# Corporate Finance Questions

1.

A firm's balance sheet shows current assets of $95, net fixed assets of $250, long-term debt of $40, and owners equity of $200. What is the value of the firm's current liabilities if that is the only remaining balance sheet item?

A) -$ 50

B) $ 50

C) $105

D) $145

E) $545

2.

Calculate net income using the following information: sales = $135; cost of goods sold = $40; selling, general and administrative expense = $35; depreciation = $20.00; interest expense = $20.00; tax rate = 34%.

A) $ 13.20

B) $ 19.80

C) $ 20.00

D) $ 23.10

E) $ 42.90

3.

RDJ Manufacturing has 600 million shares of stock outstanding and $900 million in retained earnings at the end of the year. Net income for the year is $600 million. $240 million in dividends were paid out during the year. What is RDJ's earnings per share?

A) $0.40

B) $0.50

C) $0.80

D) $1.00

E) $2.50

4.

Use the corporate tax rates in your textbook to answer this question. Suppose a firm has a taxable income of $74,000. Then, its total tax liability is

A) $10,050

B) $11,750

C) $13,500

D) $16,750

E) $18,500

5.

You have the following data for the Frank Winery: return on equity = 15%, earnings before taxes = $30,000, total asset turnover = .80, profit margin = 4.5%, tax rate = 35%. What is the firm's return on assets (ROA)?

A) 3.6%

B) 3.9%

C) 5.7%

D) 6.4%

E) 9.3%

6.

Brandies Candies has total assets of $1,200, total equity of $900, an ROA of 15%, and a dividend payout ratio of 40%. What is the internal growth rate of Brandies Candies?

A) 6.0%

B) 7.8%

C) 9.9%

D) 11.2%

E) 20.0%

7.

You need $2,000 to buy a new stereo for your car. If you have $800 to invest at 5% compounded annually, how long will you have to wait to buy the stereo?

A) 6.58 years

B) 8.42 years

C) 14.58 years

D) 15.75 years

E) 18.78 years

8.

You are going to receive $500 four years from today. If the discount rate is 6% compounded annually, what will be the present value of the $500 two years from today?

A) $395.16

B) $396.05

C) $429.04

D) $433.33

E) $445.00

9.

An account was opened with an investment of $1,000 three years ago. Today, the account balance is $1,157.63. If the account earns a fixed annual interest rate, how long will it take until the account has earned a total of $225 in simple interest?

A) less than one more year

B) between one and two more years

C) between two and three more years

D) between three and four more years

E) between four and five more years

10.

A savings account, which started with a balance of $500, has the following end of year balances: Year 1 = $525; Year 2 = $550; Year 3 = $580; Year 4 = $612; Year 5 = $700. No withdrawals were made over the life of the account, but there was one additional deposit of $50 made at the beginning of year 5. During year 2, the account earned ________

A) 4.8%.

B) 5.3%.

C) 5.5%.

D) 5.7%.

E) 5.9%.

11.

In a growing Midwestern town, the number of eating establishments at the end of each of the last five years are as follows: Year 1 = 128; Year 2 = 143; Year 3 = 166; Year 4 = 173; Year 5 = 181. From the end of year 1 to the end of year 5, the number of eating establishments grew at a rate of ________ compounded annually.

A) 4.2%

B) 4.7%

C) 5.6%

D) 8.7%

E) 9.0%

12.

Fred and Mary each invest $1,000 today. Fred is more conservative and invests his money in an account that is expected to earn 5% a year. Mary is an aggressive investor and invests her money in an account that is expected to earn 13% a year. Assume Fred and Mary each earn their expected rates of return. After ten years, how much more money will Mary have than Fred?

A) $1,313

B) $1,629

C) $1,766

D) $1,826

E) $3,395

13.

You just paid $14,960 for a rare model car. You hope to resell the car in three years and earn 15% annually on your investment. What selling price will you have to place on the model car?

A) $17,204

B) $19,785

C) $20,988

D) $21,038

E) $22,752

14.

You have $300 you would like to invest. You have 2 choices: Savings Account A which earns 5% compounded annually or Savings Account B which earns 4.75% compounded semiannually. Which would you choose and why?

A) A because it has a higher effective annual rate

B) A because the future value in one year is lower

C) B because it has a higher effective annual rate

D) B because the future value in one year is lower

E) A because it has the higher quoted rate

15.

Your monthly mortgage payment on your house is $1,311.00. It is a 30 year mortgage at 6.875% compounded monthly. How much did you borrow?

A) $181,523

B) $187,601

C) $190,690

D) $199,565

E) $200,708

16.

You are going to withdraw $1,000 at the end of each year for the next three years from an account that pays interest at a rate of 8% compounded annually. The account balance will reduce to zero when the last withdrawal is made. How much money will be in the account immediately after the second withdrawal is made?

A) $925.93

B) $977.10

C) $982.29

D) $1,000.00

E) $2,000.00

17.

You agree to loan your parents $22,000 to buy a new van. They agree to pay you $450 a month for 5 years. The _______________

A) stated interest rate on the loan is 0.75% per month.

B) APR on the loan is 8.17%.

C) EAR on the loan is 8.37%.

D) APR on the loan is 8.68%.

E) EAR on the loan is 8.70%.

18.

Moe purchases a $100 perpetuity on which payments begin in one year. Larry purchases a $100 perpetuity on which payments begin immediately. Both make annual payments and a 10% interest rate is appropriate for both cash flow streams. Which of the following statements is true?

A) Moe's perpetuity is worth $100 more than Larry's.

B) Larry's perpetuity is worth $100 more than Moe's.

C) The perpetuities are of equal value today.

D) Larry's perpetuity is worth $90.91 more than Moe's.

E) Moe's perpetuity is worth $90.91 more than Larry's.

19.

The company you work for will deposit $500 at the end of each month into your retirement fund. Interest is compounded monthly. You plan to retire 12 years from now and estimate that you will need $1,800 per month out of the account for the next 20 years. If the account pays 7.0% compounded monthly, how much do you need to put into the account in addition to your company deposit in order to meet your objective?

A) $0.00

B) $267.67

C) $533.26

D) $766.67

E) $1,033.26

20.

Consider the following balance sheet entries: Beginning Accounts Receivable (AR) = 180; ending AR = 190; Beginning Inventory (I) = 205; ending I = 210; Beginning Accounts Payable (AP) = 160; ending AP = 155. What is net cash flow?

A) -20

B) -15

C) 0

D) 5

E) 15

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#### Solution Summary

Using an Excel 97-2003 spreadsheet, this solution answers the following questions:

1.

A firm's balance sheet shows current assets of $95, net fixed assets of $250, long-term debt of $40, and owners equity of $200. What is the value of the firm's current liabilities if that is the only remaining balance sheet item?

A) -$ 50

B) $ 50

C) $105

D) $145

E) $545

2.

Calculate net income using the following information: sales = $135; cost of goods sold = $40; selling, general and administrative expense = $35; depreciation = $20.00; interest expense = $20.00; tax rate = 34%.

A) $ 13.20

B) $ 19.80

C) $ 20.00

D) $ 23.10

E) $ 42.90

3.

RDJ Manufacturing has 600 million shares of stock outstanding and $900 million in retained earnings at the end of the year. Net income for the year is $600 million. $240 million in dividends were paid out during the year. What is RDJ's earnings per share?

A) $0.40

B) $0.50

C) $0.80

D) $1.00

E) $2.50

4.

Use the corporate tax rates in your textbook to answer this question. Suppose a firm has a taxable income of $74,000. Then, its total tax liability is

A) $10,050

B) $11,750

C) $13,500

D) $16,750

E) $18,500

5.

You have the following data for the Frank Winery: return on equity = 15%, earnings before taxes = $30,000, total asset turnover = .80, profit margin = 4.5%, tax rate = 35%. What is the firm's return on assets (ROA)?

A) 3.6%

B) 3.9%

C) 5.7%

D) 6.4%

E) 9.3%

6.

Brandies Candies has total assets of $1,200, total equity of $900, an ROA of 15%, and a dividend payout ratio of 40%. What is the internal growth rate of Brandies Candies?

A) 6.0%

B) 7.8%

C) 9.9%

D) 11.2%

E) 20.0%

7.

You need $2,000 to buy a new stereo for your car. If you have $800 to invest at 5% compounded annually, how long will you have to wait to buy the stereo?

A) 6.58 years

B) 8.42 years

C) 14.58 years

D) 15.75 years

E) 18.78 years

8.

You are going to receive $500 four years from today. If the discount rate is 6% compounded annually, what will be the present value of the $500 two years from today?

A) $395.16

B) $396.05

C) $429.04

D) $433.33

E) $445.00

9.

An account was opened with an investment of $1,000 three years ago. Today, the account balance is $1,157.63. If the account earns a fixed annual interest rate, how long will it take until the account has earned a total of $225 in simple interest?

A) less than one more year

B) between one and two more years

C) between two and three more years

D) between three and four more years

E) between four and five more years

10.

A savings account, which started with a balance of $500, has the following end of year balances: Year 1 = $525; Year 2 = $550; Year 3 = $580; Year 4 = $612; Year 5 = $700. No withdrawals were made over the life of the account, but there was one additional deposit of $50 made at the beginning of year 5. During year 2, the account earned ________

A) 4.8%.

B) 5.3%.

C) 5.5%.

D) 5.7%.

E) 5.9%.

11.

In a growing Midwestern town, the number of eating establishments at the end of each of the last five years are as follows: Year 1 = 128; Year 2 = 143; Year 3 = 166; Year 4 = 173; Year 5 = 181. From the end of year 1 to the end of year 5, the number of eating establishments grew at a rate of ________ compounded annually.

A) 4.2%

B) 4.7%

C) 5.6%

D) 8.7%

E) 9.0%

12.

Fred and Mary each invest $1,000 today. Fred is more conservative and invests his money in an account that is expected to earn 5% a year. Mary is an aggressive investor and invests her money in an account that is expected to earn 13% a year. Assume Fred and Mary each earn their expected rates of return. After ten years, how much more money will Mary have than Fred?

A) $1,313

B) $1,629

C) $1,766

D) $1,826

E) $3,395

13.

You just paid $14,960 for a rare model car. You hope to resell the car in three years and earn 15% annually on your investment. What selling price will you have to place on the model car?

A) $17,204

B) $19,785

C) $20,988

D) $21,038

E) $22,752

14.

You have $300 you would like to invest. You have 2 choices: Savings Account A which earns 5% compounded annually or Savings Account B which earns 4.75% compounded semiannually. Which would you choose and why?

A) A because it has a higher effective annual rate

B) A because the future value in one year is lower

C) B because it has a higher effective annual rate

D) B because the future value in one year is lower

E) A because it has the higher quoted rate

15.

Your monthly mortgage payment on your house is $1,311.00. It is a 30 year mortgage at 6.875% compounded monthly. How much did you borrow?

A) $181,523

B) $187,601

C) $190,690

D) $199,565

E) $200,708

16.

You are going to withdraw $1,000 at the end of each year for the next three years from an account that pays interest at a rate of 8% compounded annually. The account balance will reduce to zero when the last withdrawal is made. How much money will be in the account immediately after the second withdrawal is made?

A) $925.93

B) $977.10

C) $982.29

D) $1,000.00

E) $2,000.00

17.

You agree to loan your parents $22,000 to buy a new van. They agree to pay you $450 a month for 5 years. The _______________

A) stated interest rate on the loan is 0.75% per month.

B) APR on the loan is 8.17%.

C) EAR on the loan is 8.37%.

D) APR on the loan is 8.68%.

E) EAR on the loan is 8.70%.

18.

Moe purchases a $100 perpetuity on which payments begin in one year. Larry purchases a $100 perpetuity on which payments begin immediately. Both make annual payments and a 10% interest rate is appropriate for both cash flow streams. Which of the following statements is true?

A) Moe's perpetuity is worth $100 more than Larry's.

B) Larry's perpetuity is worth $100 more than Moe's.

C) The perpetuities are of equal value today.

D) Larry's perpetuity is worth $90.91 more than Moe's.

E) Moe's perpetuity is worth $90.91 more than Larry's.

19.

The company you work for will deposit $500 at the end of each month into your retirement fund. Interest is compounded monthly. You plan to retire 12 years from now and estimate that you will need $1,800 per month out of the account for the next 20 years. If the account pays 7.0% compounded monthly, how much do you need to put into the account in addition to your company deposit in order to meet your objective?

A) $0.00

B) $267.67

C) $533.26

D) $766.67

E) $1,033.26

20.

Consider the following balance sheet entries: Beginning Accounts Receivable (AR) = 180; ending AR = 190; Beginning Inventory (I) = 205; ending I = 210; Beginning Accounts Payable (AP) = 160; ending AP = 155. What is net cash flow?

A) -20

B) -15

C) 0

D) 5

E) 15

Finances Multiple Choice Questions & Problems

Multiple Choice Questions:

1. Corporate managers are expected to make corporate decisions that are in the best interest of

A) top corporate management.

B) the corporation's board of directors.

C) the corporation's shareholders.

D) all corporate employees.

2. Financial markets are used for trading:

A) both real assets and financial assets.

B) the goods and services produced by a firm.

C) securities, such as shares of IBM.

D) the raw materials used in manufacturing.

3. The best criterion for success in a capital budgeting decision would be to:

A) minimize the cost of the investment.

B) maximize the number of capital budgeting projects.

C) maximize the difference between cash inflows and cost.

D) finance all capital budgeting projects with debt.

4. The term "capital structure" refers to:

A) the manner in which a firm obtains its long-term sources of funding.

B) the length of time needed to repay debt.

C) whether the firm invests in capital budgeting projects.

D) which specific assets the firm should invest in.

5. Which of the following financial assets might be least likely to have an active secondary market?

A) Common stock of a large firm

B) Bank loans made to smaller firms

C) Bonds of a major, multinational corporation

D) Debt issued by the United States Treasury

6. How much can be accumulated for retirement if $2,000 is deposited annually, beginning one year from today, and the account earns 9% interest compounded annually for 40 years?

A) $ 87,200.00

B) $675,764.89

C) $736,583.73

D) $802,876.27

7. The present value of the following cash flows is known to be $6,939.91; $500 today, $2,000 in one year, and $5,000 in two years. What discount rate is being used?

A) 3%

B) 4%

C) 5%

D) 6%

8. How much should you pay for a $1,000 bond with 10% coupon, annual payments, and five years to maturity if the interest rate is 12%?

A) $ 927.90

B) $ 981.40

C) $1,000.00

D) $1,075.82

9. If an investor purchases a bond when its current yield is less than the coupon

rate, then the bond's price will be expected to:

A) decline over time, reaching par value at maturity.

B) increase over time, reaching par value at maturity.

C) be less than the face value at maturity.

D) exceed the face value at maturity.

10. In the calculation of rates of return on common stock, dividends are ___ and capital gains are ____.

A) guaranteed; not guaranteed

B) guaranteed; guaranteed

C) not guaranteed; not guaranteed

D) not guaranteed; guaranteed

11. What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8%?

A) $22.86

B) $28.00

C) $42.00

D) $43.75

12. An increase in a firm's financial leverage will:

A) increase the variability in earnings per share.

B) reduce the operating risk of the firm.

C) increase the value of the firm in a non-MM world.

D) increase the WACC.

13. How much could NPV be affected by a worst-case scenario of 25% reduction from the $3 million in expected annual cash flows on a five-year project with 10% cost of capital?

A) $2,843,090

B) $3,750,000

C) $4,578,825

D) $6,155,274

14. Projects that are calculated as having negative NPVs should be:

A) depreciated over a longer time period.

B) charged less in overhead costs.

C) discounted using lower rates.

D) rejected or abandoned.

15. If a project is expected to increase inventory by $15,000, increase accounts payable by $10,000, and decrease accounts receivable by $1,000, what effect does working capital have during the life of the project?

A) Increases investment by $4,000.

B) Increases investment by $5,000.

C) Increases investment by $6,000.

D) Working capital has no effect during the life of the project.

Problem 1:

Examine the following book-value balance sheet for University Products, Inc. The preferred stock currently sells for $15 per share and the common stock for $20 per share. There are one million common shares outstanding. (Provide all computations in addition to the solutions.)

BOOK VALUE BALANCE SHEET (in millions)

Assets

Cash and short-term securities $ 1.0

Accounts receivable 3.0

Inventories 7.0

Plant and equipment 21.0

Total $32.0

Liabilities and Net Worth

Bonds, coupon = 8%, paid annually $10.0

(maturity = 10 years, current yield to maturity = 9%)

Preferred stock (par value $20 per share) 2.0

Common stock (par value $.10) 0.1

Additional paid in stockholders' capital 9.9

Retained earnings 10.0

Total $32.0

a. What is the capital structure of the firm based on market values (V)?

b. If the preferred stock pays a dividend of $2 per share, the beta of the stock is .8,

the market risk premium is 10 percent, the risk-free rate is 6 percent, and the firm's tax rate is 40 percent, what is University's weighted-average cost of capital?

Problem 2:

Dominique, Inc. is considering an investment in a new shoe factory which will entail an immediate capital expenditure of $2 million. The plant is going to be depreciated on a straight line basis over 10 years with no expected salvage value. The operating income before deducting depreciation is expected to be $500,000 per year over the 10-year life of the project. If Dominique is in the 30 percent tax bracket and the required return is 15 percent, calculate

a) the after-tax cash flows of the project (NCF),

b) the payback period (PBP),

c) the net present value (NPV),

d) the net profitability index (PI),

e) the internal rate of return (IRR).

(Provide all computations for this problem in addition to the solutions.)

Bonus Problem:

Ms. Amidala Inflamada is celebrating today her birthday and 15th anniversary as the Executive Secretary for Mr. Num Bei Wan, President of Last Chance, Inc. During the day she was talking to her closest friends how turbulent where the first days she came in to work after her graduation from the University when she was only 22 years old. One of her friends asked her if she have planned for her retirement. She replied that she has to establish a retirement plan that should provide for her needs after her retirement, considering that probably she will be alone and maybe the Social Security will not be around any more.

For a female her age and ethnic group, the life expectancy is 85 years and according to new rules her retirement age should be 65. She thinks that she will do fine with a monthly pension payment of $3,500.00.

How much should Ms. Inflamada deposit every end of month starting this same month in order to accumulate the proper amount to fund her pension payments after her retirement? Assume that she can obtain a 9% average return on her deposits and on her funds accumulated on her retirement plan.

(Provide all computations for this problem in addition to the solution.)

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