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1. A firm has a profit margin of 15 percent on sales of $20,000,000. If the firm has debt of $7,500,000, total assets of $22,500,000, and an after-tax interest cost on total debt of 5 percent, what is the firm’s ROA? (Points : 5) 8.4% 10.9% 12.0% 13.3% 15.1%
2. Which of the following ratios measures how effectively a firm is managing its assets? (Points : 5) quick ratio times interest earned profit margin inventory turnover ratio price earnings ratio
3. If Boyd Corporation has sales of $2 million per year (all credit) and days sales outstanding of 35 days, what is its average amount of accounts receivable outstanding (assume a 360 day year)? (Points : 5) $194,444 $57,143 $5,556 $97,222 $285,714
4. Which of the following statements is most correct? (Points : 5) An increase in a firm’s debt ratio, with no changes in its sales and operating costs, could be expected to lower its profit margin on sales. An increase in DSO, other things held constant, would generally lead to an increase in the total asset turnover ratio. An increase on the DSO, other things held constant, would generally lead to an increase in the ROE. In a competitive economy, where all firms earn similar returns on equity, one would expect to find lower profit margins for airlines, which require a lot of fixed assets relative to sales, than for fresh fish markets. It is more important to adjust the Debt/Asset ratio than the inventory turnover ratio to account for seasonal fluctuations.
5. Which of the following statements is most correct? (Points : 5) firms with relatively low debt ratios have higher expected returns when the business is good. firms with relatively low debt ratios are exposed to risk of loss when the business is poor. firms with relatively high debt ratios have higher expected returns when the business is bad. firms with relatively high debt ratios have higher expected returns when the business is good. none of the above.
6. Savelots Stores’ current financial statements are shown below: Inventories $ 500 Accounts payable $ 100 Other current assets 400 Short-term notes payable 370 Fixed assets 370 Common equity 800 Total assets $1,270 Total liab. and equity $1,270 Sales $2,000 Operating costs 1,843 EBIT 157 Less: Interest 37 EBT 120 Less: Taxes (40%) 48 Net income 72 A recently released report indicates that Savelots’ current ratio of 1.9 is in line with the industry average. However, its accounts payable, which have no interest cost and which are due entirely to purchases of inventories, amount to only 20% of inventory versus an industry average of 60%. Suppose Savelots took actions to increase its accounts payable to inventories ratio to the 60% industry average, but it (1) kept all of its assets at their present levels (that is, the asset side of the balance sheet remains constant) and (2) also held its current ratio constant at 1.9. Assume that Savelots’ tax rate is 40%, that its cost of short-term debt is 10%, and that the change in payments will not affect operations. In addition, common equity would not change. With the changes, what would be Savelots’ new ROE? (Points : 5) 10.5% 7.8% 9.0% 13.2% 12.0%
7. You want to borrow $1,000 from a friend for one year, and you propose to pay her $1,120 at the end of the year. She agrees to lend you the $1,000, but she wants you to pay her $10 of interest at the end of each of the first 11 months plus $1,010 at the end of the 12th month. How much higher is the effective annual rate under your friend’s proposal than under your proposal? (Points : 5) 0.00% 0.45% 0.68% 0.89% 1.00%
8. What is the future value of a 5-year ordinary annuity with annual payments of $200, evaluated at a 15 percent interest rate? (Points : 5) $670.44 $842.91 $1,169.56 $1,522.64 $1,348.48
9. You deposited $1,000 in a savings account that pays 8 percent interest, compounded quarterly, planning to use it to finish your last year in college. Eighteen months later, you decide to go to the Rocky Mountains to become a ski instructor rather than continue in school, so you close out your account. How much money will you receive? (Points : 5) $1,171 $1,126 $1,082 $1,163 $1,008
10. Gomez Electronics needs to arrange financing for its expansion program. Bank A offers to lend Gomez the required funds on a loan where interest must be paid monthly, and the quoted rate is 8 percent. Bank B will charge 9 percent, with interest due at the end of the year. What is the difference in the effective annual rates charged by the two banks? (Points : 5) 0.25% 0.50% 0.70% 1.00% 1.25%
11. If you buy a factory for $250,000 and the terms are 20 percent down, the balance to be paid off over 30 years at a 12 percent rate of interest on the unpaid balance, what are the 30 equal annual payments? (Points : 5) $20,593 $31,036 $24,829 $50,212 $6,667
12. You are given the following cash flow information. The appropriate discount rate is 12 percent for Years 1-5 and 10 percent for Years 6-10. Payments are received at the end of the year. Year Amount 1–5 $20,000 6–10 $25,000 What should you be willing to pay right now to receive the income stream above? (Points : 5) $166,866 $158,791 $225,000 $125,870 $198,433
13. You are given the following cash flows. What is the present value (t = 0) if the discount rate is 12 percent? (Points : 5) $3,277 $4,804 $5,302 $4,289 $2,804
14. The Desai Company just borrowed $1,000,000 for 3 years at a quoted rate of 8 percent, quarterly compounding. The loan is to be amortized in end-of-quarter payments over its 3-year life. How much interest (in dollars) will your company have to pay during the second quarter? (Points : 5) $15,675.19 $18,508.81 $21,205.33 $24,678.89 $28,111.66
15. Carter Corporation has some money to invest, and its treasurer is choosing between City of Chicago municipal bonds and U.S. Treasury bonds. Both have the same maturity, and they are equally risky and liquid. If Treasury bonds yield 6 percent, and Carter’s marginal income tax rate is 40 percent, what yield on the Chicago municipal bonds would make Carter’s treasurer indifferent between the two? (Points : 5) 2.40% 3.60% 4.50% 5.25% 6.00%
16. Which of the following statements is most correct? Other things held constant. (Points : 5) the “liquidity preference theory” would generally lead to an upward sloping yield curve. the “market segmentation theory” would generally lead to an upward sloping yield curve. the “expectations theory” would generally lead to an upward sloping yield curve. the yield curve under “normal” conditions would be horizontal (i.e., flat). a downward sloping yield curve would suggest that investors expect interest rates to increase in the future.
17. Which of the following is not one of the four fundamental factors that affect the cost of money? (Points : 5) production opportunities time preferences for consumption risk liquidity inflation
18. If the Federal Reserve sells $50 billion of short-term U.S. Treasury securities to the public, other things held constant, what will this tend to do to short-term security prices and interest rates? (Points : 5) Prices and interest rates will both rise. Prices will rise and interest rates will decline. Prices and interest rates will both decline. Prices will decline and interest rates will rise. There will be no changes in either prices or interest rates.
19. You read in The Wall Street Journal that 30-day T-bills currently are yielding 8 percent. Your brother-in-law, a broker at Kyoto Securities, has given you the following estimates of current interest rate premiums: Inflation premium 5% Liquidity premium 1% Maturity risk premium 2% Default risk premium 2% Based on these data, the real risk-free rate of return is (Points : 5) 0% 1% 2% 3% 4%
20. You are given the following data: r* = real risk-free rate 4% Constant inflation premium 7% Maturity risk premium 1% Default risk premium for AAA bonds 3% Liquidity premium for long-term T-bonds 2% Assume that a highly liquid market does not exist for long-term T-bonds, and the expected rate of inflation is a constant. Given these conditions, the nominal risk-free rate for T-bills is ____, and the rate on long-term Treasury bonds is ____. (Points : 5) 4%; 14% 4%; 15% 11%; 14% 11%; 15% 11%; 17%
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