FINA 6301 Exam 1 (Ch. 1-6)

A firm has a total debt ratio of .47. This means the firm has 47 cents in debt for every:

$0.53 in total equity

A firm has $820 in inventory, $3,200 in fixed assets, $1,210 in accounts receivable, $890 in accounts payable, and $360 in cash. What is the amount of the net working capital?

$1,500

Mart's Boutique has sales of $820,000 and costs of $540,000. Interest expense is $36,000 and depreciation is $59,000. The tax rate is 35%. What is the net income?

$120,250

Beatrice invests $1,000 in an account that pays 5% simple interest. How much more could she have earned over a 10-year period if the interest had compounded annually?

$128.89

Ernie's Electrical is evaluating a project which will increase sales by $50,000 and costs by $30,000. The project will cost $150,000 and will be depreciated straight-line to a zero book value over the 10-year life of the project. The applicable tax rate is 34%. What is the operating cash flow for this project?

$18,300

A project costing $6,200 initially should produce cash inflows of $2,860 a year for three years. After the three years, the project will be shut down and will be sold at the end of Year 4 for an estimated net cash amount of $3,300. What is the net present value of this project if the required rate of return is 11.3 percent?

$2,903.19

You borrow $12,600 to buy a car. The terms of the loan call for monthly payments for five years at an interest rate of 4.65%, compounded monthly. What is the amount of each payment?

$235.76

Your firm has total sales of $22,980, costs of $14,715, and depreciation of $6,045. The tax rate is 34%. There are no interest expense or other income. What is the operating cash flow?

$7,510.20

Cado Industries has total debt of $6,800 and a debt-equity ratio of .36. What is the value of the total assets?

$25,689

Tool Makers manufactures equipment for use by other firms. The initial cost of one customized machine is $850,000 with an annual operating cost of $10,000 and a life of 3 years. The machine will be replaced at the end of its life. What is the equivalent annual cost of this machine if the required rate of return is 15% and we ignore taxes?

$382,280.42

Ben's Border Café is considering a project that will produce sales of $16,000 and increase cash expenses by $10,000. If the project is implemented, taxes will increase from $23,000 to $24,500 and depreciation will increase from $4,000 to $5,500. What is the amount of the operating cash flow using the top-down approach?

$4,500

Total assets are $1,450, fixed assets are $790, long-term debt is $750, and short-term debt is $300. What is the amount of current assets?

$660

You plan to invest $6,500 for three years at 4% simple interest. What will your investment be worth at the end of the three years?

$7,280.00

Which one of the following is a capital budgeting decision?

Deciding whether or not a new production facility should be built.

Nu-Tools plans to set aside an equal amount of money each year, starting today, so that it will have $25,000 saved at the end of three years. If the firm can earn 4.7%, how much does it have to save annually?

$7,596.61 (Don't forget to change PMT: to BEGIN)

A project will increase sales by $140,000 and cash expenses by $95,000. The project will cost $100,000 and will be depreciated using the straight-line method to a zero book value over the 4-year life of the project. The company has a marginal tax rate of 34%. What is the value of the depreciation tax shield?

$8,500

What is the net present value of a project that has an initial cash outflow of $7,670 and cash inflows of $1,280 in Year 1, $6,980 in Year 3, and $2,750 in Year 4? The discount rate is 12.5%.

$86.87

A preferred stock pays an annual dividend of $6.50 a share and has an annual rate of return of 7.35%. What is the stock price?

$88.44

A project will increase sales by $60,000 and cash expenses by $51,000. The project will cost $40,000 and will depreciated using the straight-line depreciation to a zero book value over the 4-year life of the project. The company has a marginal tax rate of 35%. What is the operating cash flow of the project using the tax shield approach?

$9,350

A credit card compounds interest monthly and has an effective annual rate of 12.67%. What is the annual (nominal) percentage rate?

11.99%

Homer is considering a project with cash inflows of $950 a year for Years 1 to 4, respectively. The project has a required discount rate of 11 percent and an initial cost of $2,100. What is the discounted payback period?

2.68 years

You are considering a project with an initial cost of $4,300. What is the payback period for this project if the cash inflows are $550, $970, $2,600, and $500 a year for Years 1 to 4, respectively?

3.36 years

Given the tax rate schedule, what is the average tax rate for a firm with taxable income of $218,700?

31.34%

The financial ratio days' sales in inventory is measured as:

365 days divided by the inventory turnover

You just paid $525,000 for a security that will pay you and your heirs $25,000 a year forever. What rate of return will you earn?

4.76%

Which one of these is a cash outflow from a corporation?

Dividend payment

Northern Industries has accounts receivable of $42,300, inventory of $61,200, sales of $544,200, and cost of goods sold of $393,500. How many days, on average, does it take the firm to sell its inventory?

56.77

The net working capital of a firm will decrease if there is:

A decrease in accounts receivable.

Which one of the following assets is generally the most liquid?

Accounts Receivable

Which statement concerning the net present value (NPV) of an investment or a financing project is correct?

Any type of project should be accepted if the NPV is positive and rejected if it is negative.

You have $2,500 to deposit into a savings account. The five banks in your area offer the following rates. In which bank should you deposit your savings?

Bank B: 3.69%, compounded monthly

In the accounting statement of cash flows, which one of these is calculated by adding back non-cash expenses to net income and adjusting for changes in current assets and liabilities?

Cash flow from operating activities

Which statement expresses all accounts as a percentage of total assets?

Common-size balance sheet

A business created as a distinct legal entity is called a:

Corporation

Which one of these is a correct definition?

Current assets are assets with short lives, such as inventory.

The quick ratio is measured as:

Current assets minus inventory, divided by current liabilities.

Which one of the following parties is considered a stakeholder of a firm?

Customer

For a firm with long-term debt, net income is equal to:

Dividends + Addition to Retained Earnings

An annuity stream of cash flow payments is a set of:

Equal cash flows occurring each time period over a fixed length of time.

A business formed by two or more individuals who each have unlimited personal liability for all of the firm's debts is called a:

General partnership

An increase in which one of the following accounts increases a firm's current ratio without affecting its quick ratio?

Inventory

Which one of these accounts is classified as a current asset on the balance sheet?

Inventory

A financing project is acceptable if its IRR is:

Less than the discount rate.

Which one of the following best describes the primary advantage of being a limited partner rather than a general partner?

Liability for firm debts is limited to the capital invested.

Ratios that measure a firm's ability to pay its bills over the short run without undue stress are known as:

Liquidity measures

Ratios that measure a firm's financial leverage are known as ________ ratios.

Long-term solvency

According to the Generally Accepted Accounting Principles, cost are:

Matched with revenues.

A stakeholder is any person or entity:

Other than a stockholder or creditor who potentially has a financial interest in the firm.

The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the:

Payback period

A flow of unending and equal payments that occur at regular intervals of time is called a(n):

Perpetuity

Wilson's Market is considering two mutually exclusive projects that will not be repeated. The required rate of return is 13.9 percent for Project A and 12.5 percent for Project B. Project A has an initial cost of $54,500, and should produce cash inflows of $16,400, $28,900, and $31,700 for Years 1 to 3, respectively. Project B has an initial cost of $69,400, and should produce cash inflows of $0, $48,300, and $42,100, for Years 1 to 3, respectively. Which project, or projects, if either, should be accepted and why?

Project A; because its NPV is positive while Project B's NPV is negative.

Matt is analyzing two mutually exclusive projects of similar size. Both projects have 5-year lives. Project A has an NPV of $18,389, a payback period of 2.38 years, an IRR of 15.9%, and a discount rate of 13.6%. Project B has an NPV of $19,748, a payback period of 2.69 years, an IRR of 13.4%, and a discount rate of 12.8%. He can afford to fund either project, but not both. Matt should accept:

Project B based on its NPV.

Interest rates or rates of return on investments that have been adjusted for the effects of inflation are called _________ rates.

Real

The salvage value of an assets creates an aftertax cash flow in an amount equal to:

Sales price minus the tax due based on the sales price minus the book value.

The basic regulatory framework for the public trading of securities in the United States was provided by the:

Securities Act of 1933 and the Securities Exchange Act of 1934.

The cash flow from a project is computed as the:

Sum of the incremental operating cash flow, capital spending, and net working capital cash flows incurred by the project.

Which one of the following statements is correct concerning the organizational structure of a corporation?

The controller reports to the Chief Financial Officer (CFO).

The debt-equity ratio is measured as:

Total debt divided by total equity

The equivalent annual cost method is useful in determining:

Which one of two machines to purchase when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out.

Anne is considering two independent projects with 2-year lives. Both projects have been assigned a discount rate of 13%. She has sufficient funds to finance one or both projects. Project A costs $38,500 and has cash flows of $19,400 and $28,700 for Years 1 and 2, respectively. Project B costs $41,000 and has cash flows of $25,000 and $22,000 for Years 1 and 2, respectively. Which project, or projects, if either, should you accept based on the profitability index method and what is the correct reason for that decision?

You should only accept Project A since it has the largest PI and the PI exceeds one.