Chapter 1 - 12 (excludes chapter 9).

Corner Restaurant is considering a project with an initial cost of $211,600. The project will not produce any cash flows for the first three years. Starting in Year 4, the project will produce cash inflows of $151,000 a year for three years. This project is risky, so the firm has assigned it a discount rate of 18.6 percent. What is the project's net present value?

$-16,670.67

What is the net present value of a project that has an initial cost of $42,700 and produces cash inflows of $9,250 a year for 9 years if the discount rate is 14.65 percent?

$1,992.43

Lamey Gardens has a dividend growth rate of 5.6 percent, a market price of $13.16 a share, and a required return of 14 percent. What is the amount of the last dividend this company paid?

$1.05 $13.16= (D0 * 1.056)/ (.14 - .056) D0= $1.05

Village East expects to pay an annual dividend of $1.40 per share next year, and $1.68 per share for the following two years. After that, the company plans to increase the dividend by 3.4 percent annually. What is this stock's current value at a discount rate of 13.7 percent?

$15.15

Solar Energy will pay an annual dividend of $1.93 per share next year. The company just announced that future dividends will be increasing by 1.6 percent annually. How much are you willing to pay for one share of this stock if you require a rate of return of 11.75 percent?

$19.01 P0= $1.93 / (.1175 - .016) = 19.01

Best Ever Toys just paid its annual dividend of $1.78 per share. The required return is10.6 percent and the dividend growth rate is 1.23 percent. What is the expected value of this stock five years from now?

$20.44

Braxton's Cleaning Company stock is selling for $32.60 a share based on a rate of return of 13.8 percent. What is the amount of the next annual dividend if the dividends are increasing by 2.4 percent annually?

$3.72 D1= $32.60 * (.138 - .024) = $3.72

The 6.5 percent bond of ABCO has a yield to maturity of 6.82 percent. The bond matures in seven years, has a face value of $1,000, and pays semiannual interest payments. What is the amount of each coupon payment?

$32.50

the Sports Club plans to pay an annual dividend of $1.20 per share next year, $1.12 per share a year for the following two years, and then a final liquidating dividend of $14.20 per share four years from now. How much is one share of this stock worth to you today if you require a rate of return of 18.7 percent of this risky investment?

$9.63

Over the past four years, a stock produced returns of 13 percent, -9 percent, 8 percent, and 14 percent, respectively. Based on these four years, what range of returns would you expect to see 99 percent of the time?

-25.48 percent to 38.48 percent

Over the past five years, a stock returned 6.2 percent, -10.4 percent, -2.2 percent, 16.9 percent, and 5.8 percent, respectively. What is the variance of these returns?

.010439

3 major forms of business organization?

1. Corporations 2. Sole proprietorships 3. Partnerships (General, Limited).

You own a portfolio that is invested as follows: $13,700 of Stock A, $4,800 of Stock B, $16,200 of Stock C, and $9,100 of Stock D. What is the portfolio weight of Stock B?

10.96 percent.

The stock of Wiley United has a beta of .98. The market risk premium is 7.6 percent and the risk-free rate is 3.9 percent. What is the expected return on this stock?

11.35 percent.

S&S stock is expected to return 17.5 percent in a booming economy, 12.4 percent in a normal economy, and 1.2 percent in a recession. The probabilities of an economic boom, normal state, or recession are 2 percent, 90 percent, and 8 percent, respectively. What is the expected rate of return on this stock?

11.61 percent.

You own a stock that has an expected return of 15.72 percent and a beta of 1.33. The U.S. Treasury bill is yielding 3.82 percent and the inflation rate is 2.95 percent. What is the expected rate of return on the market?

12.77 percent.

he Steel Factory is considering a project that will produce annual cash flows of $43,800, $40,200, $46,200, and $41,800 over the next four years, respectively. What is the internal rate of return if the initial cost of the project is $127,900?

13.00 percent

Bama Entertainment has common stock with a beta of 1.22. The market risk premium is 8.1 percent and the risk-free rate is 3.9 percent. What is the expected return on this stock?

13.78 percent.

Western Electric has 21,000 shares of common stock outstanding at a price per share of $61 and a rate of return of 15.6 percent. The firm has 11,000 shares of $8 preferred stock outstanding at a price of $48 a share. The outstanding debt has a total face value of $275,000 and currently sells for 104 percent of face. The yield to maturity on the debt is 8.81 percent. What is the firm's weighted average cost of capital if the tax rate is 35 percent?

14.2 percent.

ABD common stock is selling for $36.08 a share. The company has earnings per share of $.34 and a book value per share of $12.19. What is the market-to-book ratio?

2.96

A $1,000 face value bond is currently quoted at 100.8. The bond pays semiannual payments of $22.50 each and matures in six years. What is the coupon rate?

4.50 percent ($22.50 * 2)/1000 - .0450 or 4.5 percent

A 12-year, annual coupon bond is priced at $1,102.60. The bond has a $1,000 face value and a yield to maturity of 5.33 percent. What is the coupon rate?

6.51 percent (tvm)

The 8 percent, $1,000 face value bonds of Sweet Sue Foods are currently selling at $1,057. These bonds have 16 years left until maturity. What is the current yield?

7.57 Current yield: (.08 * 1000)/1057 = 7.57

Your portfolio has provided you with returns of 11.4 percent, 6.2 percent, -.7 percent, and 14.6 percent over the past four years, respectively. What is the geometric average return for this period?

7.72 percent

City Rentals has 44,000 shares of common stock outstanding at a market price of $32 a share. The common stock just paid a $1.50 annual dividend and has a dividend growth rate of 2.5 percent. There are 7,500 shares of $9 preferred stock outstanding at a market price of $72 a share. The outstanding bonds mature in 11 years, have a total face value of $825,000, a face value per bond of $1,000, and a market price of $989 each, and a pretax yield to maturity of 8.3 percent. The tax rate is 35 percent. What is the firm's weighted average cost of capital?

7.76 percent.

The common stock of Mountain Farms has yielded 14.2 percent, 11.7 percent, 3.4 percent, -2.8 percent, and 15.8 percent over the past five years, respectively. What is the geometric average return?

8.22 percent

Holly Farms has sales of $509,600, costs of $448,150, depreciation expense of $36,100, and interest paid of $12,400. The tax rate is 28 percent. How much net income did the firm earn for the period?

=(509600 - 448150 - 36100 - 12400)(1- .28) = 9324

Marcie's has sales of $179,600, depreciation of $14,900, costs of goods sold of $138,200, and other costs of $28,400. The tax rate is 35 percent. What is the net income?

=(sales - COGS - other costs- depreciation)(tax) Net income = ($179,600 -138,200 -28,400 -14,900)(1 -.35) = **-$1,235**

What are the three types of financial management decisions, and what questions are they designed to answer?

CFO, treasurer, controller. 1. What long term investments should the firm take on? 2. Where will we get the long term financing pay for the investments? 3. How will we manage the everyday financial activities of the firm?

The Wood Shed has cash of $5,800, accounts receivable of $18,600, inventory of $53,100, and net working capital of $2,100. What is the cash ratio

Cash ratio = $5,800 / ($5,800 + 18,600 + 53,100 - 2,100) = .08

Builder's Outlet just hired a new chief financial officer. To get a feel for the company, she wants to compare the firm's sales and costs over the past three years to determine if any trends are present and also determine where the firm might need to make changes. Which one of the following statements will best suit her purposes?

Common size income statement

what are agency problems, and why do they exist in a corporation?

Conflict of interest between principal and agent; when the firm's control is separated from the firm's ownership.

what are the four basic areas of finance?

Corporate (=Business), Financial Institutions, Investments, International

Matt and Alicia created a firm that is a separate legal entity and will share ownership of that firm on a 75/25 basis. Which type of entity did they create if they have no personal liability for the firm's debts?

Corporation

which type of stock pays a fixed dividend, receives first priority in dividend payment, and maintains the right to a dividend payment, even if that payment is deferred?

Cumulative preferred.

Wes Motors has total assets of $98,300, net working capital of $11,300, owners' equity of $41,600, and long-term debt of $38,600. What is the value of the current assets?

Current liabilities = $98,300-38,600 -41,600 = $18,100 Current assets = $11,300 + 18,100 = $29,400 **29,400**

If a firm wants to increase internal growth rate, what would they decrease?

Dividend payout.

annuities

FINITE series of EQUAL payments that occur at regular intervals

What are the major categories of ratios and how do you compute specific rations within each category?

Liquidity, Asset Utilization, Financial Leverage, Market value, Profitability

What is the difference between average and marginal tax rates? Which should we use when making financial decisions?

Marginal is the percentage of tax paid on the next dollar earned Average is the total tax bill divided by taxable income. USE MARGINAL WHEN MAKING FINANCIAL DECISIONS.

the tax rate that determines the amount of tax that will be due on the next dollar of taxable income earned is called the...

Marginal tax rate.

what is the primary goal of financial management for a sole proprietorship?

Maximize the market value of the equity.

Blue water bonds have a face value of 1,000, a coupon rate of 6.5 percent, semiannual interest payments, and mature in 11.5 years. what is the current price of these bonds if the yield to maturity is 6.36 percent?

N: 11.5*2 I/Y: 6.36/2 PMT: (.065*1000)/2 FV: 1000 *******PV= -1011.30 ******

The 4.5 percent bond of JL Motors has a face value of $1,000, a maturity of 7 years, semiannual interest payments, and a yield to maturity of 6.23 percent. What is the current market price of the bond?

N: 7yrs * 2 = 14 (semi annual) I/Y: 6.23/2= 3.115 (semi annual) PMT: (.045*1000)/2= 22.5 (semi annual) FV: 1000 *****PV= -903.05****

You are considering an investment for which you require a rate of return of 8.5 percent. The investment costs $67,400 and will produce cash inflows of $25,720 for three years. Should you accept this project based on its internal rate of return? Why or why not?

No; because the IRR is 7.08 percent.

Gino's Winery has net working capital of $29,800, net fixed assets of $64,800, current liabilities of $34,700, and long-term debt of $23,000. What is the value of the owners' equity?

Owner's equity = networking capital + net fixed assets - long term debt Owners' equity = $29,800 + 64,800 -23,000 = **$71,600**

which one of the following indicators offers the best assurance that a project will produce value for its owners?

Positive NPV.

what are the major determinants of a firms growth potential?

Profit Margin, Total Asset turnover, financial leverage, dividend policy.

Bed Bug Inn has annual sales of $137,000. Earnings before interest and taxes is equal to 5.8 percent of sales. For the period, the firm paid $4,700 in interest. What is the profit margin if the tax rate is 34 percent?

Profit margin = {[(.058 × $137,000) - $4,700] × (1 - .34)} / $137,000 = .0156, or 1.56 percent

Dupont Identity

ROE = PM *TA T/O *Equ. Multiplier

Towne Realty has total assets of $346,200, net fixed assets of $277,400, current liabilities of $16,100, and long-term liabilities of $124,600. What is the total debt ratio?

Total debt ratio = ($16,100 + 124,600) / $346,200 = .41 current liabilities + long term liabilities/ total assets

how do we determine a firm's cash flows? What are the equations and where do we find the information?

You find cash flows from financial statements and their main purpose is to allow generation of utilizing assets and how they are paid t those who finance the asset purchase.

a portfolio is...

a group of assets held by an investor.

Derek's is a brick-and-mortar toy store. The firm is considering expanding its operations to include Internet sales. Which one of the following would be the best firm to use in a pure play approach to analyzing this proposed expansion?

a toy store that sells online only.

which one of the following is the best example of unsystematic risk? a) Inflation exceeding market expectations b) A warehouse fire c) Decrease in corporate tax rates d) Decrease in the value of the dollar e) Increase in consumer spending

a warehouse fire.

which one of the following statements is correct? a) Preferred stock can be callable. b) Preferred stock generally has a stated liquidation value of $1,000 per share. c) Dividend payments to preferred shareholders are tax-deductible expenses for the issuing firm. d) Preferred dividends are generally variable in amount. e) Preferred shareholders receive preferential treatment over bondholders in a liquidation.

a) preferred stock can callable,

Semistrong form market efficiency states that the value of a security is based on...

all publicly available information.

a debenture is...

an unsecured bond

systematic risk is defined as...

any risk that affects a large number of assets.

which one of the following methods of analysis ignores cash flows?

average accounting return

Which one of these represents systematic risk? a) Major layoff by a regional manufacturer of power boats b) Increase in consumption created by a reduction in personal tax rates c) Surprise firing of a firm's chief financial officer d) Closure of a major retail chain of stores e) Product recall by one manufacturer

b) increase in consumption created by a reduction in personal tax rates.

When using the pure play approach for a proposed investment, a firm is primarily seeking a rate of return that...

best matches the risk level of the proposed investment.

a broker is an agent who...

brings buyers and sellers together.

what do security dealers do?

buy and sell from their own inventory.

New Labs just announced that it has received a patent for a product that will eliminate all flu viruses. This news is totally unexpected and viewed as a major medical advancement. Which one of the following reactions to this announcement indicates the market for New Labs stock is efficient? a) The price of New Labs stock remains unchanged. b) The price of New Labs stock increases rapidly and then settles back to its pre-announcement level. c) The price of New Labs stock increases rapidly to a higher price and then remains at that price. d) All stocks quickly increase in value and then all but New Labs stock fall back to their original values. e) The value of all stocks suddenly increase and then level off at their higher values.

c) The price of New Labs stock increases rapidly to a higher price and then remains at that price.

An efficient capital market is best defined as a market in which security prices reflect which one of the following? a) Current inflation b) A risk premium c) All available information d) The historical arithmetic rate of return e) The historical geometric rate of return

c) all available information.

unsystematic risk can be defined by all of the following except.... a) unrewarded risk. b) diversifiable risk. c) market risk. d) unique risk. e) asset-specific risk.

c) market risk.

which one of the following statements is correct? a) A longer payback period is preferred over a shorter payback period. b) The payback rule states that you should accept a project if the payback period is less than one year. c) The payback period ignores the time value of money. d) The payback rule is biased in favor of long-term projects. e) The payback period considers the timing and amount of all of a project's cash flows.

c) the payback period ignores the time value of money.

Which one of the following statements is correct? Assume cash flows are conventional. a) If the IRR exceeds the required return, the profitability index will be less than 1.0. b) The profitability index will be greater than 1.0 when the net present value is negative. c) When the internal rate of return is greater than the required return, the net present value is positive. d) Projects with conventional cash flows have multiple internal rates of return. e) If two projects are mutually exclusive, you should select the project with the shortest payback period.

c) when the internal rate of return is greater than the required return, the net present value is positive.

Uptown Markets is financed with 45 percent debt and 55 percent equity. This mixture of debt and equity is referred to as the firm's:

capital structure.

dividends are best defined as...

cash or stock payments to shareholders.

what is the quoted price of a bond?

clean price.

what are some of the problems associated with financial statement analysis?

conglomerates; no readily available comparables global competitors different accounting procedures different fiscal year ends differences in capital structure seasonal variations in one-time events

the weighted average cost of capital is defined as the weighted average of a firm's .....

cost of equity, cost of preferred, and its aftertax cost of debt.

Katie owns 100 shares of ABC stock. Which one of the following terms is used to refer to the return that Katie and the other shareholders require on their investment in ABC?

cost of equity.

Networking capital is defined as...

current assets minus current liabilities.

A stock is expected to return 13 percent in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy. Which one of the following will lower the overall expected rate of return on this stock? a) An increase in the rate of return in a recessionary economy b) An increase in the probability of an economic boom c) A decrease in the probability of a recession occurring d) A decrease in the probability of an economic boom e) An increase in the rate of return for a normal economy

d) a decrease in the probability of an economic boom.

Which one of the following could cause the total return on an investment to be a negative rate? a) Constant annual dividend amount b) Increase in the annual dividend amount c) Stock price that remains constant over the investment period d) Stock price that declines over the investment period e) Stock price that increases over the investment period

d) stock price that declines over the investment period.

an agent who buys and sells securities from inventory is called a...

dealer.

Miller Farm products is issuing a 15-year, unsecured bond. based on this information, you know that this debt can be described as a...

debenture. (bc unsecured bond automatically implies debenture).

Which one of these is the best example of systematic risk? a) Discovery of a major gas field b) Decrease in textile imports c) Increase in agricultural exports d) Decrease in gross domestic product e) Decrease in management bonuses for banking executives

decrease in the gross domestic product.

an increase in a levered firm's tax rate will....

decrease the firm's cost of capital.

what is the price that an investor pays to purchase an outstanding bond ?

dirty price.

Which term best refers to the practice of investing in a variety of diverse assets as a means of reducing risk? a) Systematic b) Unsystematic c) Diversification d) Security market line e) Capital asset pricing model

diversification.

Net income is distributed to...

dividends or retained earnings.

net present value involves discounting an investments...

future cash flows.

which one of the following is defined as the average compound return earned per year over a multi year period?

geometric average return.

What can be sold quickly almost as close to full value?

highly liquid assets.

Internal growth rate

how much firm can grow assets using retained earnings as the only source of financing

sustainable growth rate

how much the firm can grow by using internally generated funds and issuing debt to maintain a constant debt ratio.

How do you standardize balance sheets and income statements?

idk lol

what will increase the cost of equity, all else held constant?

increase in the dividend growth rate.

the written agreement that contains the specific details related to a bond issue is called the...

indenture.

perpetuity

infinite series of equal payments

what is the maximum growth rate a firm can achieve without any additional external financing?

internal growth rate.

Why evaluate financial statements?

internal uses: performance evaluation, planning for the future external uses: creditors, suppliers, customers, stockholders.

the cost of preferred stock...

is equal to the stock's dividend yield.

The lower the standard deviation of returns on a security, the _____ the expected rate of return and the _____ the risk.

lower; lower.

The primary goal of financial management is most associated with increasing the....

market value of the firm.

Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B?

mutually exclusive.

A bond's indenture agreement generally includes all of the following except the.....

names of registered shareholders.`

which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities?

net present value.

On which one of the following dates do dividends become a liability of the issuer for accounting purposes?

on the date the boards declares the dividend.

a call provision grants the bond issuer the...

option of repurchasing the bonds prior to maturity at a prespecified price.

a registered form bond is defined as a bond that...

pays coupon payments directly to the owner of record.

Stock A comprises 28 percent of Susan's portfolio. Which one of the following terms applies to the 28 percent? a) Portfolio variance b) Portfolio standard deviation c) Portfolio weight d) Portfolio expected return e) Portfolio beta

portfolio weight.

newly issued securities are sold to investors in which one of the following markets?

primary market.

what is a pure discount loan?

principal is repaid all at once

Farmer's Supply is considering opening a clothing store, which would be a new line of business for the firm. Management has decided to use the cost of capital of a similar clothing store as the discount rate to evaluate this proposed expansion. Which one of the following terms describes this evaluation approach?

pure play approach.

what is an amortized loan?

regular principal payments made over time

The 6.3 percent, semi-annual coupon bonds of PE Engineers mature in 13 years and have a price quote of 99.2. These bonds have a current yield of _____ percent, a yield to maturity of _____ percent, and an effective annual yield of _____ percent.

remember current yield = (coupon rate * FV)/ price quote * FV so, (.063 *1000) / (.992 *1000) ****Current yield= 6.35**** ****ytm= 6.39 **** ****eff annual yield= 6.49*****

Net income increases when....

revenue increases.

what is the market called that facilitates the sale of shares between individual investors?

secondary markets

Kate is the CFO of a major firm and has the job of assigning discount rates to each project under consideration. Kate's method of doing this is to assign an incrementally higher rate as the risk level of the project increases and a lower rate as the risk level declines. Kate is applying the ___ approach.

subjective.

For a risky security to have a positive expected return but less risk than the overall market, the security must have a beta....

that is greater than zero, but less than 1.

An agency issue is most apt to adapt when...

the control of the firm is separated from the firm's ownership.

on which date is the principal amount of a semiannual coupon bond repaid?

the entire bond is repaid on the maturity date.

Whats an advantage of being a limited partner?

the losses are limited to the capital invested.

when valuing a stock using the constant growth model, D1 represents the....

the next annual expected annual dividend.

Kelly's uses the firm's WACC as the required return for some of its projects. For other projects, the firms uses a rate equal to WACC plus one percent, while another set of projects is assigned rates equal to WACC minus some amount. Which one of the following factors should be the key factor the firm uses to determine the amount of the adjustment it will make when assigning a discount rate to a specific project?

the perceived risk level of project.

in a general partnership, each partner is personally liable for...

the total debts of the partnership, even if he or she was unaware of those debts.

if a firm has an inventory tunrover of 15,

then the firm sells its entire inventory on average of 15 times per year.

What is the goal of financial management

to increase the market value of the firm.

he modified internal rate of return is specifically designed to address the problems associated with...

unconventional cash flows.

Why is standardization useful?

useful for comparing financial information year to year, and comparing companies of different sizes, particularly within the same industry.

what is used as the pretax cost of debt?

weighted average yield to maturity on the firm's outstanding debt.

The daily operations of a financial firm are primarily controlled by managing the....

working capital.