Fin 303 Final
(#11 from balance sheet) For the year 2014, how much has the Kirkmonds' total assets contributed to sales?
0.91 TAT = Sales/total assets = 108,360/119,000 = 0.91
(#10 from Balance Sheet) For the year 2014, how much is the ratio that tells about the extent to which interest payment is covered by operating income?
13.41 Times Interest Earned=EBIT/Interest =20,110/1500 = 13.41
(#12 from balance sheet) For the year 2014, how much is Kirkmonds' return generated with owners' equity?
19.20% ROF = NI/total equity = 12,096/63,000=19.20%
Probability distribution
A listing of all the outcomes of an experiment and the probability associated with each outcome.
What is the NPV of the following set of cash flows at a discount rate of zero percent? What if the discount rate is 15%? Year 0: -$21,400 Year 1: 11,600 Year 2: 13,500 Year 3: 12,200 A. $0; -$665.07 B. $0; $6,916.59 C. $0; $7,208.19 D. $15,900; $7,208.19 E.$15,900; $6,916.59
E.$15,900; $6,916.59
You own a $36,800 portfolio that is invested in Stocks A and B. The portfolio beta is equal to the market beta. Stock A has an expected return of 22.6 percent and has a beta of 1.48. Stock B has a beta of .72. What is the value of your investment in Stock A? A. $8,619 B. $12,333 C. $14,500 D. $13,558 E. $17,204
Let investment in A= x Investment in B= 36800- x (x*1.48 + (36800-x)*.72)/36800=1 .76x=36800-26496 x= 13557.89= 13558 invested in stock A
Variance
Standard deviation squared
Capstone Investments is considering a project that will produce cash inflows of $11,000 at the end of Year 1, $24,000 in Year 2, and $36,000 in Year 3. What is the present value of these cash inflows at a discount rate of 12 percent?
$54,578.17 Year 1+Year2+Year3 Year 1 = 9,821.43 Year 2 = 19,132.65 Year 3 = 25,624.09 =$54,578.17
Coefficient of variation
-A standardized measure of dispersion about the expected value, that shows the risk per unit of return -CV= St. Dev/Expected return
The plaza cafe has an operating cash flow of $97,770, depreciation expense of $43,976, and taxes paid of $21,590. A partial listing of its balance sheet accounts as follows: Beg. Bal. End. Bal. Current Assets($) 143,590 134,204 Net Fixed Assets 599,608 597,913 Current Liab 143,215 139,827 Long-Term Debt 408,660 402,120
$61,487 NCS = 597,913-599,608+43,976 NCS= 42,281 Change in NWC = 139,827-143,215 = -3328 CFFA = OCF-NCS-Change in NWC CFFA = 97,770-42,281-(-3328) = $61,487
Uptown Insurance offers an annuity due with semi-annual payments for 25 years at 6% interest. The annuity costs $200,000 today. What is the amount of each annuity payment?
$7,546.70
The Underground Cafe has an OCF of $187,000 and a cash flow to creditors of $71,400 for the past year. The firm reduced its NWC by $28,000 and incurred NCS of $47,900. What is the amount of the cash flow to stockholders for the past year?
$95,700
What does the following statement mean? "The beta coefficient of the stock Z is 1.28."
When the market return changes by 1 the return on stock changes by 1.28
The Golden Goose is considering a project with an initial cost of $46,700. The project will produce cash inflows of $10,000 a year for the first two years and $12,000 a year for the following three years. What is the payback period? (in years) A. 3.97 B. 4.18 C. 4.46 D. 4.23
4.23 years
A firm has adopted a policy whereby it will not seek any additional external financing. Given this, what is the maximum growth rate for the firm if it has net income of $32,600, total equity of $294,000, total assets of $503,000, and a 25 percent dividend payout ratio?
5.11% Particulars Amount Net Income 32,600.00 Equity 294,000.00 Return on Equity = 32600/294000 11.09% Growth rate = 11.09%(1-.25) 8.32%
Portfolio
A grouping of financial assets such as stocks, bonds and cash equivalents, as well as their mutual, exchange-traded and closed-fund counterparts.
The Steel Factory is considering a project that will produce annual cash flows of $43,800, $40,200, $46,200, $41,800. What is the internal rate of return if the project is $127,900? A.13.00 percent B. 10.19 percent C. 11.28 percent D. 12.24 percent E. 12.83 percent
A. 13%
PL Lumber stock is expected to return 22% in a booming economy, 15% in a normal economy, and lose 2% in recession. The probabilities of an economic boom, normal state, or recession are 5%, 92%, and 3% respectively. What is the expected rate of return on this stock? A. 14.84% B. 14.23% C. 14.51% D. 15.47% E.15.26%
A. 14.84% ER(boom)=(22%)(0.05)=1.10% ER(normal)=(15%)(0.92) =13.80% ER(recession)=(-2%)(0.03) =-0.06% ER=1.10+13.80+(-0.06)= 14.84%
A project has the following cash flows. What is the IRR? Year 0: -$68,700 Year 1: 19,600 Year 2: 22,300 Year 3: 27,500 Year 4: 15,300 A. 9.08% B. 9.16% C. 9.58% D. 9.23% E. 9.19%
A. 9.08%
Systematic risk is defined as: A. Any risk that affects a large number of assets. B. The total risk of an individual security. C. Diversifiable risk D. Asset-specific risk. E. The risk unique to a firm's management.
A. Any risk that affects a large number of assets
Which one of the following is most closely related to the net present value profile? A. Internal rate of return B. Average accounting return C. Profitability index D. Payback E. Discounted payback
A. Internal rate of return
(TEST QUESTION) You have been hired by Fly by Night Airlines to compute its cost of capital. Its target capital structure calls for 40% debt and 60% equity. Which of the following statements is CORRECT A. WACC=[(0.4*after tax cost of debt)+(0.6*cost of equity)] B. WACC=[After tax cost of debt+cost of equity] C. The cost of capital only depends on the interest rate on a company's debt D.Retained earnings belong to the company and are therefore free of cost
A. WACC=[(0.4*after tax cost of debt)+(0.6*cost of equity)]
(TEST QUESTION) For an investment to have a positive net present value the: A. present value of all future cash flows from the investment must be greater than the initial price of the investment B. present value of all future net cash flows from the investment must be equal to the overall revenue from the investment C. future value of the initial investment must exceed the present value of all the investments net cash flow D. time value of the investment must exceed the marginal value of the investment
A. present value of all future cash flows from the investment must be greater than the initial price of the investment
(POSS TEST QUESTION) Net Working Capital is? A. the current assets minus the current liabilities of a company B. the amount of money a company owes on its current liabilities C. the amount of cash a company has on hand to cover cash needs D. total assets minus total liabilities E. the net change in the fixed assets
A. the current assets minus the current liabilities of a company
Risk aversion
Assumes investors dislike risk and require higher rates of return to encourage them to hold riskier securities
Unsystematic risk can be defined by all of the following except: A. Unrewarded risk. B. Diversifiable risk. C. Market risk. D. Unique risk. E. Asset-specific risk.
B. Diversifiable risk
Which of the following is incorrect regarding the use and limitations of ratios? A. Many firms have multi-divisional structures so it is difficult to develop a meaningful financial ratios' analysis B. Inflation cannot distort values in financial statements, especially in balance sheet because financial ratio analysis already takes the inflation into consideration. C. Seasonal factors can be one of the factors that can distort the financial ratio analysis. Hence, ratio analysis must be interpreted carefully. D. Window dressing is a technique to make the financial statements fancier than they really are. Ratio analysis using financial statements should take the window dressing into account. E. One financial ratio can tell two different stories about the financial status.
B. Inflation cannot distort values in financial statements, especially in balance sheet because financial ratio analysis already takes the inflation into consideration.
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% rate of return, should the firm purchase this particular machine based on its IRR? A. Yes, because the IRR is 10.75 percent B. Yes, because the IRR is 12.74 percent C. No, because the IRR is 10.75 percent D. No, because the IRR is 12.74 percent E. The answer cannot be determined as there are multiple IRRs
B. Yes, because the IRR is 12.74 percent
The amount of systematic risk present in a particular risky asset relative to that in an average risky asset is measured by the: A. squared deviation B. beta coefficient C. standard deviation D. Mean E. Variance
B. beta coefficient
(TEST QUESTION) A firms cost of capital is directly influenced by: A. the current ratio B. the capital structure of the firm C. the par value of the common stock D. the net income of the firm
B. the capital structure of the firm
You want to buy a house whose price is $600,000 currently in the market. Without making the down payment, you plan to pay off the house only with monthly payments. Assume the annual fixed interest rate for 20-year mortgage is 6%. How much is the monthly payment?
C. $4,298.59 N=20*12=240 i/y=6 FV=0 PV=600,000 CPT PMT=4,298.59
Assume the total cost of a college education will be $325,000 when your child enters college in 16 years. You presently have $40,000 to invest. What annual rate of interest must you earn on your investment to cover the cost of your child's college education?
C. 13.99% r=(325,000/40,000)^1/16-1 = 13.99%
What is the payback period for a project with the following cash flows? (in years) Year 0: -$75,000 Year 1: 15,000 Year 2: 23,000 Year 3: 35,000 Year 4: 25,000 A. 2.56 B. 2.89 C. 3.08 D. 3.24 E. Never
C. 3.08 years
Which term best refers to the practice of investing in a variety of diverse assets as a means of reducing risk? A. Systematic B. Unsystematic C. Diversification D. Security market line E. Capital asset pricing model
C. Diversification
Which of the following is incorrect? A. Time lines can be constructed to deal with situations where some of the cash flow occur annually but others occur quarterly. B. Holding everything else constant, FV increases as interest rate increases. C. Holding everything else constant, PV increases as number of periods increases. D. Holding everything else constant, FV is greater with monthly compounding than FV with yearly compounding. E. The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.
C. Holding everything else constant, PV increases as number of periods increases.
Julie wants to create a $5,000 portfolio. She also wants to invest as much as possible in a high risk stock with the hope of earning a high rate of return. However, she wants her portfolioto have no more risk than the overall market. Which one of the following portfolios is most apt to meet all of her objectives? A. Invest the entire $5,000 in a stock with a beta of 1.0 B. Invest $2,500 in a stock with a beta of 1.98 and $2,500 in a stock with a beta of 1.0 C. Invest $2,500 in a risk-free asset and $2,500 in a stock with a beta of 2.0 D. Invest $2,500 in a stock with a beta of 1.0, $1,250 in a risk-free asset, and $1,250 in a stock with a beta of 2.0 E. Invest $2,000 in a stock with a beta of 3, $2,000 in a risk-free asset, and $1,000 in a stock with a beta of 1.0
C. Invest $2,500 in a risk-free asset and $2,500 in a stock with a beta of 2.0
Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive? A. Internal rate of return B. Profitability index C. Net present value D. Modified internal rate of return E. Average accounting return
C. Net present value
Soft and Cuddly is considering a new toy that will produce the following cash flows. Should the company produce this toy based on the IRR if the firm requires a rate of return of 17.5% Year 0: -$132,000 Year 1: 97,000 Year 2: 42,000 Year 3: 28,000 A. Yes, because the project's rate of return is 16.45 percent B. Yes, because the project's rate of return is 11.47 percent C.No, because the project's rate of return is 16.45 percent D. No, because the project's rate of return is 11.47 percent E. No, because the internal rate of return is zero percent
C. No, because the project's rate of return is 16.45 percent
(POSS TEST QUESTION) All other things being equal, the PRESENT VALUE of a cash flow will DECREASE if? A. Future cash flow becomes larger B. Interest rate becomes smaller C. Number of periods becomes larger D. None of the above has a relationship with present value
C. Number of periods becomes larger
Which one of the following indicates that a project is expected to create value for its owners? A. Profitability index less than 1.0 B. Payback period greater than the requirement C. Positive net present value D. Positive average accounting rate of return Internal rate of return that is less than the requirement
C. Positive net present value
Which one of the following can be defined as a benefit-cost ratio? A. Net present value B. Internal rate of return C. Profitability index D. Accounting rate of return E. Modified internal rate of return
C. Profitability index
Which one of the following will occur when the internal rate of return equals the required return? A. The average accounting return will equal 1.0. B. The profitability index will equal 1.0. C. The profitability index will equal 0. D. The net present value will equal the initial cash outflow. E. The profitability index will equal the average accounting return.
C. The profitability index will equal 1.0
Which one of the following statements is correct? Assume cash flows are conventional. A. If the IRR exceeds the required return, the profitability index will be less than 1.0. B. The profitability index will be greater than 1.0 when the net present value is negative. C. When the internal rate of return is greater than the required return, the net present value is positive. D. Projects with conventional cash flows have multiple internal rates of return. E. If two projects are mutually exclusive, you should select the project with the shortest payback period.
C. When the internal rate of return is greater than the required return, the net present value is positive.
S&S stock is expected to return 17.5 percent in a booming economy, 12.4 percent in a normal economy, and 1.2 percent in a recession. The probabilities of an economic boom, normal state, orrecession are 2 percent, 90 percent, and 8 percent, respectively. What is the expected rate of return on this stock? A. 11.89 percent B. 12.56 percent C. 12.43 percent D. 11.61 percent E. 10.50 percent
D. 11.61 percent
A project has the following cash flows. What is the payback period? (in years) Year 0: -$14,000 Year 1: 2,200 Year 2: 4,800 Year 3: 6,500 Year 4: 7,500 A. 3.04 B. 2.59 C. 2.96 D. 3.13 E. 3.24
D. 3.13 years
(POSS TEST QUESTION) You expect to receive $6,000 at graduation one year from now. Your plan is to invest this money at 6.5 percent, compounded semi-annually, until you have $50,000. At that time, you plan to travel around the world. How long FROM NOW will it be until you can begin your travels? A. 66.29 years B. 33.15 years C. 67.29 years D. 34.15 years E. 37.57 years
D. 34.15 years PV= 6,000 FV= 50,000 I/Y= 6.5% PMT= 2
Greenbriar Cotton Mill is spending $284,000 to update its facility. The company estimates that this investment will improve its cash inflows by $50,500 a year for 8 years. What is the payback period? (in years) A. 4.03 B. 4.95 C. 5.48 D. 5.62 E. The project never pays back
D. 5.62 years
EKG, Inc. is considering a new project that will require an initial cash investment of $419,000. The project will produce no cash flows for the first two years. The projected cash flows for year 3 through 7 are $69,000, $98,000, $98,000, $109,000, $145,000, and $165,000. How long will it take the firm to recover from its initial investment? (in years) A. 3.81 B. 3.98 C. 5.57 D. 5.99 E. The project never pays back
D. 5.99 years
Diamond Enterprises is considering a project that will produce cash inflows of $41,650 a year for three years followed by $49,000 in year 4. What is the internal rate of return if initial cost is $219,000? A. 9.43 percent B. 8.29 percent C. 7.81 percent D. 8.42 percent E. 7.55 percent
D. 8.42%
A project has the following cash flows. What is the internal rate of return? Year 0: -$89,000 Year 1: 32,900 Year 2: 64,200 Year 3: 5,800 A. 11.21% B. 10.47% C. 10.72% D. 8.57% E. 9.19%
D. 8.57%
(TEST QUESTION) Which of the following statements is correct when making an acceptance/rejection decision of a project? A. Accept if the payback period is longer than the acceptable payback period B. Accept if the NPV is greater than the IRR C. Accept if the IRR is greater than 0 D. Accept if the IRR is greater than the cost of capital
D. Accept if the IRR is greater than the cost of capital
Which one of the following is the primary advantage of payback analysis? A. Incorporation of the time value of money concept B. Ease of use C. Research and development bias D. Arbitrary cutoff point E. Long-term bias
D. Arbitrary cutoff point
(POSS TEST QUESTION) The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to: A. Maximize its expected total corporate income B. Maximize its expected EPS C. Minimize the chances of losses D. Maximize the stock price per share over the long run
D. Maximize the stock price per share over the long run
You are considering an investment for which you require a rate of return of 8.5%. The investment costs $67,400, and will produce cash inflows of $25,720 for three years. Should you accept this project based on its internal rate of return? A. Yes; because the IRR is 9.51 percent B. Yes; because the IRR is 7.08 percent C. Yes; because the IRR is 6.67 percent D. No; because the IRR is 7.08 percent E. No; because the IRR is 9.51 percent
D. No because the IRR is 7.08%
Which one of the following indicators offers the best assurance that a project will produce value for its owners? A. PI equal to zero B. Negative rate of return C. Positive IRR D. Positive NPV
D. Positive IRR
The internal rate of return is the: A. Discount rate that causes a project's aftertax income to equal zero. B. Discount rate that results in a zero net present value for the project. C. Discount rate that results in a net present value equal to the project's initial cost. D. Rate of return required by the project's investors. E. Project's current market rate of return.
D. Rate of return require by the projects investors
(POSS TEST QUESTION) Profit margin is the amount of net profit earned for every $1 of? A. total assets B. equity C. long-term debt D. sales E. total liabilities
D. Sales
The payback method of analysis ignores which one of the following? A. Initial cost of an investment B. Arbitrary cutoff point C. Cash flow direction D. Time value of money E. Timing of each cash inflow
D. Time value of money
Angela has just received an insurance settlement of $22,500. She wants to save this money until her daughter goes to college. If she can earn an average of 4.7 percent, compounded annually, how much will she have saved when her daughter enters college 6 years from now?
E. $29,638.94 N=6 i/y=4.7 PMT=0 PV=22,500 CPT FV=-29,638.94
Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities? A. Payback B. Profitability index C. Accounting rate of return D. Internal rate of return E. Net present value
E. Net present value
The payback period is the length of time it takes an investment to generate sufficient cash flows enable the project to: A. Produce a positive annual cash flow. B. Produce a positive cash flow from assets. C. Offset its fixed expenses. offset its total expenses. E. Recoup its initial cost.
E. Recoup its initial cost
Which one of the following statements is correct? A. A longer payback period is preferred over a shorter payback period. B. The payback rule states that you should accept a project if the payback period is less than one year. C. The payback period ignores the time value of money. D. The payback rule is biased in favor of long-term projects. E. The payback period considers the timing and amount of all of a project's cash flows.
E. The payback period considers the timing and amount of all of a projects cash flows.
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? (in years) A. 3.97 B. 4.18 C. 4.46 D. 4.70 E. The project never pays back
E. The project never pays back
Bama Entertainment has common stock with a beta of 1.22. The market risk premium is 8.1 percent and the risk-free rate is 3.9 percent. What is the expected return on this stock? A. 13.31 percent B. 12.67 percent C. 12.40 percent D. 13.78 percent E. 14.13 percent
ER= RFR+ Beta stock (P) ER= Annual return RFR = Risk free interest rate =3.9% Beta= beta of stock = 1.22 P= market premium=8.1% Putting in formula, ER=3.9 + 1.22 (8.1) ER= 13.78%
(#13 from balance sheet) For the year 2014, analyze ROE using the DuPont analysis.
ROE = PM * TAT * (TA/TE) PM = NI/Sales = 12,096.50/108,360=0.116 TAT = sales/total assets=0.91 TA/TE = 119,000/63,000=1.888 ROE = (0.116)(0.91)(1.88)=19%
Risk premium
The difference between the return on a risky asset and a riskless asset, which serves as compensation for investors to hold riskier securities.
Standard deviation
The measure of how far the actual return is likely to deviate from the expected return
Investment Risk
The possibility that an investment will fail to pay the expected return or fail to pay a return at all
