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Fin 480 test practice

Terms in this set (110)

A firm has sales of $1,310, net income of $241, net fixed assets of $501, and current assets of $301. The firm has $97 in inventory. What is the common-size statement value of inventory?
12.1 percent
12.1 percent
Common-size inventory = $97/($501 + $301) = 12.1 percent
What is the quick ratio for 2009?
.80
Quick ratio for 2009 = ($2,450 - $1,530)/$1,150 = 0.8
What is the debt-equity ratio for 2009?
.38
Debt-equity ratio = ($1,240 + $500)/($3,356 + $1,224) = 0.38
Reliable Cars has sales of $3,830, total assets of $3,150, and a profit margin of 5 percent. The firm has a total debt ratio of 41 percent. What is the return on equity?
10.30 percent
Return on equity = (0.05 x $3,830)/[$3,150 x (1 - .41)] = 10.3 percent
What is the return on equity for 2009?
15 percent
Return on equity = $547/($2,930 + $766) = 15 percent
The Purple Martin has annual sales of $4,500, total debt of $1,240, total equity of $2,400, and a profit margin of 6 percent. What is the return on assets?
7.42 percent
Return on assets = (0.06 x $4,500)/($1,240 + $2,400) = 7.42 percent
Jessica's Boutique has cash of $54, accounts receivable of $64, accounts payable of $200, and inventory of $160. What is the value of the quick ratio?
.59
Quick ratio = ($54 + $64)/$200 = 0.59
A firm has net working capital of $452, net fixed assets of $2,209, sales of $6,000, and current liabilities of $800. How many dollars worth of sales are generated from every $1 in total assets?
$1.73
Total asset turnover = $6,000/($452 + $2,209 + $800) = 1.73
The higher the inventory turnover, the:
less time inventory items remain on the shelf.
A capital intensity ratio of 1.03 means a firm has $1.03 in:
total assets for every $1 in sales.
Which one of the following is a liquidity ratio?
quick ratio
Which one of the following statements is correct if a firm has a receivables turnover of 10?
The firm collects on its sales in an average of 36.5 days.
From a cash flow position, which one of the following ratios best measures a firm's ability to pay the interest on its debts?
cash coverage ratio
The profitability index:
is useful as a decision tool when investment funds are limited and all available funds are allocated.
How should a profitability index of zero be interpreted?
The project's cash flows subsequent to the initial cash flow have a present value of zero.
Project A is opening a bakery at 10 Center Street. Project B is opening a specialty coffee shop at the same address. Both projects have unconventional cash flows, that is, both projects have positive and negative cash flows that occur following the initial investment. When trying to decide which project to accept, given sufficient funding to accept either, you should rely most heavily on the _____ method of analysis.
net present value
You are considering a project with the following data: Internal rate of return 8.7% Profitability ratio .98 Net present value −$393 Payback period 2.44 years Required return 9.5% Which one of the following is correct given this information?
This project should be rejected based on the internal rate of return.
Comparing the NPV profile of an investment project to that of a financing project demonstrates why the:
IRR decision rule for investment projects is the opposite of the rule for financing projects.
Which one of the following is the best example of two mutually exclusive projects?
renting out a company warehouse or selling it outright
The discounted payback rule may cause:
some positive net present value projects to be rejected.
For investment projects, the internal rate of return (IRR):
is the rate generated solely by the cash flows of the investment.
Bernie's Beverages purchased some fixed assets classified as 5-year property for MACRS. The assets cost $26,000. What will the accumulated depreciation be at the end of year three?
MACRS 5-year property
Year Rate
1 20.00%
2 32.00%
3 19.20%
4 11.52%
5 11.52%
6 5.76%
$18,512
Depreciation = $26,000 x (0.20 + 0.32 + 0.192) = $18,512
The Beach House has sales of $780,000 and a profit margin of 6 percent. The annual depreciation expense is $80,000. What is the amount of the operating cash flow if the company has no long-term debt?
$126,800
OCF = ($780,000 x 0.06) + $80,000 = $126,800
Edward's Manufactured Homes purchased some machinery 2 years ago for $51,000. The assets are classified as 5-year property for MACRS. The company is replacing this machinery today with newer machines that utilize the latest in technology. The old machines are being sold for $16,000 to a foreign firm for use in its production facility in South America. What is the aftertax salvage value from this sale if the tax rate is 34 percent?
MACRS 5-year property
Year Rate
1 20.00%
2 32.00%
3 19.20%
4 11.52%
5 11.52%
6 5.76%
$18,883.20
Book value2 = $51,000 x (1 - 0.20 - 0.32) = $24,480.00
Tax on sale = ($16,000 - $24,480.00) x .34 = -$2,883.20
Aftertax cash flow = $16,000 + $2,883.20 = $18,883.20
Camille's Café is considering a project that will not produce any sales but will decrease cash expenses by $12,000. If the project is implemented, taxes will increase from $23,000 to $24,500 and depreciation will increase from $4,000 to $5,500. What is the amount of the operating cash flow using the top-down approach?
$10,500
OCF = $0 ?(?$12,000) - ($24,500 ?23,000) = $10,500
Assume a firm has no interest expense or extraordinary items. Given this, the operating cash flow can be computed as:
Net income + Depreciation.
Ben's Border Café is considering a project that will produce sales of $16,000 and increase cash expenses by $10,000. If the project is implemented, taxes will increase from $23,000 to $24,500 and depreciation will increase from $4,000 to $5,500. What is the amount of the operating cash flow using the top-down approach?
$4,500
OCF = $16,000 ?10,000 ?($24,500 ?23,000) = $4,500
The equivalent annual cost method is useful in determining:
which one of two machines to purchase when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out.
Peter's Boats has sales of $760,000 and a profit margin of 5 percent. The annual depreciation expense is $80,000. What is the amount of the operating cash flow if the company has no long-term debt?
$118,000
OCF = ($760,000 �.05) + $80,000 = $118,000
Jamie's Motor Home Sales currently sells 1,100 Class A motor homes, 2,200 Class C motor homes, and 2,800 pop-up trailers each year. Jamie is considering adding a mid-range camper and expects that if she does so she can sell 1,500 of them. However, if the new camper is added, Jamie expects that her Class A sales will decline to 850 units while the Class C camper sales decline to 2,000. The sales of pop-ups will not be affected. Class A motor homes sell for an average of $140,000 each. Class C homes are priced at $59,500 and the pop-ups sell for $5,000 each. The new mid-range camper will sell for $42,900. What is the erosion cost of adding the mid-range camper?
$46,900,000
Erosion cost = [(1,100 ?850) �$140,000] + [(2,200 ?2,000) �$59,500] = $46,900,000
Ronnie's Coffee House is considering a project which will produce sales of $6,000 and increase cash expenses by $2,500. If the project is implemented, taxes will increase by $1,300. The additional depreciation expense will be $1,000. An initial cash outlay of $2,000 is required for net working capital. What is the amount of the operating cash flow using the top-down approach?
$2,200
OCF = $6,000 ?2,500 ?1,300 = $2,200
Walks Softly sells customized shoes. Currently, it sells 14,800 pairs of shoes annually at an average price of $59 a pair. It is considering adding a lower-priced line of shoes that will be priced at $39 a pair. Walks Softly estimates it can sell 6,000 pairs of the lower-priced shoes but will sell 3,500 less pairs of the higher-priced shoes by doing so. What annual sales revenue should be used when evaluating the addition of the lower-priced shoes?
$27,500
Sales = (6,000 �$39) + (?3,500 � $59) = $27,500
Wexford Industrial Supply is considering a new project with estimated depreciation of $33,000, fixed costs of $35,000, and total sales of $75,000. The variable costs per unit are estimated at $5.00. What is the accounting break-even level of production?
1,400 units
Qaccounting break even = $35,000 + $33,000 = $75,000 - ($5.00 × Q)
Stellar Plastics is analyzing a proposed project. The company expects to sell 11,000 units, give or take 4 percent. The expected variable cost per unit is $7.00 and the expected fixed cost is $36,000. The fixed and variable cost estimates are considered accurate within a plus or minus 4 percent range. The depreciation expense is $33,000. The tax rate is 34 percent. The sale price is estimated at $16.00 a unit, give or take 3 percent.
What is the operating cash flow for a sensitivity analysis using total fixed costs of $32,000?
$55,440.00
OCF = [(11,000 x ($16.00 - $7.00)] - $32,000][1- .34] +($33,000 x .34) = $55,440.00
Including the option to expand in your project analysis will tend to:
increase the net present value of a project.
Fixed costs for a new project:
will remain constant on a per unit basis over a given range of output.
Which one of the following statements is correct?
At the accounting break-even level, the pretax profit is equal to the aftertax profit.
Utilizing a decision tree, the NPV used to make the decision to commence the testing for a project is dependent on:
all project cash flows and probabilities over the project's entire life.
Which one of the following statements is correct when a project is operating at its financial break-even point?
The present value of the cash flows subsequent to the initial cash flow equals the amount of the initial investment.
The investment timing decision relates to:
when a project should commence.
In order to make a decision utilizing a decision tree, you must:
start at the most distant point in time and work backwards to Time 0.
All else equal, the contribution margin must increase as:
the variable cost per unit declines.
The yield to maturity on a bond is currently 7.75 percent. The real rate of return is 3.70 percent. What is the rate of inflation?
3.91 percent r= 1.0775/1.037 -1 = 3.91%
Oil Well Supply offers a 8 percent coupon bond with semiannual payments and a yield to maturity of 8.73 percent. The bonds mature in 9 years. What is the market price per bond if the face value is $1,000?
$955.13

Enter 9 × 2 8.73/2 80/2 1,000
N I/Y PV PMT FV
Solve for -955.13
A bond that pays interest annually yielded 6.75 percent last year. The inflation rate for the same period was 5.80 percent. What was the actual real rate of return on this bond for last year?
.90 percent (1.0675)/1.058 -1 = .9%
The outstanding bonds of Winter Time Products provide a real rate of return of 3.30 percent. The current rate of inflation is 2.30 percent. What is the nominal rate of return on these bonds?
5.68 percent
(1 + 0.033) x (1 + 0.023) - 1 = 5.68 percent
Northern Warehouses wants to raise $12 million to expand its business. To accomplish this, it plans to sell 35-year, $1,000 face value zero-coupon bonds. The bonds will be priced to yield 5 percent. What is the minimum number of bonds it must sell to raise the $12 million it needs?
67,585
PV= 1000/(1+ (.05/2))^35x2= 177.553576
Number 12000000/177.553576= 67585
Which one of these bonds is the most interest-rate sensitive?
10-year zero coupon bond
The market price of a bond increases when the:
discount rate decreases.
Rosina purchased a 15-year bond at par value when it was initially issued. The bond has a coupon rate of 7 percent and matures 13 years from now. If the current market rate for this type and quality of bond is 7.5 percent, then Rosina should expect:
to realize a capital loss if she sold the bond at today's market price.
A zero coupon bond:
has a market price that is computed using semiannual compounding of interest
Aspens is preparing a bond offering with a coupon rate of 5.5 percent. The bonds will be repaid in 10 years. The company plans to issue the bonds at par value and pay interest semiannually. Which one of the following statements is correct?
At issuance, the bond's yield to maturity is 5.5 percent.
All else constant, a coupon bond that is selling at a premium, must have:
a yield to maturity that is less than the coupon rate.
A par value bond offers a coupon rate of 7 percent with semiannual interest payments. The effective annual rate provided by these bonds must be:
greater than 7 percent but less than 8 percent.
Combined Communications is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 23 percent a year for the next 4 years and then decreasing the growth rate to 5 percent per year. The company just paid its annual dividend in the amount of $1.30 per share. What is the current value of one share of this stock if the required rate of return is 9.00 percent?
$62.43
P4= 1.3 x (1.023)^4 x (1.05) / .09-.05 = 78.11
CF0= 0 CF1= 1.3x(1.023) CF2= 1.3x(1.023)^2 CF3= 1.3x(1.023)^3 CF4= 1.3x(1.023)^4 + 78.11
Winter Time Adventures is going to pay an annual dividend of $3.22 a share on its common stock next week. This year, the company paid a dividend of $3.10 a share. The company adheres to a constant rate of growth dividend policy. What will one share of this common stock be worth 11 years from now if the applicable discount rate is 8.0 percent?
$118.43
G= (3.33-3.2)/3.1 g=.03871
P11= 3.22 x (1.03871)^11 / .08=.03871= 118.43
The common stock of Auto Deliveries sells for $27.71 a share. The stock is expected to pay $2.10 per share next month when the annual dividend is distributed. Auto Deliveries has established a pattern of increasing its dividends by 4.5 percent annually and expects to continue doing so. What is the market rate of return on this stock?
12.08 percent
27.71 = 2.1/ (R-.045)
Roy's Welding Supplies common stock sells for $22 a share and pays an annual dividend that increases by 6 percent annually. The market rate of return on this stock is 9 percent. What is the amount of the last dividend paid?
$0.62
22= D0 x (1.06)/ .09-.03
Latcher's is a relatively new firm that is still in a period of rapid development. The company plans on retaining all of its earnings for the next six years. Seven years from now, the company projects paying an annual dividend of $.25 a share and then increasing that amount by 3 percent annually thereafter. To value this stock as of today, you would most likely determine the value of the stock _____ years from today before determining today's value.
6
Assume you are using the dividend growth model to value stocks. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect the:
market values of all stocks to decrease.
Al's Sport Store has sales of $2,750, costs of goods sold of $2,090, inventory of $536, and accounts receivable of $441. How many days, on average, does it take the firm to sell its inventory assuming that all sales are on credit?
93.6
Inventory turnover = $2,090/$536 = 3.8993 Days in inventory = 365/3.8993 = 93.61 days
A firm has a debt-equity ratio of .44. What is the total debt ratio?
.31
The debt-equity ratio is 0.44. If total debt is $44 and total equity is $100, then total assets are $144. Total debt ratio = $44/$144 = 0.31.
A firm has total debt of $1,060 and a debt-equity ratio of .27. What is the value of the total assets?
$4,986
Total equity = $1,060 / .27 = $3,926

Total assets = $1,060 + $3,926= $4,986
What is the days' sales in receivables? (use 2009 values)
33.1
Accounts receivable turnover for 2009 = $8,500/$770 = 11.04
Days' sales in receivables for 2009 = 365/11.04 = 33.06
A firm has a total debt ratio of .47. This means the firm has 47 cents in debt for every
$.53 in total equity.
The external funds needed (EFN) equation projects the addition to retained earnings as:
PM × Projected sales × (1 - d).
If stockholders want to know how much profit the firm is making on their entire investment in that firm, the stockholders should refer to the:
return on equity.
Which of the following methods of project analysis are biased towards short-term projects?
discounted payback and payback
Matt is analyzing two mutually exclusive projects of similar size. Both projects have 5-year lives. Project A has an NPV of $18,389, a payback period of 2.38 years, an IRR of 15.9 percent, and a discount rate of 13.6 percent. Project B has an NPV of $19,748, a payback period of 2.69 years, an IRR of 13.4 percent, and a discount rate of 12.8 percent. He can afford to fund either project, but not both. Matt should accept:
Project B based on its NPV.
If a project is assigned a required rate of return of zero, then:
the timing of the project's cash flows has no bearing on the value of the project.
Kelly's Corner Bakery purchased a lot in Oil City five years ago at a cost of $580,000. Today, that lot has a market value of $830,000. At the time of the purchase, the company spent $41,000 to level the lot and another $4,900 to install storm drains. The company now wants to build a new facility on that site. The building cost is estimated at $1,000,000. What amount should be used as the initial cash flow for this project?
$-1,830,000
CF0 = -$830,000 - $1,000,000 = -$1,830,000
Kurt's Cabinets is looking at a project that will require $80,000 in fixed assets and another $20,000 in net working capital. The project is expected to produce sales of $110,000 with associated costs of $70,000. The project has a 4-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 35 percent. What is the operating cash flow for this project?
$33,000
OCF = ($110,000 - 70,000) � (1 ?.35) + ($80,000 / 4) � .35 = $33,000
Toni's Tools is comparing machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs, differing machine lives, and will be replaced when worn out. These machines should be compared using:
their equivalent annual costs.
. Ernie's Electrical is evaluating a project which will increase sales by $50,000 and costs by $30,000. The project will cost $150,000 and will be depreciated straight-line to a zero book value over the 10-year life of the project. The applicable tax rate is 34 percent. What is the operating cash flow for this project?
$18,300
OCF = ($50,000 - 30,000) � (1 ?.34) + ($150,000 / 10) � .34 = $18,300
The By-Way has sales of $435,000, costs of $254,000, depreciation of $35,000, interest expense of $22,000, and taxes of $43,400. What is the amount of the operating cash flow?
$137,600
OCF = $435,000 - 254,000 - 43,400 = $137,600
Miller Mfg. is analyzing a proposed project. The company expects to sell 11,000 units, give or take 3 percent. The expected variable cost per unit is $6.00 and the expected fixed cost is $35,000. The fixed and variable cost estimates are considered accurate within a plus or minus 6 percent range. The depreciation expense is $29,000. The tax rate is 34 percent. The sale price is estimated at $14.00 a unit, give or take 4 percent.
What is the earnings before interest and taxes under the base case scenario?
$24,000
EBIT for base case = [11,000 x ($14.00 - $6.00)] - $35,000 - $29,000 = $24,000
All else constant, as the variable cost per unit for a project increases, the:
contribution margin decreases.
Simulation analysis is based on assigning a _____ and analyzing the results.
wide range of values to multiple variables simultaneously
As the degree of sensitivity of a project to a single variable rises, the:
more attention management should place on accurately forecasting that variable.
All else constant, the accounting break-even level of sales will decrease when the:.
depreciation expense decreases.
Redesigned Computers has 8 percent coupon bonds outstanding with a current market price of $879.64. The yield to maturity is 9.34 percent and the face value is $1,000. Interest is paid semiannually. How many years is it until this bond matures?
20 years
Enter 9.34/2 -879.64 80/2 1,000
N I/Y PV PMT FV
Solve for 40

The number of six-month periods is 40. The number of years is 20 years.
A zero coupon bond with a face value of $1,000 is issued with an initial price of $475.00. The bond matures in 25 years. What is the implicit interest, in dollars, for the first year of the bond's life?
$14.36
475= 1000/ (1+ r/2)^25x2 = 3%
PV1= 1000/ (1 +.03/2)^24x2= 489.36
Implicit interest = $489.36 − $475 = $14.36
The relationship between nominal interest rates on default-free, pure discount securities and the time to maturity is called the:
term structure of interest rates.
The yield to maturity:
equals both the current yield and the coupon rate for par value bonds.
If its yield to maturity is less than its coupon rate, a bond will sell at a _____, and increases in market interest rates will:
premium; decrease this premium.
All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate.
a discount; greater than
Miller Brothers Hardware paid an annual dividend of $1.45 per share last month. Today, the company announced that future dividends will be increasing by 3.20 percent annually. If you require a 9.2 percent rate of return, how much are you willing to pay to purchase one share of this stock today?
$24.94
P0= 1.45x(1.032)/(.092-.032)
The differential growth model:
requires g2 to be less than the discount rate.
A banker considering loaning money to a firm for ten years would most likely prefer the firm have a debt ratio of _______ and a times interest earned ratio of _______.
.40 (lowest) ; 1.75 (highest)
A supplier, who requires payment within ten days, should be most concerned with which one of the following ratios when granting credit?
cash
An increase in which one of the following accounts increases a firm's current ratio without affecting its quick ratio?
inventory
The internal rate of return for a project will increase if:
the initial cost of the project can be reduced.
If a firm is more concerned about the quick return of its initial investment than it is about the amount of value created, then the firm is most apt to evaluate a capital project using the _____ method of analysis.
payback
Why do managers suggest that ignoring all cash flows following the assigned payback period is not a major flaw of the payback method of capital budgeting analysis?
If the cash flows after the required payback period are significant, managers will use their discretion to override the payback rule.
A project will increase sales by $60,000 and cash expenses by $51,000. The project will cost $40,000 and will be depreciated using straight-line depreciation to a zero book value over the 4-year life of the project. The company has a marginal tax rate of 35 percent. What is the operating cash flow of the project using the tax shield approach?
$9,350
OCF = ($60,000 - 51,000) �(1 ?.35) + ($40,000 / 4) �.35 = $9,350
Samoa's Tools has sales of $760,000 and a profit margin of 8 percent. The annual depreciation expense is $50,000. What is the amount of the operating cash flow if the company has no long-term debt?
$110,800
OCF = ($760,000 �.08) + $50,000 = $110,800
The bottom-up approach to computing the operating cash flow applies only when:
the interest expense is equal to zero.
The option to wait:
may have value even if a project currently does not.
In a decision tree, caution should be used in the analysis because:
early stage decisions are probably riskier than later stages
Grand Adventure Properties offers a 8 percent coupon bond with annual payments. The yield to maturity is 6.85 percent and the maturity date is 8 years from today. What is the market price of this bond if the face value is $1,000?
$1,069.07
Enter 8 6.85 80 1,000
N I/Y PV PMT FV
Solve for -1,069.07
A bond with a coupon rate of 6 percent that pays interest semiannually and is priced at par will have a market price of _____ and interest payments in the amount of _____ each.
$1,000; $30
Langley Enterprises pays a constant dividend of $1.40 a share. The company announced today that it will continue to do this for another 2 years after which time it will discontinue paying dividends permanently. What is one share of this stock worth today if the required rate of return is 8 percent?
$2.50
P0= 1.4/(1.08) + (1.4)/(1.08)^2
For a firm with a constant payout ratio, the dividend growth rate can be estimated as:
Return on retained earnings × Retention ratio.
The total return on a stock is equal to the:
dividend yield plus the dividend growth rate.
If a firm produces a return on assets of 15 percent and also a return on equity of 15 percent, then the firm:
has no debt of any kind.
Puffy's Pastries generates five cents of net income for every $1 in equity. Thus, Puffy's has _______ of 5 percent.
a return on equity
You are trying to determine whether to accept Project A or Project B. These projects are mutually exclusive. As part of your analysis, you should compute the incremental IRR by determining the:
internal rate of return for the differences in the cash flows of the two projects.
Champion Bakers uses specialized ovens to bake its bread. One oven costs $850,000 and lasts about 3 years before it needs to be replaced. The annual operating cost per oven is $10,000. What is the equivalent annual cost of an oven if the required rate of return is 8 percent? (Round your answer to whole dollars)
$-339,828
1 - 1
NPV = - $850,000 - $10,000 × (1+ 0.08)3 = $-875,771
0.08

1 - 1
$-875,771 = EAC × (1+ 0.08)3 ; EAC = $-339,828
Pete's Garage just purchased some equipment at a cost of $650,000. What is the proper methodology for computing the depreciation expense for Year 3 if the equipment is classified as 5-year property for MACRS? The MACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively.
$650,000 ×.192
Last week, Hansen Delivery paid its annual dividend of $1.20 per share. The company has been reducing the dividends by 12 percent each year. How much are you willing to pay to purchase stock in this company if your required rate of return is 15 percent?
$3.91
P0= 1.2 x (1+(-.12)/(.15-(-.12)
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