Exam 2 Review

A firm is operating at less than 100 percent of capacity. When preparing pro forma statements, this information is primarily needed to project which one of the following account values?

Fixed assets

You hope to buy your dream car five years from now. Today, that car costs $62,500. You expect the price to increase by an average of 2.9 percent per year. How much will your dream car cost by the time you are ready to buy it?

$72,103.59 FV = $62,500(1.0295)FV = $72,103.59

When preparing pro forma statements, which one of the following is an analyst most likely to estimate first?

Projected sales

Which one of the following statements related to loan interest rates is correct?

When comparing loans you should compare the effective annual rates.

Suppose the first comic book of a classic series was sold in 1954. In 2020, the estimated price for this comic book was $310,000, which is an annually compounded return of 22 percent. For this to be true, what was the original price of the comic book in 1954?

$.62 PV = $310,000/1.2266PV = $.62

With a sales level of $547,200 and fixed assets of $471,000, Esquivel's is operating at full capacity. The net profit margin is 5.4 percent. If sales are to increase by 4 percent, what is the required addition to fixed assets?

$18,840 Required addition to fixed assets = (.04)$471,000Required addition to fixed assets = $18,840

Ace Custom Metal has annual sales of $56,900 and is currently operating at 86 percent of capacity. What is the level of sales at full capacity?Ace Custom Metal has annual sales of $56,900 and is currently operating at 86 percent of capacity. What is the level of sales at full capacity

$66,163 Full-capacity sales = $56,900/.86Full-capacity sales= $66,163

Assume you currently earn a salary of $50,000 per year. What will be your annual salary 17 years from now if you receive annual raises of 3.75 percent?

$93,491 FV = $50,000(1.037517)FV = $93,491

What is the present value of $45,000 to be received 50 years from today if the discount rate is 8 percent, compounded annually?

$959.46 PV = $45,000/1.0850PV = $959.46

All else constant, which one of the following will result in the lowest present value of a lump sum?

8 percent interest for 10 years

Wei Bridal is a profitable firm with a dividend payout ratio of 25 percent. The firm does not want to issue additional equity shares nor increase its long-term debt. Which one of the following defines the maximum rate at which this firm can currently grow?

Internal growth rate

Project A has cash flows of $4,000, $3,000, $0, and $3,000 for Years 1 to 4, respectively. Project B has cash flows of $2,000, $3,000, $2,000, and $3,000 for Years 1 to 4, respectively. Which one of the following statements is correct assuming the discount rate is positive? (No calculations needed.)

Project B is worth less today than Project A.

When utilizing the percentage of sales approach, managers:

consider the current production capacity level.

Andrew just calculated the present value of a $15,000 bonus he will receive next year. The interest rate he used in his calculation is referred to as the:

discount rate.

A pro forma statement indicates that both sales and fixed assets are projected to increase by 7 percent over their current levels. Given this, you can safely assume the firm:

is currently operating at full capacity.

Which one of the following statements concerning interest rates is correct?

The effective annual rate equals the annual percentage rate when interest is compounded annually.

Zeng Systems is currently operating at full capacity. The firm, has sales of $47,000, current assets of $5,100, current liabilities of $6,200, net fixed assets of $51,500, and a net profit margin of 5 percent. The firm has no long-term debt and does not plan on acquiring any. The firm does not pay any dividends. Sales are expected to increase by 3 percent next year. If all assets, short-term liabilities, and costs vary directly with sales, how much additional equity financing is required for next year?

−$908.50 Projected assets = ($5,100 + 51,500)(1.03)Projected assets = $58,298 Projected liabilities = $6,200(1.03)Projected liabilities = $6,386 Current equity = $5,100 + 51,500 − 6,200Current equity = $50,400 Projected increase in retained earnings = $47,000(.05)(1.03)Projected increase in retained earnings = $2,420.50 Equity funding needed = $58,298 − 6,386 − 50,400 − 2,420.50Equity funding needed= −$908.50