How can a private firm appropriately maximize shareholder value? - ANSWER-By making decisions that keep the control of the business with the
... [Show More] owners.
Why are American regulators focused on international investing in a global marketplace? - ANSWER-Because american investors are focused on international investing in a global marketplace.
What is one of the two basic types of financial instruments? - ANSWER-Bonds.
If a company outsources the manufacturing of its products to a foreign country, what are the likeliest outcomes? - ANSWER-Consumer prices will decrease and domestic employment will decrease.
What is true about the content and structure of a balance sheet? - ANSWER-It reports the assets, liabilities, and equity at a point in time.
A company reported an increase in accounts receivable of $5000 during the recent period. Half of this amount is expected to be collected next period. How will this change in accounts receivable affect the cash flows from the operating activities section? - ANSWER-The change will decrease cash flows from operations by $5000
Which statement accurately explains the recognitions of revenues and expenses under accounting income and income for tax purposes? - ANSWER-Revenues and expenses may be recognized in one period for accounting income purposes and in a different period for income tax purposes.
What is a firms cash flow from investments, using the data below and assuming no asset disposals?
-change in PP&E $5000
-depreciation expense $300 - ANSWER-Putting these two only together. $5300 outflow
What is the basic equation for a balance sheet? - ANSWER-Assets=liabilities + equity
What do cash flows from investing activities generally relate to? - ANSWER-A firm's purchase and sale of long-term assets.
Which transaction is reflected in cash flow from operating activities? - ANSWER-Cash sales to customers.
What does free cash flow represent? - ANSWER-Cash available for distribution after funding required reinvestment.
I'm comparing the ratios of two firms, looking to address timing differences, what would be considered an example of a timing difference between the two firms? - ANSWER-The firms have different physical years.
What is fixed asset turnover rate?
Sales / fixed assets. Ex: sales 4000 fixed assets 1000 - ANSWER-The fixed asset turnover rate would be 4.0
A firm has a ROE (return on equity) of .27 and the industry average ROE is .24. What conclusion can an analyst draw? - ANSWER-The firm in generating higher returns to owners than the industry.
What must have taken place for a firm to recognize revenue, in order for the firm to comply with the accrual accounting rules? - ANSWER-The product must have been delivered.
A teacher invest $100,000, for 5 years at an interest rate of 4% compounded annually. How much will they have at the end of 5 years? - ANSWER-Long math. 1 year 104,000. 2 year 108,160 3 year 114,486 4 year 118,985 5 year etc. compound yearly and add to last compound =
$121,665
An accountant is 40, retiring at 70 =30 years. Going to save 6,000 per year and will earn 4% annually. - ANSWER-$336,510
An investor deposits $2000 each year for 10 years, 4% interest bearing account, the last cash is received 1 year prior to the end of the 10 years. What is the future balance after 10 years. - ANSWER-$24,973
What is the par value of a bond? - ANSWER-The sum of money that the corporation promises to pay upon expiration of the bond.
A broker is considering purchasing common stock in a company that has an average but consistent operating performance. Which factor should lead the broker to purchase shares in this company? - ANSWER-The current price of the stock is 25% below its intrinsic value.
Consider buying a dividend paying stock. Dividend is paid at the end of the year. Consensus is that it will be worth $36 at the end of the year. The company pays a 2.25 annual dividend. The broker expects a 12% rate of return. What is the highest price the broker should be willing to pay for the stock? - ANSWER-$34.15
A person buys shares of a company at $45. They recently paid a $2 annual dividend which is expected to grow by 10% per year. What is the expected return per year? - ANSWER-14.9%
Figure that represents the levels of market efficiency. Which investment option is less desirable for a prudent investor? - ANSWER-E- the area in which the most risk is shows.
The market rate of return is 9%. The face value of the bond is $1000, the coupon rate is 9% with annual compounding, and the bond matures in 10 years. What is the value of the bond? - ANSWER-$1000
Which statement is true about fluctuation in bond prices? - ANSWER-When market interest rates fluctuate, the bond coupon rate is unchanged.
A company issued bonds at market price of $925. The face value is $1000. The bond matures in 10 years, and the coupon rate is 6% compounded semiannually. What is the yield to maturity on the company's bonds? - ANSWER-7.06%
Which securities are issued by local governments and are usually tax exempt at the federal level? - ANSWER-Municipal bonds.
A bond pays $27.50 semiannually. Matures in 9 years and is currently priced at $1090. What is the yield to maturity for this bond? - ANSWER-4.28%
A bond that matures in 30 months is sold at a premium. What is the yield to maturity? - ANSWER-Lower than the coupon rate.
Why does a long term bond resemble an interest only loan? - ANSWER-None of the principle is repaid until the bond matures.
Under which circumstances will annual percentage yield be greater than the annual percentage rate? - ANSWER-Any time the number of compounding periods is greater than the annual.
What is the difference between a common stock and a preferred stock? - ANSWER-Skipping a declared preferred stock dividends results in dividends in arrears.
What happens to the risk level in a portfolio as the number of assets in the portfolio increases? - ANSWER-Risk decreases at a slower rate.
The figure below represents a portfolio that plots the expected return against the risk of each investment. Where will a highly risk adverse investor call? - ANSWER-C1- in the risky zone
What are two primary benefits of the capital asset pricing model CAPM? - ANSWER--CAPM provides a way to determine the expected return for stocks
-CAPM provides a way to estimate the required return
A company has a before tax cost of common equity of 14%, a pre tax cost of debt 6%, a cost of preferred equity 8%, and a marginal tax rate of 34%. The current market value of the company is $150 million, with $75 million common equity, $50 million debt, and $25 million preferred equity.
What is the company's weighted average cost of capital? - ANSWER-9.7%
Which two techniques would be considered effective ways to manage the growth of a firm, I additional financing is not available? - ANSWER--increase sales prices
-alter capacity
Partial financial data for a company:
Assets 10,000,000
Liabilities 4,000,000
Equity 6,000,000
Sales 25,000,000
Net income 5,000,000
Profit margin 20%
Dividends 500,000
Dividend payout ratio 10%
ROA 50%
ROE 83% - ANSWER-75%
A machine will reach the end of its useful life in year 5. The realizable salvage value is expected to be 50,000. The company's marginal tax rate is 34%. What is the tax implication on the sale of the new machine at year 5? - ANSWER-34% of 50,000 is tax liabilities of $17,000
What is the acceptance criteria when using internal rate of return to evaluate a project? - ANSWER-Accept when the project is greater than the required return.
A company would like to invest in a capital budget project that will be worth $500,000 in 40yrs. How much should the company invest today, assuming an average inflation rate of 2% and a 10% annual return? - ANSWER-$24, 393
A company has a market value of $500 million. It has a market value of equity of $200 million, a market value of long term debt of $150 million, and a market value of short term debt of $150 million. The cost of equity is 12%, the cost of long term debt is 8%, and the cost of short term debt is 6%. The marginal tax rate is 35%. What is the weighted average pre tax cost of capital WACC for this company? - ANSWER-A and B have the same relative maturity.
What advantage does the capital asset pricing model CAPM have over the Gordon Growth Model? - ANSWER-CAPM considers risk of a stock relative to the market to determine expected returns.
Why do companies strive for a lower cost of capital ? - ANSWER-Less money dedicated to financial means more money is available for production and operations.
A corporation established its projected sales at $210 million. It is using its current year balance sheet as a basis for creating a pro firms balance sheet. They estimate cash will be 7% of projected sales, accounts receivable will be 19% of Rome Red sales, and PP&E will be 55% of projected sales. Accounts payable are estimated to be 12% of projected sales. Owners equity is $34 million. Long term debt is $90 million. Additionally, the firm raised $12.9 million of equity capital. What is the amount of discretionary financing needed? - ANSWER-$7 million
Year 2010 ending retained earnings were $2,000,000. Year 2011 forecasted sales are $100,000 with a $25,000 net margin and 20% dividend payout ratio. What are the forecasted retained earnings for year 2011? - ANSWER-$2,020,000
How is the amount of discretionary financing that is needed by a firm determined? - ANSWER-Projected total assets- projected total liabilities- projected owners equity
A company is preparing a pro forma balance sheet. The company forecast $10 million in projected sales. The projected cash needed 6% of sales, accounts receivable are 19% of sales, and PP&E are 50% of sales. Accounts payable has been 12% of sales, historically. Shareholders equity is $1.5 million Pro forma income is $3.6 million. The company has no long term debt. What is the total discretionary amount for the pro forma balance sheet? - ANSWER-$1.2 million
Which three pieces of data are needed to perform a capital budget analysis? - ANSWER--annual cash flows for the life of the new project
-cash flow when the firm terminated the project
-the initial cost of the new project
What are two examples of sunk costs? - ANSWER--the cost of a market study conducted prior to the decision
-the cost of feasibility consulting incurred before the decision point
Company A has a degree of operating leverage of 1.85 and company B has a degree of operating leverage of 6.5.
What does the degree of operating leverage say about the the two companies? - ANSWER-Company ABC has lower risk than company XYZ.
Which action is an important part of managing accounts receivable? - ANSWER-Setting credit terms.
What is the main benefit associated with holding inventory? - ANSWER-It makes it possible to meet the demands of customers.
A person needs to determine the cost to replace a company's PP&E using the replacement cost method.
Which value does this person need to consider in order to make this determination? - ANSWER-Market value
Which type of investment will a risk-averse investor most likely invest in? - ANSWER-Index funds [Show Less]