FIN350-W Quiz 1 First Name_______ Last Name_______ Version A
EFF= 1 nom 1
When using calculator, sometimes you might need to enter a negative number to get the
When there are several cash flows within a year, apply periodic rate.
For HP calculator, after doing an operation to convert nominal rate to EFF, you might
need to change to setting of P/YR back to 1.
NOPAT = EBIT (1 – Tax rate)
NOWC = Current assets - Non-interest bearing current liability
Notes payable or short-term debt is not a non-interest bearing current liability.
Total Operating capital = NOWC + Net Fixed Assets
OCF = NOPAT + Depreciation expense
FCF(free cash flow) = NOPAT – change in total operating capital
EVA= NOPAT – (After tax cost of capital) * (total operating capital)
1. The primary goal of a financial manager is to:
A) Maximize current year’s dividends per share of the existing stock.
B) Maximize sales
C) Maximize the wealth of the shareholders.
D) Maximize the wealth of the bond holders.
2. When a corporation fails, the maximum that can lost by an investor protected by
limited liability is:
A) the amount of the initial investment.
B) the amount of the profit on the investment.
C) the amount necessary to pay the corporation’s debts.
D) the amount of the investor’s personal wealth.
3. Which of the following are advantages of the corporate form of business ownership?
I. limited liability for firm debt
II. unlimited firm life
III. ability to raise capital
IV. ease to transfer ownership
a. I and II only
b. I, II,III, and IV
c. I, II, and III only
d. II, III, and IV only
4. One agency problem in a corporation is that shareholders may prefer to take ______
projects that may hurt bondholders.
C. value increasing
D. tax exempt
5. An example of a firm's capital structure decision would be:
A) acquisition of a competitive firm.
B) how much to pay for a specific asset.
C) repurchasing shares of common stock
D) whether or not to increase the price of its products.
6. A general partner:
a. has more management responsibility than a limited partner.
b. has less legal liability than a limited partner.
c. faces double taxation whereas a limited partner does not.
d. cannot lose more than the amount of his/her investment.
7. Because management goals may conflict with shareholder goals, __________ are said
to exist. The possibility of _____ may impose some pressure on managers to work hard.
A. Synergies; excessive perks
B. Agency problems; takeover by another company
C. Growth opportunities; golden parachute
D. Leverage problems; entrenchment
8. Because of the Jobs and Growth Tax Relief Reconciliation Act of 2003, the Tax
Increase Prevention and Reconciliation Act of 2005, and the Tax Relief, Unemployment
Insurance Reauthorization and Job Creation Act of 2010, double taxation for corporate
shareholders in year 2003 to 2012 _________ compared to other years.
A) is more severe
B) is less severe
C) is no different
9. How much would you pay for a perpetuity that pays $600 per year for ever when
annual interest rate is 6% ?
10. Bob has $100 invested in a bank that pays 4% annually. How long will it take for
his funds to double to $200?
11. What is the present value of the following cash flow stream at a rate of 6.25%?
Years: 0 1 2 3 4
| | | | |
CFs: $10 $75 $225 $0 $300
12. Suppose a U.S. government bond will pay a single $1,000 three years from now. If
the interest rate is 4%, how much is the bond worth today?
13. Sue now has $125. How much would she have after 8 years if she leaves it
invested at 8.5% with annual compounding?
14. I was once offered a loan from AIG (remember?). I could borrow $3250 and pay
$102.40 per month for 4 years (48 months). Which of the following is correct?
A) The interest rate on the loan is 1.6183% per month
B) The effective interest rate (EFF) on this loan is 23.46%
C) The APR on this loan is 22%.
D) None of above
15. Credit card issuers must by law print their Annual Percentage Rate (APR) on their
monthly statements. If the APR is stated to be 12% monthly, what is the interest rate
per month (periodic rate)?
16. You plan to invest some money in a bank account. Which of the following banks
provides you with the highest effective rate of interest?
a. Bank 1; 6.1% with annual compounding.
b. Bank 5; 6.0% with daily (365-day) compounding.
c. Bank 3; 6.0% with annual compounding.
d. Bank 4; 6.0% with quarterly compounding.
17. A lump sum payment of $1,000 is due at the end of year 5. The nominal interest
rate is 10%, quarterly compounding. Which of the following statements is
a. The present value of this $1,000 would be greater if interest were
compounded monthly rather than quarterly.
b. The periodic interest rate is greater than 2.5%.
c. The periodic interest rate is 2%.
d. Compared with this $1,000 lump sum that is due at the end of year 5, a 5-year,
$200 ordinary annuity has a higher present value.
18. An investment has the following uneven cash flows (cash flows occur at the end of
each year. Note cash flows at t=0 and t=1 are both $0):
Year Cash Flows
If the discount rate (interest rate) is 9%, what is the investment’s present value?
19. You want to buy a new sports car 3 years from now, and you plan to save $4,200
per year, beginning one year from today. You will deposit your savings in an account
that pays 5.2% interest. How much will you have just after you make the 3rd deposit, 3
years from now?
20. Which of the following statements is true?
A) Compounding essentially means earning interest on principal only and not on
B) On loans with daily compounding, the nominal rate will exceed the APY.
C) Discounting means the procedure to find future value.
D) Present values and interest rates (discount rates) move in the opposite
direction with one another.
Q21 may be worked under “BGN” mode
21. Your aunt has $500,000 invested at 5.5%, and she now wants to retire. She wants
to withdraw $45,000 at the beginning of each year, beginning immediately. She also
wants to have $50,000 left to give you when she ceases to withdraw funds from the
account. For how many years can she make the $45,000 withdrawals and still have
$50,000 left in the end?
No correct answer. Everyone gets a credit on this question. Interested students
could read the following:
The textbook guy, which provides a wrong answer of 17.22 year, solved it in
the following way:
BGN mode, -$500 PV, $45 PMT,-$50 FV, N, 5.5 I/Y, CPT N, N=17.22 Year
But the $45K and the last withdraw of $50K should have the same sign. The
$50K should have the same sign as the PMT, no matter your aunt leaves
that $50K to you or to herself. The $50K is not additional contribution to
the bank, so it should have the opposite sign to that of the $500k
originally deposited at the bank. So 17.22 year is wrong!
Correct answer should be one of the following two depending on the
interpretation on how to interpret “She also wants to have $50,000 left to
give you when she ceases to withdraw funds from the account.”
BGN mode, -$500 PV, $45 PMT,$50, N, 5.5 I/Y, CPT N, N=15.05
Years. This assumes that the last withdrawal of $50k is (or $50k
balance that is made available) one year after your aunt’s last
B) If we interpret the question as making the $50K available immediately
after the last withdrawal, then the question could be solved in this way:
under END mode: -$455 PV, $45 PMT,$50 FV, 5.5 I/Y, CPT N,
N=13.99, ($455K is how much you aunt have right after the first
N+1(first withdrawl) =14.99 Years
The (B) interpretation might be what the question really meant, though the two
interpretations generate very close answers.
More ado about the (A) interpretation. It could also be solved under END
-$455 PV, $45 PMT ,5.5 I/Y, 5 FV, CPT N,N=15.05 years
(Do not forget to return to the “END” mode after this question)
22. Wu Systems has the following balance sheet. How much net operating working
capital does the firm have?
Cash $ 100 Accounts payable $ 200
Accounts receivable 650 Accruals 350
Inventory 550 Notes payable 350
Current assets $1,300 Current liabilities $ 900
Net fixed assets 1,000 Long-term debt 600
Common equity 300
Retained earnings 500
Total assets $2,300 Total liab. & equity $2,300
23. Which of the following has the highest present value? (Assuming a positive interest rate;
Cash flows are inflows. Hint: Which of the following cash flows would you prefer to
24. Based on the information below, what is the amount of NOPAT of Craig
Corporation in year 2003? Tax rate is 40%.
25. Based on the information below, what is the amount of free cash flow of Craig
Corporation in the year 2003? (tax rate is 40%)
(Note that the numbers for year 2003 are listed on the right side column.).
Craig Incorporated Balance Sheet
For 12/31/2002 and 12/31/2003
Cash $10,000 $10,000
Accounts receivable 178,000 140,000
Inventory 342,000 390,000
Prepaid expenses 20,000 20,000
Total current assets 550,000 560,000
Plant and equipment 476,000 622,000
Accumulated depreciation (80,000) (132,000)
Net Fixed Assets 396,000 490,000
Total assets $946,000 $1,050,000
Accounts payable $100,000 $100,000
Accrued expenses (accruals) 136,000 106,000
Notes payable 70,000 110,000
Total current liabilities 306,000 316,000
Longterm debt 140,000 196,000
Preferred stock 0 34,000
Common stock 410,000 410,000
Retained earnings 90,000 94,000
Total debt and equity $946,000 $1,050,000
Craig Incorporated Income Statement
For the Year Ended 12/31/2003
Revenue (all credit) $348,000
Cost of goods sold (100,000)
Gross profit $248,000
Selling, general and admin. Expenses (88,000)
Depreciation expense (52,000)
Operating income(EBIT) $108,000
Interest expense (8,000)
Earnings before taxes 100,000
Net income $ 60,000
Preferred stock dividends (20,000)
Net income avail. to common shareholders $ 40,000