SP19: FINANCIAL MANAGEMENT - Exam 2

Cross Corporation has Net Income of $4,095. Their retention ratio is 65%. How much will they payout in dividends this year?

$1,433

Suppose a business takes out a $7,000, five-year loan at 6 percent that will be paid annually with a single, fixed payment each period. How much will be the annual payment?

$1,661.88

What is the present value of $1,200 to be received at the end of in each of 18 years invested at a rate of 5%?

$14,028

What is the future value of $1,000 invested for 15 years at a rate of 5%?

$2,079

What is the future value of $1,200 invested for 20 years at a rate of 6%?

$3,849

The lowest present value interest factor will be resulted from ________________________.

8 percent interest for 10 years

Robert invested $4,000 five years ago at 4 percent interest. He takes out all his interest earnings and spends them immediately. As a result, he only receives interest on his initial $4,000 investment. That is why he is earning __________________ only.

simple interest

When we do financial planning for the long run, how long will usually be the planning horizon?

a period of 2 to 5 years

The process that Dell Computer combines the investment proposals from each operational unit into one single project for planning purposes is called _____________________.

aggregation

Given a stated future value in Year 5 and an annual percentage rate of 10 percent, ____________________ compounding will yield the lowest effective annual rate

annual

Your mother's credit card charges her .9 percent interest per month. You want to help her estimate the _______________ so you multiply the monthly interest rate by 12.

annual percentage

The _______________________ is the interest rate that is most commonly quoted by a lender.

annual percentage rate

The _____________ ratio illustrates the amount of total assets a firm needs in order to generate $1 in sales. return on assets equity multiplier retention capital intensity current

capital intensity

When managers use the percentage of sales approach, they ________________.

consider the current production capacity level

The financial planning process is least apt to ___________________.

consider the development of future technologies

Rudy wants to build up a wealth of $1 million for his retirement. To reach this goal, he will make one lump sum deposit today. If he plans to retire _________ rather than _______, then he can deposit a smaller lump sum today.

later; sooner

A drawback of financial planning is that it generally tends to ignore _________________________.

risks associated with cash flows

What is the present value of $1,000 to be received in 12 years invested at a rate of 8%?

$397

The capital intensity ratio of __________ from below indicates the smallest need for fixed assets per dollar of sales.

.07

Retention ratio =

1 − (Cash dividends/Net income).

Garner Corporation has total liabilities of $1,750 and equity of $4,450. Sales are $3,300. What is the Capital Intensity Ratio for Garner Corporation?

1.88

For the most recent fiscal year, the Hammock Company's total equity was $450 and net income was equal to $97. Of the $97 net income, $44 was retained. What is the sustainable growth rate for the Ladder Company?

10.83%

For the most recent fiscal year, the Hammock Company's total assets were $850 and net income was equal to $97. Of the $97 net income, $44 was retained. What is the internal growth rate for the Hammock Company?

5.46%

Pick the correct statement related to annuities and perpetuities from below. An ordinary annuity is worth more than an annuity due given equal annual cash flows for 10 years at 7 percent interest, compounded annually. A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal. Most loans are a form of a perpetuity. The present value of a perpetuity cannot be computed but the future value can. Perpetuities are finite but annuities are not.

A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal.

Amy and Anna are of the same age. Amy invests $4,000 at 6 percent at age 25. Anna invests the same amount at the same interest rate at age 30. Both investments compound interest annually. Both of them retire at age 60 and neither adds nor withdraws funds prior to retirement. Pick the correct statement regarding this from below.

Amy will have more money than Anna at any age.

The variables in a future value of a lump sum problem include all of the following, except:

Annuity Payments

Which loan type requires the borrower to repay a single lump sum payment at some time in the future with interest?

Pure Discount

Andrew deposited $5,000 today into an account that pays 4 percent interest, compounded annually. Betsy also deposited the same amount at the same interest rate, compounded annually. Andrew will withdraw his interest earnings and spend it as soon as possible. However, Betsy will reinvest her interest earnings into her account. Pick the true statement regarding this from below.

Betsy will earn more interest in Year 2 than Andrew.

_________________ is the interest earned on both the initial principal and the interest reinvested from prior periods.

Compound interest

Susan invested $5,000 five years ago and earns 3 percent annual interest. She has left her interest earnings in her account since then. _________________ increases the amount of interest she earns each year.

Compounding

How would a decrease in the interest rate affect the future value of a lump sum, single amount problem (all other variables remain the same)?

Decrease the future value.

__________________ is the process of determining the present value (value today) of future cash flows.

Discounted cash flow valuation

________________ is a necessary characteristic for amortized loans over its life.

Either equal or unequal principal payments

______________, the ______________ growth rate achievable by a firm is its internal growth rate.

Excluding external financing of any kind; maximum

For the Sales Forecast, almost all financial plans require an internally supplied sales forecast.

False

The internal growth rate is where the external funds needed (EFN) is equal to 1, also where the required increase in assets is exactly equal to the addition to retained earnings.

False

Pick the correct statement related to financial planning from below. Financial planning focuses solely on the short-term outlook for a firm. Financial planning is a process that firms employ only when major changes to a firm's operations are anticipated. Financial planning is a process that firms undergo once every five years. Financial planning considers multiple options and scenarios. Financial planning provides minimal benefits for firms that are highly responsive to economic changes.

Financial planning considers multiple options and scenarios.

Pick the correct statement related to financial plans from below. Financial plans concentrate solely on income and expense items. Financial plans often contain alternative options based on economic developments. Financial plans frequently contain conflicting goals. Financial plans assume that firms obtain no additional external financing. Financial plans are based on a single set of economic assumptions.

Financial plans often contain alternative options based on economic developments.

Two projects have the following cash flows. Year Project X Cash Flow Project Y Cash Flow 1 $9,500 $8,000 2 $9,000 $8,500 3 $8,500 $9,000 4 $8,000 $9,500 Pick the true statement concerning these two projects given a positive discount rate from below? (No calculations needed)

Project X has both a higher present and a higher future value than Project Y.

The variable that you are solving for in a future value of a lump sum problem is:

Future value

Burt invested $5,000 ten years ago. He expected to have $13,000 today. He has neither added nor withdrawn any money since his initial investment. All interest was reinvested and compounded annually. As it turns out, he only has $11,500 in his account today. Pick the true statement related to Burt's investment from below. He earned simple interest rather than compound interest. He earned a lower interest rate than he expected. He did not earn any interest on interest as he expected. He ignored the Rule of 72 which caused his account to decrease in value. The future value interest factor turned out to be higher than he expected.

He earned a lower interest rate than he expected.

During the financial planning process, we will address questions including : I. Should the firm merge with a competitor? II. Should additional shares of stock be sold? III. Should a particular division be sold? IV. Should a new product be introduced?

I, II, III, and IV

Which of the following are covered in financial planning? I. Determination of asset requirements. II. Development of contingency plans. III. Establishment of priorities. IV. Analysis of funding options.

I, II, III, and IV

Which of the following must be considered by John Smith who is developing a financial plan for Facebook? I. How much net working capital will be needed? II. Will additional fixed assets be required? III. Will dividends be paid to shareholders? IV. How much new debt must be obtained?

I, II, III, and IV

John is going to receive a $25,000 gift five years from now. Carol is going to receive a gift of the same amount seven years from now. Both use the same discount rate of 5%. Pick the correct statement related to their gifts from below.

In today's dollars, John's gift is worth more than Carol's.

How would a decrease in the interest rate affect the present value of an annuity (all other variables remain the same)?

Increase the present value.

Which loan type calls for the borrower to pay interest each period and to repay the entire principal at some point in the future?

Interest-only

The variables in a present value of an annuity problem (a series of equal-amount payments) include all of the following, except:

Inventory

____________ is the exponent variable (the one representing the power) in the present value formula.

Number of time periods

There are two investment options A and B. They provide you with the same total amount of income as below. Year Option A Income Option B Income 1 $1,000 $5,000 2 $1,000 $5,000 3 $13,000 $5,000 Total $15,000 $15,000 Pick the correct statement related to these two investment options from below. Assume a positive discount rate. (No calculations needed.)

Option B has a higher present value at Time 0.

The variable that you are solving for in a present value of a lump sum problem is:

Present value

Pick the correct statement related to pro forma statements from below. Pro forma statements must assume that no new equity is issued. Pro forma statements are projections, not guarantees. Pro forma statements are limited to a balance sheet and income statement. Pro forma statements must assume that no dividends will be paid. Pro forma statements exclude net working capital needs.

Pro forma statements are projections, not guarantees.

Two projects have the following cash flows. Year Project A Cash Flow Project B Cash Flow 1 $4,000 $2,000 2 $3,000 $3,000 3 $0 $2,000 4 $3,000 $3,000 Pick the correct statement related to the two projects assuming the discount rate is positive from below. (No calculations needed).

Project B is worth less today than Project A.

_________________ is the portion of net income that a firm reinvests in itself.

Retention ratio

Roger has just opened today a savings account paying 4 percent interest, compounded annually. The savings account will be worth $25,000 in 4 years. He does not plan on putting any more money in this account or taking out any amount from the account. Pick the correct statement related to Roger's savings from below.

Roger could have deposited less money today and still had $25,000 in four years if the account paid a higher rate of interest.

Pick the correct statement related to pro forma statements from below. Fixed assets must increase if sales are projected to increase. Net working capital is affected only when a firm's sales are expected to exceed the firm's current production capacity. The addition to retained earnings is equal to net income less cash dividends. Long-term debt varies directly with sales when a firm is currently operating at maximum capacity. Inventory changes are not proportional to sales changes.

The addition to retained earnings is equal to net income less cash dividends.

Pick the correct statement concerning interest rates from below. Savers would prefer annual compounding over monthly compounding given the same annual percentage rate. The effective annual rate decreases as the number of compounding periods per year increases. The effective annual rate equals the annual percentage rate when interest is compounded annually. Borrowers would prefer monthly compounding over annual compounding given the same annual percentage rate. For any positive rate of interest, the annual percentage rate will always exceed the effective annual rate.

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

Pick the correct statement related to the present value of a set amount to be received some time in the future from below. The present value and future value factors are equal to each other. The present value factor is the exponent of the future value factor. The future value factor is the exponent of the present value factor. The factors are reciprocals of each other. There is no relationship between these two factors.

The factors are reciprocals of each other.

From reading Facegen's financial statements, we can easily tell the firm's net working capital and all of its expenses vary directly with sales. At the same time, the firm is currently operating at 86 percent of capacity. And, it does not want to apply external financing by issuing either stock or bonds. Facegen is paying income taxes at 21%. It has adopted a constant dividend payout ratio of 25%. Which statement given below related to the firm's pro forma financial statement of next year must be correct? Total equity will remain constant at this year's ending value. The maximum rate of sales increase is four percent. The firm cannot exceed its internal rate of growth. Accounts payable will increase at the same rate as fixed assets. Inventory will remain constant at the current level.

The firm cannot exceed its internal rate of growth.

Pick the correct statement related to plowback ratio from below. The plowback ratio is equal to net income divided by the change in total equity. The plowback ratio is the percentage of net income available to the firm to fund future growth. The plowback ratio is equal to one minus the retention ratio. The plowback ratio is the change in retained earnings divided by the dividends paid. The plowback ratio is the dollar increase in net income divided by the dollar increase in sales.

The plowback ratio is the percentage of net income available to the firm to fund future growth.

Pick the correct statement related to growing annuities and perpetuities from below. You can compute the present value of a growing annuity but not a growing perpetuity. In computing the present value of a growing annuity, you discount the cash flows using the growth rate as the discount rate. The future value of an annuity will decrease if the growth rate is increased. An increase in the rate of growth will decrease the present value of an annuity. The present value of a growing perpetuity will decrease if the discount rate is increased.

The present value of a growing perpetuity will decrease if the discount rate is increased.

Mary has deposited $1,000 into a retirement savings account today. The account will compound interest at 5 percent annually. She is not going to withdraw any principal or interest until she retires in 30 years. Pick the correct statement related to her retirement savings from below.

The present value of this investment is equal to $1,000.

Your wealthy aunt has told you that she will give you $10,000 when you graduate from college. If you graduate sooner by one year and graduate two years from now rather than the expected three years, how will the present value of your gift be changed?

The present value will increase.

When evaluating financial planning steps, we must consider all of the following, except: The planning horizon for the next 2 to 5 years. The project horizon for the next 30 to 90 days. Correct How all small projects are added up for one big project. Identifying the total need investment for the plan. Sets of assumptions for various scenarios.

The project horizon for the next 30 to 90 days.

The variables in a present value of a lump sum problem include all of the following, except:

The variables in a present value of a lump sum problem include all of the following, except:

Pick the correct statement related to time value of money relationship from below. Time and future values are inversely related, all else held constant. Interest rates and time are positively related, all else held constant. An increase in a positive discount rate increases the present value. An increase in time increases the future value given a zero rate of interest. Time and present value are inversely related, all else held constant.

Time and present value are inversely related, all else held constant.

The variable appears as the power in the formula for calculating the future value of a lump sum is :

Time period

For a firm's sustainable growth rate to exceed its internal growth rate, which of the following must be true?

Total debt > $0

To generate a coherent plan, goals and objectives will have to be modified, and priorities will have to be established.

True

Pick the correct statements related to loan interest rates from below. The annual percentage rate considers the compounding of interest. When comparing loans you should compare the effective annual rates. Lenders are most apt to quote the effective annual rate. Regardless of the compounding period, the effective annual rate will always be higher than the annual percentage rate. The more frequent the compounding period, the lower the effective annual rate given a fixed annual percentage rate.

When comparing loans you should compare the effective annual rates.

A firm's external financing need is met its _______________________.

debt or equity

All else constant, the internal rate of growth of a firm can be increased by a(an) ________________________.

decrease in the firm's total assets

The present value of a set amount to be received some time in the future will be increased by a/an _______________.

decrease in the interest rate

To compute the present value of a $10,000 bonus he will receive next year, the interest rate Tom used in his computation is called ______________.

discount rate

Your sister has just been told that she will be given a $1,000 bonus next year. She is very eager to know its present value. So, she applies the ______________ process to estimate the present value of her gift.

discounting

n the compilation of the pro forma financial statements for a firm, the firm's _______________ will directly affect the projection of the retained earnings account balance.

dividend policy

The ____________rate is the actual interest rate on a loan that is compounded monthly (or in other compounding periods that are shorter than a year) but expressed as an annual rate.

effective annual

An ordinary annuity is a series of _______________________

equal payments paid at the end of regular intervals over a stated time period.

Growth can summarize various aspects of a firm's __________ and ___________ policies.

financial, investment

A firm's current level of operation (for example, at 90% of its operating capacity) can be used to project the firm's account value of __________________ when preparing pro forma financial statements.

fixed assets

As Plastic Products is operating at just 87 percent capacity, although it is earning a substantial profit, its increase in sales will least lead to the firm's __________ to increase.

fixed assets

Hoosier Industries is currently operating at full (100%) capacity, so, its sales are also currently being limited by its ______________.

fixed assets

Your father has invested $200 today in a savings account. The total value of his investment one year from now is referred to as ____________________________.

future value

A firm can achieve its maximum rate of growth by __________________.

increasing its retention ratio

Arthur invested $500 two years ago at 5 percent interest. The first year, he earned $25 interest on his $500 investment. He left the $25 in his account instead of withdrawing the amount for spending. The second year, he earned $26.25 interest on his $525 investment. The extra $1.25 he earned in interest the second year was due to ____________.

interest (earned) on interest

A(n) ____ loan is one that calls for periodic interest payments and a lump sum principal payment.

interest-only

HoosierMart earns a profit and it adopts a dividend payout ratio of 30%. It has no plan on issuing additional stocks (equity shares) or bonds (long-term debt) at this time. Thus, ______________ is the maximum rate at which it can currently grow.

internal growth rate

If a firm's pro forma financial statements indicate that both sales and fixed assets are projected to increase by 7 percent over their current levels, the firm _______________________. is projected to grow at the internal rate of growth is projected to grow at the sustainable rate of growth currently has excess capacity is currently operating at full capacity retains all of its net income

is currently operating at full capacity

Financial planning tends to emphasize the least on a firm's ___________________.

market value

A firm's sustainable growth rate is its ___________ growth rate achievable ___________________.

maximum; excluding any external equity financing while maintaining a constant debt-equity ratio

The ________________ method is the financial planning method that uses the projected sales level to determine changes in balance sheet and income statement account values.

percentage of sales

A consol (whether British, Canadian or of the countries) is actually a(n) _____________________.

perpetuity

Nancy has won a lottery today. She will receive $5,000 a year for the next 25 years. We call the current value (value today) of these payments to Nancy the _________________.

present value

You should estimate a firm's ___________ first before you begin preparing pro forma statements for the firm.

projected sales

A(n) _____ loan is one where the borrower receives money today and repays a higher single lump sum on a future date.

pure discount

Among the options provided below, ______________________ has the least impact on a firm's sustainable growth rate.

quick ratio

The principal of an interest-only loan is ___________

repaid in one lump sum at the end of the loan period.

A perpetuity is a series of ______________

unending equal payments paid at equal time intervals.

In the construction of a pro forma financial statement, net working capital generally __________________________. remains fixed varies only if the firm is currently producing at full capacity varies only if the firm maintains a fixed debt-equity ratio varies only if the firm is producing at less than full capacity varies proportionally with sales

varies proportionally with sales

A firm's external financing need ____________________.

will limit the firm's growth if unfunded