Principles of Corporate Finance

1. Which of the following statements is correct? All else being equal_______

a) More value is preferred to less.

b) The sooner cash is received, the more valuable it is.

c) Less risky assets are more valuable than (preferred to) riskier assets

d) All of the above

2. Having the manager's compensation tied to the company's performance increases the agency problem that corporations face.

a) true

b) false

3. The present value of an investment increases as the opportunity cost rate (interest rate) increases.

a) false

b) true

4. When the payment for an annuity is made at the end of each period, such an annuity is referred to as a(n) _____.

a) ordinary annuity

b) deferred annuity

c) discounted annuity

d) annuity due

5. An annuity with payments that occur at the beginning of each period is known as a_____.

a) annuity due

b) discounted annuity

c) ordinary annuity

d) immediate annuity

e) deferred annuity

6. The balance sheet is a financial statement measuring the flow of funds into and out of various accounts over time while the income statement measures the progress of the firm at a point in time.

a) True

b) false

7. Which of the following mathematical expressions computes earnings per share?

a) Earnings per share = Net Income Number of outstanding shares of common stock

b) Earnings per share = (Net Income + Dividend Paid) Number of outstanding shares of common stock

c) Earnings per share = Net Income Number of outstanding shares of common stock

8. The informational efficiency where current prices reflect all pertinent information both public and private is manifested as

a) The weak-form

b) The semi strong-form

c) The strong-form

9. Primary markets are markets _____.

a) where loans are traded

b) where financial assets that have previously been issued by various organizations are traded among investors

c) in which various organizations raise funds by issuing new securities

d) where the instruments traded have original maturities equal to one year or less

10. One of the following is not a benefits of financial intermediaries

a) Reduced cost

b) Helps corporations design securities attractive to investors

c) Risk diversification

d) Financial flexibility

11. Which of the following is an example of a firm's long-term debt?

a) Retained earnings

b) Accounts receivable

c) Corporate bonds

d) Accounts payable

12. An annuity with payments that occur at the beginning of each period is known as a _____.

a) deferred annuity

b) immediate annuity

c) ordinary annuity

d) annuity due

Problems:

13. Dwayne invests $4,700 in a savings account at the beginning of each of the next twelve years. If his opportunity cost rate is 7 percent compounded annually, how much will his investment be worth after the last annuity payment is made?

14. Robert invests $650 in a savings account at the beginning of each of the next seven years. If his opportunity cost rate is 5 percent compounded annually, how much will his investment be worth after the last annuity payment is made? Nper = 7, rate = 5, PV = 0, PMT = 650;

15. Jason's opportunity cost rate is 8 percent compounded annually. How much must he deposit in an account today if he wants to receive $5,400 at the end of each of the next 10 years? Nper = 10, Rate= 8, FV = 0, PMT = 5,400

16. If Emma purchased a 5 year annuity and she pays $5000 in year 1, $300 in year 2, $2000 in year 3, $1500 in year 4, and $1000 in year 5, at a 5% rate, what is the worth of the investment today?

Complete the balance sheet and sales information in the table that follows for Isberg Industries using the following financial data:

Debt ratio: 50%

Quick ratio: 0.80x

Total assets turnover: 1.5x

Days sales outstanding: 36.0 days

Gross profit margin on sales: (Sales Cost of goods sold)/Sales = 25%

Inventory turnover ratio: 5.0x

Balance Sheet:

17. Cash Accounts payable

18. Accounts receivable Long-term debt $ 60,000

19. Inventories Common stock

20. Fixed assets Retained earnings $ 97,500

21. Total assets $300,000 Total liabilities and equity

22. Sales Cost of goods sold

Campsey Computer Company: Balance Sheet as of December 31

Cash $ 77,500 Accounts payable $129,000

Receivables 336,000 Notes payable 84,000

Inventories 241,500 Other current liabilities 117,000

Total current assets $655,000 Total current liabilities $330,000

Net fixed assets 292,500 Long-term debt 256,500

Common equity 361,000

Total assets $947,500 Total liabilities and equity $947,500

Campsey Computer Company: Income Statement for Year Ended December 31

Sales $1,607,500

Cost of goods sold (1,353,000)

Gross profit $ 254,500

Fixed operating expenses except depreciation ( 143,000)

Earnings before interest, taxes, depreciation,

and amortization (EBITDA) $ 111,500

Depreciation ( 41,500) Earnings before interest and taxes (EBIT) $ 70,000

Interest ( 24,500) Earnings before taxes (EBT) $ 45,500

Taxes (40%) ( 18,200)

Net income $ 27,300

Using the information above, calculate the following ratios:

23. Current ratio

24. Days sales outstanding

25. Inventory turnover

26. Total assets turnover

27. Net profit margin

28. Return on assets (ROA)

29. Return on equity (ROE)

30. Debt ratio