FINA 43100 Exam result

FINA 43100 Exam results

You are estimating your company’s external financing needs for the next year. At the end of the year you expect that owners’ equity will be $80 million, total assets will amount to $170 million, and total liabilities will be $70 million. How much will your firm need to borrow, or otherwise acquire, from outside sources during the year?

  1. $20 million
  2. $70 million
  3. $150 million
  4. $160 million
  5. $180 million

 

To estimate Missed Places Inc.’s (MP) external financing needs, the CFO needs to figure out how much equity her firm will have at the end of next year. At the end of the most recent fiscal year, MP’s retained earnings were $158,000. The Controller has estimated that over the next year, gross profits will be $360,700, earnings after tax will total $23,400, and MP will pay $12,400 in dividends. What are the estimated retained earnings at the end of next year?

  1. $169,000
  2. $170,400
  3. $181,400
  4. $506,300
  5. $518,700
  6. None of the above.

158,000 + 23,400 – 12,400 = $169,000

 

The most common approach to developing pro forma financial statements is called the:

  1. cash budget method.
  2. financial planning method.
  3. seasonality approach.
  4. percent-of-sales method.
  5. market-oriented approach.

 

Which of the following are viable techniques to cope with the uncertainty inherent in realistic financial projections?

  1. Simulation
  2. Ad hoc adjustments

III. Scenario analysis

  1. Sensitivity analysis

 

 

  1. II and IV only
  2. III and IV only
  3. II, III, and IV only
  4. I, II, and III only
  5. I, III, and IV only
  6. I, II, III, and IV

 

Which one of the following statements is correct concerning the cash balance of a firm?

  1. Most firms attempt to maintain a zero cash balance at all times.
  2. The cumulative cash surplus shown on a cash budget is equal to the ending cash balance plus the minimum desired cash balance.
  3. Most firms attempt to maximize the cash balance at all times.
  4. A cumulative cash deficit on a cash budget indicates the need to acquire additional funds.
  5. The ending cash balance must equal the minimum desired cash balance.

 

Assume each month has 30 days and AmDocs has a 60-day accounts receivable period. During the second calendar quarter of the year (April, May, and June), AmDocs will collect payment for the sales it made during which of the months listed below?

  1. October, November, and December
  2. November, December, and January
  3. December, January, and February
  4. January, February, and March
  5. February, March, and April

 

The Limited collects 25 percent of sales in the month of sale, 60 percent of sales in the month following the month of sale, and 15 percent of sales in the second month following the month of sale. During the month of April, the firm will collect:

  1. 60 percent of February sales.
  2. 15 percent of April sales.
  3. 60 percent of March sales.
  4. 15 percent of March sales.
  5. 25 percent of February sales.

 

Steve has estimated the cash inflows and outflows for his sporting goods store for next year. The report that he has prepared summarizing these cash flows is called a:

  1. pro forma income statement.
  2. sales projection.
  3. cash budget.

 

  1. receivables analysis.
  2. credit analysis.
  3. None of the above.

 

You are developing a financial plan for a corporation. Which of the following questions will be considered as you develop this plan?

  1. How much will our sales grow?
  2. Will additional fixed assets be required?

III. Will dividends be paid to shareholders?

  1. How much new debt must be obtained?

 

  1. I and IV only
  2. II and III only
  3. I, III, and IV only
  4. II, III, and IV only
  5. I, II, III, and IV

 

Ruff Wear expects sales of $560, $650, $670, and $610 for the months of May through August, respectively. The firm collects 20 percent of sales in the month of sale, 70 percent in the month following the month of sale, and 8 percent in the second month following the month of sale. The remaining 2 percent of sales is never collected. How much money does the firm expect to collect in the month of August?

  1. $621
  2. $628
  3. $633
  4. $639
  5. $643

 

August collections = 0.20($610) + 0.70($670) + 0.08($650) = $643

On May 1, Vaya Corp. had a beginning cash balance of $175. Vaya’s sales for April were $430 and May sales were $480. During May, the firm had cash expenses of $110 and made payments on accounts payable of $290. Vaya’s accounts receivable period is 30 days. What is the firm’s beginning cash balance on June 1?

  1. $145
  2. $155
  3. $205
  4. $215
  5. $265 Cash balance = $175 – $110 – $290 + $430 = $205

You are preparing pro forma financial statements for 2014 using the percent-of-sales method. Sales were $100,000 in 2013 and are projected to be $120,000 in 2014. Net income was $5,000 in 2013 and is projected to be $6,000 in 2014. Equity was $45,000 at year-end 2012 and $50,000 at year-end 2013. Assuming that this company never issues new equity, never repurchases equity, and never changes its dividend payout ratio, what would be projected for equity at year-end 2014?

  1. $55,000
  2. $56,000
  3. $60,000
  4. Insufficient information is provided to project equity in 2014.

 

All of net income was added to equity in 2013, so all of net income will be added to equity in 2014. $50,000 + $6,000 = $56,000.

Which of the following statements is correct if a firm’s pro forma financial statements project net income of $12,000 and external financing required of $5,000?

  1. Total assets cannot grow by more than $10,000
  2. Dividends cannot exceed $10,000.
  3. Retained earnings cannot grow by more than $12,000.
  4. Long-term debt cannot grow by more than $5,000.

 

Please refer to Oscar’s financial statements above. What was Oscar’s increase in retained earnings during 2014?

  1. $450
  2. $1,380
  3. $1,830
  4. $2,280
  5. None of the above.

 

Please refer to Oscar’s financial statements above. Sales are projected to increase by 3 percent next year. The profit margin and the dividend payout ratio are projected to remain constant. What is the projected addition to retained earnings for next year?

  1. $1,309.19
  2. $1,421.40
  3. $1,884.90
  4. $2,667.78
  5. $3,001.40
  6. None of the above.

 

Please refer to Oscar’s financial statements above. All of Oscar’s costs and current asset accounts vary directly with sales. Sales are projected to increase by 10 percent. What is the pro forma accounts receivable balance for next year?

  1. $949
  2. $1,034
  3. $1,113
  4. $1,730
  5. $2,670
  6. None of the above.

 

Please refer to Oscar’s financial statements above. Assume a constant profit margin and dividend payout ratio, and further assume all of Oscar’s assets and current liabilities vary directly with sales. Assume long-term debt and common stock remain unchanged. Sales are projected to increase by 10 percent. What is Oscar’s external financing need for next year?

  1. -$410
  2. -$260
  3. $235
  4. $1,320
  5. $7,240
  6. None of the above.

 

Please refer to Oscar’s financial statements above. Assume a constant debt-equity ratio, net profit margin and dividend payout ratio, and further assume all of Oscar’s expenses, assets and current liabilities vary directly with sales. What is the pro forma net fixed asset value for next year if sales are projected to increase by 7.5 percent?

  1. $10,857.50
  2. $10,931.38
  3. $11,663.75
  4. $15,587.50
  5. $18,987.50
  6. None of the above.

 

In the above financial statements, Royal Corporation has prepared (incomplete) pro forma financial statements for 2014, based on actual financial statements for 2013. Royal Corp. used the percent-of-sales method assuming a sales growth rate of 10% for 2014. If capital expenditures are planned to be $1,615 in 2014, then what would be the appropriate projection for net fixed assets in 2014?

 

  1. $4,453
  2. $4,563
  3. $4,663
  4. $5,663

 

Please refer to the pro forma financial statements for Royal Corporation above. If Royal Corporation plans to issue $100 in new equity in 2014, what should be the projection for shareholders’ equity for 2014?

  1. $5,349
  2. $5,436
  3. $5,451
  4. $5,536

 

Please refer to the pro forma financial statements for Royal Corporation above. Assume that net fixed assets are projected to be 5,000 for 2014 and that shareholders’ equity is projected to be 5,500 for 2014. If long-term debt is the plug figure, what should be the projection for long-term debt for Royal Corporation in 2014?

  1. $2,206
  2. $2,363
  3. $2,455
  4. $2,847

 

Please refer to the spreadsheet above. Selected assumptions are given for preparing pro forma financial statements for 2015. Which of the following formulas would correctly give the forecast for sales in cell C8?

  1. =B8*B2
  2. =B8 + B8*B2
  3. =(1 + B8)*B2
  4. =(1/B2)*B8
  5. None of the above.

 

Please refer to the spreadsheet above. Selected assumptions are given for preparing pro forma financial statements for 2015. When the pro formas are completed, which of the following formulas would correctly give the forecast for cost of goods sold in cell C9?

  1. =B9*B3
  2. =B9 + B9*B3
  3. =B8*B3
  4. =B9*B2
  5. None of the above.

Please refer to the spreadsheet above. Selected assumptions are given for preparing pro forma financial statements for 2015. Assume that no new equity will be issued in 2015. When the pro formas are completed, which of the following formulas would correctly give the forecast for shareholders’ equity in cell G19?

  1. =F19*B2
  2. =F19*(1 + B2)
  3. =F19 + (1 – B4)*C16
  4. =F19 + B4*C16
  5. None of the above.

 

Which one of the following will increase the sustainable rate of growth a corporation can achieve?

  1. avoidance of external equity financing
  2. increase in corporate tax rates
  3. reduction in the retention ratio
  4. decrease in the dividend payout ratio
  5. decrease in sales given a positive profit margin
  6. None of the above.

 

Which of these ratios are the determinants of a firm’s sustainable growth rate?

  1. Assets-to-equity ratio
  2. Profit margin

III. Retention ratio

  1. Asset turnover ratio

 

  1. I and III only
  2. II and III only
  3. II, III, and IV only
  4. I, II, and III only
  5. I, II, III, and IV
  6. None of the above.

 

The retention ratio is:

  1. equal to net income divided by the change in total equity.
  2. the percentage of net income available to the firm to fund future growth.
  3. equal to one minus the asset turnover ratio.
  4. the change in retained earnings divided by the dividends paid.
  5. the dollar increase in net income divided by the dollar increase in sales.
  6. None of the above.

 

Which of the following statements is true?

  1. Rapid growth spurs increases in market share and profits and thus, is always a blessing
  2. Firms that grow rapidly only very rarely encounter financial problems.
  3. The cash flows generated in a given time period are equal to the profits reported.
  4. Profits provide assurance that cash flow will be sufficient to maintain solvency.
  5. Due to required cash investments in current assets, fast-growing and profitable companies can literally “grow broke”.

 

Which one of the following correctly defines the retention ratio?

  1. one plus the dividend payout ratio
  2. additions to retained earnings divided by net income
  3. additions to retained earnings divided by dividends paid
  4. net income minus additions to retained earnings
  5. net income minus cash dividends

 

Which one of the following policies most directly affects the projection of the retained earnings balance to be used on a pro forma statement?

  1. net working capital policy
  2. capital structure policy
  3. dividend policy
  4. capital budgeting policy
  5. capacity utilization policy

 

Which of the following questions are appropriate to address upon conducting sustainable growth analysis and the financial planning process?

  1. Should the firm merge with a competitor?
  2. Should additional equity be sold?

III. Should a particular division be sold?

  1. Should a new product be introduced?

 

  1. I, II, and III only
  2. I, II, and IV only
  3. I, III, and IV only
  4. II, III, and IV only
  5. I, II, III, and IV
  6. None of the above.

 

The sustainable growth rate of a firm is best described as the:

  1. minimum growth rate achievable assuming a 100 percent retention ratio.
  2. minimum growth rate achievable if the firm maintains a constant equity multiplier.
  3. maximum growth rate achievable excluding external financing of any kind.
  4. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio.
  5. maximum growth rate achievable with unlimited debt financing.

 

 

 

The sustainable growth rate:

  1. assumes there is no external financing of any kind.
  2. assumes no additional long-term debt is available.
  3. assumes the debt-equity ratio is constant.
  4. assumes the debt-equity ratio is 1.0.
  5. assumes all income is retained by the firm.

 

Which of the following can affect a firm’s sustainable rate of growth?

  1. Asset turnover ratio
  2. Profit margin

III. Dividend policy

  1. Financial leverage

 

  1. III only
  2. I and III only
  3. II, III, and IV only
  4. I, II, and IV only
  5. I, II, III, and IV
  6. None of the above.

 

Gujarat Corporation doubled its shareholders’ equity during the year 2014. Gujarat did not issue any new equity, repurchase any equity, or pay out any dividends during the year. What is Gujarat’s sustainable growth rate for 2014?

  1. 50%
  2. 100%
  3. 150%
  4. 200%

 

If equity doubled, then g* = change in equity/equity bop = 100%. For example, if equity bop was 25, the change in equity must also be 25 in order to double equity.

Hayesville Corporation had net income of $5 million this year on net sales of $125 million per year. At the beginning of this year, its debt-to-equity ratio was 1.5 and it held $75 million in total liabilities. It paid out $2 million in dividends for the year. What is Hayesville Corporation’s sustainable growth rate?

  1. 3%
  2. 4%
  3. 5%
  4. 6%

 

ROEbop × Retention ratio = (5/50) × 0.6 = 6%

Milano Corporation has experienced growth of 20% for each of the last 5 years. Over this 5-year period, Milano’s return on equity has never exceeded 15%, its profit margin has held steady at 5%, and its total asset turnover has not changed. Over the 5-year period, Milano paid no dividends and issued no new equity. Based on this information, which of the following can you most likely infer about Milano’s performance over the past 5 years?

 

  1. Milano’s leverage has decreased.
  2. Milano’s leverage has remained constant.
  3. Milano’s leverage has increased.
  4. None of the above.

 

Note first that g > g because g = 20% and g<15%.

With g > g* one of PRAT must increase. P has held steady at 5%, R has remained at 100%, A has not changed. Thus T (leverage) must have increased.

Which of the following would increase a company’s need for external finance, all else equal?

  1. An increase in the dividend payout ratio
  2. A decrease in sales growth
  3. An increase in profit margin
  4. A decrease in the collection period

 

You constructed a pro forma balance sheet for next year and found that external financing required was negative (i.e., the company projected a financing surplus). Which of the following options, all else equal, would NOT correct the projected imbalance?

  1. A stock repurchase
  2. A decrease in accounts payable
  3. An increase in cash and marketable securities
  4. An increase in the retention ratio

 

The sustainable growth rate:

  1. is the highest growth rate attainable for a firm that pays no dividends.
  2. is the highest growth rate attainable for a firm without issuing new stock.
  3. can never be greater than the return on equity.
  4. can be increased by decreasing leverage.

 

Wax Music expects sales of $437,500 next year. The profit margin is 4.8 percent and the firm has a 30 percent dividend payout ratio. What is the projected increase in retained earnings?

  1. $14,700
  2. $17,500
  3. $18,300
  4. $20,600
  5. $21,000
  6. None of the above.

 

Change in retained earnings = $437,500 × 0.048 × (1 – 0.30) = $14,700

Komatsu has a 4.5 percent profit margin and a 15 percent dividend payout ratio. The asset turnover ratio is 1.6 and the assets-to-equity ratio (using beginning-of-period equity) is 1.77. What is Komatsu’s sustainable rate of growth?

  1. 1.91%
  2. 6.12%
  3. 10.83%
  4. 11.26%
  5. 12.74%

 

Sustainable growth = PRAT = 0.045 × (1 – 0.15) × 1.6 × 1.77 = 10.83%

A firm has a retention ratio of 40 percent and a sustainable growth rate of 6.2 percent. Its asset turnover ratio is 0.85 and its assets-to-equity ratio (using beginning-of-period equity) is 1.80. What is its profit margin?

  1. 3.79%
  2. 5.69%
  3. 6.75%
  4. 10.13%
  5. 18.24%

 

0.062 = PRAT = profit margin × 0.40 × 0.85 × 1.80

profit margin = 0.062/(0.40 × 0.85 × 1.80) = 10.13%

Westcomb, Inc. had equity of $150,000 at the beginning of the year. At the end of the year, the company had total assets of $195,000. During the year, the company sold no new equity. Net income for the year was $72,000 and dividends were $44,640. What is Westcomb’s sustainable growth rate?

  1. 15.32 percent
  2. 15.79 percent
  3. 17.78 percent
  4. 18.01 percent
  5. 18.24 percent

 

Change in Equity = Retained earnings = $72,000 – $44,640 = $27,360

Sustainable growth rate = g* = Change in Equity/Equitybop = $27,360/$150,000 = 18.24%

Alternative: g* = R × ROEbop = (72,000 – 44,640)/72,000 × 72,000/150,000 = 0.38 × 0.48 = 0.1824

Which of the following actions would help a firm’s growth problem if its actual sales growth exceeds its sustainable rate of growth?

  1. Increase prices
  2. Decrease financial leverage

III. Decrease dividends

  1. Prune away less-profitable products

 

  1. I and II only
  2. I and III only
  3. I, II, and IV only
  4. I, III, and IV only
  5. I, II, III, and IV
  6. None of the above.

 

Please refer to the selected financial information for Boss Stores above. What is the retention ratio for 2013?

  1. 0.32
  2. 0.68
  3. 0.97
  4. 1.00
  5. None of the above.

 

Please refer to the selected financial information for Boss Stores above. What is the actual sales growth rate for 2013?

  1. – 17.6%
  2. – 7.9%
  3. 8.51%
  4. 21.4%
  5. None of the above.

 

Please refer to the selected financial information for Boss Stores above. What is the sustainable growth rate for 2013?

  1. – 17.6%
  2. – 7.9%
  3. 9.97%
  4. 10.27%
  5. 12.23%
  6. 21.40%

 

Please refer to the selected financial information for Boss Stores above. What is the difference between Boss’s sustainable growth rate and its actual growth rate for 2014?

  1. – 11.40%
  2. – 7.09%
  3. – 3.04%
  4. 5.47%
  5. 13.98%
  6. 21.40%

 

Financial leverage:

  1. increases expected ROE but does not affect its variability.
  2. increases breakeven sales, like operating leverage, but increases the rate of earnings per share growth once breakeven is achieved.

III. is a fundamental financial variable affecting sustainable growth.

  1. increases expected return and risk to owners.

 

  1. I and II only
  2. I and III only
  3. II and IV only
  4. II, III, and IV only
  5. I, II, III, and IV
  6. None of the above.

 

The best financing choice is the one that:

  1. sets the debt-to-assets ratio equal to 1.
  2. trades off the tax disadvantage of debt against the signaling effects of equity.
  3. maximizes expected cash flows.
  4. ignores the false comfort of financial flexibility.
  5. results in the lowest possible financial distress costs.

 

Homemade leverage is:

  1. the incurrence of debt by a corporation in order to pay dividends to shareholders.
  2. the exclusive use of debt to fund a corporate expansion project.
  3. the borrowing or lending of money by individual shareholders as a means of adjusting their level of financial leverage
  4. best defined as an increase in a firm’s debt-equity ratio.
  5. the term used to describe the capital structure of a levered firm.
  6. None of the above.

 

The basic lesson of the M&M theory is that the value of a firm is dependent upon:

  1. the firm’s capital structure.
  2. the total cash flow of the firm.
  3. minimizing the marketed claims.
  4. the amount of marketed claims to that firm.
  5. the size of the stockholders’ claims.
  6. None of the above.

 

The term “financial distress costs” includes which of the following?

 

  1. Direct bankruptcy costs
  2. Indirect bankruptcy costs

III. Direct costs related to being financially distressed, but not bankrupt

  1. Indirect costs related to being financially distressed, but not bankrupt

 

  1. I only
  2. III only
  3. I and II only
  4. III and IV only
  5. I, II, III, and IV
  6. None of the above.

 

Which of the following is/are helpful for evaluating the effect of leverage on a company’s risk and potential returns?

 

  1. Estimated pro forma coverage ratios
  2. The recognition that financing decisions do not affect firm or shareholder value

III. A range of earnings chart and proximity of expected EBIT to the breakeven value

  1. A conservative debt policy that obviates the need to evaluate risk

 

  1. I only
  2. III only
  3. I and III only
  4. II and III only
  5. IV only
  6. None of the above.

 

In general, the capital structures used by non-financial U.S. firms:

 

  1. typically result in debt-to-asset ratios between 60 and 80 percent.
  2. tend to converge to the same proportions of debt and equity.
  3. tend to be those that maximize the use of the firm’s available tax shelters.
  4. vary significantly across industries.
  5. None of the above.

 

Which of the following factors favor the issuance of debt in the financing decision?

 

  1. Market signaling
  2. Distress costs

III. Tax benefits

  1. Financial flexibility

 

  1. I and II only
  2. I and III only
  3. II and IV only
  4. I, II, and III only
  5. I, II, and IV only
  6. None of the above.

 

Which of the following factors favor the issuance of equity in the financing decision?

 

  1. Market signaling
  2. Distress costs

III. Management incentives

  1. Financial flexibility

 

  1. I and II only
  2. I and III only
  3. II and IV only
  4. II, III, and IV only
  5. I, II, and IV only
  6. None of the above.

 

Which of the following factors favor the issuance of debt in the financing decision?

 

  1. Market signaling
  2. Distress costs

III. Management incentives

  1. Financial flexibility

 

  1. I and II only
  2. I and III only
  3. II and IV only
  4. I, II, and III only
  5. I, II, and IV only
  6. None of the above.

 

Which of the following is NOT a likely financing policy for a rapidly growing business?

 

  1. Adopt a modest dividend payout policy that enables the company to finance most of its growth externally.
  2. Borrow funds rather than limit growth, thereby limiting growth only as a last resort.
  3. Maintain a conservative leverage ratio to ensure continuous access to financial markets.
  4. If external financing is necessary, use debt to the point it does not affect financial flexibility.
  5. None of the above.

 

According to the pecking order theory proposed by Stewart Myers of MIT, which of the following are correct?

 

  1. For financing needs, firms prefer to first tap internal sources such as retained profits and excess cash.
  2. There is an inverse relationship between a firm’s profit level and its debt level.

III. Firms prefer to issue new equity rather than source external debt.

  1. A firm’s capital structure is dictated by its need for external financing.

 

 

  1. I and III only
  2. II and IV only
  3. I, III, and IV only
  4. I, II, and IV only
  5. I, II, III, and IV
  6. None of the above.

 

Which of the following is NOT an implication of the pecking order theory of capital structure?

 

  1. On average, a firm’s stock price drops when it announces an equity issue.
  2. Firms may want to maintain a reserve of cash or unused borrowing capacity.
  3. More-profitable firms (all else equal) should have higher debt ratios.
  4. Firms may fail to undertake positive-NPV projects if they would have to be financed with a new issue of equity.

 

Salinas Corporation has net income of $15 million per year on net sales of $90 million per year. It currently has no long-term debt, but is considering a debt issue of $20 million. The interest rate on the debt would be 7%. Salinas Corp. currently faces an effective tax rate of 40%. What would be the annual interest tax shield to Salinas Corp. if it goes through with the debt issuance?

 

  1. $560,000
  2. $1,400,000
  3. $8,000,000
  4. $20,000,000

 

Interest tax shield = interest rate × amount of debt × tax rate = 0.07 × 20,000,000 × 0.40= $560,000

Which of the following statements regarding interest tax shields is correct?

 

  1. Taxes are reduced by the amount of a firm’s interest-bearing debt.
  2. Taxable income is reduced by the amount of a firm’s interest-bearing debt.
  3. Taxes are reduced by the amount of the interest on a firm’s debt.
  4. Taxable income is reduced by the amount of the interest on a firm’s debt.

 

 

 

 

Which of the following would not be considered a cost of financial distress?

 

  1. Lack of interest tax shields
  2. Bankruptcy costs
  3. Excessive risk-taking by shareholders
  4. Loss of customers or suppliers

 

When considering the impact of distress costs on capital structure, which of the following facts should lead ABC Corporation to set a higher target debt ratio than XYZ Corporation (all else equal)?

 

  1. ABC’s cash flows from operations are less volatile than XYZ’s.
  2. ABC is a computer software firm, and XYZ is an electric utility.
  3. ABC operates in a more competitive industry than XYZ.
  4. ABC’s assets have lower resale values than XYZ’s assets.

 

According to the pecking order theory of capital structure, why do firms avoid issuing equity?

  1. Because fees associated with issuing new equity are so high
  2. Because they want to avoid dilution of earnings per share
  3. Because they don’t want to commit to paying dividends on the new equity
  4. Because equity issuance signals that managers believe their stock is overvalued, which causes the price of the stock to fall

 

Under the simplifying assumptions of Modigliani and Miller, an increase in a firm’s financial leverage will:

  1. increase the variability in earnings per share.
  2. reduce the operating risk of the firm.
  3. increase the value of the firm.
  4. decrease the value of the firm.

 

The interest tax shield has no value when a firm has:

  1. no taxable income.
  2. debt-equity ratio of 1.

III. zero debt.

  1. no leverage.

 

 

  1. I and III only
  2. II and IV only
  3. I, III, and IV only
  4. II, III, and IV only
  5. I, II, and IV only
  6. None of the above.

 

Please refer to the financial information for Squamish Equipment above. For next year, calculate Squamish’s times-burden-covered ratio if Squamish sells 2 million new shares at $20 a share.

  1. 1.03
  2. 1.38
  3. 1.60
  4. 1.89
  5. 2.10
  6. None of the above.

 

Please refer to the financial information for Squamish Equipment above. For next year, calculate Squamish’s earnings per share if Squamish sells 2 million new shares at $20 a share.

  1. 1.28
  2. 1.39
  3. 2.00
  4. 2.22
  5. 4.00
  6. None of the above.

 

Please refer to the financial information for Squamish Equipment above. Calculate Squamish’s times-interest-earned ratio for next year assuming the firm raises $40 million of new debt at an interest rate of 7 percent.

  1. 2.00
  2. 3.09
  3. 3.66
  4. 4.35
  5. None of the above.

 

Please refer to the financial information for Squamish Equipment above. Calculate Squamish’s times-burden-covered ratio for the next year assuming the firm raises $40 million of new debt at an interest rate of 7 percent and that annual sinking fund payments on the new debt will equal $8 million.

 

  1. 1.01
  2. 1.08
  3. 1.38
  4. 1.49
  5. 1.95
  6. None of the above.

 

Please refer to the financial information for Squamish Equipment above. Calculate Squamish’s earnings per share next year assuming Squamish raises $40 million of new debt at an interest rate of 7 percent.

  1. 1.28
  2. 2.00
  3. 2.12
  4. 2.22
  5. 3.06
  6. None of the above.

 

Which of the following is NOT an important step in the financial evaluation of an investment opportunity?

  1. Calculate a figure of merit for the investment.
  2. Estimate the accounting rate of return for the investment.
  3. Estimate the relevant cash flows.
  4. Compare the figure of merit to an acceptance criterion.
  5. All of the above are important steps.

 

Which of the following figures of merit might not use all possible cash flows in its calculations?

 

  1. Payback period
  2. Internal rate of return

III. Net present value (NPV)

  1. Benefit-cost ratio
  2. III only
  3. I & III only
  4. II & III only
  5. I only
  6. III & IV only
  7. I, II, III, and IV

 

Which of the following figures of merit does not directly take into consideration the time value of money?

 

  1. Payback period
  2. Internal rate of return

III. Net present value (NPV)

  1. Accounting rate of return

 

  1. IV only
  2. I & III only
  3. II & III only
  4. I & II only
  5. I & IV only
  6. I, II, III, and IV

 

Ian is going to receive $20,000 six years from now. Sunny is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Ian and Sunny apply a 7 percent discount rate to these amounts?

  1. The present values of Ian and Sunny’s monies are equal.
  2. In future dollars, Sunny’s money is worth more than Ian’s money.
  3. In today’s dollars, Ian’s money is worth more than Sunny’s.
  4. Twenty years from now, the value of Ian’s money will be equal to the value of Sunny’s money
  5. Sunny’s money is worth more than Ian’s money given the 7 percent discount rate.
  6. None of the above.

 

Which of the following is NOT a reason why a dollar today is worth more than a dollar in the future?

  1. Inflation reduces the purchasing power of future dollars.
  2. The value of a dollar in the future will be compounded more than the value of a dollar today.
  3. There is more uncertainty of receiving dollars further into the future.
  4. A dollar today can be productively invested in the time before receiving a dollar in the future.

 

You plan to buy a new Mercedes four years from now. Today, a comparable car costs $82,500. You expect the price of the car to increase by an average of 4.8 percent per year over the next four years. How much will your dream car cost by the time you are ready to buy it?

  1. $98,340.00
  2. $98,666.67
  3. $99,517.41
  4. $99,818.02
  5. $100,023.16
  6. None of the above.

 

Future value = $82,500 × (1 + 0.048)4 = $99,517.41

Your grandmother invested a lump sum 26 years ago at 4.25 percent interest. Today, she gave you the proceeds of that investment which totaled $51,480.79. How much did she originally invest?

  1. $15,929.47
  2. $16,500.00
  3. $17,444.86
  4. $17,500.00
  5. $17,999.45
  6. None of the above.

 

Present value = $51,480.79/(1 + 0.0425)26 = $17,444.86

Naomi plans on saving $3,000 a year and expects to earn an annual rate of 10.25 percent. How much will she have in her account at the end of 45 years?

  1. $1,806,429
  2. $1,838,369
  3. $2,211,407
  4. $2,333,572
  5. $2,508,316

 

You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. You can earn a 6 percent annual rate on your money, compounded monthly. Which option should you take and why?

  1. You should accept the monthly payments because they are worth $209,414 to you.
  2. You should accept the $200,000 lump sum because the monthly payments are only worth $16,057 to you today.
  3. You should accept the monthly payments because they are worth $336,000 to you.
  4. You should accept the $200,000 lump sum because the monthly payments are only worth $189,311 to you today.
  5. You should accept the $200,000 lump sum because the monthly payments are only worth $195,413 to you today.
  6. None of the above.

 

The number of monthly periods = 20 × 12 = 240

The monthly interest rate = 6%/12 = 0.5%

Your brother will borrow $17,800 to buy a car. The terms of the loan call for monthly payments for 5 years at an 8.6 percent annual interest rate, compounded monthly. What is the amount of each payment?

  1. $287.71
  2. $296.67
  3. $301.12
  4. $342.76
  5. $366.05

 

The number of monthly periods = 5 × 12 = 60

The monthly interest rate = 8.6%/12 = 0.71667%

EAC Nutrition offers a 9.5 percent coupon bond with annual payments, maturing 11 years from today. Your required return is 11.2 percent. What price are you willing to pay for this bond if the face (or par) value is $1,000?

  1. $895.43
  2. $896.67
  3. $941.20
  4. $946.18
  5. $953.30

 

Price = present value of coupons and face value

Coupon payment = 0.095 × 1000 = $95 per year

A project will produce after-tax operating cash inflows of $3,200 a year for 5 years. The after-tax salvage value of the project is expected to be $2,500 in year 5. The project’s initial cost is $9,500. What is the net present value of this project if the required rate of return is 16 percent?

  1. -$311.02
  2. $2,168.02
  3. $4,650.11
  4. $9,188.98
  5. $21,168.02

 

Solve for the PV of the cash inflows, and then subtract the initial investment:

NPV = 11668.02 – 9,500 = $2,168.02

Which of the following should be included in the cash flow projections for a new product?

 

  1. Money already spent for research and development of the new product
  2. Capital expenditures for equipment to produce the new product

III. Increase in working capital needed to finance sales of the new product

  1. Interest expense on the loan used to finance the new product launch

 

  1. II and III only
  2. II and IV only
  3. I, II, and III only
  4. II, III, and IV only
  5. I, II, III, and IV

 

Pro forma free cash flows for a proposed project should:

 

  1. exclude the cost of employing existing assets that could be sold anyway.
  2. exclude interest expense.

III. include the depreciation tax shield related to the project.

  1. exclude any required increase in operating current assets.

 

  1. I and II only
  2. II and III only
  3. II and IV only
  4. I, III, and IV only
  5. I, II, III, and IV

 

Which of the following statements related to the internal rate of return (IRR) are correct?

 

  1. The IRR is the discount rate at which an investment’s NPV equals zero.
  2. An investment should be undertaken if the discount rate exceeds the IRR.

III. The IRR tends to be used more than net present value simply because its results are easier to comprehend.

  1. The IRR is the best tool available for deciding between mutually exclusive investments.

 

  1. I and II only
  2. I and III only
  3. II and III only
  4. I, II, and IV only
  5. I, II, III, and IV

 

You plan to pay $50 for a share of preferred stock that pays a $2.40 dividend per year forever. What annual rate of return will you realize?

  1. 0.48%
  2. 2.40%
  3. 4.80%
  4. 5.10%
  5. 20.83%

 

r = A/P = $2.40/$50 = 4.80%

Sol’s Sporting Goods is expanding, and as a result expects additional operating cash flows of $26,000 a year for 4 years. This expansion requires $39,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires an additional $3,000 of net working capital throughout the life of the project; Sol expects to recover this amount at the end of the project. What is the net present value of this expansion project at a 16 percent required rate of return?

  1. $18,477.29
  2. $21,033.33
  3. $28,288.70
  4. $29,416.08
  5. $32,409.57

 

The initial investment consists of the fixed assets and incremental working capital: $39,000 + $3000 = $42,000. The working capital amount is recovered at the end of year 4. Solve for the PV of the cash inflows, and then subtract the initial investment:

 

NPV = 74,409.57 – 42,000 = $32,409.57

What is the benefit-cost ratio for an investment with the following cash flows at a 14.5 percent required return?

YEAR CASH FLOW

0 $(46,500)

1 $12,200

2 $38,400

3 $11,300

 

  1. 0.94
  2. 0.98
  3. 1.02
  4. 1.06
  5. 1.11

 

PVinflows = (12,200/1.145) + (38,400/1.1452) + (11,300/1.1453) = $47,472.78

BCR = $47,472.78/$46,500 = 1.02

When making a capital budgeting decision, which of the following is/are NOT relevant?

 

  1. The size of a cash flow.
  2. The risk of a cash flow.

III. The accounting earnings from a cash flow.

  1. The timing of a cash flow.

 

  1. I only
  2. II only
  3. III only
  4. II and III only
  5. III and IV only
  6. They are all relevant.

 

Giant Corp. is considering a project that requires a $1,500 initial cost for a new machine that will be depreciated straight line to a salvage value of 0 on a 5-year schedule. The project will require a one-time increase in the level of net working capital of $300. The project will generate an additional $1,600 in revenues and $700 in operating expenses each year. The project will end at the end of year 2, at which time the machinery is expected to be sold for $800. Giant’s tax rate is 50%. In a discounted cash flow analysis of this project, what would be the projected Year 0 free cash flow?

 

 

  1. -$1,200
  2. -$1,500
  3. -$1,800
  4. -$2,100

 

In a discounted cash flow analysis of Giant Corp.’s project described in the problem above, what would be the projected Year 1 free cash flow?

  1. $300
  2. $600
  3. $750
  4. $900

 

In a discounted cash flow analysis of Giant Corp.’s project described in the problem above, what would be the projected Year 2 free cash flow?

  1. $1,300
  2. $1,450
  3. $1,700
  4. $1,750

 

A divisional manager submitted a project proposal to the chief financial officer, complete with a calculated NPV for the project. The chief financial officer studied the proposal and pointed out that the divisional manager had failed to account for a one-time increase in net working capital of $60,000 that will be required over the life of the seven-year project. Assuming the full value of net working capital will be recovered at the end of the project, how will the project’s NPV change after making the chief financial officer’s adjustment? Assume a discount rate of 9%.

  1. The NPV will decrease by $16,411.
  2. The NPV will decrease by $32,822.
  3. The NPV will decrease by $60,000.
  4. The NPV will not be affected.
  5. None of the above.

 

In Year 0 there is a $60,000 outflow.

In Year 5 there is a $60,000 inflow, which has a present value of 60,000/1.097 = $32,822.

The decrease in NPV is 60,000 – 32,822 = $27,178.

You are to receive an annuity of $1,000 per year for 10 years. You will receive the first payment two years from today. At a discount rate of 10%, what is the present value of this annuity?

  1. $5,078.15
  2. $5,585.97
  3. $6,144.57
  4. $6,759.03

 

The PV = $6,144.57. But the first payment is received in two years, not one year, so discount the PV by one more year: 6,144.57/1.1 = $5,585.97

What is the difference in the value of a $5,000 annual perpetuity and an annuity of $5,000 for 100 years? Assume that the discount rate is 8% and that cash flows are received at the end of the year.

  1. $28
  2. $656
  3. $1,656
  4. $5,000

 

The present value of the perpetuity is 5,000/0.08 = $62,500. For the annuity:

 

The difference = 62,500 – 62,472 = $28