Finance Final Exam 1

Which one of the following will increase the present value of a lump sum future amount? Assume the interest rate is a positive value and all interest is reinvested.

Decrease in the interest rate

Noncash Item

Decreases the net income but does not affect the operating cash flow of a firm that owes no taxes for the current year

Which of the following applies to a general partnership?

Any one of the partners can be held solely liable for all of the partnerships debt

Which one of the following cannot be computed?

B. Future value of a perpetuity

Working capital management example:

Determining which customers will be granted credit

A firm has sales of $529,000 for the year. The profit margin is 3.4 percent and the retention ratio is 60 percent. What is the common-size percentage for the dividends paid?

Dividends paid common-size percentage = [$529,000 x 0.034 x (1 - 0.60)]/$529,000 = 1.36 percent

Paid in surplus

Is an equity account

Which one of the following will decrease the net working capital of a firm?

Making a payment on a long-term debt

Redneck Farm Equipment owes $48,329 in tax on a taxable income of $549,600. The company has determined that it will owe $56,211 in tax if its taxable income rises to $565,000. What is the marginal tax rate at this level of income?

Marginal tax = ($56,211 - $48,329)/($565,000 - $549,600) = 51.18 percent

You just received a loan offer from Friendly Loans. The company is offering you $5,000 at 14.3 percent annual interest. The monthly payment is only $100. If you accept this offer, how long will it take you to pay off the loan?

N=?=76.47/12=6.37; I=14.3/12=1.1967; PV=5,000; PMT=-100; FV=0

Turner's Store had a profit margin of 6.8 percent, sales of $898,200, and total assets of $798,000. If management set a goal of increasing the total asset turnover to 1.40 times, what would the new sales figure need to be, assuming no increase in total assets?

Total asset turnover = 1.40 x $798,000 = $1,117,200

*Go to this one* The Plaza Cafe has an operating cash flow of $78,460, depreciation expense of $8,960, and taxes paid of $21,590. A partial listing of its balance sheet accounts is as follows:

Cash flow from assets = OCF - ^NWC (CA-CL) - ^NCS (NFAi-NFAo + Dep)

Which one of the following actions will increase the current ratio, all else constant? Assume the current ratio is greater than 1.0.

Cash payment of an account payable

Peter's Motor Works has total assets of $689,400, long-term debt of $299,500, total equity of $275,000, net fixed assets of $497,800, and sales of $721,500. The profit margin is 4.6 percent. What is the current ratio?

Current ratio = ($689,400 - $497,800)/($689,400 - $299,500 - $275,000) = 1.67

Capital budgeting includes the evaluation of

size, timing and risk of future cash flows

Travis invests $10,000 today into a retirement account. He expects to earn 8 percent, compounded annually, on his money for the next 26 years. After that, he wants to be more conservative, so only expects to earn 5 percent, compounded annually. How much money will he have in his account when he retires 38 years from now, assuming this is the only deposit he makes into the account?

1st period: N=26; I=6; PV=-10,000; PMT=0; FV=?=73,963.53 2nd period:N=12; I=7; PV=-73,963.53; PMT=o; FV=?=132,827.88 OR Future value = $10,000 x (1 + 0.08)26 x (1 + 0.05)(38 - 26) = $132,827.88

Jenny needs to borrow $16,000 for 3 years. The loan will be repaid in one lump sum at the end of the loan term. Which one of the following interest rates is best for Jenny?

8 percent simple interest, A. 8 percent simple interest B. 8 percent interest, compounded annually C. 8.5 percent simple interest D. 8.5 percent interest, compounded annually E. 9 percent interest, compounded annually

Today, Stacy is investing $26,000 at 6.0 percent, compounded annually, for 4 years. How much additional income could he earn if he had invested this amount at 7 percent, compounded annually?

At 6%: N=4;I=6;PV=-26,000; PMT=0; FV=?=32,824.40 At 7%: N=4; I=7; PV=-26,000; PMT=0; FV=?=34,080.70 Difference = 34,080.70 - 32,824.40 =1,256.30 OR Future value 6.0% = $26,000 (1 + 0.060)4 = $32,824.40 Future value 7% = $26,000 (1 + 0.07)4 = $34,080.70 Difference = $34,080.70 - $32,824.40 = $1,256.30

The Townhouse Galleries offers credit to its customers at a rate of 1.6 percent per month. What is the effective annual rate of this credit offer?

EAR = (1 + 0.016)^12 - 1 = .2098 = 20.98 percent

The Pretzel Factory has net sales of $821,300 and costs of $698,500. The depreciation expense is $28,400 and the interest paid is $8,400. What is the amount of the firm's operating cash flow if the tax rate is 34 percent?

EBIT = $821,300 - $698,500 - $28,400 = $94,400; Tax = ($94,400 - $8,400) x 0.34 = $29,240; OCF = $94,400 + $28,400 - $29,240 = $93,560

Early Works had $87,600 in net fixed assets at the beginning of the year. During the year, the company purchased $6,400 in new equipment. It also sold, at a price of $2,300, some old equipment with a book value of $1,100. The depreciation expense for the year was $3,700. What is the net fixed asset balance at the end of the year?

Ending net fixed assets = $87,600 + $6,400 - $1,100 - $3,700 = $89,200

Capital structuring example:

Establishing the preferred debt equity level

Which of the following will increase the future value of a lump sum investment?

II. Increasing the interest rate III. Increasing the time period

Which one of the following is the maximum growth rate that a firm can achieve without any additional external financing?

Internal growth rate

Fried Foods has sales of $238,900, total assets of $217,000, total equity of $121,300, net income of $18,700, and dividends paid of $7,000. What is the internal growth rate?

Internal growth rate = {($18,700/$217,000) x [($18,700 - $7,000)/$18,700]}/{1 - {($18,700/$217,000) x [($18,700 - $7,000)/$18,700]}}/ = 5.70 percent

Turntable Industrial, Inc. owes your firm $138,600. This amount is seriously delinquent so your firm has offered to arrange a payment plan in the hopes that it might at least collect a portion of this receivable. Your firm's offer consists of weekly payments for one year at an annual interest rate of 3 percent. What is the amount of each payment?

N=52; I = 3/52=.0577; PV=-138,000; PMT=?=2,706.33; FV=0

You're trying to save to buy a new $210,000 Ferrari. You have $38,000 today that can be invested at your bank. The bank pays 4.1 percent annual interest on its accounts. How long will it be before you have enough to buy the car?

N=?=42.54; I=4.1; PV=-38,000; PMT=0; FV=210,000 OR $210,000 = $38,000 (1 + 0.041)t; t = 42.54 years

*Go to this one* McClary Tires just decided to save money each year for the next four years to help fund a new building. If it earns 6.5 percent on its savings, how much will the firm have saved at the end of year 4?

PV of cash flows: CF0=0; CF1=20,000; CF2=24,000; CF3=28,000; CF4=32,000; I=6.5; NPV=?=87,993.28 FV of cash flows: N=4; I=6.5; PV= -87,993.28; PMT=0; FV=?=113,200.39

Which situation is agency conflict most apt to arise?

Separating management from ownership

Christie is buying a new car today and is paying a $500 cash down payment. She will finance the balance at 7.25 percent annual interest. Her loan requires 36 equal monthly payments of $450 each with the first payment due 30 days from today. Which one of the following statements is correct concerning this purchase?

To compute the initial loan amount, you must use a monthly interest rate.