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Department
Administrative Studies
Course
ADMS 3530
Professor
Lois King
Semester
Winter

Description
Practice Final Solutions 1. The followings are considered as financial assets, except: A) well-trained sales force. B) car insurance. C) checking accounts. D) mortgage loans. Answer: A A well-trained sales force is not a financial asset. All the others are financial assets. 2. Which of the following does NOT address the question: "What are the roles of a financial manager?" I. Deciding how to maximize the stock prices. II. Deciding the capital mix of long-term debt and equity. III. Deciding which projects a firm should undertake. IV. Deciding how much short-term debt to borrow. A) I only B) III only C) II and III only D) II, III, and IV only E) I, II, III, and IV Answer: A Maximizing the stock price is not a role of the financial manager. 3. Given the following income statement data, calculate net income: sales = $2,500, cost of goods sold = $1,800, miscellaneous expenses = $200, depreciation = $150, interest expense = $50, average tax rate = 35%. A) $195 B) $230 C) $377 D) $425 Answer: A EBT = $2,500 - 1,800 - 200 - 150 - 50 = $300; NI = $300 - (300 x .35) = $195 1 4. A firm with negative net working capital ______________. A) is technically bankrupt B) has no cash on hand C) needs to sell some of its inventory to correct the problem D) has more current liabilities than current assets Answer: D Net Working Capital = Current Assets – Current Liabilities 5. Calculate the EBIT (earnings before interest and taxes) for a firm with $5 million total revenues, $3 million cost of goods sold, $500,000 depreciation expense, and $500,000 interest expense. A) $1,500,000 B) $500,000 C) $1,000,000 D) -$500,000 Answer: A EBIT = $5,000,000 - $3,000,000 - $500,000 = $1,500,000 6. What are the annual sales for a firm with $400,000 in liabilities, a total debt ratio of 0.25, and an asset turnover of 3.0 (assume total assets remains unchanged)? A) $ 333,333 B) $3,200,000 C) $4,800,000 D) $6,400,000 Answer: C Total Debt Ratio = Total Liabilities / Total Assets = .25 = ¼ ¼ = $400,000/total assets, so total assets = $1,600,000 Asset Turnover = Sales / Average Total Assets = 3.0 3.0 = Sales / $1,600,000 So, Sales = $4,800,000 7. How much will accumulate in an account with an initial deposit of $100, and which earns 15% interest for four years? A) $107.69 B) $132.25 C) $152.09 D) $174.90 Answer: D 2 $100 x (1.15) ^4 = $174.90 8. How much would an investor expect to pay for a $1,000 par value bond with a 9% annual coupon that matures in 5 years if the interest rate is 5%? A) $ 844.4 B) $1,075.8 C) $1,082.0 D) $1,173.2 Answer: D PV = (90 x 4.3295) + (1000 x 0.7835) = $1173.15 9. What is the coupon rate for a bond with three years until maturity, a price of $1,053.46, and a yield to maturity of 6%? A) 6% B) 8% C) 10% D) 11% Answer: B $1053.46 = (PMT x 2.6730) + (1000 x 0.8396) PMT = 80 Coupon Rate = 8% 10. What happens to the price of a three-year bond with an 8% coupon when interest rates change from 8% to 6%? A) A price increase of $51.54 B) A price decrease of $53.47 C) A price increase of $53.47 D) No change in price Answer: C 8%: (80 x 2.5771) + (1000 x 0.7938) = $999.97 6%: (80 x 2.6730) + (1000 x 0.8396) = $1053.44 Price increase of $53.47 11. What is the yield to maturity of a bond with the following characteristics? Coupon rate is 8% with annual payments, current price is $950, three years until maturity. A) 4% B) 5% C) 10% D) 12% 3 Answer: C 950 = (80 x PVA 3, r%) + (1000 x PV 3, r%) … Guess and Check PVA = 2.4869 and PV = 0.7513 12. A stock paying $5 in annual dividends sells now for $80 and has an expected return of 10%. What would be the stock price one year from now? A) $83 B) $75 C) $85 D) $90 Answer: A Div1+ P1− Po Expected return = P o $5+P -$80 10% = 1 $80 $8 = P1– $75 $83 = P1 13. Which of the following statements is correct about a stock currently selling for $50 per share that has a 15% expected return and a 10% expected capital gain? A) Its expected dividend this year is $5. B) Its dividend yield is 5 percent. C) It is expected to pay $7.5 in annual dividends for the next 2 years. D) It is expected to pay $5.0 in annual dividends for the next 2 years. Answer: B Expected return = expected dividend yield + expected capital appreciation. 15% = expected dividend yield + 10% 5% = expected dividend yield $50 share price x 5% = $2.5 expected dividend payment 14. Which of the following is true for a firm having a stock price of $42, and expected dividend of $6, and a sustainable growth rate of 8%? A) It has a required return of 25%. B) It has a plowback ratio of 20%. C) It has an ROE of 40%. D) It has a dividend yield of 14.3%. 4 Answer: D DIV yield = $6/$42 = 14.3% 15. What is the plowback ratio for a firm that has a required return 15%, dividend yield 10% and a return on equity of 20%? A) 12.50% B) 14.00% C) 25.00% D) 35.00% Answer: C Expected Return = Dividend Yield + g 15% = 10% + g, so g = 5% Plowback Ratio = g / ROE = g / 20% = 5% / 20% = .25 or 25% 16. What would be the stock price today if you know you will sell the stock in 2 years from today at $55/share and you expect annual dividends $2/share in year 1 and $3/share in year 2, given the discount rate is 10%? A) $55.0 B) $54.5 C) $49.8 D) $60.0 Answer: C P2 = $55, Div1 = $2, Div2 = $3, Solve for Po Po = (Div1 + P1) / (1+r), so therefore P1 = (Div2 +P2) / (1+r) P1 = (Div2 +P2) / (1+r) …. Becomes, P1 = ($3+$55) / 1.1, P1 = $52.73 Now, use Po = (Div1 + P1) / (1+r) … becomes Po = ($2+$52.73) / 1.1 Po = $49.80 17. What is the NPV of a project that costs $80,000 today and cash inflows $45,000 annually for t
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