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 financialmanager.

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

4. A firm with negative networking 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 millioncost 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 earns15% interest for four years?
A) $107.69
B) $132.25
C) $152.09
D) $174.90

Answer: D

$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) Aprice 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 priceis $950, three years until maturity.
A) 4%
B) 5%
C) 10%
D) 12%

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...