1. If a firm wants to grow at a rate faster than its sustainablegrowth rate, it could _____.
I. issue new equity shares
II. increase its debt ratio
III. increase its dividend payout ratio
IV. reduce its return on sales
A. I and II only
B. III and IV only
C. I, II and III only
D. II and III only
E. I, II, III and IV
2. The box Store has an inventory period of 50 days, areceivables period of 55 days and a payables period of 40 days.Compute the cash cycle time.
A. 35 days
B. 45 days
C. 65 days
D. 105 days
E. 145 days
3. What is the sustainable growth rate for a firm with netincome of $2.5 million, cash dividends of $1.5 million, and acurrent and expected return on equity of 18%?
A. 18.0%
B. 15.4%
C. 10.8%
D. 7.2%
E. 4.9%
4. As of the most recent fiscal year end, Box GoTo (BGT) hadtotal assets of $500 million, a current and expected ROE of 13%, adividend payout ratio of 35%, and a ratio of equity to total assetof 40%. BGT projects sales growth of 15% for the current year. Whatis BGT's estimated total external financing need?
A. zero
B. $75 million
C. $58.1 million
D. $46.7 million
E. $32.75 million
5. Consider the situation where you have won a $10 millionlottery to be received in 25 annual equal payments of $400,000.What will happen to the present value of these winnings if theinterest rate increases during the next 25 years?
A. it will not change
B. it will be worth more
C. it will be worth less
6. When you receive your monthly statement regarding your bankcredit card, it shows that the monthly rate of interest is 1.8%.What is the annual effective rate of interest you are being chargedon your credit card?
A. 22.87%
B. 23.87%
C. 14.98%
D. 1.8%
E. 21.6%
7. Calculate the NPV of the following cash flows: you invest$3,000 today and receive back $300 one year from now, $700 twoyears from now and $1,100 four years from now. (Note: nothing threeyears from now) Assume that the interest rate is 7%.
A. $1,269
B. -$4,731
C. -$1,269
D. $4,731
E. $5,470
8. The earnings of BGB Computers have grown from $3.20 (yr0) to$6.90 (yr6) in 6 years. Determine the annual compound rate(CAGR).
A. 8.8%
B. 12.1%
C. 13.7%
D. 46%
E. 16.6%
9. A rule of thumb with using the internal rate of return is toinvest in a project if the IRR is _____________ than theopportunity cost of capital.
A. greater
B. less
C. less than or equal to
D. indeterminate relative to
10. Consider a zero coupon bond (one with zero interestpayments). If the bond has a maturity value in seven years of $1000and you would currently pay $850 for the bond, what is the yield tomaturity?
A. -3.5%
B. -2.35%
C. 23.5%
D. 2.35%
E. 17.6%
11. If you purchased a $10,000 certificate of deposit (CD) todaywith a nominal annual interest rate of 12%, with monthlycompounding, what would be the CD worth when it matures in 6years?
A. $20,471
B. $21,159
C. $20,191
D. $20,208
E. $10,615
12. The manufacturing manager of CyberProducts Inc. estimatesthat she can save the company $16,000 cash per year over the next 8years by implementing a recycling plan. What is the value of thesavings today if the appropriate interest rate for the firm is 9%?Assume cash flows occur at the end of the year.
A. $68,460
B. $117,600
C. $73,020
D. $115,500
E. $88,557
13. You take out a $350,000, 30 year mortgage (monthly paymentsand compounding) at an annual 8 percent rate. The scheduled monthlypayment will be what amount (rounded to nearest dollar)?
A. $28,000
B. $2,591
C. $2,568
D. $2,333
E. $12,911
14. If the exchange rate between the U.S. dollar and theJapanese yen is $0.00745 per yen, the dollar interest rate is 6%per year, and the Japanese interest rate is 7% per year, what isthe "break-even" value of the future dollar/yen exchange rate oneyear from now (the rate at which the returns will have equalvalue)?
A. $135.49 per yen
B. $135.23 per yen
C. $0.00752 per yen
D. $0.00738 per yen
E. $0.00745 per yen
15. What is the real interest rate (rounded to nearest 100th ofa percent) if the nominal interest rate is 9% per year and the rateof inflation is 6% per year?
A. 6.75%
B. 2.75%
C. 2.83%
D. 8.50%
E. 9.00%
16. Suppose your child is 9 years old and you are planning toopen a fund to provide for the child's college education.Currently, tuition for one year of college is $22,000. How muchmust you invest now in order to pay enough for the first year ofcollege nine years from now, if you think you can earn a rate ofinterest that is 4% more than the inflation rate? Assume thattuition moves with inflation.
A. $8,500
B. $10,129
C. $16,988
D. $15,457
E. $21,154
17. You have determined the present value of an expected cashinflow stream. Which of the following would cause the stream tohave a higher present value?
A. The discount rate increases.
B. Total cash flows remain the same but are paid over a shorterperiod of time.
C. The discount rate decreases.
D. Statements (b) and (c) are both correct.
E. Statements (a) and (b) are both correct.
18. Lucinda is currently thirty years old and she plans toretire at age sixty (30 more years to work). She is expected tolive to age eighty-five (25 years of retirement). Her labor incomeis $45,000 per year and she intends to maintain a constant level ofreal consumption spending over the next fifty-five years. Assuminga real interest rate of 4% per year, no taxes, and no growth inreal labor income, what is the value of Lucinda's humancapital?
A. $35,196
B. $40,005
C. $994,888
D. $778,141
E. $45,000
19. Let us suppose you have a choice between investing in a banksavings account which pays 9% compounded annually (Bank Yearly) andone which pays 8.5% compounded daily (Bank Daily). (Assume this isbased on 365 days). What is the Bank Daily effective annual rate(EAR), and using only effective annual rates, which bank would youprefer? (round EARs to 100th of a percent)
A. 8.87%, Bank Yearly
B. 8.87%, Bank Daily
C. 9.00%, either Bank Yearly or Bank Daily (indifferent)
D. 8.50%, Bank Daily
E. 8.50%, Bank Yearly
20. You are 60 years old and are considering whether it pays tobuy an annuity from an insurance company. For a cost of $25,000,the insurance company will pay you $3,000 per year for the rest ofyour life starting one year from now. Assume you can earn 8% peryear on your money in a bank account and you expect to live untilage 80 (another 20 years). What implied interest rate is theinsurance company paying you and should you buy the annuity?
A. Greater than 10%; Yes, buy
B. Greater than 10%; No, don't buy
C. Less than 8%; Yes, buy
D. Less than 8%; No, don't buy
E. Between 8% & 10%; No, don't buy
21-25 are short answer
21. You have just taken out a $300,000, 30 year mortgage(monthly payments and compounding) at an annual 8 percent rate.Scheduled monthly payments are $2,201.29. You decide to pay anadditional $100 each month towards the mortgage (you make thescheduled payment plus an extra $100 each month). How many paymentsmust you make before the mortgage is paid off? (round up to thenext whole payment)
22. If you can at most afford $1,200 a month and current annualmortgage rates are 6%, what is the most you can borrow to be repaidover 30 years? (Assume monthly payments/compounding and round yourfinal answer to the nearest dollar)
23. You want to buy a new Subaru Forester. You plan to borrow theentire purchase price of $25,000. Subaru offers two choices: (i) animmediate $1500 rebate and financing at the regular rate of 7.2%APR for 48 months, or (ii) low percentage financing for 48 months.What financing rate (stated per annum, APR) would make you beindifferent between the rebate and the low percentage loan? (assumemonthly compounding & payments and round your final answer to100th of a percent)
24. Your financial planning client wishes to have investmentsavings in 20 years that will provide $1.0 million dollars ofpurchasing power, measured in today's (real) dollars. The currentbalance of the client's investment account is $75,000. Nominalinvestment rates of return are 9.2% per annum, the expectedinflation rate is 4% per annum, and the real rate of return is 5%per annum. In todayâs (real) dollars, how much must the client saveper month starting at the end of the current month to accomplishthis goal, given these rates of return? Assume monthly compounding.(round your final answer to the nearest dollar)
25. What is the value today of a security that promises to pay$1,000 in one quarter, with payments increasing at 1% per quarterthereafter? Payments are made each quarter forever. Our opportunitycost of capital is 12% per annum. (round your final answer to thenearest dollar)
1. If a firm wants to grow at a rate faster than its sustainablegrowth rate, it could _____.
I. issue new equity shares
II. increase its debt ratio
III. increase its dividend payout ratio
IV. reduce its return on sales
A. I and II only
B. III and IV only
C. I, II and III only
D. II and III only
E. I, II, III and IV
2. The box Store has an inventory period of 50 days, areceivables period of 55 days and a payables period of 40 days.Compute the cash cycle time.
A. 35 days
B. 45 days
C. 65 days
D. 105 days
E. 145 days
3. What is the sustainable growth rate for a firm with netincome of $2.5 million, cash dividends of $1.5 million, and acurrent and expected return on equity of 18%?
A. 18.0%
B. 15.4%
C. 10.8%
D. 7.2%
E. 4.9%
4. As of the most recent fiscal year end, Box GoTo (BGT) hadtotal assets of $500 million, a current and expected ROE of 13%, adividend payout ratio of 35%, and a ratio of equity to total assetof 40%. BGT projects sales growth of 15% for the current year. Whatis BGT's estimated total external financing need?
A. zero
B. $75 million
C. $58.1 million
D. $46.7 million
E. $32.75 million
5. Consider the situation where you have won a $10 millionlottery to be received in 25 annual equal payments of $400,000.What will happen to the present value of these winnings if theinterest rate increases during the next 25 years?
A. it will not change
B. it will be worth more
C. it will be worth less
6. When you receive your monthly statement regarding your bankcredit card, it shows that the monthly rate of interest is 1.8%.What is the annual effective rate of interest you are being chargedon your credit card?
A. 22.87%
B. 23.87%
C. 14.98%
D. 1.8%
E. 21.6%
7. Calculate the NPV of the following cash flows: you invest$3,000 today and receive back $300 one year from now, $700 twoyears from now and $1,100 four years from now. (Note: nothing threeyears from now) Assume that the interest rate is 7%.
A. $1,269
B. -$4,731
C. -$1,269
D. $4,731
E. $5,470
8. The earnings of BGB Computers have grown from $3.20 (yr0) to$6.90 (yr6) in 6 years. Determine the annual compound rate(CAGR).
A. 8.8%
B. 12.1%
C. 13.7%
D. 46%
E. 16.6%
9. A rule of thumb with using the internal rate of return is toinvest in a project if the IRR is _____________ than theopportunity cost of capital.
A. greater
B. less
C. less than or equal to
D. indeterminate relative to
10. Consider a zero coupon bond (one with zero interestpayments). If the bond has a maturity value in seven years of $1000and you would currently pay $850 for the bond, what is the yield tomaturity?
A. -3.5%
B. -2.35%
C. 23.5%
D. 2.35%
E. 17.6%
11. If you purchased a $10,000 certificate of deposit (CD) todaywith a nominal annual interest rate of 12%, with monthlycompounding, what would be the CD worth when it matures in 6years?
A. $20,471
B. $21,159
C. $20,191
D. $20,208
E. $10,615
12. The manufacturing manager of CyberProducts Inc. estimatesthat she can save the company $16,000 cash per year over the next 8years by implementing a recycling plan. What is the value of thesavings today if the appropriate interest rate for the firm is 9%?Assume cash flows occur at the end of the year.
A. $68,460
B. $117,600
C. $73,020
D. $115,500
E. $88,557
13. You take out a $350,000, 30 year mortgage (monthly paymentsand compounding) at an annual 8 percent rate. The scheduled monthlypayment will be what amount (rounded to nearest dollar)?
A. $28,000
B. $2,591
C. $2,568
D. $2,333
E. $12,911
14. If the exchange rate between the U.S. dollar and theJapanese yen is $0.00745 per yen, the dollar interest rate is 6%per year, and the Japanese interest rate is 7% per year, what isthe "break-even" value of the future dollar/yen exchange rate oneyear from now (the rate at which the returns will have equalvalue)?
A. $135.49 per yen
B. $135.23 per yen
C. $0.00752 per yen
D. $0.00738 per yen
E. $0.00745 per yen
15. What is the real interest rate (rounded to nearest 100th ofa percent) if the nominal interest rate is 9% per year and the rateof inflation is 6% per year?
A. 6.75%
B. 2.75%
C. 2.83%
D. 8.50%
E. 9.00%
16. Suppose your child is 9 years old and you are planning toopen a fund to provide for the child's college education.Currently, tuition for one year of college is $22,000. How muchmust you invest now in order to pay enough for the first year ofcollege nine years from now, if you think you can earn a rate ofinterest that is 4% more than the inflation rate? Assume thattuition moves with inflation.
A. $8,500
B. $10,129
C. $16,988
D. $15,457
E. $21,154
17. You have determined the present value of an expected cashinflow stream. Which of the following would cause the stream tohave a higher present value?
A. The discount rate increases.
B. Total cash flows remain the same but are paid over a shorterperiod of time.
C. The discount rate decreases.
D. Statements (b) and (c) are both correct.
E. Statements (a) and (b) are both correct.
18. Lucinda is currently thirty years old and she plans toretire at age sixty (30 more years to work). She is expected tolive to age eighty-five (25 years of retirement). Her labor incomeis $45,000 per year and she intends to maintain a constant level ofreal consumption spending over the next fifty-five years. Assuminga real interest rate of 4% per year, no taxes, and no growth inreal labor income, what is the value of Lucinda's humancapital?
A. $35,196
B. $40,005
C. $994,888
D. $778,141
E. $45,000
19. Let us suppose you have a choice between investing in a banksavings account which pays 9% compounded annually (Bank Yearly) andone which pays 8.5% compounded daily (Bank Daily). (Assume this isbased on 365 days). What is the Bank Daily effective annual rate(EAR), and using only effective annual rates, which bank would youprefer? (round EARs to 100th of a percent)
A. 8.87%, Bank Yearly
B. 8.87%, Bank Daily
C. 9.00%, either Bank Yearly or Bank Daily (indifferent)
D. 8.50%, Bank Daily
E. 8.50%, Bank Yearly
20. You are 60 years old and are considering whether it pays tobuy an annuity from an insurance company. For a cost of $25,000,the insurance company will pay you $3,000 per year for the rest ofyour life starting one year from now. Assume you can earn 8% peryear on your money in a bank account and you expect to live untilage 80 (another 20 years). What implied interest rate is theinsurance company paying you and should you buy the annuity?
A. Greater than 10%; Yes, buy
B. Greater than 10%; No, don't buy
C. Less than 8%; Yes, buy
D. Less than 8%; No, don't buy
E. Between 8% & 10%; No, don't buy
21-25 are short answer
21. You have just taken out a $300,000, 30 year mortgage(monthly payments and compounding) at an annual 8 percent rate.Scheduled monthly payments are $2,201.29. You decide to pay anadditional $100 each month towards the mortgage (you make thescheduled payment plus an extra $100 each month). How many paymentsmust you make before the mortgage is paid off? (round up to thenext whole payment)
22. If you can at most afford $1,200 a month and current annualmortgage rates are 6%, what is the most you can borrow to be repaidover 30 years? (Assume monthly payments/compounding and round yourfinal answer to the nearest dollar)
23. You want to buy a new Subaru Forester. You plan to borrow theentire purchase price of $25,000. Subaru offers two choices: (i) animmediate $1500 rebate and financing at the regular rate of 7.2%APR for 48 months, or (ii) low percentage financing for 48 months.What financing rate (stated per annum, APR) would make you beindifferent between the rebate and the low percentage loan? (assumemonthly compounding & payments and round your final answer to100th of a percent)
24. Your financial planning client wishes to have investmentsavings in 20 years that will provide $1.0 million dollars ofpurchasing power, measured in today's (real) dollars. The currentbalance of the client's investment account is $75,000. Nominalinvestment rates of return are 9.2% per annum, the expectedinflation rate is 4% per annum, and the real rate of return is 5%per annum. In todayâs (real) dollars, how much must the client saveper month starting at the end of the current month to accomplishthis goal, given these rates of return? Assume monthly compounding.(round your final answer to the nearest dollar)
25. What is the value today of a security that promises to pay$1,000 in one quarter, with payments increasing at 1% per quarterthereafter? Payments are made each quarter forever. Our opportunitycost of capital is 12% per annum. (round your final answer to thenearest dollar)
