BFIN Test 1

25. You just won $50,000 and deposited your winnings into an account that pays 5.5 percent interest, compounded annually. How long will you have to wait until your winnings are worth $100,000? A. 11.24 years B. 12.00 years C. 12.29 years D. 12.67 years E. 12.95 years

$100,000 = $50,000 (1 + 0.055)t; t = 12.95 years

3. Which one of the following is most apt to create a situation where an agency conflict could arise? A. Increasing the size of a firm's operations B. Downsizing a firm C. Separating management from ownership D. Decreasing employee turnover E. Reducing both management and nonmanagement salaries

C. Separating management from ownership

4. 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.

22. You want to invest an amount of money today and receive back twice that amount in the future. You expect to earn 6 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. 12 years E. 14 years

Approximate time period = 72/6 = 12 years

1. Which one of the following is a capital structure decision? A. Determining the optimal inventory level B. Establishing the preferred debt-equity level C. Selecting new equipment to purchase D. Setting the terms of sale for credit sales E. Determining when suppliers should be paid

B. Establishing the preferred debt-equity level

40. The value of a bond is dependent on the: A. coupon rate and the current yield. B. coupon rate and the yield to maturity. C. current yield and the yield to maturity. D. coupon rate but neither the current yield nor the yield to maturity. E. yield to maturity but neither the current yield nor the coupon rate.

B. coupon rate and the yield to maturity.

37. When a bond's yield to maturity is less than the bond's coupon rate, the bond: A. had to be recently issued. B. is selling at a premium. C. has reached its maturity date. D. is priced at par. E. is selling at a discount.

B. is selling at a premium.

16. Which one of the following actions will increase the current ratio, all else constant? Assume the current ratio is greater than 1.0. A. Cash purchase of inventory B. Cash payment of an account receivable C. Cash payment of an account payable D. Credit sale of inventory at cost E. Cash sale of inventory at a loss

C. Cash payment of an account payable

33. A loan has an APR of 8.5 percent and an EAR of 8.5 percent. Given this, the loan must: A. have a one-year term. B. have a zero percent interest rate. C. charge interest annually. D. must be an interest-only loan. E. require the accrued interest be paid in full with each monthly payment.

C. charge interest annually.

10. Shareholders' equity is equal to: A. total assets plus total liabilities. B. net fixed assets minus total liabilities. C. net fixed assets minus long-term debt plus net working capital. D. net working capital plus total assets. E. total assets minus net working capital.

C. net fixed assets minus long-term debt plus net working capital.

8. 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.

13. Andre's Dog House had current assets of $67,200 and current liabilities of $71,100 last year. This year, the current assets are $82,600 and the current liabilities are $85,100. The depreciation expense for the past year is $9,600 and the interest paid is $8,700. What is the amount of the change in net working capital? A. -$2,800 B. -$1,400 C. $1,400 D. $2,100 E. $2,800

Change in net working capital = ($82,600 - $85,100) - ($67,200 - $71,100) = $1,400

34. A $1,000 face value bond is currently quoted at 101.2. The bond pays semiannual payments of $28.50 each and matures in six years. What is the coupon rate? A. 2.72 percent B. 2.85 percent C. 5.00 percent D. 5.63 percent E. 5.70 percent

Coupon rate = ($28.50 2)/$1,000 = 5.70 percent

32. Which one of the following has the highest effective annual rate? A. 6 percent compounded annually B. 6 percent compounded semiannually C. 6 percent compounded quarterly D. 6 percent compounded monthly E. All the other answers have the same effective annual rate.

D. 6 percent compounded monthly

39. Which one of the following bonds is the least sensitive to changes in market interest rates? A. Zero coupon, 10 year B. 6 percent annual coupon, 10 year C. Zero coupon, 4 year D. 8 percent annual coupon, 4 year E. 6 percent annual coupon, 4 year

D. 8 percent annual coupon, 4 year

30. Which one of the following qualifies as an annuity? A. Weekly grocery bill B. Clothing purchases C. Car repairs D. Auto loan payment E. Medical bills

D. Auto loan payment

17. You would like to borrow money three years from now to build a new building. In preparation for applying for that loan, you are in the process of developing target ratios for your firm. Which set of ratios represents the best target mix considering that you want to obtain outside financing in the relatively near future? A. Times interest earned = 1.7; debt-equity ratio = 1.6 B. Times interest earned = 1.5; debt-equity ratio = 1.2 C. Cash coverage ratio = 0.8; debt-equity ratio = 0.8 D. Cash coverage ratio = 2.6; debt-equity ratio = 0.3 E. Cash coverage ratio = 0.5; total debt ratio = 0.2

D. Cash coverage ratio = 2.6; debt-equity ratio = 0.3

29. Which one of the following can be classified as an annuity but not as a perpetuity? A. Increasing monthly payments forever B. Increasing quarterly payments for six years C. Unequal payments each year for nine years D. Equal annual payments for life E. Equal weekly payments forever

D. Equal annual payments for life

20. Jeff deposits $3,000 into an account which pays 2.5 percent interest, compounded annually. At the same time, Kurt deposits $3,000 into an account paying 5 percent interest, compounded annually. At the end of three years: A. Both Jeff and Kurt will have accounts of equal value. B. Kurt will have twice the money saved that Jeff does. C. Kurt will earn exactly twice the amount of interest that Jeff earns. D. Kurt will have a larger account value than Jeff will. E. Jeff will have more money saved than Kurt.

D. Kurt will have a larger account value than Jeff will.

26. Which one of the following is the correct formula for computing the present value of $600 to be received in 6 years? The discount rate is 7 percent. A. PV = $600 (1 + 6)7 B. PV = $600 (1 + 0.07)6 C. PV = $600 (0.07 6) D. PV = $600/(1 + 0.07)6 E. PV = $600/(1 + 6)0.07

D. PV = $600/(1 + 0.07)6

28. Christie is buying a new car today and is paying a $500 cash down payment. She will finance the balance at 7.25 percent interest. Her loan requires 36 equal monthly payments of $450 each with the first payment due 30 days from today. Which one of the following statements is correct concerning this purchase? A. The present value of the car is equal to $500 + (36 $450). B. The $500 is the present value of the purchase. C. The car loan is an annuity due. D. To compute the initial loan amount, you must use a monthly interest rate. E. The future value of the loan is equal to 36 $450.

D. To compute the initial loan amount, you must use a monthly interest rate.

7. 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.

5. 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.

9. Delivery trucks are classified as: A. noncash expenses. B. current liabilities. C. current assets. D. tangible fixed assets. E. intangible fixed assets

D. tangible fixed assets.

38. Which one of the following statements is true? A. The current yield on a par value bond will exceed the bond's yield to maturity. B. The yield to maturity on a premium bond exceeds the bond's coupon rate. C. The current yield on a premium bond is equal to the bond's coupon rate. D. A premium bond has a current yield that exceeds the bond's coupon rate. E. A discount bond has a coupon rate that is less than the bond's yield to maturity.

E. A discount bond has a coupon rate that is less than the bond's yield to maturity.

2. 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 the firm

E. Increasing the market value of the firm

11. Which one of the following will decrease the net working capital of a firm? A. Obtaining a three-year loan and using the proceeds to buy inventory B. Collecting a payment from a credit customer C. Obtaining a five-year loan to buy equipment D. Selling inventory at a profit E. Making a payment on a long-term debt

E. Making a payment on a long-term debt

31. Which one of the following features distinguishes an ordinary annuity from an annuity due? A. Number of equal payments B. Amount of each payment C. Frequency of the payments D. Annuity interest rate E. Timing of the annuity payments

E. Timing of the annuity payments

6. Net working capital is defined as: A. the depreciated book value of a firm's fixed assets. B. the value of a firm's current assets. C. available cash minus current liabilities. D. total assets minus total liabilities. E. current assets minus current liabilities.

E. current assets minus current liabilities.

23. Your grandparents just gave you a gift of $15,000. You are investing this money for 12 years at 6 percent simple interest. How much money will you have at the end of the 12 years? A. $15,900 B. $16,000 C. $17,375 D. $25,800 E. $26,938

Future value = $15,000 + ($15,000 0.06 12) = $25,800

24. Twelve years ago, you deposited $3,400 into an account. Seven 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 7 years. How much money do you have in your account today? A. $5,666.67 B. $6,717.29 C. $7,411.90 D. $8,708.15 E. $8,721.97

Future value = {[$3,400 (1 + 0.08)5] + $1,000} (1 + 0.055)7 = $8,721.97

19. Waldale Pools has total equity of $289,100 and net income of $64,500. The debt-equity ratio is 0.55 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. 9.00 percent E. 22.31 percent

Profit margin = ($64,500/$289,100)/[(1 + 0.55) 1.6] = 9.00 percent

15. You are analyzing a company that has cash of $11,200, accounts receivable of $27,800, fixed assets of $124,600, accounts payable of $31,300, and inventory of $56,900. What is the quick ratio? A. 0.30 B. 0.67 C. 0.80 D. 1.25 E. 1.37

Quick ratio = ($11,200 + $27,800)/$31,300 = 1.25

12. 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

Retained earnings = $28,975 + $4,680 - $1,600 = $32,055

18. Mike's Place has total assets of $123,800, a debt-equity ratio of 0.75, and net income of $7,100. What is the return on equity? A. 3.48 percent B. 3.73 percent C. 5.74 percent D. 10.04 percent E. 13.61 percent

Return on equity = ($7,100/$123,800) (1 + 0.75) = 10.04 percent

21. Draw a graph that illustrates the relationship between interest rates and the present value of $1,000 to be received in one year.

Students should illustrate that higher interest rates lead to lower present values.

35. Whitts BBQ would like to issue some semiannual coupon bonds at par. Comparable bonds have a current yield of 9.16 percent, an effective annual yield of 9.68 percent, and a yield to maturity of 9.50 percent. What coupon rate should Whitts BBQ set on its bonds? A. 9.00 percent B. 9.16 percent C. 9.50 percent D. 9.68 percent E. 10.00 percent

To sell bonds at par, the coupon rate must be set equal to the yield to maturity on comparable bonds, which in this case is 9.50 percent.