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Managerial Finance (BUS 718A)

1) How much money must you pay into an account at the beginning of each of 20 years in order to
have $10,000 at the end of the 20th year? Assume that the account pays 12% per annum, and round to
the nearest $1.
A) $1,195
B) $139
C) $124
D) $111
E) None of the above

2) If you put $200 in a savings account at the beginning of each year for 10 years and then allow the
account to compound for an additional 10 years, how much will be in the account at the end of the
20th year? Assume that the account earns 10%, and round to the nearest $10.
A) $9,700
B) $9,100
C) $8,900
D) $8,300
E) None of the above

3) You are thinking of buying a miniature golf course. It is expected to generate cash flows of
$40,000 per year in years one through four and $50,000 per year in years five through eight. If the
appropriate discount rate is 10%, what is the present value of these cash flows?
A) $167,943
B) $235,048
C) $285,288
D) $828,230
E) None of the above

4) Your parents are planning to retire in Kumasi, in 20 years time. Currently, the typical house that
pleases your parents costs $200,000, but they expect inflation to increase the price of the house at a
rate of 4% over the next 20 years. To buy a house upon retirement, what must they save each year in
equal annual end-of-year deposits if they can earn 10% annually?
A) $21,910.00
B) $14,715.52
C) $10,000.00
D) $7,650.94
E) None of the above

5) What is the highest effective rate attainable with a 12 percent nominal rate?
A) 12.00%
B) 12.55%
C) 12.75%
D) 12.95%
E) None of the above

6) You intend to purchase a new car upon graduation in two years’ time. It will have a cost of
$29,371, including all extra features and sales tax. You just received a $3,000 pre-graduation gift from
your rich uncle that you intend to deposit in a money market account that pays 6% interest,
compounded monthly. If you use the amount in the money market account for a down payment, and
take out an auto loan for the remainder, how much will you need to borrow?
A) $29,371
B) $26,371
C) $26,000
D) $25,880
E) None of the above

7) Higher cash flow and greater risk

A) have an inverse effect on share price.
B) have the same effect on share price.
C) have no effect on share price.
D) adversely affect share price.
E) none of the above.

8) Should you prefer to receive $100,000 right now or $10,000 at the end of each of the next 12
years?
A) The answer depends on the time value of money.
B) $100,000 now
C) $10,000 at the end of each of the next 12 years
D) Either alternative is equally valuable.
E) None of the above

9) A firm had year end 2004 and 2005 retained earnings balances of $670,000 and $560,000,
respectively. The firm paid $10,000 in dividends in 2005. The firm's net profit after taxes in 2005 was
A) $110,000.
B) -$110,000.
C) -$100,000.
D) $100,000.q
E) none of the above.

10) If Nico Corporation has annual purchases of $300,000 and accounts payable of $30,000, then
average purchases per day are ________ and the average payment period is ________.
A) 36.5; 821.9
B) 36.0; 833.3
C) 833.3; 36.0
D) 821.9; 36.5
E) none of the above.

11) Profit maximization as a goal is not ideal because it does NOT directly consider
A) EPS and stock price.
B) risk and EPS.
C) risk and cash flow.
D) cash flow and stock price.
E) none of the above.

12) Unsophisticated capital budgeting techniques do not

A) explicitly consider the time value of money.
B) examine the size of the initial outlay.
C) use net profits as a measure of return.
D) take into account an unconventional cash flow pattern.
E) None of the above
13) Firm ABC had operating profits of $100,000, taxes of $17,000, interest expense of $34,000 and
preferred dividends of $5,000. What was the firm's net profit after taxes?
A) $66,000
B) $83,000
C) $49,000
D) $44,000
E) none of the above.

14) A firm had the following accounts and financial data for 2005:

The firm's earnings per share, rounded to the nearest cent, for 2005 was ________.
A) $0.5335
B) $0.5125
C) $0.3204
D) $0.3024
E) none of the above.

15) A friend plans to buy a big-screen TV/entertainment system and can afford to set aside $1,320
toward the purchase today. If your friend can earn 5.0%, compounded yearly, how much can your
friend spend in four years on the purchase? Round off to the nearest $1.
A) $1,764
B) $1,604
C) $5,689
D) $1,283
E) None of the above

16) If Nico Corporation has cost of goods sold of $300,000 and inventory of $30,000, then the
inventory turnover is ________ and the average age of inventory is ________.
A) 36.5; 10
B) 10; 36.5
C) 36.0; 10
D) 10; 36.0
E) none of the above.

17) Your firm has the following income statement items: sales of $50,250,000; income tax of
$1,744,000; operating expenses of $10,115,000; cost of goods sold of $35,025,000; and interest
expense of $750,000. What is the amount of the firm's EBIT?
A) $15,552,000
B) $58,000,000
C) $5,110,000
D) $4,630,000
E) none of the above.

18) Key differences between common stock and bonds include all of the following EXCEPT
A) common stockholders have a voice in management; bondholders do not.
B) common stockholders have a junior claim on assets and income relative to bondholders.
C) bonds have a stated maturity but stock does not.
D) dividends paid to bondholders are tax-deductible but interest paid to stockholders is not.
E) None of the above

19) The ________ ratio may indicate that the firm will not be able to meet interest obligations due on
outstanding debt.
A) net profit margin
B) debt
C) times interest earned
D) return on total assets
E) none of the above.

20) Candy Corporation had pretax profits of $1.2 million, an average tax rate of 34 percent, and it
paid preferred stock dividends of $50,000. There were 100,000 shares outstanding and no interest
expense. What were Candy Corporation's earnings per share?
A) $3.91
B) $7.42
C) $4.52
D) $7.59
E) none of the above.

21) Jia Hua Enterprises wants to issue sixty 20-year, $1,000 par value, zero-coupon bonds. If each
bond is priced to yield 7 percent, how much will Jia Hua receive (ignoring issuance costs) when the
bonds are first sold?
A) $11,212
B) $12,393
C) $15,505
D) $18,880
E) $20,000
E) None of the above

22) Nico Corporation's common stock is expected to pay a dividend of $3.00 forever and currently
sells for $21.42. What is the required rate of return?
A) 10%
B) 12%
C) 13%
D) 14%
E) None of the above

23) A firm is evaluating three capital projects. The net present values for the projects are as follows:

The firm should

A) accept Projects 1 and 2 and reject Project 3.
B) accept Projects 1 and 3 and reject Project 2.
C) accept Project 1 and reject Projects 2 and 3.
D) reject all projects.
E) None of the above

24) The board of directors is typically responsible for

A) developing strategic goals and plans.
B) hiring and firing.
C) both A and B.
D) neither A nor B
E) None of the above

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25) A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of
$15,000 per year for five years. The payback period of the project is
A) 1.5 years.
B) 2 years.
C) 3.3 years.
D) 4 years.
E) None of the above

26) From the corporation's point of view, the advantages of issuing preferred stock include all of the
following EXCEPT
A) its increased financial leverage.
B) its flexible dividend policy.
C) its excellent merger security.
D) its difficulty to retire.
E) None of the above

27) Nico Custom Cycles' common stock currently pays no dividends. The company plans to begin
paying dividends beginning 3 years from today. The first dividend will be $3.00 and dividends will
grow at 5 percent per year thereafter. Given a required return of 15 percent, what would you pay for
the stock today?
A) $25.33
B) $18.73
C) $29.86
D) $20.72
E) None of the above

28) A firm has experienced a constant annual rate of dividend growth of 9 percent on its common
stock and expects the dividend per share in the coming year to be $2.70. The firm can earn 12 percent
on similar risk involvements. The value of the firm's common stock is
A) $22.50/share.
B) $9/share.
C) $90/share.
D) $30/share.
E) None of the above

29) The yield to maturity on a bond with a price equal to its par value will
A) be less than the coupon rate.
B) be more than the coupon rate.
C) always be equal to the coupon rate.
D) be more or less than the coupon rate depending on the required return.
E) None of the above

30) Rita borrows $4,500 from the bank at 9 percent annually compounded interest to be repaid in
three equal annual installments. The interest paid in the third year is ________.
A) $277.95
B) $405.00
C) $352.00
D) $147.00
E) None of the above