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# Financial Analysis Questions

Practice test questions

1) What are the key advantages common to LLPs and LLC.

2) If a stock is paying \$3.0 per year in dividends, and is expected to continue this indefinitely, with a required rate of return of 10% what is the value of the stock?

3)If you want to have \$600,000 for retirement in 20 years and have only \$100,000 saved today, how much do you need to put away at the end of each year until retirement if your assets can earn 8% per year?

4) The value of an asset depends on returns, timing, and __________(fill in the blank).

5) The optimal cost of capital is where the cost of capital is maximized (true/false). Circle one choice.

6) Scenario analysis focuses on liquidity of the organization (true/false). Circle one.

7) Hedging increases risk (true/false).

8) If you borrow \$20,000 at the interest rate of 12%, what are the end-of-year payments if the loan is for five years? If the interest rate is 12.5% would the monthly payment be higher/lower?

9) What is meant by an agency relationship in corporate governance? Develop a specific example to align the parties' interests?

10) Mark each account in the table. The first column is either IS for income statement or BS for balance sheet. In column two label the item as either CA (current assets), CL (current liability), E (expense), FA (fixed assets), LTD (long-term debt), R (revenue), or SE (stockholder's equity).

Item (Account) Column 1 Column 2
Maintenance Truck
Canned Goods @ Grocery
Marketable Stocks Owned by Company
Interest Paid on Loan
Salaries
Factory Building
Cost of Goods Sold
Amortization of Assets
Officer Bonuses

11) Find the future value of an ordinary annuity of \$200 each year for 5 years, earning 5%.

12) Starlight, Inc. must choose between two asset purchases. The annual rate of return and related probabilities given below summarize the firm's analysis.
Asset A Asset B
Rate of Return Probability Rate of Return Probability
8% 30% 7% 30%
13% 60% 17% 50%
18% 10% 27% 20%

For each project compute: The expected rate of return.

13) The Happy Puppy Company has compiled the following data for adding a new line of pets to their stores. What NPV is calculated using this method? The initial investment in the project is \$45,000. The firm's cost of capital is 12%, however projects in this risk class have a 14% required rate of return. The risk-free rate is 8%.
Year Cash Inflow
1 \$23,000
2 19,000
3 15,000
4 13,000
5 \$10,000

14) What three functions do investment bankers have?

#### Solution Preview

See the attached file.
Practice test questions

1)   What are the key advantages common to LLPs and LLC.
1. Single level of taxation
2. Losses pass through
3. Limited liability

2) If a stock is paying \$3.0 per year in dividends, and is expected to continue this indefinitely, with a required rate of return of 10% what is the value of the stock?
Value of a stock = D0*(1+g)/(r-g)
Here we have
D0 \$3.00
g 0
r 10%
Stock value \$30.00
Note: we can also use the direct formula of D0/r for a non growing dividend case.

3)If you want to have \$600,000 for retirement in 20 years and have only \$100,000 saved today, how much do you need to put away at the end of each year until retirement if your assets can earn 8% per year?
There are two parts of the investment: Annuity and one time investment. \$100,000 is one time investment. First we need to calculate the future value of this investment. We then subtract this from the desired amount of \$600,000 and then calculate what annuity we need to save to make the total as \$600,000
Interest Rate 8%
Single Investment \$100,000
Period 20 Years
Future Value \$466,096

Amount to come from annual savings \$133,904
FVIFA for 8%, 20 years 45.7620
Amount to be saved every year \$2,926

4)The value of an ...

#### Solution Summary

This solution provides answers to financial analysis questions.

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