FIN 571 – WEEK 6 FINAL EXAM

1.

The process of planning and managing a firm’s long-term assets is called:

financial depreciation.

agency cost analysis.

working capital management.

capital budgeting

capital structure.

2.

A proxy fight occurs when:

the board of directors disagree on the members of the management team.

a group solicits voting rights to replace the board of directors

the firm files for bankruptcy.

the firm is declared insolvent.

a competitor offers to sell their ownership interest in the firm.

3.

Which one of these statements is correct?

Accountants record sales and expenses after the related cash flows occur.

When selecting one of two projects, managers should only consider the total cash flow from each

The value of an investment by a firm depends on the size, the timing, and the risk of the investment’s cash flows

All overseas operations present the same amount of risk.

Most investors prefer greater risk over less risk.

4.

Which one of the following actions by a financial manager creates an agency problem?

agreeing to pay bonuses based on the market value of the company’s stock

increasing current costs in order to increase the market value of the stockholders’ equity

agreeing to expand the company at the expense of stockholders’ value

refusing to borrow money when doing so will create losses for the firm

refusing to lower selling prices if doing so will reduce the net profits

5.

What is the future value of $3,196 invested for 9 years at 5.00 percent compounded annually?

$4,972.01

$4,958.04

$4,660.56

$2,014.28

$4,944.08

6.

a. Compute the future value of $2,000 compounded annually for 10 years at 7 percent. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Future value $ 3,934.30

b. Compute the future value of $2,000 compounded annually for 10 years at 12 percent. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Future value $ 6,211.70

c. Compute the future value of $2,000 compounded annually for 15 years at 7 percent. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Future value $ 5,518.06

7.

What is the future value of $1,100 a year for 6 years at a 6 percent interest?

$7,672.85

$8,723.45

$6,996.00

$7,172.15

$6,105.35

8.

You bought 360 shares of stock at a total cost of $7,754.40. You received a total of $403.20 in dividends and sold your shares for $19.98 a share. What was your total rate of return?

7.24%

-1.29%

5.38%

3.67%

-2.04%

9.

Six months ago, you purchased 1,200 shares of ABC stock for $21.20 a share and have received total dividend payments of $.60 a share. Today, you sold all of your shares for $22.20 a share. What is your total dollar return on this investment?

$1,920

$3,840

$1,440

$1,200

$720

10.

Shelton, Inc., has sales of $405,000, costs of $193,000, depreciation expense of $58,000, interest expense of $39,000, and a tax rate of 40 percent. (Do not round intermediate calculations.)

What is the net income for the firm?

Net income $ 69,000

Suppose the company paid out $48,000 in cash dividends. What is the addition to retained earnings?

Addition to retained earnings $ 21,000

11.

Net working capital is defined as:

current assets minus current liabilities

total assets minus total liabilities.

current assets plus fixed assets.

fixed assets minus long-term liabilities.

current assets plus stockholders’ equity.

12.

According to generally accepted accounting principles (GAAP), revenue is recognized as income when:

a contract is signed to perform a service or deliver a good.

payment is requested.

the transaction is complete and the goods or services are delivered

managers decide to recognize it.

income taxes are paid on the revenue earned.

13.

Which one of these equations is an accurate expression of the balance sheet?

Stockholders’ equity ≡ Assets + Liabilities

Assets ≡ Stockholders’ equity −Liabilities

Assets ≡ Liabilities −Stockholders’ equity

Stockholders’ equity ≡ Assets −Liabilities

Liabilities ≡ Stockholders’ equity −Assets

14.

A firm has a debt-equity ratio of .36. What is the total debt ratio?

.44

1.78

.26

1.36

.56

15.

A firm has total debt of $1,330 and a debt-equity ratio of .34. What is the value of the total assets?

$5,242

$4,532

$3,400

$1,782

16.

A firm has net working capital of $456, net fixed assets of $2,305, sales of $6,000, and current liabilities of $800. How many dollars worth of sales are generated from every $1 in total assets?

$1.35

$2.33

$1.93

$1.68

$2.60

17.

Reliable Cars has sales of $3,710, total assets of $3,150, and a profit margin of 5 percent. The firm has a total debt ratio of 40 percent. What is the return on equity?

9.81 percent

8.33 percent

14.72 percent

12.50 percent

5.89 percent

18.

Galaxy United, Inc.

2009 Income Statement

($ in thousands)

Net sales $5,720

Less: Cost of goods sold 4,070

Less: Depreciation 420

Earnings before interest and taxes 1,230

Less: Interest paid 29

Taxable Income 1,201

Less: Taxes 420

Net income $ 781

Galaxy United, Inc.

2008 and 2009 Balance Sheets

($ in thousands)

2008 2009 2008 2009

Cash $ 65 $ 170 Accounts payable $1,340 $1,230

Accounts rec. 980 830 Long-term debt 710 530

Inventory 1,540 1,990 Common stock $3,185 $3,329

Total $2,585 $2,990 Retained earnings 930 1,211

Net fixed assets 3,580 3,310

Total assets $6,165 $6,300 Total liab. & equity $6,165 $6,300

What is the debt-equity ratio for 2009?

.39

.26

.22

.47

.45

19.

Financial planning, when properly executed:

reduces the necessity of daily management oversight of the business operations.

is based on the internal rate of growth.

ensures internal consistency among the firm’s various goals

eliminates the need to plan more than one year in advance.

ignores the normal restraints encountered by a firm.

20.

In the financial planning model, the external financing needed (EFN) as shown on a pro forma balance sheet is equal to the changes in assets:

plus the changes in liabilities minus the changes in equity.

minus the changes in both liabilities and equity

minus the changes in liabilities.

plus the changes in both liabilities and equity.

minus the change in retained earnings.

21.

The return on equity can be calculated as:

ROA ×(Net income / Total assets).

ROA × Debt-equity ratio.

Profit margin × ROA × Total asset turnover

ROA × Equity multiplier

Profit margin × ROA.

22.

Assume the following ratios are constant:

Total asset turnover 2.60

Profit margin 6.6 %

Equity multiplier 1.50

Payout ratio 25 %

________________________________________

What is the sustainable growth rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Sustainable growth rate 23.92 %

23.

If the Hunter Corp. has an ROE of 13 and a payout ratio of 21 percent, what is its sustainable growth rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Sustainable growth rate 11.45 %

24.

The length of time between the payment for inventory and the collection of cash from receivables is called the:

inventory period.

cash cycle

operating cycle

accounts receivable period.

accounts payable period.

25.

The length of time between the acquisition of inventory and its sale is called the:

inventory period

accounts payable period.

cash cycle.

accounts receivable period.

operating cycle.

26.

Here are the most recent balance sheets for Country Kettles, Inc. Excluding accumulated depreciation, determine whether each item is a source or a use of cash, and the amount. (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32. Input all amounts as positive values):

COUNTRY KETTLES, INC.

Balance Sheet

December 31, 2016

2015 2016

Assets

Cash $ 30,900 $ 30,040

Accounts receivable 70,400 73,480

Inventories 61,300 63,500

Property, plant, and equipment 152,000 161,800

Less: Accumulated depreciation (46,320 ) (50,400 )

________________________________________ ________________________________________ ________________________________________ ________________________________________

Total assets $ 268,280 $ 278,420

________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________

Liabilities and Equity

Accounts payable $ 45,400 $ 47,540

Accrued expenses 6,780 6,020

Long-term debt 26,100 28,750

Common stock 21,000 25,500

Accumulated retained earnings 169,000 170,610

________________________________________ ________________________________________ ________________________________________ ________________________________________

Total liabilities and equity $ 268,280 $ 278,420

________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________

________________________________________

Item Source/Use Amount

Cash Source $ 860

Accounts receivable Use $ 3,080

Inventories Use $ 2,200

Property, plant, and equipment Use $ 9,800

Accounts payable Source $ 2,140

Accrued expenses Use $ 760

Long-term debt Source $ 2,650

Common stock Source $ 4,500

Accumulated retained earnings Source $ 1,610

________________________________________

27.

You invested in long-term corporate bonds and earned 6.1 percent. During that same time period, large-company stocks returned 12.6 percent, Long-term government bonds returned 5.7 percent, U.S. Treasury bills returned 4.2 percent, and inflation averaged 3.8 percent. What average % premium did you earn?

1.9%

28.

Stu wants to earn a real return of 3.4 percent on any bond he acquires. The inflation rate is 2.8 percent. He has determined that a particular bond he is considering should have an interest rate risk premium of .27 percent, a liquidity premium of .08 percent, and a taxability premium of 1.69 percent. What nominal rate of return is Stu demanding from this particular bond?

8.40%

7.38%

8.74%

7.19%

8.24%

29.

What would be the maximum an investor should pay for the common stock of a firm that has no growth opportunities but pays a dividend of $1.36 per year? The required rate of return is 12.5 percent.

$10.88

$11.24

$11.47

$10.64

$9.52

30.

In the formula, P3 = Div / R – g, the dividend is for period:

five.

four

three.

two

one.

31.

Last year, Logistics paid an annual dividend of $2.20 and announced that all future dividends would be $2.25 a share indefinitely. What is your required rate of return if you are willing to pay $15.25 a share for this stock?

13.67%

14.50%

14.75%

13.88%

16.07%

32.

Miller Manufacturing has a target debt–equity ratio of .45. Its cost of equity is 13 percent, and its cost of debt is 7 percent. If the tax rate is 34 percent, what is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

WACC 10.40 %

33.

Marshall’s purchased a corner lot five years ago at the cost of $498,000 and then spent $63,500 on grading and drainage so the lot could be used for storing outdoor inventory. The lot was recently appraised at $610,000. The company now wants to build a new retail store on the site. The building cost is estimated at $1.1 million. What amount should be sued as the initial cash flow for this building project?

$1,710,000

34.

When computing WACC, you should use the:

pretax yield to maturity because it considers the current market price of debt

current yield because it is based on the current market price of debt.

aftertax cost of debt because interest is tax deductible

pretax cost of debt because it is the actual rate the firm is paying bondholders.

pretax cost of debt because most corporations pay taxes at the same tax rate.

35.

A firm’s WACC can be correctly used to discount the expected cash flows of a new project when that project:

will be financed solely with new debt and internal equity.

will be managed by the firm’s current managers.

has the same level of risk as the firm’s current operations

will be financed solely with internal equity.

will be financed with the same proportions of debt and equity as those currently used by the overall firm.

36.

When estimating the cost of equity using the DDM, which one of these is most apt to add error to this estimate?

firm’s tax rate

current stock price

next year’s dividend

dividend growth rate

beta

37.

Marshall’s purchased a corner lot five years ago at a cost of $498,000 and then spent $63,500 on grading and drainage so the lot could be used for storing outdoor inventory. The lot was recently appraised at $610,000. The company now wants to build a new retail store on the site. The building cost is estimated at $1.1 million. What amount should be used as the initial cash flow for this building project?

$1,661,500

$1,498,000

$1,100,000

$1,710,000

$1,208,635

38.

All else constant, the net present value of a typical investment project increases when:

the initial cost of a project increases.

the rate of return decreases

all cash inflows occur during the last year instead of periodically throughout a project’s life.

the discount rate increases.

each cash inflow is delayed by one year.

39.

Samson’s purchased a lot four years ago at a cost of $398,000. At that time, the firm spent $289,000 to build a small retail outlet on the site. The most recent appraisal on the property placed a value of $629,000 on the property and building. Samson’s now wants to tear down the original structure and build a new strip mall on the site at an estimated cost of $2.3 million. What amount should be used as the initial cash flow for new project?

$2,058,000

$2,987,000

$2,242,000

$2,929,000

$2,300,000

40.

Accepting a positive net present value (NPV) project:

ignores the inherent risks within the project.

means the present value of the expected cash flows is equal to the project’s cost.

indicates the project will pay back within the required period of time.

is expected to increase the stockholders’ value by the amount of the NPV

guarantees all cash flow assumptions will be realized.

41.

No matter how many forms of investment analysis you employ:

the internal rate of return will always produce the most reliable results.

the initial costs will generally vary considerably from the estimated costs.

the actual results from a project may vary significantly from the expected results

only the first three years of a project ever affect its final outcome.

a project will never be accepted unless the payback period is met.

42.

A project costing $6,200 initially should produce cash inflows of $2,860 a year for three years. After the three years, the project will be shut down and will be sold at the end of Year 4 for an estimated net cash amount of $3,300. What is the net present value of this project if the required rate of return is 11.3 percent?

$2,474.76

$3,011.40

$935.56

$2,903.19

$1,980.02

43.

A proposed project costs $300 and has cash flows of $80, $200, $75, and $90 for Years 1 to 4, respectively. Because of its high risk, the project has been assigned a discount rate of 16 percent. In dollars, how much will this project return in today’s dollars for every $1 invested?

$1.01

$1.05

$1.03

$.97

$.99

44.

Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.73 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which it will be worthless. The project is estimated to generate $2,090,000 in annual sales, with costs of $785,000. The tax rate is 30 percent and the required return is 13 percent.

What is the project’s NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV $ 71,507.56

45.

What is the net present value of a project with an initial cost of $36,900 and cash inflows of $13,400, $21,600, and $10,000 for Years 1 to 3, respectively? The discount rate is 13 percent.

−$287.22

−$1,350.49

$797.22

$204.36

−$1,195.12

46.

Which one of these is a correct definition?

Current assets are assets with short lives, such as inventory

47.

Which one of the following parties is considered a stakeholder of a firm?

Customer

48.

If a firm is currently profitable, then:

Its reported sales exceed its costs

49.

How much are you willing to pay for one share of stock if the company just paid a dividend of $1.03, the dividends increase by 3 percent annually, and you require a rate of return of 15 percent?

$8.84

50.

Which one of the following accounts is included in stockholders equity?

Accumulated retained earnings

51.

What is the net present value of a project that has an initial cash outflow of $7,670 and cash flows of $1,280 in Year 1, $6,980 in Year 3, and $2,750 in Year 4? The discount rate is 12.5 percent.

$86.87

52.

Wilson’s Market is considering two mutually exclusive projects that will not be repeated. The required rate of return is 13.9 percent for Project A and 12.5 percent for Project B. Project A has an initial cost of $54,500 and should produce cash flows of $16,400, $28,900, $31,700 for years 1 to 3. Project B has and initial cost of $69,400 and should produce cash flows of $0, $48,300, $42,100 for years 1 to 3. Which project or projects, if either, should be accepted and why?

Project A, because its NPV is positive while Project B’s NPV is negative

53.

When computing the weighted average cost of capital, which of these is adjusted for taxes?

Cost of debt

54.

Which statement concerning the net present value (NPV) of and investment or a financing project is correct?

Any type of project should be accepted if the NPV is positive and rejected if it is negative

55.

The primary reason that company project with positive net present values are considered acceptable is that:

They create value for the owners of the firm