Performing Financial Ratio Analysis - Assignment Example

FINANCE QUESTIONS TRUE/FALSE. Write T if the ment is true and F if the ment is false. (Each question is worth 3 points) 1) The adjusted WACC is the correct discount rate to use when evaluating a firms average-risk projects. 1) ___T____ 2) When performing financial ratio analysis, what we need to know is not only what the ratios are but also what the trends are over time. 2) ___T____ 3) The oil and gas industry, with its very high leverage, is usually able to produce a higher return on equity. 3) ___T____ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. (Each question is worth 2.5 points) 4) The one-time payment of money at a future date is often called a ________. 4) B A) principal amount B) lump-sum payment C) perpetuity payment D) present value 5) Your employer has agreed to place year-end deposits of $1,000, $2,000 and $3,000 into your retirement account. The $1,000 deposit will be one year from today, the $2,000 deposit two years from today, and the $3,000 deposit three years from today. If your account earns 5% per year, how much money will you have in the account at the end of year three when the last deposit is made? 5) __D_____ A) $6,000 B) $6,727.88 C) $5,357.95 D) $6,202.50 6) If for the next 40 years you place $3,000 in equal year-end-deposits into an account earning 8% per year, how much money will be in the account at the end of that time period? 6) ___A____ A) $839,343.12 B) $2,606,942.58 C) $777,169.56 D) $120,000.00 7) What type of loan makes interest payments throughout the life of the loan and then pays the principal and final interest payment at the maturity date? 7 ___A____ A) Interest-only loan B) Compound loan C) Discount loan D) Amortized loan 8) Which of the below is a USE of cash? 8) ____C___ A) Cash sales of equipment or other assets of the company B) Bank loans C) Retirement of debt (paying off loans and bonds) D) Credit Sales 9) ________ arise(s) from differences in customs, social norms, attitudes, assumptions, and expectations of the local society in a host country. 9) ___B____ A) Social fads B) Cultural risk C) . Political risk D) Similarities in business beliefs 10) A $100 deposit today that earns an annual interest rate of 10% is worth how much at the end of two years? Assume all interest received at the end of the first year is reinvested the second year. 10) ___D___ A) $100 B) $122 C) $120 D) $121 11) You intend to buy a vacation home in seven years and plan to have saved $50,000 for a down payment. How much money would you have to place today into an investment that earns 8% per year to have enough for your desired down payment? 11) ___C___ A) $37,065 B) $25,000 C) $29,175 D) $29,100 12) Rory has $2,500 but needs $5,000 to purchase a new golf cart. If he can invest his money at a rate of 12% per year, approximately how many years will it take the money in Rorys account to grow to $5,000? Use the Rule of 72 to determine your answer. Note: The golf carts price may have changed by the time Rorys account reaches a value of $5,000. 12) __B____ A) 2 years B) 6 years C) 4 years D) 8 years 13) The furniture store offers you no-money-down on a new set of living room furniture. Further, you may pay for the furniture in three equal annual end-of-the-year payments of $1,000 each with the first payment to be made one year from today. If the discount rate is 6%, what is the present value of the furniture payments? 13) __C____ A) $3,183.60 B) $2,833.39 C) $2,673.01 D) $3,000.00 14) Suppose you deposit money in a certificate of deposit (CD) at a bank. Which of the following statements is TRUE? 14) __C____ A) The bank is borrowing money from you without a promise to repay that money with interest. B) The bank is lending money to you with a promise to repay that money with interest. C) The bank is technically renting money from you with a promise to repay that money with interest. D) The bank is lending money to you, but not borrowing money from you. 15) Blackburn Inc. has issued 30-year $1,000 face value, 10% annual coupon bonds, with a yield to maturity of 9.0%. The annual interest payment for the bond is ________. 15) __A____ A) $100 B) $45 C) $50 D) $90 16) You want to invest in a stock that pays $5.00 annual cash dividends for the next four years. At the end of the four years, you will sell the stock for $20.00. If you want to earn 12% on this investment, what is a fair price for this stock if you buy it today? 16) ___A___ A) $25.42 B) $40.00 C) $27.90 D) $43.90 17) Consider the following four-year project. The initial after-tax outlay or after-tax cost is $1,000,000. The future after-tax cash inflows for years 1, 2, 3 and 4 are: $400,000, $300,000, $200,000 and $200,000, respectively. What is the payback period without discounting cash flows? 17) ___A___ A) 3.5 years B) 4.0 years C) 2.5 years D) 3.0 years 18) In the NPV Model, all cash flows are stated ________. 18) __B____ A) in present value or current dollars, and the outflow is "netted" against the total inflow to see if the gross amount is positive or negative B) in present value or current dollars, and the total inflow is "netted" against the initial outflow to see if the net amount is positive or negative C) in future value dollars, and the total inflow is "netted" against the outflow to see if the net amount is positive or negative D) in future dollars, and the initial outflow is "netted" against the total inflow to see if the net amount is positive 19) Which of the statements below is TRUE? 19) __C____ A) If we realize that NPV is the present value of the benefits minus the present value of the costs, then we simply need to subtract the costs to the NPV to get the present value of the benefits. B) There are two acceptable projects, but we can only take one due to a shortage of funds. The PI for these two projects are: Project A: 2.25; Project B: 1.89. We would take Project B. C) A PI of 1.50 can be interpreted as meaning that for every $1.00 invested today the firm gets back $1.50 in current dollars. D) According to the profitability ind ex (PI) decision criterion when the PI is greater than 1, the cost exceed the benefits. 20) ________ is the process of "expiring" the cost of a long-term tangible asset over its useful life. 20) ___D___ A) Economic recovery B) Salvaging C) Expiration D) Depreciation 21) A firm is considering purchasing two assets. Asset A will have a useful life of 15 years and cost $3 million; it will have installation costs of $400,000 but no salvage or residual value. Asset B will have a useful life of 6 years and cost $1.3 million; it will have installation costs of $180,000 and a salvage or residual value of $300,000. Which asset will have a greater annual straight-line depreciation? 21) __C____ A) Asset B has $40,000 more in depreciation per year. B) Asset B has $30,000 more in depreciation per year. C) Asset A has $30,000 more in depreciation per year. D) Asset A has $40,000 more in depreciation per year. 22) Which of the following would NOT be considered a cost of debt financing? 22) __D____ A) The required return on a bank loan B) The yield-to-maturity of a bond issue C) The required return on money borrowed from a venture capitalist D) The required return on preferred stock 23) Which of the following is an advantage of the dividend growth approach over the SML in estimating the required return on equity? 23) __A____ A) It is easy to fit flotation costs into the dividend growth model but not the SML. B) The dividend growth model uses market information but the SML does not. C) Dividend growth is known, whereas estimating beta for the SML is an art form. D) All are advantages of the dividend growth model for estimating the required return on equity. 24) For March, Heavenly Hotel will have cash receipts of $365,000 and cash disbursements of $370,000. If its beginning cash is $4,000 and its reserves are $3,000, what will be its shortfall in cash for the month? 24) ___B___ A) There is no shortfall in cash but an excess of cash. B) -$5,000 C) -$3,000 D) -$4,000 25) Surf City Inc. has decided on a 3-for-1 stock split. If the firm currently has 900,000 shares outstanding, how many shares will be outstanding after the stock split? 25) ___B___ A) 1,200,000 shares B) 2,700,000 shares C) 300,000 shares D) 3,600,000 shares 26) Tiger Training Inc. has decided on a 4-for-1 REVERSE stock split. If the firm currently has 1,600,000 shares outstanding, how many shares will be outstanding after the stock split? 26) ___C___ A) 3,200,000 shares B) 200,000 shares C) 400,000 shares D) 6,400,000 shares 27) In the United States, we can buy a pair of shoes for $58. These shoes are identical in every way, shape, and form to a pair of shoes from Japan that be purchased for ¥7,200 including shipping costs. From whom should we order the shoes if we can exchange $1 for ¥120? 27) __A____ A) Buy from the U.S., as we save $2.00. B) Buy from Japan, as we save $2.00. C) Buy from Japan, as we save $4.00. D) Buy from the U.S., as we save $4.00. 28) Assume that you are the manager of a U.S. company and you face an exchange rate of ¥120 per $1. Whenever you receive an order, rather than ship from your production facilities, you call in the order to a Japanese company and have the bill shipped to you directly. If the bill shipped to you is ¥7,500 and you can collect $62 per item sold to your customer, what would be your loss per item if you pay the Japanese company ¥7,500? 28) __B____ A) -$0.60 per item B) -$0.50 per item C) -$0.75 per item D) -$0.80 per item 29) A home improvement firm has quoted a price of $9,800 to fix up Johns backyard. Five years ago, John put $7,500 into a home improvement account that has earned an average of 5.25% per year. Does John have enough money in his account to pay for the backyard fix-up? 29) ___B___ A) Yes; John now has $10,519 in his home improvement account. B) No; John has only $9,687 in his home improvement account. C) Yes; John now has exactly $9,800 in his home improvement account. D) There is not enough information to answer this question. 30) Your firm has issued ten-year zero-coupon bonds with a $1,000 face value. If the bonds are currently selling for $514.87. What is the yield to maturity? (Assume semi-annual discounting.) 30) _A_____ A) 6.86% B) 10.45% C) 6.75% D) This question cannot be answered because there is no coupon payment provided. 31) Acme, Inc. is considering a four-year project that has an initial outlay or cost of $100,000. The respective future cash inflows from its project for years 1, 2, 3 and 4 are: $50,000, $40,000, $30,000 and $20,000. Will it accept the project if its payback period is 31 months? 31) B ______ A) No, because it pays back in over 31 months. B) Yes, because it pays back in 28 months. C) No, because it pays back in over 35 months. D) Yes, because it pays back in 25 months. 32) Dweller, Inc. is considering a four-year project that has an initial after-tax outlay or after-tax cost of $80,000. The future cash inflows from its project are $40,000, $40,000, $30,000 and $30,000 for years 1, 2, 3 and 4, respectively. Dweller uses the net present value method and has a discount rate of 12%. Will Dweller accept the project? 32) A A) Dweller accepts the project because the NPV is greater than $28,000. B) Dweller accepts the project because the NPV is greater than $30,000. C) Dweller rejects the project because the NPV is -$3,021. D) Dweller rejects the project because the NPV is less than -$4,000. 33) If £1 buys ¥200, then the reciprocal states that ¥1 buys what? 33)D A) £0.00494 B) £0.00512 C) £0.00491 D) £0.00500 Essay Questions: (Each is worth 8 points) Instructions: In the space below each question, respond in as much detail as required to the following two questions. Your responses should be at least one-two paragraphs in length. 1. Describe the complexity of managing multinational corporations and the risks they face when conducting international deals that are different from domestic deals? Multinational corporations engage in cross border trade hence have to deal with the different cultures and practices. Managing multinational corporations is therefore complex because of the dynamic nature of the global settings. This therefore makes it complex because of the nationality of the parties involved is different, factors of production are less mobile, heterogeneity nature of the customers across markets, variations in political systems and business practices, varies business policies and regulations, and the use of different currencies. Because of those factors, the international business is a difficult activity and much more complex. Further, due to the use of different currencies MNCs are faced with currency exchange risk exposures such as transaction exposure, economic exposures and translation exposures. They are therefore faced with risks such as country risk and currency risk that are unique to this international or global setting. 2. You have a friend who tells you that ethics are completely unimportant in business since a number of laws have been set up for us to know the rules of the game. Do you agree/disagree and why? Support your position with facts. I disagree, the current business world is very competitive and all businesses follow the ethical standards so that they can create a positive public image which increases consumer trust thereby boosting their sales and growth. However, a breach of business ethics can possibly damage the company’s public image hence causing consumers to turn their backs on the business. Good ethical standards on the other hand reduces labor turnover because it makes employees to want to stay and work in the business. This in turn increases their productivity. Further, it reduces recruitment costs because more employees who want to work for the business are attracted thereby enabling th company to acquire the most talented work force. Finally, The business is protected from take over because more investors are attracted which help keep share price of the company high. END OF EXAM - Answer Key 1 T 2 T 3 T 4 B 5 D 6 A 7 A 8 C 9 B 10 D 11 C 12 B 13 C 14 C 15 A 16 A 17 A 18 B 19 C 20 D 21 C 22 D 23 A 24 B 25 B 26 C 27 A 28 B 29 B 30 A 31 B 32 A 33 D Read More