FIN5063 Week 3

Question 1

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What is the future value of $700 deposited for one year earning 4 percent interest rate annually?

Select one:

a.

$1,428

b.

$728

c.

$28

d.

$700

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The correct answer is: $728

Question 2

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A firm reported year-end sales of $20 million. It listed $7 million of inventory on its balance sheet. Using a 365-day year, how many days did the firm's inventory stay on the premises?

Select one:

a.

157.75 days

b.

87.75 days

c.

127.75 days

d.

97.75 days

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The correct answer is: 127.75 days

Question 3

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Market Value versus Book Value Acme Bricks balance sheet lists net fixed assets as $40 million. The fixed assets could currently be sold for $50 million. Acme's current balance sheet shows current liabilities of $15 million and net working capital of $12 million. If all the current accounts were liquidated today, the company would receive $77 million cash after paying $15 million in liabilities. What is the book value of Acme's assets today? What is the market value of these assets?

Select one:

a.

$40 million, $50 million

b.

$27 million, $92 million

c.

$67 million, $142 million

d.

$12 million, $77 million

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The correct answer is: $67 million, $142 million

Question 4

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You are considering a stock investment in one of two firms (A and B), both of which operate in the same industry. A finances its $20 million in assets with $18 million in debt and $2 million in equity. B finances its $20 million in assets with $2 million in debt and $18 million in equity. Calculate the debt-to-equity ratio for the two firms.

Select one:

a.

Firm A: 9 times; Firm B: 1.11 times

b.

Firm A: 9 times; Firm B: 0.11 times

c.

Firm A: 19 times; Firm B: 1.11 times

d.

Firm A: 19 times; Firm B: 0.11 times

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The correct answer is: Firm A: 9 times; Firm B: 0.11 times

Question 5

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You just won the lottery and after taxes you have $32,000. You want to have $1,000,000 by the time you are 65, which is 45 years from now. Assuming that you can earn 9 percent each on your money, how much (in dollars) of the $32,000 must you invest today?

Select one:

a.

$22,943.28

b.

$20,692.24

c.

$17,891.62

d.

$18,524.91

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The correct answer is: $20,692.24

Question 6

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What is the present value of a $300 annuity payment over 5 years if interest rates are 8 percent?

Select one:

a.

$204.17

b.

$1,938.96

c.

$1,197.81

d.

$440.80

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The correct answer is: $1,197.81

Question 7

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Balance Sheet Jack and Jill Corporation's year-end 2013 balance sheet lists current assets of $250,000, fixed assets of $800,000, current liabilities of $195,000, and long-term debt of $300,000. What is Jack and Jill's total stockholders' equity?

Select one:

a.

$1,050,000

b.

$555,000

c.

$495,000

d.

There is not enough information to calculate total stockholder's equity.

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The correct answer is: $555,000

Question 8

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Joey realizes that he has charged too much on his credit card and has racked up $3,000 in debt. If he can pay $150 each month and the card charges 18 percent APR (compounded monthly), how long will it take him to pay off the debt?

Select one:

a.

13.03 months

b.

14.68 months

c.

23.96 months

d.

20.00 months

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The correct answer is: 23.96 months

Assume you deposit $200 in an account at 5% interest rate and leave it in the account for four years. In year 4, the interest on previously received interest component will be equal to

Select one:

a.

$40

b.

$4.30

c.

$31

d.

$3.10

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The correct answer is: $3.10

uestion 5

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A $400 investment has doubled to $800 in six years because of a 12.25 percent return. How much longer will it take for the investment to reach $1100 if it continues to earn 12.25 percent?

Select one:

a.

3.46 years

b.

2.76 years

c.

2.56 years

d.

5 years

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The correct answer is: 2.76 years

Assume you currently have $3,000. If you deposit this money in a bank account at an annual interest rate of 4%, and in addition deposit $1000 at the end of each year for the next 5 years, how much will you have in the account after 5 years?

Select one:

a.

$9,016

b.

$8,650

c.

$8,600

d.

$9,066

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The correct answer is: $9,066

Free Cash Flow The 2013 income statement for Betty's Barstools shows that depreciation expense is $100 million, EBIT is $400 million, and taxes are $120 million. At the end of the year, the balance of gross fixed assets was $510 million. The increase in net operating working capital during the year was $94 million. Betty's free cash flow for the year was $625 million. What was the beginning of year balance for gross fixed assets?

Select one:

a.

$849 million

b.

$1,094 million

c.

$380 million

d.

$359 million

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The correct answer is: $849 million

As the production manager of HPG, Inc., you have received an offer from the supplier who provides the wires used in headsets. Due to poor planning, the supplier has an excess amount of wire and is willing to sell $750,000 worth for only $600,000. You already have one year's supply of wire on hand. This new wire would be used one year from today. What implied interest rate would your firm be earning if you purchased the wire?

Select one:

a.

25 percent

b.

21 percent

c.

-20 percent

d.

13.5 percent

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The correct answer is: 25 percent

Which of the below is the best description of the concept of Free Cash Flows?

Select one:

a.

The amount of dividend payments that is not subject to the federal income tax.

b.

The balance of cash flows from the operating section of the balance sheet.

c.

The amount of cash in the cash account over the appropriated minimum reserved for capital expenditures.

d.

The amount of cash that can be paid out to investors, while allowing for necessary investments to support the future activities of the business.

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The correct answer is: The amount of cash that can be paid out to investors, while allowing for necessary investments to support the future activities of the business.

When computing the future value of an annuity, the higher the compound frequency,

Select one:

a.

the higher the future value will be.

b.

the lower the future value will be.

c.

the more likely the future value can be calculated.

d.

the less likely the future value can be calculated.

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The correct answer is: the higher the future value will be.

A strong liquidity position means that ______________.

Select one:

a.

the firm pays out a large portion of its net income in the form of dividends

b.

the firm pays its creditors on-time

c.

the firm is able to meet its short-term obligations

d.

the firm uses little debt in its capital structure

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The correct answer is: the firm is able to meet its short-term obligations

Determine the interest rate earned on a $1,500 deposit when $1,680 is paid back in one year.

Select one:

a.

0.89 percent

b.

89.00 percent

c.

12.00 percent

d.

1.12 percent

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The correct answer is: 12.00 percent

The cash paid in capital expenditures to improve fixed assets, listed on the cash flow statement, can best be computed as

Select one:

a.

Net fixed assets from this year minus Net fixed assets from last year.

b.

Gross fixed assets from this year minus gross fixed assets from last year.

c.

Gross fixed assets from this year minus net fixed assets from this year.

d.

Net fixed assets from last year plus depreciation from this year.

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The correct answer is: Gross fixed assets from this year minus gross fixed assets from last year.

For corporations, maximizing the value of owner's equity can also be stated as

Select one:

a.

maximizing retained earnings.

b.

maximizing the stock price.

c.

maximizing earnings per share.

d.

maximizing net income.

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The correct answer is: maximizing the stock price.

You borrow $10,000 and will pay back the entire amount in 10 years. You are charged 6 percent interest per year. How much interest do you pay on this loan?

Select one:

a.

$7,908.48

b.

$6,000.00

c.

$7,715.61

d.

$11,193.97

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The correct answer is: $7,908.48

Samantha opened a savings account this morning. Her money will earn 5 percent interest. After five years, her savings account will be worth $5,600. Assume she will not make any withdrawals. Given this, which one of the following statements is true?

Select one:

a.

The present value of Samantha's account is $5,600.

b.

Samantha deposited more than $5,600 this morning.

c.

Samantha would have had to deposit more money to have $5,600 in five years if she could have earned 6 percent interest.

d.

Samantha could have deposited less money and still had $5,600 in five years if she could have earned 5.5 percent interest.

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The correct answer is: Samantha could have deposited less money and still had $5,600 in five years if she could have earned 5.5 percent interest.

In the financial crisis that started in 2006, a significant indicator of the U.S. economic decline was:

Select one:

a.

a sharp increase in unregulated Ponzi-type security sales.

b.

a large increase in loan default due to unemployment.

c.

a significant drop in interest rates.

d.

rising defaults by subprime mortgage borrowers.

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The correct answer is: rising defaults by subprime mortgage borrowers.

Free Cash Flow The 2013 income statement for Betty's Barstools shows that depreciation expense is $100 million, EBIT is $400 million, and taxes are $120 million. At the end of the year, the balance of gross fixed assets was $510 million. The increase in net operating working capital during the year was $94 million. Betty's free cash flow for the year was $625 million. What was the beginning of year balance for gross fixed assets?

Select one:

a.

$359 million

b.

$849 million

c.

$1,094 million

d.

$380 million

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The correct answer is: $849 million

An average home in Chicago costs $295,000. If house prices are expected to grow at an average rate of 3 percent per year, what will a house cost in 5 years?

Select one:

a.

$328,995.61

b.

$347,028.19

c.

$338,941.27

d.

$341,985.85

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The correct answer is: $341,985.85 

Question 1

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Lemmon Inc. lists fixed assets of $100 on its balance sheet. The firm's fixed assets have recently been appraised at $140. The firm's balance sheet also lists current assets at $15. Current assets were appraised at $16.50. Current liabilities book and market values stand at $12 and the firm's long-term debt is $40. Calculate the market value of the firm's stockholders' equity.

Select one:

a.

$156.50

b.

$144.50

c.

$112.50

d.

$104.50

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The correct answer is: $104.50

Question 2

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The calculation of free cash flow attempts to estimate

Select one:

a.

The amount of cash that can be freely spent by the managers on capital expenditures.

b.

The amount of cash that is raised from bondholders during the accounting period.

c.

The amount of cash generated by the company that could be distributed to investors without jeopardizing future operations of the company.

d.

The amount of tax saving resulting from firm borrowing and the associated reduction in the pre-tax income.

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The correct answer is: The amount of cash generated by the company that could be distributed to investors without jeopardizing future operations of the company.

Question 3

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Which of the below IS NOT included in the calculation of operating income?

Select one:

a.

Interest expense

b.

Cost of goods sold

c.

Sales

d.

Depreciation expense

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The correct answer is: Interest expense

Question 4

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negative free cash flows would be the biggest worry for investors of

Select one:

a.

A start-up company.

b.

An all-equity company.

c.

A mature company.

d.

A company in a highly cyclical industry.

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The correct answer is: A mature company.

Question 5

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Which of the following is a use of cash?

Select one:

a.

The firm issues more long-term debt.

b.

The firm decreases its accrued wages and taxes.

c.

The firm sells some of its fixed assets.

d.

The firm takes its depreciation expense.

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The correct answer is: The firm decreases its accrued wages and taxes.

Question 6

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Common Equity consists of the following accounts

Select one:

a.

Common stock only

b.

Preferred stock, common stock, and retained earnings

c.

Preferred stock and common stock

d.

Common stock and retained earnings

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The correct answer is: Common stock and retained earnings

Question 7

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Which of the below represents a cash outflow?

Select one:

a.

A decline in inventories

b.

An increase in accrued wages

c.

Issuing more debt

d.

A decline in accounts payable

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The correct answer is: A decline in accounts payable

Question 8

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Which of the activities below is the most likely to result in a series of depreciation expenses over time?

Select one:

a.

Wages paid to workers.

b.

Steel used in production of an automobile.

c.

Acquisition of an office computer.

d.

Electricity used to power machines.

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The correct answer is: Acquisition of an office computer.

Question 9

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Net Working Capital is computed as

Select one:

a.

Current assets minus current liabilities.

b.

Total assets minus total Liabilities.

c.

Current assets divided by current liabilities.

d.

Total assets divided by total liabilities.

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The correct answer is: Current assets minus current liabilities.

Question 10

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An income statement shows

Select one:

a.

The performance of a company over a period of time.

b.

How much is owed to bondholders.

c.

The financial position of a company.

d.

Specific information about the compensation of senior management.

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The correct answer is: The performance of a company over a period of time.

Having more debt relative to equity in the capital structure is good for shareholders at the time

Select one:

a.

When their company is making lots of profit.

b.

When their company is experiencing losses.

c.

When the economy is in a recession.

d.

When interest rates are rising.

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The correct answer is: When their company is making lots of profit.

Which of the following is a use of cash?

Select one:

a.

The firm takes its depreciation expense.

b.

The firm decreases its accrued wages and taxes.

c.

The firm sells some of its fixed assets.

d.

The firm issues more long-term debt.

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The correct answer is: The firm decreases its accrued wages and taxes.

Question 2

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Financial statements of a corporation can be typically found in

Select one:

a.

The annual report.

b.

The articles of incorporation.

c.

The proxy statement.

d.

The prospectus.

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The correct answer is: The annual report.

Question 3

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Which of the below represents a cash outflow?

Select one:

a.

Issuing more debt

b.

A decline in inventories

c.

An increase in accrued wages

d.

A decline in accounts payable

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The correct answer is: A decline in accounts payable

Question 4

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A  balance sheet shows

Select one:

a.

The performance of the company over a period of time.

b.

Specific information about the compensation of senior management.

c.

The market value of company’s stock.

d.

The financial position of the company.

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The correct answer is: The financial position of the company.

Question 3

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Which of the activities below is the most likely to result in a series of depreciation expenses over time?

Select one:

a.

Electricity used to power machines.

b.

Steel used in production of an automobile.

c.

Acquisition of an office computer.

d.

Wages paid to workers.

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The correct answer is: Acquisition of an office computer.

Question 4

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If a company reports a large amount of net income on its income statement during a year, the firm will have

Select one:

a.

zero cash flow.

b.

Any of these scenarios are possible.

c.

negative cash flow.

d.

positive cash flow.

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The correct answer is: Any of these scenarios are possible.

The cash paid in capital expenditures to improve fixed assets, listed on the cash flow statement, can best be computed as

Select one:

a.

Gross fixed assets from this year minus net fixed assets from this year.

b.

Net fixed assets from this year minus Net fixed assets from last year.

c.

Gross fixed assets from this year minus gross fixed assets from last year.

d.

Net fixed assets from last year plus depreciation from this year.

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The correct answer is: Gross fixed assets from this year minus gross fixed assets from last year.

Which financial statement shows the total revenues that a firm earns and the total expenses the firm incurs to generate those revenues over a specific period of time—generally one year?

Select one:

a.

Balance sheet

b.

Statement of cash flows

c.

Statement of retained earnings

d.

Income statement

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The correct answer is: Income statement

All of the statements below are correct EXCEPT:

Select one:

a.

Market stock price incorporates expectations of investors about the future of the company.

b.

Market stock price is useful because it reflects investor opinion about the risk that the company is taking.

c.

Market stock price is useful because it is used to adjust the value of equity on the balance sheet so that the correct market value is provided in the common stock account.

d.

Market stock price can be used by company’s managers to see if they are increasing value for the shareholders.

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The correct answer is: Market stock price is useful because it is used to adjust the value of equity on the balance sheet so that the correct market value is provided in the common stock account.