FIN 301 Business Finance

Quick ratio formula (acid test)

(Current assets - Inventory) / Current Liabilities

Cash Coverage ratio

(EBIT + Depreciation) / Interest

Total debt ratio

(Total assets - Total equity) / Total assets

Days' Sales in Inventory Ratio

365/inventory turnover

days sales in receivables ratio

365/receivables turnover

Klingon Widgets, Inc., purchased new cloaking machinery five years ago for $10 million. The machinery can be sold to the Romulans today for $9.4 million. Klingon's current balance sheet shows net fixed assets of $8 million, current liabilities of $810,000, and net working capital of $247,000. If all the current accounts were liquidated today, the company would receive $1.14 million cash. A. What is the book value of Klingon's total assets today? B. What is the sum of the market value of NWC and the market value of fixed assets?

A. To find the book value of current assets, we use: NWC = CA - CL. Rearranging to solve for current assets, we get: CA = NWC + CL CA = $247,000 + 810,000 CA = $1,057,000 B. The market value of current assets and fixed assets is given, so: Book value CA $1,057,000 NWC $1,140,000 Book value NFA _8,000,000_ _MV NFA 9,400,000_ Book value assets $9,057,000 Total $10,540,000

You are planning to save for retirement over the next 25 years. To do this, you will invest $850 per month in a stock account and $450 per month in a bond account. The return of the stock account is expected to be 10.5 percent, and the bond account will pay 6.5 percent. When you retire, you will combine your money into an account with a 7.5 percent return. How much can you withdraw each month from your account assuming a 20-year withdrawal period?

Although the stock and bond accounts have different interest rates, we can draw one time line, but we need to remember to apply different interest rates. The time line is: We need to find the annuity payment in retirement. Our retirement savings ends and the retirement withdrawals begin, so the PV of the retirement withdrawals will be the FV of the retirement savings. So, we find the FV of the stock account and the FV of the bond account and add the two FVs. Stock account: FVA = $850[{[1 + (.105 / 12)]^300 − 1} / (.105 / 12)] Stock account: FVA = $1,228,648.53 Bond account: FVA = $450[{[1 + (.065 / 12)]^300 − 1} / (.065 / 12)] Bond account: FVA = $336,976.44 So, the total amount saved at retirement is: $1,228,648.53 + 336,976.44 = $1,565,624.96 Solving for the withdrawal amount in retirement using the PVA equation gives us: PVA = $1,565,624.96 = $C[1 - {1 / [1 + (.075 / 12)]^240} / (.075 / 12)] C = $1,565,624.96 / 124.13213 C = $12,612.57 withdrawal per month Calculator solution: Stock account: N= 300. I/Y= 10.5%/12. PMT= $850. Solve FV= $1,228,648.53 Bond account: N= 300. I/Y= 6.5%/12. PMT= $850. Solve FV= $336,976.44 Savings at retirement = $1,228,648.53+$336,976.96 N= 240. I/Y= 7.5%/12. PV= $1,565,624.96 Solve PMT= $12,612,57

The most recent financial statements for Hornick, Inc., are shown here (assuming no income taxes): Income Statement Balance Sheet Sales$9,600 Assets$16,000 Debt$4,000 Costs 7,470 Equity 12,000 Net income$2,130 Total$16,000 Total$16,000 Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next year's sales are projected to be $11,904. What is the external financing needed?

An increase of sales to $11,904 is an increase of: Sales increase= ($11,904 - 9,600) / $9,600 Sales increase=.24, or 24% Assuming costs and assets increase proportionally, the pro forma financial statements will look like this: Pro forma income Pro forma balance Sales. $11,904.00 Assets $19,840.00 Debt $4,000.00 Costs 9,262.80 Equity 14,641.20 Net income $2,641.20 Total$19,840.00 Total $18,641.20 If no dividends are paid, the equity account will increase by the net income, so: Equity= $12,000 + 2,641.20 Equity= $14,641.20 So the EFN is: EFN= Total assets - Total liabilities and equity EFN= $19,840 - 18,641.20 EFN= $1,198.80

Locate the Treasury issue in Figure 7.4 maturing in August 2039. Assume a par value of $10,000. Maturity. Coupon. Bid Asked Chg. Asked Yield 8/15/39. 4.5. 114.7656. 114.8438 -0.6953 3.604 What is its coupon rate? What is its bid price in dollars? What was the previous day's asked price in dollars?

Bid price = 114.7656 = 114.7656% Bid price = (114.7656 / 100)($10,000) Bid price = $11,476.56 Previous day's asked price = Today's asked price - Change = 114.8438 - (-.6953) = 115.5391 Previous day's dollar price = 115.5391 = 115.5391% = (115.5391 / 100)($10,000) = $11,553.91

A stock has a beta of 1.06, the expected return on the market is 12 percent, and the risk-free rate is 3.5 percent. What must the expected return on this stock be?

CAPM states the relationship between the risk of an asset and its expected return. CAPM is: E(Ri) = Rf + [E(RM) − Rf] × βi Substituting the values we are given, we find: E(Ri) = .035 + (.12 − .035)(1.06) E(Ri) = .1251, or 12.51%

Year Cash Flow 0 -$17,300 1 9,600 2 8,500 3 5,000 a. What is the profitability index for the set of cash flows if the relevant discount rate is 9 percent? b. What is the profitability index for the set of cash flows if the relevant discount rate is 14 percent? c. What is the profitability index for the set of cash flows if the relevant discount rate is 21 percent?

CF0 $0 C01 $9,600 C02 $8,500 C03 $5,000 I = 9% 14% 21% NPV = a. $19,822.54 b. 18,336.38 c. $16,561.87

What is the IRR of the following set of cash flows? Year Cash Flow 0 -$17,000 1 7,700 2 9,000 3 7,500

CF0 -$17,000 C01 $7,700 C02 $9,000 C03 $7,500 IRR= 20.03%

A project that provides annual cash flows of $17,600 for nine years costs $82,000 today. a. What is the NPV for the project if the required return is 8 percent? b. At a required return of 8 percent, should the firm accept this project? c. What is the NPV for the project if the required return is 20 percent? d. At a required return of 20 percent, should the firm accept this project? e. At what discount rate would you be indifferent between accepting the project and rejecting it?

CF0 -$82,000 C01 $17,600 F01 9 I= 8% 20% NPV a. $27,945.23 c. -$11,054.99 IRR e. 15.68% b. accept d. reject

A Japanese company has a bond outstanding that sells for 95 percent of its ¥100,000 par value. The bond has a coupon rate of 6.2 percent paid annually and matures in 18 years. What is the yield to maturity of this bond?

Calculator: N= 18. Solve I/Y= 6.69%. PV= 95,000. PMT= 6,200. FV= 100,000

Cash Ratio Formula

Cash / Current Liabilities

Which of the following ratios is the most stringent criteria for determining a firm's short-term solvency? Times Interest Earned Current Ratio Cash Ratio Total Debt Ratio Quick Ratio

Cash Ratio

The 2014 balance sheet of Sugarpova's Tennis Shop, Inc., showed long-term debt of $5.6 million, and the 2015 balance sheet showed long-term debt of $6 million. The 2015 income statement showed an interest expense of $140,000. What was the firm's cash flow to creditors during 2015?

Cash flow to creditors = Interest paid - Net new borrowing Cash flow to creditors = Interest paid - (LTDend - LTDbeg) Cash flow to creditors = $140,000 - ($6,000,000 - 5,600,000) Cash flow to creditors = -$260,000

A project has the following cash flows: Year Cash Flow 0 -$16,300 1 7,000 2 8,300 3 6,800 a. What is the NPV at a discount rate of zero percent? b. What is the NPV at a discount rate of 12 percent? c. What is the NPV at a discount rate of 19 percent? d. What is the NPV at a discount rate of 28 percent?

Cf0 -$16,300 C01 $7,000 C02 $8,300 C03 $6,800 a. b. c. d. I = 0% 12% 19% 28% NPV = $5,800 $1,406.81 -$521.25 -$2,522.84

The 2014 balance sheet of Steelo, Inc., showed current assets of $2,915 and current liabilities of $1,415. The 2015 balance sheet showed current assets of $2,900 and current liabilities of $1,575. What was the company's 2015 change in net working capital, or NWC?

Change in NWC = NWCend - NWCbeg Change in NWC = (CAend - CLend) - (CAbeg - CLbeg) Change in NWC = ($2,900 - 1,575) - ($2,915 - 1,415) Change in NWC = $1,325 - 1,500 = -$175

Inventory turnover ratio

Cost of goods sold / inventory

Current Ratio Formula

Current Ratio = Current Assets / Current Liabilities

Interval measure formula

Current assets / Average daily operating costs

Short-term solvency or liquidity ratios

Current ratio Quick ratio Cash NWC to total assets Interval measure

Find the APR, or stated rate, in each of the following cases Number of Times Compounded Effective Rate (EAR) Semiannually 11.2% Monthly 12.1% Weekly 9.8% Infinite 13.5%

EAR = [1 + (APR / m)]^m − 1 APR = m[(1 + EAR)1/m - 1] EAR = .112 = [1 + (APR / 2)]^2 − 1. APR = 2[(1.112)^(1/2) − 1] = .1090 or 10.90% Solve NOM= 10.90% EFF= 11.2% C/Y= 2 EAR = .121 = [1 + (APR / 12)]^12 − 1 APR = 12[(1.121)^(1/12) − 1] = .1148, or 11.48% Solve NOM= 11.48% EFF= 12.1% C/Y= 12 EAR = .098 = [1 + (APR / 52)]^52 − 1 APR = 52[(1.098)^(1/52) − 1] = .0936, or 9.36% Solve NOM= 9.36% EFF= 9.8% C/Y= 52 Solving the continuous compounding EAR equation: EAR = e^q − 1 APR = ln(1 + EAR) APR = ln(1 + .135) APR = .1266, or 12.66%

Find the APR, or stated rate, in each of the following cases # of times compounded EAR Semiannually. 10.8% Monthly 11.7 Weekly 9.4 Infinite 13.1

EAR = [1 + (APR / m)]^m − 1 We can now solve for the APR. Doing so, we get: APR = m[(1 + EAR)^(1/m) - 1] EAR = .108 = [1 + (APR / 2)]^2 − 1 APR = 2[(1.108)^(1/2) − 1] = .1052, or 10.52% EAR = .117 = [1 + (APR / 12)]^12 − 1 APR = 12[(1.117)^(1/12) − 1] = .1112, or 11.12% EAR = .094 = [1 + (APR / 52)]^52 − 1 APR = 52[(1.094)^(1/52) − 1] = .0899, or 8.99% Solving the continuous compounding EAR equation: EAR = e^q − 1 We get: APR = ln(1 + EAR) APR = ln(1 + .131) APR = .1231, or 12.31% Calculator: Solve NOM= 10.52% EFF= 10.8% C/Y= 2 Solve NOM= 11.52% EFF= 11.7% C/Y= 12 Solve NOM= 8.99% EFF= 9.4% C/Y= 52

a. Fill in the missing numbers for the following income statement. Sales $677,900 Costs 432,800 _Depreciation 105,400_ EBIT $ ? _Taxes (34%) ? _ Net income. ? b. Calculate the OCF. c. What is the depreciation tax shield?

EBIT = 139,700 Taxes= 47,498 Net Income = 92,202 OCF = EBIT + Depreciation − Taxes OCF = $139,700 + 105,400 − 47,498 OCF = $197,602 Depreciation tax shield = TC(Depreciation) Depreciation tax shield = .34($105,400) Depreciation tax shield = $35,836

Times interest earned ratio

EBIT/Interest

Enterprise value-EBITDA ratio

Enterprise Value / EBITDA

Cannonier, Inc., has identified an investment project with the following cash flows. Year Cash Flow 1 $1,010 2 1,240 3 1,460 4 2,200 a. If the discount rate is 7 percent, what is the future value of these cash flows in Year 4? b. What is the future value at a discount rate of 13 percent? c. What is the future value at a discount rate of 22 percent?

FV = PV(1 + r)^t FV@7% = $1,010(1.07)^3 + $1,240(1.07)^2 + $1,460(1.07) + $2,200 = $6,419.17 FV@13% = $1,010(1.13)^3 + $1,240(1.13)^2 + $1,460(1.13) + $2,200 = $6,890.48 FV@22% = $1,010(1.22)^3 + $1,240(1.22)^2 + $1,460(1.22) + $2,200 = $7,660.82 Notice, since we are finding the value at Year 4, the cash flow at Year 4 is added to the FV of the other cash flows. In other words, we do not need to compound this cash flow. On BAII plus: CF0. $0 C01. $1,010 C02. $1,240 C03. $1,460 C04. $2,200 I= 7 I= 13 1= 22 NPV. $6,419.17. $6,890.48. $7,660.82

Assume the total cost of a college education will be $250,000 when your child enters college in 17 years. You presently have $72,000 to invest. What annual rate of interest must you earn on your investment to cover the cost of your child's college education?

FV = PV(1 + r)^t Solving for r, we get: r = (FV / PV)^1/t - 1 r = ($250,000 / $72,000)^(1/17) - 1 r = .0760, or 7.60% On BAII Plus: N= 17 I/y=7.6% Solve PV=$72,000 PMT 0 FV: $250,000

You are planning to make monthly deposits of $310 into a retirement account that pays 9 percent interest compounded monthly. If your first deposit will be made one month from now, how large will your retirement account be in 35 years?

FVA = C{[(1 + r)^t − 1] / r} FVA = $310[{[1 + (.09 / 12)]^420 - 1} / (.09 / 12)] FVA = $911,953.19 Calculator: N= 35 x 12. I/Y= 9%/12. PMT= $310. FV= $911,953.19

You are planning to make monthly deposits of $370 into a retirement account that pays 9 percent interest compounded monthly. If your first deposit will be made one month from now, how large will your retirement account be in 35 years?

FVA = C{[(1 + r)^t − 1] / r} FVA = $370[{[1 + (.09 / 12)]^420 - 1} / (.09 / 12)] FVA = $1,088,460.26 N= 35 x 12. I/Y= 9%/12. PMT= $370 Solve FV= $1,088,460.26

You are planning to make monthly deposits of $390 into a retirement account that pays 8 percent interest compounded monthly. If your first deposit will be made one month from now, how large will your retirement account be in 25 years?

FVA = C{[(1 + r)^t − 1] / r} FVA = $390[{[1 + (.08 / 12)]^300 - 1} / (.08 / 12)] FVA = $370,900.29 Calculator: N= 25 x 12. I/Y= 8%/12. PMT= $390. Solve FV= $370,900.29

If you deposit $5,100 at the end of each of the next 25 years into an account paying 10.3 percent interest, how much money will you have in the account in 25 years? How much will you have if you make deposits for 50 years?

FVA = C{[(1 + r)^t − 1] / r} FVA for 25 years = $5,100[(1.103025 − 1) / .1030]FVA for 25 years = $524,761.56 N= 25 I/Y= 10.30%. PMT= $5,100. FV= $524,761.56 FVA for 50 years = $5,100[(1.103050 − 1) / .1030]FVA for 50 years = $6,611,012.13 N= 50 I/Y= 10.30%. PMT= $5,100. FV= $6,611,012.13

a. If you deposit $5,700 at the end of each of the next 25 years into an account paying 10.3 percent interest, how much money will you have in the account in 25 years? b. How much will you have if you make deposits for 50 years?

FVA = C{[(1 + r)^t − 1] / r} a. FVA for 25 years = $5,700[(1.1030^25 − 1) / .1030] FVA for 25 years = $586,498.22 b. FVA for 50 years = $5,700[(1.1030^50 − 1) / .1030] FVA for 50 years = $7,388,778.27 Notice that because of exponential growth, doubling the number of periods does not merely double the FVA. On BAII Plus: a. N= 25 I/y= 10.30% pv= / PMT= $5,700 Solve FV=$586,498.22 b. N= 50 I/y= 10.30% pv= / PMT= $5,700 Solve FV=$7,388,778.27

T or F: In corporate elections, the generally rule is "one vote for each shareholder", not "one vote for each share".

False

T or F: A broker is a market participant who buys and sells securities from inventory.

False

T or F: A cost reduction project which reduces operating expenses but does not create additional revenues cannot have a positive NPV.

False

T or F: A project's operating cash flow for a given year of the project includes the interest expense paid on debt during that year, but not the common stock dividends which are paid during that year.

False

T or F: A sinking fund is a type of bond which pays a little less interest each year until maturity, when the face value of the bond is paid to the bondholder.

False

T or F: A stock whose dividend payment stream exhibits "two-stage growth" is one for which the growth rate in dividends is quite large (at least twice the market average).

False

T or F: An ECN is a type of negotiable stock certificate which represents an equity stake in a privately held corporation.

False

T or F: Any firm with Retained Earnings of $10 million reported on its balance sheet would be able to take on $10 million in new projects without needing to issue additional shares of common stock or take out additional debt funding.

False

T or F: Because it accounts for the time value of money, the discounted payback method corrects for all of the shortcomings of the regular payback method.

False

T or F: Capital Budgeting is the process of raising capital to fund the firm's operations.

False

T or F: If a firm has an operating plan which requires additional external funding, then an increase in the dividend payout ratio, will reduce the amount of the firm's EFN.

False

T or F: If an ordinary annuity and a perpetuity both pay monthly cash flows of the same size and are discounted at the same interest rate, then the annuity should have a higher present value than the perpetuity.

False

T or F: If the firm holds a large amount of current assets, then the firm's CAT ratio will be large.

False

T or F: If the firm's Price- Earnings Ratio is high relative to the industry average, then investors must be relatively pessimistic concerning the firm's future prospects.

False

T or F: In the setting of time value of money calculations, the process of calculating the present value of some future amount is known as deconflating.

False

T or F: Net working capital is defined as current assets plus current liabilities.

False

T or F: The EDGAR database maintained by the SEC contains detailed information on all large multinational companies which conduct business within the territories of the United States.

False

T or F: The Fisher Effect is an explanation of the way in which bond investors "go fishing" for higher bond yields by investing in riskier bonds when interest rates are low.

False

T or F: The call provision on a bond is a formal legal agreement under which the company's management will notify (i.e. "call") the bond investors if the management thinks the company will start having trouble making its debt payments.

False

T or F: The clean price of a bond is the price of a bond which includes any accrued interest.

False

T or F: The dividend growth rate for a common stock must be less than that same stock's capital gains yield.

False

T or F: The full balance of retained earnings reported on the balance sheet is available for funding the expansion of the business.

False

T or F: The profitability index is defined as the number of years required to recover a project's cost.

False

T or F: The retention ratio is another name for the dividend payout ratio, and is calculated by dividing the dividends paid by the firm in a given period by the amount of net income the firm reports during that period.

False

T or F: The term capital structure is used to describe the percentage of the company's common stock which is owned by the company's managers.

False

T or F: Under the MACRS depreciation method, when the asset has been completely depreciated it will be carried at a book value equal to its expected salvage value.

False

Dog Up! Franks is looking at a new sausage system with an installed cost of $510,000. This cost will be depreciated straight-line to zero over the project's five-year life, at the end of which the sausage system can be scrapped for $76,000. The sausage system will save the firm $190,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $35,000. If the tax rate is 34 percent and the discount rate is 10 percent, what is the NPV of this project?

First we will calculate the annual depreciation of the new equipment. It will be: Annual depreciation = $510,000 / 5 Annual depreciation = $102,000 Now, we calculate the aftertax salvage value. The aftertax salvage value is the market price minus (or plus) the taxes on the sale of the equipment, so: Aftertax salvage value = MV + (BV − MV)TC Very often the book value of the equipment is zero as it is in this case. If the book value is zero, the equation for the aftertax salvage value becomes: Aftertax salvage value = MV + (0 − MV)TC Aftertax salvage value = MV(1 − TC) We will use this equation to find the aftertax salvage value since we know the book value is zero. So, the aftertax salvage value is: Aftertax salvage value = $76,000(1 − .34) Aftertax salvage value = $50,160 Using the tax shield approach, we find the OCF for the project is: OCF = $190,000(1 − .34) + .34($102,000) OCF = $160,080 Now we can find the project NPV. Notice we include the NWC in the initial cash outlay. The recovery of the NWC occurs in Year 5, along with the aftertax salvage value. NPV = −$510,000 − 35,000 + $160,080(PVIFA,10%,5) + [($50,160 + 35,000) / 1.10^5] NPV = $114,706.81

Your firm is contemplating the purchase of a new $570,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $58,000 at the end of that time. You will be able to reduce working capital by $73,000 (this is a one-time reduction). The tax rate is 35 percent and the required return on the project is 15 percent. If the pretax cost savings are $212,000 per year, what is the NPV of this project? If the pretax cost savings are $162,000 per year, what is the NPV of this project? Will you accept or reject the project? At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it?

First we will calculate the annual depreciation of the new equipment. It will be: Annual depreciation charge = $570,000 / 5 Annual depreciation charge = $114,000 The aftertax salvage value of the equipment is: Aftertax salvage value = $58,000(1 − .35) Aftertax salvage value = $37,700 To evaluate the project with a $212,000 cost savings, we need the OCF to compute the NPV. Using the tax shield approach, the OCF is: OCF = $212,000(1 − .35) + .35($114,000) = $177,700 NPV = −$570,000 + 73,000 + $177,700(PVIFA,15%,5) + [($37,700 − 73,000) / (1.15)^5] NPV = $81,127.62 The NPV with a $162,000 cost savings is: OCF = $162,000(1 − .35) + .35($114,000) OCF = $145,200 NPV = −$570,000 + 73,000 + $145,200(PVIFA,15%,5) + [($37,700 − 73,000) / (1.15)^5] NPV = −$27,817.42 We would accept the project if cost savings were $212,000, and reject the project if the cost savings were $162,000. The required pretax cost savings that would make us indifferent about the project is the cost savings that results in a zero NPV. The NPV of the project is: NPV = 0 = −$570,000 + 73,000 + OCF(PVIFA15%,5) + [($37,700 − 73,000) / (1.15)5] Solving for the OCF, we find the necessary OCF for a zero NPV is: OCF = $153,498.37 Using the tax shield approach to calculating OCF, we get: OCF = $153,498.37 = (S − C)(1 − .35) + .35($114,000) (S − C) = $174,766.72 The cost savings that will make us indifferent is $174,766.72

Your firm is contemplating the purchase of a new $625,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $69,000 at the end of that time. You will save $255,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $84,000 (this is a one-time reduction). If the tax rate is 35 percent, what is the IRR for this project?

First we will calculate the annual depreciation of the new equipment. It will be: Annual depreciation charge = $625,000 / 5 Annual depreciation charge = $125,000 The aftertax salvage value of the equipment is: Aftertax salvage value = $69,000(1 − .35) Aftertax salvage value = $44,850 Using the tax shield approach, the OCF is: OCF = $255,000(1 − .35) + .35($125,000) OCF = $209,500 Now we can find the project IRR. There is an unusual feature that is a part of this project. Accepting this project means that we will reduce NWC. This reduction in NWC is a cash inflow at Year 0. This reduction in NWC implies that when the project ends, we will have to increase NWC. So, at the end of the project, we will have a cash outflow to restore the NWC to its level before the project. We also must include the aftertax salvage value at the end of the project. The IRR of the project is: NPV = 0 = −$625,000 + 84,000 + $209,500(PVIFAIRR%,5) + [($44,850 − 84,000) / (1 + IRR)5] IRR = 25.88%

TwitterMe, Inc., is a new company and currently has negative earnings. The company's sales are $2.7 million and there are 144,000 shares outstanding. If the benchmark price-sales ratio is 6.4, what is your estimate of an appropriate stock price? What if the price-sales ratio were 5.7?

First, we need to find the sales per share, which is: Sales per share = Sales / Shares outstanding Sales per share = $2,700,000 / 144,000 Sales per share = $18.75 Using the equation to calculate the price of a share of stock with the PS ratio: P = Benchmark PS ratio × Sales per share P = 6.4($18.75). P = $120.00 And with a PS ratio of 5.7, we find: P = 5.7($18.75). P = $106.88

Find the EAR in each of the following cases Stated Rate (APR). # Times Compounded 8.8%. Quarterly 17.8 Monthly 13.8 Daily 10.8 Infinite

For discrete compounding, to find the EAR, we use the equation: EAR = [1 + (APR / m)]^m − 1 EAR = [1 + (.088 / 4)]^4 − 1 = .0909, or 9.09% EAR = [1 + (.178 / 12)]^12 − 1 = .1933, or 19.33% EAR = [1 + (.138 / 365)]^365 − 1 = .1479, or 14.79% To find the EAR with continuous compounding, we use the equation: EAR = e^q − 1 EAR = e^.108 − 1 = .1140, or 11.40% Calculator: NOM= 8.8%. Solve EFF= 9.90% C/y= 4 NOM= 17.8%. Solve EFF= 19.33% C/y= 12 NOM= 13.8%. Solve EFF= 14.79% C/y= 365

Find the EAR in each of the following cases: Stated Rate (APR) Number of Times Compounded 9.9% Quarterly 18.9 Monthly 14.9 Daily 11.9 Infinite

For discrete compounding, to find the EAR, we use the equation: EAR = [1 + (APR / m)]^m − 1 EAR = [1 + (.099 / 4)]^4 − 1 = .1027, or 10.27% EAR = [1 + (.189 / 12)]^12 − 1 = .2063, or 20.63% EAR = [1 + (.149 / 365)]^365 − 1 = .1606, or 16.06% To find the EAR with continuous compounding, we use the equation: EAR = e^q − 1 EAR = e^.119 − 1 = .1264, or 12.64% Calculator Solution: NOM= 9.9%. Solve EFF= 10.27%. C/Y= 4 NOM= 18.9%. Solve EFF= 20.63%. C/Y= 12 NOM= 14.9%. Solve EFF= 16.06%. C/Y= 365

The appropriate discount rate for the following cash flows is 7.13 percent per year. Year Cash Flow 1 $2,430 2 0 3 3,870 4 2,120 What is the present value of the cash flows?

Here the cash flows are annual and the given interest rate is annual, so we can use the interest rate given. We can find the PV of each cash flow and add them together. PV = $2,430 / 1.0713 + $3,870 / 1.0713^3 + $2,120 / 1.0713^4 = $7,025.36 F01 to F04 = 1 CF0. $0 C01. $2,430 C02. $0 C03. $3,870 C04 $2,210 I= 7.13% NPV= $7,025.36

Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years because the firm needs to plow back its earnings to fuel growth. The company will pay a $20 per share dividend 10 years from today and will increase the dividend by 4 percent per year thereafter. If the required return on this stock is 10 percent, what is the current share price?

Here we have a stock that pays no dividends for 10 years. Once the stock begins paying dividends, it will have a constant growth rate of dividends. We can use the constant growth model at that point. It is important to remember that general constant dividend growth formula is: Pt = [D,t × (1 + g)] / (R − g) This means that since we will use the dividend in Year 10, we will be finding the stock price in Year 9. The dividend growth model is similar to the PVA and the PV of a perpetuity: The equation gives you the PV one period before the first payment. So, the price of the stock in Year 9 will be: P9 = D,10 / (R − g) P9 = $20 / (.1 − .04) P9 = $333.33 The price of the stock today is simply the PV of the stock price in the future. We simply discount the future stock price at the required return. The price of the stock today will be: P0 = $333.33 / 1.1^9 P0 = $141.37

If you put up $47,000 today in exchange for a 6.75 percent, 14-year annuity, what will the annual cash flow be?

Here we have the PVA, the length of the annuity, and the interest rate. We want to calculate the annuity payment. Using the PVA equation: PVA = C({1 − [1 / (1 + r)^t]} / r) PVA = $47,000 = $C{[1 − (1 / 1.0675^14)] / .0675} We can now solve this equation for the annuity payment: C = $47,000 / 8.878105C = $5,293.92 On BAII Plus: N = 14 I/y = 6.75% PV = $47,000 Solve PMT = $5,293.92

Essary Enterprises has bonds on the market making annual payments, with seven years to maturity, a par value of $1,000, and selling for $950. At this price, the bonds yield 6 percent. What must the coupon rate be on the bonds?

Here we need to find the coupon rate of the bond. All we need to do is to set up the bond pricing equation and solve for the coupon payment as follows: P = $950 = C(PVIFA,6.00%,7) + $1,000(PVIF,6.00%,7) C = $51.04 The coupon payment is the coupon rate times par value. Using this relationship, we get: Coupon rate = $51.04 / $1,000 Coupon rate = .0510, or 5.10% Calculator: N= 7. I/Y= 6.0%. PV= $950. Solve PMT= $51.04. FV= $1,000

A stock has an expected return of 10.5 percent, its beta is 1.15, and the risk-free rate is 5 percent. What must the expected return on the market be?

Here we need to find the expected return of the market using the CAPM. Substituting the values given, and solving for the expected return of the market, we find: E(Ri) = .105 = .05 + [E(RM) − .05](1.15) E(RM) = .0978, or 9.78%

The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $26,000 per year forever. Suppose a sales associate told you the policy costs $471,000. At what interest rate would this be a fair deal?

Here we need to find the interest rate that equates the perpetuity cash flows with the PV of the cash flows. Using the PV of a perpetuity equation: PV = C / r $471,000 = $26,000 / r r = $26,000 / $471,000 r = .0552, or 5.52%

One of your customers is delinquent on his accounts payable balance. You've mutually agreed to a repayment schedule of $500 per month. You will charge 2 percent per month interest on the overdue balance. If the current balance is $19,000, how long will it take for the account to be paid off?

Here we need to find the length of an annuity. We know the interest rate, the PV, and the payments. Using the PVA equation: PVA = C({1 - [1 / (1 + r)^t]} / r) $19,000 = $500{[1 - (1 / 1.0200)t ] / .0200} 1 / 1.0200^t = 1 − {[($19,000) / ($500)](.0200)} 1 / 1.0200t = .2400 1.0200^t = 1 / (.2400) = 4.167 t = ln 4.167 / ln 1.0200 = 72.07 months Solve N= 72.07. I/Y= 2.00%. PV= $19,000. PMT= $500

Which of the following should a financial manager consider when analyzing a capital budgeting project? I. Project start-up costs. II. Timing of all projected cash flows. III. Dependability of future cash flows. IV. Dollar amount of each projected cash flow.

I, II, III, and IV.

Which of the following accounts are included in working capital management? I. Accounts Payable II. Accounts Receivable III. Fixed Assets IV. Inventory

I, II, and IV only.

Which of the following are advantages of the corporate form of business ownership? I. Limited liability for firm debt. II. Double taxation. III. Ability to raise capital. IV. Unlimited firm life.

I, III, and IV only.

After successfully completing your corporate finance class, you feel the next challenge ahead is to serve on the board of directors of Schenkel Enterprises. Unfortunately, you will be the only person voting for you. Schenkel has 395,000 shares outstanding, and the stock currently sells for $44. Assume that Schenkel uses cumulative voting, and there are four seats in the current election. How much will it cost you to buy a seat?

If the company uses cumulative voting, you will need 1 / (N + 1) percent of the stock (plus one share) to guarantee election, where N is the number of seats up for election. So, the percentage of the company's stock you need will be: Percent of stock needed = 1 / (N + 1) Percent of stock needed = 1 / (4 + 1) Percent of stock needed = .20, or 20% So, the number of shares you need to purchase is: Number of shares to purchase = (395,000 × .20) + 1 Number of shares to purchase = 79,001 And the total cost to you will be the shares needed times the price per share, or: Total cost = 79,001 × $44 Total cost = $3,476,044

After successfully completing your corporate finance class, you feel the next challenge ahead is to serve on the board of directors of Schenkel Enterprises. Unfortunately, you will be the only person voting for you. If Schenkel has 435,000 shares outstanding, and the stock currently sells for $52, how much will it cost you to buy a seat if the company uses straight voting?

If the company uses straight voting, you will need to own one-half of the shares, plus one share, in order to guarantee enough votes to win the election. Shares needed = (435,000 shares / 2) + 1 Shares needed = 217,501 And the total cost to you will be the shares needed times the price per share, or: Total cost = 217,501 × $52 Total cost = $11,310,052

Your firm has an average collection period of 22 days. Current practice is to factor all receivables immediately at a discount of 1.2 percent. What is the effective cost of borrowing in this case?

If we factor immediately, we receive cash on an average of 22 days sooner. The number of periods in a year are: Number of periods = 365 / 22 Number of periods = 16.5909 The EAR of this arrangement is: EAR = (1 + Periodic rate)^m - 1 EAR = (1 + 1.20 / 98.80)^16.5909 - 1 EAR = .2218, or 22.18%

Billy's Exterminators, Inc., has sales of $601,000, costs of $302,000, depreciation expense of $54,000, interest expense of $37,000, and a tax rate of 35 percent. What is the net income for this firm?

Income statement for the company: Sales $601,000 Costs 302,000 _Deprec. 54,000_ EBIT 245,000 _Interest 37,000_ EBT 208,000 _Tax (35%) 72,800_ _Net Income $135,200_

Asset management, or turnover, ratios

Inventory turnover Days' sales in inventory Receivables Turnover Days' sales in receivables NWC turnover Fixed asset turnover Total asset turnover

You find a zero coupon bond with a par value of $10,000 and 29 years to maturity. The yield to maturity on this bond is 5.1 percent. Assume semiannual compounding periods. What is the price of the bond

N= 29 x 2. I/Y= 5.1%. Solve PV= $2,321.30. FV= $10,000

Heginbotham Corp. issued 20-year bonds two years ago at a coupon rate of 7.4 percent. The bonds make semiannual payments. If these bonds currently sell for 104 percent of par value, what is the YTM?

N= 36 Solve I/Y= 3.503%. PV= $1,040. PMT= $74/2 FV= $1,000 Since the coupon payments are semiannual, this is the semiannual interest rate. The YTM is the APR of the bond: YTM = 2 × 3.503% YTM = 7.01%

Yan Yan Corp. has a $3,000 par value bond outstanding with a coupon rate of 5.2 percent paid semiannually and 25 years to maturity. The yield to maturity on this bond is 4.8 percent. What is the price of the bond?

N= 50. I/Y= 2.4%. Solve PV= $3,173.63. PMT= $78 FV= $3,000

Networking Capital to Total Assets Formula

NWC / Total Assets

Profit margin ratio

Net Income/Sales

Return on Assets (ROA)

Net Income/Total Assets

Return on Equity (ROE)

Net Income/Total Equity ROE =(Net income / sales) x (sales/assets) x (assets/equity)

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.94 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,160,000 in annual sales, with costs of $855,000. If the tax rate is 34 percent, what is the OCF for this project?

OCF = (Sales − Costs)(1 − TC) + TC(Depreciation) OCF = ($2,160,000 − 855,000)(1 − .34) + .34($2,940,000 / 3) OCF = $1,194,500

You're trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $12.6 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,914,300, $1,967,600, $1,936,000, and $1,389,500 over these four years, what is the project's average accounting return (AAR)?

Our definition of AAR is the average net income divided by the average book value. Average net income = ($1,914,300 + 1,967,600 + 1,936,000 + 1,389,500) / 4 = $1,801,850 Average book value = ($12,600,000 + 0) / 2 = $6,300,000 So, the AAR for this project is: AAR = Average net income / Average book value AAR = $1,801,850 / $6,300,000 AAR = .2860, or 28.60%

The appropriate discount rate for the following cash flows is 7.88 percent per year. Year Cash Flow 1 $2,580 2 0 3 4,020 4 2,270 What is the present value of the cash flows?

PV = $2,580 / 1.0788 + $4,020 / 1.0788^3 + $2,270 / 1.0788^4 = $7,269.37 CF0. $0 C01. $2,590 C02. $0 C03. $4,020 C04. $2,270 I= 7.88% NPV= $7,269.37

The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $38,000 per year forever. Suppose a sales associate told you the policy costs $483,000. At what interest rate would this be a fair deal?

PV = C / r$483,000 = $38,000 / r r = $38,000 / $483,000 r = .0787, or 7.87%

Imprudential, Inc., has an unfunded pension liability of $567 million that must be paid in 20 years. To assess the value of the firm's stock, financial analysts want to discount this liability back to the present. If the relevant discount rate is 6 percent, what is the present value of this liability?

PV = FV / (1 + r)^t PV = $567,000,000 / (1.06)^20 PV = $176,793,280.14 On BAII plus: N= 20 I/y=6% Solve PV=$176,793,280.14 PMT 0 FV: $567,000,000

Huggins Co. has identified an investment project with the following cash flows. Year Cash Flow 1 $790 2 1,070 3 1,330 4 1,450 a. If the discount rate is 9 percent, what is the present value of these cash flows? b. What is the present value at 17 percent? c. What is the present value at 25 percent?

PV = FV / (1 + r)^t a. PV@9% = $790 / 1.09 + $1,070 / 1.09^2 + $1,330 / 1.09^3 + $1,450 / 1.09^4 = $3,679.59 b. PV@17% = $790 / 1.17 + $1,070 / 1.17^2 + $1,330 / 1.17^3 + $1,450 / 1.17^4 = $3,061.07 c. PV@25% = $790 / 1.25 + $1,070 / 1.25^2 + $1,330 / 1.25^3 + $1,450 / 1.25^4 = $2,591.68 On BAII plus: F01 to F04 = 1 CF0. $0 C01 $790 C02. $1,070 C03. $1,330 C04 $1,450 I= 9 I=17 I=25 NPV=$3679.59 NPV = $3,061.07 NPV = $2,591.68

Huggins Co. has identified an investment project with the following cash flows. Year Cash Flow 1 $820 2 1,130 3 1,390 4 1,525 a. If the discount rate is 10 percent, what is the present value of these cash flows? b. What is the present value at 16 percent? c. What is the present value at 25 percent?

PV = FV / (1 + r)^t a. PV@10% = $820 / 1.10 + $1,130 / 1.10^2 + $1,390 / 1.10^3 + $1,525 / 1.10^4 = $3,765.26 b. PV@16% = $820 / 1.16 + $1,130 / 1.16^2 + $1,390 / 1.16^3 + $1,525 / 1.16^4 = $3,279.43 c. PV@25% =$820 / 1.25 + $1,130 /1.25^2 + $1,390 / 1.25^3 + $1,525 / 1.25^4 = $2,715.52 On a BAII plus: CF0. $0. C01. $820 C02. $1,130 C03 $1,390 C04. $1,525 I = 10. I= 16. I= 25 NPV. $3,765.26 $3,279.43. $2,715.52

One of your customers is delinquent on his accounts payable balance. You've mutually agreed to a repayment schedule of $750 per month. You will charge 2.05 percent per month interest on the overdue balance. If the current balance is $19,500, how long will it take for the account to be paid off?

PVA = C({1 - [1 / (1 + r)^t]} / r) $19,500 = $750{[1 - (1 / 1.0205)^t ] / .0205} Now we solve for t: 1 / 1.0205^t = 1 − {[($19,500) / ($750)](.0205)} 1 / 1.0205^t = .4670 1.0205^t = 1 / (.4670) = 2.141 t = ln 2.141 / ln 1.0205 = 37.52 months Calculator: Solve N= 37.52. I/Y= 2.05%. PV= $19,500. PMT= $750

Dinero Bank offers you a five-year loan for $58,000 at an annual interest rate of 6.25 percent. What will your annual loan payment be?

PVA = C({1 − [1 / (1 + r)^t]} / r) $58,000 = C{[1 − (1 / 1.0625^5)] / .0625} We can now solve this equation for the annuity payment. Doing so, we get: C = $58,000 / 4.18387C = $13,862.77 n= 5. I/Y= 6.5%. PV= $58,000 PMT= $13,862.77

Dinero Bank offers you a five-year loan for $64,000 at an annual interest rate of 6.75 percent. What will your annual loan payment be?

PVA = C({1 − [1 / (1 + r)^t]} / r) $64,000 = C{[1 − (1 / 1.0675^5)] / .0675} We can now solve this equation for the annuity payment. Doing so, we get: C = $64,000 / 4.12779 C = $15,504.66 On BAII Plus: N= 5 i/y= 6.75% PV= $64,000 Solve PMT= $15,504.66

If you put up $43,000 today in exchange for a 6.25 percent, 15-year annuity, what will the annual cash flow be?

PVA = C({1 − [1 / (1 + r)^t]} / r) PVA = $43,000 = $C{[1 − (1 / 1.0625^15)] / .0625} We can now solve this equation for the annuity payment. Doing so, we get: C = $43,000 / 9.555549C = $4,500.00 Calculator: N= 15. I/Y= 6.25%. PV= $43,000. Solve PMT= $4,5000

An investment offers $5,200 per year for 20 years, with the first payment occurring one year from now. a. If the required return is 7 percent, what is the value of the investment? b. What would the value be if the payments occurred for 45 years? c. What would the value be if the payments occurred for 70 years? d. What would the value be if the payments occurred forever?

PVA = C({1 − [1 / (1 + r)^t]} / r) a. PVA@20 yrs: PVA = $5,200{[1 − (1 / 1.07^20)] / .07} = $55,088.87 b. PVA@45 yrs: PVA = $5,200{[1 − (1 / 1.07^45)] / .07} = $70,748.71 c. PVA@70 yrs: PVA = $5,200{[1 − (1 / 1.07^70)] / .07} = $73,634.0 d. To find the PV of a perpetuity, we use the equation: PV = C / r PV = $5,200 / .07 = $74,285.71 On BAII Plus: N 20 45 70 I/Y 7% Solve PV $55,088.87 $70,748.71 $73,634.02 PMT $5,200 FV /

An investment offers $5,800 per year for 20 years, with the first payment occurring one year from now. a. If the required return is 7 percent, what is the value of the investment? b. What would the value be if the payments occurred for 45 years? c. What would the value be if the payments occurred for 70 years? d. What would the value be if the payments occurred forever?

PVA = C({1 − [1 / (1 + r)^t]} / r) a. PVA@20 yrs: PVA = $5,800{[1 − (1 / 1.07^20)] / .07} = $61,445.28 b. PVA@45 yrs: PVA = $5,800{[1 − (1 / 1.07^45)] / .07} = $78,912.03 c. PVA@70 yrs: PVA = $5,800{[1 − (1 / 1.07^70)] / .07} = $82,130.26 d. PV = $5,800 / .07 = $82,857.14 On BAII Plus: N= 20. I/Y= 7%. Solve PV= $61,445.28. PMT= $5,800 N= 45. I/Y= 7%. Solve PV= $78,912.03. PMT= $5,800 N= 70. I/Y= 7%. Solve PV= $83,130.26. PMT= $5,800

You want to buy a new sports coupe for $90,500, and the finance office at the dealership has quoted you an APR of 7.2 percent for a 48 month loan to buy the car. What will your monthly payments be? What is the effective annual rate on this loan?

PVA = C({1 − [1 / (1 + r)t]} / r) $90,500 = $C[1 − {1 / [1 + (.072 / 12)]^48} / (.072 / 12)] C = $90,500 / 41.59882 C = $2,175.54 EAR = [1 + (APR / m)]^m − 1 EAR = [1 + (.072 / 12)]^12 − 1 EAR = .0744, or 7.44%

Market Value Ratios

Price-earnings PEG Price-sales Market-to-book Tobin's Q Enterprise value-EBITDA

PEG ratio (price-earnings growth)

Price-earnings ratio / Earnings growth rate(%)

Garage, Inc., has identified the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 -$29,700 -$29,700 1 15,100 4,650 2 13,000 10,150 3 9,550 15,900 4 5,450 17,500 a. What is the IRR for each of these projects? b. Using the IRR decision rule, which project should the company accept? c. Is this decision necessarily correct? d. If the required return is 12 percent, what is the NPV for each of these projects? e. Which project will the company choose if it applies the NPV decision rule? f. At what discount rate would the company be indifferent between these two projects?

Project A Project B CF0 -$29,700 -$29,700 C01 $15,100 $4,650 C02 $13,000 $10,150 C03 $9,550 $15,900 C04 $5,450 $17,500 a. IRR= 20.14% IRR= 18.33% b. Choose A c. IRR criterion has a ranking problem for mutually exclusive projects. To see if the IRR decision rule is correct or not, we need to evaluate the project NPVs d. I = 12% NPV= $4,406.74 NPV= $4,982.18 e. Choose B f. Cf0 $0 C01 $10,450 C02 $2,850 C03 -$6,350 C04 -$12,050 IRR 14.25%

Siva, Inc., imposes a payback cutoff of three years for its international investment projects. Year Cash Flow (A) Cash Flow (B) 0 -$51,000 -$61,000 1 18,500 10,500 2 19,000 13,500 3 16,500 17,000 4 3,500 221,000 What is the payback period for both projects?

Project A has total cash flows of $37,500 after Year 2, so the cash flows are short by $13,500 of recapturing the initial investment, so the payback for Project A is: Payback = 2 + ($13,500 / $16,500) = 2.82 years Project B has cash flows of: Cash flows = $10,500 + 13,500 + 17,000 = $41,000 during the first three years. The cash flows are still short by $20,000 of recapturing the initial investment, so the payback for Project B is: Payback = 3 + ($20,000 / $221,000) = 3.09 years Using the payback criterion and a cutoff of three years, accept Project A and reject Project B.

Moraine, Inc., has an issue of preferred stock outstanding that pays a $4.95 dividend every year in perpetuity. If this issue currently sells for $94 per share, what is the required return?

R = D / P0 R = $4.95 / $94 R = .0527, or 5.27%

The most recent financial statements for Schenkel Co. are shown here: Income Statement Balance Sheet Sales$16,300 Current assets $10,900 Debt$15,400 Costs 11,700 Fixed assets 26,250 Equity 21,750 Taxable income$4,600 Total $37,150 Total $37,150 Taxes (40%) 1,840 Net income. $2,760 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 20 percent dividend payout ratio. No external financing is possible. What is the internal growth rate?

ROA=NI / TA ROA=$2,760 / $37,150 ROA=.0743, or 7.43% The plowback ratio, b, is one minus the payout ratio, so: b= 1 - .20b= .80 Now we can use the internal growth rate equation to get: Internal growth rate= (ROA × b) / [1 - (ROA × b)] Internal growth rate= [.0743(.80)] / [1 - .0743(.80)] Internal growth rate= .0632, or 6.32%

The most recent financial statements for Schenkel Co. are shown here: Income Statement Balance Sheet Sales$16,500 Current assets $11,500 Debt $16,000 Costs 10,700 Fixed assets 27,750 Equity 23,250 Taxable income$5,800 Total. $39,250 Total $39,250 Taxes (40%) 2,320 Net income$3,480 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 40 percent dividend payout ratio. No external equity financing is possible. What is the sustainable growth rate?

ROE=NI / TE ROE=$3,480 / $23,250 ROE=.1497, or 14.97% The plowback ratio, b, is one minus the payout ratio, so: b= 1 - .40b= .60 Now we can use the sustainable growth rate equation to get: Sustainable growth rate = (ROE × b) / [1 - (ROE × b)] Sustainable growth rate = [.1497(.60)] / [1 - .1497(.60)] Sustainable growth rate = .0987, or 9.87%

Receivables Turnover

Sales / Accounts Receivable

NWC turnover

Sales / NWC

Winnebagel Corp. currently sells 32,000 motor homes per year at $70,000 each, and 13,000 luxury motor coaches per year at $107,000 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 27,000 of these campers per year at $15,000 each. An independent consultant has determined that if Winnebagel introduces the new campers, it should boost the sales of its existing motor homes by 2,300 units per year, and reduce the sales of its motor coaches by 1,000 units per year. What is the amount to use as the annual sales figure when evaluating this project?

Sales due solely to the new product line are: 27,000($15,000) = $405,000,000 Increased sales of the motor home line occur because of the new product line introduction; thus: 2,300($70,000) = $161,000,000 in new sales is relevant. Erosion of luxury motor coach sales is also due to the new campers; thus: 1,000($107,000) = $107,000,000 loss in sales is relevant. The net sales figure to use in evaluating the new line is thus: $405,000,000 + 161,000,000 − 107,000,000 = $459,000,000

Fixed Asset Turnover Ratio

Sales/Net Fixed Assets

Total Asset Turnover Ratio

Sales/Total Assets

A proposed new investment has projected sales of $710,000. Variable costs are 65 percent of sales, and fixed costs are $160,000; depreciation is $61,000. Prepare a pro forma income statement assuming a tax rate of 34 percent. What is the projected net income?

Taxes = .34($27,500) = $9,350 Sales $ 710,000 Variable costs 461,500 Fixed costs 160,000 _Depreciation 61,000_ EBT $ 27,500 _Taxes 9,350_ Net income $ 18,150

Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land six years ago for $4.6 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent these facilities from a competitor instead. If the land were sold today, the company would net $4.9 million. The company wants to build its new manufacturing plant on this land; the plant will cost $12.1 million to build, and the site requires $730,000 worth of grading before it is suitable for construction. What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project?

The $4.6 million acquisition cost of the land six years ago is a sunk cost. The $4.9 million current aftertax value of the land is an opportunity cost if the land is used rather than sold off. The $12.1 million cash outlay and $730,000 grading expenses are the initial fixed asset investments needed to get the project going. Therefore, the proper Year 0 cash flow to use in evaluating this project is: $4,900,000 + 12,100,000 + 730,000 = $17,730,000

An investment offers a total return of 14 percent over the coming year. Janice Yellen thinks the total real return on this investment will be only 10 percent. What does Janice believe the inflation rate will be over the next year?

The Fisher equation, which shows the exact relationship between nominal interest rates, real interest rates, and inflation is: (1 + R) = (1 + r)(1 + h) h = [(1 + .14) / (1 + .10)] - 1 h = .0364, or 3.64%

A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows: Year Cash Flow 0 -$27,700 1 11,700 2 14,700 3 10,700 If the required return is 18 percent, what is the IRR for this project?

The IRR is the interest rate that makes the NPV of the project equal to zero. Calculator: F01-03 = 1 CF0 -$27,700 C01 $11,700 C02 $14,700 C03 $10,700 IRR CPT = 16.37%

A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows: Year Cash Flow 0 -$27,300 1 11,300 2 14,300 3 10,300 a. What is the NPV for the project if the required return is 10 percent? b. At a required return of 10 percent, should the firm accept this project? c. What is the NPV for the project if the required return is 26 percent? d. At a required return of 26 percent, should the firm accept this project?

The NPV of a project is the PV of the inflows minus the PV of the outflows. a. NPV = -$27,300 + $11,300 / 1.10 + $14,300 / 1.10^2 + $10,300 / 1.10^3 = $2,529.45 b. At a 10 percent required return, the NPV is positive, so we would accept the project. c. NPV = -$27,300 + $11,300 / 1.26 + $14,300 / 1.26^2 + $10,300 / 1.26^3 = -$4,175.41 d. At a required return of 26 percent, the NPV is negative, so we would reject the project. Calculator for A and C: CF0 -$27,300 C01 $11,300 C02 $14,300 C03 $10,300 I = 10% I = 26% NPV= $2,529.45 -$4,175.41

Which of the following is the better of the two possible explanations of what the Cash Coverage Ratio is intended to measure? The profit which the firm earns after it pays the interest on its debt or The ability of the firm to make required interest payments

The ability of the firm to make required interest payments

Treasury bills are currently paying 6 percent and the inflation rate is 2.6 percent. What is the approximate real rate of interest? What is the exact real rate?

The approximate relationship between nominal interest rates (R), real interest rates (r), and inflation (h) is: R ≈ r + h Approximate r = .06 - .026 Approximate r = .034, or 3.40% The Fisher equation, which shows the exact relationship between nominal interest rates, real interest rates, and inflation is: (1 + R) = (1 + r)(1 + h) (1 + .06) = (1 + r)(1 + .026) r = [(1 + .06) / (1 + .026)] - 1 r = .0331, or 3.31%

Consider an asset that costs $576,000 and is depreciated straight-line to zero over its eight-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $167,000. If the relevant tax rate is 35 percent, what is the aftertax cash flow from the sale of this asset?

The asset has a useful life of eight years and we want to find the BV of the asset after five years. With straight-line depreciation, the depreciation each year will be: Annual depreciation = $576,000 / 8 Annual depreciation = $72,000 So, after five years, the accumulated depreciation will be: Accumulated depreciation = 5($72,000) Accumulated depreciation = $360,000 The book value at the end of Year 5 is thus: BV5 = $576,000 − 360,000 BV5 = $216,000 The asset is sold at a loss to book value, so the depreciation tax shield of the loss is recaptured. Aftertax salvage value = $167,000 + ($216,000 − 167,000)(.35) Aftertax salvage value = $184,150 To find the taxes on salvage value, remember to use the equation: Taxes on salvage value = (BV − MV)TC This equation will always give the correct sign for a tax inflow (refund) or outflow (payment).

You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.02 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?

The beta of a portfolio is the sum of the weight of each asset times the beta of each asset. If the portfolio is as risky as the market, it must have the same beta as the market. Since the beta of the market is one, we know the beta of our portfolio is one. We also need to remember that the beta of the risk-free asset is zero. It has to be zero since the asset has no risk. Setting up the equation for the beta of our portfolio, we get: βP = 1.0 = 1/3(0) + 1/3(1.02) + 1/3(βX) Solving for the beta of Stock X, we get: βX = 1.98

Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $9.40, but management expects to reduce the payout by 3 percent per year indefinitely. If you require a return of 14 percent on this stock, what will you pay for a share today?

The constant growth model can be applied even if the dividends are declining by a constant percentage, just make sure to recognize the negative growth. So, the price of the stock today will be: P0 = D0(1 + g) / (R − g) P0 = $9.40(1 − .03) / [.14 − (−.03)] P0 = $53.64

The next dividend payment by Halestorm, Inc., will be $1.88 per share. The dividends are anticipated to maintain a growth rate of 4 percent forever. The stock currently sells for $37 per share. What is the dividend yield? What is the expected capital gains yield?

The dividend yield is the dividend next year divided by the current price Dividend yield = D1 / P0 Dividend yield = $1.88 / $37 Dividend yield = .0508, or 5.08% The capital gains yield, or percentage increase in the stock price, is the same as the dividend growth rate: Capital gains yield = 4%

You own a portfolio that has $3,700 invested in Stock A and $4,700 invested in Stock B. If the expected returns on these stocks are 9 percent and 12 percent, respectively, what is the expected return on the portfolio?

The expected return of a portfolio is the sum of the weight of each asset times the expected return of each asset. The total value of the portfolio is: Total portfolio value = $3,700 + 4,700 Total portfolio value = $8,400 So, the expected return of this portfolio is: E(RP) = ($3,700 / $8,400)(.09) + ($4,700 / $8,400)(.12) E(RP) = .1068, or 10.68%

The most recent financial statements for Alexander Co. are shown here: Income Statement Balance Sheet Sales$52,600 Current assets $23,200 Long-term debt $54,000 Costs 42,300 Fixed assets 93,000 Equity 62,200 Taxable income$10,300 Total $116,200 Total $116,200 Taxes (34%) 3,502 Net income $6,798 Assets and costs are proportional to sales. The company maintains a constant 40 percent dividend payout ratio and a constant debt-equity ratio. What is the maximum dollar increase in sales that can be sustained assuming no new equity is issued?

The maximum percentage sales increase is the sustainable growth rate. To calculate the sustainable growth rate, we first need to calculate the ROE, which is: ROE=NI / TE ROE=$6,798 / $62,200 ROE=.1093, or 10.93% The plowback ratio, b, is one minus the payout ratio, so: b= 1 - .40b= .60 Now we can use the sustainable growth rate equation to get: Sustainable growth rate=(ROE × b) / [1 - (ROE × b)] Sustainable growth rate=[.1093(.60)] / [1 - .1093(.60)] Sustainable growth rate=.0702, or 7.02% So, the maximum dollar increase in sales is: Maximum increase in sales= $52,600(.0702) Maximum increase in sales= $3,691.34

Consider the following financial statement information for the Ayala Corporation: Item Beginning Ending Inventory $11,600 $12,600 Accounts receivable 6,600 6,900 Accounts payable 8,800 9,200 Credit sales $96,000 Cost of goods sold 76,000 Calculate the operating and cash cycles.

The operating cycle is the inventory period plus the receivables period. The inventory turnover and inventory period are: Inventory turnover = COGS / Average inventory Inventory turnover = $76,000 / [($11,600 + 12,600) / 2] Inventory turnover = 6.2810 times Inventory period = 365 days / Inventory turnover Inventory period = 365 days / 6.2810 Inventory period = 58.11 days And the receivables turnover and receivables period are: Receivables turnover = Credit sales / Average receivables Receivables turnover = $96,000 / [($6,600 + 6,900) / 2] Receivables turnover = 14.2222 times Receivables period = 365 days / Receivables turnover Receivables period = 365 days / 14.2222 Receivables period = 25.66 days So, the operating cycle is: Operating cycle = 58.11 days + 25.66 days Operating cycle = 83.78 days The cash cycle is the operating cycle minus the payables period. The payables turnover and payables period are: Payables turnover = COGS / Average payables Payables turnover = $76,000 / [($8,800 + 9,200) / 2] Payables turnover = 8.4444 times Payables period = 365 days / Payables turnover Payables period = 365 days / 8.4444 Payables period = 43.22 days So, the cash cycle is: Cash cycle = 83.78 days - 43.22 days Cash cycle = 40.55 days The firm is receiving cash on average 40.55 days after it pays its bills.

What are the portfolio weights for a portfolio that has 132 shares of Stock A that sell for $42 per share and 112 shares of Stock B that sell for $32 per share?

The portfolio weight of an asset is the total investment in that asset divided by the total portfolio value. First, we will find the portfolio value, which is: Total value = 132($42) + 112($32) Total value = $9,128 The portfolio weight for each stock is: WeightA = 132($42) / $9,128 WeightA = .6074 WeightB = 112($32) / $9,128 WeightB = .3926

Which of the following is the better of the two possible explanations of what the Profit Margin is intended to measure? The portion of each dollar of sales which remains as profit or The portion of each dollar of sales which is lost to cost

The portion of each dollar of sales which remains as profit

Which of the following is the better of the two possible explanations of what the Total Debt Ratio is intended to measure? The portion of the firm's long-term funding which has been raised by borrowing Or The percentage of the firm's debt which has been used to acquire assets

The portion of the firm's long-term funding which has been raised by borrowing

E-Eyes.com just issued some new preferred stock. The issue will pay an annual dividend of $24 in perpetuity, beginning 13 years from now. If the market requires a return of 3.8 percent on this investment, how much does a share of preferred stock cost today?

The price of a share of preferred stock is the dividend payment divided by the required return. We know the dividend payment in Year 13, so we can find the price of the stock in Year 12, one year before the first dividend payment. Doing so, we get: P12 = $24 / .038 P12 = $631.58 The price of the stock today is the PV of the stock price in the future, so the price today will be: P0 = $631.58 / (1.038)^12 P0 = $403.70

Maloney, Inc., has an odd dividend policy. The company has just paid a dividend of $2 per share and has announced that it will increase the dividend by $6 per share for each of the next five years, and then never pay another dividend. If you require a return of 12 percent on the company's stock, how much will you pay for a share today?

The price of a stock is the PV of the future dividends. This stock is paying five dividends, so the price of the stock is the PV of these dividends using the required return. The price of the stock is: P0 = $8 / 1.12 + $14 / 1.12^2 + $20 / 1.12^3 + $26 / 1.12^4 + $32 / 1.12^5 P0 = $67.22

Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 15 years to maturity, and a coupon rate of 7.3 percent paid annually. If the yield to maturity is 8.4 percent, what is the current price of the bond?

The price of any bond is the PV of the coupon payments, plus the PV of the par value. Notice this problem assumes an annual coupon. The price of the bond will be: P = €73 ({1 - [1 / (1 +.084)^15]} / .084) + €1,000[1 / (1 + .084)^15] P = €908.10 Calculator: N= 15. I/Y= 8.4%. Solve PV= 908.10. PMT= 73. FV= 1,000

Estes Park Corp. pays a constant $7.25 dividend on its stock. The company will maintain this dividend for the next 9 years and will then cease paying dividends forever. If the required return on this stock is 12 percent, what is the current share price?

The price of any financial instrument is the PV of the future cash flows. The future dividends of this stock are an annuity for 9 years, so the price of the stock is the PVA, which will be: P0 = $7.25(PVIFA,12%,9) P0 = $38.63

Which of the following is the better of the two possible explanations of what the Return on Equity is intended to measure? The rate of return earned on wealth invested in the firm by shareholders Or The rate of return earned on all wealth invested in the firm

The rate of return earned on wealth invested in the firm by shareholders

Which of the following is the better of the two possible explanations of what the Total Asset Turnover ratio is intended to measure? The dollar amount of fixed asset which the firm has purchased and paid for or The success with which the firm is using its assets to generate sales revenues

The success with which the firm is using its assets to generate sales revenues

Mellott Corp. has an equity value of $13,230. Long-term debt is $8,250. Net working capital, other than cash, is $3,210. Fixed assets are $17,430 and current liabilities are $1,650. How much cash does the company have? What is the value of the current assets?

The total liabilities and equity of the company are the value of equity, plus current liabilities and long-term debt, so: Total liabilities and equity = $13,230 + 1,650 + 8,250 Total liabilities and equity = $23,130 We have NWC other than cash. Since NWC is current assets minus current liabilities, NWC other than cash is: NWC other than cash = Accounts receivable + Inventory - Current liabilities $3,210 = Accounts receivable + Inventory - $1,650 Accounts receivable + Inventory = $3,210 + 1,650 Accounts receivable + Inventory = $4,860 Since total assets must equal total liabilities and equity, we can solve for cash as: Cash = Total assets - Fixed assets - (Accounts receivable + Inventory) Cash = $23,130 - 17,430 - 4,860 Cash = $840 So, the current assets are: Current assets = $840 + 4,860 Current assets = $5,700

The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $31,000 per year forever. If the required return on this investment is 6.3 percent, how much will you pay for the policy?

This cash flow is a perpetuity. To find the PV of a perpetuity, we use the equation: PV = C / r PV = $31,000 / .0630 PV = $492,063.49

The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $34,000 per year forever. If the required return on this investment is 6.3 percent, how much will you pay for the policy?

This cash flow is a perpetuity. To find the PV of a perpetuity, we use the equation: PV = C / r PV = $34,000 / .0630 PV = $539,682.54

You're trying to save to buy a new $203,000 Ferrari. You have $53,000 today that can be invested at your bank. The bank pays 6.1 percent annual interest on its accounts. How long will it be before you have enough to buy the car?

To answer this question, we can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. FV = PV(1 + r)^t Solving for t, we get: t = ln(FV / PV) / ln(1 + r) t = ln($203,000 / $53,000) / ln(1.061) t = 22.68 years On BAII plus: Solve N= 22.68 I/y=6.1% PV=$53,000 PMT 0 FV: $203,000

A five-year project has an initial fixed asset investment of $330,000, an initial NWC investment of $34,000, and an annual OCF of −$33,000. The fixed asset is fully depreciated over the life of the project and has no salvage value. If the required return is 12 percent, what is this project's equivalent annual cost, or EAC?

To calculate the EAC of the project, we first need the NPV of the project. Notice that we include the NWC expenditure at the beginning of the project, and recover the NWC at the end of the project. The NPV of the project is: NPV = −$330,000 − 34,000 − $33,000(PVIFA12%,5) + $34,000 / 1.125 = -$463,665.10 Now we can find the EAC of the project. The EAC is: EAC = −$463,665.10 / (PVIFA12%,5) = −$128,625.21

A proposed new project has projected sales of $120,000, costs of $54,000, and depreciation of $12,300. The tax rate is 35 percent. Calculate operating cash flow using the four different approaches.

To calculate the OCF, we first need to calculate net income. The income statement is: Sales $120,000 Costs 54,000 _Depreciation 12,300_ EBT $53,700 _Taxes (35%) 18,795_ Net income. $34,905 Using the most common financial calculation for OCF, we get: OCF = EBIT + Depreciation − Taxes OCF = $53,700 + 12,300 − 18,795 OCF = $47,205 The top-down approach to calculating OCF yields: OCF = Sales − Costs − Taxes OCF = $120,000 − 54,000 − 18,795 OCF = $47,205 The tax-shield approach is: OCF = (Sales − Costs)(1 − TC) + TC(Depreciation) OCF = ($120,000 − 54,000)(1 − .35) + .35($12,300) OCF = $47,205 And the bottom-up approach is: OCF = Net income + Depreciation OCF = $34,905 + 12,300 OCF = $47,205 All four methods of calculating OCF should always give the same answer.

What is the payback period for the following set of cash flows? Year Cash Flow 0 -$4,600 1 1,075 2 1,275 3 2,030 4 1,175

To calculate the payback period, we need to find the time that the project has recovered its initial investment. After three years, the project has created: $1,075 + 1,275 + 2,030 = $4,380 in cash flows. The project still needs to create another: $4,600 - 4,380 = $220 in cash flows. During the fourth year, the cash flows from the project will be $1,175. So, the payback period will be three years, plus what we still need to make divided by what we will make during the fourth year. The payback period is: 3 + ($220 / $1,175) = 3.19 years

KCCO, Inc., has current assets of $5,000, net fixed assets of $23,300, current liabilities of $4,450, and long-term debt of $11,000. What is the value of the shareholders' equity account for this firm? How much is net working capital?

To find owners' equity, we must construct a balance sheet as follows: Balance Sheet CA. $5,000 CL $4,450 NFA 23,300 LTD 11,000 OE ?? TA $28,300 TL & OE $28,300 We know that total liabilities and owners' equity (TL & OE) must equal total assets of $28,300. We also know that TL & OE is equal to current liabilities plus long-term debt plus owners' equity, so owners' equity is: OE = $28,300 - 11,000 - 4,450 = $12,850 NWC = CA - CL = $5,000 - 4,450 = $550

For each of the following, compute the future value: Present Value Years Interest Rate Future Value $2,050 12 12% $ 7,986.75 8,352 6 10 14,796.08 72,355 13 11 280,974.74 179,796 7 7 288,713.09

To find the FV of a lump sum, we use: FV = PV(1 + r)^t FV = $2,050(1.12)^12 = $7,986.75 FV = $8,352(1.10)^6 = $14,796.08 FV = $72,355(1.11)^13 = $280,974.74 FV = $179,796(1.07)^7 = $288,713.09 or on BAII plus: N= 12 I/y=12% PV=$2,050 PMT 0 Solve FV: $7,986.75 N= 6 I/y=10% PV=$8,532 PMT 0 Solve FV: $14,796.08 N= 13 I/y=11% PV=$72,355 PMT 0 Solve FV: $208,974.74 N= 12 I/y=12% PV=$179,796 PMT 0 Solve FV: $288,713.09

Romo Enterprises needs someone to supply it with 118,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you've decided to bid on the contract. It will cost you $850,000 to install the equipment necessary to start production; you'll depreciate this cost straight-line to zero over the project's life. You estimate that, in five years, this equipment can be salvaged for $68,000. Your fixed production costs will be $323,000 per year, and your variable production costs should be $10.10 per carton. You also need an initial investment in net working capital of $73,000. If your tax rate is 35 percent and you require a return of 12 percent on your investment, what bid price should you submit?

To find the bid price, we need to calculate all other cash flows for the project, and then solve for the bid price. The aftertax salvage value of the equipment is: Aftertax salvage value = $68,000(1 − .35) = $44,200 Now we can solve for the necessary OCF that will give the project a zero NPV. The equation for the NPV of the project is: NPV = 0 = −$850,000 − 73,000 + OCF(PVIFA12%,5) + [($73,000 + 44,200) / 1.12^5] Solving for the OCF, we find the OCF that makes the project NPV equal to zero is: OCF = $856,497.57 / PVIFA12%,5 = $237,600.76 The easiest way to calculate the bid price is the tax shield approach, so: OCF = $237,600.76 = [(P − v)Q − FC](1 − TC) + TCD $237,600.76 = [(P − $10.10)(118,000) − $323,000](1 − .35) + .35($850,000 / 5) P = $15.16

Equity Multiplier

Total Assets/Total Equity

Debt-equity ratio

Total Debt/Total Equity

Long-term solvency, or financial leverage, ratios

Total debt ratio Debt-equity ratio Equity Multiplier Long-term debt ratio Times interest earned ratio Cash coverage ratio

T or F The average accounting return (AAR) is the project's average net income divided by the average book value.

True

T or F: If your FAT is average, but your TAT is below average, then you must have a problem with your CAT.

True

T or F: Preferred stock has preference over common stock in that in most instances, preferred stockholders must be paid their dividend before the common stockholders can receive their dividend.

True

T or F: The SuperDOT system is an electronic system at the NYSE which allows orders to be transmitted directly to the Designated Market Maker (DDM).

True

T or F: A company's payout ratio is calculated as the amount of dividends paid divided by the firm's net income.

True

T or F: A convertible bond is one which can be swapped for a fixed number of shares of stock any time before maturity at the bondholder's option so long as certain specified criteria are met.

True

T or F: A debenture is an unsecured debt, usually with an original maturity of 10 years or more.

True

T or F: A firm's operating cash flow for a given period of operation is equal to the firm's EBIT plus depreciation and minus taxes.

True

T or F: A low Inventory Turnover Ratio is associated with relatively large holdings of Inventory by the firm.

True

T or F: A perpetuity is essentially an annuity in which the cash flows continue forever.

True

T or F: A positive NPV project will have a profitability index value which is greater than 1.0.

True

T or F: A project's depreciation tax shield is the tax savings that results from the depreciation deduction, calculated as the depreciation expense multiplied by the corporate tax rate.

True

T or F: A project's required investment in net working capital is typically recaptured at the end of the project

True

T or F: A protective covenant is part of the indenture which limits certain actions that the firm's managers might take which would not be in the lender's best interest.

True

T or F: A proxy fight develops when a group solicits proxies in order to replace the existing board and thereby replace the existing managers of a company

True

T or F: A proxy is a grant of authority by a shareholder allowing another individual to vote the shareholder's shares.

True

T or F: A stock whose dividend is not expected to change during the foreseeable future can be valued using the formula for the present value of a perpetuity formula.

True

T or F: A treasury yield curve is a plot of yields on treasury notes and bonds relative to maturity.

True

T or F: Aggregation is the process by which smaller investment proposals of each of firm's operation units are added up and treated as one big project.

True

T or F: All three of the MIRR methods discussed in the text use the firm's required rate of return on the project (WACC) to reform the cash flows.

True

T or F: An NPV Profile is a graph of NPV as a function of the discount rate.

True

T or F: An Over-the-counter securities market is one in which trading is almost exclusively done through dealers who buy and sell for their own inventories.

True

T or F: An amortization schedule is a table showing how the payments on a loan are allocated between interest and principal repayment.

True

T or F: An annuity due is one for which the cash flows occur at the beginning of the period with which they are associated.

True

T or F: Any bond's rated below S&P's BBB rating would not be considered "investment quality"

True

T or F: As defined in the textbook, a stakeholder is someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm.

True

T or F: At the most fundamental level, the time value of money exists because humans have a preference for present consumption over future consumption.

True

T or F: Because bond values can change significantly in response to changes in interest rates, bond investors face the possibility of a loss if they sell their bonds prior to the bond's maturity.

True

T or F: Business loans are sometimes amortized using a constant principle payment during the life of the loan instead of the constant total payment common for most consumer loans.

True

T or F: Compound interest is the interest earned on both the initial principal and the interest reinvested from prior periods.

True

T or F: Control of the firm ultimately rests with the stockholders since they elect the board of directors, who in turn hire and firm managers.

True

T or F: Depreciation is not a cash expense, but is nonetheless included in capital budgeting analysis because of its impact on taxes.

True

T or F: Discounted cash flow (DCF) valuation is an analytical technique in which one calculates the present value of expected future cash flows to determine their values at the present.

True

T or F: Dividends are payments made by a corporation to its shareholders in either cash or stock.

True

T or F: Generally speaking, in the U.S., a financial manager's goal should be to maximize the market value of the existing owners' equity.

True

T or F: Halfway through a fixed rate 30 year mortgage, the balance on the loan will typically be more than 70% of the original starting loan balance.

True

T or F: If a firm cannot arrange the funding necessary to support a given operating plan, the firm will be forced to revise or abandon its plan.

True

T or F: If a firm has costs which are higher than average, then the firm's profit margin will be lower than average.

True

T or F: If a firm's payout ratio is equal to .50, then the firm's plowback ratio must also be equal to .50.

True

T or F: If an ordinary annuity and an annuity due both have the same size payment, the same number of payments, and are discounted at the same interest rate, then the ordinary annuity must have a smaller present value than the annuity due.

True

T or F: If preferred stock dividends are cumulative and are not paid in a particular year, then they will be carried forward as an arrearage.

True

T or F: If the company's Quick Ratio is above the industry average, while the firm's Current Ratio is equal to the industry average, the firm is holding less inventory than the industry average.

True

T or F: If the crossover rate is greater than the firm's WACC, then the IRR and NPV methods can yield different rankings for two mutually exclusive projects.

True

T or F: In an amortization schedule for a typical fixed rate mortgage, the amount applied to principal repayment increases over the life of the loan.

True

T or F: In business financial planning, the planning horizon is the long-range time period on which the planning process focuses.

True

T or F: In the event that they were stolen, bearer form bonds would be more difficult to recover than registered form bonds.

True

T or F: MIRR can be used even when there are multiple sign changes in the project cash flows.

True

T or F: Managing short-term assets involves a trade-off between carrying costs and shortage costs.

True

T or F: Many consumer loans such as care loans are structured using the annuity formula relationship resulting in loan for which the total payment is the same size in each period of the loan.

True

T or F: Modern financial calculators have functions which allow them to be used to relatively easily calculate the present value of a series of uneven cash flows.

True

T or F: One key observation about the time value of money is that the present value and future value functions are distinctly nonlinear with respect to time.

True

T or F: Preferred Stock normally has a fixed dividend rate.

True

T or F: Prior to studying the time value of money, most people fail to completely appreciate the power of compound interest over long periods of time.

True

T or F: Stocks that trade on an organized exchange (such as the NYSE) are said to be listed on that exchange.

True

T or F: Straight voting can "freeze out" minority shareholders in that their votes under this system can have no impact on who is elected to the board of directors.

True

T or F: Sukuk is a type of partial ownership which substitutes for Western style lending in places where the credit markets must comply with Islamic Law.

True

T or F: The "APR" is the interest rate charged per period (ex. per month) multiplied by the number of periods per year.

True

T or F: The "APR" is the interest rate charged per period multiplied by the number of periods per year.

True

T or F: The "CAT" ratio measures how well current assets are being used to support sales.

True

T or F: The "present value" is the current value of future cash flows discounted at the appropriate discount rate.

True

T or F: The Cash Budget is a forecast of cash inflows and outflows over the next short-term planning period

True

T or F: The Cash Cycle (or "Cash Conversion Cycle") is a measure of how long funds are tied up in the production process.

True

T or F: The Equivalent Annual Cost (EAC) is the present value of a project's costs calculated on an annual basis.

True

T or F: The IRR is defined as the discount rate which causes the project's NPV to be equal to zero.

True

T or F: The NPV method discounts all of the project's cash flows at the project's WACC, and then sums those cash flows.

True

T or F: The New York Stock Exchange is a secondary financial market in which transactions provide no new funding to the corporation whose shares are being traded

True

T or F: The agency problem in financial management is the possibility of conflict of interest between the stockholders and managers of a firm.

True

T or F: The asymptote which a typical project's NPV profile approaches at extremely large discount rates has a vertical intercept equal to the initial time zero outlay.

True

T or F: The capital intensity ratio is defined as the firm's total assets divided by its sales, or the amount of assets needed to generate $1 in sales.

True

T or F: The crossover rate is the discount rate at which two projects have the same NPV.

True

T or F: The effective annual rate (EAR) is the interest rate expressed as if it were compounded once per year.

True

T or F: The firm's total investment in working capital is approximately equal to the cash outflow per day times the number of days in the cash cycle.

True

T or F: The five special "time value of money keys" on a typical financial calculator correspond to the individual variables which appear in the present value and future value formulas.

True

T or F: The forecasted financial statements implied by a firm's financial plan are often referred to as "pro forma statements".

True

T or F: The funding choices which a firm's managers make will potentially change the firm's key financial ratios.

True

T or F: The future value and present value functions are distinctly non-linear for longer periods of time even at moderate interest rates.

True

T or F: The future value formula can be used to calculate how long it will take for an invested amount to grow to a specified ending amount.

True

T or F: The future value of a present cash flow is generally larger than the cash flow itself.

True

T or F: The internal growth rate is the maximum growth rate a firm can achieve if it has no access to external funding of any type.

True

T or F: The internal growth rate is the maximum growth rate a firm can achieve without external financing of any type.

True

T or F: The percentage of sales approach is a financial planning method in which forecasted financial statements for the firm are created under the assumption that accounts are expect to vary in constant proportion to the firm's sales.

True

T or F: The present value of a future cash flow can be calculated as PV = FV[1/(1+r)^t]

True

T or F: The present value of a perpetuity and the present value of a very long annuity with the same cash flow pattern are very close to the same because far distant cash flows have little present value.

True

T or F: The process of providing for a loan to be paid off gradually is called "amortizing" the loan.

True

T or F: The stockholders in a corporation have limited liability for corporate debts, so the most they can lose is the amount they have invested in the company.

True

T or F: The term "agency problem" is used to describe the situation in which the managers of the company take actions which are not in the best interests of the company's shareholders.

True

T or F: The term "capital structure" is used to describe the mix of debt and equity funding which the firm uses.

True

T or F: The term working capital refers to a firm's short-term assets, such as inventory, and is short-term liabilities, such as money owed to suppliers.

True

T or F: The yield-to-maturity on a bond is the rate of return a bond investor will earn if he or she were to purchase the bond at today's price and then hold the bond until maturity.

True

T or F: Time Value of Money relationships are difficult to understand intuitively because the underlying functions are very nonlinear.

True

T or F: Under U.S. accounting standards, net income as reported does not typically represent a cash flow amount because revenues are recorded when earned (not when collected), expenses are recorded when incurred (not when paid), and depreciation is a non-cash expense.

True

T or F: Under cumulative voting a shareholder my cast all of his or her votes for just one candidate for the board of directors.

True

T or F: With simple interest, the interest is not reinvested, so interest is earned each period only on the original principal.

True

T or F: Working capital policy involves determining the level to hold of each current asset and how the current assets are financed.

True

T or F: Zero coupon bonds are bonds which make no coupon payment at all and are thus priced as a deep discount

True

T or F: Capital budgeting is the process of planning and managing a firm's long-term investments.

True

T or F: For companies with publicly traded stock, the authors of the textbook suggest that the most appropriate goal of financial management is to maximize the current value per share of the existing stock.

True

T or F: If a firm's Receivables Turnover Ratio is lower than the industry average, then the firm takes longer to collect on credit sales than is the average for its industry.

True

T or F: In a primary financial market transaction, the corporation is the seller of the security, and the transaction raises money for the firm.

True

T or F: The sole proprietorship form of business organization is the simplest type of business to start and is the least regulated form of organization.

True

Caan Corporation will pay a $2.98 per share dividend next year. The company pledges to increase its dividend by 5 percent per year indefinitely. If you require a return of 14 percent on your investment, how much will you pay for the company's stock today?

Using the constant growth model, we find the price of the stock today is: P0 = D1 / (R − g) P0 = $2.98 / (.14 − .05) P0 = $33.11

The Perfect Rose Co. has earnings of $1.95 per share. The benchmark PE for the company is 12. What stock price would you consider appropriate? What if the benchmark PE were 15?

Using the equation to calculate the price of a share of stock with the PE ratio: P = Benchmark PE ratio × EPS So, with a PE ratio of 12, we find: P = 12($1.95) P = $23.40 And with a PE ratio of 15, we find: P = 15($1.95) P = $29.25

SDJ, Inc., has net working capital of $2,860, current liabilities of $4,050, and inventory of $3,670. What is the current ratio? What is the quick ratio

Using the formula for NWC, we get: NWC = CA - CL CA = CL + NWC CA = $4,050 + 2,860 CA = $6,910 Current ratio = CA / CL Current ratio = $6,910 / $4,050 Current ratio = 1.71 times Quick ratio = (CA − Inventory) / CL Quick ratio = ($6,910 − 3,670) / $4,050 Quick ratio = .80 times

A stock has an expected return of 12.4 percent, the risk-free rate is 4.5 percent, and the market risk premium is 10 percent. What must the beta of this stock be?

We are given the values for the CAPM except for the β of the stock. We need to substitute these values into the CAPM, and solve for the β of the stock. One important thing we need to realize is that we are given the market risk premium. The market risk premium is the expected return of the market minus the risk-free rate. We must be careful not to use this value as the expected return of the market. Using the CAPM, we find: E(Ri) = .124 = .045 + .100βi βi = .79

You have just won the lottery and will receive $1,000,000 in one year. You will receive payments for 30 years and the payments will increase by 3.3 percent per year. If the appropriate discount rate is 7.3 percent, what is the present value of your winnings?

We can use the present value of a growing annuity equation to find the value of your winnings today. Doing so, we find: PV = C{[1 / (r - g)] - [1 / (r - g)] × [(1 + g) / (1 + r)]^t} PV = $1,000,000{[1 / (.073 - .033)] - [1 / (.073 - .033)] × [(1 + .033) / (1 + .073)]^30} PV = $17,002,431.01

You have just won the lottery and will receive $1,000,000 in one year. You will receive payments for 30 years and the payments will increase by 3.6 percent per year. If the appropriate discount rate is 7.6 percent, what is the present value of your winnings?

We can use the present value of a growing annuity equation: PV = C{[1 / (r - g)] - [1 / (r - g)] × [(1 + g) / (1 + r)]^t} PV = $1,000,000{[1 / (.076 - .036)] - [1 / (.076 - .036)] × [(1 + .036) / (1 + .076)]^30} PV = $16,976,487.55

Shelton, Inc., has sales of $21 million, total assets of $19.1 million, and total debt of $6.8 million. Assume the profit margin is 8 percent. a. What is the company's net income? b. What is the company's ROA? c. What is the company's ROE?

We need to find net income first:: Profit margin = Net income / Sales Net income = Profit margin(Sales) Net income = .08($21,000,000) Net income = $1,680,000 ROA = Net income / TA ROA = $1,680,000 / $19,100,000 ROA = .0880, or 8.80% To find ROE, we need to find total equity. Since TL & OE equals TA: TA = TD + TE TE = TA − TD TE = $19,100,000 − 6,800,000 TE = $12,300,000 ROE = Net income / TE ROE = $1,680,000 / $12,300,000 ROE = .1366, or 13.66%

You are planning to save for retirement over the next 25 years. To do this, you will invest $730 per month in a stock account and $330 per month in a bond account. The return of the stock account is expected to be 9.3 percent, and the bond account will pay 5.3 percent. When you retire, you will combine your money into an account with a 6.3 percent return. How much can you withdraw each month from your account assuming a 20-year withdrawal period?

We need to find the annuity payment in retirement. Our retirement savings ends and the retirement withdrawals begin, so the PV of the retirement withdrawals will be the FV of the retirement savings. So, we find the FV of the stock account and the FV of the bond account and add the two FVs. Stock account: FVA = $730[{[1 + (.093 / 12)]^300 − 1} / (.093 / 12)] Stock account: FVA = $860,498.28 Bond account: FVA = $330[{[1 + (.053 / 12)]^300 − 1} / (.053 / 12)] Bond account: FVA = $205,563.25 So, the total amount saved at retirement is: $860,498.28 + 205,563.25 = $1,066,061.53 Solving for the withdrawal amount in retirement using the PVA equation gives us: PVA = $1,066,061.53 = $C[1 - {1 / [1 + (.063 / 12)]^240} / (.063 / 12)] C = $1,066,061.53 / 136.26848 C = $7,823.24 withdrawal per month Calculator: N= 300. I/Y= 9.3%/12. PMT= $730. FV= $860,498.28 N= 300. I/Y= 5.3%/12. PMT= $330. FV= $205,563.25 N= 240. I/Y= 6.3%/12. PV= $1,066,061.53 Solve PMT= $7,823.24

The next dividend payment by Halestorm, Inc., will be $1.68 per share. The dividends are anticipated to maintain a growth rate of 6 percent forever. If the stock currently sells for $32 per share, what is the required return?

We need to find the required return of the stock. Using the constant growth model, we can solve the equation for R. Doing so, we find: R = (D1 / P0) + g R = ($1.68 / $32) + .06 R = .1125, or 11.25%

Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 24 percent for the next three years, with the growth rate falling off to a constant 5 percent thereafter. If the required return is 14 percent, and the company just paid a dividend of $1.75, what is the current share price?

With supernormal dividends, we find the price of the stock when the dividends level off at a constant growth rate, and then find the PV of the future stock price, plus the PV of all dividends during the supernormal growth period. The stock begins constant growth in Year 4, so we can find the price of the stock in Year 3, one year before the constant dividend growth begins as: P3 = D,3(1 + g) / (R − g) = D0(1 + g,1)^3(1 + g,2) / (R − g) P3 = $1.75(1.24)^3(1.05) / (.14 − .05) P3 = $38.93 The price of the stock today is the PV of the first three dividends, plus the PV of the Year 3 stock price. The price of the stock today will be: P0 = $1.75(1.24) / 1.14 + $1.75(1.24)^2/ 1.14^2 + $1.75(1.24)^3/ 1.14^3 + $38.93 / 1.14^3 P0 = $32.50

Cannonier, Inc., has identified an investment project with the following cash flows. Year Cash Flow 1 $930 2 1,160 3 1,380 4 2,120 a. If the discount rate is 7 percent, what is the future value of these cash flows in Year 4? b. What is the future value at a discount rate of 13 percent? c. What is the future value at a discount rate of 22 percent?

a. FV@7% = $930(1.07)^3 + $1,160(1.07)^2 + $1,380(1.07) + $2,120 = $6,063.97 b. FV@13% = $930(1.13)^3 + $1,160(1.13)^2 + $1,380(1.13) + $2,120 = $6,502.50 c. FV@22% = $930(1.22)^3 + $1,160(1.22)^2 + $1,380(1.22) + $2,120 = $7,218.88 On BAII plus: F01 to F04 = 1 CF0. $0 C01 $930 C02. $1,160 C03. $1,380 C04 $2,120 I= 7 I=13 I=22 NPV=$6,063.97 NPV = $6,502.50 NPV = $7,218.88

You've worked out a line of credit arrangement that allows you to borrow up to $40 million at any time. The interest rate is .52 percent per month. In addition, 6 percent of the amount that you borrow must be deposited in a non-interest-bearing account. Assume that your bank uses compound interest on its line of credit loans. a. What is the effective annual interest rate on this lending arrangement? b. Suppose you need $22 million today and you repay it in 6 months. How much interest will you pay?

a. If you borrow $40,000,000, the compensating balance will be: Compensating balance = $40,000,000(.06) = $2,400,000 Your total repayment will be based on the full amount of the loan including the compensating balance, so at the end of the year you will owe: Interest = $40,000,000(1 + .0052)12Interest = $42,568,637.55 You will receive your compensating balance back at the end, so the year-end cash flow will be: Year-end cash flow = $42,568,637.55 - 2,400,000 Year-end cash flow = $40,168,637.55 However, with the compensating balance, you will only get the use of: Amount received = $40,000,000 - 40,000,000(.06) Amount received = $37,600,000 This means the periodic interest rate is: FV = PV(1 + R) $40,168,637.55 = $37,600,000(1 + R) R = $40,168,637.55 / $37,600,000 - 1 EAR = .0683, or 6.83% b. To end up with $22,000,000, you must borrow: Amount to borrow = $22,000,000 / (1 - .06) Amount to borrow = $23,404,255.32 The total interest you will pay on the loan is: Total interest paid = $23,404,255.32(1.0052)^6 - 23,404,255.32 Total interest paid = $739,771.61

RAK Corp. is evaluating a project with the following cash flows: Year Cash Flow 0 -$29,800 1 12,000 2 14,700 3 16,600 4 13,700 5 -10,200 The company uses an interest rate of 9 percent on all of its projects. a. Calculate the MIRR of the project using the discounting approach. b. Calculate the MIRR of the project using the reinvestment approach. c. Calculate the MIRR of the project using the combination approach.

a. In the discounting approach, we find the value of all negative cash outflows at Time 0, while any positive cash inflows remain at the time at which they occur. Time 0 cash flow = -$29,800 - $10,200 / 1.09^5 Time 0 cash flow = -$36,429.30 So, the MIRR using the discounting approach is: 0 = -$36,429.30 + $12,000 / (1 + MIRR) + $14,700 / (1 + MIRR)^2 + $16,600 / (1 + MIRR)^3 + $13,700 / (1 + MIRR)^4 Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find: MIRR = 19.99% b. In the reinvestment approach, we find the future value of all cash flows, except the initial cash flow, at the end of the project. So, reinvesting the cash flows to Time 5, we find: Time 5 cash flow = $12,000(1.09^4) + $14,700(1.09^3) + $16,600(1.09^2) + $13,700(1.09) - $10,200 Time 5 cash flow = $60,431.37 So, the MIRR using the reinvestment approach is: 0 = -$29,800 + $60,431.37 / (1 + MIRR)^5 $60,431.37 / $29,800 = (1 + MIRR)^5 MIRR = ($60,431.37 / $29,800)^(1/5) - 1 MIRR = .1519, or 15.19% c. In the combination approach, we find the value of all cash outflows at Time 0, and the value of all cash inflows at the end of the project. Time 0 cash flow = -$29,800 - $10,200 / 1.09^5 Time 0 cash flow = -$36,429.30 Time 5 cash flow = $12,000(1.09^4) + $14,700(1.09^3) +$16,600(1.09^2) + $13,700(1.09) Time 5 cash flow = $70,631.37 So, the MIRR using the combination approach is: 0 = -$36,429.30 + $70,631.37 / (1 + MIRR)^5 $70,631.372 / $36,429.30 = (1 + MIRR)^5 MIRR = ($70,631.37 / $36,429.30)^(1/5) - 1 MIRR = .1416, or 14.16%

During 2014, Raines Umbrella Corp. had sales of $770,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $610,000, $125,000, and $180,000, respectively. In addition, the company had an interest expense of $56,000 and a tax rate of 35 percent. (Ignore any tax loss carryback or carryforward provisions.) a.What is Raines's net income for 2014? b.What is the company's operating cash flow?

a. Income Statement Sales$770,000 COGS 610,000 A&S expenses 125,000 _Depreciation 180,000_ EBIT$-145,000 _Interest 56,000_ Taxable income$-201,000 _Taxes (35%) 0_ Net income (loss)$-201,000 - - b. OCF = EBIT + Depreciation − Taxes OCF = -$145,000 + 180,000 − 0 OCF = $35,000

The following is the sales budget for Harp, Inc., for the first quarter of 2015: January February March Sales budget $196,000 $216,000 $239,000 Credit sales are collected as follows: 55 percent in the month of the sale 20 percent in the month after the sale 25 percent in the second month after the sale The accounts receivable balance at the end of the previous quarter was $80,000 ($50,000 of which was uncollected December sales). a.Calculate the sales for November. b.Calculate the sales for December. c.Calculate the cash collections from sales for each month from January through March

a. The November sales must have been the total uncollected sales minus the uncollected sales from December, divided by the collection rate two months after the sale, so: November sales = ($80,000 - 50,000) / .25 November sales = $120,000.00 b. The December sales are the uncollected sales from December divided by the collection rate of the previous months' sales, so: December sales = $50,000 / .45 December sales = $111,111.11 c. The collections each month for this company are: Collections = .25(Sales from 2 months ago) + .20(Last month's sales) + .55(Current sales) January collections = .25($120,000.00) + .20($111,111.11) + .55($196,000) January collections = $160,022.22 February collections = .25($111,111.11) + .20($196,000) + .55($216,000) February collections = $185,777.78 March collections = .25($196,000) + .20($216,000) + .55($239,000) March collections = $223,650.00

Consider the following two mutually exclusive projects: Year Cash Flow(A) Cash Flow(B) 0 -$354,000 -$48,000 1 41,000 23,600 2 61,000 21,600 3 61,000 19,100 4 436,000 14,200 Whichever project you choose, if any, you require a 14 percent return on your investment. a. What is the payback period for each project? b. What is the discounted payback period for each project? c. What is the NPV for each project? d. What is the IRR for each project? e. What is the profitability index for each project?

a. The payback period for each project is: A:3 + ($191,000 / $436,000) = 3.44 years B:2 + ($2,800 / $19,100) = 2.15 years The payback criterion implies accepting Project B because it pays back sooner than Project A. b. The discounted payback for each project is: A: $41,000 / 1.14 + $61,000 / 1.14^2 + $61,000 / 1.14^3 = $124,075.69 $436,000 / 1.144 = $258,147.00 Discounted payback = 3 + ($354,000 - 124,075.69) / $258,147.00 = 3.89 years B: $23,600 / 1.14 + $21,600 / 1.142 = $37,322.25 $19,100 / 1.143 = $12,891.96 Discounted payback = 2 + ($48,000 - 37,322.25) / $12,891.96 = 2.83 years The discounted payback criterion implies accepting Project B because it pays back sooner than A c. d. e. Project A CF0 -$354,000 $0 C01 $41,000 C02 $61,000 F01 2 C03 $436,000 I = 14% IRR = 16.64% I= 14$ NPV = $28,222.69 $382,222.69 PI=382,222.69/354,000 =1.080 Project B CF0 -$48,000 $0 C01 $23,600 C02 $21,600 C03 $19,100 C04 $14,200 I = 14% IRR = 25.38% I = 14% NPV = $10,621.75 $58,621.75 PI=58,621.75/48,000 =1.221

In March 2012, Daniela Motor Financing (DMF), offered some securities for sale to the public. Under the terms of the deal, DMF promised to repay the owner of one of these securities $250 in March 2042, but investors would receive nothing until then. Investors paid DMF $125 for each of these securities; so they gave up $125 in March 2012, for the promise of a $250 payment 30 years later. a. Assuming that you purchased the bond for $125, what rate of return would you earn if you held the bond for 30 years until it matured with a value $250? b. Suppose under the terms of the bond you could redeem the bond in 2022. DMF agreed to pay an annual interest rate of .6 percent until that date. How much would the bond be worth at that time? c.In 2022, instead of cashing in the bond for its then current value, you decide to hold the bond until it matures in 2042. What annual rate of return will you earn over the last 20 years?

a. FV = PV(1 + r)^t Solving for r, we get: r = (FV / PV)^(1/t) - 1 r = ($250 / $125)^(1/30) - 1 r = .0234, or 2.34% N= 30 Solve I/y=2.34% PV=$125 PMT 0 FV: $250 b. FV = PV(1 +r)^t FV = $125(1 + .006)^10 FV = $132.71 N= 10 I/y=.6% PV=$125 PMT 0 FV: $132.71 c r = (FV / PV)^(1/t) - 1 r = ($250 / $132.71)^(1/20) - 1 r = .0322, or 3.22% N= 20 I/y=3.22% PV=$132.71 PMT 0 FV: $250

You want to buy a new sports coupe for $91,500, and the finance office at the dealership has quoted you an APR of 7.3 percent for a 72 month loan to buy the car. a. What will your monthly payments be? b. What is the effective annual rate on this loan?

a. PVA = C({1 − [1 / (1 + r)^t]} / r) $91,500 = $C[1 − {1 / [1 + (.073 / 12)]^72} / (.073 / 12)] C = $91,500 / 58.16176C = $1,573.20 b. EAR = [1 + (APR / m)]^m − 1 EAR = [1 + (.073 / 12)]^12 − 1 EAR = .0755, or 7.55% Calculator: a. N= 72 I/Y= 7.30% PV= $91,500 Solve PMT= $1,573.20 b. NOM= 7.3%. Solve EFF= 7.55%. C/Y= 12

Consider the following income statement for the Heir Jordan Corporation: HEIR JORDAN CORPORATION Income Statement Sales $46,800 Costs 36,200 Taxable income $10,600 Taxes (35%) 3,710 Net income $6,890 Dividends$3,400 Addition to retained earnings 3,490 The projected sales growth rate is 10 percent. a. Prepare a pro forma income statement assuming costs vary with sales and the dividend payout ratio is constant. b. What is the projected addition to retained earnings?

a. Pro Forma Income Statement Sales $ 51,480 Costs 39,820 Taxable income $ 11,660 Taxes. 4,081 Net income. $ 7,579 b. Taxes (35%) = $4,081 The payout ratio is constant, so the dividends paid this year is the payout ratio from last year times net income, or: Dividends=($3,400 / $6,890)($7,579) Dividends=$3,740 Addition to retained earnings= $7,579 - 3,740 = $3,839

Consider the following simplified financial statements for the Yoo Corporation (assuming no income taxes): Income Statement Balance Sheet Sales$33,600 Assets $24,350 Debt $6,850 Costs 27,800 Equity 17,500 Net income$5,800 Total$24,350 Total $24,350 The company has predicted a sales increase of 20 percent. Assume Yoo pays out half of net income in the form of a cash dividend. Costs and assets vary with sales, but debt and equity do not. a. Prepare the pro forma statements. b. What is the external financing needed?

a. Pro forma income statement Pro forma balance sheet Sales$ 40,320 Assets $29,220 Debt$ 6,850 Costs 33,360 Equity 20,980 Net income$ 6,960 Total$ 29,220 Total$ 27,830 Dividends = $3,480 Addition to retained earnings = $3,480 Note that the balance sheet does not balance. This is due to EFN. The EFN for this company is: b. EFN= Total assets - Total liabilities and equity EFN= $29,220 - 27,830 EFN= $1,390

The Jackson-Timberlake Wardrobe Co. just paid a dividend of $1.60 per share on its stock. The dividends are expected to grow at a constant rate of 6 percent per year indefinitely. Investors require a return of 10 percent on the company's stock. a. What is the current stock price? b. What will the stock price be in three years? c. What will the stock price be in 12 years?

a. The constant dividend growth model is: Pt = D,t × (1 + g) / (R − g) So the price of the stock today is: P0 = D0(1 + g) / (R − g) P0 = $1.60(1.06) / (.10 − .06) P0 = $42.40 b. The dividend at Year 4 is the dividend today times the FVIF for the growth rate in dividends and four years, so: P3 = D,3(1 + g) / (R − g) = D0(1 + g)^4 / (R − g) P3 = $1.60(1.06)4 / (.10 − .06) P3 = $50.50 or P3 = P0(1 + g)^3 P3 =$42.40(1 + .06)^3 P3 = $50.50 c. P12 = P0(1 + g)^12 P12 = $42.40(1 + .06)^12 P12 = $85.32

A business created as a distinct legal entity and treated as a legal "person" is called a: a. Corporation. b. Sole proprietorship. c. General partnership. d. Limited partnership. e. Unlimited liability company.

a. Corporation

You have just made your first $5,800 contribution to your retirement account. Assume you earn a return of 12 percent per year and make no additional contributions. a. What will your account be worth when you retire in 37 years? b. What if you wait 10 years before contributing?

a. FV = PV(1 + r)^t FV = $5,800(1.12)^37 FV = $384,144.69 N= 37 I/y=12% PV=$5,800 PMT 0 FV: $384,144.69 b. FV = PV(1 + r)^t FV = $5,800(1.12)^27 FV = $123,684.31 N= 27 I/y=12% PV=$5,800 PMT 0 FV: $123,684.31

Consider the following simplified financial statements for the Yoo Corporation (assuming no income taxes): Income Statement Balance Sheet Sales $32,800 Assets. $25,950. Debt. $6,450 _Costs 26,290_ _Equity 19,500_ Net Income $6,510 Total $25,950 Total $25,950 The company has predicted a sales increase of 12 percent. It has predicted that every item on the balance sheet will increase by 12 percent as well. a. Create the pro forma statements and reconcile them. b. What is the plug variable?

a. In order for the balance sheet to balance, equity must be: Equity= Total liabilities and equity - Debt Equity= $29,064 - 7,224 Equity= $21,840 Equity increase= $21,840 - 19,500 = $2,340 Equity increase Pro Forma Income Pro forma Balance Sheet Sales $36,736 Assets $29,064 Debt $7,224 _Costs 29,444.80_ _Equity 21,840_ Net Income $7,291 Total $29,064 Total $29,064 b. Net income is $7,291 but equity only increased by $2,340; therefore, a dividend of: Dividend= $7,291 - 2,340 Dividend= $4,951 must have been paid. Dividends paid is the plug variable.

During 2014, Raines Umbrella Corp. had sales of $980,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $675,000, $85,000, and $190,000, respectively. In addition, the company had an interest expense of $51,000 and a tax rate of 35 percent. (Ignore any tax loss carryback or carryforward provisions.) a. What is Raines's net income for 2014? b. What is the company's operating cash flow?

a. Income Statement Sales. $980,000 COGS 675,000 A&S expenses 85,000 _Depreciation 190,000_ EBIT. $30,000 _Interest 51,000_ Taxable income. $-21,000 Taxes (35%) 0 Net income (loss)$-21,000 b. OCF = EBIT + Depreciation − Taxes OCF = $30,000 + 190,000 − 0 OCF = $220,000

You want to buy a new sports coupe for $74,500, and the finance office at the dealership has quoted you an APR of 5.6 percent for a 48 month loan to buy the car. a. What will your monthly payments be? b. What is the effective annual rate on this loan?

a. PVA = C({1 − [1 / (1 + r)^t]} / r) $74,500 = $C[1 − {1 / [1 + (.056 / 12)]^48} / (.056 / 12)] C = $74,500 / 42.91463C = $1,736.00 N= 48 I/Y= 5.60%/12 PV= $74,500 Solve PMT= $1,736 b. EAR = [1 + (APR / m)]^m − 1 EAR = [1 + (.056 / 12)]^12 − 1 EAR = .0575, or 5.75% NOM= 5.6% EFF= 5.75%. C/Y= 12

An investment project costs $10,000 and has annual cash flows of $2,870 for six years. a. What is the discounted payback period if the discount rate is zero percent? b. What is the discounted payback period if the discount rate is 5 percent? c. What is the discounted payback period if the discount rate is 20 percent?

a. R = 0%: 3 + ($1,390 / $2,870) = 3.48 years Discounted payback = Regular payback = 3.48 years b. R = 5%: $2,870 / 1.05 + $2,870 / 1.052 + $2,870 / 1.053 = $7,815.72 $2,870 / 1.054 = $2,361.16 Discounted payback = 3 + ($10,000 - 7,815.72) / $2,361.16 = 3.93 years c. R = 20%: $2,870(PVIFA,20%,6) = $9,544.21 The project never pays back.

Corporation Growth has $85,000 in taxable income, and Corporation Income has $8,500,000 in taxable income. Tax table: $ 0 - 50,000 15% 50,001 - 75,000 25% 75,001 - 100,000 34% 100,001 - 335,000 39% 335,001 - 10,000,000 34% a.What is the tax bill for each firm? b.Suppose both firms have identified a new project that will increase taxable income by $14,000. How much in additional taxes will each firm pay?

a. Taxes Growth =.15($50,000) + .25($25,000) + .34($10,000) Taxes Growth = $17,150 Taxes Income = .15($50,000) + .25($25,000) + .34($25,000) + .39($235,000) + .34($8,500,000 - 335,000) Taxes Income = $2,890,000 b. Each firm has a marginal tax rate of 34 percent on the next $14,000 of taxable income, despite their different average tax rates, so both firms will pay an additional $4,760 in taxes.

Locate the Treasury bond in Figure 7.4 maturing in November 2028. Assume a $10,000 par value. a. Is this a premium or a discount bond? b. What is its current yield? c. What is its yield to maturity? d. What is the bid-ask spread in dollars?

a. This is a premium bond because it sells for more than 100 percent of face value. The dollar asked price is: Price = (123.4609 / 100)($10,000)Price = $12,346.09 b. Current yield = Annual coupon payment / Price = $525.00 / $12,346.09 = .0425, or 4.25% c. The YTM is located under the "Asked Yield" column, so the YTM is 3.230 percent. d. The bid-ask spread is the difference between the bid price and the ask price = 123.4609 - 123.3828 = .0781 In dollars, the bid-ask spread = (.0781 / 100)($10,000) = $7.81

The Market-to-Book Ratio will tend to be large when... a. the firm's managers have created significant wealth for the shareholders. b. the firm is relying heavily on debt funding. c. the firm is growing very rapidly. d. the firm has a high degree of short-term solvency. e. the firm is entering a period of reduced profitability.

a. the firm's managers have created significant wealth for the shareholders.

What is the present value of $12,400 to be received 3 years from today if the discount rate is 5 percent? a. $10,191.90 b. $10,711.59 c. $11,247.17 d. $7,440.00 e. $10,631.00

b. $10,711.59 PV = $12,400 / 1.05^3 = $10,711.59

What is the future value of $3,048 invested for 8 years at 5.7 percent compounded annually? a. $3,816.36 b. $4,749.14 c. $3,804.65 d. $7,229.30 e. $7,399.71

b. $4,749.14 FV = $3,048 × 1.057^8 = $4,749.14

Which one of the following is a capital budgeting decision? a. Determining how many shares of stock to issue. b. Deciding whether or not to purchase a new machine for the production line. c. Deciding how to refinance a debt issue that is maturing. d. Determining how much inventory to keep on hand. e. Determining how much money should be kept in the checking account.

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

Which one of the following functions should be the responsibility of the controller rather than the treasurer? a. Daily cash deposit. b. Income tax returns. c. Equipment purchase analysis. d. Customer credit approval. e. Payment to a vendor.

b. Income tax returns

Which one of the following terms is used to describe the corporate financial planning method which uses the projected sales level as the basis for determining changes in balance sheet and income statement account values? a. Sales dilution method. b. Percentage of sales method c. Sales reconciliation method. d. Common-size method. e. Sales trend method.

b. Percentage of sales method

The following table contains DuPont equation component information for Western Sunset Camping Equipment and the camping equipment manufacturing industry average. Which of the following is a correct interpretation of this information? Profit Margin. Total Asset Turnover. EquityMultiplier Western Sunset .12 1.21 1.95 Industry Average. .13 1.37 1.45 a. Western Sunset is controlling costs better than the industry average. b. Western Sunset is relying on debt funding more heavily than the average firm in the industry. c. Western Sunset is using its assets more effectively than the industry on average. d. Western Sunset has a lower return on equity than the industry average. e. All of the above

b. Western Sunset is relying on debt funding more heavily than the average firm in the industry.

The difference between a firm's future cash flows if it accepts a project and the firm's future cash flows if it does not accept the project is referred to as the project's: a. external cash flows. b. incremental cash flows. c. erosion effects. d. financing cash flows. e. internal cash flows.

b. incremental cash flows.

Which one of the following types of costs was incurred in the past and cannot be recouped? a. incremental b. sunk c. side d. opportunity e. erosion

b. sunk

Which one of the following best describes the concept of "erosion" in the context of capital budgeting? a. the alternative that is forfeited when a fixed asset is utilized by a project b. the cash flows of a new project that come at the expense of a firm's existing cash flows c. change in net working capital related to implementing a new project d. the differences in a firm's cash flows with and without a particular project e. expenses that have already been incurred and cannot be recovered

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

On the statement of cash flows, which of the following are considered operating activities? I. Costs of goods sold. II. Decrease in accounts payable. III. Purchase of equipment. IV. Dividends paid. a. I and III only b. III and IV only c. I and II only d. I, III, and IV only e. I, II, III, and IV.

c. I and II only

A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a: a. General partner. b. Sole proprietor. c. Limited partner. d. Corporate shareholder. e. Zero partner.

c. Limited partner

The cash coverage ratio directly measures the ability of a firm to meet which one of its following obligations? a. Payment to supplier. b. Payment to employee. c. Payment of interest to a lender. d. Payment of principal to a lender. e. Payment of a dividend to a shareholder.

c. Payment of interest to a lender.

Which of the following is the best definition of the "marginal tax rate"? a. Total taxes paid divided by total taxable income b. The highest tax rate specified by the tax code for any level of income c. The amount of tax payable on the next dollar earned d. The after-tax equivalent rate of return on an investment e. The lowest tax rate possible on any corporate income

c. The amount of tax payable on the next dollar earned

Which one of the following statements concerning a sole proprietorship is correct? a. A sole proprietorship is designed to protect the personal assets of the owner. b. The profits of a sole proprietorship are subject to double taxation. c. The owner of a sole proprietorship is personally responsible for all of the company's debts. d. There are very few sole proprietorships remaining in the U.S. today. e. A sole proprietorship is structured the same as a limited liability company.

c. The owner of a sole proprietorship is personally responsible for all of the company's debts.

The DuPont Identity... a. is just another name for the formula for return on equity b. describes return on equity as the mathematical product of four financial ratios c. explains return on equity as being determined by three key firm characteristics. d. states that total cash flow from assets must equal cash flow to investors. e. C. & D.

c. explains return on equity as being determined by three key firm characteristics.

The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following? a. retrograde investment expense b. wasted value c. opportunity cost d. capital entrapment e. alternative externality

c. opportunity cost

Which one of the following terms is defined as the management of a firm's long-term investments? a. Working capital management. b. Financial allocation. c. Agency cost analysis. d. Capital budgeting. e. Capital structure.

d. Capital Budgeting

Public offerings of debt and equity must be registered with which one of the following? a. New York Board of Governors. b. Federal Reserve. c. NYSE Registration Office. d. Securities and Exchange Commission. e. Market Dealers Exchange.

d. Securities and Exchange Commission.

With respect to single individual cash flows (not annuities or perpetuities), what is the relationship between the present value interest factor and the future value interest factor? a. The present value and future value factors are equal to each other. b. The present value factor is the exponent of the future value factor. c. The future value factor is the natural logarithm of the present value factor. d. The two factors are reciprocals of each other. e. There is no relationship between these two factors.

d. The two factors are reciprocals of each other.

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? a. salvage principle b. underlying value principle c. equivalent cost principle d. stand-alone principle e. fundamental principle

d. stand-alone principle

Which of the following is a problem which sometimes arise when one is conducting financial statement analysis? a. One time events may give misleading signals concerning financial performance. b. Different firm's may use different fiscal years. c. In globally dispersed industries differing accounting standards make comparisons complex. d. Many firms are conglomerates which do not fit well into a single industry category. e. All of the above

e. All of the above

A stakeholder is: a. A person who owns shares of stock. b. Any person who has voting rights based on stock ownership of a corporation. c. A person who initially founded a firm and currently has management control over that firm. d. A creditor to whom a firm currently owes money. e. Any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm.

e. Any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm.

Which one of the following terms is defined as the mixture of a firm's debt and equity financing? a. Working capital management. b. Cash management. c. Cost analysis. d. Capital budgeting. e. Capital structure.

e. Capital Structure

Corporate bylaws... a. Must be amended should a firm decide to increase the number of shares authorized. b. Cannot be amended once adopted. c. Define the name by which the firm will operate. d. Describe the intended life and purpose of the organization. e. Determine how a corporation regulates itself.

e. Determine how a corporation regulates itself.

A business owned by a solitary individual who has unlimited liability for its debt is called a: a. Corporation. b. Sole proprietorship. c. General partnership. d. Limited partnership. e. Limited liability company.

e. Limited liability company.

The Sarbanes-Oxley Act of 2002 is a governmental response to: a. Decreasing corporate profits. b. The terrorists attacks on 9/11/2001. c. A weakening economy. d. Deregulation of the stock exchanges. e. Management greed and abuses.

e. Management greed and abuses.

The controller of a corporation generally reports directly to the: a. Board of directors b. Chairman of the board c. Chief executive officer d. President e. Vice president of finance (or CFO).

e. Vice president of finance (or CFO).

Which one of the following terms is the name for a set of rules describing how the corporation regulates its existence (ex. how directors are elected)? a. Articles of incorporation. b. Corporate breakdown. c. Agency problem. d. Legal liability. e. Bylaws.

e. bylaws

Which of the following is a method of presenting a firm's financial statements in percentage terms by dividing every item on the income statement by sales and dividing every item on the balance sheet by total assets? a. industry trend profiling b. percentage normalization c. peer group analysis d. common-base year analysis e. common-size financial statements

e. common-size financial statements

Which one of the following terms is used to describe a loan that calls for periodic interest payments during the loan and then a lump sum principal payment at the end of the loan? a. Amortized loan b. Modified loan c. Partially amortized loan with "balloon" payment d. Pure discount loan. e. Interest-only loan.

e. interest-only loan

Long-term debt ratio

long term debt / (long term debt + total equity)

Tobin's Q ratio

market value of assets / replacement cost of assets

Market to Book Ratio

market value per share / book value per share

Price Earnings Ratio

price per share/earnings per share

Price-sales ratio

price per share/sales per share

Profitability Ratios

profit margin, ROA, ROE