Fine 3010 Exam 1 Assignment

Fine 3010 Exam 1 Assignment | Tulane University

Question 1

You are considering purchasing a bond in the secondary market that has a face value of $1,000. Why might you have to pay more than $1000 for this bond? Incorporate a numerical example within your explanation.

If the market rate is lower than the bond coupon rate then the bond will sell at a premium (you pay more than its face value) because it is more reasonable to receive the higher coupon rate than the lower bond rate in terms of the time value of money.

For example,

If a bond matures in 10 years and has a 10% coupon rate and the market is 5%, then the bond will appreciate in value (you pay more than its $1,000 face value) because it will give you a bigger return than if you invested the same amount of money in the market.

 

Question 2

Consider a 3-year amortizing loan.  You borrow $10,000 initially, and the bank wants it to be repaid in equal annual year-end payments.  If the interest is 10%, compounded annually, complete the following chart (you're welcome. ;) ) It might be easiest to write out the chart and its answers on your paper that shows your process:

Year       Beginning Loan Balance Interest Due      Year-End Payment          Amortization of Loan      Ending Loan Balance

1                                                                             

2                                                                             

3                                                                             

 

 

Question 3

You are 20 years old today and you are beginning to plan for your retirement.  You want to set aside an equal amount at the end of each of the next 40 years so that you can retire at age 60.  You expect to live to a maximum age of 90 and you want to be able to withdraw $75,000 per year from your account on each of your 61st through 90th birthdays.  When you die, you want to have exactly $20,000 left in your account to give to my kids, Mattie and Henderson (let’s hope they learn to share!). Your retirement account is expected to earn 10% per year for the entire period of time you are saving money (from now until retirement).  Once in retirement, you will invest more conservatively, and therefore only expect to earn 5% annually. Determine the size of the annual deposits that you must make for each of the next 40 years to achieve your goals. You have no savings currently. Show your work.

 

Question 4

Calculate the Quick Ratio, Long-Term Debt Ratio, Days' Sales in Inventory and ROE for Textbook Publishing, Inc. in 2020, given the following information: 

Textbook Publishing, Inc. 2020 Income Statement ($ in millions)

Net Sales             $1,384

Cost of Goods Sold          605

Depreciation      180

EBIT       599

Interest Expense             80

Taxable Income                519

Taxes    156

Net Income        363

               

Dividends Paid  109

 

Computers R Us 2019 & 2020 Balance Sheets ($ in millions)

                2019       2020                                       2019       2020

Cash      100         121                         Accounts Payable            400         350

Accounts Receivable      350         425                         Notes Payable   390         370

Inventory            440         410                              Total 790         720

    Total  890         956                         Long Term Debt                500         550

Net Fixed Assets              1,556     1,704                     Common Stock 600         580

                                                                Retained Earnings            556         810

Total Assets        2,446     2,660                     Total Liab & Equity           2,446     2,660

 

Question 5

Calculate the dividend per share that is paid when the earnings per share are $4.00 and plowback ratio is 75%:

 

Question 6

Assume the total expense for your current year in college equals $80,000. Approximately how much would your parents have needed to invest 20 years ago in an account paying 6% compounded annually to cover this amount?

 

Question 7

How much will accumulate in an account with an initial deposit of $400, and which earns an APR of 12% interest, compounded quarterly for five years?

 

Question 8

Calculate the EBIT for a firm with $5 million total revenues, $4 million cost of goods sold, $1,500,000 depreciation expense, $120,000 interest expense, and $70,000 in tax expense.

 

Question 9

How much must be invested today in order to generate a five-year annuity of $4,000 per year, with the first payment one year from today, at an interest rate of 14%?

 

Question 10

What is the future value of $1,000 that is deposited today and left in an account for five years at 7% simple interest?

 

Question 11

A perpetuity of $3,000 per year with the first payment occurring today is said to offer a 10% interest rate. What is its present value?

 

Question 12

What amount will be paid to purchase two (2) identical U.S. Treasury bond with a price of 126:20?

 

Question 13

Using the “exact” formula, if your financial advisor told you that you had earned 14% in your investment account during the last year, but your real return was only 10%, what must have been the inflation rate for the last year? Your answer should go out two decimal places.

3.64%

 

Question 14

What is the present value of the following payment stream, discounted at 9% annually: $2,000 at the end of year 1, $1,000 at the end of year 2, and $4,000 at the end of year 3? 

 

Question 15

How much must be saved annually in order to accumulate $60,000 at the end of 10 years, earning 5% annually?

 

Question 16

In today’s terms, what is the difference in value between these two investments, assuming a 10% interest rate with cash flows received at the end of each period:

1. A perpetuity of $2,000 per year.

2. An annuity of $2,000 per year for 40 years?

 

Question 17

Suppose you are evaluating a monthly interest-paying bond that has 10 years left until maturity. Its coupon rate is 12% and the market interest rate environment is yielding 18% for similar-risk investments. Calculate the value of this bond.

 

Question 18

How long must one wait for an initial investment of $3,000 to double in value if the investment earns 8% compounded annually?

 

Question 19

What is the yield to maturity of a bond with the following characteristics? Coupon rate is 10% with semi-annual payments, current price is $760, with five years until maturity.

 

Question 20

Unlimited liability is faced by the owners of:

  

all forms of business organization  

partnerships and corporations  

corporations  

sole proprietorships and partnerships 

 

Question 21

"Double taxation" refers to:

  

the fact that marginal tax rates are doubled for corporations.  

all partners paying equal taxes on profits.  

corporations paying taxes on both dividends and retained earnings.  

paying taxes on profits at the corporate level and dividends at the personal level. 

 

Question 22

Which of the following would not be considered a real asset?  

A corporate bond  

A machine  

A factory  

A patent

 

Question 23

An example of a firm's financing decision would be:  

how much to pay for a specific asset  

the issuance of debt or equity to raise capital for a project.  

acquisition of a competitive firm.  

whether or not to increase the price of its products

 

Question 24

When managers' compensation plans are tied in a meaningful manner to the value of the firm, agency problems:  

can be reduced.  

will be created.  

are shifted to other stakeholders. 

are eliminated entirely from the firm.

 

Question 25

When corporations need to raise funds by issuing stocks, they rely upon the:  

centralized NASDAQ exchange.  

over-the-counter market.  

primary market.  

secondary market.

 

Question 26

Which of the following would be considered a capital budgeting decision?  

A decision to expand into a new line of products, at a cost of $5 million  

Planning to issue common stock rather than issuing preferred stock  

Repurchasing shares of common stock  

Issuing debt in the form of long-term bonds

 

Question 27

Within the realm of ethical decision making, managers should attempt to maximize:  

their firm's market share. 

the profits of the firm.  

their compensation plans.  

the market value of the shareholders' wealth.

 

Question 28

In general, what is changing as you read down the left hand side of a balance sheet?  

The assets are growing in value.  

The assets are becoming less liquid.  

The assets are increasing in maturity.  

The assets are more fully depreciated. 

 

Question 29

Which of the following items should not be included in a listing of current assets?  

Inventories  

Marketable securities 

Accounts payable  

Accounts receivable

Question 30

According to GAAP, fixed assets are typically recorded on the balance sheet at:  

historical cost less depreciation.  

replacement cost.  

salvage value.  

market value.

 

Question 31

Which of the following cash outflows does not reduce a firm's net income?  

Income taxes  

Dividends  

Interest expense  

Depreciation expense 

 

Question 32

Marginal tax rates are based on:  

earnings before interest and taxes  

an additional dollar of income.  

net income.  

total income.

 

Question 33

A common-size balance sheet portrays the firm's accounts as a percent of the:  

strongest competitor's assets.  

firm's net income.  

firm's total assets.  

industry's assets. 

 

Question 34

When a firm's long-term debt-equity ratio is 1.0, the firm:  

has less long-term debt than equity.  

has as much in long-term liabilities as in equity.  

is nearing insolvency.  

has too much long-term debt in relation to leases.

 

Question 35

How would you interpret an inventory turnover ratio of 10.7?  

It takes 11 days on average to collect receivables.  

The firm has sufficient inventories to maintain sales for about 34 days.  

Inventory is converted into sales every 11 days.  

Fixed Assets are converted into sales about every 34 days. 

 

Question 36

Which of the following four assets is most liquid, when compared to the others?  

company trucks.  

fixed assets.  

buildings.  

inventory.

 

Question 37

__________ are those expected to be turned into cash in the near future, while __________ are those expected to be fulfilled (paid) in the near future, and the difference between the two is __________.  

Liquid assets; liquid liabilities; shareholders' equity.  

Current assets; current liabilities; net working capital.  

Fixed assets; current liabilities; net working capital.  

Current assets; current liabilities; shareholders' equity. 

 

Question 38

Which of the following will allow your firm to achieve its targeted 16% ROA with an asset turnover of 2.5?  

A P/E ratio of 14.  

A profit margin of 6.4%.  

A profit margin of 15%.  

A leverage ratio of .0667.

 

Question 39

An asset turnover ratio of 1.75 can be interpreted as:  

$1.75 in sales are generated for every $1.00 of assets.  

$1.75 in assets are used to generate $1.00 of sales.  

$1.00 in sales are used to generate $1.75 in assets.  

$1.75 in additional assets are generated for every $1.00 of sales.

 

 

Question 40

Given a set future value, which of the following will contribute to a lower present value?  

Lower interest rate  

Less frequent compounding  

Fewer time periods  

Higher discount rate

 

 

Question 41

A stream of equal cash payments lasting forever is termed:  

an annuity due.  

an annuity.  

a perpetuity.  

an installment plan.

 

Question 42

Which account would be preferred by a depositor: an 8% APR with monthly compounding or 8.5% APR with semi-annual compounding?  

The time period must be known to select the preferred account.  

8.5% with semi-annual compounding  

The depositor would be indifferent. 

8% with monthly compounding 

 

Question 43

The coupon rate of a bond equals:  

the maturity value.  

a percentage of its face value.  

a percentage of its price.  

its yield to maturity.

 

Question 44

A bond's par value can also be called its:  

present value.  

default value. 

coupon payment.  

face value.

 

Question 45

A bond's yield to maturity takes into consideration:  

current yield but not price changes of a bond.  

neither current yield nor price changes of a bond. 

both current yield and price changes of a bond. 

price changes but not current yield of a bond. 

 

Question 46

The discount rate that makes the present value of a bond's payments equal to its price is termed the:  

yield to maturity.  

rate of return.  

coupon rate.  

current yield.

 

Question 47

What happens to the price of a three-year bond with an annual 8% coupon when interest rates change from 8% to 6%?  

A price increase of $51.54  

A price increase of $53.46

A price decrease of $51.54  

No change in price 

 

Question 48

Which of the following bonds has the highest sensitivity to interest rate risk?  

5-year bond with 10% coupon rate  

10-year bond with 10% coupon rate  

10-year bond with 4% coupon rate  

10-year bond zero-coupon bond 

 

Question 49

Capital losses upon maturity will automatically be the case for bond investors who buy:  

premium bonds.  

junk bonds.  

zero-coupon bonds.  

discount bonds.