Exam 2 Review

A firm is operating at less than 100 percent of capacity. When preparing pro forma statements, this information is primarily needed to project which one of the following account values?

Fixed assets

With a sales level of $547,200 and fixed assets of $471,000, Esquivel's is operating at full capacity. The net profit margin is 5.4 percent. If sales are to increase by 4 percent, what is the required addition to fixed assets?

$18,840 Required addition to fixed assets = (.04)$471,000Required addition to fixed assets = $18,840

Which one of the following statements concerning interest rates is correct?

The effective annual rate equals the annual percentage rate when interest is compounded annually.

Your anticipated wedding is three years from today. You don't know who your spouse will be but you do know that you are saving $10,000 today and $17,000 one year from today for this purpose. You also plan to pay the final $12,000 of anticipated costs on your wedding day. At a discount rate of 5.5 percent, what is the current cost of your upcoming wedding?

$36,333.11 PV = $10,000 + $17,000/1.055 + $12,000/1.0553PV = $36,333.11

Ace Custom Metal has annual sales of $56,900 and is currently operating at 86 percent of capacity. What is the level of sales at full capacity?Ace Custom Metal has annual sales of $56,900 and is currently operating at 86 percent of capacity. What is the level of sales at full capacity

$66,163 Full-capacity sales = $56,900/.86Full-capacity sales= $66,163

You hope to buy your dream car five years from now. Today, that car costs $62,500. You expect the price to increase by an average of 2.9 percent per year. How much will your dream car cost by the time you are ready to buy it?

$72,103.59 FV = $62,500(1.0295)FV = $72,103.59

You just signed a consulting contract that will pay you $27,000, $31,000, and $44,000 at the end of the next three years, respectively. What is the present value of this contract given a discount rate of 12.7 percent?

$79,103 PV = $27,000/1.127 + $31,000/1.1272 + $44,000/1.1273PV = $79,103

A project has cash flows of -$343,200, $56,700, $138,500, and $245,100 for Years 0 to 3, respectively. The required rate of return is 10.5 percent. Based on the internal rate of return of _____ percent for this project, you should _____ the project.

10.93; accept NPV = 0 = −$343,200 + $56,700/(1 + IRR) + $138,500/(1 + IRR)2 + $245,100/(1 + IRR)3IRR = .1093, or 10.93% Since the IRR is more than the required return, you should accept the project.

An investment that provides annual cash flows of $20,100 for 8 years costs $87,500 today. At what rate would you be indifferent between accepting the investment and rejecting it?

15.93% NPV = 0 = −$87,500 + $20,100({1 − [1/(1 + IRR)8]}/IRR)IRR = .1593, or 15.93%

All else constant, which one of the following will result in the lowest present value of a lump sum?

8 percent interest for 10 years

Wei Bridal is a profitable firm with a dividend payout ratio of 25 percent. The firm does not want to issue additional equity shares nor increase its long-term debt. Which one of the following defines the maximum rate at which this firm can currently grow?

Internal growth rate

Project A has cash flows of $4,000, $3,000, $0, and $3,000 for Years 1 to 4, respectively. Project B has cash flows of $2,000, $3,000, $2,000, and $3,000 for Years 1 to 4, respectively. Which one of the following statements is correct assuming the discount rate is positive? (No calculations needed.)

Project B is worth less today than Project A.

When preparing pro forma statements, which one of the following is an analyst most likely to estimate first?

Projected sales

Zeng Systems is currently operating at full capacity. The firm, has sales of $47,000, current assets of $5,100, current liabilities of $6,200, net fixed assets of $51,500, and a net profit margin of 5 percent. The firm has no long-term debt and does not plan on acquiring any. The firm does not pay any dividends. Sales are expected to increase by 3 percent next year. If all assets, short-term liabilities, and costs vary directly with sales, how much additional equity financing is required for next year?

−$908.50

Suppose the first comic book of a classic series was sold in 1954. In 2020, the estimated price for this comic book was $310,000, which is an annually compounded return of 22 percent. For this to be true, what was the original price of the comic book in 1954?

$.62 PV = $310,000/1.2266PV = $.62

Aidan can afford $240 a month for five years for a car loan. If the interest rate is 8.5 percent, what is the most he can afford to borrow?

$11,697.88 PVA = $240({1 − [1/(1 + .085/12)(5)(12)]}/(.085/12))PVA = $11,697.88

Assume you currently earn a salary of $50,000 per year. What will be your annual salary 17 years from now if you receive annual raises of 3.75 percent?

$93,491 FV = $50,000(1.037517)FV = $93,491

What is the present value of $45,000 to be received 50 years from today if the discount rate is 8 percent, compounded annually?

$959.46 PV = $45,000/1.0850PV = $959.46

Which one of the following compounding periods will yield the lowest effective annual rate given a stated future value at Year 5 and an annual percentage rate of 10 percent?

Annual

Which one of the following statements related to loan interest rates is correct?

When comparing loans you should compare the effective annual rates.

An investment costs $239,000 and has projected cash flows of $123,900, $78,400, and −$22,300 for Years 1 to 3, respectively. The required rate of return is 15.5 percent. Based solely on the internal rate of return rule, should you accept the project? Why or why not?

You should not apply the IRR rule in this case. Since the cash flow direction changes twice, there are two IRRs. Thus, the IRR rule should not be used to determine acceptance or rejection.

When utilizing the percentage of sales approach, managers:

consider the current production capacity level.

Andrew just calculated the present value of a $15,000 bonus he will receive next year. The interest rate he used in his calculation is referred to as the:

discount rate.

A pro forma statement indicates that both sales and fixed assets are projected to increase by 7 percent over their current levels. Given this, you can safely assume the firm:

is currently operating at full capacity.

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

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

A project has a net present value of zero. Given this information:

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