Managerial Finance Chapter 4-7

In the percent-of-sales forecasting method, all of the following balance sheet and income statement items are
assumed to increase proportionately with sales EXCEPT:
Pro forma financial statements are used to:
Cash budgeting can be employed effectively by management to
The first step in cash budget preparation is the
Computerized financial planning models may be classified as any of the following except:
Pro forma financial statements show the results of some ____ event rather than a (an) ____ event
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?
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.
The financial statement that shows the effects of a company’s operating, investing, and financing activities on
its cash balance is known as the:
The Financial Accounting Standard Board (FASB) requires companies to prepare their statement of cash
flows using the:

 

Which of the following shows the effects of a company’s operating, investing, and financing activities on its
cash flows?
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. 25,000
Total Current Assets $ 65,000 Long-term Debt 30,000
Fixed Assets, net 50,000 Stockholder’s Equity 60,000
Total Assets $115,000 Total Liabilities & Equity $115,000
Last year, the firm had sales of $148,750. This year the company expects sales to increase 25%, to generate
earnings after tax of $16,000, and to pay a dividend of $5,000. Hudson operated its fixed assets at 85%
capacity last year. What additional financing will be needed to support the sales increase?
Which of the following is an example of a deterministic model?
Short-term operational plans are generally conducted over what time frame?
The first step in the preparation of a cash budget is:
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 ____.
An annuity due is one in which
The effective rate of interest will always be ____ the nominal rate.
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.

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.

 

Designs Now is opening a showcase office to display and sell it’s computer designed poster art. Designs
expects cash flows to be $120,000 in the first year, $180,000 in the second year, $240,000 in the third year. If
Designs uses 11 percent as its discount rate, what is the present value of the cash flows?
Joe Brady just won a $450,000 lottery in Pennsylvania. Instead of receiving a lump sum, he found that he
would receive $22,500 annually (end of year) for 20 years. Joe is 75 years old and wants his money now. He
has been offered $140,827 to sell his ticket. What rate of return is the buyer expecting to make if Joe accepts
the offer?
Your brother, who is 6 years old, just received a trust fund that will be worth $25,000 when he is 21 years old.
If the fund earns 10 percent interest compounded annually, what is the value of the fund today?

A zero coupon bond with a $1,000 par value is selling for $356 and matures in 12 years. What is the implied
discount rate (yield to maturity)?

Your local bank offers 4-year certificates of deposit (CD) at a 12 percent annual nominal interest rate
compounded quarterly. Determine how much additional interest you will earn over 4 years on a $10,000 CD
that is compounded quarterly compared with one that is compounded annually.

 

 

 

You plan to lease a Saab automobile that sells for $22,657 and has no salvage value. If the monthly lease is
$499, with the first of 60 payments due immediately. What is the implied annual interest rate on your lease?

 

What is the present value of the following net cash flows if the discount rate is 12%:
Year Cash Flow
1-5 $10,000 each year
6-10 $15,000 each year
11-15 $17,000 each year
What is the present value of the following net cash flows if the discount rate is 10%?
Year Net Cash Flow
1-10 $20,000 each year
11-15 $15,000 each year
16-20 $10,000 each year
Your monthly statement from your bank credit card shows that the monthly rate of interest is 1.5%. What is
the annual effective rate of interest you are being charged on your credit card?

What monthly rate of interest will yield an annual effective rate of interest of 14%?

Al Corbin is 25 years old today and he wishes to accumulate enough money over the next 35 years to provide
for a 20 year retirement annuity of $100,000 at the beginning of each year, starting with his 60th birthday. He
can save $2,000 at the end of each of the next 10 years and $3,000 each year for the following 10 years. How
much must he save each year at the end of years 21 through 35 to obtain his goal? Assume that the average
rate of return over the entire period will be 10%.

Assume you purchased a home and borrowed $100,000 at a rate of 8% compounded monthly over 30 years.
What is your monthly payment?

 

 

Which of the following statements is/are correct?
I. At 6% interest, the present value of: $400 for the first year, $600 for the second year, and $800 for the third
year is $1,603.00.
II. The future value of a mixed cash flow stream (if it is from an annuity due): $400 for the first year, $600 for
the second year, and $800 for the third year is $1,999 (rounded).

 

 

 

Determine the present value of $5,000 to be received 4 years from now at the continuously discounted rate of
8 percent.

First Texas National Bank is offering a one-year CD with a nominal rate of 9.5 percent. If compounding
occurs continuously, what is the effective annual rate?

Zero coupon bonds are an example of
The basic relationship in bond valuation is for a given percentage point change in the required rate of return, the ____ the time to maturity, the ____ the change in value.
. The following bond quotation indicates that the holder expects to receive ____ in interest annually:
PAC EI 11s 09 11.6 20 95 -1
A Treasury bill with 182 days to maturity is quoted at 5.62 bid, 5.60 asked, and an asked yield of 5.84. How much would you pay for this security?

A WPI 10s 08 bond closed at 89. What is the current yield on this bond?

Assume that the dividend on Central Power Company’s $3.25 preferred stock issue is paid annually at the end of the year. Determine the value of this preferred stock to an investor who requires a 12 percent rate of return.

Mid-States Utility Company sold a 10-year note with a 7 7/8% coupon and a par value of $1,000. If the note sold at a discount for $930, what was the implied yield-to-maturity to the nearest tenth of one percent? Assume interest is paid semiannually.

 

 

 

. Baywa has an outstanding bond that has a coupon rate of 8.3%. What is the market price of this bond if it pays interest semi-annually, has 15 years to maturity, and the current required rate of return is 9% on bonds of similar quality?

. King World zero coupon bonds were issued in 1998 at $124. These bonds will mature in 2018. What will these bonds sell for in 2008 if the required rate of return in 2008 is 9.5%?

 

 

 

 

A U.S. Government bond was quoted at 95:13 “bid” and 95:15 “asked”. How much would you have to pay for one of these $1,000.00 face value bonds?

UOP, a petroleum processing technology firm, issued a 10% coupon, 20 year to maturity first mortgage bond five years ago. If the current market rate of debt for UOP is 8%, at what price should this bond sell, to the nearest dollar? Assume a par value of $1,000, and pays interest semi-annually

 

 

 

What is the yield to maturity of a TVA bond that has a 9 1/2 percent coupon, pays interest semi-annually, has 12 years to maturity, and sells for $871.50?

 

 

 

 

 

. What is the yield-to-maturity of an Acme bond selling for $1107.50 with 5 years to maturity, a 12 1/2% coupon, and semi-annual compounding?

 

 

 

Debt is usually issued with a par value of
The largest user of mortgage bonds is
Stockholders’ equity includes all of the following except:
Common stockholders have a number of general rights, including all of the following except:
A change in the market price of an asset will occur as a result of changes in:
The valuation of common stock is considerably more complicated than the valuation of bonds or preferred stocks because:
From an accounting standpoint, stock dividends involve a transfer from the
____ result in what is known as treasury stock.
From the following stock quotation, what is AT&T’s dividend yield?
ATT 1.20 4.3 19 1667 29.50 29 29 -.25
The P/E ratio indicates
Assume that the dividend ($3.25) on Central Power Company’s common stock issue is paid annually at the end of the year. This dividend is not expected to increase for the foreseeable future. Determine the value of this stock to an investor who requires a 12 percent rate of return.

The earnings and dividends of MicroSun Computer Co. are expected to grow at an annual rate of 15 percent over the next 4 years and then slow to a constant growth rate of 8 percent per year. MicroSun currently pays a dividend of $0.50 per share. What is the value of MicroSun stock to an investor who requires a 14 percent rate of return?

 

 

 

 

Lawton Company common stock currently sells for $38 and pays (year 0) a dividend of $2. Determine the implied growth rate for Lawton assuming that an investor’s required rate of return is 12% and that the stock can be evaluated using a constant growth valuation model.

 

Helix common stock currently sells for $30 and its current dividend is $1.50. If the required rate of return on Helix stock is 15%, what is the implied growth rate of its earnings and dividends?

 

Over the past 10 years the dividends of Allegro have grown from $0.45 to $1.82 per share. Determine the value of Allegro’s common stock to an investor who requires a 20% rate of return, assuming that dividends continue growing at the same rate as they grew over the past 10 years.

 

 

What is the estimated price of Once in a Blue Moon stock that has the following dividends? The return on similar investments is 18%. (Round the growth rate to the nearest whole percent)
YEAR DIVIDENDS
2003 $2.50
2002 $2.48
2001 $2.36
2000 $2.32

All of the following are ways that securities are offered to the public in a public offering EXCEPT:
a. Securities are sold through competitive bidding
b. Securities are sold through negotiated underwriting to a purchasing syndicate
c. Securities are sold through excess-market pricing
d. Securities are sold on a best efforts basis