fina 320 final
An asset turnover ratio of 1.75 can be interpreted as:
$1.75 in sales are generated for every $1.00 of assets
Assume that a firm takes on a project that requires an initial investment in Year 0 of $20,000. Also assume that the project produces cash inflows of $1,800 in all future years ( a perpetuity). If the required rate of return for this project is 6 percent, then what is the net present value for this project?
$10,000
What is the present value of $100 to be deposited today into an account paying 8%, compounded semiannually for 2 years?
$100
Imprudential, Inc., had an unfunded pension liability of $650 million that must be paid in 20 years. To assets the value of the firm's stock, financial analysts want to discount this liability back to the present. If the relevant discount rate is 8.5%, what is the present value of this liability?
$127.15 million
Company XYZ is evaluating a project and here is some information for the project. The unit sales price is projected to be $40 and sales volume to be 1,000 units in year 1,1250 units in year 2,and 1,325 units in year 3. The project has a 3 year life.Variable costs amount to $22.5 per unit and fixed costs are $10,000 per year. The project requires an initial investment of $16,500, which is depreciated straight-line to zero over the 3 year project life. The actual market value of the initial investment at the end of year 3 is $3,500. Initial net working capital investment of $7,500 and NWC will maintain a level equal to 20% of sales each year thereafter. The tax rate is 34% and the required return on the project is 10% What is EBIT for the project in the first year?
$2,000s
What is the net effect on a firm's net working capital if a new project requires $30,000 increase in inventory,$10,000 increase in accounts receivable, $25,000 increase in machinery, and a $20,000 increase in accounts payable?
$20,000 increase in NWC
Bertha plans to purchase 500 shares of preferred stock in five years and wants to know how much she must save each year to make the purchase. The preferred stock pays a $6 dividend per share and has a 16% required return. Bertha can deposit her money in an account paying 7% interest rate. How much must Bertha save at the end of each of the next five years to have enough money to purchase the 500 shares at the end of year 5?
$3,001 to $5,000
An investor receives a 15% total return by purchasing a stock for $40 and selling it after one year with 5% capital gain. How much was received in dividend income during the year?
$4.00
What is the current price of a share of stock for a firm with $5 million in balance sheet 500,000 shares of stock outstanding, and a price/book value ratio of 4?
$40
A firm generates sales of $250,000, depreciation expense of $50,000, taxable income of $50,000, and has a 35% tax rate. By how much does net cash flow deviate from net income?
$50,000
A firm reports a net profit margin of 10% on sales of $3 million when ignoring the effects of financing. If taxes are $200,000, how much is EBIT?
$500,000 Net profit margin=Net profit/Sales
A chief financial officer (CFO) is the top finance officer in a firm. Which function is CFO involved with? 1. Capital budgeting 2. Cost of capital management 3. Working capital management
1.2.and 3
Assume that a corporate bond has a par value of $1,000 and 15 years until it matures. Also assume that investors require an annual rate of return of 12% (compounded semi-annually), that coupon interest is paid semi-annually, that the current price for this bond is $931.18. What is the annual coupon rate on this bond?
11%
Assume you invested $1,000 in stocks 10 years ago, and that your account is now worth $2839.42. Determine the annual rate of return that you have earned on this investment
11%
In a year in which common stocks offered an average return of 18%, treasury bonds offered 10% and treasury bills offered 7%, the risk premium for common stock was;
11%
In a year in which commons stocks offered an average return of 18%, Treasury bonds offered 10%, and Treasury bills offered 7%, the risk premium for common stocks was:
11%
What is the WACC for a firm using 55% equity with a required return of 15%, 35% debt with a required return of 8%, 10% preferred stock with a required return of 10%, and a tax rate of 35%?
11.70%
What is the payback period for an investment with these cash flows: YR 0, -60,000; YR 1, 10,000; YR 2, 20,000; YR 3, 15,000; YR 4, 20,000; YR 5, 15,000?
3.75 years
An analyst gathered the following data about a company: Capital structure required rate of return 30% debt 10% for debt 20% preferred stock 11% for preferred stock 50% common stock 18% for common stock Assuming a 40% tax rate, what after-tax rate of return must the company earn on its investments?
13%
Approximately how long must one wait (to the nearest year) for an initial investment of $1,000 to triple in value (increase to $3000) if the investment earns 8% compounded annually?
14 years
What is the approximate standard deviation of returns if over the past 4 years an investment returned 8.0%, -12.0% and 16.0%?
14%
What is the required return for a stock that has a 6% constant growth rate, a price of $25, an expected dividend of $2 next year, and a p/E ratio of 10?
14%
You have been offered a $1000 par value bond for $846.88. The coupon rate is 8%, payable annually, and annual interest rates on new issues of the same degree of risk are 10%. You want to know how many more interest payments you will receive, but the party selling the bond cannot remember. Determine how many interest payments remain.
15 years
What rate of return should an investor expect for a stock that has a beta of 1.25 when a market is expected to yield 14% and Treasury bills offer 6%?
16%
Listed below are the financial statement numbers for Shick, inc, for the year 10%. They are listed in alphabetical order, NOT in the order they appear in a statement. The applicable tax rate is 40%. What is Shick's cash coverage rate in 2016, and is in Shick better able or less able to cover its interest charges than its peer groups, which has a cash coverage of 21 times?
18.5; peer group better able to cover interest expense
The Wilson Corporation has the following relationships: Sales/Total assets =2.0,Return on assets (ROA) = 4.0% ,Return on equity (ROE)= 6.0% what is Wilson's profit margin?
2%
An analyst has gathered the following information about a company:what is the account receivables turnover ratio?
2.0 (A/R turnover=sales/account receivable=1500/750=2
Most of the beneficial effects of diversification will have been received by the time a portfolio of common stock contains ___ stocks.
25
Your credit card has a balance of $1,000 and the bank requires a minimum monthly payment of $51.22. The annual interest rate on the credit card is 24%. If you only make minimum payment every month and do NOT make additional charges on the card,how long will it take to pay off the balance ?
25 months
If a firm sells inventory for cash for a profit, then the current ratio will always:
Increase
Your company is considering two mutually exclusive projects. If the cost of the capital for both of these projects is 10%, then what is the IRR for the project that has the higher NPV?
31.92%
your company is considering an expansion into a new product area. The company has collected the following information about the proposed product. The project has an anticipated economic life of 5 years -What is the operating cash flow in year 2 (T=2)?
330,000
Suppose you know that a company's stock currently sells for $60 per share and the required return on the stock is 14 percent. You also know that the total return on the stock is evenly divided between a capital gain yield and a dividend yield. If it's the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share? Round your answer to the nearest dollar.
4
Assume that a stock is expected to pay a $3.50 dividend next year (DIV1), which is then expected to grow at a constant annual rate. The stock is currently selling at $43.75 and investors require a 12 percent rate of return for this stock. What is the expected growth rate of the dividend?
4%
What is the percentage return on a stock that was purchased for $50.00, paid a $3 dividend after one year, and was sold for $49?
4%
What is the percentage return on a stock that was purchased for $50.00, paid a $3.00 dividend after one year, and was then sold for $49.00?
4%
Assume that a share of stock, priced at $52.5 per share, just paid a dividend of $2. The dividend is expected to grow at a long-run constant rate. The required rate of return is 4% higher than the dividend growth rate (or R-g= 4%). Given this information, determine the dividend yield of the stock.
4.00%
what is the internal rate of return of an investment with an initial cost of $ n50,000, and cash inflows at the end of years 1,2 and 3 of $30,000,$35,000 and $40,000,respectively. Is this an investment that would go in the acceptable group to the evaluating company, or not or don't know? What is the best answer?
45.7% cannot tell with the information provided whether it would be acceptable
Kelvin has $2,500 but needs $5,000 to purchase a new golf cart. If he can invest his money at a rate of 12% per year, approximately how many years will it take the money in kelvins account to grow to $5,000? Use the rule of 72 to determine your
6 years
Albright Motors is expected to pay a year-end dividend of $3.00 a share (DIV1 $3.00). The stock currently sells for $30 a share. The required (and expected) rate of return on the stock is 16 percent. If the dividend is expected to grow at a constant rate, g, what is g?
6%
The market price of a bond is $1,119.90; it has 4 years to maturity, a $1,000 par value, and pays a coupon of $100 every year. What is the yield to maturity?
6.50%
You have $10,000 to invest in a stock portfolio. Your choices are Stock X with a return of 15 percent and Stock Y with a return of 10 percent If your goal is to create a portfolio with a return of 13.5 percent, how much money will you invest in Stock X? Round your answer to the nearest dollar.
7,000
South Penn Trucking is financing a new truck with a loan of $10,000 to be repaid in 5 annual end of year installments of $2,504.56. What annual interest rate is the company paying?
8%
What is the current yield of a bond with a 6% coupon, 4 years until maturity, and a price of $750?
8.0%
You have the following data for a company. What is the return on assets? Return equity= 15%. Earnings before taxes= $50,000; Total assets turnover= 1.2; Profit margin= 7.5%; Tax rate= 35%.
9%
An analyst has gathered the following information about a company:
9.26%
____ refers to the way a company finances itself through some combination of loans, bond sales, preferred stock sales, common stock sales, and retention of earnings.
: capital structure
Hanson Aluminum Inc is considering whether to build a mill based around a new technology the company has been developing. Management views this project as being riskier than the average project the company undertakes. Based on their analysis of the projected cash flows, management determines that the projects internal rate of return is equal to the company's cost of capital. If the project goes forward, the company will finance it with newly issued debt with an after-ta cost less than the project's IRR. Should management accept or reject this project?
:Reject, because the project reduces the value of the company when its risk is taken into account.
Which of the following is the most appropriate decision rule for mutually exclusive projects?
Accept the project with the highest positive NPV
From the following balance sheet accounts, what is the change in net working capital for the year 2014
A decrease of $30 in net working capital
Which of the statements below is TRUE?
Accounting Identity is: Assets = Liabilities + Owners' Equity.
Coupon rate of a bond equals:
A percentage of it
Which of the following events will reduce a company's weighted average cost of capital (WACC)?
A reduction in the market risk premium
Which of the following would most likely be considered the most liquid asset?
A share of IBM common stock
A stock investor owns a diversified portfolio of 15 stocks. What will be the likely effect on portfolio return standard deviation from adding one more stock?
A slight decrease will occur
Which of the following statements about zero-coupon bonds is FALSE?
A zero coupon bond may sell at a premium to par when interest rates decline
The managers of Kenforest Grocers are trying to determine the company's optimal capital budget for the upcoming year. Kenforest is considering the following projects: The company estimates that its WACC is 11 percent. All projects are independent. The company adjusts for risk by adding 2 percentage points to the WACC for hi-risk projects and subtracting 2 percentage points from the WACC for low-risk projects. Which of the projects will the company accept?
A,B,C,F
Given the following information, what is your best estimate for the firm's cost of equity on january 2,2012,if the stock sells for $42 on that day?
About 25%, About 23%
1.) Sarah Kelly, CFA, is analyzing two mutually exclusive investment projects. Kelly has calculated the net present value (NPV) and internal rate return (IRR) for each project:
Accept Project 2 only
Jack Smith,Cfa, is analyzing independent investment projects X and Y. Smith has calculated the net present value and internal rate of return for each project: Project x:NPV=$250;IRR=15% Project Y:NPV=$5,000;IRR=8% Smith should make which of the following recommendations concerning the two projects?
Accept both projects
An analyst has gathered the following data about a company with a 12% cost of capital: If projects P and Q are mutually exclusive,what should the company do?
Accept project P and reject Project Q
When a company is evaluating two mutually exclusive projects that both have positive NPV but have conflicting NPV and IRR project rankings, the company should:
Accept the project with the higher net present value
Which of the following best explains the combination of a high level of sales combined with a low cash flow during accounting period?
Acquisition of equipment
Assume a project has normal cash flows (that is the initial cash flow is negative, and all other cash flows are positive). Which of the following statements is most correct?
All else equal, a project's NPV increases as the cost of capital declines.
Which of the following is a function of the secondary market?
All of the above
Which of the following statements is most correct?
All of the above
Which of the following is NOT an example of annuity cash flows?
All of the examples above are annuity cash flows
In capital budgeting analysis, an increase in working capital can be shown as:
An outflow at the beginning and an equal inflow at the end of the project
Periodic receipts of interest by bondholders are known as:
Coupon payments
A company is considering a new project. The company CFO plans to calculate the project NPV by discounting the relevant cash flows (Which include the initial investment, the operating cash flows, and the salvage values) at the company's cost of capital. Which of the following factors should the CFO include when estimating the relevant cash flows?
Any opportunity cost associate with the project
Which of the following is false concerning diversification? Assume that the securities being considered for selection into a portfolio are not perfectly correlated.
As more securities are added to the portfolio,the systematic risk of the portfolio declines
Which of the following would most likely decrease a firm's current ratio if that ratio is currently 2.0?
Both A and D (Buy raw materials on credit and Pay off a portion of long-term debt with cash)
Firms that make investment decisions based on the payback rule may be biased toward rejecting projects with:
Both B and C
Which of the following is fixed for the life of a given bond?
Coupon rate
Which of the following bonds would be considered to be of an investment grade?
Baa-rated bond
The financial statement that shows what a company owns and owes is called the
Balance Sheet
The restrictive covenants of a bond indenture are intended to protect the interest of ___:
Bondholders
which of the following is a typical reason for differences between profit and cash flow?
Both A and C ( Depreciation expense and changing levels of accounts receivable)
Which of the following will occur in a statement of cash flows as a result of paying cash dividends?
Cash flows from financing will decrease.
Which of the following is likely to be correct for a CCC-rated bond, compared to a BBB-rated bond?
Both B and C ( The ccc bond will sell for a lower price and the ccc bond will offer a higher promised yield to maturity)
Sunnyside corporation has calculated the following information for the projects Y and Z Project
Both Projects' IRR are higher than 16%
The sunnyside corporation has calculated the following information for the projects Y and Z: Project Initial Cost NPV at 16% Y 125,000 15,000 Z 125,000 18,500 Both projects have conventional cash flow patterns. Which of the following must be true?
Both projects' IRRs are higher than 16%
Which of the following statements regarding the internal rate of rate of return (IRR) is most accurate?
Both statements B and C are correct
Which of the following statements regarding the internal rate of return is MOST accurate?
Both statements B and C are correct
-------- is the area of finance concerned with activities such as borrowing funds to finance projects such as plant expansions or new product launches
Corporate Finance
A company has a target capital structure of 40% debt and 60% equity. The company is a constant growth firm that just paid a dividend of $2.00, sells for $27.00 per share, and has a growth rate of 8%. The company's bonds pay 10% coupon (semi-annual payment), mature in 20 years, and sell for $849.54. The company's stock beta is 1.2. The company's marginal tax rate is 40%. The risk-free rate is 4%. The market risk premium is 10%. The cost of equity using the capital asset pricing model (CAPM) and the constant growth model is:
CAPM: 16.0%: CGM 16.0%
____ is at the heart of corporate finance because it is concerned with making the best choices about project selection.
Capital Budgeting
The process of planning, evaluating, selecting, and managing the financing of long-term operating projects of the company is termed ___
Capital budgeting
Skippy had been offered two alternative payment options to pay for his new speed boat. Alternative 1 involves an initial payment of $3,000 and monthly payments of $250 for 3 years. Alternative 2 involves $0 initial payment but monthly payment of $500 for 2 years. For both alternatives, the first monthly payment ($250 and $500) occur at the end of month 1.Assume the relevant discount rate is 9% annual interest compounded monthly. In today's dollars, alternative 1 is:
Cheaper by about $83 dollars
Which of the following choices best describes the role of taxes on the after-tax cost of capital in the U.S. from the different capital sources?
Common Equity: no effect: preferred equity: no effect: debt: decrease
Which of the following choices best describes the role of taxes on the tax cost of capital in the U.S from the different capital sources?
Common equity: no effect; preferred equity: no effect; debt: decrease
Preferred stocks are different from common stocks in that
Common stockholders have voting rights while preferred stockholders do not
Why does the double taxation problem exist for corporations?
Corporations earn taxable income, pays taxes on that income, and then pay dividends to the stockholders, who also have net taxable income.
Which of the following would be considered a capital; budgeting decision ?
Deciding to expand into a new line of product, at a cost of $5 million
Which of the following actions will increase the present value of an investment?
Decrease the interest rate
Which of the following will increase the present value of an annuity, other things equal?
Decreasing the interest rate
Bond rating from AAA to C, measures a bond's ______
Default risk
Which of the following expense categories is subtracted from total revenues to help arrive at a firm's EBIT?
Depreciation expense
To determine a percent value of a future amount, one should _____ the future cash flows.
Discount
Present value calculations do which of the following?
Discount all future cash flows back to the present.
Two mutual fund managers, Martha and David, have been discussing whose fund is the top performer. Martha states that investors bought shares in her mutual fund ten years ago for $21 and those shares are now worth $65. David states that investors bought shares in his mutual fund for only $3 six years ago and they are now worth $7.30 which mutual fund manager had the higher growth rate for the management period?
David's fund
The NPV profile is a graphical representation of the change in net present value relative to a change in the:
Discount rate
Which of the following cash outflows does not reduce a firm's net income?
Dividends
The present value of a perpetuity can be determined by:
Dividing the payment by the interest rate.
Drysdale Financial Company and Commerce financial Company have the same total assets turnover, and the same return on equity. However, Drysdale has a higher return on assets than commerce. Which of the following can explain these ratios?
Drysdale has a higher profit margin and a lower debt ratio than commerce.
The income stmt begins with revenue and subtract various operating expenses until arriving at the intermediate point of.....?
EBIT
The income statement begins with revenue and subtracts various operating expenses until arriving at Earnings Before Interest and Taxes. Next, interest expense is subtracted to find the _____ for the period.
EBT, or taxable income
Which of the following is correct for a bond priced at $1,100 that has 10 years remaining until maturity, and a 10% coupon rate, with semiannual payments?
Each payment of interest equals $50
The board of directors is dissatisfied with last year's ROE of 15%. If the profit margin and asset turnover ratio remain unchanged at 8% and 1.25,respectively,by how much must the equity multiplier increase to achieve 20% ROE?
Equity multiplier must increase by 0.5
A stock's risk premium is equal to the:
Expected market risk premium time beta
Which of the following statements about the internal rate of return (IRR) and net present value (NPV) is least accurate?
For mutually exclusive projects, if the NPV rankings and the IRR rankings give conflicting signals, you should select the project with the higher IRR.
Which of the following statements about the constant growth dividend model is false?
For the constant growth dividend model to work, the growth rate must exceed the required return on equity.
Which of the following would correctly differentiate general partners from limited partners in a partnership
General partners have unlimited personal liability
Which of the following would correctly differentiate general partners from limited partners in a partnership?
General partners have unlimited personal liability
A $1,000 par value, 10% coupon bond with 15 years to maturity is priced at $951. The bond pays coupon annually. The bond's yield to maturity is:
Greater than its current yield
If the calculated net present value is negative, which of the following must be CORRECT. The discount rate used is:
Greater than the internal rate of return (IRR)
Which of the following would be considered an example of systematic risk?
Greater unemployment rate than expected
The __ the beta coefficient the __ the expected return, on average.
Higher; Higher
Which of the following calculations ignores the impact of the time value of money? I. Payback II. IRR III. Profitability index
I only
Which of the following is/are false regarding the balance sheet and income statement? I) The income statement reflects a summary of activity that occurs over some period of time while the balance sheet is a snapshot taken at a single point in time . II) Both represent a summary of activity that occurs over some period. III) The two statements, taken together, give an accurate estimate of the firm's cash flows and market value.
II and III only
Consider a project with an initial investment and positive future cash flows.As the discount rate is decreased the ___
IRR remains constant while NPV increases
Which of the following statements is true?
If a stock's dividend is expected to grow at a constant rate, then the growth rate of its price (price appreciation or capital gain) is exactly the same as the growth rate of its dividends
Which of the following statements regarding making investment decisions using net present value (NPV) and internal rate of return (IRR) is least accurate?
If projects are mutually exclusive, one should always choose the project with the highest IRR
Which of the following statements is true?
If the NPV of a project is positive, it should be accepted
Which of the following statements is incorrect?
If the discount (or interest) rate is positive,the future value of an annuity due will always be less than the future value of an equivalent regular annuity, and the present value of an annuity due will always be less than the present value of an equivalent regular annuity.
Sunk costs are _ in estimating an investment cash flow, since sunk cost are_
Ignored, not recoverable
Retained earnings result from:
Income not paid to shareholders
The financial statement that displays how much profit a business earned or lost is referred to as the
Income statement
Which of the following changes in working capital will result in an increase in cash flows?
Increase in accounts payable
The overall goal of capital budgeting projects should be to:
Increase the wealth of the firm's shareholders
The future value of one dollar today in five years ___ as the interest rate increases.
Increases
A firm is considering an investment in a project whose risk is greater than the current risk firm, based on any method for assessing risk, in evaluating this asset, the decision maker should
Increases the cost of capital used to evaluate the project to reflect the project's higher risk.
Which of the following actions are likely to reduce agency conflicts between stockholders and managers?
Increasing the threat of corporate takeover
In a firm with both a treasurer and a controller, which of the following would most likely be handled by the controller.
Internal auditing
In a firm with both a treasurer and a controller, which of the following would most likely be handled by the controller?
Internal auditing
What would you recommend to an investor who is considering an investment that, according to beta, plots above the security market line?
Invest; return is high relative to risk
The sale of obsolete equipment would be classified in the cash flow statement as:
Investing cash flow
____ is the area of finance concerned with the activities of buying and selling financial assets such as stocks and bonds
Investment
Which of the following statements regarding investment in working capital is incorrect?
Investment in working capital, unlike investment in plant and equipment, represents a positive cash flow.
Which of the following statements about IPO is false?
Investors trade a company's stocks among themselves during an IPO
Your financial team has done a detailed analysis of a proposed 10-year project and reported that the project NPV is $456 at a discount rate of 10%. A later review by the marketing team suggests that the project requires an additional $2,000 of inventory at year 0, which will be maintained through out the life the project but liquidated (without any loss or gain) at the end of project. How does the requirement for additional inventory impact the estimated project NPV?
It will decrease the NPV by $1,228.91
Consider a 10%, 10-year bond sold to yield 8%. One year passed and interest rates remained unchanged at 8%. What will have happened to the bond's price during this period? Assume the bond pays coupons semi-annually.
It will have decreased
If a project has a cost of $50,000 and a profitability index of 0.4, then:
Its NPV is $20,000
When Tri-C Corp. compares its ratios to industry averages, it has a higher current ratio, an average quick ratio, and a low inventory turnover. What might you assume about tri-C?
Its average inventory is too high
Which of the following statements is true for a project with $20,000 initial cost,cash inflows of $5,800 per year for 6 years, and a discount rate of 15%?
Its payback period is roughly 3 ½ years.
Which of the following statements is false about junk bonds?
Junk bonds must be bad investment and should be avoided
Last year Thatcher Industries had a current ratio of 1.2 a quick ratio of 0.8, and current liabilities of $500,000. Which of the following statements is most correct?
L Statements A and B are correct ( If the company obtained a short-term bank loan for $500,000 and used the proceeds to purchase inventory, its current ratio would fall and Last year Thatcher industries had $200,000 in inventories)
which of the following is not an advantage of a sole proprietorship?
Limited Liability
If the balance sheet of a firm indicates that total assets exceed current liabilities plus shareholder's equity, then the firm must have;
Long-term debt
All other things equal ( in other words, don't read anything else into the question), if the Flubber corporation were to experience an increase in COGS, this will result in ___ cash flow from ___ activities on the statement of cash flows.
Lower, operating
Financial information about Pepsi Co, Coca-Cola and McDonald's is given in the following table. DuPoint identity decomposes a firm's ROE into three components:operating efficiency, as measured by the profit margin(net income/sales); asset management efficiency, as measured by asset turnover (sales/total assets); and financial leverage, as measured by the equity multiplier (total assets/total equity) ___ has the best operating efficiency,___ has the asset management efficiency, and ___ has the highest financial leverage.
McDonald's,PepsiCo,PepsiCo
Which of the following is a major credit rating agency in the US?
Moody's
Edelman Engineering is considering including an overhead pulley system in this year's capital budget. The cash outlay for the pulley system is $22.430. The firm's cost of capital is 14%. After-tax cash flows are $7,500 for each of the next 5 years. Calculate the internal rate of return (IRR) and the net present value (NPV) for the project, and indicate the correct accept/reject decision.
NPV = $3,318; IRR = 20%; Accept
A new, more efficient machine will last 4 years and allow inventory levels to decrease by $100,000 during its life. At a cost of capital of 13%, how does the net working capital change affect the project's NPV?
NPV will increase
Edelman Engineering is considering including an overhead pulley system in this year's capital budget. The cash outlay for the pulley system is $22,430. The firm's cost of capital is 14%. After-tax cash flows are $7,500 for each of the next 5 years. Calculate the internal rate of return and the net present value for the project, and indicate the correct accept/reject decision.
NPV= $3,318; IRR= 20%; Accept
For mutually exclusive projects, if the NPV rankings and the IRR rankings give conflicting signals, you should select the project with the higher IRR. project x and y
Neither project
The ______ model is usually considered the best of the capital budgeting decision-making models.
Net present value (NPV)
Which of the following is not accurate in depicting cash flows from operations?
Net profit + depreciation + tax paid
A firm has $600,000 in current assets and $150,000 in current liabilities. Which of the following is correct if it uses cash to pay off $50,000 in accounts payable?
Net working capital will not change
In a firm's cash flow statement shows that cash was used for investments, which of the following would seem most likely?
New machines were acquired
Should a project be accepted if it offers an annual after-tax cash flow of $1,250,000 indefinitely, costs $10 million, is riskier than the firm's average projects, and the firm uses a 12.5% WACC?
No,since NPV is negative
A firm has a total book value of equity of $300,000, a market to book ratio of 3, and a book value per share of $8. What is the total market value of the firm's equity?
None of the above
A project will generate $1 million net cash flow annually in perpetuity. If the project costs $7 million, what is the lowest wacc shown below that will make the NPV?
None of the above
Assume that you deposit $1,250 at year 0 and that the annual interest rate is 6.482%, compounded quarterly. Given this information,determine what your balance will be at year 38.
None of the above
The standard deviation of individual stocks are generally higher than the standard deviation of the market portfolio because individual stocks:
None of the above
The standard deviations of individual stocks are generally higher than the standard deviation of the market portfolio because individual stocks:
None of the above
What is expected yield on the market portfolio at a time when Treasury bills yield 6% and a stock with a beta of 1.4 is expected to yield 18%?
None of the above
What is the expected yield on the market portfolio at a time when Treasury bills yield 6% and a stock with a beta of 1.4 is expected to yield 18%?
None of the above
Which of the following changes would be likely to increase the NPV of a project?
None of the above
Your subscription to Jogger's World Monthly is about to run out and you have the choice of renewing it by sending in the $10 a year regular rate or of getting a lifetime subscription to the magazine by paying $100. Your cost of capital is 7%. How many years would you have to live to make the lifetime subscription the better buy? Payments for the regular subscription are made at the beginning of each year.
None of the above
An investment earned the following returns 1998 through 2001; 30%,40%,15%, and 7%. What is the variance of returns for this investment?
None of the above ( sample quiz) so answer wont change
If a security plots below the security market line, it is;
Offering too little return to justify its risk
Which of the following statements is most correct?
One of the disadvantages of the sole proprietorship form of organization is that there is unlimited liability
Most U.S. corporate and government bonds choose to make ____ coupon payments.
Option D. Semiannual
A company is considering the purchase of a copier that costs $5,000.Assume a cost of capital of 10 percent and the following cash flow schedule: Year 1:$3,000 Year 2:$2,000 Year 3:$2,000 Determine the project's payback period and discounted payback period.
Payback period=2.0 years; discounted payback period=2.4 years
Assume a firm's current ratio equals 3.5. Which of the following actions would increase it?
Paying off a short-term bank loan with the proceeds from new long-term debt
The_is the market of first sale in which companies first sell their authorized shares to the public.
Primary market
Which of the following would be considered an advantage of the sole proprietorship form of organization?
Profits taxed at only one level
Allied Inc. is considering project A and Project b, which are mutually exclusive. Project a is an 8 year project that has an initial outlay or cost of $180,000. Its future cash inflows for years 1 through 8 are $38,000. Project B is also an 8 year project that has an initial outlay or cost of $160,000. Its future cash inflows for years 1 through 8 are the same at $34,500. The appropriate discount rate for both projects is 7.5% Which projects should Allied accept?
Project A because it has a higher NPV
Apple industries, a firm with unlimited funds, is evaluating five projects. Projects A and B are independent and Project C, D, and E are mutually exclusive. The projects are listed with their rate of return and NPV. Assume that the applicable discount rate is 10%. Which projects should the firm select?
Project A, Project B, Project C
Allocations of overhead should not affect a project's incremental cash flows unless the:
Project actually increase overhead expenses
Current ratio= CA/CL 3=1800/CL CL= 600 Quick ratio= (CA-INV)/CL) 1.5=(1800-INV)/(600) INV= 900 Inventory turnover ratio = COGS/INV= 5000/9000=5.56
Project cash flows are not conventional
Project selection ambiguity can arise if one relies on IRR instead of NPV when
Project cash flows are not conventional
Takelmer Industries has a different wacc for each of the three types of projects. Low risk projects have an 8% wacc, average risk projects a 10% wacc and a high risk projects a 12% wacc. Which of the following projects do you recommend that the firm accept?
Projects A,D,E,F,G
A bond with 10 years until maturity and an 8% coupon rate traded as its par value of $1000 yesterday. Its price jumps to $1109.05 today. What apparently happens to the yield to maturity of the bond?
Rates decreased by about 1.5%
The major benefit of diversification is to:
Reduce the expected risk.
Assume a firm uses a constant WACC to select investment projects rather than adjusting the projects for risk. If so, the firm will tend to:
Reject profitable, low-risk and accept unprofitable, high-risk projects
What must happen to asset turnover to leave ROE unchanged from its original 16% level if the profit margin is reduced from 8% to 6% and the equity multiplier increases from 1.2 to 1.6. Asset turnover must:
Remain constant
Datem Corp. has an expected return of 11%. With a risk-free rate of 3%, a market risk premium of 7% and a beta of 0.8, you can estimate its required return. What is the required return, and would Datem plot above or below the security market line (SML)?
Required return = 8.6%, plots above the SML
New projects or products can have a side effect on the firm as well as a direct effect. Which of the following appears to be a side effect of launching a new product?
Sales of a similar product of your firm's will decline
which of the following items would not be included in cash flow from investing?
Selling stock of the company
In which of the following organizations would agency problems be least likely to occur?
Sole proprietorship
The balance sheet is most likely to provide an analyst with information about firm's:
Solvency
A bond's indenture least likely specifies the
Source of funds for repayment
Under which of the following conditions will a future value calculated with simple interest interest exceed a future value calculated with compound interest at the same rate?
This is not possible with positive interest rates
Ashlyn Lutz makes the following statement to her supervisor, paul Ulring, regarding the basic principles of capital budgeting: Statement 1: The timing of expected cash flows is crucial for deter mining the profitability of a capital budgeting project. Statement 2: Capital budgeting decisions should be based on the after-tax net income produced by the capital project. Which of the following regarding Lutiz's statement is most accurate?
Statement 1 is Correct and Statement 2 is Incorrect.
Ashlyn Lutz makes the following statements to her supervisor, Paul Ulring, regarding the basic principles of capital budgeting.
Statement 1 is Correct and Statement 2 is Incorrect.
At a recent Haggerty Semiconductors Board of Directors meeting, Merle Haggerty was asked to discuss the topic of the company's weighted average cost of capital (WACC).
Statement 1: correct; Statement 2: correct
Which of the following risk would be classified as a non-systematic risk for an auto manufacturer?
Steel prices
Which of the following statements is more likely to be correct concerning the statement, " stock A has a higher expected return than stock B"?
Stock A has a higher Beta
Bud is an undiversified investor and is considering two alternative stocks for purchase. Stock A has a beta of 0.85 and stock B has a beta of 1.6. If Bud expects the stock market to boom next year, which stock should he purchase?
Stock B
Corporations are referred to as public companies when their:
Stock is publicly traded
For a project with conventional cash flows, if pl (profitability index) is greater than 1, then:
The NPV is greater than zero
Which of the following statements about NPV and IRR is NOT correct?
The NPV will be positive if the IRR is less than the cost of capital or discount rate
Assume that the Security Market Line (SML) is based on a risk free rate of 5% and a market return of 11%. What will happen to the sml if the forecast of risk-free rate increases and investors become more risk averse?
The SML will shift up and have a steeper slope
Which of the following is true regarding WACC?
The WACC is the required return on any investment a firm makes that has a level risk equal to that of present operations.
In general, what is changing as you read,down the left hand side of a balance sheet?
The assets become less liquid
Which of the following statements is correct for a 10% coupon bond that has a current yield of 7%
The bond's yield to maturity is less than 10%
Last year, your firm had a positive net cash flow, yet cash on the balance sheet decreased. Which of the following could explain the firm's financial performance?
The company purchased a lot of new fixed assets
In calculating the weighted average cost of capital (WACC), which of the following statements is least accurate?
The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt
A bond sold five weeks ago for $1,100. The bond is worth $1,150 in today's market. Assuming no changes in risk, which of the following is false
The coupon payment of the bond must have decreased
What happens to the coupon rate of a bond that pays $80 annually in interest if yield to maturity changes from 9% to 10%?
The coupon rate remains at 8%
Which of the following statements is TRUE?
The current ratio is current assets divided by current liabilities
Which of the following statements about the discounted payback period is least accurate?
The discounted payback period is generally shorter than the regular payback.
What will happen to the expected return on a stock with beta of 1.5 and a market risk premium of 9% if the Treasury bill yield increases from 3 to 5%? (assuming the change in T-bill yield does not affect the market risk premium).
The expected return will increase by 2.0%
A firm has a times interest earned ratio of 4.5 times. This means:
The firm has sufficient EBIT to cover its interest expense 4.5 times over
How would you interpret an inventory turnover ratio of 10.7
The firm has sufficient inventories to maintain sales for 34.1 days
A two-year investment of $3500 is made today at an annual interest rate of 5.75%. Which of the following statements is true?
The future value would be greater if the interest rate was higher
What is the typical relationship between the return standard deviation of an individual common stock and the return standard deviation of a diversified portfolio of common stocks?
The individual stock's return standard deviation is higher.
An investment of $100 today is worth $ 116.64 at the end of two years if it earns an annual interest rate of 8%. How much interest is earned in the first year and how much in the second year of this investment?
The interest earned in year one is $8.00 and the interest earned in year two is $8.64
In a partnership form of organization, income tax liability, if any, is incurred by:
The partners individually
Which of the following statements about the payback period is NOT correct?
The payback method, considers all cash flows throughout the entire life of a project if the cutoff year is shorter than the project life
What happens when a bond's expected cash flows are discounted at a rate lower than the bond's coupon rate?
The price of the bond is higher than the par value
Which of the following is false regarding risk and return?
The reward for bearing risk is known as the standard deviation.
The standard deviation for historical stock returns can be calculated as
The square root of the variance
Which of the following statements below is FALSE?
The times interest earned ratio tells us the number of times a company has resorted to debt financing over the year
Given the $75,000 initial investment in NWC,what change occurs for NWC during year 1?( diff question same data)
There is a $5,000 increase in NWC
Under which of the following conditions will a future value calculated with simple interest exceed a future value calculated with compound interest at the same rate?
This is not possible with positive interest rate
The accelerated depreciation of capital investments in MACRS depreciation provides a taxable expense that reduces taxes at a faster rate than with straight-line depreciation. Therefore, according to ____ concepts, we can surmise that lower tax expenses in the earlier years and higher tax expenses in the later years are better than a steady tax expense each year.
Time-value of money
The type of risk that we can diversify away is ________.
Unsystematic Risks face value
Select the statement that is most correct
When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are tax deductible
Simpson, Inc. is considering a five-year project that has an initial after-tax outlay or after-tax cost of $48,00. The representative future cash inflows from its project for years 1,2,3,4 and 5 are $15,000, $25,000, $35,000, $45,000, and -$70,000. The appropriate discount rate for this project is $9. Should Simpson accept the project?
Yes because the NPV is positive
Tapley Acquisition,Inc is considering the purchase of Tangent Company. The acquisition would require an initial investment of $190,000, but Tapley's after-tax net cash flows would increase by $30,000 per year and remain at this new level forever. Assume a cost of capital of 15% should Tapley buy Tangent?
Yes, because the NPV =$10,000
your neighbor owns a perpetuity of $100 per year that has a discount rate of 6% per year. He offers to sell to you all but the next 20 cash flows for $500. In other words, he keeps the first 20 cash flows of his perpetuity and you get all of the rest. Is this a good price for you if the appropriate discount rate is 6%?
Yes, because the present value of the remaining cash flows is $519.68 and you are buying them for only $500
The last annual dividend of Comptron Inc. was of $4. ITs stock beta is 1.1 and its dividend is expected to grow at a constant annual rate of 2% and 6% respectively. The new ceo wants to launch new initiatives for growth. In discussing the plans with the CFO, the new initiatives boil down to an increased growth rate of dividend to 5%, but at the cost of increasing beta to 1.4. Should the initiatives be undertaken?
Yes- new stock price should move to $71.19, an increase over its current price
The rate of return by investors in the market for owning a bond is called the:
Yield to maturity
You and your best friend are both 20 year old and recently graduated from NIU to start well-paid jobs in Chicago. Since you have taken Zhous Fina 320, you decide to save for retirement as early as possible. You plan to contribute $10,000 to your retirement account every year until you are 45. After that,you will stop contributing and enjoy life. Your friend, on the other hand, would like to enjoy his life for the next ten years after living like a pauper in college. However, he vows to start saving for retirement when he turns 30 and will contribute $10,000 to his retirement account every year until 67,when both of you will retire. Assume that both of you can earn an annual rate of return of 7%, who will have more money at retirement?
You will have 1,198,812.45 more than your friend
A bond that makes no coupon payments ( and thus is initially priced at a deep discount to par value) is called a ___ bond.
Zero coupon
The coupon rate of a bond equals:
a percentage of its face value
A bond is trading at a premium if its:
all the above
A year ago a company issued a bond with a face value of $1,000 with an 8% coupon. Now the prevailing market yield is 10%. What happens to the bond? The:
bond is traded at a market price of less than $1,000
A current ratio greater than 1 can tell us that the company must ___.
both A and B ( Have more current assets than current liability and Have positive net working capital)
Which of the following statements is correct for a firm in which depreciation expense exceeds EBIT? The firm:
can still have a positive net income.
A stock has been held for one year, during which time its dividend yield was greater than its capital gains yield. For this stock, the percentage return:
cannot be determined
The process of evaluating and selecting profitable long-term investments consistent with the firm's goal of shareholder wealth maximization is known as:
capital budgeting
The net income figure on an income statement is calculated before deducting:
cash dividends
When the management of a business is conducted by individuals other than the owners, the business is more likely to be a:
corporation
Whenever a new product competes against a company's already existing products and reduces the sales of those products, ____ occur.
negative side effects
One of the basic principles of capital budgeting is that:
decisions are based on cash flows, not accounting income
Suppose that the federal reserve takes action that cause the risk-free rate to fall.All else the same ( that is, the market risk premium and stock bets remain unchanged), we would expect a firm's cost of equity to ____
decrease if we are using the SML
An increase in depreciation expense will (other things equal):
decrease net income.
Agency problem can best be characterized as:
differing incentives between managers and owners.
Common stock can be valued using the perpetuity valuation formula if the
dividends are not expected to grow
A times interest earned ratio of 5.0 indicates that the firm:
earns significantly more than it's interest obligations.
When calculating the weighted average cost of capital (WACC) an adjustment is made for taxes because:
equity is risky
A stocks risk premium is equal to the:
expected market risk premium times beta
Although non-systematic risk is present in differing amounts, individuals stocks are:
exposed to differing amounts of systematic risk also.
A bond's par value can also be called its;
face value
Assume that a company has equal amounts of debt, comm on stock and preferred stock. An increase in the corporate tax rate of a firm will cause it's weighted average cost of capital (WACC) to
fall
Dividend models suggest that ____ determine the value of a financial asset to which the owner is entitled while holding the asset.
future cash flows
A firm is considering a $5,000 project that will generate an annual cash flow of $1,000 for the next 8 years. The firm has the following financial data: Market value of debt is $100 million Market value of equity is $200 million Cost of equity capital is 15% Cost of new debt is 6% Tax rate is 33% Determine the project's net present value (NPV) and whether or not to accept it.
none of the above
The value of proposed capital budgeting project depends on the:
incremental cash flows produced
If a bond is priced at par value, then:
its coupon rate equals its yield to maturity.
Which of the following is correct for a bond currently selling at a premium to par?
its current yield is lower than its coupon rate
What will happen to a stock that offers a lower risk premium than predicted by the Capm?
its price will decrease until the expected return is increased.
Dividends that are expected to be paid far into the future have:
lesser impact on current stock price due to discounting
If Treasury bills are yielding 10% at a time when the market risk premium is 6%, then the:
market portfolio should yield 16%
If a security plots below the security market line, it is
offering too little return to justify its risk
____ involves a cash flow that never occurs, but we need to add it as a costs or outflow of a new project.
opportunity costs
What is the coupon rate for a bond with 3 years until maturity, a price of $1,053.46, and a yield to maturity of 6%?(assume that the bond makes coupon payment annually).
option B. 8%
Which of the following actions could improve a firm's current ratio if it is now less than 1.0?
option C. Buy inventory on credit.
Haig Aircraft is considering a project that requires some initial investment today (t=0). The project will generate positive cash flows of $60,000 a year for the next five years (from t=1 to t=5). The project's NPV is $75,000 and the company's cost of capital is 10 percent. What is the project's regular payback?
option E. None of the above.
The concept of compound interest refers to:
payment of interest on previously earned interest
The main variables of the TVM equation are:
present value, future value, time, interest rate and payment.
The problem of motivating one party to act in the best interest of another party is known as the _
principal-agent problem
Which mutually exclusive project would you select, if both are priced at $1,000 and your discount rate is 15%: Project A with three annual cash flows of $1,000;or project B, with 3 years of zero cash flow followed by 3 years of $1,500 annually?
project A
When firms develop a WACC for individual projects based on the cost of capital for other firms in similar lines of business as the project, the firm is utilizing a:
pure play approach
Assume a firm uses a constant WACC to select investment projects rather than adjusting the projects for risk. If so, the firm will tend to :
reject profitable, low risk projects and accept unprofitable, high-risk projects.
all items on a common size income statement are expressed as a percentage of:
sales
A principal-agent relationship most likely exists between a company's:
shareholders and managers
Which of the following statements about depreciation is false?
since depreciation is a non-cash expense, the firm does not need to know the rate of depreciation when calculating operating cash flows.
over the past 75 years, which of the following investments has provided the largest average return?
small company stocks
A chief financial officer would typically
supervise both the treasurer and controller.
The relevant risk for the fair market pricing of financial securities is the ___
systematic risk
The current yield on a bond is equal to:
the annual coupon payment divided by the current market price the most recent interest rate.
Given that a company has a healthy current ratio but a significantly lower quick ratio, which of the following may not be true?
the company is rich in cash and receivables.
As the rating of a bond increases ( for example, from A, to AA, to AAA), it generally means that
the default risk decreases and the required rate of return decreases
The value of common stock will likely decrease if:
the discount rate increases
The company cost of capital (WACC) may be an inappropriate discount rate for a capital budgeting proposal if:
the proposal has a different degree of risk
If a company uses cash to pay off some of its accounts payables, what effect will this have on its liquidity ratios, give that the ratios exceeded 1.0 before the payoff?
the quick ratio and current ratio will both increase
Which of the statements below is false?
the times interest earned ratio tells us the number of times a company has resorted to debt financing over the year.
The variance of an investment's returns is a measure of the:
volatility of the rates of return.
