Finance assignment

Multiple Choice (15 problems, 4 points each, total 60 points)

1.      The primary goal of financial management is to:

a.       Maximize current dividends per share of the existing stock

b.      Minimize operational costs and maximize firm efficiency

c.       Maintain steady growth in both sales and net earnings

d.      Maximize the current value per share of the existing stock

e.       Avoid financial distress

2.      Accounting profits and cash flows are:

a.       Generally not the same since GAAP allows for revenue recognition separate from the receipt of cash flows

b.      Generally the same since accounting profits reflect when the cash flows are received

c.       Generally the same since they reflect current laws and accounting standards

d.      Generally not the same because cash inflows occur before revenue recognition

e.       Both c and d

3.      Which of the following is not included in the computation of operating cash flow?

a.       Earnings before interest and taxes

b.      Interest paid

c.       Depreciation

d.      Current taxes

e.       All of the above are needed

4.      As seen on an income statement:

a.       Interest is deducted from income and increases the total taxes incurred.

b.      The tax rate is applied to the earnings before interest and taxes when the firm has both depreciation and interest expenses

c.       Depreciation is shown as an expense but does not affect the taxes payable

d.      Depreciation reduces both the pretax income and the net income

e.       Interest expense is added to earnings before interest and taxes to get pretax income

5.      Liquidity is:

a.       A measure of the use of debt in a firm’s capital structure

b.      Equal to current assets minus current liabilities

c.       Equal to the market value of a firm’s total assets minus its current liabilities

d.      Valuable to a firm even though liquid assets tend to be less profitable to own

e.       Generally associate with intangible assets

6.      An increase in total assets:

a.       Means that net working capital is also increasing

b.      Requires an investment in fixed assets

c.       Means that shareholders' equity must also increase

d.      Must be offset by an equal increase in liabilities and shareholders' equity

e.       Can only occur when a firm has positive net income

7.      The sustainable growth rate:

a.       Assumes there is no external financing of any kind

b.      Is normally higher than the internal growth rate

c.       Assumes the debt-equity ratio is variable

d.      Is based on receiving additional external debt and equity financing

e.       Assumes that 100% of all income is retained by the firm

8.      Turner’s Inc. has a price-earnings ratio of 16. Alfred's Co. has a price-earnings ratio of 19. Thus, you can state with certainty that one share of stock in Alfred's:

a.       Has a higher market price than one share of stock in Turner's

b.      Has a higher market price per dollar of earnings than does one share of Turner's

c.       Sells at a lower price per share than one share of Turner's

d.      Represents a larger percentage of firm ownership than does one share of Turner’s

e.       Earns a greater profit per share than does one share of Turner's stock

9.      The percentage of sales method:

a.       Requires that all accounts grow at the same rate

b.      Separates accounts that vary with sales and those that do not vary with sales

c.       Allows the analyst to calculate how much financing the firm will need to support the predicted sales level

d.      Both A and B

e.       Both B and C

10.   The _____ breaks down return on equity into three component parts

a.       Du Pont identity

b.      Return on assets

c.       Statement of cash flows

d.      Asset turnover ratio

e.       Equity multiplier

11.   The interest rate expressed as if it were compounded once per year is called the _____ rate

a.       effective interest

b.      compound interest

c.       stated annual

d.      daily interest

e.       periodic interest

12.   The stated rate of interest is 10%. Which form of compounding will give the highest effective rate of interest?

a.       Continuous compounding

b.      Annual compounding

c.       Daily compounding

d.      Monthly compounding

e.       Is it impossible to tell without knowing the term of the loan

13.   The present value of future cash flows minus initial cost is called:

a.       the future value of the project

b.      the net present value of the project

c.       the equivalent sum of the investment

d.      the initial investment risk equivalent value

e.       none of the above

14.  You are comparing two annuities, which offer monthly payments for ten years. Both annuities are identical with the exception of the payment dates. Annuity A pays on the first of each month while annuity B pays on the last day of each month. Which one of the following statements is correct concerning these two annuities?

a.       Both annuities are of equal value today

b.      Annuity B is an annuity due

c.       Annuity A has a higher future value than Annuity B

d.      Annuity B has a higher present value than Annuity A

e.       Both annuities have the same future value as of ten years from today

15.  You are considering two projects with the following cash flows:

Which of the following statements are true concerning these two projects?

I. Both projects have the same future value at the end of year 4, given a positive rate of return.

II. Project A has a higher future value than project B, given a positive rate of return.

III. Both projects have the same future value at any point in time, given a positive rate of return.

IV. Both projects have the same future value given a zero rate of return.

a.       II only

b.      IV only

c.       I and IV only

d.      II and IV only

e.       I, II, and III only

Financial Math (5 problems, 8 points each, total 40 points)

Round all values to the penny. Rates and terms should also be rounded to two places after the decimal point.

16.   Compute the future value of $10,000 compounded:

a. annually for10 years at 6%

b. quarterly for 10 years at 6%

c. continuously for 10 years at 6%

d. What is the effective annual rate (EAR) in part b?

17. The Perpetual Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $11,000 per year forever. If the required return on this investment is 9 percent, what is the fair market value of the policy today?

Suppose the Perpetual Life Insurance Co. told you that the policy cost $348,000.00. What would the fair value interest rate be?

18. You want to borrow $64,745 from your local bank to buy a new sailboat. You can afford to make monthly payments of $1,160, but no more. Assuming monthly compounding, what is the highest rate (APR) you can afford on a 72-month loan?

19. Merry Elves, Inc., has sales of $2,200, total assets of $850, and a debt-equity ratio of 1.00. If its return on equity is 15 percent, what is its net income?

20.   Bob’s Donuts purchased new commercial donut making equipment three years ago for $7,100. This equipment can be sold today to The Tastee Treat Shoppe for $5,000. Bob’s current balance sheet shows net fixed assets of $3,500, current liabilities of $700, and net working capital of $372. If the current assets were liquidated today, the company would receive $1,570.

a. What is the book value of Bob’s assets today?

b. What is the market value?

Extra Credit (9 points)

A 28 year old plans to deposit $6000 per year, every year, starting today, in her retirement account, which will compound tax free, for the next 40 years.

a. If she can earn an average rate of 10% on her money, with annual fees of .15%, by investing in a broad market index fund, how much money will she have in 40 years when she retires?

b. If she can earn an average rate of 10% on her money, but with annual fees of 1.5%, how much money will she have in 40 years when she retires?

c. If she goes with the .15% fees, what percentage of her retirement account value in 40 years is made up of her original $6000 annual contributions?