FINC 655 Summer 2012 Exam #1 You must show all of your work to receive any credit Problems

s (5pts each) 1. Stars Inc. has annual sales of $3.46 million, total debt of $977,000, total equity of $1.23 million, and a profit margin of 3.03 percent. What is the return on equity?

2. Taylor's Men's Wear has a debt-equity ratio of 55 percent, sales of $587,000, net income of $63,400, and total debt of $196,000. What is equity multiplier?

3. One year ago, you invested $2,500. Today it is worth $2,789.50. What rate of interest did you earn?

4. Your parents are giving you $500 a month for five years while you attend college to earn both a bachelor's and a master's degree. You will begin attending college two years from today. At a 7 percent discount rate, what are these payments worth to you today?

5. Your employer contributes $50 a week to your retirement plan, and you contribute another $25 per week on top of this. Assume that you work for your employer for another 21 years and that the applicable discount rate is 9.5 percent. Given these assumptions, how much money will you have saved in this retirement plan when you finally leave the company?

6. Pat retires at age 58 and expects to live to age 90. On the day she retires, she has $287,409 in her retirement savings account. She is conservative and expects to earn 5.25 percent on her money during her retirement years. How much can she withdraw from her retirement savings each month if she plans to die on the day she spends her last penny?

7. The Row Boat Cafe has operating cash flow of $36,407. Depreciation is $4,609 and interest paid is $1,105. A net total of $3,780 was paid on long-term debt. The firm spent $18,000 on fixed assets and increased net working capital by $3,247. What is the amount of the cash flow to stockholders?

8. You are paying an APR of 23% on your credit card. The interest is compounded daily. What is the effective annual rate on this account?

9. You just won the lottery and the lottery people have given you three options to collect your winnings: Option #1: $12 million today in one lump sum Option #2: $4 million today + $500,000 per year for the next 22 years (with the first payment occurring one year from today) Option #3: $1 million per year for the next 15 years + a $5 million lump sum payment 15 years from now (with the first payment occurring one year from today) From strictly a financial standpoint, which option is the most valuable to you in todays dollars?

10. You would like to have a balance in your investment account at the end of 35 years that would be sufficient for you to withdraw $10,000 per month over the next 20 years. If you begin to make monthly investments into your investment account at the end of this month, then how much must you begin to save per month? Assume that youll earn a 12% over the next 35 years, and a 7.5% return for the 20 years after that.

Multiple Choice Questions (2pts each) 1. Which one of the following terms is used to describe a loan wherein each payment is equal in amount and includes both interest and principal? A. amortized loan B. modified loan C. balloon loan D. pure discount loan 2. Ratios that measure a firm's financial leverage are known as _____ ratios. A. asset management B. long-term solvency C. short-term solvency D. profitability 3. If a firm takes on more debt, ceteris paribus, then the Dupont equation shows us that its ROE will? A. Rise B. Fall C. Remain the same D. Impossible to determine 4. A negative value for CFFA indicates which of the following? A. Our operations generated negative cash flow and we had a net cash outflow to our capital providers (stock and bondholders.) B. Our operations generated positive cash flow and we had a net cash outflow to our capital providers (stock and bondholders.) C. Our operations generated negative cash flow and we had a net cash inflow from our capital providers (stock and bondholders.) D. Our operations generated positive cash flow and we had a net cash inflow from our capital providers (stock and bondholders.) 5. Present values and interest rates have which of the following relationships? A. Inverse B. Direct C. Independent D. No discernible relationship

1. Suppose that company ABC has a P/E of 15 and company XYZ has a P/E of 22. If the ceteris paribus assumption holds (meaning both companies are identical in every regard except for their P/E ratios), then which company would be a better investment? Please give a detailed rationale for your selection.

2. If a company has a debt ratio of 0%, then how does that affect its ROE and ROA?