Can I get you to complete out a midterm I have? I've answered some of the questions and you did a similar one a couple of months ago.
BFIN3321 MIDTERM EXAM SUMMER 2014 MULTIPLE CHOICE (2 points each) 1. Which of the following is/are true: A. Unethical behavior and illegal behavior are the same B. Unethical behavior is always illegal behavior C. Illegal behavior is always unethical behavior D. Unethical behavior and illegal behavior are never the same 2. Which of the following statements is correct? A. Accountants are focused on what happened in the past. B. Financial managers are focused on what happened in the past. C. Financial managers double-check the accountant's statements. D. Accountants and financial managers use total quality management systems to standardize data. 3. The overall goal of the financial manager is to _________________. A. Minimize total costs B. Maximize net income C. Maximize earnings per share D. Maximize shareholder wealth 4. Maximizing owners' equity value means carefully considering all of the following except _______. A. Which projects to invest in B. How best to increase the firm's risk C. How to best bring additional funds into the firm D. How best to return the profits from those projects to the owners over time 5. From the perspective of access to capital, the best form of business organization is the _______. A. Sole proprietorship B. S Corporation C. Corporation D. Partnership 6. All of the following are advantages to organizing as a corporation except ____. A. Easy to transfer ownership B. Easy access to capital C. Double taxation D. Limited liability 7. The most common type of business in the United States is the __________. A. Hybrid organization such as a limited liability company B. Sole Proprietorship C. Partnership D. Corporation 8. The biggest disadvantage of the sole proprietorship is _________________. A. Limited access to capital B. Unlimited liability C. Double taxation D. Total control 9. From the perspective of ownership risk, the best form of business organization is the ______. A. Sole proprietorship B. S Corporation C. Corporation D. Partnership 10. From the perspective of control, the best form of business organization is the __________. A. Sole proprietorship B. S Corporation C. Corporation D. Partnership 11. Unethical firm behavior include all of the following except A. maximizing shareholder value, B. Mistreating Employees, C. Mistreating Customers, D. Financial Misconduct. 12. Which of the following statements is correct? A. Shareholder wealth maximization may actually be beneficial for society in the long-run. B. Shareholder wealth maximization is achieved by maximizing market share. C. Shareholder wealth maximization is achieved by maximizing sales. D. Shareholder wealth maximization is achieved by minimizing costs. 13. An employee stock option plan is ________________. A. A plan that only partnerships can use to defer compensation to partners B. A perk usually only given to the board of directors as compensation C. A way to align the interests of employees with those of the owners D. None of these answers are correct 14. All are examples of perks a CEO might enjoy except _____. A. Company car B. Corporate jet C. Golf club membership D. All of the above are examples of perks a CEO might enjoy 15. The agency relationship in corporate finance refers to _______________________. A. when the board of directors oversee the CEO B. when the board of directors are elected to staggered terms C. when the shareholders hire a manager to run their company D. when the corporate hires an advertising agency to market their new product/service 16. While cash flow is more often used in financial analysis, which of the following is not a reason to require firms to still report accounting profit? A. We need to keep accountants employed B. accounting profit proxies economic profit C. accounting profit will generally have less erratic swings from year to year D. accounting profits reflect the prospect of the business as a 'going concern' 17. Restricted stock is: A. a special type of stock that is not transferable from the current holder to others until specific conditions are satisfied. B. a special type of stock that can be converted into corporate bonds after a specific amount of time has elapsed. C. a special type of stock that is a result of offering an employee stock ownership plan. D. None of these answers is correct. 18. A legal duty between two parties where one party must act in the interest of the other party is known as a(n) ______________. A. Fiduciary B. Venture capitalist C. Restricted investor D. Restricted capitalist 19. The role of a credit analyst is to ______________. A. help firms access capital markets B. examine a firm's financial strength for its debt holders C. monitor the business activities and report to the Securities Exchange Commission D. follow a firm and conduct their own evaluations of the company's business activities 20. Which of the following is not true about ratio analysis? A. Ratio analysis tells us how to fix our organization. B. Ratio analysis can show us how our organization changes over time. C. Ratio analysis uses accounting data, not cash flow, so it is not useful. D. Ratio analysis can show us how our organization compares to other organizations. 21. Which of the following would be a result of changing to the MACRS method of depreciation? A. Lower taxable income in the early years of a project's life B. Lower taxes in the early years of a project's life C. Higher depreciation expense D. All of the above. 22. Is it possible for a firm to have positive net income and yet have cash flow problems? A. No, this is impossible since net income and cash are highly correlated. B. No, this is impossible since net income increases the firm's cash. C. Yes, this can occur when a firm is growing very rapidly. D. Yes, this is possible if the firm is selling off assets. 23. All of the following are cash flows from investing activities except a(n)___________. A. All of these items are cash flows from investing. B. Increases in marketable securities C. Decreases in fixed assets D. Increases in fixed assets 24. The board of directors _____________. A. are hired by the CEO B. are elected by shareholders C. have unlimited liability since they oversee the day-to-day operations of the firm D. are employed by the Securities Exchange Commission to ensure its rules and regulations have been met 25. Cash flows available to pay the firm's stockholders and debt holders after the firm has made the necessary working capital investments, fixed asset investments, and developed the necessary new products to sustain the firm's ongoing operations is referred to as _________________. A. Net operating working capital B. Operating cash flow C. Free cash flow D. None of the above 26. All of the following are cash flows from financing activities except a(n) _________. A. Increase in accounts payable B. Stock Repurchases C. Paying dividends D. Issuing stock 27. All of the following are reasons that one should be cautious in interpreting financial statements except ____________. A. Firms can take steps to over- or understate earnings at various times. B. It is difficult to compare two firms that use different depreciation methods. C. Financial managers have some latitude in accounting rules to manage their reported earnings. D. All of the above are reasons to be cautious in interpreting financial statements. 28. Choose the phrase that makes this statement true: Ratio analysis can provide useful information on a firm's A. past but not current position. B. current position and hint at future performance. C. current position but should never be used to forecast future performance. D. past and current position, but should never be used to forecast future performance. 29. Which of the following statements is correct? A. The use of debt in the capital structure results in tax benefits to the firm. B. Debt is referred to as "financial leverage" because it magnifies returns to shareholders. C. Debt management ratios evaluate whether a firm is financing its assets with a reasonable amount of debt versus equity financing. D. All of these statements are correct. 30. Which of the following statements is incorrect? A. A negative free cash flow means that the firm's operations are not producing any cash flows for investors and always indicates that the firm is mismanaged. B. A positive free cash flow means that the firm's operations are producing cash flows for investors both bondholders and shareholders. C. Free cash flows are the cash flows available to investors after the firm has made the necessary investments in the firm's operations. D. All of these statements are correct. 31. A strong liquidity position means that ______________. A. the firm pays out a large portion of its net income in the form of dividends B. the firm is able to meet its short-term obligations C. the firm uses little debt in its capital structure D. the firm pays its creditors on-time 32. Which of the following statements is correct? A. Performing cross-sectional analysis is easy as industries are clustered with firms that are identical. B. Time-series analysis is useless in assessing improvement or deterioration of ratios since the data is historical. C. Performing cross-sectional ratio analysis refers to assessing how a firm performed over a certain section of time. D. To interpret financial ratios, users should analyze the performance of the firm over time and the performance of the firm against one or more companies in the same industry. 33. A firm has an average collection period of 13 days. The industry average ACP is 27 days. Which of the following statements is true given this information? A. The firm could probably increase its sales by relaxing its strict accounts receivable policy. B. The firm is maximizing its net income by minimizing its losses in accounts receivable. C. The firm has an excellent accounts receivable policy. D. Both statements b and c are correct. 34. Which of the following activities will increase a firm's current ratio? A. Purchase inventory using cash. B. Accrued wages and taxes increase. C. Accounts receivable are paid in cash. D. Buy equipment with a short-term bank loan. E. None of these statements will increase a firm's current ratio. 35. Which of the following statements is correct? A. In general, a firm should strive for a high average payment period because it wants to pay for its purchases as quickly as possible. B. If a firm has a very high fixed asset turnover, it means that the firm may be nearing its maximum production capacity. C. An extremely low average collection period will maximize net income. D. A debt ratio of zero, so no interest is paid, is the most profitable strategy. 36. A firm may not want to strive to match industry average ratios when: A. Firms in the industry are shifting into different directions. B. Most of the other firms in the industry are foreign firms. C. They are the leader in the industry. D. All of the above. 37. Which of the following will increase a firm's quick ratio assuming no other accounts change? A. An increase in inventory. B. A reduction in accounts payable. C. An increase in accounts receivable. D. All of these statements will increase a firm's quick ratio. 38. Common-size financial statements: A. Are obtained by dividing all income statement accounts by net sales and all balance sheet accounts by total assets. B. Allow for easy comparison of balance sheets and income statements across firms in the industry. C. Provide quantitative clues about the direction that the firm is moving. D. All of the above. 39. The main two sources of the time value of money are: A. Interest Rates and Risk, B. Inflation and Interest Rates, C. Risk and timing of Consumption, D. Inflation and timing of Consumption. 40. Which of the following will decrease a present value? A. Increasing the future value. B. Decreasing the interest rate. C. Decreasing the number of periods. D. None of the above will decrease a present value. 41. Compounding is _______. A. the adding of interest earned every period on both the original investment and the interest previously earned and retained with the investment B. the adding of interest earned every period on both the original investment and additional deposits C. the process of using time-value equations to compute the number of years D. the process of finding a present value 42. Which of the following will increase the present value of an annuity? A. The interest rate decreases. B. The number of periods decreases. C. The amortization schedule decreases. D. The effective rate is calculated over fewer years. 43. In theory, a perpetuity's value will be infinite A. always, B. if the interest rate is zero, C. if the interest rate is 100%, D. when payments go on forever, E. when the payments are constant. 44. If a bond is selling at a discount, which of the following statements is correct? A. The coupon rate must be greater than the yield to maturity. B. The current yield must be greater than the coupon rate. C. The bond must have a low bond rating. D. All of the statements are correct. 45. Which statement is true? A. Extremely high levels of liquidity guard against liquidity crises, but at the cost of lower returns on assets B. The less liquid assets a firm holds, the less likely it is that the firm will experience financial distress. C. The lower the liquidity ratios, the less liquidity risk a firm has. D. Liquid assets generate profits for the firm. 46. Under what conditions is a bond likely to be called? A. The firm is in financial duress. B. The firm wants to increase its debt ratio. C. Interest rates have significantly declined. D. The firm is planning a massive expansion and needs to raise a lot of capital. 47. Which of the following statements is correct? A. Long-term bonds have more reinvestment rate risk than short-term bonds. B. Long-term bonds have more interest rate risk than short-term bonds. C. Short-term bonds with high coupons have high interest rate risk. D. A zero coupon bonds do not have interest rate risk. 48. Under which conditions will an investor demand a larger return (yield) on a bond? A. The bond issue is upgraded from A to AA. B. The bond issue is downgraded from A to BBB. C. Interest rates decrease due to a decline in inflation. D. None of these conditions will cause an increase in the bond's yield. 49. Which of the following is an electronic stock market without a physical trading floor? A. Mercantile Exchange B. Nasdaq Stock Market C. American Stock Exchange D. New York Stock Exchange 50. To list a stock on the NYSE, a company must meet minimum requirements that include all of the following except ____________________. A. Firm size B. P/E Ratio C. Level of trading volume D. Total number of stockholders 51. Which of the following indices best reflects the ten sectors of the economy? A. Dow Jones Industrial Average B. Standard & Poor's 500 C. Nasdaq Composite D. None of the above 52. Which of the following statements is incorrect? A. Trading at the New York Stock Exchange and the American Stock Exchange are done by open outcry. B. The Dow Jones Industrial Average includes 35 of the largest companies in the U.S. C. Dealers create market liquidity in the Nasdaq's electronic market. D. The Nasdaq contains many very large technology firms. 53. Which of the following statements is incorrect? A. Preferred stockholders have higher precedence for payment than common stockholders in firm liquidation if bankruptcy occurs. B. Preferred stock prices fluctuate with market interest rates and behave like corporate bond prices. C. Common stock price changes with the value of the company's underlying business. D. Preferred stock is preferred because it always pays a higher return than common stock. PROBLEMS 1. (7 points) Hoffa Masonry, Inc.'s balance sheet lists net fixed asset as $24 million. The fixed assets could currently be sold for $20 million. Hoffa's current balance sheet shows current liabilities of $8 million and current assets of $12 million. If all the current accounts were liquidated today, the company would receive $1 million cash after paying the $8 million in liabilities. What is the book value of Hoffa's assets today? What is the market value of these assets? Book Value: ; Market Value: 2. (4 points) Last year a firm had an ROA of 3% and a dividend payout ratio of 40%. What is the internal growth rate? Rate: 3. (4 points) Last year a firm had an ROE of 12% and a dividend payout ratio of 70%. What is the sustainable growth rate? Rate: 4. (3 points) What is the future value in 4 years of $1,000 deposited today, earning a 7% interest rate annually? Future Value: 5. (3 points) Approximately, how many years does it take to double a $2000 investment when interest rates are 4.5% per year? Years: 6. (3 points) A stock investor deposited $1000 five years ago in a non-dividend paying stock. Today the stock is valued at $904. What annual rate of return has this investor earned? Rate: 7. (8 points) A friend wants to retire in 30 years when he is 65. At age 30, he can invest $200/month that earns 4% each year. But he is thinking of waiting 15 years when he is age 50, and then investing $500/month to catch up, earning the same 4% per year. He feels that by investing two and a half times as much for half as many years (15 instead of 30 years) he will have more. What is the future value of each of these options at age 65, and under which scenario would he accumulate more money? Scenario A: , Scenario B: , Best: 8. (4 points) Compute the present value of a one-time payment of $1,000 paid in four years using the following discount rates: 2.5% in year 1, 3.5% in year 2, 4% in year 3, and 4.5% in year 4. Present Value: 9. (5 points) Tree Trunk Furniture is advertising a deal, in which you buy a living room set for $3,556 (including tax) with two years before you need to pay (no interest is incurred if you pay by the end of the two years). How much would you need to deposit at the end of each month in a savings account earning 1.2% APR, compounded monthly, to be able to pay the $3,556 bill in two years? Monthly Deposit: 10. (8 points) You purchase a house for $300,000 by getting a mortgage for $240,000 and paying a $60,000 down payment (20%). You can get a 30-year mortgage with a 3.25% interest rate. A. What would be your monthly payment? B. What would be the loan balance be in 10 years? 11. (3 points) If the present value of an ordinary, 10 year annuity is $20,000 and interest rates are 6%, what is the present value of an annuity due with the same length of life, present values and interest rate? Present Value: 12. (4 points) A credit card is offered with monthly payments and a 18.99% APR. What is the loan's effective annual rate (EAR)? EAR: 13. (5 points) Calculate the price of a $1,000 bond, offering a 10% coupon payment with 10 years left to maturity and a market interest rate of 8%. (Assume interest payments are semiannual.) Is this a discount or premium bond? Price: Type: 14. (4 points) On May 15, 2014, the Dow Jones Industrial Average opened $16,613.97 and closed at $16,446.81. What was the daily return (in percent) of the stock market that day? Daily Return: 15. (4 points) Financial analysts forecast MNO Inc.'s growth for the future to be 4%. MNO's recent annual dividend was $2.00. What is the value of ABC stock when the required return is 12%? Stock Value: 16. (5 points) URN Inc. recently paid a $4.00 annual dividend. The dividend is expected to grow at a 5% rate. At a current stock price of $35, what is the return shareholders are expecting? Expected Return BFIN3321 MIDTERM EXAM SUMMER 2014 MULTIPLE CHOICE (2 points each) 1. Which of the following is/are true: A. Unethical behavior and illegal behavior are the same B. Unethical behavior is always illegal behavior C. Illegal behavior is always unethical behavior D. Unethical behavior and illegal behavior are never the same 2. Which of the following statements is correct? A. Accountants are focused on what happened in the past. B. Financial managers are focused on what happened in the past. C. Financial managers double-check the accountant's statements. D. Accountants and financial managers use total quality management systems to standardize data. 3. The overall goal of the financial manager is to _________________. A. Minimize total costs B. Maximize net income C. Maximize earnings per share D. Maximize shareholder wealth 4. Maximizing owners' equity value means carefully considering all of the following except _______. A. Which projects to invest in B. How best to increase the firm's risk C. How to best bring additional funds into the firm D. How best to return the profits from those projects to the owners over time 5. From the perspective of access to capital, the best form of business organization is the _______. A. Sole proprietorship B. S Corporation C. Corporation D. Partnership 6. All of the following are advantages to organizing as a corporation except ____. A. Easy to transfer ownership B. Easy access to capital C. Double taxation D. Limited liability 7. The most common type of business in the United States is the __________. A. Hybrid organization such as a limited liability company B. Sole Proprietorship C. Partnership D. Corporation 8. The biggest disadvantage of the sole proprietorship is _________________. A. Limited access to capital B. Unlimited liability C. Double taxation D. Total control 9. From the perspective of ownership risk, the best form of business organization is the ______. A. Sole proprietorship B. S Corporation C. Corporation D. Partnership 10. From the perspective of control, the best form of business organization is the __________. A. Sole proprietorship B. S Corporation C. Corporation D. Partnership 11. Unethical firm behavior include all of the following except A. maximizing shareholder value, B. Mistreating Employees, C. Mistreating Customers, D. Financial Misconduct. 12. Which of the following statements is correct? A. Shareholder wealth maximization may actually be beneficial for society in the long-run. B. Shareholder wealth maximization is achieved by maximizing market share. C. Shareholder wealth maximization is achieved by maximizing sales. D. Shareholder wealth maximization is achieved by minimizing costs. 13. An employee stock option plan is ________________. A. A plan that only partnerships can use to defer compensation to partners B. A perk usually only given to the board of directors as compensation C. A way to align the interests of employees with those of the owners D. None of these answers are correct 14. All are examples of perks a CEO might enjoy except _____. A. Company car B. Corporate jet C. Golf club membership D. All of the above are examples of perks a CEO might enjoy 15. The agency relationship in corporate finance refers to _______________________. A. when the board of directors oversee the CEO B. when the board of directors are elected to staggered terms C. when the shareholders hire a manager to run their company D. when the corporate hires an advertising agency to market their new product/service 16. While cash flow is more often used in financial analysis, which of the following is not a reason to require firms to still report accounting profit? A. We need to keep accountants employed B. accounting profit proxies economic profit C. accounting profit will generally have less erratic swings from year to year D. accounting profits reflect the prospect of the business as a 'going concern' 17. Restricted stock is: A. a special type of stock that is not transferable from the current holder to others until specific conditions are satisfied. B. a special type of stock that can be converted into corporate bonds after a specific amount of time has elapsed. C. a special type of stock that is a result of offering an employee stock ownership plan. D. None of these answers is correct. 18. A legal duty between two parties where one party must act in the interest of the other party is known as a(n) ______________. A. Fiduciary B. Venture capitalist C. Restricted investor D. Restricted capitalist 19. The role of a credit analyst is to ______________. A. help firms access capital markets B. examine a firm's financial strength for its debt holders C. monitor the business activities and report to the Securities Exchange Commission D. follow a firm and conduct their own evaluations of the company's business activities 20. Which of the following is not true about ratio analysis? A. Ratio analysis tells us how to fix our organization. B. Ratio analysis can show us how our organization changes over time. C. Ratio analysis uses accounting data, not cash flow, so it is not useful. D. Ratio analysis can show us how our organization compares to other organizations. 21. Which of the following would be a result of changing to the MACRS method of depreciation? A. Lower taxable income in the early years of a project's life B. Lower taxes in the early years of a project's life C. Higher depreciation expense D. All of the above. 22. Is it possible for a firm to have positive net income and yet have cash flow problems? A. No, this is impossible since net income and cash are highly correlated. B. No, this is impossible since net income increases the firm's cash. C. Yes, this can occur when a firm is growing very rapidly. D. Yes, this is possible if the firm is selling off assets. 23. All of the following are cash flows from investing activities except a(n)___________. A. All of these items are cash flows from investing. B. Increases in marketable securities C. Decreases in fixed assets D. Increases in fixed assets 24. The board of directors _____________. A. are hired by the CEO B. are elected by shareholders C. have unlimited liability since they oversee the day-to-day operations of the firm D. are employed by the Securities Exchange Commission to ensure its rules and regulations have been met 25. Cash flows available to pay the firm's stockholders and debt holders after the firm has made the necessary working capital investments, fixed asset investments, and developed the necessary new products to sustain the firm's ongoing operations is referred to as _________________. A. Net operating working capital B. Operating cash flow C. Free cash flow D. None of the above 26. All of the following are cash flows from financing activities except a(n) _________. A. Increase in accounts payable B. Stock Repurchases C. Paying dividends D. Issuing stock 27. All of the following are reasons that one should be cautious in interpreting financial statements except ____________. A. Firms can take steps to over- or understate earnings at various times. B. It is difficult to compare two firms that use different depreciation methods. C. Financial managers have some latitude in accounting rules to manage their reported earnings. D. All of the above are reasons to be cautious in interpreting financial statements. 28. Choose the phrase that makes this statement true: Ratio analysis can provide useful information on a firm's A. past but not current position. B. current position and hint at future performance. C. current position but should never be used to forecast future performance. D. past and current position, but should never be used to forecast future performance. 29. Which of the following statements is correct? A. The use of debt in the capital structure results in tax benefits to the firm. B. Debt is referred to as "financial leverage" because it magnifies returns to shareholders. C. Debt management ratios evaluate whether a firm is financing its assets with a reasonable amount of debt versus equity financing. D. All of these statements are correct. 30. Which of the following statements is incorrect? A. A negative free cash flow means that the firm's operations are not producing any cash flows for investors and always indicates that the firm is mismanaged. B. A positive free cash flow means that the firm's operations are producing cash flows for investors both bondholders and shareholders. C. Free cash flows are the cash flows available to investors after the firm has made the necessary investments in the firm's operations. D. All of these statements are correct. 31. A strong liquidity position means that ______________. A. the firm pays out a large portion of its net income in the form of dividends B. the firm is able to meet its short-term obligations C. the firm uses little debt in its capital structure D. the firm pays its creditors on-time 32. Which of the following statements is correct? A. Performing cross-sectional analysis is easy as industries are clustered with firms that are identical. B. Time-series analysis is useless in assessing improvement or deterioration of ratios since the data is historical. C. Performing cross-sectional ratio analysis refers to assessing how a firm performed over a certain section of time. D. To interpret financial ratios, users should analyze the performance of the firm over time and the performance of the firm against one or more companies in the same industry. 33. A firm has an average collection period of 13 days. The industry average ACP is 27 days. Which of the following statements is true given this information? A. The firm could probably increase its sales by relaxing its strict accounts receivable policy. B. The firm is maximizing its net income by minimizing its losses in accounts receivable. C. The firm has an excellent accounts receivable policy. D. Both statements b and c are correct. 34. Which of the following activities will increase a firm's current ratio? A. Purchase inventory using cash. B. Accrued wages and taxes increase. C. Accounts receivable are paid in cash. D. Buy equipment with a short-term bank loan. E. None of these statements will increase a firm's current ratio. 35. Which of the following statements is correct? A. In general, a firm should strive for a high average payment period because it wants to pay for its purchases as quickly as possible. B. If a firm has a very high fixed asset turnover, it means that the firm may be nearing its maximum production capacity. C. An extremely low average collection period will maximize net income. D. A debt ratio of zero, so no interest is paid, is the most profitable strategy. 36. A firm may not want to strive to match industry average ratios when: A. Firms in the industry are shifting into different directions. B. Most of the other firms in the industry are foreign firms. C. They are the leader in the industry. D. All of the above. 37. Which of the following will increase a firm's quick ratio assuming no other accounts change? A. An increase in inventory. B. A reduction in accounts payable. C. An increase in accounts receivable. D. All of these statements will increase a firm's quick ratio. 38. Common-size financial statements: A. Are obtained by dividing all income statement accounts by net sales and all balance sheet accounts by total assets. B. Allow for easy comparison of balance sheets and income statements across firms in the industry. C. Provide quantitative clues about the direction that the firm is moving. D. All of the above. 39. The main two sources of the time value of money are: A. Interest Rates and Risk, B. Inflation and Interest Rates, C. Risk and timing of Consumption, D. Inflation and timing of Consumption. 40. Which of the following will decrease a present value? A. Increasing the future value. B. Decreasing the interest rate. C. Decreasing the number of periods. D. None of the above will decrease a present value. 41. Compounding is _______. A. the adding of interest earned every period on both the original investment and the interest previously earned and retained with the investment B. the adding of interest earned every period on both the original investment and additional deposits C. the process of using time-value equations to compute the number of years D. the process of finding a present value 42. Which of the following will increase the present value of an annuity? A. The interest rate decreases. B. The number of periods decreases. C. The amortization schedule decreases. D. The effective rate is calculated over fewer years. 43. In theory, a perpetuity's value will be infinite A. always, B. if the interest rate is zero, C. if the interest rate is 100%, D. when payments go on forever, E. when the payments are constant. 44. If a bond is selling at a discount, which of the following statements is correct? A. The coupon rate must be greater than the yield to maturity. B. The current yield must be greater than the coupon rate. C. The bond must have a low bond rating. D. All of the statements are correct. 45. Which statement is true? A. Extremely high levels of liquidity guard against liquidity crises, but at the cost of lower returns on assets B. The less liquid assets a firm holds, the less likely it is that the firm will experience financial distress. C. The lower the liquidity ratios, the less liquidity risk a firm has. D. Liquid assets generate profits for the firm. 46. Under what conditions is a bond likely to be called? A. The firm is in financial duress. B. The firm wants to increase its debt ratio. C. Interest rates have significantly declined. D. The firm is planning a massive expansion and needs to raise a lot of capital. 47. Which of the following statements is correct? A. Long-term bonds have more reinvestment rate risk than short-term bonds. B. Long-term bonds have more interest rate risk than short-term bonds. C. Short-term bonds with high coupons have high interest rate risk. D. A zero coupon bonds do not have interest rate risk. 48. Under which conditions will an investor demand a larger return (yield) on a bond? A. The bond issue is upgraded from A to AA. B. The bond issue is downgraded from A to BBB. C. Interest rates decrease due to a decline in inflation. D. None of these conditions will cause an increase in the bond's yield. 49. Which of the following is an electronic stock market without a physical trading floor? A. Mercantile Exchange B. Nasdaq Stock Market C. American Stock Exchange D. New York Stock Exchange 50. To list a stock on the NYSE, a company must meet minimum requirements that include all of the following except ____________________. A. Firm size B. P/E Ratio C. Level of trading volume D. Total number of stockholders 51. Which of the following indices best reflects the ten sectors of the economy? A. Dow Jones Industrial Average B. Standard & Poor's 500 C. Nasdaq Composite D. None of the above 52. Which of the following statements is incorrect? A. Trading at the New York Stock Exchange and the American Stock Exchange are done by open outcry. B. The Dow Jones Industrial Average includes 35 of the largest companies in the U.S. C. Dealers create market liquidity in the Nasdaq's electronic market. D. The Nasdaq contains many very large technology firms. 53. Which of the following statements is incorrect? A. Preferred stockholders have higher precedence for payment than common stockholders in firm liquidation if bankruptcy occurs. B. Preferred stock prices fluctuate with market interest rates and behave like corporate bond prices. C. Common stock price changes with the value of the company's underlying business. D. Preferred stock is preferred because it always pays a higher return than common stock. PROBLEMS 1. (7 points) Hoffa Masonry, Inc.'s balance sheet lists net fixed asset as $24 million. The fixed assets could currently be sold for $20 million. Hoffa's current balance sheet shows current liabilities of $8 million and current assets of $12 million. If all the current accounts were liquidated today, the company would receive $1 million cash after paying the $8 million in liabilities. What is the book value of Hoffa's assets today? What is the market value of these assets? Book Value: ; Market Value: 2. (4 points) Last year a firm had an ROA of 3% and a dividend payout ratio of 40%. What is the internal growth rate? Rate: 3. (4 points) Last year a firm had an ROE of 12% and a dividend payout ratio of 70%. What is the sustainable growth rate? Rate: 4. (3 points) What is the future value in 4 years of $1,000 deposited today, earning a 7% interest rate annually? Future Value: 5. (3 points) Approximately, how many years does it take to double a $2000 investment when interest rates are 4.5% per year? Years: 6. (3 points) A stock investor deposited $1000 five years ago in a non-dividend paying stock. Today the stock is valued at $904. What annual rate of return has this investor earned? Rate: 7. (8 points) A friend wants to retire in 30 years when he is 65. At age 30, he can invest $200/month that earns 4% each year. But he is thinking of waiting 15 years when he is age 50, and then investing $500/month to catch up, earning the same 4% per year. He feels that by investing two and a half times as much for half as many years (15 instead of 30 years) he will have more. What is the future value of each of these options at age 65, and under which scenario would he accumulate more money? Scenario A: , Scenario B: , Best: 8. (4 points) Compute the present value of a one-time payment of $1,000 paid in four years using the following discount rates: 2.5% in year 1, 3.5% in year 2, 4% in year 3, and 4.5% in year 4. Present Value: 9. (5 points) Tree Trunk Furniture is advertising a deal, in which you buy a living room set for $3,556 (including tax) with two years before you need to pay (no interest is incurred if you pay by the end of the two years). How much would you need to deposit at the end of each month in a savings account earning 1.2% APR, compounded monthly, to be able to pay the $3,556 bill in two years? Monthly Deposit: 10. (8 points) You purchase a house for $300,000 by getting a mortgage for $240,000 and paying a $60,000 down payment (20%). You can get a 30-year mortgage with a 3.25% interest rate. A. What would be your monthly payment? B. What would be the loan balance be in 10 years? 11. (3 points) If the present value of an ordinary, 10 year annuity is $20,000 and interest rates are 6%, what is the present value of an annuity due with the same length of life, present values and interest rate? Present Value: 12. (4 points) A credit card is offered with monthly payments and a 18.99% APR. What is the loan's effective annual rate (EAR)? EAR: 13. (5 points) Calculate the price of a $1,000 bond, offering a 10% coupon payment with 10 years left to maturity and a market interest rate of 8%. (Assume interest payments are semiannual.) Is this a discount or premium bond? Price: Type: 14. (4 points) On May 15, 2014, the Dow Jones Industrial Average opened $16,613.97 and closed at $16,446.81. What was the daily return (in percent) of the stock market that day? Daily Return: 15. (4 points) Financial analysts forecast MNO Inc.'s growth for the future to be 4%. MNO's recent annual dividend was $2.00. What is the value of ABC stock when the required return is 12%? Stock Value: 16. (5 points) URN Inc. recently paid a $4.00 annual dividend. The dividend is expected to grow at a 5% rate. At a current stock price of $35, what is the return shareholders are expecting? Expected Return 1 (7 points) Hoffa Masonry, Inc.'s balance sheet lists net fixed asset as $24 million. The fixed assets could currently be sold for $20 million. Hoffa's current balance sheet shows current liabilities of $8 million and current assets of $12 million. If all the current accounts were liquidated today, the company would receive $1 million cash after paying the $8 million in liabilities. What is the book value of Hoffa's assets today? What is the market value of these assets? 2 (4 points) Last year a firm had an ROA of 3% and a dividend payout ratio of 40%. What is the internal growth rate? Internal growth rate = = = ROA*(1-dividend payout) / (1-ROA)*(1-dividend payout) 0.03*(1-.40) / (1-.0.03 - 1-0.40) 3.09% 3 (4 points) Last year a firm had an ROE of 12% and a dividend payout ratio of 70%. What is the sustainable growth rate? Sustainable growth rate = ROE*(1-dividend payout) / (1-ROE)*(1-dividend payout) 13.64% 4 (3 points) What is the future value in 4 years of $1,000 deposited today, earning a 7% interest rate annually? NPER PV Interest 4 1000 7% FV = $1,310.80 5 (3 points) Approximately, how many years does it take to double a $2000 investment when interest rates are 4.5% per year? Using rule of 72 = 16 years 6 (3 points) A stock investor deposited $1000 five years ago in a non-dividend paying stock. Today the stock is valued at $904. What annual rate of return has this investor earned? PV = FV = Nper = 1000 904 5 Rate = -2.00% 7 (8 points) A friend wants to retire in 30 years when he is 65. At age 30, he can invest $200/month that earns 4% each year. But he is thinking of waiting 15 years when he is age 50, and then investing $500/month to catch up, earning the same 4% per year. He feels that by investing two and a half times as much for half as many years (15 instead of 30 years) he will have more. What is the future value of each of these options at age 65, and under which scenario would he accumulate more money? Age 35 Pmt Interest Nper = 200 4% 30 FV = $138,809.88 Age 50 Pmt Interest Nper = 500 4% 15 FV = $123,045.24 Under Age 35 he would accumulate more money, making scenario A best. 8 (4 points) Compute the present value of a one-time payment of $1,000 paid in four years using the following discount rates: 2.5% in year 1, 3.5% in year 2, 4% in year 3, and 4.5% in year 4. 9 (5 points) Tree Trunk Furniture is advertising a deal, in which you buy a living room set for $3,556 (including tax) with two years before you need to pay (no interest is incurred if you pay by the end of the two years). How much would you need to deposit at the end of each month in a savings account earning 1.2% APR, compounded monthly, to be able to pay the $3,556 bill in two years? FVIF = = #DIV/0! 10 (8 points) You purchase a house for $300,000 by getting a mortgage for $240,000 and paying a $60,000 down payment (20%). You can get a 30-year mortgage with a 3.25% interest rate. A. What would be your monthly payment? B. What would be the loan balance be in 10 years? 11 (3 points) If the present value of an ordinary, 10 year annuity is $20,000 and interest rates are 6%, what is the present value of an annuity due with the same length of life, present values and interest rate? Solution Calculating PMT nper PV interest PMT = 10 20000 6% $2,717.36 PV of annuity due PV = $21,200.00 12 (4 points) A credit card is offered with monthly payments and a 18.99% APR. What is the loan's effective annual rate (EAR)? EAR = (1+(i))^n - 1 20.73% 13 (5 points) Calculate the price of a $1,000 bond, offering a 10% coupon payment with 10 years left to maturity and a market interest rate of 8%. (Assume interest payments are semiannual.) Is this a discount or premium bond? Price: Coupon FV Nper Interest PV = 10% 1000 10 8% $1,135.90 This is a premium bond. 14 (4 points) On May 15, 2014, the Dow Jones Industrial Average opened $16,613.97 and closed at $16,446.81. What was the daily return (in percent) of the stock market that day? Beginning Ending 16613.97 16446.81 167.16 Return -1.01% 15 (4 points) Financial analysts forecast MNO Inc.'s growth for the future to be 4%. MNO's recent annual dividend was $2.00. What is the value of ABC stock when the required return is 12%? D0 = D1 = Value of stock = $4.00 $4.16 D1 / (r-g) $52.00 16 (5 points) URN Inc. recently paid a $4.00 annual dividend. The dividend is expected to grow at a 5% rate. At a current stock price of $35, what is the return shareholders are expecting
