worth today?

$280,894.67

Travis invested $8,000 in an account that pays 4 percent simple interest. How much more could he have earned over a 7-year period if the interest had compounded annually?

$287.45

GEO Inc. has paid annual dividends of $.41, $.47, and $.53 a share over the past three years, respectively. The company expects to now maintain a constant dividend. At a discount rate of 14.4 percent, what is the current value per share?

$3.68

You are the recipient of a gift that will pay you $25,000 one year from now and every year thereafter for the following 24 years. The payments will increase in value by 2.5 percent each year. If the appropriate discount rate is 8.5 percent, what is the present value of this gift?

$316,172

World Travel has 7 percent, semiannual, coupon bonds outstanding with a current market price of $1,023.46, a par value of $1,000, and a yield to maturity of 6.72 percent. How many years is it until these bonds mature?

12.53 years

Mr. Rich arranged for a mortgage loan for 65 percent of the $2.5 million purchase price of a home. The monthly payment will be $10,400 and the mortgage term is 30 years. What is the EAR on this loan?

6.82 percent

The 7 percent bonds issued by Modern Kitchens pay interest semiannually, mature in eight years, and have a $1,000 face value. Currently, the bonds sell for $987. What is the yield to maturity?

7.22 percent

What is the EAR if a bank charges you an APR of 7.65 percent, compounded quarterly?

7.87 percent

What is the APR on a loan with a stated rate of 2.35 percent per quarter?

9.40 percent

Projects A and B are mutually exclusive and have an initial cost of $82,000 each. Project A provides cash inflows of $34,000 a year for three years while Project B produces a cash inflow of $115,000 in Year 3. Which project(s) should be accepted if the discount rate is 11.7 percent? What if the discount rate is 13.5 percent?

Accept B at 11.7 percent and neither at 13.5 percent

Which one of the following is a current liability?

Account payable to a supplier that is due next week

According to the Rule of 72, you can do which one of the following?

Approximately double your money in 11 years at 6.55 percent interest

A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?

Callable

Which one of the following terms is defined as the mixture of a firm's debt and equity financing?

Capital structure

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project?

Cash inflow in the final year of the project

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation?

Determining the amount of the dividend to be paid per share

Which one of the following methods of project analysis is defined as computing the value of a project based on the present value of the project's anticipated cash flows?

Discounted cash flow valuation

Kelley's Baskets makes handmade baskets and is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project?

Hiring additional employees to handle the increased workload should the firm accept the wreath project

The book value of a firm is:

based on historical cost.

Which one of the following questions is least likely to be addressed by financial managers?

How should a product be marketed?

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time?

Income statement

All of the following are related to a proposed project. Which one of these should be included in the cash flow at Time 0?

Initial investment in inventory to support the project

In actual practice, managers most frequently use which two types of investment criteria?

Internal rate of return and net present value

Which one of the following best states the primary goal of financial management?

Maximize the current value per share

The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following?

Opportunity cost

Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.9 years and a net present value of $4,200. Project B has an expected payback period of 3.1 years with a net present value of $26,400. Which project(s) should be accepted based on the payback decision rule?

Project A only

Two mutually exclusive projects have an initial cost of $47,500 each. Project A produces cash inflows of $25,300, $37,100, and $22,000 for Years 1 through 3, respectively. Project B produces cash inflows of $43,600, $19,800 and $10,400 for Years 1 through 3, respectively. The required rate of return is 14.7 percent for Project A and 14.9 percent for Project B. Which project(s) should be accepted and why?

Project A, because it has the larger NPV.

Which one of the following ratios is a measure of a firm's liquidity?

Quick ratio

Project A has a required return on 9.2 percent and cash flows of −$87,000, $32,600, $35,900, and $43,400 for Years 0 to 3, respectively. Project B has a required return of 12.7 percent and cash flows of −$85,000, $14,700, $21,200, and $89,800 for Years 0 to 3, respectively. Which project(s) should you accept based on net present value if the projects are mutually exclusive?

Reject Project A and accept Project B

Hardy Lumber has a capital structure that includes bonds, preferred stock, and common stock. Which one of the following rights is most apt to be granted to the preferred shareholders?

Right to share in company profits prior to other shareholders

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach?

Selling fewer hot dogs because hamburgers were added to the menu

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?

Stand-alone principle

GL Plastics spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost?

Sunk

Which one of the following costs was incurred in the past and cannot be recouped?

Sunk

Which one of the following best describes the concept of erosion?

The cash flows of a new project that come at the expense of a firm's existing cash flows

Which one of the following statements concerning corporate income taxes is correct for 2021?

The federal income tax on corporations is a flat-rate tax with the same rate applying to all levels of taxable income

A project has a net present value of zero. Which one of the following best describes this project?

The project's cash inflows equal its cash outflows in current dollar terms.

A proposed project has an initial cost of $38,000 and cash inflows of $12,300, $24,200, and $16,100 for Years 1 through 3, respectively. The required rate of return is 16.8 percent. Based on IRR, should this project be accepted? Why or why not?

Yes; The IRR exceeds the required return.

As the beneficiary of a life insurance policy, you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. If you can earn 6 percent on your money, which option should you take and why?

You should accept the $200,000 because the payments are only worth $195,413 to you today.

The decision to issue additional shares of stock is an example of:

a capital structure decision.

All else constant, a bond will sell at ________ when the coupon rate is ________ the yield to maturity.

a discount; less than

You are considering two independent projects. Project A has an initial cost of $125,000 and cash inflows of $46,000, $79,000, and $51,000 for Years 1 to 3, respectively. Project B costs $135,000 with expected cash inflows for Years 1 to 3 of $50,000, $30,000, and $100,000, respectively. The required return for both projects is 16 percent. Based on IRR, you should:

accept Project A and reject Project B.

A project's average net income divided by its average book value is referred to as the project's average:

accounting return.

The capital structure weights used in computing a company's weighted average cost of capital:

are based on the market values of the outstanding securities.

Agency problems are most associated with:

corporations.

Net working capital is defined as:

current assets minus current liabilities.

The internal rate of return is defined as the

discount rate which causes the net present value of a project to equal zero.

One disadvantage of the corporate form of business ownership is the:

double taxation of distributed profits.

Relationships determined from a company's financial information and used for comparison purposes are known as:

financial ratios.

Cash flow from assets is also known as the firm's:

free cash flow.

Road Hazards has 12-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued:

in registered form.

The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's: Correct!

incremental cash flows.

A company's weighted average cost of capital:

is the return investors require on the total assets of the firm.

The current yield is defined as the annual interest on a bond divided by the:

market price.

If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:

mutually exclusive.

The length of time a firm must wait to recoup the money it has invested in a project is called the:

payback period.