Finance

Joe just inherited the family business, and having no desire to run the family business, he has decided to sell it to an entrepreneur. In exchange for the family business, Joe has been offered an immediate payment of $100,000. Joe will also receive payments of $50,000 in one year, $50,000 in two years, and $75,000 in three years. The current market rate of interest for Joe is 6%. In terms of present value (PV), how much will Joe receive for selling the family business?

$254,641

An S Corporation earns $6.00 per share before taxes. The corporate tax rate is 35%, the personal tax rate on dividends is 20% and the personal tax rate on non-dividend income is 39%. What is the total amount of taxes paid if the company pays a $2.00 dividend?

$6.00x39%= $2.34

Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their childʹs college education. Currently, college tuition, books, fees, and other costs average $12,500 per year. On average, tuition and other costs have historically increased at a rate of 4% per year. Assuming that college costs continue to increase an average of 4% per year and that all her college savings are invested in an account paying 7% interest, then what is the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education?

$97,110.01

Define the following terms: (a) perpetuity(b) annuity (c) growing perpetuity (d) growingannuity

(a) A perpetuity is a stream of equal cash flows that occur at regular intervals and lasts forever. (b) AnannuityisastreamofNequalcashflowspaidatregularintervals. (c) A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a constant rate forever. (d) A growing annuity is a stream of N growing cash flows, paid at regular intervals.

What are the four financial statements that all public companies must produce?

- Balance Sheet - Income statement - Statement of Cash Flows - Statement of Stockholders' Equity

What is the role of an auditor in financial statement analysis?

- Ensure that the annual financial statements are prepared accurately - Ensure that the annual financial statements are prepared according to the Generally Accepted Accounting Principles (GAAP) - To verify the information used in preparing the annual financial statement is reliable

What is the major advantage corporations have over other business entities?

- It is easier for a corporation to raise capital than other forms of business - A corporation is treated as a separate legal entity for tax and legal purposes - A corporations' shares can be freely traded among its shareholders

What is a firm's net income?

- The difference between sales and other income generated by a firm, and all costs, taxes, and expenses incurred by the firm in a giving period - The last or "bottom" line of the income statement - A measure of the firm's profitability over a given period

How do you calculate (mathematically) the present value (PV) of a(n): (a) perpetuity(b) annuity(c) growing perpetuity (d) growingannuity

11 (b) PVofanannuity=C× 1- Chapter 4 Time Value of Money: Valuing Cash Flow Streams 151 14) How do you calculate (mathematically) the present value (PV) of a(n): (a) perpetuity(b) annuity(c) growing perpetuity (d) growingannuityAnswer: (a) PV of a perpetuity = C r r (1 + r)N (c) PV of a growing perpetuity = C r-g 1 1+gN (d) PVofagrowingannuity =C× 1- (LOOK THESE UP)

You are watching TV late one night and see an ad from Ronco for the Dial-o-matic food slicer. You learn that the Dial-o-matic sells for $29.95. Ronco also includes a set of Ginsu steak knives worth $10.95 and another free gift worth $7.95 in this deal. Assuming that there is a competitive market for Ronco items, at what price must Ronco offer this three item Dial-o-matic deal to ensure the absence of an arbitrage opportunity and uphold the Law of One Price?

29.95 + 10.95 + 7.95 = $48.85

How is a corporation different from most of the other forms of business organizations?

A corporation has a separate legal identity from those of its owners. This separation gives the owners limited liability for the actions of the corporation. The down side is the process of double taxation for each dollar earned by the corporation, once when it is earned by the corporation and subsequently when it is passed on to the owners.

Explain why a dollar today is worth more than a dollar tomorrow.

A dollar today can be invested to earn interest, which will make it worth more than a dollar tomorrow.

What are the main differences between a limited partnership and a limited liability corporation?

A limited partnership is required to have at least one general partner. A limited liability corporation is similar, but without the general partner.

A limited liability company is essentially...

A limited partnership without a general partner

The above diagram shows a balance sheet for a certain company. If the company buys new property, plant and equipment today using its entire cash balance, what will its net-working capital be?

A) $-12 million (Current assets would fall by $54 with no charge to current liabilities. (20+16) - $48= $-12)

Refer to the income statement above. Assuming that Luther has convertible bonds outstanding, then for the year ending December 31, 2006 Luther's diluted earnings per share are closest to

A) $1.03 (Diluted EPS= Net income/shares outstanding +options contract+ shares possible from convertible bonds outstanding) = $10.6/(10+.3+0) = 1.03

You are thinking about investing in a mine that will produce $10,000 worth of ore in the first year. As the ore closest to the surface is removed it will become more difficult to extract the ore. Therefore, the value of the ore that you mine will decline at a rate of 7% per year forever. If the appropriate interest rate is 3%, then the value of this mining operation is closest to ________.

A) $100,000

Consider the following timeline detailing a stream of cash flows: 0-$1000\1-$2000\2-$3000\3-$4000\4-? If the current market rate of interest is 8%, then the future value (FV) of this stream of cash flows is closest to ________.

A) $11,699

Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their childʹs college education. Currently, college tuition, books, fees, and other costs average $12,000 per year. On average, tuition and other costs have historically increased at a rate of 5% per year. Assuming that college costs continue to increase an average of 5% per year and that all her college savings are invested in an account paying 8% interest, then the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education is closest to ________.

A) $110,793

Sara wants to have $600,000 in her savings account when she retires. How much must she put in the account now, if the account pays a fixed interest rate of 8%, to ensure that she has $600,000 in 20 years?

A) $128,729

A homeowner in a sunny climate has the opportunity to install a solar water heater in his home for a cost of $2900 . After installation the solar water heater will produce a small amount of hot water every day, forever, and will require no maintenance. How much must the homeowner save on water heating costs every year if this is to be a sound investment? (The interest rate is 5% per year.)

A) $145

Matthew wants to take out a loan to buy a car. He calculates that he can make repayments of $5000 per year. If he can get a four-year loan with an interest rate of 7.9%, what is the maximum price he can pay for the car?

A) $16,598

Refer to the balance sheet above, what is Luther's net-working capital and 2006?

A) $16.8 million (Total current assets-total current liabilities= Net working capital) 156.4-139.6= 16.8

A 2013 Toyota Camry can be bought in Buffalo, NY, for $18,620. The same model Camry can be purchased across the Canadian border in Hamilton, ON. If cars could be freely traded across the border, what would be the expected price of a 2013 Toyota Camry in Hamilton in Canadian dollars, given that $1 U.S. is equal to $0.92 Canadian?

A) $17,130

Consider the following timeline detailing a stream of cash flows: 0-$100\1-$200\2-$300\3-$400\4-$500\5-? If the current market rate of interest is 6%, then the future value (FV) of this stream of cash flows is closest to ________.

A) $1723

Dan buys a property for $210,000 . He is offered a 30-year loan by the bank, at an interest rate of 8% per year. What is the annual loan payment Dan must make?

A) $18,653.76

A Xerox DocuColor photocopier costing $44,000 is paid off in 60 monthly installments at 6.90% APR. After three years the company wishes to sell the photocopier. What is the minimum price for which they can sell the copier so that they can cover the cost of the balance remaining on the loan?

A) $19,433

A small foundry agrees to pay $220,000 two years from now to a supplier for a given amount of coking coal. The foundry plans to deposit a fixed amount in a bank account every three months, starting three months from now, so that at the end of two years the account holds $220,000 . If the account pays 12.5% APR compounded monthly, how much must be deposited every three months?

A) $24,602

A backhoe can dig 180 feet of trench per hour and costs $720 per hour to hire and operate. A ditch digger can dig 6 feet of trench per hour. Based on this information, what is the most a ditch digger can charge for per hour when digging ditches?

A) $24.0 per hour

How much money would a stock exchange make from buying and selling 500 shares of the stock under conditions shown above?

A) $250 (421.25-420.75) x 500= $250 (Bid-Ask) x 500

The present value (PV) of receiving $1100 per year with certainty at the end of the next three years is closest to ________.

A) $3010

What is the present value (PV) of an investment that pays $100,000 every year for four years if the interest rate is 5% APR, compounded quarterly?

A) $353,818

Since your first birthday, your grandparents have been depositing $1200 into a savings account on every one of your birthdays. The account pays 6% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to ________.

A) $37,086.78

Consider the following timeline: Date: 0-?\1-$100\2-$200\3-$300 If the current market rate of interest is 8%, then the present value (PV) of this timeline as of year 0 is closest to ________.

A) $502

A business promises to pay the investor of $6000 today for a payment of $1500 in one yearʹs time, $3000 in two yearsʹ time, and $3000 in three yearsʹ time. What is the present value of this business opportunity if the interest rate is 6% per year?

A) $603.94

Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $42,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this yearʹs salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 9%. The present value (PV) (at age 30) of your retirement savings is closest to ________.

A) $61,303

If the rate of interest (r) is 9%, then you should be indifferent about receiving $750 in one year or ________.

A) $688.07 today

An S corporation earns $9.10 per share before taxes. The corporate tax rate is 39%, the personal tax rate on dividends is 15% and the personal tax rate on non-dividend income is 36%. What is the total amount of taxes paid if the company pays a $5.00 dividend?

A) $9.10 x 36%= $3.28

In 2009, an agricultural company introduced a new cropping process which reduced the cost of growing some of its crops. If sales in 2008 and 2009 were steady at $30 million, but the gross margin increased from 2.8% to 3.9% between those years, by what amount was the cost of sales reduced?

A) (30 x 3.9)- (20x2.8) x 1,000,000= $330,000

On Commodity Exchange A, it is possible to buy and sell crude oil at $116 per barrel, while on Commodity Exchange B crude oil can be bought and sold at $117 per barrel. If there are transaction costs of 1% when buying or selling on either exchange, what is the net effect of buying a barrel of oil on Exchange A and selling it on Exchange B?

A) -$1.33

In 2009, U.S. Treasury yielded 0.1%, while inflation was 2.7%. What was the real rate in 2009?

A) -2.6%

Refer to the balance sheet above. Luther's quick ratio for 2006 is closest to ________.

A) .87 (Quick ratio= current assets- inventory/current liabilities) (171.3-46.1)/$143.2= .87

A construction company takes a loan of $1,531,000 to cover the cost of a new grader. If the interest rate is 6.75% APR, and payments are made monthly for five years, what percentage of the outstanding principal does the company pay in interest each month?

A) 0.56%

Manufacturer A has a profit margin of 2.2%, an asset turnover of 1.7 and an equity multiplier of 5.0. Manufacturer B has a profit margin of 2.5%, an asset turnover of 1.2 and an equity multiplier of 4.7. How much asset turnover should Manufacturer B have to match Manufacturer A's ROE?

A) 1.59% (ROE A= 2.2 x 1.7 x 5.0 =18.7 /(2.5x4.7)= 1.59

Refer to the income statement above. Luther's net profit margin for the year ending December 31, 2005 is closest to

A) 11.61% (Net profit margin= Net income/Sales= $66.105/569.6= 0.1161 or 11.61%

How long will it take $50,000 placed in a savings account at 10% interest to grow into $75,000 ?

A) 4.25 years

Consider the above income statement for Xenon Manufacturing. All values are in millions of dollars. If Xenon Manufacturing has 20 million shares outstanding, what is its EPS in 2008?

A) 50 EPS= Net Income / Shares outstanding = 10 million / 20 million shares = .50 per share

The lowest effective rate of return you could earn on any of these investments is closest to ________.

A) 6.3830 %

If $17,000 is invested at 10% per year, in approximately how many years will the investment double?

A) 7.3 years

The effective annual rate (EAR) for a loan with a stated APR of 8% compounded monthly is closest to ________.

A) 8.30%

Which of the following would be best considered to be an agency conflict problem in the behavior of the following financial managers?

A) Bill chooses to pursue a risky investment for the company's funds because his compensation will substantially rise if it succeeds.

What is the most common way that agency conflict problems are addressed in most corporations?

A) By minimizing the number of decisions that a manager makes where there is a conflict between the managers interest and those of the shareholders

A factory owner wants his workers to produce as many widgets as they can so he can pays his workers based on how many widgets they produce. However, in order to make sure the workers do not rush and produce a large number of poorly made widgets, he checks the widgets at random at various stages of their manufacture. If a defect is found in a widget, the pay of the entire section of the factory responsible for the defect is docked. How is this factory owner seeking to solve the agency conflict problem in this case?

A) By supplying incentives so the agents act in the way the principle desires.

Company A has current assets of $42 billion and current liabilities of $41 billion. Company B has current assets of $2.7 billion and current liabilities of $1.8 billion. Which of the following statements is correct, based on this information? A) Company A is less likely than Company B to have sufficient working capital to meet its short-term needs. B) Company A has greater leverage than Company B. C) Company A has less leverage than Company B. D) Company A and Company B have roughly equivalent enterprise values.

A) Company A is less likely than Company B to have sufficient working capital to meet its short-term needs.

Valiant Corp. is a C corporation that earned $3.4 per share before it paid any taxes. Valiant Corp. retained $1 of after-tax earnings for reinvestment and distributed what remained in dividend payments. If the corporate tax rate was 35% and dividend earnings were taxed at 12.5%, what was the value of the dividend earnings received after-tax by a holder of 100,000 shares of Valiant Corp.? A) $105,875 B) $127,050 C) $148,225 D) $84,700

A) Corporate tax paid on $3.4 earnings= $3.4 x .35= 1.190 earnings after-tax= 3.4-1.190= 2.210 earnings distributed as dividends = $2.210- $1= $1.2100 taxes put on dividends by a shareholder= 1.2100x0.125= 0.1513 after-tax dividends per share = 1.2100- 0.1513= $1.0588 hence a holder of 100,000 shares receives 1.0588 x 100,000 =$105,875

Which ratio would you use to measure the financial health of a firm by assessing that firm's leverage?

A) Debt-to-equity or equity multiplier ratio

Which of the stock markets listed below is the smallest, as judged by trading volume? A) Deutsche Börse B) London Stock Exchange C) NASDAQ D) NYSE Euronext (US)

A) Deutsche Börse

Which of the following statements is FALSE about valuing cash at different points in time?

A) Finding the present value (PV) and compounding are the same.

Steve is offered an investment where for every $1.00 invested today, he will receive $1.10 at the end of each of the next five years. Steve concludes that in five years he will have $1.10 for every $1.00 invested and that this investment will increase his personal value. What is Steveʹs major error in reasoning when making this decision?

A) He ignores the fact that the costs and benefits of the investment are not stated in the same terms.

Steve is offered an investment where for every $1.00 invested today, he will receive $1.10 at the end of each of the next five years. Steve concludes that in five years he will have $1.10 for every $1.00 invested and that this investment will increase his personal value. What is Steveʹs major error in reasoning when making this decision?

A) He ignores the fact that the costs and benefits of the investments are not stated in the same terms

The table above shows the rate of return (APR) for four investment alternatives. Which offers the highest EAR?

A) Investment A

Which alternative offers you the lowest effective rate of return?

A) Investment A

Investment X and Investment Y are both growing perpetuities with initial cash flow of $100. Both investments have the same interest rate (r) and cash flows. The present value of Investment X is $5,000, while the present value of Investment Y is $4,000. Which of the following is true?

A) Investment X has a higher growth rate than Investment Y.

What is the effective annual rate (EAR)?

A) It is the interest rate that would earn the same interest with annual compounding.

A manufacturer of plastic bottles for the medical trade purchases a new compression blow molder for its bottle protection plant. How will the cost to the company of this piece of this equipment be recorded?

A) It will be depreciated over time on the income statement and subtracted as a capital expenditure on the statement of cash flows.

You are scheduled to receive $10,000 in one year. What will be the effect of an increase in the interest rate on the present value of this cash flow?

A) It will cause the present value to fall.

A 30 year mortgage loan is a

A) Long term liability

Which of the following firms would be expected to have a high ROE based on that firm's high profitability?

A) Medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals.

Why, in general, do investment opportunities offer a rate greater than that offered by U.S. Treasury securities for the same horizon?

A) Most investment opportunities bear far greater risk than those offered by U.S. Treasury securities.

You see on Craigslist that a used XBOX 360 sells for $100 and a new XBOX 360 sells for $300. Is this an arbitrage opportunity?

A) No, because the market for a used XBOX 360 is not the same as the market for a new XBOX 360.

Which of the following would be more typically the responsibility of the controller rather than a treasurer?

A) Overseeing accounting and tax functions

Which of the following formulas is INCORRECT?

A) PV of a growing annuity = C ×1/r-g(1-(1+r/1+g) ((The big long one) That's what she said))

Refer to the income statement above. Luther's return on assets (ROA) for the year ending December 31, 2005 is closest to

A) ROA=Net income/Total Assets(This is a little tricky in that total assets are not given in the problem. The student must remember the basic balance sheet equation A=L+SE. Total liabilities and shareholders' equity is given and this is the same as total assets. So, ROA= $67.405/$386.7= .1743 or 17.43%.

A firm that provides tax services to the public intends to offer a premium tax-return service at a higher price than their current services. The managers of these companies ask experts in marketing to determine how much an effective ad campaign such a service would cost and by how much sales would increase. They consult experts in economics to calculate the interest in revenue from the success of the campaign, experts in operation to determine the cost of offering the service, and the experts in strategy to anticipate counter moves by competitors. Which of the following points about the role of financial managers does this example illustrate?

A) Real world decisions are complex and require information from many sources if the decisions are to be valid.

As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaskan North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Another oil refiner is offering to trade you 10,150 bbl of Alaskan North Slope (ANS) crude oil for 10,000 bbl of WTI crude, what should you do?

A) Sell 10,000 bbl WTI crude on the market and use the proceeds to purchase and refine ANS crude

As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Another oil refiner is offering to trade you 10,150 bbl of Alaska North Slope (ANS) crude oil for 10,000 bbl of West Texas Intermediate (WTI) crude oil. Assuming you currently have 10,000 bbl of WTI crude, what should you do?

A) Sell 10,000 bbl WTI crude on the market and use the proceeds to purchase and refine ANS crude.

Which of the following is true about perpetuities?

A) Since a perpetuity generates cash flows every period infinitely, the cash flow generated equals the PV times the interest rate.

A small company has small assets of $112,000, and current liabilities of $117,000. Which of the following statements about that company is most likely to be true?

A) Since net-working capital is negative, the company will not have enough funds to meet its obligations.

If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in the balance sheet between 2007 and 2008?

A) The company is having difficulty selling its product

What is the bid-ask spread?

A) The difference in price available for an immediate sale of a stock and the immediate purchase of the stock

Which of the following is the least likely for a firm's high ROE?

A) The firm is growing

Which of the following statements regarding the income statement is incorrect?

A) The income statement shows the cash flows and expenses at a given point in time

You are given two choices of investments, Investment A and Investment B. Both investments have the same future cash flows. Investment A has a discount rate of 4%, and Investment B has a discount rate of 5%. Which of the following is true?

A) The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B.

On August 19, 2004 Google IPO offered 19,605,052 shares at a price of US $85 per share, which were sold in an online auction in the bid to make the shares more widely available. Which of the following statements best describes why these are considered a primary market transaction?

A) The transaction was between the corporation and the investors

What is the main problem in using a balance sheet to provide an accurate assessment of the value of a company's equity?

A) Valuable assets such as a company's reputation, the quality of its work force, and the strength of its management are not captured on the balance sheet.

Which of the following statements regarding growing perpetuities is FALSE?

A) We assume that r < g for a growing perpetuity.

A McDonaldʹs Big Mac value meal consists of a Big Mac sandwich, large Coke, and a large fries. Assume that there is a competitive market for McDonaldʹs food items and that McDonaldʹs sells the Big Mac value meal for $4.59. Does an arbitrage opportunity exists and if so how would you exploit it and how much would you make on one value meal?

A) Yes, buy a value meal and then sell the Big Mac, Coke, and fries to make arbitrage profit of $0.67.

Which of the following best explains why you cannot use the price of rolled oats at a local supermarket as the competitive market value of rolled oats?

A) You can buy the oats at the price posted by the store, but the store will not buy oats from you for the same price.

Which of the following situations is best described by the timeline shown below? Date: 0-5\Cash Flows:-$250

A) You make payments of $250 per month for six months.

When computing a present value, which of the following is TRUE?

A) You should adjust the discount rate to match the interval between cash flows.

Which of the following is not an operating expense?

A) interest expense

A sole proprietorship is owned by

A) one person

Which of the following best describes the annual percentage rate?

A) the quoted interest rate which, considered with the compounding period, gives the effective interest rate

Whose interests should a financial manager consider paramount when making a decision?

A) the stockholders who have risked their money to become owners of the company

How do we handle a situation when both compounding period and cash flow interval are given to us but both are less than a year and not equal to each other?

Additional care should be taken when the compounding period is given to us and it does not equal the cash flow interval. This requires some additional steps in computing the applicable interest rate. The compounding interval has to match the cash flow interval to enable transformation to present value (PV) or future value (FV). In most cases, it should be possible to achieve this by calculating the effective annual rate from the given compounding interval and subsequently calculating the annual percentage rate and periodic interest rate for the cash flow interval.

What role does Generally Accepted Accounting Principles (GAAP) play in the accounting process?

All firms quoted on a US exchange are required to use GAAP in their financial reporting process. This standardization process makes it easier to adjust and/or compare the financial figures across different firms.

Everything else remaining same, under what situation will APR and EAR be equal?

An APR will equal EAR only with annual compounding assuming everything else remains same.

Why should interest rates be generally positive?

An investor should be compensated for foregoing current consumption and, everything else remaining the same, a positive interest rate serves to compensate the investor.

Advanced Micro Devices (NYSE: AMD) is currently trading at $20.75 on the NYSE. Advanced Micro Devices is also listed on NASDAQ. Assume it is currently trading on NASDAQ at $20.50. Does an arbitrage opportunity exist and, if so, how would you exploit it and how much would you make on a block trade of 1000 shares?

Answer: Yes, buy 1,000 shares × 20.50 ($20,500) and sell 1,000 shares × 20.75 ($20,750) = $250.00.

How does arbitrage help the Law of One Price?

Any arbitrage opportunity will exploit any mispricing to restore the Law of One Price

What role to external auditors play in a firm's financial reporting process?

As the name implies, external auditors act as third party monitors to a firm's financial reporting process

In a trade with the government of an oil producing nation, a manufacturer will deliver 13 caterpillar D9 tractors, with a value of $320,000 per tractor, and receive 45,000 barrels of oil, valued at $120 per barrel. What is the net benefit of this trade to the manufacturer?

B) $1,240,000

Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $40,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this yearʹs salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 10%. The future value (FV) at retirement (age 65) of your savings is closest to ________.

B) $1,445,531

Refer to the income statement above. For the year ending December 31, 2006 Lutherʹs earnings per share is closest to ________.

B) $1.03 (EPS= Net income/ shares outstanding= 10.6/10.3= $1.03)

A home buyer buys a house for $2,155,000 . She pays 20% cash, and takes a fixed-rate mortgage for ten years at 7.70% APR. If she makes semi-monthly payments, which of the following is closest to each of her payment?

B) $10,311.34

A lottery winner will receive $6 million at the end of each of the next twelve years. What is the future value (FV) of her winnings at the time of her final payment, given that the interest rate is 8.6% per year?

B) $118.00 million

You are offered an investment opportunity that costs you $28,000, has a net present value (NPV) of $2278, lasts for three years, has interest rate of 10%, and produces the following cash flows: The missing cash flow from year 2 is closest to ________.

B) $12,000

As an oil refiner, you are able to produce $77 worth of unleaded gasoline from one barrel of Alaskan North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $78 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Another oil refiner is offering to trade you 10,150 bbl of Alaskan North Slope crude oil for 10,000 bbl of West Texas Intermediate (WTI) crude oil. Assuming you currently have 10,000 bbl of crude oil, the added benefit, (cost) to you if you take the trade is closest to

B) $1550

Suppose that a young couple has just had their first baby and they wish to insure that enough money will be available to pay for their childʹs college education. They decide to make deposits into an educational savings account on each of their daughterʹs birthdays, starting with her first birthday. Assume that the educational savings account will return a constant 9%. The parents deposit $2400 on their daughterʹs first birthday and plan to increase the size of their deposits by 7% each year. Assuming that the parents have already made the deposit for their daughterʹs 18th birthday, then the amount available for the daughterʹs college expenses on her 18th birthday is closest to ________.

B) $160,463

A bank is negotiating a loan. The loan can either be paid off as a lump sum of $80,000 at the end of four years, or as equal annual payments at the end of each of the next four years. If the interest rate on the loan is 6%, what annual payments should be made so that both forms of payment are equivalent?

B) $18,287

Consider the above statement of cash flows. If all amounts shown above are in millions of dollars, what were AOS Industries' retained earnings for 2008?

B) $2.2 million (3.2-1=2.2 million)

Consider the following timeline detailing a stream of cash flows: Date: 0-?\1-$5000\2-$6000\3-$7000\4-$8000 If the current market rate of interest is 10%, then the present value (PV) of this stream of cash flows is closest to ________.

B) $20,227

Cronus Airlines has a contract that gives them the opportunity to purchase up to 13,000,000 gallons of jet fuel at $2.00 per gallon. The current market price of jet fuel is $2.3 per gallon. Cronus believes they will only need 4,000,000 gallons of jet fuel. What is the value of this opportunity?

B) $3,900,000

If $8000 is invested in a certain business at the start of the year, the investor will receive $2400 at the end of each of the next four years. What is the present value of this business opportunity if the interest rate is 6% per year?

B) $316.25

A coin collector treasures his 1969-S doubled die obverse Lincoln cent because he found it in his pocket change, rather than purchasing it. He can sell it on the open market for $35,000, but would only sell it for at least twice that price, due to its sentimental value to him. It is anticipated that the coin will increase in market value in the foreseeable future. What is the value of the coin?

B) $35,000, since this is the price that the coin would fetch on the open market.

Based on the information shown above, how much would you receive from selling 2,000 shares of the above stock?

B) $40,740 (Multiply the 2,000 and the bid number) selling=bid

If the current rate of interest is 7%, then the future value (FV) of an investment that pays $1200 per year and lasts 18 years is closest to ________.

B) $40,799

On the day Harry was born, his parents put $1200 into an investment account that promises to pay a fixed interest rate of 6 percent per year. How much money will Harry have in this account when he turns 21?

B) $4079

Using the information above, how much would you pay for a share of BHP Billiton stock?

B) $41.93 (Look at the Ask price)

Since your first birthday, your grandparents have been depositing $100 into a savings account every month. The account pays 9% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to ________.

B) $53,635

What is the present value (PV) of $100,000 received six years from now, assuming the interest rate is 8% per year?

B) $63,016.96

You are interested in purchasing a new automobile that costs $33,000 . The dealership offers you a special financing rate of 9% APR (0.75% per month) for 60 months. Assuming that you do not make a down payment on the auto and you take the dealerʹs financing deal, then your monthly car payments would be closest to ________.

B) $685

As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaskan North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Assuming you just purchased 9950 bbl of WTI crude at the current market price, the total revenue (cost) to you if you were to refine this crude oil and sell the unleaded gasoline is closest to

B) $766,150

An annuity is set up that will pay $1500 per year for ten years. What is the present value (PV) of this annuity given that the discount rate is 9%?

B) $9626

If $432 invested today yields $450 in a yearʹs time, what is the discount factor?

B) 0.96

Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then using market value of equity, the debt to equity ratio for Luther in 2006 is closest to

B) 1.72 (Total Debt= Notes Payable (10.5)+ Current Maturities of long term debt (39.6) + Long term debt (231.3) = $281.4 million Total Equity= 10.2 x 16= $163.2= 1.72

U.S. public companies are required to file their annual financial statements with the U.S. Securities and Exchange Commission on which form?

B) 10-K

Refer to the balance sheet above. When using the book value of equity, the debt-equity ratio for Luther in 2006 is closest to

B) 2.25 (Total debt/Total equity) (Total debt= Notes payable (10.7)+Current maturities of long term debt (38.7) + Long term debt (234.4) = 238.8 million Total Equity= 125.9 so D/E is 238.8/125.9= 2.25

What is the bid-ask spread on the stock shown above?

B) 3 cents (Bid- 14.15/Ask- 14.18)

A businessman wants to buy a truck. The dealer offers to sell the truck for either $120,000 now, or six yearly payments of $25,000 . Which of the following is closest to the interest rate being offered by the dealer?

B) 6.8%

Using the above information, how much would you receive if you sold a share of Washington Post stock?

B) 677.62 (Look at the Bid price)

If the current inflation rate is 2.0%, then the nominal rate necessary for you to earn a(n) 7.3% real interest rate on your investment is closest to ________.

B) 9.4%

What is a competitive market?

B) A market in which a good can be bought and sold at the same price

Refer to the balance sheet above. The change in Luther's quick ratio from 2005-2006 is closest to

B) An increase in .01 (Quick ratio in 2006= 158.9-46.5/144.1=.78) (Quick ratio in 2005= 144.0-42.9/132.0= .77) So, the quick ratio increased by .78-.77=.01

A software company acquires a smaller company in order to acquire the patients that it holds. Where will the cost of this acquisition be recorded on the statement of cash flows?

B) As an outflow under investment activities

How do the shareholders of most corporations exercise their control of that corporation?

B) By electing members of a board of directors

The financial manager of a well-regarded book publishing firm wishes to buy a small internet publishing company to provide an avenue for sale of its materials online. In order to raise the funds to make this purchase, the financial manager decides to sell more stock in the company. How is the financial manager raising funds in this case?

B) By raising the company's equity by encouraging new owners to take a stake in the company.

A corporate raider gains a controlling fraction of the shares of a poorly managed company and replaces the board of directors. How does the corporate raider hope to make a profit in this case?

B) By the rise in the value of the stock held by the raider when the new board of directors is judged to be superior to the ousted board of directors.

Which of the following is not considered to be an operating expense on the income statement?

B) Corporate taxes

Cash is a

B) Current asset

The above data is for four regional trucking firms. Based on price-earnings ratios, which firm's stock is the best value?

B) Firm B (Look for lowest earnings per share)

Above are portions of the balance sheet and income statement for two companies in 2008. Based upon this information, which of the following statements is most likely to be true?

B) Fixed asset turnover ratios indicate that Firm A generating fewer sales for the assets it employs than firm B.

A firm has contracted to supply 500,000 gallons of propane fuel for $1.46 million to the local municipality. The municipality wants to break the contract. What does the minimum current market price of propane need to be in order for the firm to benefit from breaking the contract?

B) Greater than $2.92 per gallon

A vintner is deciding when to release a vintage of Sauvignon Blanc. If it is bottled and released now, the wine will be worth $2.2 million. If it is barrel aged for a further year, it will be worth 15% more, though there will be additional costs of $528,000 incurred at the end of the year. If the interest rate is 7%, what is the difference in the benefit the vintner will realize if he releases the wine after barrel aging it for one year or if he releases the wine now?

B) He will earn $328,972 more if he releases the wine now.

Why is it usually necessary to use the time value of money when performing a cost-benefit analysis?

B) In most investment projects, costs are incurred up front, but benefits are received in the future.

Which of the following statements regarding the cost benefit analysis is NOT correct?

B) In the absence of competitive markets, we can use one-sided prices to determine exact cash values

Which of the following investments has a higher present value, assuming the same (strictly positive) interest rate applies to both investments?

B) Investment Y has a higher present value.

A public company has a book value of $128 million. They have $20 million shares outstanding, with a market price of $4 per share. What is Gen-Corp's market debt-equity ratio?

B) Investors believe the company's assets are not likely to be profitable because its market value is worth less than its book value.

Which of the following is a way that the operating activity section of the statement of cash flows adjusts the Net income from the balance sheet.

B) It adds all non-cash entries related to a firm's operating activities

Allen Company bought a new copy machine to be depreciated straight line for three years for use by sales personnel. Where would this purchase be reflected on the Statement of Cash Flows?

B) It would be an addition to property, plant and equipment so it would be an investing activity

Consider the above statement of cash flows. In 2008, AOS industries had contemplated buying a new warehouse for $3 million, the cost of which would be depreciated over 10 years. If AOS industries has a tax rate of 25%, what would be the impact for the amount of cash held by AOS at the end of 2008?

B) It would have $2,925,000 less cash at the end of 2008 (-$3,000,000+ $300,000 x 25% = $2,925,000)

The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. How would the balance sheet change if the company's long-term assets were judged to depreciate at an extra $5 million per year?

B) Net property, plant, and equipment would fall to $116 million and total assets and stockholders' equity would be adjusted accordingly

A company that produces racing motorbikes has several models that sell well within the motorcycle racing community and which are very profitable for the company. Despite having a profitable product, why must this company take care to ensure that it has sufficient cash on hand to meet its obligations?

B) New models require a lot of money to develop and bring to market before they generate any revenue

Heavy duty company, a manufacturer of power tools, decides to offer a rebate of $130 on its 16 inch mid-range chain saw, which currently had a retail price $490. Heavy duty marketers estimate that as a result of the rebate, sales of this model will increase from 60,000 to 80,000 units next year. The profit margin for heavy duty before the rebate is $180. Based on the given information, is the decision to give a rebate a wise one?

B) No, since costs are 6,800,000 more than benefits

Which of the following is/are TRUE? The EAR can never exceed the APR. The APR can never exceed the EAR. The APR and EAR can never be equal.

B) Only II is true.

A delivery company is creating a balance sheet. Which of the following would most likely be considered a short-term liability on this balance sheet?

B) Revenue received for the delivery of items that have not yet been delivered

Which of the following is a measure of the aggregate price level of collections of pre-selected stocks?

B) S&P 500

Why is a stock exchange like NASDAQ considered a secondary market? A) It trades the second largest volume of shares in the world. B) Shares sold on it are exchanged between investors without any involvement of the issuing corporation. C) The exchange has rules that attempt to ensure that bid and ask prices do not get too far apart. D) NASDAQ is called a secondary market because NYSE is considered a primary market.

B) Shares sold on it are exchanged between investors without any involvement of the issuing corporation

A company's board of directors chooses to provide a comprehensive health care plan for the families of all employees, despite the large cost. They argue that this will not only increase the number of employees who stay with the firm, and thus reduce some costs involved in employee turnover, but also increase the employees' diligence and industry. What general principle is being argued by the board of directors?

B) Some activities that decrease shareholders' wealth may have intangible benefits which increase the strength of the company overall.

Which of the following is NOT a financial statement that every public company is required to produce?

B) Statement of sources and uses of cash

If equivalent investment opportunities trade simultaneously in different competitive markets, then they must trade for the same price in both markets.

B) The Law of One Price

Which of the following statements regarding annuities is FALSE?

B) The difference between an annuity and a perpetuity is that a perpetuity ends after some fixed number of payments.

What is a firm's gross profit?

B) The difference between sales revenue and costs

A printing company prints a brochure for a client and then bills them for the service. At the time the printing company's financial disclosure statements are prepared, the client has not yet paid the bill for this service. How will this transaction be recorded?

B) The statement will be added to Net Income on the income statement but deducted from the net income on the statement of cash flows

Which of the following best describes the valuation principle?

B) The value of a commodity or an asset to a firm or its investors is determined by its competitive market price. When the value of the benefits exceeds the value of the costs in terms of market prices, the decision will increase the market value of the firm.

Which of the following best explains why market prices are useful to a financial manager when performing a cost-benefit analysis?

B) They can be used to convert different services and commodities into equivalent cash values which can be compared.

The notes to the financial statements would least likely be used for which of the following purposes?

B) To disclose the financial implications of any off-balance sheet transactions

Samantha has holdings of 250 troy ounces of platinum, currently valued at $820 dollars per ounce. She estimates that the price of platinum will rise to $869.20 per ounce in the next year. If the interest rate is 12%, should she sell the platinum today?

B) Yes, as the difference between the present value of selling now and selling in one year is $10,982 dollars today.

Walgreens Company (NYSE: WAG) is currently trading at $48.75 on the NYSE. Walgreens Company is also listed on NASDAQ and assume it is currently trading on NASDAQ at $48.50. Does an arbitrage opportunity exist and, if so, how would you exploit it and how much would you make on a block trade of 100 shares?

B) Yes, buy on NASDAQ and sell on NYSE, make $25.

To compute the future value of a cash flow, you must ________.

B) compound it

Which of the following accounts has the highest EAR?

B) one that pays 1.0% per month

Whenever a good trades in a competitive market, the ________ determines the value of the good.

B) price

Consider the following timeline: Date:0--$150\1-$40\2-$80\3-$100 If the current market rate of interest is 13%, then the value of the cash flows in year 0 and year 2 as of year 1 is closest to ________.

B)-$98.7

What are the terms for the two types of prices quoted for a stock on an exchange?

Bid price and ask price

Which of the following organizations has the most revenue?

C Corporations

Consider the above Income Statement for CharmCorp. All values are in millions of dollars. If CharmCorp. has 4 million shares outstanding, and its managers and employees have stock options for 2 million shares, what is its diluted EPS in 2008?

C) $1.67

A company intends to install new management software for its warehouse. The software will cost $47,000 to buy and will cost an additional $148,000 to install and implement. It is anticipated that it will save the company $44,000 through reductions in staff and $69,000 in general inventory costs in the first year after installation. What is the total benefit to the company in the first year if they choose to install the software?

C) $113,000

Ally wishes to leave a provision in her will that $7000 will be paid annually in perpetuity to a local charity. How much must she provide in her will for this perpetuity if the interest rate is 6%?

C) $116,667

If the current rate of interest is 8%, then the present value (PV) of an investment that pays $1200 per year and lasts 24 years is closest to ________.

C) $12,635

A perpetuity has a PV of $20,000 . If the interest rate is 6%, how much will the perpetuity pay every year?

C) $1200

A $50,000 new car loan is taken out with the terms 12% APR for 48 months. How much are monthly payments on this loan?

C) $1316.69

An annuity pays $10 per year for 98 years. What is the present value (PV) of this annuity given that the discount rate is 7%?

C) $142.67

What is the present value (PV) of $50,000 received twenty years from now, assuming the interest rate is 6% per year?

C) $15,590.24

You are saving money to buy a car. If you save $310 per month starting one month from now at an interest rate of 6%, how much will you be able to spend on the car after saving for 4 years?

C) $16,770.33

Martin wants to provide money in his will for an annual bequest to whichever of his living relatives is oldest. That bequest will provide $4000 in the first year, and will grow by 7% per year, forever. If the interest rate is 9%, how much must Martin provide to fund this bequest?

C) $200,000.00

Howard is saving for a holiday. He deposits a fixed amount every month in a bank account with an EAR of 14.7%. If this account pays interest every month then how much should he save from each monthly paycheck in order to have $14,000 in the account in four yearsʹ time?

C) $220

What is the future value (FV) of $20,000 in four years, assuming the interest rate is 4% per year?

C) $23,397.17

Owen expects to receive $30,000 at the end of next year from a trust fund. If a bank loans money at an interest rate of 8.2%, how much money can he borrow from the bank on the basis of this information?

C) $27,726

Suppose you invest $1000 into a mutual fund that is expected to earn a rate of return of 11%. The amount of money will you have in ten years is closest to which of the following? The amount you will have in 50 years is closest to which of the following?

C) $2839 ; $184,565

An investment will pay you $120 in one year and $200 in two years. If the interest rate is 4%, what is the present value of these cash flows?

C) $300.29

You are considering purchasing a new home. You will need to borrow $290,000 to purchase the home. A mortgage company offers you a 20-year fixed rate mortgage (240 months) at 12% APR (1% month). If you borrow the money from this mortgage company, your monthly mortgage payment will be closest to ________.

C) $3193

An elderly relative offers to sell you their used 1958 Cadillac Eldorado for $52,000. You note that very similar cars are selling on the open market for $87,000. You don't care for classic cars and would rather you buy a new Ford Explorer for $35,000. What is the net value of buying the Cadillac.

C) $35,000 since this is the difference between purchase and retail price of the Cadillac.

Drew receives an inheritance that pays him $54,000 every three months for the next two years. Which of the following is closest to the present value (PV) of this inheritance if the interest rate is 8.9% (EAR)?

C) $392,957

Stella deposits $4500 in a savings account at a bank that offers interest of 4.7% on such accounts. What is the value of the money in her savings account in one yearʹs time?

C) $4712

Consider the following timeline detailing a stream of cash flows: 0-?\1-$100\2-$100\3-$200\4-$200 If the current market rate of interest is 8%, then the present value (PV) of this stream of cash flows is closest to ________.

C) $484

A McDonaldʹs Big Mac value meal consists of a Big Mac sandwich, large Coke, and a large fries. Assuming that there is a competitive market for McDonaldʹs food items, at what price must a Big Mac value meal sell to insure the absence of an arbitrage opportunity and uphold the Law of One Price?

C) $5.44

A perpetuity will pay $900 per year, starting five years after the perpetuity is purchased. What is the present value (PV) of this perpetuity on the date that it is purchased, given that the interest rate is 11%?

C) $5390

If the rate of interest (r) is 8%, then you should be indifferent about receiving $500.00 today or ________.

C) $540.00 in one year

What is the present value (PV) of $90,000 received six years from now, assuming the interest rate is 5% per year?

C) $67,159.39

A homeowner has five years of monthly payments of $1400 before she has paid off her house. If the interest rate is 6% APR, what is the remaining balance on her loan?

C) $72,416

As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaskan North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Another oil refiner is offering to trade you 10,100 bbl of Alaska North Slope (ANS) crude oil for 9950 bbl of West Texas Intermediate (WTI) crude oil. Assuming you just purchased 9950 bbl of WTI crude at the current market price, the total revenue (cost) to you if you take the trade is closest to

C) $767,600

An investment pays you $30,000 at the end of this year, and $10,000 at the end of each of the four following years. What is the present value (PV) of this investment, given that the interest rate is 5% per year?

C) $79,228

You own 1000 shares of Newstar Financial stock, currently trading for $57 per share. You are offered a deal where you can exchange these stocks for 900 shares of Amback Financial Group stock, currently trading at $63 per share. What is the value of this trade, if you choose to make it?

C) -$300

Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $300,000 , or you can lease a truck from the manufacturer for five years for a monthly lease payment of $6000 (paid at the end of each month). Your firm can borrow at 8.00% APR with quarterly compounding. The monthly discount rate that you should use to evaluate the truck lease is closest to ________.

C) 0.6623 %

If the interest rate is 9%, the one-year discount factor is equal to ________.

C) 0.917

Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then using the market value of equity, the debt-equity ratio for Luther in 2006 is closest to ________.

C) 1.29 (MTB= Market Value of Equity/Book Value of Equity) (10.2 million x 16)/126.7 = 163.2 (163.2/126.7= 1.288)

You are a shareholder in a corporation which has elected subchapter S tax treatment. The corporation announces a profit of $6 per share, of which it retains $1 for investment and distributes the rest as dividend payments. Given that the personal tax rate is 35%, how much tax must you pay per share?

C) 1.75 (tax paid by shareholder of S corporation= 5 x .35= $1.75)

A pottery factory purchases a continuous belt conveyor kiln for $68,000 . A 6.3% APR loan with monthly payments is taken out to purchase the kiln. If the monthly payments are $765.22 , over what term is this loan being paid?

C) 10 years

A 10% APR with quarterly compounding is equivalent to an EAR of ________.

C) 10.38%

The effective annual rate (EAR) for a loan with a stated APR of 11% compounded quarterly is closest to ________.

C) 11.46%

Refer to the income statement above. Luther's return on equity (ROE) for the year ending December 31, 2005 is closest to

C) 123.56% (ROE= Net income/Shareholders' equity = $78.585/$63.6= 1.2356 or 123.56%)

Refer to the income statement above. Luther's operating margin for the year ending December 31, 2005 is closest to

C) 20.36 (Operating Margin= operating income/sales= $114.6/$562.8= .2036)

The effective annual rate (EAR) for a savings account with a stated APR of 5% compounded daily is closest to ________.

C) 5.13%

Faisal has $12,000 in his savings account and can save an additional $3600 per year. If interest rates are 12%, how long will it take his savings to grow to $47,000 ?

C) 5.3 years

A metal fabrication company is pricing raw supplies of aluminum. The following are the costs to the company to receive one ton of aluminum from various sources. Which source offers the best price for aluminum per ton?

C) 5888 Brazilian reals per ton, with $0.507 U.S. = 1 BRL

You are considering investing in a zero-coupon bond that will pay you its face value of $1000 in twelve years. If the bond is currently selling for $496.97 , then the internal rate of return (IRR) for investing in this bond is closest to ________.

C) 6.0%

The highest effective rate of return you could earn on any of these investments is closest to ________.

C) 6.1610 %

A bank pays interest semiannually with an EAR of 13%. What is the periodic interest rate applicable semiannually ?

C) 6.30%

A bank offers a loan that will requires you to pay 7% interest compounded monthly . Which of the following is closest to the EAR charged by the bank?

C) 7.23%

A house costs $148,000 . It is to be paid off in exactly ten years, with monthly payments of $1737.54 . What is the APR of this loan?

C) 7.25%

If money is invested at 8% per year, after approximately how many years will the interest earned be equal to the original investment?

C) 9 years

A company that produces drugs is preparing a balance sheet. Which of the following would be most likely to be considered a long term asset on this balance sheet?

C) A patent for a drug held by a company

Which of the following is an example of arbitrage?

C) An investor, seeing that the price of palladium on the metals exchange in two different countries is slightly different, buys on one and sells on the other to make a profit.

Which of the following balance sheet equations are incorrect?

C) Assets-Current liabilities= Long term liabilities

A manufacturer of breakfast cereals has the opportunity to purchase barley at $3.00 a bushel for 10,000 bushels, if it also buys 5,000 bushels of wheat at $16.00 per bushel. However, the manufacturer does not use any barley in its products, and currently needs 20,000 bushels of wheat. If the current market price of barley is $3.80 per bushel and that of wheat is $15.80 per bushel, should this opportunity be taken, and why?

C) Because the value of the opportunity is positive, the opportunity should be taken.

WorldCom classified 3.85 billion in operating expenses as long-term investments. How would this make WorldCom's financial statements more attractive to investors?

C) By raising its reported earnings

The major components of stockholder equity are

C) Common stock, paid in surplus, and retained earnings

Inflation is calculated as the rate of change in the _______.

C) Consumer Price Index

A C corporation earns $8.30 per share before taxes. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the total amount of taxes paid if the company pays a $6.00 dividend?

C) Corporate tax= $8.30 x 39% = $3.24 Personal tax= $6 x 15%= $.90 Total= $3.24+$.90= $4.14

Samantha enters a rent-to-own agreement for living room furniture. She will pay $60 per month for one year. Which of the following shows the timeline for her payments if the first payment is one month from now?

C) Date 0-12\Cash Flows 0-(-$60)

The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. If the company has $5 million shares outstanding, and these shares are trading at a price of $6.39 per share, what does this tell you about how investors view the firm's book value?

C) Investors consider the firm's market value and book value roughly equivalent.

You are scheduled to receive $10,000 in one year. What will be the effect of an increase in the interest rate on the future value of this cash flow?

C) It will have no effect on the future value.

Whose cash flow is best described by the timeline shown below? Date:0-4/Cash Flows: -$3,500-$1,000

C) Karen, who loans a friend $3,500, which friend then pays back the loan in four annual installments of $1,000

An animator needs a laptop for audio/video editing, and notices that he can pay $2600 for a Dell XPS laptop, or lease from the manufacturer for monthly payments of $75 each for four years. The designer can borrow at an interest rate of 14% APR compounded monthly. What is the cost of leasing the laptop over buying it outright?

C) Leasing costs $145 more than buying.

Why are arbitrage opportunities short-lived?

C) Once investors take advantage of the opportunity, prices will respond so that the buying and selling price become equal.

Which of the following statements regarding perpetuities is FALSE?

C) PV of a perpetuity = r C

Which of the following is not a role of financial institutions?

C) Printing money for borrowers

A firm whose primary business is in a line of regional grocery stores would be most likely to have to include which of the following facts, if true, the firm's management discussion and analysis (MD&A)?

C) That the company has lost a class action suit brought against the firm by its employees and is expected to have to pay a large amount of damages

In most corporations, to whom does their chief financial officer report?

C) The Chief Executive Officer (CEO)

Which of the following amounts would be shown on the right side of the balance sheet?

C) The amount of deferred tax liability owned by the company

Which of the following describes why the left and right sides of a balance sheet are equal?

C) The assets must equal liabilities plus stockholders' equity because stockholders' equity is the difference between the assets and liabilities

If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in stockholders equity between 2007 and 2008?

C) The company's net income in 2008 was negative

Consider the above income statement for Xenon Manufacturing. All values are in millions of dollars. Calculate the operating margin for 2008 and 2009. What does the change in operating margin between these two years imply about the company?

C) The efficiency of Xenon Manufacturing has significantly fallen between 2008 and 2009. (24/202=.12; 16/212=.08

Which of the following statements is FALSE?

C) The highest interest rate for a given horizon is the rate paid on U.S. Treasury securities.

Which of the following best describes why a firm provides a financial statement?

C) To provide a means for interested outside parties such as creditors to obtain information about a firm, with an overview of the short-and long-term financial condition of a business

The exchanges in which of the following countries or regions do NOT accept the International Financial Reporting Standards Board?

C) United States

Which of the following statements is INCORRECT based on the time value of money?

C) We refer to (1 - rf) as the interest rate factor for risk-free cash flows.

Which of the following statements regarding arbitrage and security prices is INCORRECT?

C) When a bond is underpriced, the arbitrage strategy involves selling the bond and investing some of the proceeds.

A lender lends $10,100, which is to be repaid in annual payments of $2070 for 6 years. Which of the following shows the timeline of the loan from the lenderʹs perspective?

C) Year0, -$10,100 Year 1, $2070 Year 2, $2070 Year 3, $2070 Year 4, $2070 Year 5, $2070 Year 6, $2070

A(n) 12% APR with monthly compounding is closest to ________.

C) an EAR of 12.68 %

What is the shape of the yield curve and what expectations are investors likely to have about future interest rates?

C) inverted; lower

Jeff has the opportunity to receive lump-sum payments either now or in the future. Which of the following opportunities is the best, given that the interest rate is 4% per year?

C) one that pays $1350 in five years

A bank offers an account with an APR of 5.8% and an EAR of 5.88%. How does the bank compound interest for this account?

C) semiannual compounding

Which of the following is NOT an advantage of a sole proprietorship?

C) unlimited liability

Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then what is Luther's enterprise value?

C)385.7 million Enterprise Value= Market Value of Equity + Debt - Cash = (10.2 x $16)+ 278.6 - 56.1 = 385.7

If an analyst incorrectly adds cash flows occurring at different points in time, what is the implied assumption in the process?

Cash flows occurring at different points in time cannot be added because a dollar today is worth more than a dollar tomorrow. In other words, these cash flows are not in the same units. The compounding and discounting effect causes these cash flows to be different across time. However, this is only valid for nonzero interest rates. Hence, the implied assumption in adding cash flows across time is that interest rate is zero.

Is there a need to distinguish between cash inflows and outflows on a timeline?

Cash inflows and outflows should have opposite signs to give meaningful results that can be used in decision making. One convention that is easier to follow is to assign a positive sign to all cash coming in, i.e., cash inflows, and a negative sign to all cash going out, i.e., cash outflows.

A mining company is offering to trade 7,250 tons of low-grade copper ore for 5,000 tons of high-grade copper ore. Assuming Coloma currently has 5,000 tons of high -grade ore, what should it do?

Coloma should not trade. It should keep the high grade ore and refine it.

Over four-fifths of all business revenue is generated by which type of firms?

Corporations

What is the future value (FV) of $50,000 in thirty years, assuming the interest rate is 12% per year?

D) $1,497,996.11

You are borrowing money to buy a car. If you can make payments of $320 per month starting one month from now at an interest rate of 12%, how much will you be able to borrow for the car today if you finance the amount over 4 years?

D) $12,151.67

A bank offers a home buyer a 20-year loan at 8% per year. If the home buyer borrows $130,000 from the bank, how much must be repaid every year?

D) $13,240.79

Refer to the table above. An international seafood supplier is offered 9.52 million yen today for 1000 pounds of abalone frozen in the shell. One thousand pounds of abalone can be sourced from various countries at the prices shown above. The current market exchange rates between the United States and the other relevant currencies are also shown. In addition, $1 U.S. = 102 yen. What is the value, in U.S. dollars, of the best deal the international seafood supplier can make?

D) $13,333

An annuity pays $13 per year for 53 years. What is the future value (FV) of this annuity at the end of that 53 years given that the discount rate is 9%?

D) $13,764.85

Stella places a market order with her broker to buy 1,000 shares of OneWorld Corp. The broker buys 1,000 shares at $15.80 each, and sells them to Stella at $15.95 each. He also charges a commission of $12.00. What is bid-ask spread in this case? A) $162 B) $120 C) $210.00 D) $150

D) $150

A $52,000 loan is taken out on a boat with the terms 3% APR for 36 months. How much are the monthly payments on this loan?

D) $1512.22

A company decides to close down its plastics division. It has on hand 20 tons of styrene monomer, a raw material that has a market price of $800 per ton, which had been originally purchased at $750 per ton. Given that the company has no use for the styrene monomer, and that it would cost the company $5200 to store it, what is the total value of the 20 tons of styrene monomer to the company?

D) $16,000

Clarissa wants to fund a growing perpetuity that will pay $10,000 per year to a local museum, starting next year. She wants the annual amount paid to the museum to grow by 5% per year. Given that the interest rate is 9%, how much does she need to fund this perpetuity?

D) $250,000.00

An annuity pays $47 per year for 22 years. What is the future value (FV) of this annuity at the end of those 22 years, given that the discount rate is 8%?

D) $2606.47

What is the future value (FV) of $50,000 in thirty years, assuming the interest rate is 6% per year?

D) $287,174.56

Salvatore has the opportunity to invest in a scheme which will pay $5000 at the end of each of the next 5 years. He must invest $10,000 at the start of the first year and an additional $10,000 at the end of the first year. What is the present value of this investment if the interest rate is 3%?

D) $3189.80

You have a used CD store. At an estate sale, you can purchase 230 compact discs for $356.5. You believe you could sell the CDs for an average of $3.05 each. What is the net benefit of buying the CDs at the estate sale and selling them in your store?

D) $345

As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaskan North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Assuming you have 10,000 bbl of WTI crude, the added benefit (cost) to you if you were to sell 10,000 bbl of WTI crude and use the proceeds to purchase and refine ANS crude and is closest to

D) $3908

What is the present value (PV) of an investment that will pay $500 in one yearʹs time, and $500 every year after that, when the interest rate is 10%?

D) $5000

A rich donor gives a hospital $1,040,000 one year from today. Each year after that, the hospital will receive a payment 6% larger than the previous payment, with the last payment occurring in ten yearsʹ time. What is the present value (PV) of this donation, given that the interest rate is11 %?

D) $7,681,257.74

As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaskan North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Assuming you currently have 10,000 bbl of WTI crude, the total benefits to you and if you were to sell the 10,000 bbl of WTI crude, and use the proceeds to purchase and refine ANS crude is closest to

D) $784,091

Based on the information shown above, what would it cost to buy 1,000 shares of the above stock?

D) $91,650

The net present value (NPV) of an investment that costs $4320 and pays $1600 certain at the end of one, three, and five years is closest to ________.

D) -$114.21

Refer to the balance sheet above. Luther's current ratio for 2006 is closest to

D) 1.11 (Current ratio= Current Assets/Current liabilities = 160.3 -144.1= 1.11

GenCorp. has a total debt of $140 million and stockholdersʹ equity of $50 million. It also has 26 million shares outstanding, with a market price of $4.00 per share. What is GenCorpʹs market debt-equity ratio?

D) 1.35 (140/$4 x 26)= 1.35

A 12% APR with bi-monthly compounding is equivalent to an EAR of ________.

D) 12.62%

Convex Industries has inventories of $218 million, current assets of $1.4 billion, and current liabilities of $504 million. What is its quick ratio?

D) 2.35 (1400-218/504= 2.345)

Consider an investment that pays $1900 certain at the end of each of the next four years. If the investment costs $6650 and has a net present value (NPV) of $142.31 , then the four year risk-free interest rate is closest to ________.

D) 4.51%

What is the internal rate of return (IRR) of an investment that requires an initial investment of $11,000 today and pays $15,400 in one yearʹs time?

D) 40%

The above diagram shows a balance sheet for a certain company. If the company pays back all of its accounts payable today using cash, what will its net-working capital be?

D) 45 Million (both cash and accounts payable would fall by the same amount, leaving net-working capital the same. Total current assets- total current liabilities = Net working capital)

The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. What is the company's net-working capital?

D) 45 million (Networking capital= Total current assets- total current liabilities)

f the one-year discount factor is equal to 0.94340, the interest must be equal to ________,

D) 6.0%

If the current inflation rate is 3.6% and you have an investment opportunity that pays 10.9%, then the real rate of interest on your investment is closest to ________.

D) 7.0%

Ursula wants to buy a $19,000 used car. She has savings of $2,000 plus an $800 trade-in. She wants her monthly payments to be about $282 . Which of the following loans offers monthly payments closest to $282 ?

D) 7.8% APR for 72 months

Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $350,000 , or you can lease a truck from the manufacturer for five years for a monthly lease payment of $7000 (paid at the end of each month). Your firm can borrow at 9.00% APR with quarterly compounding. The effective annual rate on your firmʹs borrowings is closest to ________.

D) 9.31%

Which of the following statements is FALSE about valuing cash at different points in time?

D) A dollar in the future is worth more than a dollar today.

Which of the following firms would be expected to have a high ROE?

D) A grocery store chain that has very high turnover, selling many multiples of its assets per year

Why should you approach every problem by drawing a timeline?

D) A timeline identifies events in a transaction or investment which might otherwise be easily overlooked.

Like other metals, uranium 308 is traded in competitive markets like the New York Metals Exchange. Which of the following would value a given weight of uranium 308 the most?

D) All buyers and sellers would have the same value for 250 pounds of uranium 308.

Consider the above statement of cash flows. Which of the following is true of AOS industries' operating cash flow?

D) All of the above are true

Which of the following is true about perpetuities?

D) All of the above are true statements.

Which of the following statements regarding the Law of One Price is INCORRECT?

D) An important property of the Law of One Price is that it holds even in markets where arbitrage is possible.

The third party who checks annual financial statements to ensure that they are prepared according to the Generally Accepted Accounting Principle (GAAP) that verifies that the information you reported is reliable is the

D) Auditor

Why is the personal decision a financial manager makes as to whether to buy or to rent an apartment as a personal residence most like the professional decision that manager makes as to whether her firm should try to acquire a stake in a fast growing new internet based company?

D) Both decisions should be made based upon tradeoff benefits and costs across time

Emma runs a small factory that needs a vacuum oven for brazing small fittings. She can purchase the model she needs for $180,000 up front, or she can lease it for five years for $4,200 per month. She can borrow at 7% APR, compounded monthly. Assuming that the oven will be used for five years, should she purchase the oven or should she lease it?

D) Buy, since the present value (PV) of the lease is $32,108 more than the cost of the oven.

Which of the following is not one of the ways that the Sarbanes-Oxley Act sought to improve the accuracy of information given to both boards and shareholders?

D) By forcing companies to audit financial statements they release

Consider the above statement of cash flows. What were AOS industries major means of raising money in 2008?

D) By issuing debt

Accounts payable is a

D) Current liability

A tenant wants to lease a building for $50,000 per year. She signs a five-year rental agreement that states that she will pay $25,000 every six months for the next five years. Which of the following is the timeline for her rental payments, assuming she makes the first payment immediately?

D) Date: 0,-$25\Date 1/2, -$25\Date 1,-$25\Date 1 1/2,-$25\Date 2, -$25\Date 2 1/2, -$25\Date 3,-$25/3 1/2, -$25/Date 4,-$25\Date 4 1/2, $25\Date 5,0

Which of the following is NOT a function of the board of directors

D) Day to day running of the company

Which of the following is the overarching principle that a financing manager should follow when making decisions?

D) Decisions should decrease the value of the firm to its inventors

Which of the following statements is FALSE?

D) For a risk-free project, the opportunity cost of capital will typically be greater than the interest rate of U.S. Treasury securities with a similar term.

Which of the following statements is FALSE?

D) Fundamentally, interest rates are determined by the Federal Reserve.

A typical company has many types of shareholders, from individuals holding a few shares, to large institutions that hold very large numbers of shares. How does a financial manager ensure that the priorities and concerns of such disparate stockholders are met?

D) In general, all shareholders will agree that they are better off if the financial manager works to maximize the value of their investment.

Which alternative offers you the highest effective rate of return?

D) Investment D

An investor has the opportunity to buy a $10,000 government bond which is guaranteed to yield 6.5% interest in one yearʹs time. The investor decides to make the investment as there is a net difference between the absolute cost and benefit. Which of the following is NOT a reason that the investorʹs decision may be flawed?

D) It does not consider whether the $10,000 will be needed elsewhere.

What is the main reason that it is necessary for public companies to follow the rules and format set out in the Generally Accepted Accounting Principles (GAAP), when creating financial statements?

D) It makes it easier to compare the results of financial firms

What are the requirements on section 404 of SOX?

D) It requires that senior management and the boards of public companies attest to the effectiveness and validity of their financial control process.

Investments by wealthy individuals and endowments is a major source of money for each of the following except

D) Mutual Funds

Which of the following is unique for an S-Corporation?

D) None of the above

A C Corporation earns $8.30 per share before taxes and the company pays a dividend of $4.00 per share. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the after-tax amount an individual would receive from the dividend?

D) Personal tax= 4x15%= $.60 Total = $4.00-.60= $3.40

Which of the following is the main lesson that analysts and investors should take from the cases of Enron and WorldCom?

D) Readers of even fraudulent financial statements can spot signs of a firm's financial health, if those statements are read fully with care

What must be taken when comparing a firm's share price to its operating income?

D) Share price is a quantity related to equity holders, while operating income is an amount that is related to the whole firm

The State Bank offers an interest rate of 5.5% on savings and 6% on loans, while the Colonial Bank offers 6.5% on savings and 7% on loans. Which of the following is the LEAST likely outcome of such a situation?

D) The Colonial Bank would experience a surge in demand for loans.

Which of the following statements is FALSE about interest rates?

D) The annual percentage rate indicates the amount of interest including the effect of compounding.

Which of the following statements regarding the balance sheet is INCORRECT?

D) The balance sheet reports all liabilities on the left side

If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in quick ratio between 2007 and 2008?

D) The company has increased the risk that it will experience a cash shortfall in the near future.

A U.S. based manufacturer of sunscreen is contemplating using funds to purchase courtside advertising at major tennis matches such as the French Open and the Australian Open. Advertising at such well viewed international events will then raise the domestic sales of the manufacturers products. Which of the following factors is most relevant when analyzing this decision?

D) The cost of courtside advertising at a tennis game

Which of the following would be LEAST likely to lower the interest rate that a bank offers a borrower?

D) The loan will be for a long period of time.

One way Enron manipulated its financial statements was to sell assets at inflated prices to other firms, while giving a promise to buy back those assets at a later date. The incoming cash was recorded as revenue, but the promise to buy back the assets was not disclosed. Which of the following is one of the ways that such a transaction is deceptive?

D) The off balance sheet promises to repurchase assets should have been disclosed in management discussion and analysis (MD&A) or notes to the financial statement

Which of the following is not one of the financial statements that must be produced by a public company?

D) The statement of activities

A perpetuity will pay $1000 per year, starting five years after the perpetuity is purchased. What is the future value (FV) of this perpetuity, given that the interest rate is 3%?

D) There is no solution to this problem.

What is the most important duty of a firm's financial officer?

D) To make investment decisions

An investment will pay $289,940 at the end of next year for an investment of $190,000 at the start of the year. If the market interest rate is 9% over the same period, should this investment be made?

D) Yes, because the investment will yield $82,840 more than putting the money in a bank.

A wholesale food retailer is offered $15.60 per two-layer carton for 5000 cartons of peaches. The wholesaler can buy peaches from their growers at $13.20 per carton. Shipping costs $2.40 per carton, for the first 1000 cartons and $1.90 per carton for every carton over that. Will taking this opportunity increase the value of the wholesale food retailer?

D) Yes, the costs are $2000 less than the benefits

If the exchange rates, after fees, in Tokyo are ¥1,000 = €6 = $9 and the exchange rates in Paris are €1 = $1.5 = ¥171, which of the following is most likely to occur?

D) a surge in conversion of euros to yen in Paris

If the above balance sheet is for a retail company, how has the company's leverage changed between 2007 and 2008?

D) the company has experienced a significant increase in its leverage

How can we convert the value of money from one point in time to another?

D) using the current interest rate

Refer to the income statement above. Luther's earnings before interest, taxes, depreciation, and amortization (EBITDA) for the year ending December 31, 2005 is closest to

D)$135.9 million (EBITDA= EBIT+Depreciation and amortization= 132.5+3.4= $135.9)

Consider the following timeline: Date:0-$500\1-?\2--$500 If the current market rate of interest is 7%, then the value as of year 1 is closest to ________.

D)$68

Which of the following features of a corporation is least accurate?

Earnings from a corporation are taxed only once.

State the names of some of the firms discussed in the chapter that had an inaccurate reporting in their financial statements.

Enron and WorldCom

Refer to the balance sheet above, if on December 31st, 2005, Luther has $8 million shares outstanding trading at $15 per share, then what was Luther's enterprise value?

Enterprise value= Market value of equity + Debt- Cash= Market value of equity= 8 million x 15 = 120 million Debt= Notes payable + current maturities of long term dates + long-term debt Debt= 9.6 +36.9+ 168.9 = 215.4 Cash= $58.5 So, enterprise value= $120+215.4 - 58.5= $276.90

If a few intermediate cash flows in valuing a stream of cash flows are zero can we delete those points on the timeline and squeeze the timeline to show only nonzero cash flows?

Every cash flow contains two pieces of informationthe nominal value and the time stamp. If we decide to eliminate the zero cash flows from the timeline and concentrate only on the nonzero ones, we will be distorting the time stamp of some nonzero cash flows. Hence, we need to show the timeline in full, including all cash flows zero as well as nonzero.

If broker will buy a share of stock from you at $3.85 and sell it to you at $3.87, the ask price would be $3.85.

FALSE

It is generally not the duty of the financial managers to ensure that a firm has the cash it needs for its day-to-day transactions.

FALSE

Raising new capital by issuing bonds is an example of a commercial banking activity.

FALSE

The shares of private corporations are sold on the stock market

FALSE

A dollar today and a dollar in one year may be considered to be equivalent.

False

Cash flows from an annuity occur every year in the future.

False

Financial decisions require you strictly in monetary terms

False

In most corporations, the owners exercise direct control of a corporation

False

In order to distinguish between inflows and outflows, different colors are assigned to each of these cash flows when constructing a timeline.

False

In the US, publicly traded companies can choose whether or not they wish to release periodic financial statements

False

International Financial Reporting Standards are taking root throughout the world. However, it is unlikely that the U.S. will report according to the IFRS before the second half of the twenty-first century.

False

Joe borrows $100,000 and agrees to repay the principal, plus 7% APR interest compounded monthly, at the end of three years. Joe has taken out an amortizing loan.

False

Partnerships are the most common types of business firms in the world.

False

The annual percentage rate indicates the amount of interest, including the effect of any compounding.

False

The balance sheet shows assets, liabilities, and stockholders' equity of a firm over a given length of time

False

The fact that corporations' shares are easily traded within the market has a net effect of acting as a disincentive for managers to favor the interest of shareholders over their own interests.

False

The management of public companies is not legally required to disclose any off-balance sheet transactions.

False

To calculate a cash flowʹs present value (PV), you must compound it.

False

To enable costs and benefits to be compared, they are typically converted into cash value at the time the benefit is received.

False

Trial and error is the only way to compute the internal rate of return (IRR) when interest is calculated over five or more periods.

False

Use of Generally Accepted Accounting Principles (GAAP) and auditors have eliminated the danger of inadvertent or deliberate fraud in financial statements.

False

When there are large numbers of people looking to save their money and there is little demand for loans, one would expect interest rates to be high.

False

Financial statements are optional accounting reports issued periodically by a firm which present information on the past performance of the firm, a summary of the firms' assets and the financing of those assets, and a prediction of the firm's future performance,

False (Not optional)

Helen owns 10.2% of the stock of the Median Corporation. If Median makes a dividend payment of $25,000,000 paid proportionally to its shareholders, how much of this amount would Helen receive, disregarding tax? A) $3,060,000 B) $2,550,000 C) $3,570,000 D) $2,040,000

Helen would receive 10.2% of the dividend payment proportional to her ownership .102 x 25,000,000= $2,550,000

A rich individual or organization purchases a large fraction of the stock of a poorly performing firm and in doing so gets enough votes to replace the board of directors and the CEO

Hostile Takeover

What are the steps of the financial cycle in order?

I) Ppl invest and save their money II) Money flows to companies who use it to fund financial growth through new products. III) Money flows back to the savers and investors

Why is the stock price of a company an indication of the performance of a company's senior managers?

In general, people want to invest in a well-managed corporation, which will drive up price of shares

What care, if any, should be taken when cash flows occur in periodicities that are shorter than a year (e.g., quarterly or monthly cash flows)?

In the real world, cash flows can occur with any periodicity but interest rates are generally quoted in annual terms. As such, when cash flows occur at a shorter than annual time interval the interest rates have to be modified to correspond to the cash flow interval. One way to do that is to match the compounding period equal to cash flow interval.

Which of the following would be true for an asset to be considered liquid?

It can be easily bought and sold and the selling price is very close to the buying price at a given point in time.

Which of the following is not a reason that the income statement does not accurately indicate how much cash a firm has earned?

It includes cash inflows from services rendered

Which of the following is not a reason that the income statement doesn't accurately indicate how much cash a firm has earned?

It includes cash inflows from services rendered

Why is it possible for a corporation to enter into contracts, acquire assets, incur obligations, and enjoy protection against seizure of its property?

It is a legally defined, artificial entity that is separate from its owners.

The balance sheet and income statement of a particular firm are shown above. What does the account receivable days ratio tell you about this company?

It takes on average about 4 weeks to collect payment from its customers.

In what way is a limited liability like a corporation?

Its owners' liability is restricted to their investment

Joe is a general partner in a limited partnership firm, while Jane is a limited partner in the same firm. Which of the following statements regarding their respective relationships to the firm is correct?

Jane's liability for the firm's debts consists solely on her investment in the firm.

Which of the following people may not manage the operations of a firm in which they are part of or full owners?

Limited partners in a limited partnership

According to the text, did Enron and WorldCom follow Generally Accepted Accounting Principles (GAAP) in their financial reporting process?

Many of the problems of Enron and WorldCom were kept hidden from boards and shareholders, until it was too late. People felt that the accounting statements of these companies, while often remaining true to the letter of GAAP, did not present an accurate picture of the financial health of the company

A company has a share price of $22.15 and 118 million shares outstanding. Its market-to-book ratio is 4.2, its book debt-equity ratio is 3.2, and it has cash of $800 million. How much would it cost to take over this business assuming you pay its enterprise value.

Market Cap= $22.15 x 118= 2.614 billion Book Value of equity= 2.614/4.2=.622 billion; Debt= 0.622 x 3.2= 1.991; Enterprise Value=$2.614 + $1.991-$800= $3.085 billion

Refer to the partial balance sheet above. If on December 31, 2005 Luther has 8 million shares outstanding trading at $15 per share, then what is Lutherʹs market -to-book ratio?

Market-to-book= Market value of equity/ Book value of equity Market to book= 8 million x $15/$63.6= 1.89

What is the principle guiding factor for the financial manager of the firm?

Maximizing stockholder wealth

What is the need for the notes to the financial statements when a firm's operations are already documented in the financial statements?

Not all actions of the firm can be directly converted to an entry on the financial statements. For example, the firm may be involved in off balance sheet transactions, which have to be reported through notes to the financial statements

What is one of the main obstacles in cost-benefit analysis?

One of the main obstacles in the cost-benefit analysis is that not all benefits that are expected to occur in the future can be stated in dollar terms.

A C-Corporation earns $4.30 per share before taxes. The corporate tax rate is 35%. The personal tax rate on dividends is 20%, and the personal tax rate on non-dividend income is 39%. What is the total amount of taxes paid if a company pays a $3.00 dividend?

Personal tax: 3.00x20%= .60 Corporate tax: 4.30x 35%= 1.51 Total= $2.11

Which of the following firms does not have limited liability?

Sole proprietorship

What is the most common type of firms in the world?

Sole proprietorships

If an arbitrage opportunity exists, an investor can act quickly in the hope of making a risk-free profit.

TRUE

The Law of One Price states that if equivalent goods or securities are traded simultaneously in different competitive markets, they will trade for the same price in each market.

TRUE

Explain some of the measures taken to reduce the agency conflict problem.

Taking measures that align the managers interests with those of the shareholders. For example, incentive based compensation, such as employee stock options, helps align the interests of those two constituents.

What is the general relationship between the absolute values of APR and EAR for an investment?

The APR of a project will either equal its EAR or be smaller than EAR. The APR will equal EAR with annual compounding for all other compounding intervals the APR will be smaller than EAR.

What is typically the major factor in limiting the growth of sole proprietorships?

The Amt of money that can be raised by such firms is limited due to the fact that the single owner must make good on all debts.

What are the main differences between the NYSE and NASDAQ stock markets?

The NYSE has a physical location, a geographical location where traders gather to trade, but the NASDAQ is an electronic market. Moreover while the NYSE has one specialist in each stock, NASDAQ has multiple market makers serving the functions of both matching buyers and sellers and trading on their own account.

Briefly discuss the issues in the agency conflict problem.

The agency conflict problem arises out of the principle-agent relationship existing between the shareholders and managers of a corporation. Although managers are required to put the shareholders interest ahead of their own, in practice they tend to put their own interest ahead of the shareholders interest.

What will be the effect of the balance sheet if a firm buys a new processing plant through a new loan?

The assets side will increase under net property, plant, and equipment with the net effect of the new processing plant, while the liabilities side will correspondingly show the new debt that was incurred in paying for the plant.

What is one of the prerequisite conditions for the Valuation Principle to work?

The availability of competitive market prices is a prerequisite for the Valuation Principle to be effective and efficient.

How does a firm select the date for preparation of its balance sheet?

The balance sheet is created on the fiscal closing date for the accounts of a firm that may or may not coincide with the calendar-year end.of December 31st.

What is the term for the applicable price that I will pay, if I have to buy a stock?

The buyer of the stock pays the ask price

What is the process of double taxation for stockholders in a C-Corporation?

The corporation is taxed on the profits it makes, and the owners are taxed when this profit is distributed to them.

How do the growth perpetuity results differ with negative and positive growths of similar magnitude assuming everything else remains unchanged?

The denominator in the formula for growth perpetuity plays in important role on the results for negative and positive growths of similar magnitude. A positive growth results in a smaller denominator thereby increasing the present value (PV). Contrarily, a negative growth results in a larger denominator giving a smaller present value (PV).

What will be the effect on the income statement if the firm buys a new processing plant through a new loan.

The effect on the income statement will be in the form of a depreciation expense for the first year on the new processing plant.

How does a firm select the date for preparation of its income statement?

The income statement is prepared on the fiscal closing date for the accounts of a firm that may or may not coincide with the calendar year-end of December 31st. Typically the income statement spans the flow between two adjacent balance sheets.

How can we cross check the statement of cash flows?

The last item in the statement of cash flows should equal the difference in cash balances between two adjacent balance sheets.

What will be the effect on the statement of cash flows if a firm buys a new processing plant through a new loan?

The new loan entry should show as cash inflow for the firm, while the payment for the new processing plant will be entered as a new cash flow

Can the nominal interest rate ever be negative? Can the real interest rate ever be negative? Explain.

The nominal interest rate can never be negative since by just holding your money you are earning a 0% return (no negative) on your money. The real rate, however, can be negative anytime that the inflation rate exceeds the nominal rate.

What is the major way in which the roles and obligations of the owners of a limited liability company differ from the roles and obligations of limited partners in a limited partnership?

The owners of a limited liability company can take an active role in running the company.

In which of the following relationships is an agency conflict problem LEAST likely to arise?

The relationship between a driver and the passengers in a car regarding the safe driving of the car

Explain the role played by some of the other management disciplines in financial decision making.

The role played by some of the other management disciplines include:Economics: to determine the effect of a price reduction or increase on net income. Marketing: to determine the increase in revenues resulting from an advertising campaign. Strategy: to determine a competitorʹs response to a price decrease or increase.

What is the term for the applicable price that the seller gets when he sells a stock on the exchange?

The seller gets the bid price when he sells the stock on exchange.

What is the general relation of the two types of prices quoted for a stock on an exchange ?

The two prices are bid price and ask price. The ask price is higher than the bid price to deter a buyer from buying a stock and selling it back immediately, assuming everything else remains unchanged.

Why in general do financial managers make financial decisions in a corporation, rather than the owners making these decisions themselves?

There are often many owners, and can change as they often buy and sell stock

Why is it difficult to determine the market price of a private corporations' shares at any point in time?

There is no organized market for its shares

Which of the following is NOT a reason why a firm's financial managers must take great care when making investment decisions?

These investment decisions determine the corporation's mix of debt and equity.

After examining the yield curve, what predictions do you have about interest rates in the future? About future economic growth and the overall state of the economy?

This is an inverted yield curve, which implies that interest rates should be falling in the future. An inverted yield curve is often interpreted as a negative forecast for economic growth. Since each of the last six recessions in the United States were preceded by a period with an inverted yield curve it could be a leading indicator of a future recession.

Which of the following is a major duty of a financial manager?

To make investment decisions To make financing decisions To manage cash flow from operating activities

A company that manufactures copper piping is offering to trade you 5,925 tons of low -grade copper ore for 4,000 tons of high-grade copper ore. Assuming you currently have 4,000 tons of high-grade ore, what are the total benefits and added benefits of taking the trade?

Total Benefits No trade and refine high-grade ore (base case): 4,000 tons × $940 of copper/ton = $3,760,000 Trade high-grade for low-grade: 5,925 tons × $640 of copper/ton = $3,792,000 (total benefits) Added Benefits = Total Benefits - Base Case = $3,792,000 - $3,760,000 = $32,000

Gross Profit=

Total sales-cost of sales

A firm's cash flow includes the balance sheet and the income statement to determine the amount of cash a firm has generated and how it has used that cash during a given period.

True

A growing perpetuity, where the rate of growth is greater than the discount rate, will have an infinitely large present value (PV).

True

Corporations have come to dominate the business world through their ability to raise large amounts of capital by sale of ownership shares to anonymous outside investors.

True

Costs and benefits must be put in common terms if they are to be compared.

True

Dollar amounts received at different points in time cannot be compared in absolute terms.

True

In general, a successful firm will have a market to book ratio that is substantially greater than 1.

True

In general, if action increases a firm's value by providing benefits with a value greater than any costs involved, then that action is good for the firm's investors.

True

Price-earnings ratios tend to be high or fast-growing firms.

True

Stock markets provide liquidity for a firms' shares

True

Stockholder's equity is the difference between a firm's assets and liabilities, as shown on the balance sheet

True

The income statement reports the firm's revenues and expenses, and it computes the firm's bottom line of net income, or earnings.

True

The internal rate of return (IRR) is the interest rate that sets the net present value (NPV) of the cash flows equal to zero.

True

The one-year discount factor is the discount at which we can purchase money in the future, one year from now.

True

The opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term to the cash flow being discounted.

True

The present value (PV) of a stream of cash flows is just the sum of the present values of each individual cash flow.

True

The rule of 72 tells you approximately how long it takes for money invested at a given rate of compound interest to double in value.

True

When you borrow money, the interest rate on the borrowed money is the price you pay to be able to convert your future loan payments into money today.

True

Whenever a good trades in a competitive market, the price determines the value of a good.

True

How can we perform a cost-benefit analysis in case they are occurring in different currencies?

We need to convert costs and benefits occurring in different currencies to one base currency before performing any analysis.

How can we make a financial decision with cash flows occurring at different points in time?

We need to transform the cash flows to a single point in time either through present value (PV) computations or through future value (FV) computations, therefore bringing all of them at the same point in time to perform simple algebraic computation.

How do we decide on opportunity cost when we have several opportunities that need to be foregone?

We rank all the foregone opportunities, and opportunity cost is the second best opportunity that we forego. Thus we select the best opportunity and rank all the alternative opportunities and use the cost of the second best opportunity as opportunity cost.

What are the main differences between a partnership and a sole proprietorship?

While a sole proprietor has the same identity as a single owner, a partnership of general owners has the same identity as its partners. Each general partner is responsible for the decisions taken by that partner as well as any other partner.

Is it possible to analyze cash flows that occur in time intervals that are not exactly equal to a year?

Yes, in real world cash flows may be between any intervals. They may be shorter than a year or longer than a year. Additional care needs to be taken in both cases. For cash flows that have an interval longer than one year, one should be careful to show the years with zero cash flows. Alternately, for those with shorter than a year, one should be careful about modifying the interest rate to match the time interval.

Can we apply the growing perpetuity equation for negative growth as well?

Yes, it is perfectly in order to apply the growth perpetuity for negative growth. A negative growth gives two negatives in the denominator making it larger than a positive growth thus reducing the valuation compared to a positive growth of similar magnitude.

The yield curve is typically ________.

b. upward sloping.

What best describes why the valuation principle is a key concept in making financial decisions?

it shows how to make the costs and benefits of a decision comparable so that we can weigh them properly

Valuation Principle

shows how to make the costs and benefits of a decision comparable so that we can evaluate them properly

The principle goal of a financial manager is

to maximize the wealth of the stockholders