Professional Documents
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BU340 Managerial Finance
BU340 Managerial Finance
Ashworth College
Part A: Given the following cash inflow at the end of each year, what is the future value of
this cash flow at 6%, 9%, and 15% interest rates at the end of the seventh year?
Year 1 $15,000
Year 2 $20,000
Year 3 $30,000
Years 4 through 6 $0
Year 7 $150,000
Part B: County Ranch Insurance Company wants to offer a guaranteed annuity in units of
$500, payable at the end of each year for 25 years. The company has a strong investment
record and can consistently earn 7% on its investments after taxes. If the company wants to
make 1% on this contract, what price should it set on it? Use 6% as the discount rate. Assume
that it is an ordinary annuity and that the price is the same as present value.
Part C: A local government is about to run a lottery but does not want to be involved in the payoff if a winner
picks an annuity payoff. The government contracts with a trust to pay the lump-sum payout to the trust and have
the trust (probably a local bank) pay the annual payments. The first winner of the lottery chooses the annuity
and will receive $150,000 a year for the next 25 years. The local government will give the trust $2,000,000 to
pay for this annuity. What investment rate must the trust earn to break even on this arrangement?
Part D: Your dreams of becoming rich have just come true. You have won the State of Tranquility's Lottery.
The State offers you two payment plans for the $5,000,000 advertised jackpot. You can take annual payments of
$250,000 for the next 20 years or $2,867,480 today.
a. If your investment rate over the next 20 years is 8%, which payoff will you choose?
b. If your investment rate over the next 20 years is 5%, which payoff will you choose?
c. At what investment rate will the annuity stream of $250,000 be the same as the lump sum
payment of $2,867,480?
Part A: Moore Company is about to issue a bond with semiannual coupon payments, a coupon rate of 8%, and
par value of $1,000. The yield-to-maturity for this bond is 10%.
a. What is the price of the bond if the bond matures in 5, 10, 15, or 20 years?
b. What do you notice about the price of the bond in relationship to the maturity of the bond?
Part B: The Crescent Corporation just paid a dividend of $2 per share and is expected to
continue paying the same amount each year for the next 4 years. If you have a required rate
of return of 13%, plan to hold the stock for 4 years, and are confident that it will sell for $30
at the end of 4 years, how much should you offer to buy it at today?
Part C: Use the information in the following table to answer the questions below.
2. Delsing Plumbing Company has beginning inventory of 14,000 units, will sell 50,000 units for the
month, and desires to reduce ending inventory to 40 percent of beginning inventory. How many units
should Delsing produce?
3. At the end of January, Higgins Data Systems had an inventory of 600 units, which cost $16 per unit
to produce. During February the company produced 850 units at a cost of $19 per unit. If the firm sold
1,100 in February, what was its cost of goods sold (assume LIFO inventory accounting)?
4.. Victoria's Apparel has forecast credits sales for the fourth quarter of the year as:
September (actual) ……………… $50,000
Fourth Quarter
October …………………………………. $40,000
November ……………………………… $35,000
December ………………………………..$60,000
Experience has shown that 20 percent of sales receipts are collected in the month of sale, 70 percent
in the following month, and 10 percent are never collected. Prepare a schedule of cash receipts for
Victoria's Apparel covering the fourth quarter (October through December).
5. The Manning Company has financial statements as shown below, which are representative of the
company's historical average. The firm is expecting a 20 percent increase in sales next year, and
management is concerned about the company's need for external funds. The increase is sale is
expected to be carried out without any expansion of fixed assets, but rather through more efficient
asset utilization. In the existing store. Among liabilities, only current liabilities vary directly with sales.
Using the percent-of-sales method, determine whether the company has external financing needs, or
a surplus of funds.
Income Statement
Sales $200,000
Expenses 158,000
Earnings before interest and taxes $42,000
Interest 7,000
Earnings before taxes $35,000
Taxes $15,000
Earnings after taxes $20,000
Dividends $6,000
Balance Sheet
Assets
Cash $5,000
Accounts receivable 40,000
Inventory 75,000
Current assets $120,000
Fixed assets 80,000
Total assets 200,000
Directions: Be sure to make an electronic copy of your answer before submitting it to Ashworth
College for grading. Unless otherwise stated, answer in complete sentences, and be sure to use
correct English spelling and grammar. Sources must be cited in APA format. Your response should be
a minimum of one (1) single-spaced page to a maximum of two (2) pages in length; refer to the
"Assignment Format" page for specific format requirements.
1. What form of partnership allows some of the investors to limit their liability? Explain by giving
examples. (25 points)
2. When does insider trading occur? What government agency is responsible for protecting against
the unethical practice of insider trading? Explain by giving examples. (25 points)
3. Explain how the tax code allows depreciation to contribute to cash flow. (25 points)
4. Explain why inflation may restrict the usefulness of the balance sheet as normally presented. (25
points)
Question 2
________ is the name given to the processes surrounding recognition of the principal-agent problem
and ways to align agents with the interests of the principals.
Principal theory
Interested party theory
Agency theory
Compensation process theory
Question 3
Which of the following items may be included on all balance sheets at Yahoo! Finance, even though
they may not be part of an individual company's balance sheet for that year?
The effect of accounting changes, extraordinary items, and treasury stock
Deferred long-term asset charges, treasury stock, and extraordinary items
Goodwill, deferred long-term asset charges, and treasury stock
Cost of revenue, goodwill, and treasury stock
Question 4
In finance, we separate operating decisions from financing decisions, and thus exclude ________ as
a part of operating income from the income statement.
cash flow
dividends
interest expense
earnings
Question 5
You have purchased a Treasury bond that will pay $10,000 to your newborn child in 15 years. If this
bond is discounted at a rate of 3.875% per year, what is today's price (present value) for this bond?
8417
8500
5654
10000
Question 6
What type of loan requires both principal and interest payments as you go, making equal payments
each period?
Amortized loan
Interest-only loan
Discount loan
Compound loan
Question 7
APRs must be converted to the appropriate periodic rates when compounding is:
more frequent than once a year.
less frequent than once a year.
more frequent than once a month.
less frequent than once every six months.
Question 8
The appropriate rate to use to discount the cash flows of a bond in order to determine the current
price is the:
yield to maturity
coupon rate
par rate
current yield
Question 9
Bonds are different from stocks because:
bonds promise fixed payments for the length of their maturity.
bonds give payments only after other owners are paid.
bonds do not have maturity dates.
bonds promise growth in earnings
Question 10
Robert invested in stock and received a positive return over a nine-month period. Which of the
following types of returns will be greater?
Holding period return (HPR)
Effective annual return (EAR)
Annual percentage rate (APR)
There is not enough information to make a definitive choice.
Note: The golf cart's price may have changed by the time
Rory's account reaches a value of $5,000.
Question options:
2 years
4 years
6 years
8 years
Question 17
Which of the following investments has a larger future value?
A $100 investment earning 10% per year for 5 years, or a
$100 investment earning 5% per year for 10 years?
Question options:
An investment of $100 invested at 10% per year for 5 years because it has a future value of $161
An investment of $100 invested at 10% per year for 5 years because it has a future value of $162
An investment of $100 invested at 5% per year for 10 years because it has a future value of $161
An investment of $100 invested at 5% per year for 10 years because it has a future value of $162
Question 18
Your production manager informs you that currently the firm
is producing 1,438 heating units per month but has plans to
increase production at a rate of 5% per month until the firm is
producing 3,000 units per month. How many months will this
take?
Question options:
27.33 months
15.07 months
14 months
There is not enough information to answer this question.
Question 19
Your aunt places $13,000 into an account earning an interest
rate of 7% per year. After 5 years the account will be valued at
$18,233.17. Which of the following statements is correct?
Question options:
The present value is $13,000, the time period is 7 years, the present value is $18,233.17, and the
The future value is $13,000, the time period is 5 years, the principal is $18,233.17, and the intere
The principal is $13,000, the time period is 5 years, the future value is $18,233.17, and the intere
The principal is $13,000, the time period is 7 years, the future value is $18,233.17, and the intere
Question 20
__________ is simply the interest earned in subsequent periods
on the interest earned in prior periods.
Question options:
Quoted interest
Anticipated interest
Simple interest
Compound interest
BU340 Lesson 4 & 5 Exam SCORE 95 PERCENT
2.5 / 2.5 points
You have saved $47,000 for college and wish to use $15,000
per year. If you use the money as an ordinary annuity and earn
6.15% on your investment, how many years will your annuity
last? Use a calculator to determine your answer.
Question options:
4.27 years
3.13 years
3.59 years
3.36 years
Question 2
An annuity is a series of:
Question options:
variable cash payments at regular intervals across time.
equal cash payments at regular intervals across time.
variable cash payments at different intervals across time.
equal cash payments at different intervals across time.
Question 3
If you borrow $100,000 at an annual rate of 8% for a 10-year
period and repay the total amount of principal and interest
due of $215,892.50 at the end of 10 years, what type of loan
did you have?
Question options:
Amortized loan
Interest-only loan
Discount loan
Compound loan
Question 4
The main variables of the TVM equation are:
Question options:
present value, future value, time, interest rate, and payment.
present value, future value, perpetuity, interest rate, and payment.
present value, future value, time, annuity, and interest rate.
present value, future value, perpetuity, interest rate, and principal.
Question 5
You just won the Publisher's Clearing House Sweepstakes and
the right to 20 after-tax ordinary annuity cash flows of
$163,291.18. Assuming a discount rate of 7.50%, what is the
present value of your lottery winnings? Use a calculator to
determine your answer.
Question options:
$3,265,823.60
$1,789,520.81
$1,664,670.52
There is not enough information to answer this question.
Question 6
You have just won the Reader's Digest lottery of $5,000 per
year for 20 years, with the first payment today followed by 19
more start-of-the-year cash flows. At an interest rate of 5%,
what is the present value of your winnings?
Question options:
$100,000
$65,426.60
$62,311.05
$47,641.18
Question 7
What is the future value in Year 12 of an ordinary annuity cash
flow of $6,000 per year at an interest rate of 4% per year?
Question options:
$90,154.83
$93,761.02
$28,675.97
$32,117.08
Question 8
What is the present value of a stream of annual end-of-the-
year annuity cash flows if the discount rate is 0%, and the cash
flows of $50 last for 20 years?
Question options:
Less than $1,000
Exactly $1,000
More than $1,000
This question cannot be answered because we have an interest rate of 0%.
Question 9
Which is greater, the present value of a $1,000 five-year
ordinary annuity discounted at 10%, or the present value of a
$1,000 five-year annuity due discounted at 10%?
Question options:
The ordinary annuity is worth more with a present value of $3,790.79.
The annuity due is worth more with a present value of $4,169.87.
The ordinary annuity is worth more with a present value of $4,169.87.
The annuity due is worth more with a present value of $4,586.85.
Question 10
What is the future value in Year 25 of an ordinary annuity cash
flow of $2,000 per year at an interest rate of 10% per year?
Question options:
$66,505.81
$55,000.00
$196,694.12
$216,363.53
Question 11
Given the following cash flows, what is the future value at
Year 6 when compounded at an interest rate of 8%?
Year 0 2 4 6
Cash Flow $5,000 $7,000 $9,000 $11,000
Question options:
$38,955.39
$56,687.43
$42,074.42
$32,000
Question 12
If you borrow $100,000 at an annual rate of 8% for a 10-year
period and repay with 10 equal annual end-of-the-year
payments of $14,902.95, then you have just repaid what type
of loan?
Question options:
Amortized loan
Interest-only loan
Discount loan
Compound loan
Question 13
Randy W. recently won the Western States Lottery of
$6,500,000. The lottery pays either a total of twenty
$325,000 payments per year with the first payment today
(i.e., an annuity due), or $3,500,000 today. At what interest
rate would Randy be financially indifferent between these two
payout choices?
Question options:
5.37%
7.36%
7.76%
8.00%
Question 14
What type of loan makes interest payments throughout the life
of the loan and then pays the principal and final interest
payment at the maturity date?
Question options:
Amortized loan
Interest-only loan
Discount loan
Compound loan
Question 15
If you borrow $50,000 at an annual interest rate of 12% for six
years, what is the annual payment (prior to maturity) on an
interest-only type of loan?
Question options:
$0
$6,000
$8,333.33
$12,161.29
Question 16
If for the next 40 years you place $3,000 in equal year-end
deposits into an account earning 8% per year, how much
money will be in the account at the end of that time period?
Question options:
$120,000.00
$777,169.56
$839,343.12
$2,606,942.58
Question 17
If you borrow $100,000 at an annual rate of 8% for a 10-year
period and repay the interest of $8,000 at the end of each
year prior to maturity and the final payment of $108,000 at
the end of 10 years, then you have just repaid what type of
loan?
Question options:
Amortized loan
Interest-only loan
Discount loan
Compound loan
Question 18
Your firm intends to finance the purchase of a new
construction crane. The cost is $1,500,000. How large is the
payment at the end of Year 10 if the crane is financed at a
rate of 8.50% as a discount loan?
Question options:
$228,611.56
$127,500
$3,391,475.16
There is not enough information to answer this question.
Question 19
Present value calculations do which of the following?
Question options:
Compound all future cash flows into the future
Compound all future cash flows back to the present
Discount all future cash flows back to the present
Discount all future cash flows into the future
Question 20
A/An __________ is a series of cash flows at regular intervals
across time.
Question options:
annuity
annuity due
perpetuity due
None of the above
Online Exam 5
2.5 / 2.5 points
Assume that Don is 45 years old and has 20 years for saving
until he retires. He expects an APR of 8.5% on his investments.
How much does he need to save if he puts money away
annually in equal end-of-the-year amounts to achieve a
future value of $1 million in 20 years' time?
Question options:
$20,570.00
$20,670.97
$20,770.90
$20,800.00
Question 22
The phrase "price to rent money" is sometimes used to refer
to:
Question options:
historical prices.
compound rates.
discount rates.
interest rates.
Question 23
Suppose you invest $1,000 today, compounded quarterly,
with the annual interest rate of 5%. What is your investment
worth in one year?
Question options:
$1,025.00
$1,500.95
$1,025.27
$1,050.95
Question 24
James is a rational investor wishing to maximize his return
over a 20-year period. The current yield curve is inverted with
one-year rates at 5% and 20-year rates at 3.5%. James will
invest in the lower-rate 20-year bonds if:
Question options:
he thinks rates will fall in the future and locking in long-term rates today may provide the highes
he thinks rates will rise in the future and locking in long-term rates today may provide the lowes
he thinks rates will remain flat at 5% in the future and locking in long-term rates today will prev
opportunity.
James has no idea what to do and should just skip this question.
Question 25
Suppose you deposit money in a certificate of deposit (CD) at
a bank. Which of the following statements is true?
Question options:
The bank is borrowing money from you without a promise to repay that money with interest.
The bank is lending money to you with a promise to repay that money with interest.
The bank is technically renting money from you with a promise to repay that money with interes
The bank is lending money to you, but not borrowing money from you.
Question 26
Assume you just bought a new home and now have a
mortgage on the home. The amount of the principal is
$150,000, the loan is at 5% APR, and the monthly payments
are spread out over 30 years. What is the loan payment? Use a
calculator to determine your answer.
Question options:
$798.95
$805.23
$850.32
$903.47
Question 27
The two major components of the interest rate that cause
rates to vary across different investment opportunities or
loans are:
Question options:
the default premium and the bankruptcy premium.
the liquidity premium and the maturity premium.
the default premium and the maturity premium.
the inflation premium and the maturity premium.
Question 28
You put down 20% on a home with a purchase price of
$300,000. The down payment is thus $60,000, leaving a
balance owed of $240,000. The bank will loan you the
remaining balance at 4.28% APR. You will make annual
payments with a 20-year payment schedule. What is the
annual annuity payment under this schedule?
Question options:
$18,100.23
$22,625.29
$12,000.00
$33,785.23
Question 29
Nominal interest rates are the sum of two major components.
These components are:
Question options:
the real interest rate and expected inflation.
the risk-free rate and expected inflation.
the real interest rate and default premium.
the real interest rate and the T-bill rate.
Question 30
When interest rates are stated or given for loan repayments, it
is assumed that they are __________ unless specifically stated
otherwise.
Question options:
daily rates
annual percentage rates
effective annual rates
APYs
Question 31
The __________ compensates the investor for the additional
risk that the loan will not be repaid in full.
Question options:
default premium
inflation premium
real rate
interest rate
Question 32
If you take out a loan from a bank, you will be charged:
Question options:
for principal but not interest.
for interest but not principal.
for both principal and interest.
for interest only.
Question 33
Which of the following statements is true if you increase your
monthly payment above the required loan payment?
Question options:
The extra portion of the payment does not go to the principal.
You can significantly increase the number of payments needed to pay off the loan.
The extra portion of the payment increases the principal.
You can significantly reduce the number of payments needed to pay off the loan.
Question 34
We can write the true relationship between the nominal
interest rate and the real rate and expected inflation as which
of the following?
Question options:
(1 + r) = (1 + r) × (1 + h*)
r = (1 + r*) × (1 + h) - 1
r* = (1 + r) × (1 + h) -1
r = (1 + r*) × (1 + h) + 1
Question 35
Assume that you are willing to postpone consumption today
and buy a certificate of deposit (CD) at your local bank. Your
reward for postponing consumption implies that at the end of
the year:
Question options:
you will be able to consume fewer goods.
you will be able to buy the same amount of goods or services.
you will be able to buy fewer goods or services.
you will be able to buy more goods or services.
Question 36
The typical payments on a consumer loan are made at:
Question options:
the end of each day.
the end of each week.
the end of each month.
the beginning of each month.
Question 37
What is the EAR if the APR is 10.52% and compounding is
daily?
Question options:
Slightly above 10.09%
Slightly below 11.09%
Slightly above 11.09%
Over 11.25%
Question 38
Suppose you invest $2,000 today, compounded monthly, with
an annual interest rate of 7.5%. What is your investment worth
in one year?
Question options:
$2,150
$2,152.81
$2,155.27
$2,154.77
Question 39
Suppose you postpone consumption so that by investing at 8%
you will have an extra $800 to spend in one year. Suppose
that inflation is 4% during this time. What is the approximate
real increase in your purchasing power?
Question options:
$800
$600
$400
$200
Question 40
Which of the following statements is true?
Question options:
On many calculators the TVM key for interest is I/Y; this is Interest per Year, or the EAR rate.
On many calculators the TVM key for interest is Y/I; this is Interest per Year, or the APR rate.
On many calculators the TVM key for interest is I/Y; this is Interest per Year, or the APR rate.
On many calculators the TVM key for a period is I/Y.
Question options:
The dividend model requires that a firm have a cash dividend history and that the dividend histo
A problem with using the dividend growth model is that it appears to underestimate the expected
A problem with using the dividend growth model is that it produces a negative expected return w
A problem with using the dividend growth model is that it appears to underestimate the expected
Question 27
You can think of the __________ as the "used stock" market
because these shares have been owned or "used" previously.
Question options:
secondary market
primary market
NYSE market
initial public offering market
Question 28
The hiring process for an investment banker can happen in
two ways. Which of the below is one of these ways?
Question options:
Randomly choose an investment banking firm from a list of underwriting firms.
Pick a desirable investment banking firm, usually basing the choice on the reputation and history
Have the primary government regulator of your industry choose the best investment banking firm
Solicit advice from a government agency and use it as your primary guide in choosing an investm
Question 29
Strong-form efficient markets theory proclaims that:
Question options:
one can chart historical stock prices to predict future stock prices such that you can identify misp
one can exploit publicly available news or financial statement information to routinely outperfor
current prices reflect the price and volume history of the stock, all publicly available information
current prices reflect the price and volume history of the stock, all publicly available information
Question 30
You buy a stock for which you expect to receive an annual
dividend of $2.10 for the 15 years that you plan on holding it.
After 15 years, you expect to sell the stock for 32.25. What is
the present value of a share for this company if you want a
10% return?
Question options:
$7.72
$15.97
$23.69
$31.41
Question 31
You want to invest in a stock that pays $6 annual cash
dividends for the next five years. At the end of the five years,
you will sell the stock for $30. If you want to earn 10% on this
investment, what is a fair price for this stock if you buy it
today?
Question options:
$41.37
$40.37
$22.75
$18.63
Question 32
A typical practice of many companies is to distribute part of
the earnings to shareholders through:
Question options:
quarterly stock splits.
quarterly cash dividends.
semiannual cash dividends.
annual stock dividends.
Question 33
Shortcomings of the dividend pricing models suggest that we
need a pricing model that is more inclusive than the dividend
models and provides expected returns for companies based
on aspects besides their historical dividend patterns. Which of
the below is NOT one of these aspects?
Question options:
The company's risk
The premium for taking on risk
The reward for waiting
Stable dividends
Question 34
__________ has to do with the speed and accuracy of
processing a buy or sell order at the best available price.
Question options:
Market efficiency
Mechanical efficiency
Informational efficiency
Operational efficiency
Question 35
Which of the statements below is FALSE?
Question options:
In estimating the current price using the constant growth dividend <br /> model, we let g be the
return required by the potential buyer of the stock.
Constant growth means that the percentage increase in the dividend is <br /> the same each year
<p> Div<sub>0</sub> refers to the dividends that were just been paid to the current owner of th
One unlikely dividend pattern is to raise or grow dividends by a fixed <br /> amount at fixed int
Question 36
In the United States, there are three well-known secondary
stock markets. Which of the below is NOT one of these?
Question options:
The New York Stock Exchange (NYSE)
The Chicago Stock Exchange (CSE)
The National Association of Securities Dealers and their trading system NASDAQ (National As
The American Stock Exchange (AMEX)
Question 37
Stocks are different from bonds because:
Question options:
stocks, unlike bonds, are major sources of funds.
stocks, unlike bonds, represent residual ownership.
stocks, unlike bonds, give owners legal claims to payments.
bonds, unlike stocks, represent voting ownership.
Question 38
Which of the statements below is FALSE?
Question options:
The profits for common stock owners come before payment to employees, suppliers, governmen
Shareholders elect the board of directors, which ultimately selects the management team that run
Stock is a major financing source for public companies.
Common stock's ownership claim on the assets and cash flow of a company is often referred to a
Question 39
Which of the statements below is true?
Question options:
Buying of shares is the selling of ownership in the company.
A company is said to go "private" when it opens up its ownership structure to the ge
Private companies choose to sell stock to attract permanent financing through equity ownership
Most companies have the resident expertise to complete an initial public offering (IPO), or first
Question 40
Which of the statements below is FALSE?
Question options:
If an investor purchases 20% of the initial issue of the company, the investor then owns 20% of the com
After an initial offering, the company can sell more shares to the public at a later date. If the investor w
issue, his or her ownership is diluted below 20%.
A preemptive right enables one to maintain one's proportional level of ownership.
A preemptive right is never particularly valuable to shareholders with large ownership percentages.
Question 1
Question options:
40.25%
36.75%
27.30%
14.90%
Question 16
The correlation coefficient, a measurement of the
comovement between two variables, has what range?
Question options:
From 0.0 to +10.0
From 0.0 to +1.0
From -1.0 to +10.0
From =1.0 to -1.0
Question 17
Stock A B C D
Expected Return 5% 5% 7% 6%
Standard Deviation 10% 12% 12% 11%
Question options:
A is a better investment than B.
B is a better investment than C.
C is a better investment than D.
D is a better investment than C.
Question 18
Unsystematic risk:
Question options:
is also known as nondiversifiable risk.
can be diversified away.
is system-wide risk.
is equal to 2 times the systematic risk.
Question 19
Which of the following statements is true about variance?
Question options:
Variance describes how spread out a set of numbers or values are around its mean or average.
Variance is essentially the variability from the average.
The larger the variance, the greater the dispersion.
All of the above statements are true.
Question 20
Assume the following information about the market and
JumpMasters' stock. JumpMasters' beta = 1.50, the risk-free
rate is 3.5%, the market risk premium is 10%. Using the SML,
what is the expected return for JumpMasters' stock?
Question options:
7.5%
13.5%
18.5%
27%