Understanding of fundamental principles of financial decision-making

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understanding of fundamental principles of financial decision-making and the


1.       The Kumar Corp. is planning on using bonds that pay no interest but can be converted into $4,000 at maturity, 8 years from their purchase. To price these bonds competitively with other bonds of equal risk, it is determined that they should yield 7%, compound. At what price should they Kumar sell the bond?    

2.       Mr Bill S Preston Esq purchased a new house from $110,000. He paid $20,000 down and agreed to pay the rest over the next 20 years in 20 equal end of the year payments plus 8% compound interest on the unpaid balance. What will equal payments be?

3.       Levine Manufacturing is considering several investments. The rate on treasury bills is currently 8% and the expected return for the market is 13%. What should be required rate of return for each investment (using the Capm)

Security                                Beta

A                                             1.61

B                                             1.09

C                                             0.78

D                                             1.29

a. Required rate of return for security A is __%

b. Required rate of return for security B is __% 

c. Required rate of return for security C is __% 

d. Required rate of return for security D is __% 

4. The market price is $1,150 for a 14 year bond ($1,000 per value) that pays 8% interest (4%semiannually). What is the bond’s expect rate of return? Expect annual rate of return is____%

5. Shelly inc. bonds have a coupon rate of 11%. The interest paid semiannually, and the bonds nature in 8 years. Their par value is $1,000. If your required rate of return is 12%, what is the value of the bond? What is the value if the interest is paid annually?

                a. If the interest is paid semiannually, the value of the bond is $____

                b. If the interest is paid annually, the value of the bond is $_____

6. You are planning to purchase 200 shares of preferred stock and must choose between stock A and B.  Stock A pays an annual dividend of $3.75 and is currently selling for $38. Stock B pays an annual dividend of $3.55 and is selling for $40. If your required return is 9.38% which should you choose?

   a.  What is the expected return on stock A?

    b.   What is the expect return on stock B?

     c.  If your required return is 9.38% you should choose ( none; Stock A; Stock B)



7. Dalton Inc. has a return of 12.1% and retains 52% for reinvestments purposes. It recently paid a dividend of $3.75 and the stock is currently selling for $38.

                a. What is the growth rate for Dalton?____%

                b. What expected return for Dalton stock?____%

                c.  If you required a 13% return should you invest in the firm? Yes/No

8. You intend to purchase Margio common stock at$1.00 per share, hold it one year and then resell it after a dividend of $5.50 is paid. How much will the stock price have appreciate for you to satisfy your required rate of return of 15%??

                The stock appreciate ___%

9. Which of the following forms of business organizations limits liability of owners?

                A. corporation

                b. sole proprietorship

                c. 2 person partnership

                d. general partnership

10. The recent finical crisis was exacerbated by?

                a.  a lack if finical leverage that made US firms less competitive in world markets

                b. extremely high interest rate in the US that stifled investments

                c. managers who underestimated the real risk of their decisions and borrowed excessively

                d. managers who overestimated risk and hence   did not invest sufficient funds

11. Sandersen Inc. sells minicomputers. During the past year, the company sales were $3.00 million. The cost of its merchandise sold came to $2.00milion and cash operating expense were $400,000, depreciation expense was $100,000 and the firm paid $150,000 in interest on its bank loans. Also, the corporation paid $25,000 in the form of dividends to its common stockholders. Calculate the corporations tax liability by using the corporate tax rate structures..

                The corporation tax liability is $____

12.Rogue Industries reported the following items for the current year, Sales=$3,000,000; Cost of Goods=$1,500,000; Deprecation expense= $170,000; administrative expense= $150,000; interest expense=$30,000; Marketing expense=$80,000; taxes=$300,000. Rogue gross profit Is equal to

                a. $1,100,00

                b. $1,500,000

                c. $1,070,000

                d. $770,000

13.Use the following  info to calculate the company’s accounting net income for the year.

                Credit Sales= $80,000

                Cash Sales=$500,000

                Operating expense on credit=$20,000

                Cash operating expense= $700,000

                Accounts receivable (beg year) =$50,000

                Accounts receivable (end of year)= $80,000

                Accounts payable (beg of year) =$50,000

                Accounts payable(end of year) = $100,000

                Corporate tax rate=40%

Is it? A. $300,00

                b. $120,000

                c. $125,000

                d. $240,000

14. A corporation has annual sales of $18 million total assets of $4million, a depreciation expense $200,000 and a tax rate of 40% . The corporation’s total stockholders’ equity is equal to

                a. $5,600,000

                b. $2,800,000

                c. $1,800,000

                d. $2,400,000

15. Generally accepted accounting principle (GAAP) requires finance statements prepared on cash basis because these statements are most useful for investors and managers. True or false

16. Financial ratios are used by managers inside the company and by lenders, credit-rating agencies and investors outside of the company. True or false






17. Benkart Corp. has sales of $5,000,000, net income $800,000, total assets of $2,00,000 and 100,000 shares of common stock outstanding. If Benkraft P/E ratio is 12, what is the company’s current stock price?

                a. $60 per share

                b. $96 per share

                c. $240 pershare

                d. $360 per share

18. Given an account turnover of 10 and annual credit sales of $900,000, the average collection period is:

                a. 36.5 days

                b. 90 days

                c. 40.56 days

                d. 18.25 days

19.  RBW Corp. has cash of $48,000, short-term note payables of $35,000, accounts receivable of $100,000, accounts payable of $120,000, inventories of $200,000, and accruals of $90,000. What is RWB’s current ratio?

                a. 2.71

                b. 1.57

                c. 0.64

                d. 1.42

20. The present value of $1,000 to be received in 5 years is_____ if the discount rate is 12.78%.

21. You have been depositing money at the end of each year into an account drawing 8% interest.  What is the balance in the account at the end of year four if you deposited the following amounts:


a.       $1,622

b.      $2,207

c.       $2,687

d.      $2,384

22. Last National Bank is offering you a loan at 10% , payments on the loan are made monthly. Credit union is offering you a loan where payments are to be made semi-annually the rate of 10%. Local Bank down the street is offering a loan at 10% where payments are made quarterly.  Which loan has the lowest annual cost?

23. You are ready to retire. A glance at your 401k statement indicates that you have $750,000. If the funds remain in an account earning 9% how much could you withdraw at the begging of each year for the next 25 years?

24. How can investors reduce the risk associated with an investment portfolio without having to accept a lower expected return?

                a. wait until the stock market rises

                b. purchase stocks that have exceptionally high standard deviations

                c. increase the amount of money in the portfolio

                D. Purchase of a variety of securities i.e. diversify

25. An example of a Eurobond is a bond issued  an Asia by a US Corporation with interest and principle payments made in US dollar? True or False

26. If market interest rates rise

                a. long-term bonds will rise in value more than short term bonds

                b.  short term bonds will rise in value more than long term bonds

                c. short term bonds will decline in value more than long term bonds

                d. long term bonds will decline in value more than short term bonds

27. Preferred stock is similar to a bond in the following way

                a. preferred stock always contains a maturity date

                b. both contain a growth factor similar to common stock

                c. both provide interest payments

                d. both investments provide a stated income stream

28.  Lithium Lakes Industries preferred stock has a par value of $100 and pays a dividend of $6.00 per share. It presently sells for $87 per share. What do investors require as a rate of return on this stock? Round off to the nearest .10%

                a. 9.3%

                b. 14.5 %

                c. 6.0%

                d. 6.9%



29. What provision entitles the common shareholder to maintain a proportionate share of ownership in a firm?

                a. the proportionality clause

                b. the convertible feature

                c. the cumulative feature

                d. the preemptive right

30.  DYI construction Co. is considering a new inventory system that will cost $750,000.  The system it expected to generate positive cash flows over the next four years in the amounts of $350,000 in one year, $325,000 in year two, $150,000 in year three, $180,000 in year four. DYI’s required rate of return is 8%. What is the payback period of this project?

                a. 2.91 years

                b. 2.5 years

                c. 3.09 years

                d. 4.00 years

31. Your firm is considering an investment that will cost $920,000TODAY. The investment will produce cash flow of $450,000 in year 1, $270,000 in years 2 through 4, and $200,000 in year 5. The discount rate that your firm uses for projects of this type is 11.25%. What is the investment’s net present value?

                a. $192,369

                b. $378, 458

                c. $112,583

                d. $540,000

32.  All of the following are criticisms of the payback period criterion except:

                a. it deals with accounting profits as opposed to cash flow

                b. time value money is not accounted for

                c. Cash flows occurring after the payback are ignored

                d. none of the above, they are all criticisms of the payback period criteria






33. Stock W has the following returns for various state of economy:

                State of Economy Probability Stock W’s Return

                Recession 10%-30%

                Below Average 20%-2%

                Average 40%-10%

                Above average 20%-18%

                Boom 10%-40%

Stock W’s standard deviation of returns is

a.       17%

b.      10%

c.       20%

d.      14%

34. Of the following different types of securities which is typically considered most risky?

                a. common stocks of small companies

                b. long term government bonds

                c. common stocks if large companies

                d. long term corporate bonds

35. Stock A has the following returns for various states of the economy:

                State of

                The Economy                     Probability                          Stock A’s Return

                Recession                            10%                                        -30%

                Below Average                                 20%                                        -2%

                Average                               40%                                        10%

                Above Average                 20%                                        18%

                Boom                                    10%                                        40%

                Stock A’s expected return is:

a.       9.6%

b.      5.4%

c.       8.2%

d.      7.2%


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