Finance Midterm

What are agency problems and why do they exist within a corporation?

the possibility of conflict of interest between the stockholders and management of a firm

10. The Lakeside Inn had operating cash flow of $48,450. Interest paid was $2,480. A net total of $2,620 was paid on reducing long-term debt. The firm spent $24,000 on capital spending and decreased net working capital by $1,330. What is the amount of the cash flow to stockholders? A. $20,680 B. $5,100 C. $7,830 D. $18,020 E. $19,998

A Solution: Cash flow from assets = $48,450 - (-$1,330) - $24,000 = $25,780 Cash flow to creditors =$2,480 - (-$2,620) = $5,100 Cash flow from assets = Cash flow to creditors + Cash flow to stockholders Cash flow to stockholders = $25,780 - $5,100 = $20,680

3. If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following? A. 0.0 B. 0.5 C. 1.0 D. 1.5 E. 2.0

B

4. You invested $1,650 in an account that pays 5 percent simple interest. How much more could you have earned over a 20-year period if the interest had compounded annually? A. $849.22 B. $930.11 C. $982.19 D. $1,021.15 E. $1,077.94

E Simple interest = $1,650 + ($1,650 x .05 x 20) = $3,300 Annual compounding = $1,650 x (1.05)^20 = $4,377.94 Difference = $4,377.94 - $3,300 = $1,077.94 N = 20 I/Y = 5 PV = -1,650 CPT FV

What are the three major forms of business organization?

sole proprietorship, partnership, and corporation

8. Your grandmother is gifting you $100 a month for four years while you attend college to earn your bachelor's degree. At a 5.5 percent discount rate, what are these payments worth to you on the day you enter college? A. $4,201.16 B. $4,299.88 C. $4,509.19 D. $4,608.87 E. $4,800.00

B N = 4*12 I/Y = 5.5/12 PMT = 100 CPT PV

6. A firm has $520 in inventory, $1,860 in fixed assets, $190 in accounts receivables, $210 in accounts payable, and $70 in cash. What is the amount of the current assets? A. $710 B. $780 C. $990 D. $2,430 E. $2,640

B Solution: Current Assets = 520 + 190 + 70 = 780

4. Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers? A. articles of incorporation B. corporate breakdown C. agency problem D. bylaws E. legal liability

C

7. Some time ago, Julie purchased eleven acres of land costing $36,900. Today, that land is valued at $214,800. How long has she owned this land if the price of the land has been increasing at 10.5 percent per year? A. 13.33 years B. 16.98 years C. 17.64 years D. 19.29 years E. 21.08 years

C $214,800 = $36,900 x (1 + .105)t ; t = 17.64 years I/Y = 10.5 PV = -36,900 FV = 214,800 CPT N

6. Forty years ago, your mother invested $5,000. Today, that investment is worth $430,065.11. What is the average annual rate of return she earned on this investment? A. 11.68 percent B. 11.71 percent C. 11.78 percent D. 11.91 percent E. 12.02 percent

C $430,065.11 = $5,000 x (1 + r)40; r = 11.78 percent N = 40 PV = -5000 FV = 430,065.11 CPT I/Y

5. Your father invested a lump sum 26 years ago at 4.25 percent interest. Today, he gave you the proceeds of that investment which totaled $51,480.79. How much did your father originally invest? A. $15,929.47 B. $16,500.00 C. $17,444.86 D. $17,500.00 E. $17,999.45

C Present value = $51,480.79 x [1/(1 + .0425)^26] = $17,444.86 N = 26 I/Y = 4.25 FV = 51,480.79 CPT PV

Given the tax rates as shown, Answer the next two questions for a firm with taxable income of $311,360? $0-50,000: 15% $50,001 - 75,000: 25% 75,001 - 100,000: 34% 100,001 - 335,000: 39% 7. What is the average tax rate? A. 28.25 percent B. 31.09 percent C. 33.62 percent D. 35.48 percent E. 39.00 percent

C SOLUTION: Tax Liability = .15($50,000) + .25($25,000) + .34($25,000) + .39($211,360) = $104,680.40 Average tax rate = $104,680.40/$311,360 = 33.62 percent

What are the three types of financial management decisions and what questions are they designed to answer?

Capital budgeting: what long-term investments should the firm take? Capital structure: where will the firm get the long-term financing to pay for its investment? In other words, what mixture of debt and equity should the firm use to fund operations? Working capital management: how should the firm manage its everyday financial activities?

10. You are considering two savings options. Both options offer a 7.4 percent rate of return. The first option is to save $900, $2,100, and $3,000 at the end of each year for the next three years, respectively. The other option is to save one lump sum amount today. If you want to have the same balance in your savings account at the end of the three years, regardless of the savings method you select, how much do you need to save today if you select the lump sum option? A. $4,410 B. $4,530 C. $4,600 D. $5,080 E. $5,260

D

5. Which of the following accounts are included in working capital management? I. accounts payable II. accounts receivable III. fixed assets IV. inventory A. I and II only B. I and III only C. II and IV only D. I, II, and IV only E. II, III, and IV only

D

Which one of the following terms is defined as the management of a firm's long-term investments? A. working capital management B. financial allocation C. agency cost analysis D. capital budgeting E. capital structure

D

1. Russell's Deli has cash of $136, accounts receivable of $87, accounts payable of $215, and inventory of $409. What is the value of the quick ratio?? A. 1.90 B. 2.94 C. 0.63 D. 1.04 E. 0.96

D Quick Ratio = (CA - Inventory)/ Current Liabilities = (136 + 87)/215 = 1.04

$0-50,000: 15% $50,001 - 75,000: 25% 75,001 - 100,000: 34% 100,001 - 335,000: 39% 8. What is the marginal tax rate? A. 28.25 percent B. 31.09 percent C. 33.62 percent D. 35.48 percent E. 39.00 percent

E

2. Which one of the following terms is defined as the mixture of a firm's debt and equity financing? A. working capital management B. cash management C. cost analysis D. capital budgeting E. capital structure

E

3. What should be the goal of a corporation? A. Maximize profit B. Minimize costs C. Maximize market share D. Maximize management corporation E. Maximize the current value of the company's stock

E

9. Net working capital is defined as: A. total liabilities minus shareholders' equity. B. current liabilities minus shareholders' equity. C. fixed assets minus long-term liabilities. D. total assets minus total liabilities. E. current assets minus current liabilities.

E

9. Ratios that measure a firm's financial leverage are known as _____ ratios. A. asset management B. book value C. short-term solvency D. profitability E. long-term solvency

E

2. If a firm produces a twelve percent return on assets and also a twelve percent return on equity, what is the equity multiplier? A. 0 B. -1 C. 0.5 D. 2 E. 1

E ROE = ROA * EM

What is the difference between MVA and EVA?

MVA: the difference between the market value of the firm's equity and the amount of capital that was supplied by shareholders EVA: an estimate of a business's true economic profit for the year

What is the difference between average and marginal tax rates? Which should we use when making financial decisions?

average tax rate: the percentage of your income that goes towards paying taxes marginal tax rate: the rate of extra tax you would pay if you earned one more dollar the marginal tax rate is used for decision making

What is the difference between book value and market value? Which should we use for decision-making purposes?

market value

What is the goal of financial management?

maximize the current value per share of the existing stock

What are the major categories of financial ratios?

short-term solvency, long-term solvency, asset management/turnover ratios, profitability ratios, market value ratio