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FIN 571 Final Exam. |Rated A+
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Question 1

 

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Which of the following is considered a hybrid organizational form?

 

 

  sole proprietorship   partnership

  corporation

  limited liability partnership

 

Question 2

 

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Which of the following is a principal within the agency relationship?

 

 

  the board of directors   the CEO of the firm   a company engineer    a shareholder

 

Question 3

 

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Teakap, Inc., has current assets of $ 1,456,312 and total assets of $4,812,369 for the year ending September 30, 2006. It also has current liabilities of $1,041,012, common equity of

$1,500,000, and retained earnings of $1,468,347. How much long-term debt does the firm have?

 

Solution: Teakap has

 

Current Assets=$1,456,312 Total Assets =$4,812,369

 

Current Liabilities= $1,041,012

 

Common equity= $1,500,000 & Retained Earnings=$1,468,347 Long Term Debt= ($4,812,369-$1,041,012-$15,00,000-$1,468,347

=$803,010

 

 

  $803,010 $1,844,022 $2,303,010 $2,123,612

 

Question 4

 

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Which of the following presents a summary of the changes in a firm’s balance sheet from the beginning of an accounting period to the end of that accounting period?

 

 

  The statement of net worth.

  The statement of retained earnings.   The statement of working capital.

  The statement of cash flows.

 

Question 5

 

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Efficiency ratio: Gateway Corp. has an inventory turnover ratio of 5.6. What is the firm's days's sales in inventory?

 

Solution:365 days /5.6

 

=65.2 days

 

  61.7 days

  65.2 days

  57.9 days

64.3 days

 

Question 6

 

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Leverage ratio: Your firm has an equity multiplier of 2.47. What is its debt-to-equity ratio?

 

Solution: We know, Equity Multiplier=Total assets/ stockholders equity Also, Equity Multiplier=1/Equity Ratio

Or, 2.47/1= Equity Ratio Equity proportion=2.47 Debt proportion=2.47-1

=1.47

 

 

  1.47

  0

  1.74

  0.60

 

Question 7

 

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Which of the following is not a method of “benchmarking”?

 

 

  Identify a group of firms that compete with the company being analyzed.

Evaluating a single firm’s performance over time.

 

  Utilize the DuPont system to analyze a firm’s performance.

Conduct an industry group analysis.

 

 

Question 8

 

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Present value: Jack Robbins is saving for a new car. He needs to have $ 21,000 for the car in three years. How much will he have to invest today in an account paying 8 percent annually to achieve his target? (Round to nearest dollar.)

 

Solution: PV =$21,000/(1.08)3

 

=$16,670

 

 

  $19,444 $16,670 $26,454 $22,680

Question 9

 

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PV of multiple cash flows: Ferris, Inc., has borrowed from their bank at a rate of 8 percent and will repay the loan with interest over the next five years. Their scheduled payments, starting at the end of the year are as follows—$450,000, $560,000, $750,000,

$875,000, and $1,000,000. What is the present value of these payments? (Round to the nearest dollar.)

Solution:

 

Pv  =$450,000/1.08+ $560,000/(1.08)2+$7,50,000/(1.08)3+$875,000/(1.08)4+

$1,000,000/(1.08)5

 

=$(416,667+480,110+595,374+643,151+680,583

 

=$2,815,885

 

 

 

 

 

 

 

 

 

  $2,735,200 $2,815,885  $2,431,224

$2,615,432

 

Question 10

 

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PV of multiple cash flows: Ajax Corp. is expecting the following cash flows—$79,000,

$112,000, $164,000, $84,000, and $242,000—over the next five years. If the company's opportunity cost is 15 percent, what is the present value of these cash flows? (Round to the nearest dollar.)

 

Solution:

 

Pv  =$79,000/1.15+ $112,000/(1.15)2+$164,000/(1.15)3+$84,000/(1.15)4+

$2,42,000/(1.15)5

 

=$(68696+84,688+107833+48027+120316)

 

=$429,560

 

 

  $477,235 $429,560 $480,906 $414,322

 

Question 11

 

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Future value of an annuity: Jayadev Athreya has started on his first job. He plans to start saving for retirement early. He will invest $5,000 at the end of each year for the next 45 years in a fund that will earn a return of 10 percent. How much will Jayadev have at the end of 45 years? (Round to the nearest dollar.)

 

Future Value of ordinary annuity=A X[(1+.i)n-1/i]

 

=$5,000x[(1.10)45-1/.10]

 

=$3,594,524

 

 

 

 

  $3,594,524 $1,745,600 $5,233,442 $2,667,904

Question 12

 

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Serox stock was selling for $20 two years ago. The stock sold for $25 one year ago, and it is currently selling for $28. Serox pays a $1.10 dividend per year. What was the rate of return for owning Serox in the most recent year? (Round to the nearest percent.)

 

Solution: Given, 2 years ago the price was $20.

 

After 1 year it was sold for $25(P0=$25) & Now it is selling for $28(p1=$28) Dividend (D1=1.10)

Rate of Return(R)= D1+(P1-P0)/P0x100

 

=[$1.10+$(28-25)/25]x100

 

=16%

 

 

  16%

  32%

  40%

12%

 

 

Question 13

 

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Bond price: Regatta, Inc., has six-year bonds outstanding that pay a 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. What should the company's bonds be priced at today? Assume annual coupon payments. (Round to the nearest dollar.)

 

 

 

Solution: Given,n=6 years,i=8.25%,YTM=6.875%,PV of Bond =?

 

PV of Bond= (1000x8.25%) x[1-1/(1.06875)6/.06875]+ 1000/(1.06875)6

 

=(82.5x4.8)+671

 

=$1,067

 

 

 

 

 

 

  $923 $972   $1,066   $1,014

Question 14

 

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PV of dividends: Next year Jenkins Traders will pay a dividend of $3.00. It expects to

 

increase its dividend by $0.25 in each of the following three years. If their required rate of return is 14 percent, what is the present value of their dividends over the next four years?

 

Solution: Given,n=3,D1=$3.00, G=0.25,R=14%

 

Present Value of dividends over the next 4 years=$(3.00/1.14)+$3.25/(1.14)2+$3.50/(1.14)3+$3.75/(1.14)4

 

=$(2.63+2.50+2.36+2.22)

 

=$9.72

 

[D2=D1(1+g)=$3.00+.25=$3.25 D3=D2(1+g)=$3.25+.25=$3.50 D4=D3(1+g)=$3.50+.25=$3.75]

 

 

 

  $9.72   $12.50 $11.63 $13.50

Question 15

 

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Capital rationing. TuleTime Comics is considering a new show that will generate annual cash flows of $100,000 into the infinite future. If the initial outlay for such a production is

$1,500,000 and the appropriate discount rate is 6 percent for the cash flows, then what is the profitability index for the project?

 

Solution: Given, annual cashflow=$100,000 Initial outflow= $1,500,000, i=6%

Profitability Index=Cash inflow/ Cash outflow

 

=${100,000/.06}/$1,500,000

 

= 1.11

 

 

  0.90

  1.11

  1.90

0.11

 

 

Question 16

 

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What decision criteria should managers use in selecting projects when there is not enough capital to invest in all available positive NPV projects?

 

 

  The internal rate of return.   The discounted payback.

  The modified internal rate of return.

  The profitability index.

 

 

Question 17

 

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How firms estimate their cost of capital: The WACC for a firm is 13.00 percent. You know that the firm's cost of debt capital is 10 percent and the cost of equity capital is 20%. What proportion of the firm is financed with debt?

 

Solution:Given, WACC=13%,Kd=10%,Ke=20% We know,                     Ke=Ko+(K0-Kd)B/S Or,.20=.13+(.13-.10)x B/S

Or,.20-.13=.03x S/E Or,.07=.03S/E

 

Or,.07/.03= S/E Or,S:E=70:30

70% of the total fund is financed  by debt.

 

 

  70%

  50%

  30%

33%

 

Question 18

 

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The cost of equity: Gangland Water Guns, Inc., is expected to pay a dividend of $2.10 one year from today. If the firm's growth in dividends is expected to remain at a flat 3 percent forever, then what is the cost of equity capital for Gangland if the price of its common shares is currently $17.50?

 

Solution: D1=$2.10,g=3%,P1=$17.50

 

Cost of Equity = (Next Year's dividends per share / Current market value of stock) + Growth rate of dividends

 

=($2.10/$17.50)+0.03

 

=0.15 or 15%

 

 

 

 

 

 

  15.36%

  12.00%

  14.65%

          15.00%

 

Question 19

 

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If a company's weighted average cost of capital is less than the required return on equity, then the firm:

 

 

  Is financed with more than 50% debt

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