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# Finance: Loan amortization.

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4-5: PRICE/EARNING RATIO A company has an EPS of \$2.00, a cash flow per share of \$3.00, and a price/cash flow ratio of 8.0x. What is its P/E ratio?

4-8: BASIC EARNING POWER Duval manufacturing recently reported the following information:

Net income \$600,000
ROA \$ 8%
Interest expense \$225,000
Duval's tax rate is 35%. What is its basic earning power (BEP)?

5-6: FUTURE VALUE: ANNUITY VERSUS ANNUITY DUE what's the future value of a 7%, 5-year ordinary annuity that pays \$300 each year? If this was an annuity due, what would its future value be?

5-21: EVALUATING LUMP SUMS AND ANNUITIES Crissie just won the lottery, and she must choose between three award options. She can elect to receive a lump sum today of \$61 million, to receive 10 end-of-year payments of \$9.5 million, or to receive 30 end-of-year payments of \$5.5 million.

5-35: AMORTIZATION SCHEDULE WITH A BALLOON PAYMENT you want to buy a house that cost \$100,000. You have \$10,000 for a down payment, but your credit is such that mortgage companies will not lend you the required \$90,000. However, the realtor persuades the seller to take a \$90,000 mortgage (called a seller take-back mortgage) at a rate of 7%, provided the loan is paid off in full in 3 years. You expect to inherit \$100,000 in 3 years; but right now all you have is \$10,000, and you can afford to make payments of no more than \$7,500 per year given your salary. (The loan would call for monthly payments, but assume end-of-year annual payments to simplify things.)

a. If the loan was amortized over 3 years, how large would each annual payment be? Could you afford those payments?
b. If the loan was amortized over 30 years, what would each payment be? Could you afford those payments?
c. To satisfy the seller, the 30-year mortgage loan would be written as a balloon note, which means that at the end of the third year, you would have to make the regular payment plus the remaining balance on the loan. What would the loan balance be at the end of Year 3, and what would the balloon payment be?

#### Solution Summary

The problems deal with issues under finance: loan amortization, future value etc.

\$2.19

1. The accountant's primary function is
A) evaluating the financial statements.
B) making decisions based on financial data.
C) the collection and presentation of financial data.
D) planning cash flows.

2. A financial manager must choose between four alternative Assets: 1, 2, 3, and 4. Each asset
costs \$35,000 and is expected to provide earnings over a three -year period as described below.
Asset Year 1 Year 2 Year 3
1 21,000 \$15,000 \$6,000
2 9,000 15,000 21,000
3 3,000 20,000 19,000
4 6,000 12,000 12,000

Based on the profit maximization goal, the financial manager would choose:
A) Asset 1.
B) Asset 2.
C) Asset 3.
D) Asset 4.

3. Operating profits are defined as
A) gross profits minus operating expenses.
B) sales revenue minus cost of goods sold.
C) earnings before depreciation and taxes.
D) sales revenue minus depreciation expense.

4. The statement of cash flows may also be called the
A) sources and uses statement.
B) statement of retained earnings.
C) bank statement.
D) funds statement.

5. A firm had the following accounts and financial data for 2005:
Sales Revenue \$3,060 Cost of goods sold \$1,800
Accounts receivable 500 Preferred stock dividends 18
Interest expense 126 Tax rate 40%
Total operating expenses 600 Number of common shares 1,000
Accounts payable 240 outstanding

6. ________ analysis involves comparison of current to past performance and the evaluation of
developing trends.
A) Time-series
B) Cross-sectional
C) Marginal
D) Quantitative

7. A firm has a current ratio of 1; in order to improve its liquidity ratios, this firm might
A) improve its collection practices, thereby increasing cash and increasing its current
and quick ratios.
B) improve its collection practices and pay accounts payable, thereby decreasing
current liabilities and increasing the current and quick ratios.
C) decrease current liabilities by utilizing more long-term debt, thereby increasing the
current and quick ratios.
D) increase inventory, thereby increasing current assets and the current and quick
ratios.

8. For the year ended December 31, 2008, a corporation had cash flow from operating activities of \$20,000, cash flow from investment activities of -\$15,000, and cash flow from financing activities of -\$10,000. The Statement of Cash Flows would show a
A) net increase of \$5,000 in cash and marketable securities.
B) net decrease of \$5,000 in cash and marketable securities.
C) net decrease of \$15,000 in cash and marketable securities.
D) net increase of \$25,000 in cash and marketable securities.

9. One major risk a firm assumes in an aggressive financing strategy is
A) the possibility that collections will be slower than expected.
B) the possibility that long-term funds may not be available when needed.
C) the possibility that short-term funds may not be available when needed.
D) the possibility that it will run out of cash.

10. The costs associated with inventory can be divided into the following groups EXCEPT
A) order costs.
B) marginal costs.
C) carrying costs.
D) total costs.

11. Certain financing plans are termed conservative when
A) short-term financing is used frequently.
B) working capital is relatively high.
C) working capital is relatively low.
D) risk is increased.

12. The future value of a dollar ________ as the interest rate increases and ________ the farther in the future an initial deposit is to be received.
A) decreases; decreases
B) decreases; increases
C) increases; increases
D) increases; decreases

13. The future value of an ordinary annuity of \$1,000 each year for 10 years, deposited at 3 percent, is
A) \$11,808.
B) \$11,464.
C) \$ 8,530.
D) \$10,000.

14. The present value of an ordinary annuity of \$2,350 each year for eight years, assuming an
opportunity cost of 11 percent, is
A) \$ 1,020.
B) \$27,869.
C) \$18,800.
D) \$12,093.

15. The rate of interest actually paid or earned, also called the annual percentage rate (APR), is the ________ interest rate.
A) effective
B) nominal
C) discounted
D) continuous

16. Hayley makes annual end-of-year payments of \$6,260.96 on a five-year loan with an 8 percent interest rate. The original principal amount was
A) \$31,000.
B) \$30,000.
C) \$25,000.
D) \$20,000.

17. If a person requires greater return when risk increases, that person is said to be
A) risk-seeking.
B) risk-indifferent.
C) risk-averse.
D) risk-aware.

18. Combining two assets having perfectly positively correlated returns will result in the creation of a portfolio with an overall risk that
A) remains unchanged.
B) decreases to a level below that of either asset.
C) increases to a level above that of either asset.
D) lies between the asset with the higher risk and the asset with the lower risk.

19. The ________ describes the relationship between non-diversifiable risk and return for all assets.
A) EBIT-EPS approach to capital structure
B) supply-demand function for assets
C) capital asset pricing model
D) Gordon model

20. ________ of all future cash flows an asset is expected to provide over a relevant time period is the market value of the asset.
A) The future value
B) The present value
C) The stated value
D) The sum

21. A firm has an issue of \$1,000 par value bonds with a 9 percent stated interest rate outstanding. The issue pays interest annually and has 20 years remaining to its maturity date. If bonds of similar risk are currently earning 11 percent, the firm&#697;s bond will sell for ________ today.
A) \$1,000
B) \$716.67
C) \$840.67
D) \$1,123.33

22. ________ in the beta coefficient normally causes ________ in the required return and therefore ________ in the price of the stock, all else remaining the same.
A) An increase; an increase; an increase
B) An increase; a decrease; an increase
C) An increase; an increase; a decrease
D) A decrease; a decrease; a decrease

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