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Exam1 FIN470 Winter 2008 Key Ross - Chapter 002 1. What is the cash flow from assets for 2007? a. $508 b. $247 c. $967 D. $109 e. $1,215 Cash flow from assets = $2,900 $553 $2,238 = $109 (See questions 67, 69, and 70.) AACSB TOPIC: ANALYTIC Ross - Chapter 002 #71 SECTION: 2.4 TOPIC: CASH FLOW FROM ASSETS TYPE: PROBLEMS 2. The process of identifying projects which will produce positive cash flows is called: a. financial depreciation. b. capital structure. c. working capital management. d. agency cost analysis. E. capital budgeting. Ross - Chapter 001 #3 SECTION: 1.1 TOPIC: CAPITAL BUDGETING TYPE: DEFINITIONS 3. Gerold's Travel Service just paid $1.79 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 3.2 percent. If you require a 10.5 percent rate of return, how much are you willing to pay to purchase one share of this stock? a. $24.52 b. $17.59 C. $25.31 d. $20.64 e. $24.08 AACSB TOPIC: ANALYTIC Ross - Chapter 008 #58 SECTION: 8.1 TOPIC: STOCK VALUE TYPE: PROBLEMS 4. Baker's Used Autos has sales of $638,400, total assets of $524,200, and a profit margin of 9.8 percent. The firm has a total debt ratio of 35 percent. What is the return on equity? a. 11.93 percent b. 21.05 percent C. 18.36 percent d. 28.00 percent e. 14.47 percent Return on equity = (.098 $638,400) [$524,200 (1 .35)] = $62,563.20 $340,730 = .18362 = 18.36 percent AACSB TOPIC: ANALYTIC Ross - Chapter 003 #89 SECTION: 3.3 TOPIC: PROFITABILITY RATIOS TYPE: PROBLEMS 5. If a firm is at full-capacity sales, it means the firm is at the maximum level of production possible without increasing: a. net working capital. b. cost of goods sold. c. the debt ratio. d. inventory. E. fixed assets. Ross - Chapter 004 #32 SECTION: 4.3 TOPIC: FULL-CAPACITY SALES TYPE: CONCEPTS 6. If a project has a net present value equal to zero, then: a. the project is expected to produce cash inflows in an amount equal to the initial cash outflow. B. any delay in receiving the projected cash inflows will cause the project to have a negative net present value. c. the present value of the cash inflows must exceed the initial cost of the project. d. the project produces a rate of return in excess of the required return. e. the cash inflows equal the project's initial cost given a positive discount rate. Ross - Chapter 009 #14 SECTION: 9.1 TOPIC: NET PRESENT VALUE TYPE: CONCEPTS Ross - Chapter 004 7. Creative Analysis, Inc. is currently operating at 70 percent of capacity. All costs and net working capital vary directly with sales. The tax rate, the profit margin, and the dividend payout ratio will remain constant. How much additional debt is required if no new equity is raised and sales are projected to increase by 10 percent? a. $21.70 b. $3.80 c. $14.10 d. $23.68 E. $54.90 Projected current assets = $5,000 1.1 = $5,500 Projected fixed assets = $2,200 Projected accounts payable = $2,075 1.1 = $2,282.50 Current long-term debt = $425 Current common stock = $3,000 Projected retained earnings = $1,700 + ($216 1.1) = $1,937.60 Additional debt required = $5,500 + $2,200 $2,282.50 $425 $3,000 $1,937.60 = $54.90 AACSB TOPIC: ANALYTIC Ross - Chapter 004 #63 SECTION: 4.4 TOPIC: EXTERNAL FINANCING NEEDED AT LESS THAN MAXIMUM CAPACITY TYPE: PROBLEMS 8. What is the net present value of a project that has an initial cash outflow of $18,900 and the following cash inflows? The required return is 13.25 percent. a. $4,052.53 b. -$2,636.21 c. -$3,840.60 D. -$4,847.47 e. $3,109.16 AACSB TOPIC: ANALYTIC Ross - Chapter 009 #58 SECTION: 9.1 TOPIC: NET PRESENT VALUE TYPE: PROBLEMS 9. Flagler Stores is analyzing a project with the following cash flows. Should this project be accepted based on the discounting approach to the modified internal rate of return if the discount rate is 12 percent? Why or why not? a. No; The MIRR is 11.92 percent. b. Yes; The MIRR is 13.48 percent. C. Yes; The MIRR is 23.67 percent. d. Yes: The MIRR is 18.77 percent. e. No; The MIRR is 13.48 percent. The modified cash flows will be: AACSB TOPIC: ANALYTIC Ross - Chapter 009 #66 SECTION: 9.5 TOPIC: MODIFIED INTERNAL RATE OF RETURN TYPE: PROBLEMS 10. The primary market is the market in which: A. newly issued securities are offered for sale. b. all securities which are included in the Dow Jones Industrial Average (DJIA) must trade. c. shareholders who are also company officers offer their securities for sale. d. a particular security tends to trade the most frequently. e. trades occur on the floor of the NYSE only. Ross - Chapter 001 #17 SECTION: 1.5 TOPIC: PRIMARY MARKET TYPE: DEFINITIONS 11. A U.S. Treasury bond that is quoted at 100:05 is selling: a. at par and pays a 5 percent coupon. b. at 5 percent over the face amount. c. at a 5 percent discount. D. for about $1.56 over face value. e. at a 5 percent premium. Ross - Chapter 007 #73 SECTION: 7.5 TOPIC: TREASURY BOND QUOTE TYPE: CONCEPTS 12. A conflict of interest between the stockholders and company management is called: a. legal liability. b. corporate breakdown. c. stockholders' liability. D. the agency problem. e. corporate activism. AACSB TOPIC: ETHICS Ross - Chapter 001 #14 SECTION: 1.4 TOPIC: AGENCY PROBLEM TYPE: DEFINITIONS 13. The Smith Co., which is currently operating at full capacity, has sales of $3,000, current assets of $800, current liabilities of $400, net fixed assets of $1,900, and a 6 percent profit margin. The firm has no long-term debt and does not plan on acquiring any. The firm does not pay any dividends. Sales are expected to increase by 9 percent next year. If all assets, liabilities, and costs vary directly with sales, how much additional equity financing is required for next year? a. $103.50 B. $10.80 c. $40.00 d. $207.00 e. $196.20 Projected assets = ($800 + $1,900) 1.09 = $2,943 Projected liabilities = $400 1.09 = $436 Current equity = $800 + $1,900 $400 = $2,300 Projected increase in retained earnings = $3,000 .06 1.09 = $196.20 Equity funding need = $2,943 $436 $2,300 $196.20 = $10.80 AACSB TOPIC: ANALYTIC Ross - Chapter 004 #45 SECTION: 4.2 TOPIC: PRO FORMA STATEMENTS TYPE: PROBLEMS 14. The voting procedure where you must own fifty percent plus one of the outstanding shares of stock to guarantee that you will win a seat on the board of directors is called _____ voting. A. straight b. deferred c. cumulative d. democratic e. proxy Ross - Chapter 008 #6 SECTION: 8.2 TOPIC: STRAIGHT VOTING TYPE: DEFINITIONS 15. Which one of the following is a source of cash? a. a purchase of inventory b. a credit sale to a customer C. an increase in accounts payable d. an increase in cash e. the payoff of a loan Ross - Chapter 003 #37 SECTION: 3.1 TOPIC: SOURCES OF CASH TYPE: CONCEPTS 16. The internal growth rate of a firm is best described as the: a. maximum growth rate achievable without any limits on the level of debt financing. b. minimum growth rate achievable if the firm maintains a constant equity multiplier. c. maximum growth rate achievable without using any external equity financing while maintaining a constant debt-equity ratio. d. minimum growth rate achievable if the firm does not pay out any cash dividends. E. maximum growth rate achievable without external financing of any kind. Ross - Chapter 004 #7 SECTION: 4.4 TOPIC: INTERNAL GROWTH RATE TYPE: DEFINITIONS 17. The cash flow from assets is equal to: a. operating cash flow minus the change in net working capital plus net capital spending. b. cash flow to creditors minus the cash flow to shareholders. C. earnings before interest and taxes plus depreciation minus taxes minus net capital spending minus the change in net working capital. d. the cash flow to shareholders minus the cash flow to creditors. e. earnings before interest and taxes plus depreciation minus taxes. Ross - Chapter 002 #40 SECTION: 2.4 TOPIC: CASH FLOW FROM ASSETS TYPE: CONCEPTS 18. Which one of the following will decrease a firm's operating cash flow? A. a decrease in the depreciation expense b. an increase in sales c. a decrease in net working capital d. a decrease in wages paid e. a decrease in the marginal tax rate Ross - Chapter 002 #43 SECTION: 2.4 TOPIC: OPERATING CASH FLOW TYPE: CONCEPTS 19. A common-size statement is an accounting statement that expresses all of a firm's expenses as a percentage of: a. total equity. b. net income. c. taxable income. d. total assets. E. sales. Ross - Chapter 003 #3 SECTION: 3.2 TOPIC: COMMON-SIZE STATEMENTS TYPE: DEFINITIONS 20. You are trying to determine whether to accept project A or project B. These projects are mutually exclusive. As part of your analysis, you should compute the crossover point by determining the: a. net present value of each project using the internal rate of return as the discount rate. B. internal rate of return for the differences in the cash flows of the two projects. c. internal rate of return for the cash flows of each project. d. discount rate that makes the net present value of each project equal to 1. e. discount rate that equates the discounted payback periods for each project. Ross - Chapter 009 #37 SECTION: 9.5 TOPIC: CROSSOVER POINT TYPE: CONCEPTS 21. Swenson & Swenson just decided to save $2,200 a month for the next 6 years as a safety net for recessionary periods. The money will be set aside in a separate savings account which pays 5.5 percent interest compounded monthly. They deposit the first $2,200 today. If the company had wanted to deposit an equivalent lump sum today, how much would they have had to deposit? a. $138,001.14 b. $137,778.92 c. $130,297.18 D. $135,273.51 e. $134,656.34 AACSB TOPIC: ANALYTIC Ross - Chapter 006 #30 SECTION: 6.2 TOPIC: ANNUITY DUE AND PRESENT VALUE TYPE: PROBLEMS 22. A firm has a debt-equity ratio of 62 percent, a total asset turnover of 1.39, and a profit margin of 7.8 percent. The total equity is $672,100. What is the amount of the net income? a. $121,212 b. $120,202 c. $124,097 d. $119,600 E. $118,048 Using the Du Pont identity: Total assets = (1 + .62) $672,100 = $1,088,802; Total sales = $1,088,802 1.39 = $1,513,434.78; Net income = $1,513,434.78 .078 = $118,048 AACSB TOPIC: ANALYTIC Ross - Chapter 003 #95 SECTION: 3.4 TOPIC: DU PONT IDENTITY TYPE: PROBLEMS 23. An account managed by a bond trustee for early bond redemption payments is called a: a. deed in trust account. B. sinking fund. c. call provision account. d. collateral payment account. e. conversion fund. Ross - Chapter 007 #12 SECTION: 7.2 TOPIC: SINKING FUND TYPE: DEFINITIONS 24. The interest rate used to calculate the present value of future cash flows is called the _____ rate. a. annual b. simple C. discount d. compound e. free Ross - Chapter 005 #10 SECTION: 5.2 TOPIC: DISCOUNT RATE TYPE: DEFINITIONS 25. The principle amount of an interest-only loan is: a. repaid in increasing increments and included in each loan payment. b. never repaid. c. repaid in equal annual payments even when the loan interest is repaid monthly. d. repaid in equal increments and included in each loan payment. E. repaid in full at the end of the loan period. Ross - Chapter 006 #22 SECTION: 6.4 TOPIC: INTEREST-ONLY LOAN TYPE: CONCEPTS 26. The sustainable growth rate will be equivalent to the internal growth rate when: a. the dividend payout ratio is zero. b. a firm has a debt-equity ratio exactly equal to one. C. a firm has no debt. d. the projected growth rate is equal to the internal growth rate. e. the plowback ratio is positive but less than one. Ross - Chapter 004 #35 SECTION: 4.4 TOPIC: SUSTAINABLE GROWTH RATE TYPE: CONCEPTS 27. Today, you earn a salary of $42,500. What will be your annual salary 10 years from now if you earn annual raises of 3.2 percent? a. $56,100.00 B. $58,235.24 c. $59,122.08 d. $57,414.06 e. $59,360.45 Future value = $42,500 (1 + .032)10 = $58,235.24 AACSB TOPIC: ANALYTIC Ross - Chapter 005 #21 SECTION: 5.1 TOPIC: FUTURE VALUE TYPE: PROBLEMS 28. Cellular Talk is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 25 percent a year for the next three years and then decreasing the growth rate to 6 percent per year. The company just paid its annual dividend in the amount of $0.80 per share. What is the current value of one share of this stock if the required rate of return is 17 percent? a. $12.94 b. $11.17 c. $14.27 d. $15.06 E. $12.14 AACSB TOPIC: ANALYTIC Ross - Chapter 008 #81 SECTION: 8.1 TOPIC: SUPERNORMAL GROWTH TYPE: PROBLEMS 29. Interest earned only on the original principal amount invested is called _____ interest. a. compound b. annual C. simple d. free e. interest on Ross - Chapter 005 #5 SECTION: 5.1 TOPIC: SIMPLE INTEREST TYPE: DEFINITIONS 30. Which of the following statements concerning the effective annual rate are correct? I. When making financial decisions, you should compare effective annual rates rather than annual percentage rates. II. The more frequently interest is compounded, the higher the effective annual rate given a fixed annual percentage rate. III. A quoted rate of 6 percent compounded continuously has a higher effective annual rate than if the rate were compounded daily. IV. When choosing which loan to accept, you should select the offer with the highest effective annual rate. a. I and IV only b. I, II, III, and IV c. II, III, and IV only d. I and II only E. I, II, and III only Ross - Chapter 006 #19 SECTION: 6.3 TOPIC: EFFECTIVE ANNUAL RATE TYPE: CONCEPTS 31. Any external financing needed is generally covered by: a. the projected operating cash flow. b. adjusting accounts payable. c. the net income retained by the firm. D. adjusting the level of debt and/or equity. e. adjusting the projected cash balance. Ross - Chapter 004 #30 SECTION: 4.4 TOPIC: EXTERNAL FINANCING NEED TYPE: CONCEPTS 32. The rate of return required by investors in the market for owning a bond is called the: a. coupon rate. b. maturity. c. face value. D. yield to maturity. e. coupon. Ross - Chapter 007 #4 SECTION: 7.1 TOPIC: YIELD TO MATURITY TYPE: DEFINITIONS 33. The Burger Joint paid $420 in dividends and $611 in interest expense. The addition to retained earnings is $397.74 and net new equity is $750. The tax rate is 34 percent. Sales are $6,250 and depreciation is $710. What are the earnings before interest and taxes? A. $1,850.00 b. $1,576.67 c. $1,660.00 d. $1,780.82 e. $1,582.16 Net income = $420 + $397.74 = $817.74; Taxable income = $817.74 (1 .34) = $1,239; Earnings before interest and taxes = $1,239 + $611 = $1,850 AACSB TOPIC: ANALYTIC Ross - Chapter 002 #59 SECTION: 2.4 TOPIC: EARNINGS BEFORE INTEREST AND TAXES TYPE: PROBLEMS 34. Next year's annual dividend divided by the current stock price is called the: a. yield to maturity. b. total yield. C. dividend yield. d. capital gains yield. e. earnings yield. Ross - Chapter 008 #2 SECTION: 8.1 TOPIC: DIVIDEND YIELD TYPE: DEFINITIONS 35. Frank invests $2,500 in an account that pays 6 percent simple interest. How much money will he have at the end of four years? a. $3,156 B. $3,100 c. $2,650 d. $3,163 e. $10,600 Ending value = $2,500 + ($2,500 .06 4) = $3,100.00 AACSB TOPIC: ANALYTIC Ross - Chapter 005 #16 SECTION: 5.1 TOPIC: SIMPLE INTEREST TYPE: PROBLEMS 36. A business entity which taxes it owners like partners while providing those owners with limited liability is called a: a. limited proprietorship. b. corporation. c. sole proprietorship. D. limited liability company. e. general partnership. Ross - Chapter 001 #13 SECTION: 1.2 TOPIC: LIMITED LIABILITY COMPANY TYPE: DEFINITIONS 37. Your grandmother left you an inheritance that will provide an annual income for 25 years. You will receive the first payment one year from now in the amount of $10,000. Every year after that, the payment amount will increase by 5 percent. What is your inheritance worth to you today if you can earn 12 percent on your investments? a. $116,666.67 B. $114,400.49 c. $121,121.21 d. $126,908.17 e. $123,464.12 AACSB TOPIC: ANALYTIC Ross - Chapter 006 #65 SECTION: 6.2 TOPIC: GROWING ANNUITY PRESENT VALUE TYPE: PROBLEMS 38. The bonds issued by Jordache Jewelers bear a 7.5 percent coupon, payable semiannually. The bonds mature in 13 years and have a $1,000 face value. Currently, the bonds sell at par. What is the yield to maturity? a. 7.46 percent b. 7.67 percent c. 7.41 percent D. 7.50 percent e. 7.33 percent ; This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the rate in the formula just to verify that your answer is correct. Answer is 7.50 percent. Also, when a bond sells at par, the market rate must equal the coupon rate. AACSB TOPIC: ANALYTIC Ross - Chapter 007 #83 SECTION: 7.1 TOPIC: YIELD TO MATURITY TYPE: PROBLEMS Exam1 FIN470 Winter 2008 Summary Category # of Questions AACSB TOPIC: ANALYTIC 15 AACSB TOPIC: ETHICS 1 Ross - Chapter 001 4 Ross - Chapter 002 5 Ross - Chapter 003 4 Ross - Chapter 004 7 Ross - Chapter 005 4 Ross - Chapter 006 4 Ross - Chapter 007 4 Ross - Chapter 008 4 Ross - Chapter 009 4 SECTION: 1.1 1 SECTION: 1.2 1 SECTION: 1.4 1 SECTION: 1.5 1 SECTION: 2.4 4 SECTION: 3.1 1 SECTION: 3.2 1 SECTION: 3.3 1 SECTION: 3.4 1 SECTION: 4.2 1 SECTION: 4.3 1 SECTION: 4.4 4 SECTION: 5.1 3 SECTION: 5.2 1 SECTION: 6.2 2 SECTION: 6.3 1 SECTION: 6.4 1 SECTION: 7.1 2 SECTION: 7.2 1 SECTION: 7.5 1 SECTION: 8.1 3 SECTION: 8.2 1 SECTION: 9.1 2 SECTION: 9.5 2 TOPIC: AGENCY PROBLEM 1 TOPIC: ANNUITY DUE AND PRESENT VALUE 1 TOPIC: CAPITAL BUDGETING 1 TOPIC: CASH FLOW FROM ASSETS 2 TOPIC: COMMON-SIZE STATEMENTS 1 TOPIC: CROSSOVER POINT 1 TOPIC: DISCOUNT RATE 1 TOPIC: DIVIDEND YIELD 1 TOPIC: DU PONT IDENTITY 1 TOPIC: EARNINGS BEFORE INTEREST AND TAXES 1 TOPIC: EFFECTIVE ANNUAL RATE 1 TOPIC: EXTERNAL FINANCING NEED 1 TOPIC: EXTERNAL FINANCING NEEDED AT LESS THAN MAXIMUM CAPACITY 1 TOPIC: FULL-CAPACITY SALES 1 TOPIC: FUTURE VALUE 1 TOPIC: GROWING ANNUITY PRESENT VALUE 1 TOPIC: INTEREST-ONLY LOAN 1 TOPIC: INTERNAL GROWTH RATE 1 TOPIC: LIMITED LIABILITY COMPANY 1 TOPIC: MODIFIED INTERNAL RATE OF RETURN 1 TOPIC: NET PRESENT VALUE 2 TOPIC: OPERATING CASH FLOW 1 TOPIC: PRIMARY MARKET 1 TOPIC: PRO FORMA STATEMENTS 1 TOPIC: PROFITABILITY RATIOS 1 TOPIC: SIMPLE INTEREST 2 TOPIC: SINKING FUND 1 TOPIC: SOURCES OF CASH 1 TOPIC: STOCK VALUE 1 TOPIC: STRAIGHT VOTING 1 TOPIC: SUPERNORMAL GROWTH 1 TOPIC: SUSTAINABLE GROWTH RATE 1 TOPIC: TREASURY BOND QUOTE 1 TOPIC: YIELD TO MATURITY 2 TYPE: CONCEPTS 11 TYPE: DEFINITIONS 12 TYPE: PROBLEMS 15