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Final for Business Finance 360 (MSU)
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Terms in this set (96)
Which of the following statements about forms of business organizations is true?
The primary advantages of a limited liability company are the means of taxation and the limits on the liabilities assumed by the owners.
Conveys Auto has shareholders' equity of $25,370. The firm owes a total of $14,700 of which 60 percent is payable within the next year. The firm net fixed assets of $32,490. What is the amount of the net working capital?
-$1,240
Firm A has a price-earnings ratio of 15. Firm B also has a price-earnings ration of 15. Which one of the following statements must be true is Firm A has a higher PEG ration than Firm B?
Firm B is increasing its earnings at a faster rate than Firm A.
Which of the following statements is true?
All else constant, the present value will increase as the period of time decreases, given an interest rate greater than zero.
You wish to retire in 30 years, at which time you want to have accumulated enough money to receive an annuity of $50,000 for 20 years after retirement. If you thing you can earn 9% annually, what annual contributions to the retirement fund will allow you to the $50,000 annuity?
$3,348.51
Why should financial managers strive to maximize the current value per share of the existing stock?
because they have been hired to represent the interests of the current shareholders.
In 2015, TSM Corporation has the sales of $10,205,700, the net income of $2,487,000, the depreciation expense of $174,100, the preferred stock dividends paid of $502,400, and the common stock dividends paid of $1,989,600. What is the net increase (or decrease) in cash flows for TSM?
-$3,011,600
When a firm increases its inventory turnover rate, it has to be:
selling its inventory in less days, regardless of the level of total sales for the year.
At 12 percent interest, how long would it take to quadruple your money?
12.23 years
Which of the following statements is false?
An increase in the amount of an annuity payment will decrease the present value of the annuity?
Which one of the following statements is correct concerning a corporation with taxable income of $125,000?
An increase in depreciation will increase the operating cash flow.
Which one of the following will cause the sustainable growth rate to equal to internal growth rate?
equity multiple of 1.0
A college football coach has just signed a five-year contract that requires a salary of $400,000 in each of the first three years and $500,000 in the latter two years. Assuming the current interest rate is 5%, what is the present value of coach's contract>
$1,892,414
Atlantis Insurance wants to sell you an annuity which will pay you $1,600 per quarter for 25 years. You want to earn a minimum rate of return of 6%. What is the most you are willing to pay as a lump sum today to buy this annuity?
$82,599.53
All else constant, net working capital increases when
a company sells shares and uses the funds to increase the inventory level.
Which one of the following statements concerning financial statement analysis is correct?
The Du Pont identity provides a measure of a firm's operating efficiency, asset use efficiency, and financial leverage.
You invested $1,450 in an account that pays 5% simple interest. How much more could you have earned over a 20-year period if the interest had compounded annually?
$947.28
Vandelay Industries is borrowing $100,000 to expand his business. The loan will be for 10 years at 12% and will be repaid in equal quarterly installments. What will the principal outstanding be after the first quarterly payment?
$98,673.76
Which one of the following statements is correct?
Long-term creditors would prefer the times interest earned ration be 1.4 rather than 1.3.
If you borrow $16,168 and are required to pay back the loan in seven equal annual installments of $3,000, what is the interest rate associated with the loan?
7%
A financially wise individual would prefer a loan based on ________ interest and an investment earning ________ interest.
Simple; Compound
Your credit card company quotes you a rate of 19.5%. Interest is billed monthly. What is the actual rate of interest you are paying?
21.34%
Kramerica Industries (KI) net income for 2015 is
$61,096
Kramerica Industries (KI) retained earnings for 2015 is
$135,492
Kramerica Industries (KI) cash flow from assets for 2015 is
$9,422
Kramerica Industries (KI)'s cash flow to creditors for 2015 is
$4,096
Kramerica Industries (KI)'s cash flow to stockholders for 2015 is
$5,326
Kramerica Industries (KI)'s internal growth rate for 2015 is
7.09%
Kramerica Industries (KI)'s current ratio for 2015 is
2.16
Kramerica Industries (KI)'s days' sales in inventory for 2015 is
20.83
Kramerica Industries (KI)'s profit margin for 2015 is
10.81%
Kramerica Industries (KI)'s equity multiplier for 2015 is
1.63
If Kramerica Industries (KI) has 10,000 shares outstanding and the stock is sold for $98.25 per share at the end of 2015, its PE ratio is
16.08
Kramerica Industries (KI)'s quick ratio for 2015 is
1.31
If Kramerica Industries (KI) has 10,000 shares outstanding and the stock is sold for $98.25 per share at the end of 2015, its market-to-book ratio is
3.44
Kramerica Industries (KI)'s total asset turnover for 2015 is
1.22
Kramerica Industries (KI)'s sustainable growth rate for 2015 is
12.08%
Kramerica Industries (KI)'s days' sales in receivables for 2015 is
13.63 days
Kramerica Industries (KI)'s total debt ratio for 2015 is
38.53%
Kramerica Industries (KI)'s times interest earned ratio for 2015 is
5.80
A Vandelay Industries bond has a 10% coupon rate and a $1,000 face value. Interest is paid semiannually, and the bond has 20 years to maturity. If investors require a 12% yield, what is the bond's value?
$849.54
Jen owes 30 shares of stock in Delta Fashions and wants to win a seat on the board of directors. The firm has a total of 100 shares of stock outstanding. Each share receives one vote. Presently, the company is voting to elect three new directors. Which one of the following statements must be true given this information?
If cumulative voting applies, Jen is assured one seat on the board.
Which one of the following will increase the rate of return for a security assuming the security continues to plot on the security market line?
an increase in the market risk-to-reward ratio
Hacker's Corporation's stock produced returns of 15%, 26%, 7%, -13%, and 11% last five years. What is the arithmetic average return and the standard deviation of the stock's returns for the period?
arithmetic average return = 9.20%; standard deviation = 14.29%
Following Question 44, suppose the current T-bill rate is 0.2%. What is the risk premium of owing Hacker Corporation's stock?
9%
Following Question 44, what range of returns would you expect to see 68% of the time?
(-5.09%, 23.49%)
Following Question 44, what is the geometric average return?
8.41%
Which of the following statements is false concerning the term structure of interest rates?
If interest rates are expected to increase in the future, the graph depicting the term structure of interest rates will be downward-sloping.
A common stock is selling for $50. The dividend paid next year will be $4.40 assuming a constant growth rate of 3.4%. What is the capital gains yield?
3.4%
The historical record for the period 1926-2013 supports which one of the following statements?
It is possible for small-company stocks to more than double in value in any one given year.
Stock A has a beta of 0.5 and has the same reward-to-risk ratio as stock B. Stock B has a beta of 1.3 and an expected return of 18.5%. What is the expected return on Stock A if the risk-free rate is 8%?
12.04%
Merton Enterprise has bonds with face value of $1,000 on the market making semiannual payments, with 10 years to maturity, and selling for $1,223.47. At this price, the bonds yield 6%. What is the coupon rate on Merton's bonds?
9%
Which one of the following comparisons between debt and equity is correct?
The stockholders are the firm's owners but have a lower claim to firm's assets than do the creditors.
Which one of the following statements is false?
The lower the average return, the greater the risk premium.
Suppose you have $10,000 total. If you put $4,000 in Stock A and the remainder in Stock B, what will the expected return on your portfolio?
12.40%
Following Question 55, what will be the standard deviation on your portfolio?
5.50%
Which of the following statements is true?
Given a change in market interest rate, longer term bonds have greater price change than shorter term bonds.
The Hugh Co. expects to pay a cash dividend of $2.50 per share next year. Investors require a 14% return from investments such as this. If the dividend is expected to grown at a steady 5% per year, what will the stock be worth in four years?
$33.76
If a group of securities are each correctly priced, then the reward-to-risk ratio:
of each security is equal to the slope of the security market line.
Suppose you bought a 10% coupon bond one year ago for $940. The face value of the bond is $1,000. The bond sells for $980 today. If the inflation rate last year was 8%, what was your total real rate of return on this investment?
6.38%
Which of the following statements is true?
An increase in an unrealized capital gain will increase the capital gains yield.
The common stock of ABC Homes has an expected return of 13.6% and a beta of 0.7. The expected return on the market portfolio is 16%. What is the risk-free rate?
8.0%
The principle of diversification tells us that:
spreading an investment across many diverse assets will eliminate some of the total risk.
DBA Corp. has a bond outstanding that sells for 105% of it's $1,000 par value. The bond has a coupon rate of 5.3% paid semiannually and matures in 18 years. What is the yield to maturity of this bond?
4.88%
Morain, Inc., has an issue of preferred stock outstanding that pays a $3.50 dividend every year in perpetuity. If this issue currently sells for $85 per share, what is the required rate of return?
4.12%
Which one of the following is an example of systematic risk?
investors panic causing security prices around the globe to fall precipitously
You have $10,000 to invest in a stock portfolio. Your choices are Stock A with an expected return of 12% and Stock B with an expected return of 9.5%. If your goal is to create a portfolio with an expected return of 11.1%, how much money will you invest in Stock A? In Stock B?
A: $6,400; B: $3,600
Which one of the following statements is correct concerning market efficiency?
A firm will generally receive a fair price when it issues new shares of stock.
The perfect Rose Co. has earnings of $2.35 per share. The benchmark PE for the company is 21. What stock price would you consider appropriate?
$49.35
A firm jut paid a dividend of $2. The dividend is expected to grown at a 20% rate for the next 3 years and a 8% rate thereafter. What is the value of the stock if the required rate of return is 16%?
$36.31
Kentucky Hardware Company (KHC) is considering an investment project that requires a new machine for producing special tools. This new machine costs $1,000,000 and will be depreciated over 10 years on a straight-line basis toward zero salvage value. KHC paid a consulting company $50,000 last year to help them decide whether there is sufficient demand for the special tools. In addition to the investment on the machine, KHC also invests $30,000 in net working capital but decides NOT to recoup the net working capital at the end of the investment project. The company pays $45,000 in interest expenses annually. KHC has estimated the performance of the new machine and believes that the new machine will produce $350,000 per year in sales, $130,000 per year in cost of goods sold, and $25,000 per year in administrative expenses.
In order to get an estimate of cost of capital, KHC collect the following information. KHC has 310,000 shares of common stock outstanding, 15,000 shares of preferred stock outstanding, and 8,000 issues of corporate bond outstanding. The bonds have face value $1,000 and coupon rate 6%. The bonds make semiannual coupon payments, have 25 years to maturity, and sell for 131.472% of par. The common stock sells for $56 per share and has a beta of 1.05. KHC's next common stock dividend is expected to be $2.80 per share, and the common stock dividend is expected to grow at 7.7% indefinitely. The preferred stock sells for $72 per share and pays $4.5 annual dividend. The market risk premium is 8%, T-bills are yielding 4.5%, and KHC's tax rate is 25%.
Use the above information to answer Questions 1 - 17.
How much money does KHC need to spend to start the investment project (i.e., project cash flow at time 0)?
$1,030,000
Should KHC include consulting fee, $50,000, in estimating project's cash flows?
No.
Should KHC include interest expenses, $45,000, in estimating project's cash flows?
No.
What is the annual project cash flow expected to be generated from the investment project (i.e., project cash flow at time 1 -10)?
$171,250
What is the cost of preferred stock for KHC?
6.25%
What is the after-tax cost of debt for KHC?
3%
What is the cost of equity for KHC by using the capital asset pricing model?
12.9%
What is the cost of equity for KHC by using the dividend growth model?
12.7%
What is the KHC's market value capital structure?
$28,957,760
What is the weighted average cost of capital for KHC?
9%
What is the payback period for the investment project?
6.01 years
What is the net present value for the investment project?
$69,023.88
What is the internal rate of return for the investment project?
10.5%
What is the provability index for the project?
1.07
Should KHC accept the project?
Yes because the net present value is positive.
What is the maximum price that KHC has to pay if the target profitability index is 1.2?
$915,853.23
What is the minimum annual cash flow that project has to generate in order to accept the project?
$160,494.69
Highfield Co. is considering a project that will require an initial cash outlay of $78,120 today. The project has a five-year life and will generate cash flows of $20,608 every year for next five years. The required rate of return is 15%. What is the payback period?
3.7908
Given the information in Question 88, what is the net present value?
-$9,038.79
Given the information in Question 88, what is the internal rate of return?
10%
Given the information in Question 88, what is the profitability index?
0.8843
Given the information in Question 88, what is the maximum price that Highfield has to pay if the target profitability index is 1.2?
$57, 567.68
Given the information in Question 88, what is the minimum annual cash flow that project has to generate in order to accept the project?
$23,304.41
The British pound trades at $1.9735 in London and $1.9684 in New York. How much profit could you earn on each trade with $10,000? Please show work.
You could buy Pounds at New York and sell them at London.
Amount of Pounds you can buy at NY with $10,000 = 10000/1.9684 = 5080.27 Pounds.
If we sell them in London, we'll dollars that we'll get back = 5080.27 * 1.9735 = $10025.91
Therefore Profit = 10025.91 - 10000 = $25.91, on each trade
The inflation rate in the U.S. is projected at 6% per year for the next several years. The Australian inflation rate is projected to be 2% during that time. The exchange rate is currently A$2.2. Based on relative purchasing power parity, what is the expected exchange rate in two years?
A$2.03
If the interest rate in the Japan is 5%, the interest rate in the U.S. is 10%, the spot exchange rate is 120 Japanese yens per U.S. dollar, what must be the forward exchange rate to prevent covered interest arbitrage?
114.55 Japanese yens
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