Test Financial Management

Name ________________________________

Instructor _____________________________

Course _____________ Date ____________

MULTIPLE CHOICE (60 points) Instructions: Designate the best answer for each of the following questions.

1) Which of the following statements is FALSE? A) Quarterly compounding has a higher annual percentage yield than monthly compounding. B) On monthly compounding loans, the annual percentage yield will be less than the nominal or quoted rate of interest. C) Compounding essentially means earning interest on interest on an initial balance. D) Perpetuities pay an equal payment forever. 2) Which of the following provides the greatest annual interest? A) 10%, compounded annually B) 10%, compounded semiannually C) 10%, compounded quarterly D) 10%, compounded monthly E) 10%, compounded daily 3) At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years? A) 6% B) 5% C) 7% D) 8% 4) A friend plans to buy a big-screen TV/entertainment system and can afford to set aside $1,320 toward the purchase today. If your friend can earn 5.0%, compounded yearly, how much can your friend spend in four years on the purchase? Round off to the nearest $1. A) $1,444 B) $1,604 C) $1,764 D) $1,283

5) A bank pays a quoted annual (nominal) interest rate of 4.25%, compounded daily (365-day year). What is the annual percentage yield (APY)? A) 4.25% B) 5.56% C) 4.75% D) 6.20% E) 4.34% 6) Northwest Bank pays a quoted annual (nominal) interest rate of 4.75%. However, it pays interest (compounds) daily using a 365-day year. What is the effective annual rate of return (APY)? A) 4.75% B) 5.02% C) 3.61% D) 4.86% 7) Middletown, USA currently has a population of 1.5 million people. It has been one of the fastest growing cities in the nation, growing by an average of 4% per year for the last five years. If this city's population continues to grow at 4% per year, what will the population be 10 years from now? A) 1,560,000 B) 2,220,366 C) 2,100,000 D) 1,824,979 8) How many years will it take for an initial investment of $200 to grow to $544 if it is invested today at 8% compounded annually? A) 8 years B) 10 years C) 11 years D) 13 years 9) Discounting is the opposite of: A) compounding. B) future value. C) opportunity costs. D) both A and C. 10) An increase in ________ will decrease present value. A) the discount rate per period B) the original amount invested C) the number of periods D) both A and C E) all of the above

11) If you invest $750 every six months at 8% compounded semi-annually, how much would you accumulate at the end of 10 years? A) $10,065 B) $10,193 C) $22,334 D) $21,731 12) Your company has received a $50,000 loan from an industrial finance company. The annual payments are $6,202.70. If the company is paying 9% interest per year, how many loan payments must the company make? A) 15 B) 13 C) 12 D) 19 13) What is the present value of $250 received at the beginning of each year for 21 years? Assume that the first payment is received today. Use a discount rate of 12%, and round your answer to the nearest $10. A) $1,870 B) $2,090 C) $2,117 D) $3,243 14) What is the present value of an annuity of $12 received at the end of each year for seven years? Assume a discount rate of 11%. The first payment will be received one year from today (round to the nearest $1). A) $25 B) $40 C) $57 D) $118 Use the following information, which describes the possible outcomes from investing in a particular asset, to answer the following question(s). State of the Economy Probability of the States Percentage Returns Economic recession 25% 5% Moderate economic growth 55% 10% Strong economic growth 20% 13% 15) The expected return from investing in the asset is: A) 9.00%. B) 9.35%. C) 10.00%. D) 10.55%.

16) What is the expected rate of return for an investment that has the following expected scenario? If there is an 18% probability of a recession, 2.0% return; if there is a 65% probability of a moderate economy, 9.5% return; if there is a 17% probability of a strong economy, 14.2% return. A) 11.25% B) 7.33% C) 8.95% D) 9.59% 17) On any given day, a bond can be issued at: A) a discount. B) a premium. C) par. D) all of the above. 18) Mortgage bonds: A) are a type of debenture. B) are secured by a lien on real property. C) usually pay little or no interest. D) can only be issued by financial institutions. 19) What is the expected rate of return on a bond that pays a coupon rate of 9%, has a par value of $1,000, matures in five years, and is currently selling for $714? Round your answer to the nearest whole percent and assume annual coupon payments. A) 18% B) 13% C) 16% D) 17% 20) What is the value of a bond that has a par value of $1,000, a coupon rate of $80 (annually), and matures in 11 years? Assume a required rate of return of 11%, and round your answer to the nearest $10. A) $320 B) $500 C) $810 D) $790

21) Which of the following statements is CORRECT? A) Corporations generally are subject to fewer regulations and more favorable tax treatment than sole proprietorships and partnerships. This is why corporations do most of the business in the United States. B) Managers who face the threat of hostile takeovers are less likely to pursue policies that maximize shareholder value than are managers who do not face the threat of hostile takeovers. C) One advantage of the corporate form of organization is that liability of the owners of the firm is limited to their investment in the firm. D) Because of their simplified organization, it is easier for sole proprietorships and partnerships to raise large amounts of outside capital than it is for corporations. E) Bond covenants are an effective way to resolve conflicts between shareholders and managers. 22) Below are the 2008 and 2009 year-end balance sheets for Wolken Enterprises: Assets: Cash Accounts receivable Inventories Total current assets Net fixed assets Total assets Liabilities and equity: Accounts payable Notes payable Total current liabilities Long-term debt Common stock Retained earnings Total common equity Total liabilities and equity 2009 200,000 864,000 2,000,000 $ 3,064,000 6,000,000 $ 9,064,000 $ 2008 $ 170,000 700,000 1,400,000 $2,270,000 5,600,000 $7,870,000

$ 1,400,000 1,600,000 $ 3,000,000 2,400,000 3,000,000 664,000 $ 3,664,000 $ 9,064,000

$1,090,000 1,800,000 $2,890,000 2,400,000 2,000,000 580,000 $2,580,000 $7,870,000

Wolken has never paid a dividend on its common stock, and it issued $2,400,000 of 10-year noncallable, long-term debt in 2008. As of the end of 2009, none of the principal on this debt had been repaid. Assume that the companys sales in 2008 and 2009 were the same. Which of the following statements must be CORRECT? A) Wolken increased its short-term bank debt in 2009. B) Wolken issued long-term debt in 2009. C) Wolken issued new common stock in 2009. D) Wolken repurchased some common stock in 2009. E) Wolken had negative net income in 2009.

23) Which of the following statements is CORRECT? A) The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets. B) The statement of cash flows shows where the firms cash is located; indeed, it provides a listing of all banks and brokerage houses where cash is on deposit. C) The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital. D) The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock. E) The statement of cash flows shows how much the firms cash--the total of currency, bank deposits, and short-term liquid securities (or cash equivalents)--increased or decreased during a given year. 24) Which of the following is a correct equation to solve for the NPV of the project that has an initial outlay of $30,000, followed by incremental cash inflows in the next 3 years of $15,000, $20,000, and $30,000? Assume a discount rate of 10%. A) NPV = - $30,000 + $15,000(1.10)1 + $20,000(1.10)2 + $30,000(1.10)3 B) NPV = - $30,000 + $15,000/(1.10)1 + $20,000/(1.10)2 + $30,000/(1.10)3 C) NPV = - $30,000 + $15,000/(1.01).10 + $20,000/(1.02).10 + $30,000/(1.03).10 D) NPV = - $30,000 + $15,000/(1.1).10 + $20,000(1.2).10 + $30,000(1.3).10 25) There is a 20% probability that the NPV of a project will be $20 million, a 50% probability that it will be sold for $45 million and a 30% probability that it will be for $15 million. What is the expected NPV of the project? A) $17.5 million B) $45 million C) $31 million D) $26.67 million 26) Lemminburg Plastics estimates a 60% probability that sales of pink flamingo lawn ornaments in the summer of 2011 will be 45,000 units, about the same as in 2010. They believe there is a 20% probability that they will go viral and potential sales would be 90,000. There is also a 20% probability that restrictive zoning ordinances will limit sales to 30,000 units. Expected unit sales of the pink flamingos are ________. A) 55,000 B) 51,000 C) 67,500 D) 60,000

27) Pace Corp.'s assets are $625,000, and its total debt outstanding is $185,000. The new CFO wants to employ a debt ratio of 55%. How much debt must the company add or subtract to achieve the target debt ratio? A) $158,750 B) $166,688 C) $175,022 D) $183,773 E) $192,962 28) Heaton Corp. sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $425,000, and its year-end receivables were $60,000. If its DSO is less than the 45-day credit period, then customers are paying on time. Otherwise, they are paying late. By how much are customers paying early or late? Base your answer on this equation: DSO - Credit period = days early or late, and use a 365-day year when calculating the DSO. A positive answer indicates late payments, while a negative answer indicates early payments. A) 6.20 B) 6.53 C) 6.86 D) 7.20 E) 7.56 29) Bonner Corp.'s sales last year were $415,000, and its year-end total assets were $355,000. The average firm in the industry has a total assets turnover ratio (TATO) of 2.4. Bonner's new CFO believes the firm has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales. By how much must the assets be reduced to bring the TATO to the industry average, holding sales constant? A) $164,330 B) $172,979 C) $182,083 D) $191,188 E) $200,747 30) Vang Corp.'s stock price at the end of last year was $33.50 and its earnings per share for the year were $2.30. What was its P/E ratio? A) 13.84 B) 14.57 C) 15.29 D) 16.06 E) 16.86