Test bank tài chính (1)

1) Which one of the following functions should be the responsibility of the controller rather than the treasurer? Processing cost reports 2) The treasurer of a corporation generally reports directly to the: vice president of finance. 3) Which one of the following correctly defines the upward chain of command in a typical corporate organizational structure? The controller reports to the chief financial officer. 4) An example of a capital budgeting decision is deciding: whether or not to purchase a new machine for the production line. 5) When evaluating the timing of a projects projected cash flows, a financial manager is analyzing: the amount of each expected cash flow. 6) Capital structure decisions include determining: how much debt should be assumed to fund a project. 7) The decision to issue additional shares of stock is an example of: a capital structure decision. 8) Which one of the following questions is a working capital management decision? How much inventory should be on hand for immediate sale? 9) Which one of the following is a working capital management decision? Should the firm pay cash for a purchase or use the credit offered by the supplier? 10) Working capital management decisions include determining: the minimum level of cash to be kept in a checking account. 11) Which one of the following terms is defined as the management of a firms longterm investments? Capital budgeting 12) Which one of the following terms is defined as the mixture of a firms debt and equity financing? Capital structure 13) A firms shortterm assets and its shortterm liabilities are referred to as the firms: A) working capital. 14) Which one of the following questions is least likely to be addressed by financial managers? A) How should a product be marketed? 15) A business owned by a solitary individual who has unlimited liability for the firms debt is called a: sole proprietorship.

Chapter 1:

1) Which one of the following functions should be the responsibility of the controller rather than

the treasurer?

Processing cost reports

2) The treasurer of a corporation generally reports directly to the:

vice president of finance.

3) Which one of the following correctly defines the upward chain of command in a typical

corporate organizational structure?

The controller reports to the chief financial officer.

4) An example of a capital budgeting decision is deciding:

whether or not to purchase a new machine for the production line.

5) When evaluating the timing of a project's projected cash flows, a financial manager is

analyzing:

the amount of each expected cash flow.

6) Capital structure decisions include determining:

how much debt should be assumed to fund a project.

7) The decision to issue additional shares of stock is an example of:

a capital structure decision.

8) Which one of the following questions is a working capital management decision?

How much inventory should be on hand for immediate sale?

9) Which one of the following is a working capital management decision?

Should the firm pay cash for a purchase or use the credit offered by the supplier?

10) Working capital management decisions include determining:

the minimum level of cash to be kept in a checking account.

11) Which one of the following terms is defined as the management of a firm's long-term

14) Which one of the following questions is least likely to be addressed by financial managers?

A) How should a product be marketed?

15) A business owned by a solitary individual who has unlimited liability for the firm's debt is

17) A business partner whose potential financial loss in the partnership will not exceed his or her

investment in that partnership is called a:

limited partner.

18) A business created as a distinct legal entity and treated as a legal "person" is called a(n):

corporation.

19) Which one of the following statements concerning a sole proprietorship is correct?

The owner of a sole proprietorship is personally responsible for all of the company's debts.

20) Which one of the following statements concerning a sole proprietorship is correct?

The life of a sole proprietorship is limited.

21) Which of the following individuals have unlimited liability for a firm's debts based on their ownership interest?

Both general partners and sole proprietors

22) The primary advantage of being a limited partner is:

the partner's maximum loss is limited to their capital investment.

23) A general partner:

is personally responsible for all partnership debts.

24) A limited partnership:

has at least one partner who has unlimited liability for all of the partnership's debts.

25) A partnership with four general partners:

must distribute 25 percent of the profits to each partner.

26) One disadvantage of the corporate form of business ownership is the:

.double taxation of distributed profits

27) Which one of the following statements is correct?

Corporations can have an unlimited life.

28) Which one of the following statements is correct?

Income from both sole proprietorships and partnerships that is taxable is treated as individual income.

29) The articles of incorporation:

describe the purpose of the firm and set forth the number of shares of stock that can be issued.

30) Corporate bylaws:

determine how a corporation regulates itself.

31) A limited liability company:

is taxed similar to a partnership.

32) Which business form is best suited to raising large amounts of capital?

Corporation

33) A has all the respective rights and privileges of a legal person

corporation

34) Sam, Alfredo, and Juan want to start a small U.S business Juan will fund the venture but wants

to limit his liability to his initial investment and has no interest in the daily operations Sam will contribute his full efforts on a daily basis but has limited funds to invest in the business Alfredo will

be involved as an active consultant and manager and will also contribute funds Sam and Alfredo are

willing to accept liability for the firm's debts as they feel they have nothing to lose by doing so All three individuals will share in the firm's profits and wish to keep the initial organizational costs of the business to a minimum Which form of business entity should these individuals adopt?

Limited partnership

35)Sally and Alicia are equal general partners in a business They are content with their current management and tax situation but are uncomfortable with their unlimited liability Which form of business entity should they consider as a replacement to their current arrangement assuming they wish to remain the only two owners of the business?

Limited liability company

36)The growth of both sole proprietorships and partnerships is frequently limited by the firm's:

inability to raise cash.

37) Corporate dividends are:

taxable income of the recipient even though that income was previously taxed.

38)Financial managers should primarily focus on the interests of:

shareholders

39) Which one of the following best states the primary goal of financial management?

Maximize the current value per share

40)Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management?

An increase in the market value per share

41)Financial managers should strive to maximize the current value per share of the existing stock to:

best represent the interests of the current shareholders.

42)Decisions made by financial managers should primarily focus on increasing the:

market value per share of outstanding stock.

43) The Sarbanes-Oxley Act of 2002 is a governmental response to:

management greed and abuses.

44)Which one of the following is an unintended result of the Sarbanes-Oxley Act?

Corporations delisting from major exchanges

45) A firm which opts to "go dark" in response to the Sarbanes-Oxley Act:

can provide less information to its shareholders than it did prior to "going dark".

46) The Sarbanes-Oxley Act of 2002 holds a public company's responsible for the accuracy

of the company's financial statements

managers

47)Which one of the following actions by a financial manager is most apt to create an agency

problem?

Increasing current profits when doing so lowers the value of the company's equity

48)Which one of the following is least apt to help convince managers to work in the best interest

of the stockholders? Assume there are no golden parachutes

Increasing managers' base salaries

49) Agency problems are most associated with:

limited liability companies.

50) Which one of the following is an agency cost?

Hiring outside accountants to audit the company's financial statements

51) Which one of the following is a means by which shareholders can replace company

54) Which of the following parties are considered stakeholders of a firm?

Employees and the government

55) Which one of the following represents a cash outflow from a corporation?

Payment of dividends

56) Which one of the following is a cash flow from a corporation into the financial markets?

Payment of loan interest

57) Which one of the following is a primary market transaction?

Sale of a new share of stock to an individual investor

58)Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange This transaction:

was facilitated in the secondary market.

59) Public offerings of debt and equity must be registered with the:

Securities and Exchange Commission

60) Which one of the following statements is generally correct?

Auction markets match buy and sell orders.

61)Which one of the following statements concerning stock exchanges is correct

Most debt securities are traded on the NYSE.

62) Shareholder A sold shares of Maplewood Cabinets stock to Shareholder B The stock is listed on the NYSE This trade occurred in which one of the following?

Secondary, auction market

63) Which one of the following statements is correct concerning the NYSE?

The listing requirements for the NYSE are more stringent than those of NASDAQ

Good reputation of the company

4) Which one of the following is a current liability?

Account payable to a supplier that is due next week

5) Which one of the following will decrease the value of a firm's net working capital?

Selling inventory at a loss

6) Which one of the following statements concerning net working capital is correct?

Net working capital may be a negative value.

7) Which one of the following statements concerning net working capital is correct?

Net working capital increases when inventory is sold for cash at a profit.

8) Which one of the following accounts is the most liquid?

Accounts Receivable

9) Which one of the following represents the most liquid asset?

$100 of inventory that is sold today for $100 cash

10) Which one of the following statements related to liquidity is correct?

Liquid assets are valuable to a firm.

11) Shareholders' equity:

represents the residual value of a firm.

12) As the degree of financial leverage increases, the:

probability a firm will encounter financial distress increases.

13) The book value of a firm is:

based on historical cost.

14) The value of which one of the following is included in the market value of a firm but is excluded from the firm's book value?

Employee's experience

15) You recently purchased a grocery store At the time of the purchase, the store's market value and its book value were equal The purchase included the building, fixtures, and inventory Which one of the following is most apt to cause the market value of this store to

be less than its book value?

Construction of a new restricted access highway located between the store and the

surrounding residential areas

16) Which one of the following is the financial statement that shows the accounting value of

a firm's equity as of a particular date?

Balance sheet

17) Net working capital is defined as:

current assets minus current liabilities.

18) Which one of these sets forth the common set of standards and procedures by which audited financial statements are prepared?

Generally Accepted Accounting Principles

19) Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time?

Income statement

20) Noncash items refer to:

expenses that do not directly affect cash flows

21) Which one of the following is true according to generally accepted accounting

principles?

Income is recorded based on the realization principle.

22) Which one of these is most apt to be a fixed cost?

Office salaries

23) Which one of the following statements is correct assuming accrual accounting is used?

The labor costs for producing a product are expensed when the product is sold.

24) The percentage of the next dollar you earn that must be paid in taxes is referred to as the tax rate

marginal

25) The tax rate is equal to total taxes divided by total taxable income

average

26) Which one of the following statements related to corporate taxes is correct?

The marginal tax rate for a company can be either higher than or equal to the average

tax rate.

27) Which one of the following statements concerning corporate income taxes is correct for 2018?

The federal income tax on corporations is a flat-rate tax with the same rate applying

to all levels of taxable income.

28) The cash flow that is available for distribution to a corporation's creditors and

stockholders is called the:

cash flow from assets.

29) Which term relates to the cash flow that results from a company's ongoing, normal business activities?

Operating cash flow

30) Cash flow from assets is also known as the firm's:

free cash flow.

31) The cash flow related to interest payments less any net new borrowing is called the:

cash flow to creditors.

32) Cash flow to stockholders is defined as:

dividend payments less net new equity raised.

33) Which one of the following is an expense for accounting purposes but is not an

operating cash flow for financial purposes?

Interest expense

34) Depreciation for a tax-paying firm:

increases expenses and lowers taxes.

35) Which one of the following statements related to an income statement is correct?

Taxes reduce both net income and operating cash flow.

36) Which one of the following statements is correct concerning a corporation with taxable income of $125,000?

An increase in depreciation will increase the operating cash flow.

37) Which one of the following will increase the cash flow from assets, all else equal?

Decrease in the change in net working capital

38) For a tax-paying firm, an increase in will cause the cash flow from assets to increase

depreciation

39) Which one of the following must be true if a firm had a negative cash flow from assets?

The firm utilized outside funding.

40) An increase in the interest expense for a firm with a taxable income of $123,000 will:

increase the cash flow from assets.

41) Which one of the following is excluded from the cash flow from assets?

Interest expense

42) Net capital spending:

is equal to zero if the decrease in the net fixed assets is equal to the depreciation

expense.

43) Which one of the following statements related to the cash flow to creditors must be correct?

A positive cash flow to creditors represents a net cash outflow from the firm.

44) A positive cash flow to stockholders indicates which one of the following with certainty?

The dividends paid exceeded the net new equity raised.

45) A firm has $680 in inventory, $2,140 in fixed assets, $210 in accounts receivables, $250

in accounts payable, and $80 in cash What is the amount of the net working capital?

$720

NWC = $680 + 210 + 80 − 250 = $720

46) A firm has net working capital of $560 Long-term debt is $3,970, total assets are

$7,390, and fixed assets are $3,910 What is the amount of the total liabilities?

49) Bonner Automotive has shareholders' equity of $218,700 The firm owes a total of

$141,000 of which 40 percent is payable within the next year The firm has net fixed assets

of $209,800 What is the amount of the net working capital?

$35,900

Equity BV = $97,400 + 41,300 − 102,800 = $35,900

51) The What-Not Shop owns the building in which it is located This building initially cost

$647,000 and is currently appraised at $819,000 The fixtures originally cost $148,000 and are currently valued at $65,000 The inventory has a book value of $319,000 and a market value equal to 1.1 times the book value The shop expects to collect 96 percent of the

$21,700 in accounts receivable The shop has $26,800 in cash and total debt of $414,700 What is the market value of the shop's equity?

$867,832

Equity MV = $819,000 + 65,000 + 1.1($319,000) + 96($21,700) + 26,800 − 414,700= $867,832

52) The Widget Co purchased all of its fixed assets three years ago for $4 million These assets can be sold today for $2 million The current balance sheet shows net fixed assets of

$2,500,000, current liabilities of $1,375,000, and net working capital of $725,000 If all the current assets were liquidated today, the company would receive $1.9 million in cash The book value of the total assets today is and the market value of those assets is

$4,600,000; $3,900,000

BV = ($725,000 + 1,375,000) + 2,500,000 = $4,600,000

MV = $1,900,000 + 2,000,000 = $3,900,000

53) JJ Enterprises has inventory of $11,600, fixed assets of $22,400, total liabilities of

$12,900, cash of $1,900, accounts receivable of $8,700, and long-term debt of $6,500 What

is the net working capital?

$15,800

NWC = $1,900 + 8,700 + 11,600 − ($12,900 − 6,500) = $15,800

54) The River Side Stop has a current market value of $26,400 and owes its creditors

$31,300 What is the market value of the shareholders' equity?

$520

Net income = $700 − 180 = $520

56) Andre's Bakery has sales of $487,000 with costs of $263,000 Interest expense is

$26,000 and depreciation is $42,000 The tax rate is 21 percent What is the net income?

$123,240

Net income = ($487,000 − 263,000 − 26,000 − 42,000)(1 − 21) = $123,24057) Hayes Bakery has sales of $30,600, costs of $15,350, an addition to retained earnings

of $4,221, dividends paid of $469, interest expense of $1,300, and a tax rate of 21 percent What is the amount of the depreciation expense?

$1,611

Noncash expenses = Depreciation

60) Beach Front Industries has sales of $546,000, costs of $295,000, depreciation expense

of $37,000, interest expense of $15,000, and a tax rate of 21 percent The firm paid $59,000

in cash dividends What is the addition to retained earnings?

$98,210

Net income = ($546,000 − 295,000 − 37,000 − 15,000)(1 − 21) = $157,210Addition to retained earnings = $157,210 − 59,000= $98,210

61) Keisler's has cost of goods sold of $11,518, interest expense of $315, dividends of

$420, depreciation of $811, and a change in retained earnings of $296 What is the taxable income given a tax rate of 21 percent?

$906.33

Net income = $296 + 420 = $716

Taxable income = $716/(1 − 21) = $906.33

62) What is the average tax rate for a firm with taxable income of $118,740 in 2017?

Taxable Income Tax Rate

Average tax rate = $29,558.60/$118,740 = 24.89%

63) For 2017, Nevada Mining had projected taxable income of $94,800 Its actual taxable income exceeded this projection by $21,000 How much additional tax did the firm owe due

to the $21,000 increase in taxable income?

Taxable Income Tax Rate

100,001 - 335,000 39

18.68

Tax = 15($50,000) + 25($25,000) + 34($76,700 − 75,000) = $14,328

Average tax rate = $14,328/$76,700 =18.68%

65) Winston Industries had sales of $843,800 and costs of $609,900 The company paid

$38,200 in interest and $35,000 in dividends The depreciation was $76,400 The firm has a combined tax rate of 24 percent What was the addition to retained earnings for the year?

$55,668

EBT = $843,800 − 609,900 − 76,400 − 38,200= $119,300

Net income = $119,300(1 − 24)= $90,668

Addition to retained earnings = $90,668– 35,000 = $55,668

66) RTF Oil has total sales of $911,400 and costs of $787,300 Depreciation is $52,600 andthe tax rate is 21 percent The firm is all-equity financed What is the operating cash flow?

Net capital spending = $209,411 − 218,470 + 42,822 = $33,763

68) At the beginning of the year, a firm had current assets of $121,306 and current liabilities

of $124,509 At the end of the year, the current assets were $122,418 and the current liabilities were $103,718 What is the change in net working capital?

$21,903

Change in NWC = ($122,418 − 103,718) − ($121,306 − 124,509) = $21,90369) At the beginning of the year, the long-term debt of a firm was $72,918 and total debt was $138,407 At the end of the year, long-term debt was $68,219 and total debt was

$145,838 The interest paid was $6,430 What is the amount of the cash flow to creditors?

$11,129

CFC = $6,430 − ($68,219 − 72,918) = $11,129

70) Ernie's Home Repair had beginning long-term debt of $51,207 and ending long-term debt of $36,714 The beginning and ending total debt balances were $59,513 and $42,612, respectively The interest paid was $2,808 What is the amount of the cash flow to creditors?

$17,301

CFC = $2,808 − ($36,714 − 51,207) CFC = $17,301

71) The Daily News has projected annual net income of $272,600, of which 28 percent will

be distributed as dividends Assume the company will have net sales of $75,000 worth of common stock What will be the cash flow to stockholders if the tax rate is 21 percent?

$1,328

CFS = 28($272,600) − $75,000 = $1,328

72) The Lakeside Inn had operating cash flow of $48,450 Depreciation was $6,700 and interest paid was $2,480 A net total of $2,620 was paid on long-term debt The firm spent

$24,000 on fixed assets and decreased net working capital by $1,330 What was the amount

of the cash flow to stockholders?

$20,680

CFA = $48,450 − (−$1,330) − 24,000 = $25,780

CFC = $2,480 − (−$2,620) = $5,100

CFS = $25,780 − 5,100 = $20,680

73) For the past year, Galaxy Interiors had depreciation of $2,419, beginning total assets of

$23,616, and ending total assets of $21,878 Current assets decreased by $1,356 What was the amount of net capital spending for the year?

$1,732

Change in NWC = −$1,356 − (−$2,662) = $1,306

NCS = −$382 + 1,611 = $1,229

FCF = CFA = $4,267 − 1,306 − 1,229 = $1,732

77) Up Towne Cleaners has taxable income of $48,900 and a tax rate of 21 percent What

is the change in retained earnings if the firm pays $20,200 in dividends for the year?

$18,431

Change in retained earnings = ($48,900)(1 − 21) − $20,200 = $18,431

78) For the year, B&K United increased current liabilities by $1,400, decreased cash by

$1,200, increased net fixed assets by $340, increased accounts receivable by $200, and decreased inventory by $150 What is the annual change in net working capital?

Net capital spending = $145,000 − 68,400 = $76,600

80) Nu Furniture has sales of $241,000, depreciation of $32,200, interest expense of

$35,700, costs of $103,400, and taxes of $14,637 What is the operating cash flow for the year?

$122,963

OCF = $241,000 − 103,400 − 14,637 = $122,963

81) HiWay Furniture has sales of $316,000, depreciation of $47,200, interest expense of

$41,400, costs of $148,200, and taxes of $16,632 The firm has net capital spending of

$36,400 and a decrease in net working capital of $14,300 What is the cash flow from assetsfor the year?

$5,630

Net new borrowing = ($72,415 − 13,870) − ($68,847 − 15,932) = $5,630

83) JJ Enterprises has current assets of $10,406, long-term debt of $4,780, and current liabilities of $9,822 at the beginning of the year At year end, current assets are $11,318, long-term debt is $5,010, and current liabilities are $9,741 The firm paid $277 in interest and

$320 in dividends during the year What is the cash flow to creditors for the year?

$47

CFC = $277 − ($5,010 − 4,780) = $47

84) BK Enterprises neither sold nor repurchased any shares of stock during the year The firm had annual sales of $7,202, depreciation of $1,196, cost of goods sold of $4,509, interest expense of $318, taxes of $248, beginning-of-year shareholders' equity of $4,808, and end-of-year shareholders' equity of $4,922 What is the amount of dividends paid during the year?

85) Carlisle Carpets has cost of goods sold of $92,511, interest expense of $4,608,

dividends paid of $3,200, depreciation of $14,568, an increase in retained earnings of

$11,920, and a tax rate of 21 percent What is the operating cash flow?

87) Webster's has beginning net fixed assets of $684,218, ending net fixed assets of

$679,426, and depreciation expense of $48,859 What is the net capital spending for the year if the tax rate is 25 percent?

$44,067

Net capital spending = $679,426 − 684,218 + 48,859 = $44,067

88) Global Tours has beginning current assets of $1,360, beginning current liabilities of

$940, ending current assets of $1,720, and ending current liabilities of $1,080 What is the change in net working capital?

$220

Change in NWC = ($1,720 − 1,080) − ($1,360 − 940) = $220

89) The Beach Shoppe has beginning total debt of $682,400 and ending total debt of

$697,413 Current liabilities increased by $18,915 during the year What was the cash flow

to creditors if the firm paid $34,215 in interest during the year?

$38,117

CFC = $34,215 − ($697,413 − 682,400 − 18,915) = $38,117

90) The Outlet started the year with $650,000 in the common stock account and $1,318,407

in the additional paid-in surplus account The end-of-year balance sheet showed $720,000 and $1,299,310 in the same two accounts, respectively What is the cash flow to

stockholders if the firm paid $68,500 in dividends?

22 percent What is the operating cash flow for the year ? Ignore any tax loss carry-forward provisions

$30,800

EBIT = Net income = $565,600 − 476,000 − 58,800 − 42,800 = −$12,000OCF = −$12,000 + 42,800 − 0 = $30,800

Chapter 3

1) Which one of the following is a source of cash for a tax-exempt firm?

Increase in common stock

2) Which one of the following is a use of cash?

Decrease in accounts payable

3) Which one of the following is a source of cash?

6) On the statement of cash flows, which one of the following is considered an operating

activity?Decrease in accounts payable

7) According to the statement of cash flows, an increase in inventory will the cashflow from activities

uses of cash.

10) The sources and uses of cash over a stated period of time are reflected on the:

statement of cash flows.

11) A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of:

sales.

12) Which one of the following standardizes items on the income statement and balance sheet relative to their values as of a chosen point in time?

Common-base year statement

13) On a common-size balance sheet all accounts for the current year are expressed as apercentage of:

total assets for the current year.

14) On a common-base year financial statement, accounts receivables for the current year will be expressed relative to which one of the following?

Base-year accounts receivables

15) Which one of the following ratios is a measure of a firm's liquidity?

Quick ratio

16) An increase in current liabilities will have which one of the following effects, all else heldconstant? Assume all ratios have positive values

Decrease in the quick ratio

17) An increase in which one of the following will increase a firm's quick ratio without

affecting its cash ratio?

Accounts receivable

18) A supplier, who requires payment within 10 days, should be most concerned with which

one of the following ratios when granting credit? Cash

19) A firm has an interval measure of 48 This means that the firm has sufficient liquid assets

to do which one of the following? Cover its operating costs for the next 48 days

20) Ratios that measure a firm's liquidity are known as ratios

short-term solvency

21) Which one of the following statements is correct?

An increase in the depreciation expense will not affect the cash coverage ratio.

22) If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the

following? 5

23) The cash coverage ratio directly measures the ability of a company to meet its obligation

to pay: interest to a lender.

24) All-State Moving had sales of $899,000 in 2017 and $967,000 in 2018 The firm's currentaccounts remained constant Given this information, which one of the following statements

must be true? The net working capital turnover rate increased.

25) The Corner Hardware has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level Assume that both the cost per unit and the selling price per unit also remained constant This accomplishment will be reflected in the firm's financial ratios in which one of the following ways?

Decrease in the day's sales in inventory

26) RJ's has a fixed asset turnover rate of 1.26 and a total asset turnover rate of 97 Sam's has a fixed asset turnover rate of 1.31 and a total asset turnover rate of 94 Both companieshave similar operations Based on this information, RJ's must be doing which one of the

following? Utilizing its total assets more efficiently than Sam's

27) Ratios that measure how efficiently a firm manages its assets and operations to

generate net income are referred to as ratios profitability

28) If a company produces a return on assets of 14 percent and also a return on equity of 14

percent, then the firm: has an equity multiplier of 1.0.

29) Which one of the following will decrease if a firm can decrease its operating costs, all

else constant? Price-earnings ratio

30) Al's has a price-earnings ratio of 18.5 Ben's also has a price-earnings ratio of 18.5 Which one of the following statements must be true if Al's has a higher PEG ratio than

Ben's? Ben's is increasing its earnings at a faster rate than Al's.

31) Tobin's Q relates the market value of a firm's assets to which one of the following?

Today's cost to duplicate those assets

32) The price-sales ratio is especially useful when analyzing firms that have:

negative earnings.

33) Mortgage lenders probably have the most interest in the ratios

long-term debt and times interest earned

34) Relationships determined from a company's financial information and used for

comparison purposes are known as: financial ratios.

35) DL Farms currently has $600 in debt for every $1,000 in equity Assume the company uses some of its cash to decrease its debt while maintaining its current equity and net

income Which one of the following will decrease as a result of this action? Equity multiplier

36) Which one of these identifies the relationship between the return on assets and the

return on equity? DuPont identity

37) Which one of the following accurately describes the three parts of the DuPont identity?

Equity multiplier, profit margin, and total asset turnover

38) An increase in which of the following must increase the return on equity, all else

constant? Total asset turnover and debt-equity ratio

39) Which one of the following is a correct formula for computing the return on equity?

ROA × Equity multiplier

40) The DuPont identity can be used to help managers answer which of the following

questions related to a company's operations?

I How many sales dollars are being generated per each dollar of assets?

II How many dollars of assets have been acquired per each dollar in shareholders' equity?III How much net profit is being generating per dollar of sales?

IV Does the company have the ability to meet its debt obligations in a timely manner?

I, II, and III only

41) The U.S government coding system that classifies a company by the nature of its

Standard Industrial Classification codes.

42) Which one of the following statements is correct?

Historical information is useful when projecting a company's future performance.

43) The most acceptable method of evaluating the financial statements is to compare the

company's current financial: ratios to the company's historical ratios.

44) All of the following issues represent problems encountered when comparing the financial

statements of two separate entities except the issue of the companies: having the same

46) At the beginning of the year, Brick Makers had cash of $183, accounts receivable of

$392, accounts payable of $463, and inventory of $714 At year end, cash was $167,

accounts payables was $447, inventory was $682, and accounts receivable was $409 What

is the amount of the net source or use of cash by working capital accounts for the year?

Net source of $15 cash

expense What was the net cash flow from operating activity? $959

Net cash from operating activities = $911 + 47 + 15 - 28 + 14= $959

49) For the past year, Jenn's Floral Arrangements had taxable income of $198,600,

beginning common stock of $68,000, beginning retained earnings of $318,750, ending common stock of $71,500, ending retained earnings of $316,940, interest expense of

$11,300, and a tax rate of 21 percent What is the amount of dividends paid during the year?

$158,704

Net income = $198,600(1 - 21) = $156,894

Dividends paid = $156,894 - ($316,940 - 318,750) = $158,704

50) The Floor Store had interest expense of $38,400, depreciation of $28,100, and taxes of

$19,600 for the year At the start of the year, the firm had total assets of $879,400 and current assets of $289,600 By year's end total assets had increased to $911,900 while current assets decreased to $279,300 What is the amount of the cash flow from investment

activity for the year? -$70,900

Cash flow from investment activity = ($879,400 - 289,600) - 28,100 - ($911,900

- 279,300)= -$70,900

51) Williamsburg Market is an all-equity firm that has net income of $96,200, depreciationexpense of $6,300, and an increase in net working capital of $2,800 What is the amount of

the net cash from operating activity? $99,700

Net cash from operating activity = $96,200 + 6,300 - 2,800= $99,700

52) The accounts payable of a company changed from $136,100 to $104,300 over the

course of a year This change represents a: use of $31,800 of cash as an operating

activity.

Change in accounts payable = $104,300 - 136,100 = -$31,800

A decrease in accounts payable is a use of cash as an operating activity

53) Oil Creek Auto has sales of $3,340, net income of $274, net fixed assets of $2,600, andcurrent assets of $920 The firm has $430 in inventory What is the common-size statement

value of inventory? 12.22 percent

55) Last year, which is used as the base year, a firm had cash of $52, accounts receivable of

$223, inventory of $509, and net fixed assets of $1,107 This year, the firm has cash of $61,

accounts receivable of $204, inventory of $527, and net fixed assets of $1,216 What is this

year's common-base-year value of inventory? 1.04

Common-base year inventory = $527/$509 = 1.04

56) Duke's Garage has cash of $68, accounts receivable of $142, accounts payable of $235,

and inventory of $318 What is the value of the quick ratio? .89

Quick ratio = ($68 + 142)/$235= 89

57) Uptown Men's Wear has accounts payable of $2,214, inventory of $7,950, cash of

$1,263, fixed assets of $8,400, accounts receivable of $3,907, and long-term debt of $4,200

What is the value of the net working capital to total assets ratio? 51

NWC to total assets=($1,263 + 3,907 + 7,950-2,214)/($1,263 + 3,907 + 7,950 + 8,400) = 5158) DJ's has total assets of $310,100 and net fixed assets of $168,500 The average daily

operating costs are $2,980 What is the value of the interval measure? 47.52 days

Interval measure = ($310,100 - 168,500)/$2,980 = 47.52 days

59) Corner Books has a debt-equity ratio of 57 What is the total debt ratio? 36

Given the debt-equity ratio of 57, if total debt is $.57 then total equity is $1.00 and total assets are $1.57 Total debt ratio = $.57/$1.57 = 36

60) SS Stores has total debt of $4,910 and a debt-equity ratio of 0.52 What is the value of

the total assets? $14,352.31

Total equity = $4,910/.52 = $9,442.31 Total assets = $4,910 + 9,442.31 = $14,352.3161) JK Motors has sales of $96,400, costs of $53,800, interest paid of $2,800, and

depreciation of $7,100 The tax rate is 21 percent What is the value of the cash coverage

ratio? 15.21

Cash coverage ratio = ($96,400 - 53,800)/$2,800 = 15.21

62) Terry's Pets paid $2,380 in interest and $2,200 in dividends last year The interest

earned ratio is 2.6 and the depreciation expense is $680 What is the value of the cash

coverage ratio? 2.89

EBIT = 2.6($2,380)= $6,188 Cash coverage ratio = ($6,188 + 680)/$2,380= 2.89

63) The Up-Towner has sales of $913,400, costs of goods sold of $579,300, inventory of

$123,900, and accounts receivable of $78,900 How many days, on average, does it take

the firm to sell its inventory assuming that all sales are on credit? 78.07 days

Days' sales in inventory = 365/($579,300/$123,900)= 78.07 days

64) Flo's Flowers has accounts receivable of $4,511, inventory of $1,810, sales of $138,609,and cost of goods sold of $64,003 How many days does it take the firm to sell its inventory

and collect the payment on the sale assuming that all sales are on credit? 22.20 days

Days' sales in inventory = 365/($64,003/$1,810)= 10.322 days Days' sales in receivables = 365/($138,609/$4,511) = 11.879 days Total days in inventory and receivables = 10.322 + 11.879 = 22.20 days

65) The Harrisburg Store has net working capital of $2,715, net fixed assets of $22,407, sales of $31,350, and current liabilities of $3,908 How many dollars' worth of sales are

generated from every $1 in total assets? $1.08

Total asset turnover = $31,350/($2,715 + 22,407 + 3,908) = 1.08

Every $1 in total assets generates $1.08 in sales

66) TJ's has annual sales of $813,200, total debt of $171,000, total equity of $396,000, and

a profit margin of 5.78 percent What is the return on assets? 8.29 percent

ROA = [.0578 ($813,200)]/($171,000 + 396,000) = 0829, or 8.29%

67) Frank's Used Cars has sales of $807,200, total assets of $768,100, and a profit margin

of 6.68 percent The firm has a total debt ratio of 54 percent What is the return on equity?

15.26 percent

69) Hungry Lunch has net income of $73,402, a price-earnings ratio of 13.7, and earnings

per share of $.43 How many shares of stock are outstanding? 170,702

Number of shares = $73,402/$.43 = 170,702

70) A firm has 160,000 shares of stock outstanding, sales of $1.94 million, net income of

$126,400, a price-earnings ratio of 21.3, and a book value per share of $7.92 What is the

market-to-book ratio? 2.12

EPS = $126,400/160,000 = $.79 Price per share = $.79(21.3)= $16.827 Market-to-book ratio = $16.827/$7.92 = 2.12

71) Taylor's Men's Wear has a debt-equity ratio of 48 percent, sales of $829,000, net income

of $47,300, and total debt of $206,300 What is the return on equity?11.01 percent

ROE = $47,300/($206,300/.48) = 1101, or 11.01%

72) Nielsen's has inventory of $29,406, accounts receivable of $46,215, net working capital

of $4,507, and accounts payable of $48,919 What is the quick ratio? 49

Current Assets = 48,919 + 4,507 = 53,426 Quick ratio = ($53,426 - 29,406)/$48,919 = 4973) The Strong Box has sales of $859,700, cost of goods sold of $648,200, net income of

$93,100, and accounts receivable of $102,300 How many days of sales are in receivables?

43.43 days

Days' sales in receivables = 365/($859,700/$102,300) = 43.43

74) Corner Books has sales of $687,400, cost of goods sold of $454,200, and a profit margin

of 5.5 percent The balance sheet shows common stock of $324,000 with a par value of $5 ashare, and retained earnings of $689,500 What is the price-sales ratio if the market price is

$43.20 per share? 4.07

Price-sales ratio = $43.20/[$687,400/($324,000/$5)]= 4.07

75) Gem Jewelers has current assets of $687,600, total assets of $1,711,000, net working

capital of $223,700, and long-term debt of $450,000 What is the debt-equity ratio? 1.15

Current liabilities = $687,600 - 223,700 = $463,900 Total equity = $1,711,000 - 463,900 - 450,000 = $797,100 Debt-equity ratio = ($463,900 + 450,000)/$797,100= 1.15

76) Russell's has annual sales of $649,200, cost of goods sold of $389,400, interest of

$23,650, depreciation of $121,000, and a tax rate of 21 percent What is the cash coverage

ratio for the year? 10.99

Cash coverage ratio = ($649,200 - 389,400)/$23,650 = 10.99

77) Lawn Care, Inc., has sales of $367,400, costs of $183,600, depreciation of $48,600, interest of $39,200, and a tax rate of 25 percent The firm has total assets of $422,100, long-term debt of $102,000, net fixed assets of $264,500, and net working capital of $22,300

What is the return on equity 38.96 percent

Net income = ($367,400 - 183,600 - 48,600 - 39,200) (1 - 25) = $72,000 Current liabilities =

$422,100 - 264,500 - 22,300 = $135,300 Total equity = $422,100 - 135,300 - 102,000 =

$184,800 ROE = $72,000/$184,800= 3896, or 38.96%

78) Frank's Welding has net fixed assets of $36,200, total assets of $51,300, long-term debt

of $22,000, and total debt of $29,700 What is the net working capital to total assets ratio?

14.42 percent

NWC = ($51,300 - 36,200) - ($29,700 - 22,000) = $7,400.Net working capital to total assets

= $7,400/$51,300= 1442, or 14.42%

79) The Green Fiddle has current liabilities of $28,000, sales of $156,900, and cost of goods sold of $62,400 The current ratio is 1.22 and the quick ratio is 71 How many days on

average does it take to sell the inventory? 83.53 days

Inventory = $28,000 (1.22 - 71) = $14,280.Days' sales in inventory = 365/($62,400/$14,280)

= 83.53 days

80) Green Yard Care has net income of $62,300, a tax rate of 21 percent, and a profit margin of 6.7 percent Total assets are $1,100,500 and current assets are $328,200 How

many dollars of sales are being generated from every dollar of net fixed assets? $1.20

Fixed asset turnover = ($62,300/.067)/($1,100,500 - 328,200) = $1.20

For every $1 in net fixed assets, the firm generates $1.20 in sales

81) Jensen's Shipping has total assets of $694,800 at year's end The beginning owners' equity was $362,400 During the year, the company had sales of $711,000, a profit margin of5.2 percent, a tax rate of 21 percent, and paid $12,500 in dividends What is the equity

multiplier at year-end? 1.80

Equity multiplier at year's end = $694,800/[$362,400 + 052($711,500) - 12,500)]= 1.8082) Western Gear has net income of $12,400, a tax rate of 21 percent, and interest expense

of $1,600 What is the times interest earned ratio for the year? 10.81

Times interest earned = [$12,400/(1 - 21) + $1,600]/$1,600 = 10.81

83) Big Tree Lumber has earnings per share of $1.36 The firm's earnings have been

increasing at an average rate of 2.9 percent annually and are expected to continue doing so.The firm has 21,500 shares of stock outstanding at a price per share of $23.40 What is the

firm's PEG ratio? 5.93

PEG ratio = ($23.40/$1.36)/[.029(100)] = 5.93

84) Townsend Enterprises has a PEG ratio of 5.3, net income of $49,200, a price-earnings

ratio of 17.6, and a profit margin of 7.1 percent What is the earnings growth rate? 3.32

percent

5.3 = 17.6/[Earnings growth rate(100)]

Earnings growth rate = 0332, or 3.32%

85) A firm has total assets with a current book value of $71,600, a current market value of

$82,300, and a current replacement cost of $90,400 What is the value of Tobin's Q? 91

Tobin's Q = $82,300/$90,400= 91

86) Dixie Supply has total assets with a current book value of $368,900 and a current

replacement cost of $486,200 The market value of these assets is $464,800 What is the

value of Tobin's Q? 96

Tobin's Q = $464,800/$486,200 = 96

87) Dandelion Fields has a Tobin's Q of 96 The replacement cost of the firm's assets is

$225,000 and the market value of the firm's debt is $101,000 The firm has 20,000 shares ofstock outstanding and a book value per share of $2.09 What is the market-to-book ratio?

89) Lassiter Industries has annual sales of $328,000 with 8,000 shares of stock outstanding.The firm has a profit margin of 4.5 percent and a price-sales ratio of 1.20 What is the firm's

price earnings ratio? 26.7

Explanation: Price per share = 1.20($328,000/8,000)= $49.20 EPS = [.045($328,000)]/8,000

= $1.845.PE ratio = $49.20/$1.845 = 26.7

90) Drive-Up has sales of $31.4 million, total assets of $27.6 million, and total debt of $14.9

million The profit margin is 3.7 percent What is the return on equity? 9.15 percent

ROE = [.037($31.4m)]/($27.6m - 14.9m)= 0915, or 9.15%

91) Corner Supply has a current accounts receivable balance of $246,000 Credit sales for the year just ended were $2,430,000 How many days on average did it take for credit

customers to pay off their accounts during this past year? 36.95 days

Days' sales in receivables = 365/($2,430,000/$246,000)= 36.95 days

92) BL Industries has ending inventory of $302,800, annual sales of $2.33 million, and annual cost of goods sold of $1.41 million On average, how long did a unit of inventory sit

on the shelf before it was sold? 78.38 days

Day's sales in inventory = 365/($1,410,000/$302,800)= 78.38 days

93) Billings Inc has net income of $161,000, a profit margin of 7.6 percent, and an accountsreceivable balance of $127,100 Assume that 66 percent of sales are on credit What is the

days' sales in receivables? 33.18 days

Credit sales = 66($161,000/.076)= $1,398,158.Days' sales in receivables =

365/($1,398,158/$127,100) = 33.18 days

94) Stone Walls has a long-term debt ratio of 6 and a current ratio of 1.2 Current liabilities are $800, sales are $7,800, the profit margin is 6.5 percent, and return on equity is 15.5

percent What is the amount of the firm's net fixed assets? $8,017.43

Current assets = 1.2($800)= $960 Net income = 065($7,800) = $507.Total equity =

Net fixed assets = $8,977.43 - 960

Net fixed assets = $8,017.43

95) A firm has a debt-total asset ratio of 61 percent and a return on total assets of 11.4

percent What is the return on equity 29.23 percent

(Total assets – Total equity)/Total assets = 61

Total equity = 39 Total assets

Net income = 114 Total assets

ROE = 114 Total assets/.39 Total assets= 2923, or 29.23%

96) The Docksider has net income for the most recent year of $24,650 and a combined tax rate of 24 percent The firm paid $1,800 in total interest expense and deducted $2,900 in

depreciation expense What was the cash coverage ratio for the year? 20.63 times

EBT = $24,650/(1 -.24) = $32,434 EBIT = $32,434 + 1,800 = $34,234.Cash coverage ratio =($34,234 + 2,900)/$1,800 = 20.63 times

97) Beach Wear has current liabilities of $350,000, a quick ratio of 1.65, inventory turnover

of 4.7, and a current ratio of 2.9 What is the cost of goods sold? $2,056,250

($1,015,000 - Inventory)/$350,000 = 1.65

Inventory = $437,500 COGS = 4.7($437,500) = $2,056,250

98) Coulter Supply has a total debt ratio of 46 What is the equity multiplier? 1.85

Debt-equity ratio = 46/(1 - 46) = 85 Equity multiplier = 1 + 85= 1.85

99) Oscar's Dog House has a profit margin of 5.6 percent, a return on assets of 12.5

percent, and an equity multiplier of 1.49 What is the return on equity? 18.63 percent

ROE = 12.5%(1.49) = 18.63%

100) A firm has a debt-equity ratio of 62, a total asset turnover of 1.24, and a profit margin

of 5.1 percent The total equity is $489,600 What is the amount of the net income? $50,159

ROE = 051(1.24)(1.62) = 1024 Net income = 1024($489,600) = $50,159

101) High Mountain Foods has an equity multiplier of 1.72, a total asset turnover of 1.16,

and a profit margin of 4.5 percent What is the return on assets? 5.22 percent

ROA = 045(1.16)= 0522, or 5.22%

102) Lancaster Toys has a profit margin of 5.1 percent, a total asset turnover of 1.84, and a

return on equity of 16.2 percent What is the debt-equity ratio? 73

Equity multiplier = 162/[.051(1.84)]= 1.73 Debt-equity ratio = 1.73 – 1= 73

103) Best-Ever Chicken has a debt-equity ratio of 94 Return on assets is 8.5 percent, and

total equity is $520,000 What is the net income? $85,748

Equity multiplier = 1 + Debt-equity ratio = 1.94 ROE = 085(1.94) = 1649 Net income

= 1649($520,000) = $85,748

104) Canine Supply has sales of $2,800, total assets of $1,900, and a debt-equity ratio of 5

Its return on equity is 15 percent What is the net income?$190

ROE = 15 = (Net income/$2,800)($2,800/$1,900)(1.50)

Net income = $190

Chapter 5:

1) Andy deposited $3,000 this morning into an account that pays 5 percent interest,

compounded annually Barb also deposited $3,000 this morning at 5 percent interest,

compounded annually Andy will withdraw his interest earnings and spend it as soon as possible Barb will reinvest her interest earnings into her account Given this, which one of

the following statements is true? Barb will earn more interest in Year 2 than Andy.

2) Nan and Neal are twins Nan invests $5,000 at 7 percent at age 25 Neal invests $5,000

at 7 percent at age 30 Both investments compound interest annually Both twins retire at age 60 and neither adds nor withdraws funds prior to retirement Which statement is correct?Nan will have more money than Neal at any age

3) You are investing $100 today in a savings account Which one of the following terms

refers to the total value of this investment one year from now? Future value

4) Christina invested $3,000 five years ago and earns 2 percent annual interest By leaving her interest earnings in her account, she increases the amount of interest she earns each

year The way she is handling her interest income is referred to as: compounding

5) Art invested $100 two years ago at 8 percent interest The first year, he earned $8 interest

on his $100 investment He reinvested the $8 The second year, he earned $8.64 interest onhis $108 investment The extra $.64 he earned in interest the second year is referred to as:

interest on interest.

6) The interest earned on both the initial principal and the interest reinvested from prior

periods is called: compound interest.

7) Renee invested $2,000 six years ago at 4.5 percent interest She spends all of her

interest earnings immediately so she only receives interest on her initial $2,000 investment

Which type of interest is she earning? Simple interest

8) Kurt won a lottery and will receive $1,000 a year for the next 50 years The current value

of these winnings is called the: present value.

9) Terry is calculating the present value of a bonus he will receive next year The process he

is using is called: discounting.

10) Steve just computed the present value of a $10,000 bonus he will receive next year The

interest rate he used in his computation is referred to as the: discount rate.

11) The process of determining the present value of future cash flows in order to know their

value today is referred to as: discounted cash flow valuation.

12) Sam just opened a savings account paying 3.5 percent interest, compounded annually After four years, the savings account will be worth $5,000 Assume there are no additional

deposits or withdrawals Given this, Sam: could have deposited less money today and

still had $5,000 in four years if the account paid a higher rate of interest.

13) This afternoon, you deposited $1,000 into a retirement savings account The account willcompound interest at 6 percent annually You will not withdraw any principal or interest until

you retire in 40 years Which one of the following statements is correct? The present value

of this investment is equal to $1,000.

14) Your grandmother has promised to give you $10,000 when you graduate from college If you speed up your graduation by one year and graduate two years from now rather than the

expected three years, the present value of this gift will: equal $10,000.

15) Chang Lee is going to receive $20,000 six years from now Soo Lee is going to receive

$20,000 nine years from now Which one of the following statements is correct if both

individuals apply a discount rate of 7 percent? In today's dollars, Chang Lee's money is

worth more than Soo Lee's.

16) Which one of the following variables is the exponent in the present value formula?

Number of time periods

17) Your goal is to have $1 million in your retirement savings on the day you retire To fund this goal, you will make one lump sum deposit today If you plan to retire rather than and earn a rate of interest, then you can deposit a smaller lump

sum today later; sooner; high

18) Which one of the following will produce the lowest present value interest factor?

8 percent interest for 10 years

19) Which one of these will increase the present value of a set amount to be received

sometime in the future? Decrease in the interest rate

20) What is the relationship between the present value and future value interest factors?

The factors are reciprocals of each other.

21) Phillippe invested $1,000 ten years ago and expected to have $1,800 today He has neither added nor withdrawn any money since his initial investment All interest was

reinvested and compounded annually As it turns out, he only has $1,680 in his account

today Which one of the following must be true? He earned a lower interest rate than he

expected.

22) Al invested $3,630 in an account that pays 6 percent simple interest How much money

will he have at the end of five years? $4,719

FV = $3,630 + ($3,630)(.06)(5) = $4,719

23) Alex invested $2,550 in an account that pays 5 percent simple interest How much money will he have at the end of four years? $3,060.00

25) You invested $6,500 at 6 percent simple interest How much more could you have

earned over a 10-year period if the interest had compounded annually? $1,240.51

28) Today, you earn a salary of $31,000 What will be your annual salary ten years from now

if you receive annual raises of 2.2 percent?$38,536.36

FV = $31,000(1.02210) = $38,536.36

29) You own a classic car currently valued at $64,000 If the value increases by 2.5 percent

annually, how much will the car be worth 15 years from now? $92,691.08

FV = $64,000(1.02515)= $92,691.08

30) You hope to buy your dream car five years from now Today, that car costs $62,500 Youexpect the price to increase by an average of 2.9 percent per year How much will your dream car cost by the time you are ready to buy it? $72,103.59

annual interest rate of 6.5 percent How much money will you have 8 years from now?

$21,887.13

FV = $15,000(1.065(8 - 2))= $21,887.137

35) You just received a $5,000 gift from your grandmother which you have decided to save and then gift to your grandchildren 50 years from now How much additional money will you gift if you earn 7.5 percent interest rather than 7 percent interest over the next 50 years?

account $1,256.43

PV = $30,000/(1.035)5 = $25,259.20

PV = $30,000/(1.025)5 = $26,515.63

makes a deposit today but earns an annual interest rate of 6.2 percent? $3,381.39 less

decide whether to deposit a lump sum today, or to wait and deposit a lump sum five years from today to fund this goal How much more will you have to deposit if you wait for five

years before making the deposit? $20,468.85

if he waits for one year rather than making the deposit today? $1,178.76

PV = $40,000/(1.035)5 = $33,678.93

PV = $40,000/(1.035)4= $34,857.69

Difference = $34,857.69 - 33,678.93 = $1,178.76

48) Friendly Companies has an unfunded pension liability of $327 million that must be paid

in 16 years What is the present value of this liability at a discount rate of 6.24 percent?

$124,147,723.50

PV = $327,000,000/(1.0624)16 = $124,147,723.50

49) You have just received notification that you have won the $1.25 million first prize in theCentennial Lottery However, the prize will be awarded on your 100th birthday, 79 years fromnow The appropriate discount rate is 6.4 percent What is the present value of your

winnings? $9,300.82

PV = $1,250,000/(1.06479) = $9,300.82

50) One year ago, you invested $1,750 Today it is worth $1,815.48 What rate of interest

did you earn? 3.74 percent

$1,815.48 = $1,750(1 + r)

r = 0374, or 3.74%

51) According to the Rule of 72, you can do which one of the following? Approximately

double your money in 11 years at 6.55 percent interest

r = 72/11 = 6.55%

52) Sixty years ago, your mother invested $4,500 Today, that investment is worth

$430,065.11 What is the average annual rate of return she earned on this investment? 7.90

investments? One year ago, Saul's investment was worth less than Trek's investment.

58) On your tenth birthday, you received $300 which you invested at 4.5 percent interest,

compounded annually Your investment is now worth $756 How old are you today? Age 31

$756 = $300(1.045t)

t = 21 years

Age today = 10 + 21 = 31 years

59) Assume the total cost of a college education will be $245,000 when your child enters college in 15 years You presently have $108,000 to invest for this purpose What rate of

interest must you earn to cover the cost of your child's college education? 5.61 percent

61) Assume the average vehicle selling price in the United States last year was $36,420 The average price five years earlier was $31,208 What was the annual increase in the

selling price over this time period? 3.14 percent

$36,420 = $31,208[(1 + r)5]

r = 0314, or 3.14%

62) You're trying to save to buy a new $68,000 sports car Currently, you have saved

$36,840 which is invested at 4.9 percent annual interest How many years will it be before

you purchase the car, assuming the price of the car remains constant? 12.81 years

$68,000 = $36,840(1.049t)

t = 12.81 years

63) In 1903, the winner of a competition was paid $50 In 2017, the winner's prize was

$235,000 What will the winner's prize be in 2040 if the prize continues increasing at the same rate? (Do not round intermediate calculations Round your answer to the nearest

1) Which one of the following statements correctly defines a time value of money

relationship? Time and present value are inversely related, all else held constant.

2) Project X has cash flows of $8,500, $8,000, $7,500, and $7,000 for Years 1 to 4,

respectively Project Y has cash flows of $7,000, $7,500, $8,000, and $8,500 for Years 1 to

4, respectively Which one of the following statements is true concerning these two projects

given a positive discount rate? (No calculations needed) Project X has both a higher

present and a higher future value than Project Y.

3) Project A has cash flows of $4,000, $3,000, $0, and $3,000 for Years 1 to 4, respectively.Project B has cash flows of $2,000, $3,000, $2,000, and $3,000 for Years 1 to 4,

respectively

Project B is worth less today than Project A.

4) You are comparing two investment options that each pay 6 percent interest, compoundedannually Both options will provide you with $12,000 of income Option A pays $2,000 the first year followed by two annual payments of $5,000 each Option B pays three annual payments of $4,000 each Which one of the following statements is correct given these two

investment options? Assume a positive discount rate (No calculations needed.) Option B

has a higher present value at Time 0.

5) Which one of the following statements related to annuities and perpetuities is correct?

A perpetuity comprised of $100 monthly payments is worth more than an annuity of

$100 monthly payments provided the discount rates are equal.

6) Which one of these statements related to growing annuities and perpetuities is correct?

The present value of a growing perpetuity will decrease if the discount rate is

increased.

7) You are comparing two annuities that offer regular payments of $2,500 for five years andpay 75 percent interest per month You will purchase one of these today with a single lump sum payment Annuity A will pay you monthly, starting today, while annuity B will pay

monthly, starting one month from today Which one of the following statements is correct

concerning these two annuities? Annuity B has a smaller present value than annuity A 8) An ordinary annuity is best defined as: equal payments paid at the end of regular

intervals over a stated time period.

9) A perpetuity is defined as:unending equal payments paid at equal time intervals 10) A Canadian consol is best categorized as a(n):perpetuity.

11) The interest rate that is most commonly quoted by a lender is referred to as the:

annual percentage rate.

12) The actual interest rate on a loan that is compounded monthly but expressed as an

annual rate is referred to as the rate effective annual

13) Your credit card charges you 85 percent interest per month This rate when multiplied

by 12 is called the rate annual percentage

14) Which one of the following statements related to loan interest rates is correct?

When comparing loans you should compare the effective annual rates.

15) Which one of the following statements concerning interest rates is correct?

The effective annual rate equals the annual percentage rate when interest is

compounded annually.

16) Which one of the following compounding periods will yield the lowest effective annual rate given a stated future value at Year 5 and an annual percentage rate of 10 percent?

Annual

17) A loan where the borrower receives money today and repays a single lump sum on a

future date is called a(n) loan pure discount

18) A loan that calls for periodic interest payments and a lump sum principal payment is referred to as a(n) loan interest-only

19) Amortized loans must have which one of these characteristics over its life? Either equal

or unequal principal payments

20) A(n) loan has regular payments that include both principal and interest but

these payments are insufficient to pay off the loan balloon

21) The entire repayment of a(n) loan is computed simply by computing one

single future value pure discount

22) With an interest-only loan the principal is: repaid in one lump sum at the end of the

loan period.

23) An amortized loan: may have equal or increasing amounts applied to the principal

from each loan payment.

24) You need $25,000 today and have decided to take out a loan at 7 percent interest for five years Which one of the following loans would be the least expensive for you? Assume

all loans require monthly payments and that interest is compounded on a monthly basis

Amortized loan with equal principal payments

25) Southern Tours is considering acquiring Holiday Vacations Management believes Holiday Vacations can generate cash flows of $218,000, $224,000, and $238,000 over the next three years, respectively After that time, they feel the business will be worthless If the desired rate of return is 14.5 percent, what is the maximum Southern Tours should pay

today to acquire Holiday Vacations? $519,799.59

PVA = $218,000/1.145 + $224,000/1.1452 + $238,000/1.1453 = $519,799.59

26) You are considering two savings options Both options offer a rate of return of 7.6

percent The first option is to save $2,500, $2,500, and $3,000 at the end of each year for the next three years, respectively The other option is to save one lump sum amount today You want to have the same balance in your savings account at the end of the three years, regardless of the savings method you select If you select the lump sum method, how much

do you need to save today? $6,890.89

PV = $2,500/1.076 + $2,500/1.0762 + $3,000/1.0763 = $6,890.89

27) Your parents have made you two offers The first offer includes annual gifts of $5,000,

$6,000, and $8,000 at the end of each of the next three years, respectively The other offer

is the payment of one lump sum amount today You are trying to decide which offer to accept given the fact that your discount rate is 6.2 percent What is the minimum amount

that you will accept today if you are to select the lump sum offer? $16,707.06

PV = $5,000/1.062 + $6,000/1.0622 + $8,000/1.0623 = $16,707.06

28) You want to start a business that you believe can produce cash flows of $5,600,

$48,200, and $125,000 at the end of each of the next three years, respectively At the end ofthree years you think you can sell the business for $250,000 At a discount rate of 16

percent, what is this business worth today? $280,894.67

31) You have some property for sale and have received two offers The first offer is for

$89,500 today in cash The second offer is the payment of $35,000 today and an additional guaranteed $70,000 two years from today If the applicable discount rate is 11.5 percent,

which offer should you accept and why? You should accept the second offer because it

has the larger net present value

Offer A: PV = $89,500

Offer B: PV = $35,000 + $70,000/1.1152

PV = $91,305.1732) Your anticipated wedding is three years from today You don't know who your spouse will be but you do know that you are saving $10,000 today and $17,000 one year from today for this purpose You also plan to pay the final $12,000 of anticipated costs on your wedding day At a discount rate of 5.5 percent, what is the current cost of your upcoming wedding?

$36,333.11

PV = $10,000 + $17,000/1.055 + $12,000/1.0553= $36,333.11

33) One year ago, JK Mfg deposited $12,000 in an investment account for the purpose of buying new equipment four years from today Today, it is adding another $15,000 to this account The company plans on making a final deposit of $10,000 to the account one year from today How much cash will be available when the company is ready to buy the

equipment assuming an interest rate of 5.5 percent? $46,008.30

FV = $12,000(1.0555) + $15,000(1.0554) + $10,000(1.0553) = $46,008.30