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    Financial Management

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    Question 10

    What's the rate of return you would earn if you paid $950 for a perpetuity that pays $85 per year?






    Question 11

    What is the future value of $1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually?






    Question 12

    What annual payment would you have to receive in order to earn a 7.5% rate of return on a perpetuity that has a cost of $1,250?






    Question 13

    Suppose you are buying your first house for $210,000, and are making a $20,000 down payment. You have arranged to finance the remaining amount with a 30-year, monthly payment, amortized mortgage at a 6.5% nominal interest rate. What will your equal monthly payments be (principal plus interest, excluding taxes and insurance)?






    Question 14

    Your child's orthodontist offers you two alternative payment plans. The first plan requires a $4,000 immediate up-front payment. The second plan requires you to make monthly payments of $137.41, payable at the end of each month for 3 years. What nominal annual interest rate is built into the monthly payment plan?






    Question 15

    Your sister turned 35 today, and she is planning to save $5,000 per year for retirement, with the first deposit to be made one year from today. She will invest in a mutual fund that will provide a return of 8% per year. She plans to retire 30 years from today, when she turns 65, and she expects to live for 25 years after retirement, to age 90. Under these assumptions, how much can she spend in each year after she retires? Her first withdrawal will be made at the end of her first retirement year






    Question 16

    Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet?

    The company repurchases common stock.

    The company pays a dividend.

    The company issues new common stock.

    The company gives customers more time to pay their bills.

    The company purchases a new piece of equipment.

    Question 17

    On its 2007 balance sheet, Barngrover Books showed $510 million of retained earnings, and exactly that same amount was shown the following year. Assuming that no earnings restatements were issued, which of the following statements is CORRECT?

    If the company lost money in 2007, they must have paid dividends.

    The only possibility is that the company had zero net income in 2007.

    The company must have paid out half of its earnings as dividends.

    The company must have paid no dividends in 2007.

    Dividends could have been paid in 2007, but they would have had to equal the earnings for the year.

    Question 18

    A security analyst obtained the following information from Prestopino Products' financial statements:
    â?¢ Retained earnings at the end of 2006 were $700,000, but retained earnings at the end of 2007 had declined to $320,000.
    â?¢ The company does not pay dividends.
    â?¢ The company's depreciation expense is its only non-cash expense; it has no amortization charges.
    â?¢ The company has no non-cash revenues.
    â?¢ The company's net cash flow (NCF) for 2007 was $150,000.
    On the basis of this information, which of the following statements is CORRECT?

    Prestopino had negative net income in 2007

    Prestopino's depreciation expense in 2007 was less than $150,000.

    Prestopino had positive net income in 2007, but its income was less than its 2006 income.

    Prestopino's NCF in 2007 must be higher than its NCF in 2006.

    Prestopino's cash on the balance sheet at the end of 2007 must be lower than the cash it had on the balance sheet at the end of 2006.

    Question 19

    Which of the following statements is CORRECT?

    The income of certain small corporations that qualify under the Tax Code is completely exempt from corporate income taxes. Thus, the federal government receives no tax revenue from these businesses.

    All businesses, regardless of their legal form of organization, are taxed under the Business Tax Provisions of the Internal Revenue Code.

    Small businesses that qualify under the Tax Code can elect not to pay corporate taxes, but then their owners must report their pro rata shares of the firm's income as personal income and pay taxes on that income.

    Congress recently changed the tax laws to make dividend income received by individuals exempt from income taxes. Prior to the enactment of that law, corporate income was subject to double taxation, where the firm was first taxed on the income and stockholders were taxed again on the income when it was paid to them as dividends.

    All corporations other than non-profit corporations are subject to corporate income taxes, which are 15% for the lowest amounts of income and 35% for the highest amounts of income.

    Question 20

    Which of the following statements is CORRECT?

    Dividends paid reduce the net income that is reported on a company's income statement.

    If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will cause a decline in its current assets as shown on the balance sheet.

    If a company issues new long-term bonds during the current year, this will increase its reported current liabilities at the end of the year.

    Accounts receivable are reported as a current liability on the balance sheet.

    If a company pays more in dividends than it generates in net income, its retained earnings as reported on the balance sheet will decline from the previous year's balance.

    Question 21

    Hunter Manufacturing Inc.'s December 31, 2006, balance sheet showed total common equity of $2,050,000 and 100,000 shares of stock outstanding. During 2007, Hunter had $250,000 of net income, and it paid out $100,000 as dividends. What was the book value per share at 12/31/07, assuming that Hunter neither issued nor retired any common stock during 2007?






    Question 22

    Frederickson Office Supplies recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,250 of depreciation. The company had no amortization charges and no non-operating income. It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federal-plus-state income tax rate was 40%. How much was the firm's taxable income, or earnings before taxes (EBT)?






    Question 23

    You observe that a firm's ROE is above the industry average, but its profit margin and debt ratio are both below the industry average. Which of the following statements is CORRECT?

    Its total assets turnover must be above the industry average.

    Its return on assets must equal the industry average.

    Its TIE ratio must be below the industry average.

    Its total assets turnover must be below the industry average.

    Its total assets turnover must equal the industry average.

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    Solution Summary

    The solution explains some multiple choice questions in financial management