Q&A Hero

Q: You have just won a $50,000 bond that pays no interest and matures in 20 years. If the discount rate is 10%, what is the present value of your bond? a. $7,450 b. $8,175 c. $8,900 d. $1,490

Q: Baggos has seen their EPS increase from $0.30 to $3.16 in seven years. What has been the growth rate of Baggos's EPS? a. about 30% b. about 40% c. about 20% d. none of these are correct

Q: Your grandparents put $1,000 into a savings account for you when you were born 20 years ago. This account has been earning interest at a compound rate of 7 percent. What is its value today? a. $3,870 b. $1,967 c. $3,026 d. $3,583

Q: You sold 100 shares of stock today for $30 per share that you paid $20 for 6 years ago. Determine the average annual rate of return on your investment, assuming the stock paid no dividends. a. 25% b. 8.33% c. 150% d. 7%

Q: If you invest $10,000 in a 4-year certificate of deposit (CD) paying 10 percent interest compounded annually, determine how much the CD will be worth at the end of 4 years.a. $13,600b. $45,730c. $14,640d. $15,958

Q: Air Atlantic (AA) has been offered a 3-year old jet airliner under a 12-year lease arrangement. The lease requires AA to make annual lease payments of $500,000 at the beginning of each of the next 12 years. Determine the present value of the lease payments if the opportunity cost of funds is 14 percent. a. $2,830,000 b. $13,635,500 c. $6,000,000 d. $3,226,200

Q: Determine how much you would be willing to pay for a bond that pays $60 annual interest indefinitely and never matures (i.e. a perpetuity), assuming you require an 8 percent rate of return on this investment. a. $480 b. $743 c. $1,000 d. $750

Q: Determine (to the nearest dollar) the amount you would be willing to pay for a $1,000 par value bond paying $80 interest each year and maturing in 12 years, assuming you wanted to earn a 9 percent rate of return. a. $929 b. $573 c. $1,316 d. $1,960

Q: Mr. Moore is 35 years old today and is beginning to plan for his retirement. He wants to set aside an equal amount at the end of each of the next 25 years so that he can retire at age 60. He expects to live to the maximum age of 80 and wants to be able to withdraw $25,000 per year from the account on his 61st through 80th birthdays. The account is expected to earn 10 percent per annum for the entire period of time. Determine the size of the annual deposits that must be made by Mr. Moore. a. $212,850 b. $23,449 c. $2,164 d. $8,514

Q: Comet Powder Company has purchased a piece of equipment costing $100,000. It is expected to generate a ten-year stream of benefits amounting to $16,273 per year. Determine the rate of return Comet expects to earn from this equipment. a. 16.3% b. 62.7% c. 10% d. 20%

Q: The earnings of Omega Supply Company have grown from $2.00 per share to $4.00 per share over a nine year time period. Determine the compound annual growth rate. a. 11.1% b. 8% c. 22.2% d. 100%

Q: Determine how much $1,000 deposited in a savings account paying 8% (compounded annually) will be worth after 5 years. a. $5,526 b. $ 784 c. $1,400 d. $1,469

Q: ____ is the return earned by someone who has forgone current consumption. a. The present value b. Principle c. An annuity d. Interest

Q: The difference between an ordinary annuity and an annuity due is: a. the interest rate b. the timing of the payments c. the amount of the payments d. the number of periods

Q: The payment or receipt of a series of equal cash flows per period, at the end of each period, for a specified amount of time is called a(n): a. annuity due b. perpetuity c. ordinary annuity d. simple interest

Q: Annuity due calculations are most common when dealing with: a. cash dividends b. loan repayments c. lease contracts d. interest payments

Q: The ____ of a perpetual stream of equal, annual returns (PMT) discounted at i% per year is equal to ____. a. present value; PMT/i b. present value; PMT x i c. future value; PMT/i d. future value; PMT x i

Q: An annuity that begins more than 1 year in the future is referred to as a(n) ____. a. perpetuity b. annuity due c. uneven annuity d. deferred annuity

Q: The present value of a(n) ____ is determined by dividing the annual cash flow by the interest rate. a. annuity b. annuity due c. perpetuity d. none of these are correct

Q: More frequent compounding results in ____ future values and ____ present values than less frequent compounding at the same interest rate. a. higher, higher b. lower, higher c. higher, lower d. lower, lower

Q: The annual effective rate of interest (ieff ) is a function of: a. the annual nominal rate of interest (inom) b. the number of compounding intervals per year (m) c. the number of years (n) d. both the annual nominal rate of interest (inom) and the number of compounding intervals per year (m)

Q: Which of the following is worth more? a. Future value of an ordinary annuity of PMT dollars per year for n years discounted at i percent. b. Future value of an annuity due of PMT dollars per year for n years discounted at i percent. c. Both are worth the same amount. d. Cannot be determined from the information given.

Q: ____ is interest that is paid not only on the principal, but also on any interest earned but not withdrawn during earlier periods. a. basic interest b. simple interest c. future interest d. compound interest

Q: The effective rate of interest will always be ____ the nominal rate. a. greater than b. equal to c. less than d. equal to or greater than

Q: The more frequent the compounding, the a. greater the present value b. greater the amount deposited c. greater the effective interest rate d. lesser the future value

Q: Annuity due calculations are especially important when dealing with a. term loans b. lease contracts c. capital investments d. capital recovery problems

Q: When a loan is amortized over a five year term, the a. rate of interest is reduced each year b. amount of interest paid is reduced each year c. payment is reduced each year d. balance is paid as a balloon payment in the fifth year

Q: The present value of an ordinary annuity is the a. sum of the present value of a series of equal periodic payments b. future value of an equal series of payments c. receipt of equal cash flows for a specified amount of time d. sum of the future value of an equal series of payments

Q: Using the "Rule of 72," about how long will it take a sum of money to double in value if the annual interest rate is 9 percent? a. 9 years b. 7 years c. 8 years d. 10 years

Q: If the present value of a given sum is equal to its future value, then a. the discount rate must be very high b. there is no inflation c. the discount rate must be zero d. none of these are correct

Q: You have just calculated the present value of the expected cash flows of a potential investment. Management thinks your figures are too low. Which of the following actions would improve the present value of your cash flows? a. extend the cash flows over a longer period of time b. increase the discount rate c. decrease the discount rate d. extend the cash flows over a longer period of time and decrease the discount rate

Q: You have just won a $5 million lottery to be received in twenty annual equal payments of $250,000. What will happen to the present value of your winnings if the interest rate increases during the next 20 years? a. it will be worth less b. it will be worth more c. it will not change d. none of these answers are correct.

Q: An annuity due is one in which a. payments or receipts occur at the end of each period. b. payments or receipts occur at the beginning of each period. c. payments or receipts occur forever. d. cash flows occur continuously.

Q: When using a future value of an annuity table (e.g., Table III at the back of the book), a. payments are assumed to be made at the end of each period b. FVIFA factors increase with an increase in the interest rate c. FVIFA factors increase with an increase in the number of periods d. all of these answers are correct

Q: When using a present value of an annuity table(e.g.,Table III at the back of the book), a. payments are assumed to be made at the beginning of each period b. PVIFA factors decrease with an increase in the interest rate c. PVIFA factors increase with an increase in the number of periods d. PVIFA factors decrease with an increase in the interest rate and increase with an increase in the number of periods

Q: Finding the compound sum of $1,000 to be received at the beginning of each of the next 5 years requires calculating the a. future value of an annuity b. present value of an annuity c. future value of an annuity due d. present value of an annuity due

Q: Finding the discounted current value of $1,000 to be received at the end of each of the next 5 years requires calculating the a. future value of an annuity b. future value of an annuity due c. present value of an annuity d. present value of an annuity due

Q: A(n) ____ is a financial instrument that agrees to pay an equal amount of money per period into the indefinite future (i.e. forever) a. annuity b. annuity due c. sinking fund d. perpetuity

Q: The values shown in ordinary annuity tables (either present value or compound value) can be adjusted to the annuity due form by ____ the ordinary annuity interest factor by ____. a. dividing, (1 + i) b. dividing, (1 + i)n c. multiplying, (1 + i) d. multiplying, (1 + i)n

Q: The process of finding present values is frequently called a. annualizing b. compounding c. discounting d. leasing

Q: The basic future value equation is given by a. FVn = PV0(PVIFi,n) b. FVn = PV0(FVIFAi,n) c. FVn = PV0(1/(1+ i)n) d. FVn = PV0(FVIFi,n)

Q: The present value of a single amount can be represented as a. PV0 = FVn(PVIFi,n) b. PV0 = FVn(PVIFAi,n) c. PV0 = FVn[1/(1 + i)n] d. a and c

Q: Other names for the interest rate include all of the following except: a. inflation rate b. opportunity rate c. discount rate d. required rate of return

Q: Which of the following statements about strategic planning is correct? a. Strategic planning details the short range objectives of the firm. b. Strategic planning details the current management structure of the firm. c. Strategic planning details the long range direction of the firm. d. Strategic planning details the current financial needs of the firm.

Q: Cryo-vac expects sales to increase 20% next year from the current level of $5,000,000. The firm has current assets of $1,000,000 and fixed assets of $1,500,000. Cryo-vac has current liabilities of $750,000 of which $300,000 are in notes payable. What additional financing will Cryo-vac need to support the expected sales increase if its profit margin is 8% and the firm expects to pay out $200,000 in dividends? An increase in net fixed assets of $300,000 will be required. a. $130,000 b. $ 70,000 c. Surplus of $70,000 d. $270,000

Q: In 20X3, the Fillmore Company's sales were $12.0 million. Its balance sheet at year end 20X3 is shown below. Fillmore's 20X4 sales are expected to be $15 million and its 20X5 sales are expected to be $18 million. Earnings after tax in both years is expected to be 5.0% of sales, and annual dividends of $250,000 are expected to be paid in both 20X4 and 20X5. The company presently has excess plant and equipment capacity. As a result, assume that the net fixed asset figure on the balance sheet will remain constant for both 20X4 and 20X5. Assuming that the ratios of assets (except fixed assets, net) to sales and accounts payable to sales in 20X3 remain the same in 20X4 and 20X5, calculate the total amount, i.e., one number, of external financing required during the 2 year period from 20X4 through 20X5, using the percentage of sales method. Fillmore Co. Balance Sheet (December 31, 20X3) ($ millions) Current assets: Current liabilities: Cash $0.2 Accts. payable $0.6 Accts. rec. 1.2 Notes payable 0.7 Inventory 2.0 Long-term debt 1.5 Fixed assets, net 2.6 Stockholders' equity 2.2 $6.0 $6.0 a. $ 750,000 b. $ 250,000 c. $1,000,000 d. None of these are correct

Q: Jones Company sales last year were $25 million and its total assets were $8 million. Accounts payable were $2 million and common stock and retained earnings were $5 million. Jones sales are forecasted to be $30 million this year, earnings after tax are expected to be 3% of sales, and dividends of $250,000 are expected to be paid. Assuming that the ratio of assets to sales and current liabilities to sales remain the same this year as last year, determine the amount of additional financing required. a. $550,000 b. $1,200,000 c. $300,000 d. none of these are correct

Q: The Hudson River Line Company has a balance sheet as of the end of the year as follows: Cash $ 5,000 Accounts payable $15,000 Accounts receivable 20,000 Notes payable 10,000 Inventories 40,000 Total current liab. Total current assets $ 65,000 Long-term debt 30,000 Fixed assets, net 50,000 Stockholders' equity 60,000 Total assets $115,000 Total liabilities and equity $115,000 Last year, the firm had sales of $148,750. This year the company expects sales to increase 25 percent, to generate earnings after tax of $16,000, and to pay a dividend of $5,000. Hudson operated its fixed assets at 85 percent capacity last year. What additional financing will be needed to support the sales increase? a. $2,125 b. $4,625 c. $1,500 d. $375 surplus

Q: Lane Manufacturing needs to determine the amount of growth the firm could experience without having to obtain external financing. The current sales level is $800,000, the net profit margin is 6 percent, and the dividend payout ratio is 40 percent. Assume the firm is currently operating at full capacity and all assets will increase proportionately with sales. Lane's current balance sheet follows: Cash $ 30,000 Accounts payable $140,000 Accounts receivable 90,000 Notes payable 50,000 Inventories 110,000 Long-term debt 280,000 Net fixed assets 380,000 Common stock 40,000 $610,000 Retained earnings 100,000 $610,000 a. 6.53% b. 1.09% c. 11.97% d. 13.50%

Q: Calculate United's total assets if the firm expects sales to grow 15 percent this year and the earnings after tax will be $50,000. United paid $20,000 in dividends last year and expects to increase dividends 10 percent this year. The firm will need additional financing of $25,000 to finance the expected growth. United started the year with $40,000 in accounts payable; $30,000 in notes payable; and $100,000 in long-term debt. The company is operating at full capacity. a. $393,333 b. $590,000 c. $226,667 d. $616,000

Q: Great Subs believes it can increase sales by 50 percent without any increase in net fixed assets. Earnings after tax are expected to be $2,000. The company pays no dividends. What additional financing will Subs need to finance this growth? Subs balance sheet currently is as follows: Cash $ 2,500 Accounts payable $ 5,600 Accounts Rec. 4,400 Notes payable 10,000 Inventory 6,000 Long-term debt 15,000 Fixed assets, net 47,700 Stockholder's equity 30,000 $60,600 $60,600 a. $3,350 surplus--no additional financing needed b. $1,650 c. $3,650 d. None of these are correct

Q: Getrag expects its sales to increase 20% next year from its current level of $4.7 million. Getrag has current assets of $660,000, net fixed assets of $1.5 million, and current liabilities of $462,000. All assets are expected to grow proportionately with sales. If Getrag has a net profit margin of 10%, what additional financing will be needed to support the increase in sales? Getrag does not pay dividends. a. $339,600 b. $283,200 c. No financing needed, surplus of $224,400 d. No financing needed, surplus of $524,400

Q: CU Tech expects sales next year will be $4.8 million, a 25% increase over current sales. CU has total assets of $2.24 million and all assets will increase proportionately with sales. CU has $1.49 million in current liabilities and a current ratio of 1.60 to 1. What total financing will CU need to support the expected sales increase? a. No financing needed, surplus of $139,700 b. $ 187,500 c. $ 48.800 d. $234,400

Q: Great Skot expects to have cash receipts in June of $532,160. Skot's cash disbursements in June are $581,720, including an interest payment on a bond issue of $32,000. If Skot wishes to maintain a cash balance of $40,000, how much will Skot have to borrow if it started the month with a cash balance of $52,000? a. Surplus of $2,440. Will not have to borrow b. Surplus of $34,440. Will not have to borrow c. $5,560 d. $37,560

Q: ICU has current assets of $800,000 and net fixed assets of $1,400,000. The firm expects its sales to climb 25 percent next year from its current level of $3,500,000. ICU's only current liability is accounts payable of $1,200,000. If both current assets and current liabilities will increase proportionately with sales, what additional financing will be needed by ICU next year? Assume ICU has a net profit margin of 6 percent. An increase in net fixed assets of $500,000 will be required. The firm pays out 50 percent of its earnings as dividends. a. $400,000 b. $358,750 c. $178,750 d. $268,750

Q: ECG Monitors is forecasting that sales next year will be $8,640,000, a 20 percent increase over current sales. ECG has total assets of $3,840,000 and all assets will increase proportionately with sales. Of the current liabilities, only accounts payable (now $740,000) will increase with sales. What total financing will be needed by ECG to support the expected sales increase? a. $317,600 b. $620,000 c. $465,600 d. $840,400

Q: Peerless believes that its sales next year will increase 20 percent from the current level of $800,000. Management calculates that assets must increase $110,000 to support the new sales level, and current liabilities will increase $70,000. What total financing will be needed? a. $40,000 b. $1,600 c. $33,600 d. $8,000

Q: In 1998, Hepler Company's sales were $26 million and its total assets were $10 million. Current liabilities were $4 million and total equity was $2 million. Hepler Company's sales for 1999 are forecasted to be $34 million, earnings after taxes are expected to be 5 percent of sales and dividends of $800,000 are expected to be paid. Assuming that the ratios "assets to sales" and "current liabilities to sales" in 1998 remain the same in 1999, determine the amount of additional financing required. a. $1,746,154 b. $1,446,154 c. $6,946,154 d. $ 946,154

Q: Which of the following is an example of a deterministic model? a. profit optimization model b. budget simulator c. probabilistic set d. discriminant model

Q: In those industries where capacity can be added only in discrete or "lumpy" increments, fixed assets are increased in a ____manner as sales increase. a. proportional b. stepwise c. direct relationship d. discriminant

Q: ____financial planning models seek to maximize (or minimize) the value of some objective function, such as profits (or costs). a. Deterministic b. Optimization c. Probabilistic d. all of these answers are correct

Q: The ____is (are) used to forecast the amount of additional financing (i.e., cash) a company will need in some future period. a. percentage of sales forecasting method b. pro forma statement of cash flows c. percentage of sales forecasting and pro forma statement of cash flows d. none of these are correct

Q: Pro forma financial statements show the results of some ____event rather than a (an) ____event. a. actual; assumed b. assumed; actual c. deterministic; probabilistic d. probabilistic; deterministic

Q: If a firm shows a profit on the quarterly income statement, then a. there will be no need for additional financing b. the firm may need additional financing c. the firm will increase its cash balance d. any of these answers may be correct

Q: All the following current liabilities normally vary directly with the sales except: a. accounts payable b. notes payable c. accrued wages d. accrued taxes

Q: The main advantage of deterministic models is that they a. provide the user with more useful information than other models b. allow the user to maximize some objective function c. allow the user to perform sensitivity analyses quickly d. allow the user to maximize or minimize some objective function

Q: Computerized financial planning models may be classified as any of the following except: a. deterministic b. optimistic c. probabilistic d. none of these are correct

Q: The first step in cash budget preparation is the a. estimation of credit sales b. estimation of the expected cash disbursements c. scheduling of disbursements d. determination of estimated receipts

Q: Cash budgets indicate the periods when the firm a. had an increase in outflows b. expects an increase in net profit c. may have cash surpluses d. needs to increase accruals

Q: Cash budgeting can be employed effectively by management to a. identify potential cash flow problems in advance b. aid them in capital budgeting c. control retained earnings d. coordinate cash and deferred expenses

Q: To decrease the additional financing needed to support an increase in sales, management can a. decrease notes payable b. retire common stock c. increase the dividend payout d. cut dividends

Q: In using the percentage of sales forecasting method the assumption is that a. there is a direct relationship between long-term debt and sales b. inventories will increase proportionately with sales c. there is a direct relationship between notes payable and sales d. retained earnings will increase proportionately with sales

Q: The percentage of sales forecasting method is used by management to forecast the amount of a. profit expected for a given percentage increase in sales b. capital financing needed to promote future growth c. cash needed to finance future growth d. debt financing needed

Q: Pro forma financial statements are used to a. find the contribution margin b. show the results of some assumed event c. predict the sensitivity of different output variables d. show the results of an actual event

Q: Financial models that attempt to maximize or minimize the value of a criterion function (e.g., profits, costs) are classified as ____models. a. static b. dynamic c. probabilistic d. optimization

Q: In the percent-of-sales forecasting method, ____is (are) assumed to increase proportionately with sales. a. cash b. accounts receivable c. accounts payable d. all of these answers are correct

Q: In the percent-of-sales forecasting method, all of the following balance sheet and income statement items except ____are assumed to increase proportionately with sales. a. dividends b. accounts payable c. long-term debt d. dividends and long-term debt

Q: An anticipated need for short-term borrowed funds is best shown in a. an operating budget b. a capital budget c. a production budget d. a cash budget

Q: What are the components of an operational plan?

Q: Which of the following liabilities would normally vary directly with sales?I. Accounts payableII. Notes payablea. I onlyb. II onlyc. Both I and IId. Neither I nor II