Finance Final

The security market line is defined as a positively sloped straight line that displays the relationship between which two of the following variables?

Expected return and beta

Common-size financial statements present all balance sheet account values as a percentage of:

total assets.

Aaron's Rentals has 58,000 shares of common stock outstanding at a market price of $36 a share. The common stock just paid a $1.64 annual dividend and has a dividend growth rate of 2.8 percent. There are 12,000 shares of 6 percent preferred stock outstanding at a market price of $51 a share. The preferred stock has a par value of $100. The outstanding bonds mature in 17 years, have a total face value of $750,000, a face value per bond of $1,000, and a market price of $1,011 each. The bonds pay 8 percent interest, semiannually. The tax rate is 34 percent. What is the firm's weighted average cost of capital?

7.74 percent

The After Life has sales of $428,300, total assets of $389,100, and a profit margin of 7.2 percent. What is the return on assets?

7.93 percent

Children's Place has a market-to-book ratio of 2.9, net income of $68,400, a book value per share of $37, and 45,000 shares of stock outstanding. What is the price-earnings ratio?

70.59

A risky security has less risk than the overall market. What must the beta of this security be?

> 0 but < 1

Horseshoe Stables is losing significant market share and thus its managers have decided to decrease the firm's annual dividend. The last annual dividend was $0.90 a share but all future dividends will be decreased by 10 percent annually. What is a share of this stock worth today at a required return of 15 percent?

$3.24

Kroeger Exporters has total assets of $74,300, net working capital of $22,900, owners' equity of $38,600, and long-term debt of $23,900. What is the value of the current assets?

$34,700

One year ago, you purchased a 5 percent coupon bond with a face value of $1,000 when it was selling for 101.2 percent of par. Today, you sold this bond for 99.8 percent of par. What is your total dollar return on this investment?

$36

The Paint Ball Range, Inc. paid $30,500 in dividends and $7,600 in interest over the past year. Sales totaled $211,800 with costs of $167,900. The depreciation expense was $16,500. The applicable tax rate is 34 percent. What is the amount of the operating cash flow?

$37,168

What is the net present value of the following set of cash flows at a discount rate of 7 percent? At 20 percent?

$4,518.47; -$321.76

Donner United has total owners' equity of $18,800. The firm has current assets of $23,100, current liabilities of $12,200, and total assets of $36,400. What is the value of the long-term debt?

$5,400

The Undergrounds Coffee Shop has total assets of $85,300 and an equity multiplier of 1.53. What is the debt-equity ratio?

0.53

You want to invest an amount of money today and receive back twice that amount in the future. You expect to earn 6 percent interest. Approximately how long must you wait for your investment to double in value?

12 years

Country Kitchen's cost of equity is 15.3 percent and its aftertax cost of debt is 6.9 percent. What is the firm's weighted average cost of capital if its debt-equity ratio is 0.58 and the tax rate is 30 percent?

12.21 percent

Home Grown Tomatoes stock returned 28.7 percent, 2.6 percent, 13.1 percent, 12.2, and 11.8 percent over the past five years, respectively. What is the arithmetic average return for this period?

13.68 percent

One year ago, LaTresa purchased 600 shares of Outland Co. stock for $3,600. The stock does not pay any regular dividends but it did pay a special dividend of $0.30 a share last week. This morning, she sold her shares for $7.25 a share. What was the total return on this investment?

25.83 percent

A stock produced returns of 19 percent, 27 percent, and -38 percent over three of the past four years, respectively. The arithmetic average for the past four years is 7 percent. What is the standard deviation of the stock's returns for the four-year period?

30.21 percent

Galaxy Sales has sales of $746,700, cost of goods sold of $603,200, and inventory of $94,300. How long on average does it take the firm to sell its inventory?

57.06 days

Which one of the following has the highest effective annual rate?

6 percent compounded monthly

Electronic Products has 35,000 bonds outstanding that are currently quoted at 102.3. The bonds mature in 11 years and carry a 9 percent annual coupon. What is the firm's aftertax cost of debt if the applicable tax rate is 30 percent?

6.07 percent

Four years ago, the Morgan Co. issued 15-year, 7.0 percent semiannual coupon bonds at par. Today, the bonds are quoted at 101.6. What is this firm's pretax cost of debt?

6.79 percent

Judy's Boutique just paid an annual dividend of $1.65 on its common stock. The firm increases its dividend by 2.5 percent annually. What is the rate of return on this stock if the current stock price is $38.20 a share?

6.93 percent

Which one of the following types of securities has no priority in a bankruptcy proceeding?

Common stock

You are considering an investment for which you require a 14 percent rate of return. The investment costs $61,900 and will produce cash inflows of $26,000 for three years. Should you accept this project based on its internal rate of return? Why or why not?

No, because the IRR is 12.51 percent

Which one of the following terms refers to the best option that was foregone when a particular investment is selected?

Opportunity cost

Which one of the following indicates that a project should be rejected?

Profitability index less than 1.0

The recognition principle states that:

sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined.

which one of the following is most apt to create a situation where an agency conflict could arise

separating management from ownership

What is the primary purpose of bond covenants?

Protect the lender

A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as which type of cost?

Sunk

Portfolio diversification eliminates which one of the following?

Unsystematic risk

The Tool Box needs to purchase a new machine costing $1.46 million. Management is estimating the machine will generate cash inflows of $223,000 the first year and $600,000 for the following three years. If management requires a minimum 12 percent rate of return, should the firm purchase this particular machine? Why or why not?

Yes, because the IRR is 12.74 percent

Which one of the following terms applies to a bond that initially sells at a deep discount and pays no interest payments?

Zero coupon

Today, you are purchasing a 20-year, 6 percent annuity at a cost of $120,000. The annuity will pay annual payments starting 1 year from today. What is the amount of each payment?

$10,462.15

Healthy Foods just paid its annual dividend of $1.45 a share. The firm recently announced that all future dividends will be increased by 2.8 percent annually. What is one share of this stock worth to you if you require a 14 percent rate of return?

$13.31

The Good Life Store has sales of $79,600. The cost of goods sold is $48,200 and the other costs are $18,700. Depreciation is $8,300 and the tax rate is 34 percent. What is the net income?

$2,904

Karl can afford car payments of $235 a month for 48 months. The bank will lend him money to buy a car at 7.75 percent interest. How much money can he afford to borrow?

$9,672.48

A 5.5 percent $1,000 bond matures in seven years, pays interest semiannually, and has a yield to maturity of 6.23 percent. What is the current market price of the bond?

$959.09

Wilson's Realty has total assets of $46,800, net fixed assets of $37,400, current liabilities of $6,100, and long-term liabilities of $24,600. What is the total debt ratio?

0.66

The 7 percent annual coupon bonds of IPO, Inc. are selling for $1,021. The bonds have a face value of $1,000 and mature in seven years. What is the yield to maturity?

6.62 percent

Peter's Motor Works has total assets of $689,400, long-term debt of $299,500, total equity of $275,000, net fixed assets of $497,800, and sales of $721,500. The profit margin is 4.6 percent. What is the current ratio?

1.67

You own a portfolio of two stocks, A and B. Stock A is valued at $6,500 and has an expected return of 11.2 percent. Stock B has an expected return of 8.1 percent. What is the expected return on the portfolio if the portfolio value is $9,500?

10.22 percent

The stock of Wiley United has a beta of 0.92. The market risk premium is 8.4 percent and the risk-free rate is 3.2 percent. What is the expected return on this stock?

11.11 percent

Given the following information for Electric Transport, find the WACC. Assume the company's tax rate is 34 percent. Debt: 7,500, 8.4 percent coupon bonds outstanding. $1,000 par value, 22 years to maturity, selling for 103 percent of par, the bonds make semiannual payments. Common stock: 195,000 shares outstanding, selling for $78 per share, beta is 1.21. Preferred stock: 11,000 shares of 6.35 percent preferred stock outstanding, currently selling for $76 per share. Market: 8 percent market risk premium and 5.1 percent risk-free rate.

11.49 percent

Over the past six years, a stock had annual returns of 14 percent, -3 percent, 8 percent, 21 percent, -16 percent, and 4 percent, respectively. What is the standard deviation of these returns?

13.05 percent

Bama Entertainment has common stock with a beta of 1.46. The market risk premium is 9.3 percent and the risk-free rate is 4.6 percent. What is the expected return on this stock?

18.03 percent

A project has the following cash flows. What is the payback period?

2.60 years

The Townhouse Galleries offers credit to its customers at a rate of 1.6 percent per month. What is the effective annual rate of this credit offer?

20.98 percent

The Universal Network has sales of $496,500, cost of goods sold of $264,900, and inventory of $87,100. What is the inventory turnover rate?

3.04

Noah's Landing stock is expected to produce the following returns given the various states of the economy. What is the expected return on this stock?

4.05 percent

The Green Balloon just paid its first annual dividend of $0.12 a share. The firm plans to increase the dividend by 3.5 percent per year indefinitely. What is the firm's cost of equity if the current stock price is $6.50 a share?

5.41 percent

Overnight Trucking recently purchased a new truck costing $150,800. The firm financed this purchase at 8.6 percent interest with monthly payments of $2,100. How many years will it take the firm to pay off this debt?

8.44 years

Which one of the following statements is accurate for a levered firm?

A reduction in the risk level of a firm will tend to decrease the firm's WACC.

Which one of the following is included in net working capital?

Accounts payable

Fred is the owner of a local feed store. Which one of the following ratios should he compute if he wants to know how long the store can pay its bills given the amount of cash the store currently has?

Cash ratio

Which one of the following can be classified as an annuity but not as a perpetuity?

Equal annual payments for life

Which one of the following is a measure of long-term solvency?

Equity multiplier

The DuPont identity can be totally defined by which one of the following?

Equity multiplier and return on assets

Which of the following should be included in the analysis of a proposed investment? I. Erosion effects II. Opportunity costs III. Sunk costs IV. Side effects

I, II, and IV only

The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships can best be described by which one of the following terms?

Perpetuity

Which one of the following describes systemic risk?

Risk that affects a large number of assets

Today, Sweet Snacks is investing $491,000 in a new oven. As a result, the company expects its cash flows to increase by $64,000 a year for the next two years and by $98,000 a year for the following three years. How long must the firm wait until it recovers all of its initial investment?

The project never pays back.

Cash flow to creditors is equal to:

beginning long-term debt minus ending long-term debt plus interest paid.

When a bond's yield to maturity is less than the bond's coupon rate, the bond:

is selling at a premium.

A protective covenant:

limits the actions of the borrower.

A call provision grants the bond issuer the:

option of repurchasing the bonds prior to maturity at a prespecified price.

Which one of the following is the primary determinant of an investment's cost of capital?

Level of risk

Which one of the following will decrease the net working capital of a firm?

Making a payment on a long-term debt

Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B?

Mutually exclusive

the primary goal of financial management is to maximize which one of the following for a corporation?

market value of existing stock

Systematic risk is:

measured by beta.

Which one of the following situations is most apt to create an agency conflict

rejecting a profitable project to protect employee jobs

What is the net present value of a project with the following cash flows if the discount rate is 15 percent?

-$5,433.67

Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as which one of the following?

Incremental cash flows

A stock has produced returns of 11 percent, 18 percent, -6 percent, -13 percent, and 21 percent for the past five years, respectively. What is the standard deviation of these returns?

14.99 percent

Best Western has $1,000 face value bonds outstanding. These bonds pay interest semiannually, mature in six years, and have a 5 percent coupon. The current price is quoted at 101. What is the yield to maturity?

4.64 percent

Textile Mills has sales of $923,000, cost of goods sold of $748,000, and accounts receivable of $106,700. How long on average does it take the firm's customers to pay for their purchases?

42.19 days

Freedom Health Centers has total equity of $861,300, sales of $1.48 million, and a profit margin of 5.2 percent. What is the return on equity?

8.94 percent

Waldale Pools has total equity of $289,100 and net income of $64,500. The debt-equity ratio is 0.55 and the total asset turnover is 1.6. What is the profit margin?

9.00 percent

Friendly Skies Airline has earnings before interest and taxes of $21,680 and net income of $12,542. The tax rate is 35 percent. What is the times interest earned ratio?

9.09

Casper's is analyzing a proposed expansion project that is much riskier than the firm's current operations. Thus, the project will be assigned a discount rate equal to the firm's cost of capital plus 3 percent. The proposed project has an initial cost of $17.2 million that will be depreciated on a straight-line basis over 20 years. The project also requires additional inventory of $687,000 over the project's life. Management estimates the facility will generate cash inflows of $2.78 million a year over its 20-year life. After 20 years, the company plans to sell the facility for an estimated $1.3 million. The company has 60,000 shares of common stock outstanding at a market price of $49 a share. This stock just paid an annual dividend of $1.84 a share. The dividend is expected to increase by 3.5 percent annually. The firm also has 10,000 shares of 12 percent preferred stock with a market value of $98 a share. The preferred stock has a par value of $100. The company has a 9 percent, semiannual coupon bond issue outstanding with a total face value of $1.1 million. The bonds are currently priced at 102 percent of face value and mature in 16 years. The tax rate is 33 percent. Should the firm pursue the expansion project at this point in time? Why or why not?

Accept; the NPV is $4.507 million.

Which one of the following best matches the primary goal of financial management?

Increasing the market value of the firm

Which one of the following terms is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project?

Erosion

Which one of the following represents the rate of return a firm must earn on its assets if it is to maintain the current value of its securities?

Weighted average cost of capital

Tom earned $120 in interest on his savings account last year. Tom has decided to leave the $120 in his account so that he can earn interest on the $120 this year. This process of earning interest on prior interest earnings is called:

compounding.

The goal of financial management is to increase the:

current market value per share.