chapter 1: intro to finance
The treasurer of a corporation generally reports directly to the:
A) board of directors.
B) chairman of the board.
C) chief executive officer.
D) president.
E) vice president of finance.
vice president of finance.
What is the Operating Cash Flow (OCF) equation?
HINT: X + Y - Z
OCF = Earnings before Interest and Taxes (EBIT) + Depreciation – Taxes
EBIT = Operating Revenue – Operating Expense
or
EBIT = Net Income + Interest + Taxes
Name the -->
Short-term solvency ratios (hint: CR, QR, CR)
Current ratio, quick ratio, cash ratio
What are the two traits of an annuity?
1) Paid the exact same amount.
2) Paid at exact the same time.
Capital structure decisions include determining:
A) which one of two projects to accept.
B) how to allocate investment funds to multiple projects.
C) the amount of funds needed to finance customer purchases of a new product.
D) how much debt should be assumed to fund a project.
E) how much inventory will be needed to support a project.
D) how much debt should be assumed to fund a project.
What is the difference between a fixed asset and a current asset?
A fixed asset has a relatively long life. (May be tangible, truck or computer) or intangible (patent)
A current asset has a life of less than one year (e.g., inventory, cash, accounts receivable)
Name the -->
Profitability ratios (hint: PM, ROA, ROE)
Profit margin, return on assets, return on equity
What is the relationship between the present value and future value?
They are reciprocals of each other.
What is the APR on a loan with a stated rate of 2.35 percent per quarter?
A) 9.40 percent
B) 8.69 percent
C) 8.38 percent
D) 8.90 percent
E) 9.74 percent
A) 9.40 percent
2.35 x 4 (quarterly) = 9.4
Which one of the following terms is defined as the mixture of a firm's debt and equity financing?
A) Working capital management
B) Cash management
C) Cost analysis
D) Capital budgeting
E) Capital structure
E) Capital structure
At the beginning of the year, the long-term debt of a firm was $72,918 and the 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?
EQUATION: interest paid - (long-term debt end of year - long-term debt beginning of year)
A) $1,731
B) −$1,001
C) $11,129
D) $13,861
E) $19,172
C) $11,129
Explanation: CFC = $6,430 (interest paid) − ($68,219long-term debt end of year − 72,918long-term debt beginning of year [long-term debt change]
CFC = $11,129
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Asset utilization ratios (hint: TAT, IT, RT)
Total asset turnover, inventory turnover, receivables turnover
How do you calculate the future value of money with present value, time, and interest?
FV = PV*(1+r)^t
Example:
FV = 2000*(1+4%)^2
FV = 2000*(1.04^2)
FV = 2000*1.0816
FV = 2163.2
You just paid $480,000 for an annuity that will pay you and your heirs $15,000 a year forever. What
rate of return are you earning on this policy?
A) 3.650 percent
B) 3.100 percent
C) 2.875 percent
D) 3.125 percent
E) 4.255 percent
D) 3.125 percent
r = 15,000/480,000
r = 3.125
Which one of the following actions by a financial manager is most apt to create an agency problem?
A) Refusing to borrow money when doing so will create losses for the firm
B) Refusing to lower selling prices if doing so will reduce the net profits
C) Refusing to expand the company if doing so will lower the value of the equity
D) Agreeing to pay bonuses based on the market value of the company's stock rather than on its level of sales
E) Increasing current profits when doing so lowers the value of the company's equity
E) Increasing current profits when doing so lowers the value of the company's equity
A firm has a 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?
EQUATION:
current liabilities = current assets - net working capital
total liabilities = current liabilities + long-term debt
A) $2,050
B) $2,920
C) $4,130
D) $7,950
E) $6,890
E) $6,890
Current assets = $7,390 (total assets) − 3,910 (long-term assets)
Current assets = $3,480
Current liabilities = $3,480 − 560 (NWC)
Current liabilities = $2,920
Total liabilities = $2,920 + 3,970 (long-term debt)
Total liabilities = $6,890
Do sources of cash...?
Increase/decrease assets
Increase/decrease liabilities or equity
Decrease assets
Increase liabilities or equity
Vice versa.
Uses of cash -->
Increase assets
Decrease liabilities or equity
How do you calculate present value when you have future value, interest, and time?
PV = FV*(1/(1+r)^t
Example:
PV(?) = 3000(1/(1+5%)^10
PV = 3000/(1.05^10)
PV = 3000/(1.6289)
PV = 1841.74
1) Which one of the following statements related to annuities and perpetuities is correct?
A) An ordinary annuity is worth more than an annuity due given equal annual cash flows for 10 years at 7 percent interest, compounded annually.
B) A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal.
C) Most loans are a form of a perpetuity.
D) The present value of a perpetuity cannot be computed but the future value can.
E) Perpetuities are finite but annuities are not.
B) A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal.
Which one of the following questions is a working capital management decision?
A) Should the company issue new shares of stock or borrow money?
B) Should the company update or replace its older equipment?
C) How much inventory should be on hand for immediate sale?
D) Should the company close one of its current stores?
E) How much should the company borrow to buy a new building?
C) How much inventory should be on hand for immediate sale?
Four years ago, Ship Express purchased a mailing machine at a cost of $218,000. This equipment is currently valued at $97,400 on today's balance sheet, but could actually be sold for $92,900. This is the only fixed asset the firm owns. Net working capital is $41,300, and long-term debt is $102,800. What is the book value of shareholders' equity?
EQUATION: Equity BV = current value + net working capital - long-term debt
A) $31,400
B) $47,700
C) $35,900
D) $249,400
E) $253,900
C) $35,900
Equity BV = $97,400 (current value) + 41,300 (NWC) − 102,800 (long-term debt)
Long-term solvency ratios (hint: TDR, DER, EM, TIE, CCR)
Total debt ratio, debt-equity ratio, equity multiplier, times interest earned, cash coverage ratio
On your tenth (10) 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?
Find t (time)
756 (FV) = 300 (PV)*(1.045^t)
756/300 or 2.52 = 1.045^t
log(2.52) = log(1.045^t)
log(2.52)/log(1.045) = t
t = 20.99 or 21
21 + 10 (initial age) = 31 years old.
An insurance annuity offers to pay you $1,000 per quarter for 20 years. If you want to earn a rate of return of 6.5 percent, compounded quarterly, what is the most you are willing to pay as a lump sum today to obtain this annuity?
A) $32,008.24
B) $34,208.16
C) $44,591.11
D) $43,008.80
E) $38,927.59
C) $44,591.11
PVA =
$1,000[(1 − {1/[1 + (.065/4)]^(20)(4))(.065/4)]
PVA = $44,591.11