Midterm Review
Wine and Roses, Inc., offers a bond with a coupon of 6.0 percent with semiannual payments and a yield to maturity of 6.91 percent. The bonds mature in 12 years. What is the market price of a $1,000 face value bond?
$926.59 correct
You have just leased a car that has monthly payments of $390 for the next 3 years with the first payment due today. If the APR is 7.44 percent compounded monthly, what is the value of the payments today?
10
Fancy Cat Products has a project that will cost $247,500 today and will generate monthly cash flows of $5,435 for the next 60 months. What is the rate of return of this project when expressed as an APR?
11
One of your customers has just made a purchase in the amount of $24,000. You have agreed to payments of $465 per month and will charge a monthly interest rate of 1.29 percent. How many months will it take for the account to be paid off?
5
Neiger Flours owes $16,929 in taxes on taxable income of $61,509. If the firm earns $100 more in income, it will owe an additional $48 in taxes. What is the average tax rate on income of $61,609?
Average tax rate = ($16,929 + 48)/$61,609 = .2756, or 27.56 percent
The term structure of interest rates is primarily based on which three of the following? I. Interest rate risk premium II. Real rate of interest III. Default risk premium IV. Inflation premium V. Liquidity premium
I, II, and IV
ANC Plastics has net working capital of $15,400, current assets of $39,200, equity of $46,600, and long-term debt of $22,100. What is the amount of the net fixed assets?
Net fixed assets = $22,100 + 46,600- 15,400 = $53,300
Plenti-Good Foods has ending net fixed assets of $98,700 and beginning net fixed assets of $84,900. During the year, the firm sold assets with a total book value of $13,200 and also recorded $9,800 in depreciation expense. How much did the company spend to buy new fixed assets?
New fixed asset purchases = $98,700 + 9,800 + 13,200-84,900 = $36,800
Which one of the following is the correct formula for the current value of $600 invested today at 5 percent interest for 6 years?
PV = $600 / (1 + .05)^6
A firm has net income of $197,400, a return on assets of 8.4 percent, and a debt-equity ratio of .72. What is the return on equity?
Return on equity = .084 ×(1 + .72) = .1445, or 14.45 percent
Margie opened a used bookstore and is both the 100 percent owner and the store's manager. Which type of business entity does Margie own if she is personally liable for all the store's debts?
Sole Proprietorship
What is the days sales in receivables?
365 / recoverable turnover
Todd can afford to pay $320 per month for the next 5 years in order to purchase a new car. The interest rate is 5.4 percent compounded monthly. What is the most he can afford to pay for a new car today?
4
Which one of the following statements concerning the balance sheet is correct?
Assets are listed in descending order of liquidity.
What is the effective annual rate for an APR of 10.30 percent compounded quarterly?
EAR = (1 + .1030/4)^4 = .1070, or 10.70%
Cornerstone Markets has beginning long-term debt of $64,500, which is the principal balance of a loan payable to Centre Bank. During the year, the company paid a total of $16,300 to the bank, including $4,100 of interest. The company also borrowed $11,000. What is the value of the ending long-term debt?
Ending long-term debt = $64,500 -16,300 + 4,100 + 11,000 = $63,300
What is the principal amount of a bond that is repaid at the end of the loan term called?
Face value
Which one of the following terms applies to a junk bond that was originally issued with a bond rating of AA?
Fallen angel
Travis invests $5,500 today into a retirement account. He expects to earn 9.2 percent, compounded annually, on his money for the next 13 years. After that, he wants to be more conservative, so only expects to earn 6 percent, compounded annually. How much money will he have in his account when he retires 25 years from now, assuming this is the only deposit he makes into the account?
Future value = $5,500 ×(1 + .092)^13 ×(1 + .06)^(25-13) = $34,747.80
Eleven years ago, you deposited $3,200 into an account. Seven years ago, you added an additional $1,000 to this account. You earned 9.2 percent, compounded annually, for the first 4 years and 5.5 percent, compounded annually, for the last 7 years. How much money do you have in your account today?
Future value = {[$3,200 ×(1 + .092)^4] + $1,000} ×(1 + .055)^7 = $8,073.91
Which one of the following is a working capital decision?
How much cash should the firm keep in reserve?
How long will it take to double your savings if you earn 6.4 percent interest, compounded annually?
$2 = $1 ×(1 + .064)t t = 11.17 years
Stephen claims that he invested $6,000 six years ago and that this investment is worth $28,700 today. For this to be true, what annual rate of return did he have to earn? Assume the interest compounded annually.
$28,700 = $6,000 ×(1 + r)^6 r = 29.80 percent
The Nashville Geetars, a professional foosball team, has just signed its star player Harold "The Wrist" Thornton to a new contract. One of the terms requires the team to make a lump sum payment of $13.57 million to the The Wrist exactly 11 years from today. The team plans to make equal annual deposits into an account that will earn 5.44 percent in order to fund the payment. How much must the team deposit each year?
1
One year ago, the Jenkins Family Fun Center deposited $3,800 into an investment account for the purpose of buying new equipment four years from today. Today, they are adding another $5,600 to this account. They plan on making a final deposit of $7,800 to the account next year. How much will be available when they are ready to buy the equipment, assuming they earn a rate of return of 6 percent?
12
Mo will receive a perpetuity of $18,000 per year forever, while Curly will receive the same annual payment for the next 45 years. If the interest rate is 6.2 percent, how much more are Mo's payments worth?
13
You want to buy a house and will need to borrow $225,000. The interest rate on your loan is 5.53 percent compounded monthly and the loan is for 25 years. What are your monthly mortgage payments?
14
Assuming an interest rate of 7.3 percent, what is the value of the following cash flows four years from today?
15
Your grandparents put $11,100 into an account so that you would have spending money in college. You put the money into an account that will earn 4.37 percent compounded monthly. If you expect that you will be in college for 5 years, how much can you withdraw each month?
2
Roger has just lost a lawsuit and has agreed to make equal annual payments of $12,700 for the next 10 years with the first payment due today. The value of this liability today is $97,000. What is the interest rate on the payments?
3
Jenny Enterprises has just entered a lease agreement for a new manufacturing facility. Under the terms of the agreement, the company agreed to pay rent of $21,000 per month for the next 9 years with the first payment due today. If the APR is 8.52 percent compounded monthly, what is the value of the payments today?
6
Tessler Farms has a return on equity of 11.28 percent, a debt-equity ratio of 1.03, and a total asset turnover of .87. What is the return on assets?
Return on assets = .1128 /(1 + 1.03) = .0556, or 5.56 percent
Noma plans to save $3,700 per year for the next 35 years. If she can earn an annual interest rate of 9.5 percent, how much will she have in 35 years?
7
You have researched your dream around-the-world vacation and determined that the total cost of the vacation will be $34,000. You feel you can earn an APR of 10.9 percent compounded monthly and plan to save $410 per month until you reach your goal. How many years will it be until you reach your goal and enjoy your well-deserved vacation?
8
shareholders equity
= assets - liabilities(something a firm owns)
Which one of the following statements is correct?
Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory.
The potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict?
Agency
Which one of the following statements is correct?
All stock transactions are secondary market transactions.
You want to invest an amount of money today and receive back twice that amount in the future. You expect to earn 6 percent interest. Approximately how long must you wait for your investment to double in value?
Approximate time period = 72/6 = 12 years
Uptown Markets is financed with 45 percent debt and 55 percent equity. This mixture of debt and equity is referred to as the firm's:
Capital Structure
A firm has net income of $28,740, depreciation of 6,170, taxes of $13,420, and interest paid of $2,605. What is the cash coverage ratio?
Cash coverage ratio = ($28,740 + 13,420 + 2,605 + 6,170) / $2,605 = 19.55
Six months ago, Benders Gym repurchased $140,000 of its common stock. The company pays regular dividends totaling $18,500 per quarter. What is the amount of the cash flow to stockholders for the past year if 1,200 new shares were issued and sold for $38 a share?
Cash flow to stockholders = ($18,500 ×4) -[(1,200 × $38) - $140,000] = $168,400
Gently Used Goods has cash of $2,950, inventory of $28,470, fixed assets of $9,860, accounts payable of $11,900, and accounts receivable of $4,660. What is the cash ratio?
Cash ratio = $2,950 / $11,900 = .25
The Sarbanes-Oxley Act in 2002 was primarily prompted by which one of the following from the 1990s?
Corporate accounting and financial fraud
Leisure Products has sales of $738,800, cost of goods sold of $598,200, and accounts receivable of $86,700. How long on average does it take the firm's customers to pay for their purchases? Assume a 365-day year.
Days' sales in receivables = 365 / ($738,800 / $86,700) = 42.83 days
Peterboro Supply has a current accounts receivable balance of $391,648. Credit sales for the year just ended were $5,338,411. How long did it take on average for credit customers to pay off their accounts during the past year? Assume a 365-day year.
Days' sales in receivables = 365/($5,338,411 / $391,648) = 26.78 days
Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected?
Default risk premium
Working capital management includes which one of the following?
Determining which customers will be granted credit
Maria is the sole proprietor of an antique store that is located in a rented warehouse. The store has an outstanding loan with the local bank but no other debt obligations. There are no specific assets pledged as security for the loan. Due to a sudden and unexpected downturn in the economy, the store is unable to generate sufficient funds to pay the loan payments due to the bank. Which of the following options does the bank have to collect the money it is owed? I. Sell the inventory and apply the proceeds to the debt II. Sell the lighting fixtures from the building and apply the proceeds to the debt III. Withdraw funds from Maria's personal account at the bank to pay the store's debt IV. Sell any assets Maria personally owns and apply the proceeds to the store's debt
I, III, and IV only
Sweet Candies reduced its fixed assets this year without affecting the shop's operations, sales, or equity. This reduction will increase which of the following ratios? I. Capital intensity ratio II. Return on assets III. Total asset turnover IV. Return on equity
II and III only
Today, you deposit $2,500 in a bank account that pays 3.6 percent simple interest. How much interest will you earn over the next 5 years?
Interest = $2,500 ×.036 ×5 = $450
UXZ has sales of $683,200, cost of goods sold of $512,900, and inventory of $74,315. What is the inventory turnover rate?
Inventory turnover = $512,900 / $74,315 = 6.90 times
Assets =
Liabilities + Equity
Which one of the following is an advantage of being a limited partner?
Losses limited to capital invested
Production equipment is classified as:
a tangible fixed asset.
Dairy Delight wants to raise $1.4 million by selling 15-year coupon bonds at par. Comparable bonds in the market have a coupon rate of 5.4 percent, semiannual payments, 15 years to maturity, and are selling at 97.8 percent of par. What coupon rate should Dairy Delight set on its bonds?
PV = $978 =[(.054 × $1,000) / 2] ×{(1 - {1 / [1 + (r / 2)]^30}) / (r / 2)} + $1,000 / [1 + (r / 2)]^30 r = .0562, or 5.62 percent Since the current yield-to-maturity on comparable bonds is 5.62 percent, Dairy Delight should set its coupon rate at 5.62 percent if it wants its bonds to sell at par.
Blue Water bonds have a face value of $1,000, a coupon rate of 6.5 percent, semiannual interest payments, and mature in 11.5 years. What is the current price of these bonds if the yield to maturity is 6.36 percent?
PV = [(.065 × $1,000) / 2]×{(1 - {1 / [1 + (.0636/ 2)]^23}) / (.0636 / 2)} + $1,000 / [1 + (.0636 /2)]^23 PV= $1,011.30
Tressler Industries opted to repurchase 5,000 shares of stock last year in lieu of paying a dividend. The cash flow statement for last year must have which one of the following assuming that no new shares were issued?
Positive cash flow to stockholders
Katlyn needs to invest $5,318 today in order for her savings account to be worth $8,000 six years from now. Which one of the following terms refers to the $5,318?
Present value
Starlite Industries will need $2.2 million 4.5 years from now to replace some equipment. Currently, the firm has some extra cash and would like to establish a savings account for this purpose. The account pays 3.6 percent interest, compounded annually. How much money must the company deposit today to fully fund the equipment purchase?
Present value = $2,200,000/(1 + .036)4.5= $1,876,306.49
You want to have $40,000 for a down payment on a house 4 years from now. If you can earn 5.6 percent, compounded annually on your savings, how much do you need to deposit today to reach your goal?
Present value = $40,000/(1 + .056)^4 = $32,166.54
What condition must exist if a bond's coupon rate is to equal both the bond's current yield and its yield to maturity? Assume the market rate of interest for this bond is positive.
The bond must be priced at par.
Which one of the following correctly defines a common chain of command within a corporation?
The controller reports directly to the chief financial officer.
Carroll, Inc., has a total debt ratio of .59, total debt of $319,000, and net income of $39,250. What is the company's total assets? What is the company's total equity? What is the company's return on equity?
To find the ROE, we need the equity balance. Since we have the total debt, if we can find the total assets we can calculate the equity. Using the total debt ratio, we find total assets as: Debt ratio = Total debt / Total assets .59 = $319,000 / Total assets Total assets = $540,678 Total liabilities and equity is equal to total assets. Using this relationship, we find: Total assets = Total debt + Total equity $540,678 = $319,000 + Total equity Total equity = $221,678 Now, we can calculate the ROE as: ROE = Net income / Total equity ROE = $39,250 / $221,678 ROE = .1771, or 17.71%
A bond's annual interest divided by its face value is referred to as the:
coupon rate.
net working capital
current assets - current liabilities
A firm has sales of $1,110, net income of $215, net fixed assets of $522, and current assets of $278. The firm has $90 in inventory. What is the common-size balance sheet value of inventory?
Total assets = $522 + 278 = $800 Common-size value of inventory = $90/$800 = .1125, or 11.25%
Which one of the following bonds is most apt to have the smallest liquidity premium?
Treasury bill
Profit margin = 8.8 % Capital intensity ratio = .49 Debt-equity ratio = .64 Net income = $ 99,000 Dividends = $ 46,000 Based on the above information, calculate the ROE for Southern Lights Co. Calculate the sustainable growth rate for Southern Lights Co.
We need the return on equity to calculate the sustainable growth rate. To calculate return on equity, we need to realize that the total asset turnover is the inverse of the capital intensity ratio and the equity multiplier is one plus the debt-equity ratio. So, the return on equity is: ROE = (Profit margin)(Total asset turnover)(Equity multiplier) ROE = (.088)(1/.49)(1 + .64) ROE = .2945, or 29.45% Next we need the plowback ratio. The plowback ratio is one minus the payout ratio. We can calculate the payout ratio as the dividends divided by net income, so the plowback ratio is: b = 1 - ($46,000 / $99,000) b = .54 Now, we can use the sustainable growth rate equation to find: Sustainable growth rate = [(ROE)(b)] / [1 - (ROE)(b)] Sustainable growth rate = [.2945(.54)] / [1 - .2945(.54)] Sustainable growth rate = .1872, or 18.72%
Net working capital is defined as:
current assets minus current liabilities.
Security dealers:
buy and sell from their own inventory.
Lester had $6,270 in his savings account at the beginning of this year. This amount includes both the $6,000 he originally invested at the beginning of last year plus the $270 he earned in interest last year. This year, Lester earned a total of $282.15 in interest even though the interest rate on the account remained constant. This $282.15 is best described as:
compound interest
current ratio
current assets/ current liabilities
The interest rate used to compute the present value of a future cash flow is called the:
discount rate.
cash flow to stockholders
dividends paid - net new equity raised
The Sarbanes-Oxley Act of 2002 has:
essentially made officers of publicly traded firms personally responsible for the firm's financial statements.
Corporate shareholders:
have the ability to change the corporation's bylaws.
The accounting statement that measures the revenues, expenses, and net income of a firm over a period of time is called the:
income statement.
All else held constant, the future value of a lump sum investment will decrease if the:
interest is changed to simple interest from compound interest.
Jamie earned $14 in interest on her savings account last year. She has decided to leave the $14 in her account so that she can earn interest on the $14 this year. The interest earned on last year's interest earnings is called:
interest on interest.
Given a profitable firm, depreciation:
lowers taxes.
The tax rate that determines the amount of tax that will be due on the next dollar of taxable income earned is called the:
marginal tax rate.
receivables turnover
net credit sales / accounts recoverable
Shareholders' equity is equal to:
net fixed assets minus long-term debt plus net working capital.
ROA
net income / total assets
ROE
net income / total equity
The equity multiplier is equal to:
one plus the debt-equity ratio.
A call provision grants the bond issuer the:
option of repurchasing the bonds prior to maturity at a prespecified price.
The primary purpose of bond covenants is to:
protect the bondholders.
Financial statement analysis:
provides useful information that can serve as a basis for forecasting future performance.
A floating-rate bond frequently has a:
put provision.
An income statement prepared according to GAAP:
records expenses based on the matching principle.
Given an interest rate of zero percent, the future value of a lump sum invested today will always:
remain constant, regardless of the investment time period.
Net income increases when:
revenue increases.
One example of a primary market transaction would be the:
sale of 1,000 shares of newly issued stock by Alt Company to Miquel.
In a general partnership, each partner is personally liable for:
the total debts of the partnership, even if he or she was unaware of those debts.
total equity
total assets - total debt
Common-size financial statements present all balance sheet account values as a percentage of:
total assets.
