Fin 201
What is the price of a bond with a $1000 face value, a coupon rate of 13% paid annually, and matures in 25 years? Your required rate of return is 7.5%. CH 6 $1255.21 $1613.08 $1316.80 $1198.32 $1459.75
Answer: $1613.08 N = 25 I = 7.5% PMT = $1000 * 13% = $130 FV = $1000
The MBJ Company has fixed assets of $509 Million, Total Equity of $218 Million, Current Liabilities of $ 128M, and Long-Term Debt of $390 Million. Given this information, MBJ has Current Assets that equal: CH 2 $262 Million $119 Million $128 Million $227 Million None of the above
Answer: $227 Million Total Assets = Total Liabilities + Total Equity, so CA + $509mil (FA) = 128mil (CL) + 390mil (LTD) + 218mil (TE), thus CA = 736mil - 509mil = 227mil
A firm has projected current assets to be $32 million, fixed assets to be $55 million, total liabilities to be $49 million, and owner's equity to be $7 million. Given this information, what is the discretionary financing need? CH 4 $45 million $6 million $27 million $7 million $31 million
Answer: $31 million DFN = Assets - Liabilities - Equities = (32m + 55m) - 49m - 7m = $31m
A preferred stock pays a dividend of $3.50 in perpetuity. If the return required by shareholders is 11%, then the price per share for this preferred stock is: Ch 7 $35.08 $31.82 $38.50 $41.21 None of the above
Answer: $31.82 Price = 3.50/0.11 = $31.82
You bought a new car today which cost you $20,000. You financed the entire cost with a 5-year loan at 4.00%. If you make payments at the end of each month starting a month from now, how much is your monthly payment? CH 5 $374.38 $884.04 $850.04 $368.33
Answer: $368.33 Solution: Note: use 4 decimal places of accuracy for the interest rate. PV: 20,000.00 FV: 0.00 PMT: ($368.33) N: 60 I: 4/12=0.3333% Note: as with calculator keystrokes, you can interpret the black variables as known inputs and the highlighted variable as the solution. Red variables indicate a negative value.
You want $15,000, fifteen years from now. If you can earn 8% per year in your savings account, how much do you have to deposit in today? CH 5 $5,261 $4,729 $7,128 $6,818
Answer: $4,729 Solution: PV: ($4728.63) FV: $15,000.00 PMT: N: 15 I: 8.00% Note: as with calculator keystrokes, you can interpret the black variables as known inputs and the highlighted variable as the solution. Red variables indicate a negative value.
A firm just issued new shares of preferred stock that will pay a dividend of $4.60. If the return required by shareholders is 10%, then the price of the preferred stock is ____________. ch 7 $46 $0.46 $5.06 $460 $74.54
Answer: $46 Answer: Price = 4.6/.10 = 46
A firm has projected current assets to be $205 million, fixed assets to be $605 million, current liabilities to be $188 million, long-term debt to be $461 million, and owner's equity to be $106 million. Given this information, what is the discretionary financing need? CH 4 $94 million $55 million $17 million $38 million $9 million
Answer: $55 million Answer: DFN = A - L - E = (205+605) - (188+461) - 106 = 55
Suppose you want to establish a fund that will pay $5,000 a year forever to your favorite charity. If the discount rate is 8%, how much do you have to set a side today? CH 5 $67,500 $62,500 $70,000 $65,000
Answer: $62,500 Solution: PVperpetuity = PMT/I = 5000/0.08 = $62,500
Some company is considering a project with an initial cost of $46,000. The project will produce cash inflows of $18,000 a year for the first 2 years and $19,000 a year for the following 2 years. What is the net present value if the discount rate is 14%? ch 11 $7,713.87 $28,000.00 $53,713.87 $99,713.87
Answer: $7,713.87 Let's enter the cash flows into the cash flow worksheet of the financial calculator: CF0 = -46,000 CF1 = 18,000 (Freq = 1) CF2 = 18,000 (Freq = 1) CF3 = 19,000 (Freq = 1) CF4 = 19,000 (Freq = 1) I (the discount rate) = 14% Compute NPV = $7,713.87
Today, a round-trip plane ticket from Los Angeles to New York costs $350. If the average annual inflation rate is 2.5%, who much will the ticket cost 30 years from now? CH 5 $612.50 $658.24 $734.15 $763.81
Answer: $734.15 Solution: PV: 350.00 FV: ($734.15) PMT: N: 30 I: 2.50% Note: as with calculator keystrokes, you can interpret the black variables as known inputs and the highlighted variable as the solution. Red variables indicate a negative value.
You are planning to retire 40 years from now. If your retirement account pays an annual rate of 6% compounded monthly and you start making a monthly contribution of $400 a month today, how much will you have when you retire in 40 years? CH. 5 $787,429 $742,857 $796,596 $800,579
Answer: $800,579 Solution: Since you started today, you have to use the begin mode to calculate the future value. PV: FV: $800,579 PMT: (400.00) N: 40*12=480 I: 6/12=0.50% Mode: Begin Note: as with calculator keystrokes, you can interpret the black variables as known inputs and the highlighted variable as the solution. Red variables indicate a negative value.
Lost Inc. had Sales of $14 million, Operating Expenses of $4.75 million, COGS of $7.7 million, Depreciation Expense of $3.75 million and Interest Expense of $0.87 million. Calculate the firm's EBIT. CH 2 $3,750,000 $1,550,000 ($2,200,000) ($1,550,000)
Answer: ($2,200,000) Lost Inc.'s EBIT is $(2,200,000). See Income Statement below. Net Sales14,000,000less:COGS7,700,000Gross Profit6,300,000less:G&A Exp.4,750,000EBITDA1,550,000less: Dep exp.3,750,000EBIT $(2,200,000)less:Interest Exp.870,000Profit before tax EBT-3,070,000
What is the profitability index of the following stream of cash flows if the discount rate is 11%? ch 11 Year 0: -$21.4 Million Year 1: $7.8 Million Year 2: $8.1 million Year 3: $7.1 million Year 4: $6.4 million 0.99 1.01 1.03 1.05 1.08
Answer: 1.08 To get the profitability index, we first find the NPV of the project BUT we exclude the initial outlay in our NPV calculation. CF0 = 0 CF1= 7.8 CF2=8.1 CF3=7.1 CF4=6.4 I=11% Compute NPV = $23.01 M Now, we take our NPV and divide it by our initial outlay. 23.01/21.4=1.08
Use the following information on Project Michelle to answer the question. ch 11 Initial Outlay: $50 million Year 1: $10 million Year 2: $20 million Year 3: $20 million Year 4: $10 million Year 5: $5 million The required rate of return is 15%. What is the internal rate of return of the Project Michelle? 10.25% 10.50% 11.25% 30.00%
Answer: 10.50% IRR: NPV = 0 = -50 + 10/(1+IRR)^1 +20/(1+IRR)^2+20/(1+IRR)^3 +10/(1+IRR)^4 +5/(1+IRR)^5. The IRR is the rate that forces the equation to have a value of zero. There is no closed form solution, so this must be solved on a trial and error basis. The cash flow buttons on your calculator allow you to get a very accurate answer very quickly (your calculator uses trial and error, but absorbs the errors and provides you with a highly accurate solution).
YIPE Inc. is expecting to pay a dividend of $2.98 in the upcoming year and further anticipates growing the dividend at a constant rate of 5% per year, indefinitely. If the current share price is $39.87, then what is the cost of equity according to the Gordon Growth Model? ch 9 12.47% 13.84% 14.10% 14.85% None of the above
Answer: 12.47% Ke = D1/P + g = 2.98/39.87 + 5% = 12.47%
Given the following information, this stock's expected return is ______________. ch 8 Economic State Probability Return Recessionary .20 4.5% Normal .45 13.4% Expansionary .35 17.5% 13.06% 14.41% 12.59% 9.54% 16.44%
Answer: 13.06% .2*4.5 + .45*13.4 + .35*17.5 = 13.06%
Suppose that Company XYZ has a beta of 1.4. The expected return on the market is 14% and the risk free rate is 3.5%. According to the CAPM, the expected return for XYZ is ____________. ch 8 16.5% 15.2% 12.7% 19.6% 18.2%
Answer: 18.2% E[R] = 3.5 + 1.4(14-3.5) = 18.2%
In the bond market, firms raise debt financing directly from ________. CH 6 Consumer Banks Investors Loan officers Government agencies
Answer: Investors Found in the 2nd paragraph. Firms like bonds because typically they help defray costs by going straight to investors.
Which of the following gives the smallest effective yield? Assume that 1 year is 365 days. CH 5 18.60% APR compounded daily 19.00% APR compounded quarterly 20.40% APR compounded annually 18.65% APR compounded monthly
Answer: 18.65% APR compounded monthly Solution: To calculate, you can use the formula given in the learning resource or you can use your calculator to find the future value in one year of $100. For example, $100 invested for a year at 19% compounded quarterly grows to $120.40. Hence, the effective yield is (120.40/100) -1 = 20.4%. Repeat for all four possible combinations as shown in the table below. 18.65% compounded monthly gives the lowest effective yield and future value. PV: (100) (100) (100) (100) FV: 120.40 120.40 120.33 120.44 PMT: 0 0 0 0 N: 1 4 12 364 I: 20.4000% 4.7500% 1.5583% 0.0510% APR: 20.4% 19.0% 18.7% 18.6% Effective Yield: 20.40% 20,40% 20.33% 20.44%
NEXTOLL has a beta of 1.4. The expected return on the market is 15% while the risk free rate is 3.1%. Given this information, what is the return required by the shareholders? ch 9 24.10% 19.76% 17.41% 15.21% None of the above
Answer: 19.76% Rp = 3.1% + 1.4 (15% - 3.1%) = 19.76%
A recent start-up technology company that has a very low market cap is looking to calculate the return required by share holders using the build-up method. Historically long-term government bonds have been 5.8% and the equity risk premium is approximately 6%. Further, the start-up premium and the micro-cap premium are each 4%. Given this information, what is the return required by shareholders? ch 9 11.8% 15.8% 19.8% 24.1% None of the above
Answer: 19.8% Recall that the build-up method adds a premium for each element of risk, beginning with the risk-free rate of return Rp = 5.8% + 6% + 4% + 4% = 19.8%
Measuring risk and rate return) Given the following holding-period returns, calculate the average return for the market. ch8 Month Champ Inc. Market 1 2.8% 1.8% 2 3.2% 1.2% 3 9.0% 11.0% 4 -2.6% -1.0% 5 -2.9% -4.% 6 12.0% 8.0% 3.58% 11.01% 5.80% 2.72%
Answer: 2.72% The expected return is merely the average of the recorded returns. Month Champ Inc. Market Champ Variance Market Var 1 2.80% 1.80% 6.13611E-05 8.40278E-05 2 3.20% 1.20% 1.46944E-05 0.000230028 3 9.00% 11.00% 0.002934028 0.006861361 4 -2.60% -1.00% 0.003823361 0.001281261 5 -2.90% -4.70% 0.004203361 0.005500694 6 12.00% 8.00% 0.00708428 0.002791361 Average: 3.58% 2.72% Standard Deviation 6.02% 5.80%
A company has a beta of 1.5. The expected return on the market is 15% and the risk free rate is 3.5%. Given this information, the company has a cost of equity that is ______________. ch 9 20.75% 19.50% 17.25% 24.66% 21.55%
Answer: 20.75% Kcs = 3.5 + 1.5(15-3.5) =20.75%
What is the payback period for the following stream of cash flows if the discount rate is 16%? ch 11 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 -$102.4M $37.4M $33.1M $28.4M $24.9M $17.1M $15.9M 2.84 years 2.96 years 3.05 years 3.14 years 3.55 years
Answer: 3.14 years We want to see how many years it will take us to recover the initial cash outlay. So, we need to find out how many years it takes to make $102.5 million. After 1 year = $37.4 M After 2 years = 37.4 + 33.1 = $70.5 M After 3 years = $70.5 + 28.4 = $98.9 M At the end of year 3, we are only $3.5 M away from recovering the initial outlay (102.4 - 98.9 = $3.5 M). As you can see, in year 4 we make $24.9 million. This surpasses the amount needed to recover the IO. Therefore, we know that the payback period will be somewhere between year 3 and 4. To find the exact point in the year, we divide the remaining amount to payback by the total amount received for the year. 3.5/24.9 = .14 Thus, the payback period is 3.14 years.
(Built-up method) Assume a required rate of return of 23%, an equity risk premium of 8%, micro-cap premium of 5%, and a start-up risk premium of 6%. Use the build-up method to calculate the bond yield. ch 8 4% 12% 13% 42%
Answer: 4% Required rate of return 23% -Equity risk premium 8% - Micro-cap risk premium 5% -Start-up risk premium 6% ------------------------------------------- = Bond yield 4%
Suppose you bought a stock for $45 on January 1st. 30 days later you received a dividend of $2.2 and you sold the stock for $44.30. Given this information, annualized return is ______________. (Assume 360 days in a year). ch 8 25% 40% 59% 12% 9%
Answer: 40% (44.3-45)/45 + 2.2/45 = 0.0333. This is a 30 day return. We must multiply this by 360/30 or 12. 3.33%*12 = 40%
(Cost of debt) AlterU has the option to issue 15-year bonds at $1,180 with a flotation cost of 7%, tax rate of 34%, and a coupon rate of 6% (paid annually). What is AlterU firm's cost of debt prior to tax? ch 9 5.06% 4.34% 5.24% 5.88%
Answer: 5.06% The firm has to pay 7% of its price as a flotation cost, so the funds the firm will receive are: 1,180 x (1 - 0.07) = 1,097.40 which is your PV on your calculator. PV: -1,097.40 FV: 1,000 N: 15 PMT: 60 I: 5.06%** **this is the answer since you are looking for the "before-tax" cost of debt.
New York Pizza Kitchen has an leverage multiplier of 2.00, total asset turnover of 1.50 and an ROE 18.00%. What is New York Pizza Kitchen's net profit margin? CH 3 5.60% 6.00% 7.20% 8.00%
Answer: 6.00% Solution: ROE = Net Margin X TAT X Leverage Multiplier, so Net Margin = ROE/(TAT X Leverage Multiplier). Hence: net margin = .18/(1.5x2) = 6%
Another company plans to issue 20-year bonds with a face value of $1,000 and an annual coupon rate of 10%. The market price of similar bonds is $1,098. Flotation costs are estimated to be 5% for each bond. If interest payments are made annually, and the company's marginal tax rate is 34%, what is the after-tax cost of debt? ch 9 5.89% 6.28% 8.03% 9.51%
Answer: 6.28% FV = -$1,000 PMT = -$100 N = 20 years PV = $1,098 before including flotation costs; $1,098×(1-.05) = $1,043.10 after including flotation costs. Compute I/Y = 9.511% After-tax cost of debt = 9.511%×(1-.34) = 6.28%
If you deposit $10,000 in an account with annual rate of 9% compounded semi-annually, how long will it take for you to have $2,000,000 in the account? CH 5 53.43 years 60.18 years 61.48 years 120.37 years
Answer: 60.18 years Solution: Step 1: Calculate the number of semi-annual periods PV: (10,000.00) FV: $2,000,000.00 PMT: 0 N: 120.3701106 I: 4.50% Note: as with calculator keystrokes, you can interpret the black variables as known inputs and the highlighted variable as the solution. Red variables indicate a negative value. Step2: Convert semi-annual periods into years. # of Years = 120.37/2 = 60.18 years
What is the value of a bond? CH 6 The present value of its cash flows The future value of its cash flows The face value of the bond The face value of the bond plus coupon payments The coupon payments of the bond
Answer: The present value of its cash flows
Job Cart Inc. has a preferred stock paying a 7% dividend on a $180 par value. The company issues new preferred stock, and flotation cost will be 12% of the current price of $195.74. What is the cost of preferred stock? ch 9 6.44% 7.00% 7.31% 7.95%
Answer: 7.31% Kps = Dps / Vps The dividend is equal to 7% of the Par Value of the Stock or .07*180 = $12.60 Flotation costs are .12 * 195.74 = $23.4889 Kps = 12.60/(195.74 - 23.4889) = 7.31%
A zero-coupon bond that is currently priced at $456, has a face value of $1,000, and matures in 10 years. What is the yield to maturity of this bond? ch 6 4.00% 6.54% 8.17% 9.25%
Answer: 8.17% FV = -1,000, PV = $456, PMT = 0, N = 10, Compute I/Y = 8.17%
(Weighted average cost of capital) Great Minds Inc. has a target capital structure of 45% debt, 35% preferred stock, and 20% Common Stock. The before-tax costs of debt, preferred stock, and common stock are 7%, 9%, and 15%, respectively. What is Great Mind's after-tax WACC? Assume a 35% tax rate. ch 9 8.20% 6.20% 5.71% 5.58%
Answer: 8.20% <p style="" margin-left:.25in;text-indent:-.25in"="">WACC = 0.45 X (7% x (1 - 0.35)) + 0.35 x 9% + 0.20 x 15% = 8.20% WACC = 2.048 + 3.15 + 3 = 8.20%
Another Co. expects to issue a $1,000 face-value bond that matures in 10 years. The annual coupon rate is 8.25% and interest payments are expected to be paid annually. Similar bonds are currently priced at 98.4% of face value. Given this information, what is the required return by bond holders? ch 6 8.49% 8.77% 9.08% 9.26% None of the above
Answer: 8.49% PV FV PMT N I -984 1000 82.5 10 8.49%
Suppose a firm has a net profit margin of 15%, sales of $155 million, assets of $312 million, and owner's equity of $223 million. If the dividend payout ratio is 10%, what is the firm's sustainable growth rate? CH 4 9.38% 10.43% 11.55% 12.88% Cannot be determined
Answer: 9.38% Answer: SGR = ROE*(1-b) = NI/S*S/A*A/E*(1-b) = .15*(155/312)*(312/223)*(1-.1) = .0938
Which of the following is NOT an example of factors that affect systematic risk? ch 8 An unexpected change in cash flows due to tax changes Business Cycle Changes A company's labor force goes on strike An unexpected change in interest rates
Answer: A company's labor force goes on strike "A company's work force goes on strike" is an example of firm-specific risk
If a security's standard deviation is high this indicates ALL BUT THE FOLLOWING: ch 8 A greater uncertainty of the security's return A greater total risk of the security A greater likelihood of obtaining expected returns A higher volatility in the security's expected return
Answer: A greater likelihood of obtaining expected returns
How does a perpetuity differ from an ordinary annuity? CH 5 A perpetuity has payments that go on forever while an ordinary annuity has a limited numbers of cash flows. A perpetuity has only a limited numbers of cash flows while an ordinary annuity has payments that continue forever. A perpetuity is another name for an annuity due. A perpetuity is another name for an ordinary annuity.
Answer: A perpetuity has payments that go on forever while an ordinary annuity has a limited numbers of cash flows.
Cost of capital includes: ch 9 the coupon payments to the bondholders. the opportunity cost of the equity holders All of the above None of the above
Answer: All of the above
Which of the following statements correctly defines the difference between preferred stock and common stock? ch 7 Preferred shareholders have more of a claim to dividends than common stockholders Preferred shareholders do not have the voting rights that common stockholders have Common shareholders have more exposure to variable share prices than preferred shareholders All of the above None of the above
Answer: All of the above
Which of the statements correctly identifies the disadvantages of the payback period method? ch 11 The payback period does not identify the varying levels of risk in a project The payback period does not account for the timing of the project's cash flows The payback period does not account for the varying levels of risk in a project All of the above None of the above
Answer: All of the above
Which of the following ways can a firm decrease it DFN? CH 4 Reduce sales growth Recheck existing capital constraints Reduce the dividend payout Improve net margin All of the above
Answer: All of the above Answer: All of these ways will reduce DFN.
The Net Present Value is a measure of: ch 11 How much value is added to the firm as a result of undertaking the project. Which projects should be accepted and rejected. The value of a project to the firm. All of the above.
Answer: All of the above.
Which of the following is true with respect to accrual accounting? CH 2 Accrual accounting yields easily interpreted financial statements. Cash based accounting is much better when analyzing the operations of the firm. Amounts reported on the financial statements can be managed or manipulated without violating GAAP. Net income is the amount of cash a company receives from customers less cash payments to vendors and employees.
Answer: Amounts reported on the financial statements can be managed or manipulated without violating GAAP. Solution: Even though GAAP provides direction for the creation of financial statements, the accrual accounting system is complex and requires lots of input from management. Hence, the amount reported on almost all line items is subject to managerial discretion (which can lead to manipulation).
A spontaneous account refers to: ch 4 An account on the balance sheet that changes when net income is changed An account on the income statement that cyclically appears An account on the balance sheet and income statement that is calculated using the time value of money An account on the balance sheet and income statement that varies automatically when sales are changed None of the above
Answer: An account on the balance sheet and income statement that varies automatically when sales are changed
Which of the following best describes the difference between an annuity due and an ordinary annuity? CH. 5 An ordinary annuity pays at the beginning of the period, but an annuity due pays at the end. An ordinary annuity has a limited life, but an annuity due goes on forever. An ordinary annuity goes on forever, but an annuity due has a limited life. An ordinary annuity pays at the end of the period, but an annuity due pays at the beginning.
Answer: An ordinary annuity pays at the end of the period, but an annuity due pays at the beginning. Solution: The cash flows in an ordinary annuity come at the end of the period. The cash flows in an annuity due come at the beginning of the period.
The balance sheet equation states: Assets = Liabilities + Owners' Equity. Which of the following best describes the logic behind this equation? CH 2 Assets must generate revenues equal to the firm's liabilities and owners' equity. Assets have to be financed by either by other people's money or the owner's money. Assets are financial resources used to obtain debt and equity. A firm must use assets to payback debt and equity.
Answer: Assets have to be financed by either by other people's money or the owner's money. Solution. The assets are uses of finance while liabilities and owners' equity are the sources of finance. That is, all of the firm's assets must be financed either by using other's money (liabilities) or the firm's owner's money (owner's equity).
Which of the following steps is not used to calculate the firm's future Discretionary Financing Needed (DFN). CH 4 Project Sales and Expenses Identify the discretionary accounts that will be held constant with an increase in sales Calculate retained earnings Calculate Cash Flows from Operations
Answer: Calculate Cash Flows from Operations Steps to determine DFN: 1. Project Sales and Expenses 2. Forecast the change in spontaneous balance sheet accounts 3. Identify the discretionary accounts that will be held constant with an increase in sales 4. Calculate retained earnings 5. Determine the total amount of financing needed 6. Calculate discretionary financing needed (e.g. projected total assets - projected total liabilities - projected owner's equity)
If a company skips a dividend payment to preferred shareholders, then the company _____________. ch 7 Must pay the dividend to common shareholders Must repurchase shares from both common and preferred shareholders Cannot pay any dividends to common shareholders until the preferred dividend is paid All of the above None of the above
Answer: Cannot pay any dividends to common shareholders until the preferred dividend is paid
The net present value of a project is smaller when: ch 11 The required rate is lower Cash inflows are pushed farther into the future The initial outlay is decreased None of the above
Answer: Cash inflows are pushed farther into the future The time value of money means that pushing the inflows farther into the future makes their value smaller today. If the cash inflows are delayed, then the present value of the cash inflows decreases which decreases the NPV. Decreasing the required return (aka discount rate) or the initial outlay will increase the NPV.
In order to determine the future value of some lump sum, we must use the process of _________________. CH 5 Discounting Compounding Annuity analysis Risk analysis None of the above
Answer: Compounding Compounding means moving a sum of money further into the future.
If a company called Fin201 Inc. went out of business and was liquidated, which of the following is the correct order that the following stakeholders and owners would be paid?(i.e. paid first, paid second, paid third) ch 7 Preferred Stock, Debt Holders, Common Stock Debt Holders, Preferred Stock, Common Stock TA's, Professor Cardell, Students, Bugs, Dirt Common Stock, Debt Holders, Preferred Stock
Answer: Debt Holders, Preferred Stock, Common Stock
In the basic framework, a firm can allocate net income to one of two items. These two items are: CH 2 Additional Paid In Capital and Retained Earnings Dividends and Retained Earnings Dividends and Common Stock Inventory and Retained Earnings
Answer: Dividends and Retained Earnings Solution: Net income is either paid out as dividends or retained in the firm.
Which one of the following is NOT a factor impacting the DuPont Decomposition? CH 3 Dividends as a percent of net income. Portion of assets financed by debt. Earnings as a percentage of sales. Sales as a percentage of total assets.
Answer: Dividends as a percent of net income. Solution: The DuPont equation (i.e., ROE = net margin x total asset turnover x leverage multiplier) helps identify how the firm generates ROE. Dividend payout is not included in the DuPont decomposition.
Firms A and B operate in the same industry. Firm A has a fixed asset turnover ratio of 1.22 while Firm B has a fixed asset turnover ratio of 0.88. Holding all else constant, given this information, which of the following conclusions can be made? ch 3 A. Firm B is considered more efficient than Firm A with the use of its fixed assets. B. Firm A is considered more efficient that Firm B with the use of its fixed assets. C. Firm A is generating sales with its fixed assets at a greater rate than Firm B D. A & C E. B & C
Answer: E. B & C The correct answer is B and C. Higher the fixed asset turnover, higher the efficiency of using the fixed asset to generate its sales.
T or F - If interest rates increase then bond prices will also increase. CH 6
Answer: False False - bond prices and interest rates are inversely related. The interest rate on the bond (or the yield to maturity) is the discount rate. As the discount rate gets larger, the price of the bond will decrease.
Which type of risk can be diversified away? ch 8 Systematic risk Firm-specific risk The entire standard deviation None of the above
Answer: Firm-specific risk Recall - Firm specific risk can be diversified away. Sometimes this risk is called diversifiable risk. The entire standard deviation is made up of firm-specific risk and systematic risk. Systematic risk cannot be diversified away.
What is sales revenue minus cost of goods sold? CH 2 Net Income EBIT Gross Income Dividends
Answer: Gross Income Gross Income. By definition, Sales minus Cost of goods sold (COGS) equals Gross Income, also referred to as "Gross Profit" or "Gross Loss".
Which of the following is NOT one of the ways that firms can manipulate their earnings? CH 2 Relaxing of credit standards Using a sale-leaseback arrangement Switch between LIFO and FIFO Decreasing R&D on the books Hiring more sales force
Answer: Hiring more sales force All except "hiring more sales force" are discussed in the section above and do not impact "real" revenues or earnings. Hiring more people to sell product or service can actually increase "real" revenues and earnings, hence it's not a manipulation.
The purpose of financial forecasting can best be described as an answer to which of the following questions: ch 4 What product will produce the most in sales during the next year? How will an increase in the firm's tax rate affect the firm's net income? How much financing will the firm need in the future? What is the firm's current market share?
Answer: How much financing will the firm need in the future?
Firm A and Firm B are perfectly negatively correlated. If your portfolio contains an equal dollar amount of stock in Firm A and B, what will be the risk of the portfolio? ch 8 Firm A's stock will influence it more because its standard deviation is greater Firm B's stock will influence it more because its variance is greater Firm A will influence it more because its variance is greater It will be riskless
Answer: It will be riskless if two assets are perfectly negatively correlated then we can eliminate all risk.
Holding all else equal, higher levels of depreciation on an income statement will lead to: CH 2 Higher net income Higher EBIT Higher tax expense Lower tax expenses Lower Costs of the Good Sold
Answer: Lower tax expenses
The period of time for which a bond remains outstanding is called: CH 6 Coupon date Face value Maturity Issue date Expiration date
Answer: Maturity
What are bonds issued by cities, counties, or states called? ch 6 Treasury Bonds Municipal Bonds Junk Bonds Samurai Bonds
Answer: Municipal Bonds Municipal bonds are issued by cities, counties, or states.
Some Co. is planning to pay a dividend of $5.60 in the next year and expects to grow the dividend at a constant rate of 4% per year, indefinitely. If the required rate of return by shareholders is 13%, then the price of this stock should be: ch 7 $43.10 $52.66 $63.72 $67.10 None of the above
Answer: None of the above Price = 5.60/(0.13 - 0.04) = $62.22
A company currently has $50 million in sales, $23 million in current assets, $39 million in fixed assets, $15 million in Accounts Payable. The fixed assets are currently operated with fully capacity and will change proportionally with the sales growth. If sales are projected to $70 million, then current assets are projected to be ___________, fixed assets are projected to be ____________, and Accounts Payable are projected to be ____________. CH 4 $19.4 million; $45.8 million; $11.2 million $36.3 million; $58.6 million; $21.0 million $40.1 million; $74.1 million; $18.7 million $22.1 million; $41.4 million; $14.5 million None of the above
Answer: None of the above Proj CA = 23/50 X 70 = $32.2m Proj FA = 39/50 X 70 = $54.6m Proj AP = 15/50 X 70 = $21.0m
Which of the following elements on a balance sheet is not a spontaneous account? CH 4 Cash Notes Payable Inventory Accounts Payable Accounts Receivable
Answer: Notes Payable
Accounts payable represent money a firm: CH 2 Owes to a landlord or leasing agent for rental costs. Owes to suppliers for purchases made on credit. Owes to its employees. Owes to a lender under a borrowing arrangement with an explicit interest rate.
Answer: Owes to suppliers for purchases made on credit. Solution: Accounts payable represent money owed to suppliers for the purchase of materials on credit.
Which of the following is NOT a characteristic of common stock? ch 7 Pays fixed dividends. Has no maturity. Has the lowest priority to claim the asset in case of bankruptcy. Has voting rights.
Answer: Pays fixed dividends.
Which of the following securities is considered a hybrid security? CH 7 Common Stock Preferred Stock Bond Annuity None of the above
Answer: Preferred Stock
Which of the following securities represents ownership in the firm? ch 7 Annuity Bond Preferred stock None of the above All of the above
Answer: Preferred stock
OIROI is a ratio measures not only efficiency, but also: CH 3 Liquidity Leverage Profitability Only efficiency
Answer: Profitability
For risk-specific projects, we typically analyze other firms that are already in the new market where we are moving to infer our WACC. This is called a: ch 9 Free style Similitude Pure play Comparable
Answer: Pure play From text: So if we can't use the WACC, what should we use? For risk-specific projects, we typically analyze other firms that are already in the new market where we are moving. This is called a pure play. We look at their costs of capital and infer, from theirs, how we should adjust ours.
Which one of the following is NOT true with respect to the usefulness of ratios? CH 3 Ratio creation/analysis is NOT governed by GAAP. Ratio analysis help identify key areas for further investigation. Ratios are useful in the comparison of firms with different size and/or strategy. Ratios provide definitive answers to company performance questions.
Answer: Ratios provide definitive answers to company performance questions. Solution: Ratios do not answer questions; rather, ratios help you ask the right questions to understand firm performance. Ratios do standardize financial data so you can compare different firms.
Stockholders have a __________ claim on firm earnings and assets. ch 7 Fixed Residual Contracted Guaranteed
Answer: Residual From the reading: "First, stockholders have a residual claim on the earnings and the assets of the company. This means that each year after the company pays for its operations and pays its creditors, any residual or remaining earnings belong to the shareholders."
What is beta in financial terms? Ch 8 The amount of systematic risk in an asset The market premium A firm's expected return The beginning of time (hint = not this one!)
Answer: The amount of systematic risk in an asset
Which of the following is an ideal criteria for the methods used to evaluate a capital investment project? ch 11 All cash flows should be included, which might consist of opportunity costs, sunk costs, and cannibalization costs. The method must account for the success of previous projects The method should set required risk to be constant for all projects that will be considered The method should consider the timing of the project's cash flows None of the above
Answer: The method should consider the timing of the project's cash flows
Current assets are normally listed on the balance sheet in the order of: CH 2 The largest dollar amount to the smallest dollar amount. The most liquid to the least liquid. The most commonly used to the least commonly used. There is no specific order for current assets
Answer: The most liquid to the least liquid. Current assets are the assets expected to generate cash within one year (or one operating cycle, whichever is longer). Current assets are listed in the order of the most to the least liquid. Cash always comes first, followed by marketable securities, accounts receivable, and inventory.
What is the main goal of financial forecasting? ch 4 To provide a detailed map of a firm's future To understand the implications of today's decisions on tomorrow's performance. To project sales so investors can adjust stock prices. To project net income and dividends for the firm.
Answer: To understand the implications of today's decisions on tomorrow's performance.
The required rate of return on a bond is called the: CH 6 Yield to maturity Call yield Current yield Liquidity premium Risk premium
Answer: Yield to maturity
The decision rule for using the NPV states that when the NPV is greater than ______________ the project should be accepted. ch 11 The initial outlay Zero The IRR One None of the above
Answer: Zero
If the average debt ratio in the industry is 65%, then in 20x1: CH 3 eBuy is more aggressively financed than the industry. eBuy has more debt financing than the industry norm. eBuy is more conservatively financed than the industry average. eBuy cannot compete well in its industry.
Answer: eBuy is more conservatively financed than the industry average. eBuy has a lower debt ratio than the industry, therefore eBuys is more conservatively financed than the industry norm. Having more debt financing (and therefore a higher debt ratio) means the company is more aggressively financed. The debt ratio alone doesn't tell us about eBuy's competitive position. Debt ratio = Total Liabilities/Total Assets = 3661/6450 = 0.57
Which of the following statements about a bond are true? CH 6 i. A bond is a fixed-income security ii. The bond's interest payments vary each year with the market iii. A bond acts like an interest-only loan Only i i and ii i and iii ii and iii i, ii, and iii
Answer: i and iii Many bonds make scheduled interest payments of a fixed amount over the life of the bond with the full face value being paid in full at maturity.
If you are interested in working as a financial planner, or want to hire someone to manage your personal assets, which professional designation does the text mention is important? CH 1 CPA CFP CFA FPM
CPA CFP <--- CFA FPM
Which of the following is NOT given as an example of an Institution's setting? CH 1 Consumer Bank Commerical Bank Insurance Company Pension Company All of the above are mentioned as examples.
Consumer Bank Commerical Bank Insurance Company Pension Company All of the above are mentioned as examples. <---
How do you calculate EVA? ch 3
EVA = NOPAT - (WACC X Costly Capital) Costly capital = equity + interest-bearing debt = 6005 o Note: Interest-bearing debt does NOT include accounts payable (all other liabilities are included)
Which of the following would a corporate finance professional NOT work with? CH 1 Financial policy implementation Tax strategies Investing and financing decisions Supply chain management Cash management
Financial policy implementation Tax strategies Investing and financing decisions Supply chain management <--- Cash management
Which of the following is NOT one of the main three sub-specialties of finance? CH 1 Investments Real Estate Corporate Finance Institutions
Investments Real Estate <-- Corporate Finance Institutions
Which group would most likely say something like, "No matter how good your finance people are, if you don't have any sales, you don't have a business." CH 1 Marketing Finance Operations OB/HR
Marketing <-- Finance Operations OB/HR
The text mentions some historical investment banks. Which of the following is NOT one of them? CH 1 Merrill Lynch Morgan Stanley Zions International Lehman Brothers Goldman Sachs
Merrill Lynch Morgan Stanley Zions International <-- Lehman Brothers Goldman Sachs
How do you calculate ROE? CH 3
Net Income/Equity
Which of the following areas is typically in charge of the actual production of the product? CH 1 OB/HR Strategic management Accounting Operations Marketing
OB/HR Strategic management Accounting Operations <-- Marketing
Which of the following deals mainly with the people issues of a firm? CH 1 Operations Finance OB/HR Accounting
Operations Finance OB/HR <-- Accounting
Which of the following is NOT mentioned as an area in which an asset manager may invest when we think of the Investments sub-field? CH 1 PP&E Venture capital Mutual funds Real estate All of the above are
PP&E <--- Venture capital Mutual funds Real estate All of the above are
Which of the following is NOT another name for corporate finance? CH 1 Financial Management Managerial Finance Business Finance Quantitative Finance
Quantitative Finance
What is Total Asset Turnover? Ch 3
Total asset turnover is defined as sales/Total assets. This tells us that for every dollar in assets the firm generates about $.45 in sales.
What does a negative EVA mean? ch 3
a negative value for EVA indicates that the management team destroyed value during the period.
What is the Current Ratio? Ch 3
current assets/current liabilities
