Financial Management Final

Available information

An efficient capital market is best defined as a market in which security prices reflect which one of the following?

zero

If an investment is producing a return that is equal to the required return, the investment's net present value will be:

26.80 percent E(R) = 0.044 + 1.60 × 0.14 = 0.2680 = 26.80 percent

The risk-free rate of return is 4.4 percent and the market risk premium is 14 percent. What is the expected rate of return on a stock with a beta of 1.6?

An agency conflict

The shareholders of Weil's Markets would benefit if the firm were to be acquired by Better Foods. However, Weil's board of directors rejects the acquisition offer. This is an example of:

Market risk

The systematic risk principle states that the expected return on a risky asset depends only on which one of the following?

greater than both the current yield and the coupon rate.

The yield to maturity on a discount bond is:

9.88 FV = $3,250.00 = $2,450.00 × (1 + r)3; r = 9.88 percent

Three years ago, you invested $2,450.00. Today, it is worth $3,250.00. What rate of interest did you earn?

SIC

Which one of the following is the abbreviation for the U.S. government coding system that classifies a firm by its specific type of business operations?

A warehouse fire

Which one of the following is the best example of unsystematic risk?

β[E(RM) - Rf]

Which one of the following is the computation of the risk premium for an individual security? E(R) is the expected return on the security, Rf is the risk-free rate, β is the security's beta, and E(RM) is the expected rate of return on the market.

PV = $600 / (1 + .05)6

Which one of the following is the correct formula for the current value of $600 invested today at 5 percent interest for 6 years?

The firm should increase in value each time the firm accepts a new project.

Which one of the following is true if the managers of a firm accept only projects that have a profitability index greater than 1.5?

Stock E E(RA) = 0.036 + 0.89 × 0.081 = 10.8090 percent Stock A is overpriced. E(RB) = 0.036 + 1.52 × 0.081 = 15.9120 percent Stock B is overpriced. E(RC) = 0.036 + 1.25 × 0.081 = 13.7250 percent Stock C is overpriced. E(RD) = 0.036 + 1.27 × 0.081 = 13.8870 percent Stock D is underpriced. E(RE) = 0.036 + 0.80 × 0.081 = 10.0800 percent Stock E is correctly priced.

Which one of the following stocks is correctly priced if the risk-free rate of return is 3.6 percent and the market risk premium is 8.1 percent? Stock Beta Expected Return A 0.89 7.83% B 1.52 12.59% C 1.25 11.27% D 1.27 14.50% E 0.80 10.08%

Determining which customers will be granted credit

Working capital management includes which one of the following?

The net present value of Project A equals that of Project B, but generally does not equal zero.

You are using a net present value profile to compare Project A and B, which are mutually exclusive. Which one of the following statements correctly applies to the crossover point between these two?

3.52 percent r = $12,400 / $352,000 = 3.52 percent

You just paid $352,000 for a policy that will pay you and your heirs $12,400 a year forever. What rate of return are you earning on this policy?

35.40 Weight C = (450 × $59) / [(120 × $39) + (820 × $35) + (450 × $59) + (260 × $58)] = $26,550 / $75,010 = 0.3540 = 35.40 percent

You own the following portfolio of stocks. What is the portfolio weight of stock C? Stock Number of Shares Price per Share A 120 $39 B 820 $35 C 450 $59 D 260 $58

$1,090.15 Clean price = $1,108.48 -[(.055 ×$1,000)/2] × 4/6 = $1,090.15

You purchase a bond with an invoice price of $1,108.48. The bond has a coupon rate of 5.5 percent, semiannual coupons, and there are two months to the next coupon date. What is the clean price of the bond?

2.3 percent Dividend yield = ($505 / 440) / $50.16 = 0.023 = 2.3 percent

You purchased 440 shares of stock at a price of $50.16 per share. Over the last year, you have received total dividend income of $505. What is the dividend yield?

13.39 percent E(R) = (0.24 × 0.24) + (0.61 × 0.13) + (0.15 × -0.02) = 0.1339 = 13.39 percent

You recently purchased a stock that is expected to earn 24 percent in a booming economy, 13 percent in a normal economy, and lose 2 percent in a recessionary economy. There is a 24 percent probability of a boom, a 61 percent chance of a normal economy, and a 15 percent chance of a recession. What is your expected rate of return on this stock?

12.6 percent APR = 1.05 percent × 12 = 12.60 percent

Your credit card company charges you 1.05 percent per month. What is the annual percentage rate on your account?

Standard Deviation

Which one of the following is the positive square root of the variance?

1.30 years Payback period = $3,500 / $2,700 = 1.30 years

It will cost $3,500 to acquire a small ice cream cart. Cart sales are expected to be $2,700 a year for four years. After the four years, the cart is expected to be worthless as that is the expected remaining life of the cooling system. What is the payback period of the ice cream cart?

a dividend is paid to current shareholders.

Net working capital decreases when:

$10,400 Net working capital = $21,100 + 8,600 -19,300 = $10,400

Donut Delite has total assets of $31,300, long-term debt of $8,600, net fixed assets of $19,300, and owners' equity of $21,100. What is the value of the net working capital?

between two brokers

If a trade is made "in the crowd," the trade has occurred:

Risk premium

Investors require a 4 percent return on risk-free investments. On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called?

7.91 percent Net income common-size percentage = $120,400 / $1,521,700 = .0791, or 7.91 percent

Oil Field Services has net income of $120,400, total assets of $1,219,000, total equity of $694,100, and total sales of $1,521,700. What is the common-size percentage for the net income?

protect bondholders from issuer actions.

The primary purpose of protective covenants is to help:

invested

The profitability index reflects the value created per dollar:

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

The recognition principle states that:

Cash flow from assets

Which one of the following has nearly the same meaning as free cash flow?

The future value is directly related to the interest rate.

Which one of the following is a correct statement, all else held constant?

Losses limited to capital invested

Which one of the following is an advantage of being a limited partner?

NYSE member who functions as a dealer for a limited number of securities.

A DMM is a(n)

11.53 years $3 = $1 ×(1 + .10)t t = 11.53 years

At 10 percent interest, how long does it take to triple your money?

$31.50 Coupon payment = [.0625×(1.008 ×$1,000)]/2 = $31.50

A bond has a par value of $1,000, a current yield of 6.25 percent, and semiannual interest payments. The bond quote is 100.8. What is the amount of each coupon payment?

6.13 percent 1 + 0.0825 = (1 + r) × (1 + 0.02) r = 1.0825 / 1.02 - 1 = 6.13 percent

A bond that pays interest annually yields a rate of return of 8.25 percent. The inflation rate for the same period is 2 percent. What is the real rate of return on this bond?

7.77 percent R = (1 + .0387)(1 + .0375) - 1 R= .0777, or 7.77 percent

A bond yielded a real rate of return of 3.87 percent for a time period when the inflation rate was 3.75 percent. What was the actual nominal rate of return?

Charge interest annually

A loan has an APR of 8.5 percent and an EAR of 8.5 percent. Given this, the loan must:

10.42 percent AAR = [($1,700 + $1,700 + $2,100 + $4,500) / 4] / [($48,000 + $0) / 2] = 0.1042 = 10.42 percent

A project has an initial cost of $48,000 and a four-year life. The company uses straight-line depreciation to a book value of zero over the life of the project. The projected net income from the project is $1,700, $1,700, $2,100, and $4,500 a year for the next four years, respectively. What is the average accounting return?

records expenses based on the matching principle

An income statement prepared according to GAAP:

floor broker

An individual who executes buy and sell orders on the floor of an exchange for a fee is called a:

Effective annual rate

Anna pays 1.5 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded only annually, the rate would be referred to as the:

Between 3 and 4

Based on the period 1926-2011, what rate of return should you expect to earn over the long-term if you are unwilling to bear risk?

$7.77 Balance Year 4 with simple interest = $1,410 + ($1,410 × 0.03 × 4) = $1,579.20 Balance Year 4 with compound interest = $1,410 × 1.034 = $1,586.97 Additional interest = $1,586.97 - $1,579.20 = $7.77

Beatrice invests $1,410 in an account that pays 3 percent simple interest. How much more could she have earned over a 4-year period if the interest had compounded annually?

1.56 Profit margin = {[(.058 × $137,000) - $4,700] × (1 - .34)} / $137,000 = .0156, or 1.56 percent

Bed Bug Inn has annual sales of $137,000. Earnings before interest and taxes is equal to 5.8 percent of sales. For the period, the firm paid $4,700 in interest. What is the profit margin if the tax rate is 34 percent?

18.33 years $44,917 = $15,440 × 1.06t 2.90913 = 1.06t t = ln 2.90913 / ln1.06 t = 1.06785 / 0.05827 t = 18.33 years

Bob bought some land costing $15,440. Today, that same land is valued at $44,917. How long has Bob owned this land if the price of land has been increasing at 6 percent per year?

Common-size income statement

Builder's Outlet just hired a new chief financial officer. To get a feel for the company, she wants to compare the firm's sales and costs over the past three years to determine if any trends are present and also determine where the firm might need to make changes. Which one of the following statements will best suit her purposes?

Stock with a constant growth dividend

Computing the present value of a growing perpetuity is most similar to computing the current value of which one of the following?

.001716 E(R) = (0.78 × 0.12) + (0.22 × 0.02) = 0.0980 σ2 = 0.78 × (0.12 - 0.0980)2 + 0.22 × (0.02 - 0.0980)2 = 0.000378 + 0.001338 = 0.001716

If the economy booms, RTF, Inc. stock is expected to return 12 percent. If the economy goes into a recessionary period, then RTF is expected to only return 2 percent. The probability of a boom is 78 percent while the probability of a recession is 22 percent. What is the variance of the returns on RTF, Inc. stock?

the total debts of the partnership, even if he or she was unaware of those debts

In a general partnership, each partner is personally liable for:

12.76 percent The assumed par value of a bond is $1,000. WD = (100,000 × $1,000) / [(100,000 × $1,000) + (4,300,000 × $35)] = $100 million / $250.5 million = 0.3992 WE = (4,300,000 × $35) / [(100,000 × $1,000) + (4,300,000 × $35)] = $150 million / $250.5 million = 0.6008 E(RE) = 0.05 + (1.5 × 0.08) = 0.170 WACC = (0.6008 × 0.170) + [(0.3992 × 0.098) × (1 - 0.35)] = 0.1021 + 0.0254 = 0.1276 = 12.76 percent

Jack's Construction Co. has 100,000 bonds outstanding that are selling at par value. The bonds yield 9.8 percent. The company also has 4.3 million shares of common stock outstanding. The stock has a beta of 1.5 and sells for $35 a share. The U.S. Treasury bill is yielding 5 percent and the market risk premium is 8 percent. Jack's tax rate is 35 percent. What is Jack's weighted average cost of capital?

Annuity due

Janis just won a scholarship that will pay her $500 a month, starting today, and continuing for the next 48 months. Which one of the following terms best describes these scholarship payments?

22.70 days Days' sales in receivables = 365 / [(1.17 × $523,700) / $38,100] = 22.70 days

Jessica's Sports Wear has $38,100 in receivables and $523,700 in total assets. The total asset turnover rate is 1.17 and the profit margin is 7.3 percent. How long on average does it take to collect the receivables? Assume a 365-day year.

Amortized

Letitia borrowed $6,000 from her bank two years ago. The loan term is four years. Each year, she must repay the bank $1,500 plus the annual interest. Which type of loan does she have?

Stakeholder

Levi had an unexpected surprise when he returned home this morning. He found that a chemical spill from a local manufacturer had spilled over onto his property. The potential claim that he has against this manufacturer is that of a(n):

4.46 Internal growth rate = [($.094/$1.21) ×(1 -.45)]/{1 - [($.094/$1.21) ×(1 -.45)]} = .0446, or 4.46 percent

Lookin' Up earns $.094 in profit on every $1 of sales and has $1.21 in assets for every $1 of sales. The firm pays out 45 percent of its profits to its shareholders. What is the internal growth rate?

I, III, and IV only

Maria is the sole proprietor of an antique store that is located in a rented warehouse. The store has an outstanding loan with the local bank but no other debt obligations. There are no specific assets pledged as security for the loan. Due to a sudden and unexpected downturn in the economy, the store is unable to generate sufficient funds to pay the loan payments due to the bank. Which of the following options does the bank have to collect the money it is owed? I. Sell the inventory and apply the proceeds to the debt II. Sell the lighting fixtures from the building and apply the proceeds to the debt III. Withdraw funds from Maria's personal account at the bank to pay the store's debt IV. Sell any assets Maria personally owns and apply the proceeds to the store's debt

10.71 percent RE = [$1.80 × (1 + 0.062)] / $42.40 + 0.062 = 0.107085 = 10.71 percent

Martin Industries just paid an annual dividend of $1.80 a share. The market price of the stock is $42.40 and the growth rate is 6.2 percent. What is the firm's cost of equity?

$56.20 P0 = [$2.25 × (1 + 0.049)] / (0.091 - 0.049) = $56.20

Michael's, Inc. just paid $2.25 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 4.90 percent. If you require a rate of return of 9.1 percent, how much are you willing to pay today to purchase one share of Michael's stock?

22.13 percent EAR = [1 + (0.20 / 365)]365 - 1 = 22.13 percent

Mr. Miser loans money at an annual rate of 20 percent. Interest is compounded daily. What is the actual rate Mr. Miser is charging on his loans?

$67,015 Cash flow from assets = ($24,615 + 23,800) + ($38,600-20,000) = $67,015

National Importers paid $38,600 in dividends and $24,615 in interest over the past year while net working capital increased from $15,506 to $17,411. The company purchased $38,700 in net new fixed assets and had depreciation expenses of $14,784. During the year, the firm issued $20,000 in net new equity and paid off $23,800 in long-term debt. What is the amount of the cash flow from assets?

$26,708.51 FV = $4,700 × (1 + 0.08)5 + $6,500 × (1 + 0.08)4 + $8,700 × (1 + 0.08)3 = $26,708.51

One year ago, the Jenkins Family Fun Center deposited $4,700 in an investment account for the purpose of buying new equipment four years from today. Today, they are adding another $6,500 to this account. They plan on making a final deposit of $8,700 to the account next year. How much will be available when they are ready to buy the equipment, assuming they earn a 8 percent rate of return?

I, II, and IV only

Outdoor Gear reduced its general and administrative costs this year. This cost improvement will increase which of the following ratios? I. Profit margin II. Return on assets III. Total asset turnover IV. Return on equity

$70,056 EBIT = $361,820-267,940-16,500 = $77,380 Tax = ($77,380-9,310) ×.35 = $23,824.50 OCF = $77,380 + 16,500 -23,824.50 = $70,056

Outdoor Sports paid $12,500 in dividends and $9,310 in interest over the past year. Sales totaled $361,820 with costs of $267,940. The depreciation expense was $16,500 and the tax rate was35 percent. What was the amount of the operating cash flow?

Small-company stocks

Over the period of 1926-2011, which one of the following investment classes had the highest volatility of returns?

7.01 percent 1 + R = (1 + 0.044) × (1 + 0.025) R = 7.01 percent

The outstanding bonds of Roy Thomas, Inc. provide a real rate of return of 4.4 percent. The current rate of inflation is 2.5 percent. What is the nominal rate of return on these bonds?

Time value of money

The payback method of analysis ignores which one of the following?

increases as the interest rate decreases.

The present value of a lump sum future amount:

D5/(R - g).

The price of a stock at year 4 can be expressed as:

U.S. Treasury bill

The rate of return on which one of the following is used as the risk-free rate?

$5,184 Total dollar return = 1,800 × ($40.34 - $38.06 + $0.60) = $5,184

Six months ago, you purchased 1,800 shares of ABC stock for $38.06 a share. You have received dividend payments equal to $0.60 a share. Today, you sold all of your shares for $40.34 a share. What is your total dollar return on this investment?

17.38 percent WP = (8,600 × $80) / [(1,000 × $870) + (8,600 × $80) + (32,000 × $75)] = $688,000 / $3,958,000 = 0.1738 = 17.38 percent

The Auto Group has 1,000 bonds outstanding that are selling for $870 each. The company also has 8,600 shares of preferred stock at a market price of $80 each. The common stock is priced at $75 a share and there are 32,000 shares outstanding. What is the weight of the preferred stock as it relates to the firm's weighted average cost of capital?

I, II, III, and IV

The DuPont identity can be used to help a financial manager determine the: I. degree of financial leverage used by a firm. II. operating efficiency of a firm. III. utilization rate of a firm's assets. IV. rate of return on a firm's assets.

Perpetuity

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?

5.26 Price-earnings ratio = (3.3 ×$18.50)/($87,100/7,500) = 5.26

The Kids' Mart has a market-to-book ratio of 3.3, net income of $87,100, a book value per share of $18.50, and 7,500 shares of stock outstanding. What is the price-earnings ratio?

80,012 PV = $1,000 / 1.0715 = $362.45 Number of bonds = $29,000,000 / $362.45 = 80,012 bonds

The MerryWeather Firm wants to raise $29 million to expand its business. To accomplish this, the firm plans to sell 15-year, $1,000 face value zero-coupon bonds. The bonds will be priced to yield 7 percent. What is the minimum number of bonds the firm must sell to raise the $29 million it needs? Use annual compounding.

$4.45 P0 = $2.50 / 1.081 + $2.50 / 1.0812 = $4.45

The Red Bud Co. pays a constant dividend of $2.50 a share. The company announced today that it will continue to do this for another 2 years after which time they will discontinue paying dividends permanently. What is one share of this stock worth today if the required rate of return is 8.1 percent?

19.48 Return on equity = .0792 ×(1 + 1.46) = .1948, or 19.48 percent

The Saw Mill has a return on assets of 7.92 percent, a total asset turnover rate of 1.18, and a debt-equity ratio of 1.46. What is the return on equity?

may or may not affect the portfolio beta.

The addition of a risky security to a fully diversified portfolio:

measures profitability rather than cash flow.

The average accounting return

Dividend growth rate

The capital gains yield equals which one of the following?

13.36 percent r = $3.50 / $45.08 + 0.056 = 13.36 percent

The common stock of Eddie's Engines, Inc. sells for $45.08 a share. The stock is expected to pay $3.50 per share next year. Eddie's has established a pattern of increasing their dividends by 5.6 percent annually and expects to continue doing so. What is the market rate of return on this stock?

balance sheet

The financial statement that summarizes a firm's accounting value as of a particular date is called the:

$506.06 Future value 6.72% = $18,000 × (1 + .0672)5 = $24,917.33 Future value 7.15% = $18,000 × (1 + .0715)5 = $25,423.39 Difference = $25,423.39- 24,917.33 = $506.06

Today, Stacy is investing $18,000 at 6.72 percent, compounded annually, for 5 years. How much additional income could she earn if she had invested this amount at 7.15 percent, compounded annually?

Capital Structure

Uptown Markets is financed with 45 percent debt and 55 percent equity. This mixture of debt and equity is referred to as the firm's:

29,400 Current liabilities = $98,300-38,600 -41,600 = $18,100 Current assets = $11,300 + 18,100 = $29,400

Wes Motors has total assets of $98,300, net working capital of $11,300, owners' equity of $41,600, and long-term debt of $38,600. What is the value of the current assets?

9.50 percent; 9.00 percent Arithmetic average = (0.23 + 0.09 - 0.06 + 0.12) / 4 = 0.0950 = 9.50 percent Geometric average = [(1 + 0.23) × (1 + 0.09) × (1 - 0.06) × (1 + 0.12)] ¼ - 1 = 0.08998 = 9.00 percent

What are the arithmetic and geometric average returns for a stock with annual returns of 23 percent, 9 percent, -6 percent, and 12 percent? List the arithmetic answer first.

1.444 Portfolio value = $5,400 + $6,400 + $8,900 = $20,700 βPortfolio = [($5,400 / $20,700) × 1.72] + [($6,400 / $20,700) × 1.83] + [($8,900 / $20,700) × 1.00] = 1.444

What is the beta of a portfolio comprised of the following securities? Stock Amount Invested Security Beta A $5,400 1.72 B $6,400 1.83 C $8,900 1.00

4,680.84 AFV = $1,070 × [(1.064 - 1) / 0.06] = $4,680.84

What is the future value of $1,070 a year for 4 years at a 6 percent rate of interest?

-$7,369.50 NPV = -$45,400 + $13,350 / (1 + 0.14) + $31,530 / (1 + 0.14)2 + $3,050 / (1 + 0.14)3 = -$7,369.50

What is the net present value of a project with the following cash flows and a required return of 14 percent? Year Cash Flow 0 -$45,400 1 13,350 2 31,530 3 3,050

$11,316.27 PV = $13,100 / 1.053 = $11,316.27

What is the present value of $13,100 to be received 3 years from today if the discount rate is 5 percent?

1.18 PI = [$15,200 / (1 + 0.08) + $17,500 / (1 + 0.08)2 + $16,900 / (1 + 0.08)3] / $36,000 = 1.18

What is the profitability index for an investment with the following cash flows given a 8 percent required return? Year Cash Flow 0 -$36,000 1 15,200 2 17,500 3 16,900

frequently use accounting information

When conducting a financial analysis of a firm, financial analysts

Any one of the partners can be held solely liable for all of the partnership's debt.

Which one of the following applies to a general partnership?

Increase the protections against corporate fraud

Which one of the following best describes the primary intent of the Sarbanes-Oxley Act of 2002?

Treasury bill

Which one of the following bonds is most apt to have the smallest liquidity premium?

Increase in accounts payable

Which one of the following changes during a year will increase cash flow from assets but not affect the operating cash flow?

Cumulative preffered

Which one of the following generally pays a fixed dividend, receives first priority in dividend payment, and maintains the right to a dividend payment, even if that payment is deferred?