Finance Final Exam

Bartlett Batteries Inc. just paid an annual dividend of $1.12. If you expect a constant growth rate of 4% and have a required rate of return of 13%, what is the current stock price according to the constant growth dividend model?

$12.94

You buy a stock for which you expect to receive an annual dividend of $2.10 for the ten years that you plan on holding it. After 10 years, you expect to sell the stock for $26.15. What is the present value of a share for this company if you want an 8% return?

$26.20

A firm is considering purchasing an asset that will cost $1 million. Other depreciable costs include $100,000 in installation costs. If the asset is classified in the 3-year class, what is the annual depreciation for each year for this asset using the fixed depreciation percentages given by MACRS? (The percentages are 33.33%, 44.45%, 14.81%, and 7.41%, respectively.)

$366,630, $488,950, $162,910, and $81,510 for years 1, 2, 3, and 4, respectively

If you borrow $40,000 at an annual interest rate of 11% for seven years, what is the annual payment (prior to maturity) on a fully amortized loan?

$8,488.61

An analyst is considering an investment in Treetops Inc. and has gathered the following information. What is the expected return for a share of the firm's stock? State of the Economy Probability of the State Conditional Expected Return Treetops Inc. Recession .20 -20% Steady .40 10% Boom .40 35%

14.00%

If you can get 8% APR, how much would you need to put away per month to pay for your 5,000 dream vacation in 28 months.

163.02

Douglas Dynamics Inc. has outstanding $1,000 face value 8% coupon bonds that make semiannual payments, and have 14 years remaining to maturity. If the current price for these bonds is $1,118.74, what is the annualized yield to maturity?

6.68%

Stock A B C D Expected Return 5% 5% 7% 6% Standard Deviation 10% 12% 12% 11% Which of the following statements is TRUE?

A is a better investment than B.

What type of loan requires both principal and interest payments as you go by making equal payments each period?

Amortized loan

Which of the following types of bonds may the issuer buy back before maturity?

Callable bond

What is the impact on cash flow of a decrease in "other noncurrent liabilities" from one period to the next? Certeris paribus, of course.

Cash flow must have fallen.

What is the impact on cash flow of a decrease in inventories from one period to the next? Certeris paribus, of course.

Cash flow will have risen.

Which of the following actions will INCREASE the present value of an investment?

Decrease the interest rate.

________ costs each year do not reflect cash flow because the actual purchase and installation (outflow of dollars) of the asset have already taken place.

Depreciation

________ is the process of "expiring" the cost of a long-term tangible asset over its useful life.

Depreciation

Present value calculations do which of the following?

Discount all future cash flows back to the present

Bonds are different from stocks because ________.

bonds promise fixed payments for the length of their maturity

Depreciation and amortization should be included with..

cost of revenues

According to the text in Chapter 14, income statements are often prepared...

monthly for internal use and quarterly for external reporting.

The frequency of default on a home loan is ________ the frequency of default on a credit card.

much lower than

a dividend of $3.00 was paid yesterday & you expect it to grow 3% annually. If the stock price is $26.75...

the expected equity return is 14.55%

Suppose you postpone consumption so that by investing at 5% you will have an extra $500 to spend in one year. Suppose that inflation is 2% during this time. What is the approximate real increase in your purchasing power?

$300

A firm is considering purchasing an asset that will have a useful life of 15 years and cost $5 million; it will have installation costs of $500,000 and a salvage or residual value of $500,000. What is the annual straight-line depreciation for this asset?

$333,333 per year

Western Inc. purchases a machine for $70,000. This machine qualifies as a five-year recovery asset under MACRS with the fixed depreciation percentages as follows: year 1 = 20.00%; year 2 = 32.00%; year 3 = 19.20%; year 4 = 11.52%. The firm has a tax rate of 20%. If the machine is sold at the end of two years for $50,000, what is the cash flow from disposal?

$46,720

Cash and Equivalents are $1,561; Short-Term Investments are $1,000; Accounts Receivables are $3,616; Accounts Payable are $5,121; Short-Term Debt is $288; Inventories are $1,816; Other Current Liabilities are $1,401; and Other Current Assets are $707. What is the amount of Total Current Liabilities?

$6,810

The ExecUfind Corporation has issued 20-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 10% and the current yield to maturity is 12%, what is the firm's current price per bond?

$849.54

If you borrow $40,000 at an annual interest rate of 11% for seven years, what is the annual payment (prior to maturity) on a discount loan?

0

Your firm has preferred stock outstanding that pays a current dividend of $2.50 per year and has a current price of $25.00. Currently, preferred stock makes up approximately 5% of your firm's long-term financing. What is the market required rate of return on your firm's preferred stock?

10.00%

Use the security market line to determine the required rate of return for the following firm's stock. The firm has a beta of 1.10, the required return in the market place is 9.50%, and the risk-free rate of return is 2.00%.

10.25%

Sales=$1000, COGS=$400, D$A=$100, SG&A=$250, R&D=$135, Tax Rate=20%. What is operating margin?

11.5%

A hit song produces 200000 in royalties forever. what are the rights worth if the band uses a 7.5% discount rate?

2,666,667

ACME Inc. has a profitability ratio of 0.11, an asset turnover ratio of 1.7, a price to earnings ratio of 17.4, and a total asset to equity ratio of 1.50. What is the firm's ROE?

28.05%

A stock cost 18.85, paid 0.55 in dividends, then was sold in 6 mos for 23.65. What is the holding period rate?

28.4

Douglas Dynamics Inc. has outstanding $1,000 face value 4% coupon bonds that make semiannual payments, and have 10 years remaining to maturity. If the current price for these bonds is $938.57, what is the annualized yield to maturity?

4.78%

Last year, Kilroy's paid a 1.40 dividend, which they raise annually by 4%. Investors want a 7% return, whats the price?

48.53

Sales=$1000, COGs=$400, D&A=$100, SG&A=$250, R&D=$135, Interest=$15, Tax Rate=20%. What is gross profit margin?

50%

You purchased 1000 shares of stock for $25 per share. After holding the stock for 6 years and not receiving any dividends, you sell the stock for $42 per share. What are the holding period and annual return on this investment?

68%, 9.03%

Dakota Drilling Inc. (DD) has a new project that will require the company to borrow $5,000,000. MM has made an agreement with three lenders for the needed financing. First National Bank will give $1,000,000 and wants 6% interest on the loan. Texas Bank will give $3,000,000 and wants 7% interest on the loan. Chase Bank will give $1,000,000 and wants 8% interest on the loan. What is the weighted average cost of debt capital for this $5,000,000.

7.00%

Whats the yield to maturity of 1000 par, semi annual bond with 10 years to maturity, a 6% coupon priced at 850?

8.23%

Use the dividend growth model to determine the required rate of return for equity. Your firm intends to pay a dividend of $2.25 per share one year from now, has a recent price of $40.20 per share, and anticipates a growth rate in dividends of 3.00% per year for the foreseeable future.

8.60%

Rogue Drafting has debt with a market value of $450,000, preferred stock with a market value of $150,000, and common stock with a market value of $350,000. If debt has a cost of 8%, preferred stock a cost of 10%, common stock a cost of 12%, and the firm has a tax rate of 30%, what is the WACC?

8.65%

Use the dividend growth model to determine the required rate of return for equity. Yesterday your firm paid a dividend of $1.50 per share. Further, the recent stock price is $31.82 per share, and you anticipate a growth rate in dividends of 4.00% per year for the foreseeable future.

8.90%

Cash and Equivalents are $1,561, Short-Term Investments are $1,000, Accounts Receivables are $3,616, Accounts Payable is $5,121, Short-Term Debt is $288, Inventories are $1,816, Other Current Liabilities are $1,401, and Other Current Assets are $707. What are the Total Current Assets? Correct!

8700

The following information comes from the Galaxy Construction balance sheet. The value of common stock is $10,000, retained earnings equals $7,000, total common equity equals $17,000, preferred stock has a value of $3,000, and long-term debt totals $15,000. If the cost of debt is 8.00%, preferred stock has a cost of 10.00%, common stock has a cost of 12.00%, and the firm has a corporate tax rate of 30%, calculate the firm's WACC adjusted for taxes.

9.09%

Your firm has $2,000,000 available for investment in capital projects. Which combination of projects is the best, given this budget constraint? Project Initial Investment NPV A $750,000 $100,000 B $1,500,000 $125,000 C $500,000 $75,000 D $500,000 $35,000

A, C, D

Nodak, Inc. is currently considering an eight-year project that has an initial outlay or cost of $160,000. The cash inflows from its project for years 1 through 5 are the same at $55,000. Nodak has a discount rate of 11%. Because there is a shortage of funds to finance all good projects, Nodak wants to compute the profitability index (PI) for each project. That way Nodak can get an idea as to which project might be a better choice. What is the PI for Nodak's current project?

About 1.27

Branson works for a firm that is expanding into a completely new line of business. He has been asked to determine an appropriate WACC for an average-risk project in the expansion division. Branson finds two publicly traded stand-alone firms that produce the same products as his new division. The average of the two firm's betas is 1.40. Further, he determines that the expected return on the market portfolio is 11.00% and the risk-free rate of return is 3.00%. Branson's firm finances 70% of its projects with equity and 30% with debt, and has a before-tax cost of debt of 8% and a corporate tax rate of 20%. What is the WACC for the new line of business?

About 11.86%

Consider the following four-year project. The initial outlay or cost is $210,000. The respective cash inflows for years 1, 2, 3 and 4 are: $100,000, $80,000, $80,000 and $20,000. What is the discounted payback period if the discount rate is 11%?

About 2.94 years

Agency theory is the name given to the processes surrounding recognition of the principal-agent problem and ways to align agent interests principal interests.

Agency theory

Which of the following is not an activity of a financial institution or​ market?

All of the activities listed here are activities of financial institutions.

Which of the following is NOT an example of a bond that contains an option feature?

Both are examples of bonds with option features.

Very often, operating income is the same number as...

EBIT.

When reviewing in class Cranston's ratios, how was it that liquidity and asset management might be related?

Efficiency with cash management and inventory management would lower these numbers in current assets and, possibly, lead to a smaller current ratio.

Leonard, Inc. is considering a five-year project that has an initial after-tax outlay or after-tax cost of $70,000. The future after-tax cash inflows from its project for years 1, 2, 3, 4 and 5 are all the same at $35,000. Leonard uses the net present value method and has a discount rate of 10%. Will Leonard accept the project?

Leonard accepts the project because the NPV is about $62,678.

________ corrects for most, but not all, of the problems of IRR and gives the solution in terms of a return.

MIRR

The ________ method is economically sound and properly ranks projects across various sizes, time horizons, and levels of risk, without exception for all independent projects.

NPV

Which of the following identities is TRUE?

Net Working Capital (NWC) = Current Assets - Current Liabilities

Which one of the answers below is NOT one of the three components of the "Cash Flow from Assets"?

Noncash Expenses

Which of the statements below is FALSE?

Officers of a company or others who have a fiduciary responsibility to the owners can trade on their acquired private information about the company prior to the information being made public.

Which of the following identities is TRUE?

Operating Cash Flow = EBIT + Depreciation - Taxes

Which of the items below is sometimes termed hybrid equity financing?

Preferred stock

Which was NOT a reason why Cranston's stock was underperforming?

Price-earnings (P/E) ratio below industry averages.

Which of the statements below is TRUE?

Private companies can go public by choosing to sell stock to attract permanent financing through equity ownership of the company.

Which method is designed to give the dollar amount of return for every $1.00 invested in the project in terms of current dollars?

Profitability Index Method

Stocks A, B, C, and D have standard deviations, respectively, of 20%, 5%, 10%, and 15%. Which one is the riskiest?

Stock A

Tesla's beta is 1.43, the risk free rate is 1.63, the market risk premium is 4.63. Use the security market line.

Tesla's expected return is 8.25%

Amazon's sales were $177,866 mm in 2017 & $386,064 mm in 2020.

The 3 year CAGR in sales was 29.5%.

Darrox, Inc. is considering a four-year project that has an initial outlay or cost of $90,000. The future cash inflows from its project are $50,000, $30,000, $30,000, and $30,000 for years 1, 2, 3 and 4, respectively. Darrox uses the internal rate of return method to evaluate projects. What is the approximate IRR for this project?

The IRR is about 22.80%.

Market value of debt=$4m, preferred=$1M, common =$5m, debt/pref/common have costs of 4%/5%/10% & a tax rate of 25%

The firm's WACC is 6.70%

Which of the statements below is FALSE?

The profitability index (PI) method multiplies the Present Value of Benefits by Present Value of Costs.

Which of the following are issued with the shortest time to maturity?

Treasury Bills

Which of the following investments is considered to be default risk-free?

Treasury bills

A low P/E ratio may be a sign of undervaluation by the market

True

In capital budgeting, the ________ is the appropriate discount rate to use when calculating the NPV of an average risk project.

WACC

You've set a personal financial goal of retiring in 25 years. To have a satisfying lifestyle, you want a total of $1.25 million in retirement savings. You're pretty sure you can earn about 6.5% annually on whatever you save or invest. If you have $30,000 already saved now, how much should you set aside each year to meet you goal?

about $18,767

If you can save (or invest) $450 per month at 5.0% APR (compounded monthly) for the next 25 years, how much in total will you have saved?

about $267,979.37

Just recently having accepted a full time position at your dream job, you go in search of a new car. You found one you like a lot and you consider a three-year lease. It will cost you $360 per month, plus an additional $15,000 at the end of the lease if you want to purchase it. If (1) your opportunity cost of money is about an APR of 7.0%, and (2) you intend to purchase the car after the lease, what will be the total investment you will have made in the car when the lease is up and you purchase it?

about $29,380

If you can save (or invest) $350 per month at 6.0% APR (compounded monthly) for the next 30 years, how much in total will you have saved?

about $351,580.26

You've set a personal financial goal of having $100,000 available in 15 years for a daughter's university expenses. It's reasonable that you can earn a 5.6% APR on whatever you save. If you save and earn interest monthly, how much should you set aside to meet this goal?

about $356 each month

Sales=$1000, COGS=$750, A/R= $225, Cash=$50. How much is days sales in receivables?

about 82 days

accounts payable management is not a main task (or category) of financial management.

accounts payable management

Which is not a main task(or category) of financial management?

accounts payable managment

An 25 yr life asset costs $9.6mm, salvage value=$1.0mm, Yr1-3 OCF=$1m & install=400k. Use straight-line depreciation.

annual depreciation expense will be $360,000

The current book value of an asset serves as the basis for determining the gain or loss ________.

at disposal

After studying financial statements and determining some ratios, we usually gain more perspective on the results by...

benchmarking against key competitors.

To project the appropriate anticipated cash flow for a project, we must put all cash flow knowledge together. This includes ________ of the incremental cash flow.

both the amount and timing

Dividend models suggest that the value of a financial asset is determined by future cash flows. A problem arises, however, in that future cash flows may be difficult to predict as to ________ of these cash flows.

both the timing and the amount

Any discussion about profits must also address how profits are measured. For example, some companies make very high profits on an absolute basis...

but their profit margins - per dollar of revenue - might be very small.

If we want to get some idea about a/an ________ over time between two specific assets, we can compare the returns on top-rated corporate bonds and U.S. government bonds.

default premium

The ________ compensates the investor for the additional risk that the loan will not be repaid in full.

default premium

Milton Friedman's essay on the goal of business corporations...

did not promote making profits at all costs.

When a depreciable asset is sold, a tax gain or tax loss on disposal is calculated, based on the ________ of the asset at the time of disposal.

difference in book and market values

To determine the present value of a future amount, one should ________ the future cash flows.

discount

Your company is borrowing 50000 for 5 years at 8% APR. Which type of loan will pay the least in years 1-4?

discount loan

Ceteris paribbus, an increase in inventories causes cash flow to increase.

false

Consider the TVM equation: A decrease in the time period will increase the future value, other things remaining equal.

false

Effective annual rate < annual percentage rate

false

Profit margin=0.14, asset turnover=1.3, debt to equity=0.40, and total asset to equity=1.20

firms ROE is 21.8%

When a depreciable asset is sold, a tax gain or tax loss on disposal is calculated, based on the book value of the asset at the time of disposal. If a ________ has occurred, ________ are incurred

gain, taxes

It seemed reasonably clear from our review in class of Cranston's financial statements and performance ratios that...

important weaknesses were its asset management efficiency and profitability.

Of the​ following, which is not an example of a financial​ intermediary?

insurance company commercial bank investment bank Correct! All of the institutions listed here are intermediaries.

The most popular alternative to NPV for capital budgeting decisions is the ________ method.

internal rate of return (IRR)

The capital budgeting decision model that utilizes all the discounted cash flow of a project is the ________ model, which is one of the single most important models in finance.

net present value (NPV)

Which is NOT one of the three components of the "cash flow from assets"?

noncash expenses

The remaining book value when a project is terminated is the ________ minus accumulated depreciation over the life of the project.

original cost

To construct common-size income statements, restate all of the numbers

percentages of revenues.

To construct common-size income statements, restate all of the numbers as...

percentages of revenues.

To construct common-size balance sheets, restate all of the numbers as...

percentages of total assets.

Investors ________ for estimating the WACC.

prefer market value to book value

The main variables of the TVM equation are ________.

present value, future value, time, interest rate, and payment.

Market values require multiplying the ________ of each component source of capital by the ________.

price; quantity

The ________ is the market of first sale in which companies first sell their authorized shares to the public.

primary market

The question "At what rate is my money growing over time?" is best answered by which form of the TVM equation?

r = (FV/PV)^(1/n) - 1

Preferred stock ________.

represents a preferential claim on dividends

It is necessary to assign the appropriate cost of capital for each individual project that reflects that project's ________ when doing capital budgeting.

riskiness

When a company is in financial difficulty and cannot fully pay all of its creditors, the first lenders to be paid are the ________.

senior debtholders

Despite the evidence on the value of profits, reference to profits or wealth in business is often received in negative ways. One of three possible reasons for this is...

that people are concerned about how profits are distributed.

A $100k machine is sold after 3 years for $50k. Use the 3 year MACRS(%s=33.33%,44.45%,14.81%,7.41%) and a tax rate of 20%.

the cash from disposal is $41,482

The cost of capital is ________.

the cost of each financing component multiplied by that component's percent of the total borrowed

The net present value of an investment is ________.

the present value of all benefits (cash inflows) minus the present value of all costs (cash outflows) of the project

The DuPont identity measures ROE by multiplying ________.

the profitability ratio × total asset turnover × the equity multiplier

From 1991 to 2000, the US economy had annual inflation of 2.93%, GDP of 2.34%, & nominal interest rate was 5.02%.

the real interest rate for this period was about 2.09%

A yield curve constructed using Treasury securities has each of the following components embedded in the nominal interest rates ________.

the real rate, expected inflation, and a maturity premium

A project costs=$3.5m, add'l NWC=$450, completed marketing study=$150k, installation=$250k, salvage=$1.0m

the relevant initial investment is $4.20m

The brief case study of Blackberry and Apple illustrated that...

there seems to be a clear connection between a company's ability to grow and earn profits and its ability to offer increasing numbers of full time jobs.

The Rule of 72 is a rule of thumb for estimating the length of time necessary to double your money, given an interest rate. Correct!

true

In order to account for differences in company sizes, it will be helpful to...

use common-size financial statements.

A semi-annual, 1000 par bond has a 6% coupon, a yield-to-maturity of 7.7038%, and is currently priced at 850

will mature in about 15 years