2). (TCO 5) Dave Harris has just purchased a bond with a face value of $1,000 that pays 6%. The purchase price of the bond was $900, and the bond will mature in 5 years. What is the yield to maturity for this bond?

5.5%

6.0%

9.0%

8.4%

9.8%

3) (TCO 5) A characteristic of serial bonds is that they

will pay no interest payments.

will have varying issue dates.

will have a series of maturity dates.

cannot be called.

will all mature 10 years from the date of issue.

4).

(TCO 3) All of the following are disadvantages of leasing a vehicle except

automatic ownership interest in the car.

unlimited mileage on the car.

no need to meet credit requirements.

lease payments are likely to be lower than loan payments.

All of the other answers are advantages.

5). (TCO 4) John Brown owns a home in Oakland, California and because of the risk of earthquakes, he decides to purchase _____ to cover potential losses.

building and other structures

additional living expenses

personal property

personal liability

specialized coverage

6). (TCO 4) If Mark Wright obtains a permanent disability as a result of an injury on the job, most likely he will receive _____ as a source of disability income.

his employer

Social Security

worker's compensation

an individual insurance policy

his health insurance policy

7). (TCO 4) A(n) _____ is a document attached to an insurance policy that modifies coverage by adding or deleting a specified condition.

rider

waiver of premium

automatic premium loan

beneficiary

incontestability clause

8). (TCO 6) The Capitalist Mutual Fund's net asset value is $28.25. The fund has liabilities of $3 million and 1,600,000 shares have been issued. What is the value of the fund's portfolio?

9). (TCO 6) A benefit associated with an investment in a real estate limited partnership is that the investor

does not have to worry about capital gains tax.

does not have to pay federal income tax.

does not have to pay state income tax.

can invest in a shopping center or large building by investing as little as $5,000.

faces an investment that is very liquid.

10) (TCO 6) Chuck owns a home worth $140,000, a car valued at $30,000, and miscellaneous assets worth $7,500. He owes $75,000 on the home and $12,000 on the car, and has no other debts. His retirement account, in which he is fully vested, contains $17,500 in mutual funds. He is insured with a $250,000 term life insurance policy. What is his net worth?

11). (TCO 7) Brenda wants to leave a message of encouragement to her grandchildren just in case something happens to her in the near future. She would be interested in preparing a(n)

ethical will.

durable power of attorney.

letter of last instruction.

codicil.

formal will.

12). (TCO 7) Marion would be acting in the capacity of a(n) _____ if she is selected to manage the assets of her 16-year-old niece until the niece reaches the age of 21.

Susan Burke, president of Triple A Office Mart, studied her notes for the afternoon meeting with the bankâs commercial loan committee. The profitable company, organized in 1978, sold a complete line of office equipment, furniture, and supplies. Two stores operated in two adjoining states in the southwestern United States. Budgetary control of the two stores was centralized in the store and office complex which operated in the larger of the two cities. In preparation for the meeting, Burke wondered about the type of information the bank might have with which to make a decision on her loan. She was also concerned about how the bank would view a profitable company that needed to borrow funds.

The stores had operated profitably since their inception. Triple A was organized by Burke and a college roommate, Virginia Best, one year after their graduation. Best left the company after only three years to participate in an overseas venture. Her interest was sold to Burke at that time.

With the advent of the personal computer, a major component of company sales, and a general trend in the economy toward specialty stores, Triple A had experienced excellent growth in revenue and earnings. Table 1 illustrates a portion of the firmâs sales and earnings history. Table 2 provides balance sheets for selected years.

The firm had issued no common stock or long-term debt in the recent past. In fact, the second store was opened in 1990 without any additional long-term financing. In the case of the new store, however, there was an increase in inventory and bank borrowing. The companyâs financial staff wondered if this were a normal state of affairs for an expansion situation. Triple A had traditionally handled its credits well, and the stockholders were generally satisfied with the firmâs return on equity. (Stock was offered to the public for the first time in 1980).

The primary benefit to the company was the strong local economy. Although it was primarily a service economy, it supported Triple A almost perfectly. A nearby college of business administration, which published an economic report and forecast concerning the local economy, stated that since 1987 the growth of the local GNP had been in the range of 8-10 percent. Susan Burke had, as a long-range plan, every intention of participating in the regionâs growth and of contributing to it through the efficient operation of her firm.

In recent months during early 1992, there had been cause for concern on the part of company management. Prices from suppliers had risen and the firmâs financial managers wondered about the effect of this upon profitability and the general operation of the business. The suppliers to the firm were varied, since the firm carried a wide range of office equipment and supplies. As a result, it was not possible to develop a strong and mutually supportive relationship with any one supplier. In general, the company had to deal with the vagaries of the economy.

Foremost in Burkeâs thinking was to maintain a sensible payout ratio for the equity investors, one which reflected the operational reality of the company. Firms that were similar in product line and sales pattern to Triple A paid a dividend which amounted to 30-60 percent of earnings. Growth in sales volume beyond the nominal growth in the economy usually came about as a result of market share being taken away from competitors. Triple Aâs management intended to survive in the region in which they operated. The relatively stable payout ratio which the company had maintained for several years seemed appropriate given revenue growth.

In preparation for her meeting with the bank, Susan Burke had concerns about the financial condition of her firm and whether there was a trend in the financial statements that might cause the bank to become wary of Triple A as a continuing customer.

TABLE 1

Triple A Office Mart

Income Statement (selected years)

1990

1989 1990 1991 1992

Sales $3,800,000 $4,180,000 $4,850,000 $6,000,000

Cost of goods sold (2,460,000) (2,975,000) (3,200,000) (4,180,000)

Gross profit $1,340,000 $1,205,000 $1,650,000 $1,820,000

Selling, admin, and

Depreciation expenses ($684,000) ($820,000) ($898,408) ($1,015,467)

Interest (30,780) (30,780) (42,372) (35,313)

Profit before tax $625,220 $354,220 $709,220 $769,220

Taxes (187,566) (106,266) (212,766) (230,766)

Net income $437,654 $247,954 $496,454 $538,454

TABLE 2

Triple A Office Mart

Balance Sheet

1989 1990 1991 1992

Cash $295,000 $326,040 $378,300 $468,000

Accounts receivable 11,400 12,540 20,700 18,000

Inventory 950,000 1,028,595 1,559,407 1,735,207

Total current assets $1,256,400 $1,367,175 $1,958,407 $2,221,207

Property, plant, equipâ¦ 450,000 501,600 501,600 503,000

Total assets $1,706,400 $1,868,775 $2,460,007 $2,724,207

Accounts payable $152,000 $167,200 $190,000 $300,000

Notes payable-bank â¦â¦â¦ â¦â¦ 289,776 113,326

Accrued wages & taxes 114,000 125,000 145,500 180,000

Total current liabilities 266,000 292,200 625,276 593,326

Long term debt 342,200 342,000 342,200 342,200

Common stock 600,000 600,000 600,000 600,000

(120,000 shares)

Retained earnings 498,200 634,575 892,731 1,188,881

Total liabilities and equity $1,706,400 $1,868,775 $2,460,007 $2,724,207

QUESTIONS

1. What are Triple Aâs earnings per share for year 1991 and 1992, respectively?

2.Calculate some financial ratios for the company for 1990, 1991 and 1992 (including ROE, net profit margin, total asset turnover, financial leverage, current ratio, and number of days of receivables)

1990 1991 1992

ROE

Net profit margin

Total asset turnover

Financial leverage

Current ratio

Number of days of receivables

3. Comment on the trend of ROE you got in part 2, what are the reasons for the trend of Roe based on the Dupont Analysis?

4. If the typical firm in the industry in which Triple A operates has a debt to equity ratio of 42 percent, what advice would you give Triple A concerning its debt ratio? Show the work.

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