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1. Whichone of the following is a capital budgeting decision?
A. Decidingwhether or not to purchase a new machine for the production line
1. Whyshould financial managers strive to maximize the current value per share of theexisting stock?
A. Because they have been hired to represent theinterests of the current shareholders
1. Whichone of the following best describes the primary advantage of being a limitedpartner instead of a general partner?
1. Whichone of the following is a source of cash
A. Decreasein inventory
1. DixieSupply has total assets with a current book value of $368,900 and a currentreplacement cost of $486,200. The market value of these assets is $464,800.What is the value of Tobin’s Q?
1. Russel’sDeli has cash of $136, accounts receivable of $95, accounts payable of $210,and inventory of $409. What is the value of current ratio?
1. Netincome is $3,843 for 2012. What is the return on assets ratio for PrecisionTool for 2012?
1. LassiterIndustries has annual sales of $220,000 with 10,000 shares of stockoutstanding. The firm has a profit margin of 6 percent. The market price pershare is $26.40. What is the firm’s price-earnings ratio?
1. HungryHowie’s maintains a constant payout ratio. The firm is currently operating atfull capacity. What is the maximum rate at which the firm can grow withoutacquiring any additional external financing?
Assets,costs, and current liabilities are proportional to sales. Debt and equity arenot. The company maintains a constant 40 percent dividend payout ratio. Likeevery other firm in its industry, next year’s sales are projected to increaseby exactly 10 percent. What is the amount of external financing needed?
1. Travisinvested $9,250 in an account that pays 6% simple interest. How much more couldhe have earned over a 7-year period if the interest had compounded annually?
1. Today,you earn a salary of $36,000. What will be your annual salary twelve years fromnow if you earn annual raises of 3.6%?
1. PennStation is saving money to build a new loading platform. Two years ago, theyset aside $24,000 for this purpose. Today, that account is worth $28,399. Whatrate of interest is Penn Station earning on this investment?
1. Youare committed to owning a $140,000 Ferrari. Today you have $75,000. If you canachieve an annual rate of return of 8%, how much more money you have to havetoday to be able to buy this car in 7 years?
1. Toadies,Inc. has identified an investment project with the following cash flows. If thediscount rate is 11%, what is the future value of these cash flows in year 4?
1. Roseyhas $1,000 on her credit card. She can afford to make $20 minimum payment permonth. If the going monthly interest rate is 1.5%, how long will it take her topay off the $1,000 credit card debt?
1. What is the effective annualrate if a bank charges you 9 percent compounded quarterly?
1. Free Motion Enterprises paida $2.20 per share annual dividend last week. Dividends are expected to increaseby 3.75% annually. What is one share of this stock worth to you today if yourrequired rate of return is 15%
1. Anindenture is:
1. Oil Well Supply offers a7.5% coupon bonds with semiannual payments and a YTM of 7.68%. The bonds maturein 6 years. What is the market price per bond?
Page Enterprises has bonds on the market making annual payments, with twelve years to maturity, and selling for $972. At this price, the bonds yield 7.10 percent.
Both Bond Sam and Bond Dave have 6 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has four years to maturity, whereas Bond Dave has 19 years to maturity.
1. Abond that pays interest annually yielded 7.47% last year. The inflation ratefor the same period was 4%. What was the actual real rate of return on thisbond for last year?
1. Allelse constant, a bond will sell at ________ when the coupon rate is _____ theYTM?
A. Adiscount; less than
1. Whichone of the following bonds is the least sensitive to interest rate risk?
A. 3-year,6% coupon
1. Thebonds issued by Stainless Tubs bear an 8% coupon, payable semiannually. Thebonds mature in 11 years and have a $1,000 face value. Currently, the bondssell for $952. What is the YTM?
1. WinterTime Adventures is going to pay an annual dividend of $2.86 a share on itscommon stock next year. This year, the company paid a dividend of $2.75 ashare. The company adheres to a constant rate of growth dividend policy. What willone share of this common stock be worth in five years from now if the requiredrate of return is 11.7%?
1. Hardwoods,Inc. just paid a $10 dividend, but the management expects to reduce the payoutby 9% each year, indefinitely. How much are you willing to pay today per shareto buy this stock if you require a 15% rate of return?
1. Acompany has earnings of $3.25 per share. The benchmark PE for the company is 22.What is the price that you would be willing to pay?
1. Aproject will produce cash inflows of $2,800 a year for 4 years with a finalcash inflow of $5,700 in year 5. The project’s initial cost is $9,500. What isthe NPV of this project if the required rate of return is 16%?
A. No;The IRR is less than the required return by about 1.53%.
A. No;The PI is 0.80.
1. Aliciais considering adding toys to her gift shop. She estimates that the cost ofinventory will be $7,500. The remodeling expenses and shelving costs areestimated at $1,800. Toy sales are expected to produce net cash inflows of$2,300, $2,900, $3,200, and $3,400 over the next four years, respectively.Should Alicia add toys to her store if she assigns a three-year payback periodto this project? Why or why not?
A. No;The payback period is 3.26 years.
1. Youare analyzing the two mutually exclusive projects and have developed thefollowing information. What is the crossover rate?
1. Whichone of the following best describes the concept of erosion?
A. Thecash flows of a new project that come at the expense of a firm’s existing cashflows.
1. M&MFashions is considering a project that will require $28,000 in net workingcapital and $87,000 in fixed assets. The project is expected to produce annualsales of $75,000 with associated costs if $57,000. The project has a 5-yearlife. The company uses straight-line to a zero book value over the life of theproject. The tax rate is 30%. What is the operating cash flow for this project?
1. Youpurchased some equipment 4 years ago at a cost of $225,000. The equipment is5-year property for MACRS. You are considering selling the equipment today for$87,000. What will be the after tax salvage value of the property if your taxrate is 35%?
1. Aproject will produce an operating cash flow of $14,600 a year for 7 years. Theinitial fixed asset investment will be $48,900. The net after tax salvage valueis estimated at $12,000 and will be received during the last year of theproject’s life. What is the NPV of the project if the required rate of returnis 12%?
1. Scholastic Toys isconsidering developing and distributing a new board game for children. Theproject is similar in risk to the firm's current operations. The firm maintainsa debt-equity ratio of 0.40 and retains all profits to fund the firm's rapidgrowth. How should the firm determine its cost of equity?
A. By using the capitalasset pricing model (Refer to section 14.2)
1. The common stock ofMetal Molds has a negative growth rate of 1.5 percent and a required return of18 percent. The current stock price is $11.40. What was the amount of the lastdividend paid?
1. Tidewater Fishing has acurrent beta of 1.21. The market risk premium is 8.9 percent and the risk-freerate of return is 3.2 percent. By how much will the cost of equity increase ifthe company expands its operations such that the company beta rises to1.50?
1. Wayco Industrial Supplyhas a pre-tax cost of debt of 7.6 percent, a cost of equity of 14.3 percent,and a cost of preferred stock of 8.5 percent. The firm has 220,000 shares ofcommon stock outstanding at a market price of $27 a share. There are 25,000 sharesof preferred stock outstanding at a market price of $41 a share. The bond issuehas a face value of $550,000 and a market quote of 101.2. The company's taxrate is 37 percent. What is the firm's weighted average cost of capital?
1. Central Systems, Inc.desires a weighted average cost of capital of 8 percent. The firm has anaftertax cost of debt of 5.4 percent and a cost of equity of 15.2 percent. Whatdebt-equity ratio is needed for the firm to achieve its targeted weightedaverage cost of capital?
1. Thecost of preferred stock is computed the same as the:
A. Returnon perpetuity (Refer to section 14.3)
A. All-equityfirm (Refer to section 16.4)
1. Central Supply purchased a toboggan forinventory this morning and paid cash for it. The time period between today andthe day Central Supply will receive cash from the sale of this toboggan iscalled the
1. The Harvester collects 25 percent of sales inthe month of sale, 60 percent of sales in the month following the month ofsale, and 15 percent of sales in the second month following the month of sale.During the month of April, the firm will collect:
1. Your firm has an inventory turnover rate of 14,a payables turnover rate of 8, and a receivables turnover rate of 19. How longis your firm's operating cycle?
A. 45.28 days
1. Forest Gardens, Inc., has a beginningreceivables balance on February 1 of $730. Sales for February through May are$720, $780, $820, and $850, respectively. The accounts receivable period is 30days. What is the amount of the April collections? Assume a year has 360 days.
1. Juno Industrial Supply has a $150,000 line ofcredit with a 7.5 percent interest rate. The loan agreement requires a 2percent compensating balance, which is based on the total amount borrowed, andwhich will be held in an interest-free account. What is the effective interestrate if the firm borrows $90,000 on the line of credit for one year?
1. It takes your firm 4.5 days to prepare and mailout all the monthly statements to your customers. On average, the mail timebetween your firm and your customers is 2.6 days. Customer checks take anaverage of 1.8 days to clear the bank. You have determined that your totalaverage collection time is 6.1 days. How long, on average, does it take yourfirm to process the payments from customers?
1. You are doing some comparison shopping. Fivestores offer the product you want at basically the same price. Which one of thefollowing stores offers the best credit terms if you plan to forego thediscount?
Youwant to deposit sufficient money today into a savings account so that you willhave $1,000 in the account three years from today. Explain why you coulddeposit less money today if you could earn 3.5 percent interest rather than 3percent interest.
Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 15 years to maturity, and a coupon rate of 6.5 percent paid annually.
Approximate r = 0.08 – 0.028 = 0.052,or 5.20%
(1 + 0.08) = (1 + r)(1 + 0.028)
Exact r = [(1 + 0.08) / (1 + 0.028)] – 1 = 0.0506, or 5.06%
An investment offers a 17 percent total return over the coming year. Fred Bernanke thinks the total real return on this investment will be only 13 percent.
(1 + R) = (1 + r)(1 + h)
h = [(1 + 0.17) / (1 + 0.13)] – 1 = 0.0354, or 3.54%
Current yield = Annual coupon payment / Price = $35.00 / $1,015.62500 = 0.03446, or 3.446%
The YTM is located under the “Asked Yield” column, so the YTM is 3.303%.
The bid-ask spread is the difference between the bid price and the ask price, so:
Bid-Ask spread = 101:18 – 101:17 = 1/32 = 0.03125
You want to have $1 million in real dollars in an account when you retire in 20 years. The nominal return on your investment is 11 percent and the inflation rate is 3.5 percent.What real amount must you deposit each year to achieve your goal?
1. find the real interest rate on the savings
One More Time Software has 8.6 percent coupon bonds on the market with 20 years to maturity. The bonds make semiannual payments and currently sell for 114.0 percent of par.
A bond contains three key items:
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