Tirth Patel

Week 3 Assignment (ch. 4, 5) FIN315

Chapter 4
1) A firm with no leases has a long-term debt ratio of 50%. This means that the book value of
equity:

A. equals the book value of long-term debt.

B. is less than the book value of long-term debt.
C. is greater than the book value of long-term debt.
D. is unknown in relation to the book value of long-term debt.
Answer: A

2) When a firm's long-term debt-equity ratio is 0.98, the firm:

A. has too much long-term debt in relation to leases.

B. has less long-term debt than equity.
C. is nearing insolvency.
D. has as much in long-term liabilities as in equity.
Answer: B

3) The market value added of a firm uses which of the following numbers in its calculation?

A. Market capitalization
B. Market return
C. Market value of assets
D. Market value of debt
Answer: A

4) If a firm's debt ratio is greater than 0.5, then:

A. its current liabilities are quite high.

B. its debt-equity ratio exceeds 1.0.
C. it has too few total assets.
D. it has more long-term debt than equity.
Answer: B
5) An asset's liquidity measures its:

A. potential for generating a profit.

B. cash requirements.
C. ease and cost of being converted to cash.
D. proportion of debt financing.
Answer: C

6) Which of the following actions could improve a firm's current ratio if it is now less than 1.0?

A. Converting marketable securities to cash

B. Paying accounts payable with cash
C. Buying inventory on credit
D. Selling inventory at cost
Answer: C

7) If a firm's quick ratio is equal to its current ratio:

A. it has a low level of current liabilities.

B. it has no inventory.
C. it faces a potentially serious liquidity crisis.
D. it is in a loss-making position.
Answer: B

8) A firm has $600,000 in current assets and $150,000 in current liabilities. Which of the
following is correct if it uses cash to pay off $50,000 in accounts payable?

A. Current ratio will increase to 5.0

B. Net working capital will increase to $500,000
C. Current ratio will decrease
D. Net working capital will not change
Answer: D

9) How would you interpret an inventory turnover ratio of 10.7?

A. It takes 50 days on average to collect receivables.
B. Inventory is converted into sales every 50 days.
C. The firm has sufficient inventories to maintain sales for 34.1 days.
D. Assets are converted into sales every 50 days.
Answer: C

10) What are the annual sales for a firm with $400,000 in debt, a total debt ratio of 0.4, and an
asset turnover of 3?

A. $333,333
B. $1,200,000
C. $1,800,000
D. $3,000,000
Answer: D

11) The inventory turnover ratio compares:

A. current assets to inventory.

B. cost of goods sold to inventory.
C. average receivables to inventory.
D. average assets to inventory.
Answer: B

12) An all-equity firm reports a net profit margin of 10% on sales of $3 million. If the tax rate is
21%, what is the pretax profit?

A. $103,082
B. $323,421
C. $379,747
D. $726,568
Answer: C

13) What is the ROA of a firm with $150,000 in receivables, which represents 60 days' sales,
assets of $750,000, and an operating profit margin of 9%?

A. 7.50%
B. 9.00%
C. 10.95%
D. 16.70%
Answer: C

14) Which one of these costs accounts for the difference between accounting income and
economic value added?

A. Depreciation
B. Cost of capital
C. Taxes
D. Dividends
Answer: B

15) After-tax operating income for a leveraged firm is defined as:

A. net income + after-tax interest.

B. EBIT × (1 − tax rate).
C. net income + depreciation.
D. profit margin × sales.
Answer: A

16) Which one of these changes indicates an improvement in a firm's asset management
efficiency?

A. An increase in the amount of assets per dollar of sales

B. An increase in the inventory turnover rate
C. A decrease in the receivables turnover rate
D. An increase in the average days in inventory
Answer: B

17) What is the market price of a share of stock for a firm with 100,000 shares outstanding, a
book value of equity of $3,000,000, and a market-to-book ratio of 3?

A. $10
B. $30
C. $90
D. $105
Answer: C

18) One reason suggesting that banks may be better than individuals at matching lenders to
Which one of these statements is correct?
A. Market value added measures the difference between the total market value and the total book
value of equity.
B. Net income is also called economic value added.
C. EVA measures the net profit of a firm after deducting the cost of the assets used in the
production process.
D. EVA considers the cost of long-term debt financing but excludes the cost of equity financing.
Answer: A

19) The board of directors is dissatisfied with last year's ROE of 15%. If the operating profit
margin and asset turnover ratio remain unchanged at 8% and 1.25, respectively, by how much
must the leverage ratio (i.e., assets/equity) increase to achieve 20% ROE?

A. 1.50%
B. 5.08%
C. 16.67%
D. 33.33%
Answer: D

20) The use of debt in the firm's capital structure will increase ROE if the firm:

A. has more debt than equity.

B. pays less in taxes than in interest.
C. earns a higher return than the rate paid on debt.
D. has a times interest earned ratio greater than 1.0.
Answer: C

21) A corporation declares $25 million in net income, $1 million in preferred stock dividends,
and $7 million in common stock dividends. By how much will shareholders' equity increase on
the balance sheet?

A. $17 million
B. $18 million
C. $19 million
D. $25 million
Answer: A

22) If a firm starts the year with receivables of $80,000 and produces sales for the year of
$300,000, what is its average collection period?
A. 3.75 days
B. 97.33 days
C. 52.67 days
D. 77.90 days
Answer: B

23) A firm's after-tax operating income was $1,000,000 in 2020. It started the year with total
capital of $8,000,000 and raised an additional $1 million of capital during the year. The
additional capital raised during 2020 only started to affect the operating income in 2021. Which
value best represents the return on capital for 2020?

A. 12.5%
B. 11.8%
C. 11.1%
D. 10.0%
Answer: A

24) If ROC is less than a firm's cost of capital, which of the following must be true?

A. The firm's EVA is positive.

B. The firm's EVA is negative.
C. The firm's ROE is equal to zero.
D. The firm's ROE is negative.
Answer: B

25) When will ROE equal ROC?

A. Whenever the firm has equal debt and equity financing

B. Whenever the firm has no debt
C. Whenever the value of the firm's assets exceeds the value of its equity
D. ROE will never equal ROC
Answer: B

26) If the ratio of total liabilities to total assets is 0.5, long-term liabilities are $3,000, and equity
is $5,000, then:

A. you know that current liabilities must be $2,000.

B. you know that current assets must be $400.
C. you know that retained earnings must be $800.
D. you know that preferred stock must be $400.
Answer: A

27) What is the debt ratio for a firm with a debt-equity ratio of 0.5?

A. 35.0%
B. 33.3%
C. 54.5%
D. 66.7%
Answer: B

28) A retail store with zero net working capital has:

A. no cash or marketable securities.

B. insufficient inventory.
C. no current debt.
D. a quick ratio that is less than 1.
Answer: B

29) If a company has a healthy current ratio but a significantly lower quick ratio, then you can
assume that:

A. the cost of goods sold represents more than half of sales.

B. current liabilities exceed current assets.
C. the firm sells only on a cash basis.
D. inventory represents a large portion of the firm's current assets.
Answer: D

30) Last year's asset turnover ratio was 2.0. Sales have increased by 25% and total assets have
increased by 10% since that time. What is the current asset turnover ratio?

A. 1.82
B. 2.05
C. 2.15
D. 2.27
Answer: D
31) What is the inventory turnover ratio for ABC Corporation if cost of goods sold equals
$5,000, current ratio equals 3, quick ratio equals 1.5, and the firm has $1,800 in current assets?

A. 2.78 times
B. 4.17 times
C. 5.56 times
D. 8.33 times
Answer: C

32) A firm's operating profit margin is 20% with an EBIT of $1.5 million and sales of $5 million.
If it has no debt, how much did the firm pay in taxes?

A. $50,000
B. $300,000
C. $350,000
D. $500,000
Answer: C

33) What is primarily responsible for the potential distortion among the ROA of different firms
when net income is used in the numerator of ROA?

A. Firms have different dividend payout ratios.

B. Some firms use fully depreciated assets.
C. Financial leverage varies among firms.
D. Unprofitable firms will not have any tax liability.
Answer: C

34) Which one of the following changes will provide an increase in a firm's ROE?

A. A decrease in the profit margin

B. An increase in the interest rate
C. An increase in equity
D. A decrease in the tax rate
Answer: D

35) What is the book value per share for a firm with 2 million shares outstanding at a price of
$50, a market-to-book ratio of 0.75, and a dividend-payout ratio of 50%?
A. $33.33
B. $37.50
C. $62.50
D. $66.67
Answer: D

36) What is the ROE for a firm with a times interest earned ratio of 2, a tax liability of $1
million, and interest expense of $1.5 million if equity equals $1.5 million?

A. 26.67%
B. 30.00%
C. 33.33%
D. 50.00%
Answer: C

37) The use of financial leverage will be detrimental to a firm's ROE if the:

A. firm currently has no long-term debt.

B. firm's current ratio is greater than 1.
C. interest expense exceeds the tax liability.
D. interest rate on debt exceeds the firm's ROA.
Answer: D

38) Efficiency ratios:

A. include the quick ratio, asset turnover ratio, and return on equity.
B. are used to measure how well the company uses its assets.
C. are used to measure how liquid the company is.
D. measure the profits generated by a firm's equity and assets.
Answer: B

39) A company has total assets of $1,000, current liabilities of $130, and total liabilities of $350.
If debt is the only long-term liability, what is the long-term debt ratio?

A. 0.19
B. 0.25
C. 0.36
D. 0.31
Answer: B
40) The current ratio is a good proxy for a firm's:

A. liquidity.
B. efficiency.
C. degree of leverage.
D. profitability.
Answer: A

Chapter 5
1) What is the future value of $10,000 on deposit for 2 years at 6% simple interest?

A. $10,600
B. $11,236
C. $11,200
D. $13,382
Answer: C

2) How much interest is earned in just the third year on a $1,000 deposit that earns 7% interest
compounded annually?

A. $70.00
B. $80.14
C. $105.62
D. $140.00
Answer: B

3) The concept of compound interest refers to:

A. earning interest on the original investment.

B. payment of interest on previously earned interest.
C. investing for a multiyear period of time.
D. determining the APR of the investment.
Answer: B
4) Assume the total expense for your current year in college equals $20,000. How much would
your parents have needed to invest 21 years ago in an account paying 8% compounded annually
to cover this amount?

A. $952.46
B. $1,600.00
C. $1,728.08
D. $3,973.11
Answer: D

5) An investment of $100 pays interest of 2.5% per quarter. What will be the value of this
investment at the end of 3 years?

A. $107.69
B. $133.10
C. $134.49
D. $313.84
Answer: C

6) To achieve an annual return of 7.0%, an investment that is compounded semi-annually would

need to earn how much every six months?

A. 3.44%
B. 3.50%
C. 3.64%
D. 7.00%
Answer: A

7) A car’s price is currently $20,000 and is expected to rise by 4% a year. If the interest rate is
6%, how much do you need to put aside today to buy the car one year from now?

A. $18,182
B. $19,231
C. $19,623
D. $4,080
Answer: C

8) Given the future value, which of the following will contribute to a lower present value?

A. Higher discount rate

B. Fewer time periods
C. Less frequent discounting
D. Lower discount factor
Answer: A

9) Cash flows occurring in different periods should not be compared unless:

A. interest rates are expected to be stable.

B. the flows occur no more than one year from each other.
C. high rates of interest can be earned on the flows.
D. the flows have been discounted to a common date.
Answer: D

10) What will be the approximate population of the United States, if its current population of 300
million grows at a compound rate of 2% annually for 25 years?

A. 413 million
B. 430 million
C. 488 million
D. 492 million
Answer: D

11) A furniture store is offering free credit on purchases over $1,000. You observe that a big-
screen television can be purchased for nothing down and $4,000 due in one year. The store next
door offers an identical television for $3,650 but does not offer credit terms. Which rate below
best describes the cost of the "free" credit?

A. 8.75%
B. 9.13%
C. 9.59%
D. 0.00%
Answer: C

12) How much must be invested today in order to generate a 5-year annuity of $1,000 per year,
with the first payment 1 year from today, at an interest rate of 12%?

A. $3,604.78
B. $3,746.25
C. $4,037.35
D. $4,604.78
Answer: A

13) The salesperson offers, "Buy this new car for $25,000 cash or, with an appropriate down
payment, pay $500 per month for 48 months at 8% interest." Assuming that the salesperson does
not offer a free lunch, calculate the "appropriate" down payment.

A. $1,000.00
B. $4,519.04
C. $5,127.24
D. $8,000.00
Answer: B

14) What is the present value of the following payment stream, discounted at 8% annually:
$1,000 at the end of year 1, $2,000 at the end of year 2, and $3,000 at the end of year 3?

A. $5,022.10
B. $5,144.03
C. $5,423.87
D. $5,520.00
Answer: A

15) You invested $1,200 three years ago. During the three years, you earned annual rates of
return of 4.8%, 9.2%, and 11.6%. What is the value of this investment today?

A. $1,498.08
B. $1,512.11
C. $1,532.60
D. $1,549.19
Answer: C

16) You will be receiving cash flows of: $1,000 today, $2,000 at end of year 1, $4,000 at end of
year 3, and $6,000 at end of year 5. What is the present value of these cash flows at an interest
rate of 7%?

A. $9,731.13
B. $10,412.27
C. $10,524.08
D. $11,524.91
Answer: B

17) Someone offers to buy your car for four equal annual payments beginning 2 years from
today. If you think that the present value of your car is $9,000 and the interest rate is 10%, what
is the minimum annual payment that you would accept?

A. $2,839.24
B. $3,435.48
C. $3,123.16
D. $2,250
Answer: C

18) How much more is a perpetuity of $1,000 worth than an annuity of the same amount for 20
years? Assume an interest rate of 10% and cash flows at the end of each period.

A. $297.29
B. $1,486.44
C. $1,635.08
D. $2,000.00
Answer: B

19) If the interest rate is 6%, which of these investments would you prefer?

A. A single payment of $500 in year 3.

B. A payment of $40 a year for 20 years starting in one year’s time.
C. A perpetuity of $30 a year starting in one year’s time.
D. A payment of $342.17 today.
Answer: C

20) You are borrowing $245,000 to purchase a home. The loan agreement requires a monthly
payment based upon a 4.5% quoted APR over 20 years. What is your monthly mortgage
payment? (Round to two decimal places)

A. $1,326.33
B. $1,549.99
C. $1,783.87
D. $1,803.65
Answer: B
21) A bond promises to pay $1,000 20 years from today. No interest will be paid on the bonds
during the 20 years. If the interest rate is 7%, what is the bond’s present value?

A. $50.00
B. $258.42
C. $629.56
D. $1,000.00
Answer: B

22) Suppose you take out a 30-year mortgage for $100,000 with annual payments. The interest
rate on the mortgage is 8%. When you have paid off half the mortgage, so that the value of the
remaining payments is reduced to $50,000, how many more payments need to be made?

A. Approximately 15 payments
B. Approximately 12 payments
C. Approximately 8 payments
D. Approximately 20 payments
Answer: C

23) If $120,000 is borrowed for a home mortgage, to be repaid at 9% interest over 30 years with
annual payments of $11,680.36, how much interest (as opposed to return of capital) is paid in the
last year of the loan?

A. $0.00
B. $814.56
C. $458.54
D. $964.43
Answer: D

24) What will be the monthly payment on a $75,000 30-year home mortgage at 1% interest per
month?

A. $771.46
B. $775.90
C. $1,028.61
D. $1,034.53
Answer: A
25) Assume you are making $989 monthly payments on your amortized mortgage. The amount
of each payment that is applied to the principal balance:

A. decreases with each succeeding payment.

B. increases with each succeeding payment.
C. is constant throughout the loan term.
D. fluctuates monthly with changes in market interest rates.
Answer: B

26) How much must be saved at the end of each year for the next 10 years in order to accumulate
$50,000, if you can earn 9% annually? Assume you contribute the same amount to your savings
every year.

A. $3,291.00
B. $3,587.87
C. $4,500.33
D. $4,587.79
Answer: A

27) Your retirement account has a current balance of $50,000. You plan to add $6,000 a year to
the account for each of the next 30 years. Use a financial calculator or Excel to find what interest
rate you need to earn in order to have $1,000,000 in the account at the end of the 30 years.

A. 5.02%
B. 7.24%
C. 9.80%
D. 10.07%
Answer: B

28) Approximately how much must be saved for retirement in order to withdraw $100,000 per
year for the next 25 years if the balance earns 8% annually, and the first payment occurs one year
from now?

A. $1,067,477.62
B. $1,128,433.33
C. $1,487,320.09
D. $1,250,000.00
Answer: A
29) How much can be accumulated for retirement if $2,000 is put aside at the end of each of the
next 40 years? Assume that you can earn 9% a year on your savings.

A. $87,200.00
B. $675,764.89
C. $736,583.73
D. $802,876.27
Answer: B

30) If inflation in Wonderland was 3% per month in 2021, what was the annual rate of inflation?

A. 36.00%
B. 42.58%
C. 40.09%
D. 41.27%
Answer: B

31) On the day you retire you have $1,000,000 saved. You expect to live another 25 years
during which time you expect to earn 6.19% on your savings while inflation averages 2.5%
annually. Assume you want to spend the same amount each year in real terms and die on the day
you spend your last dime. What real amount will you be able to spend each year?

A. $61,334.36
B. $79,644.58
C. $79,211.09
D. $61,931.78
Answer: A

32) What is the expected real rate of interest for an account that offers a 12% nominal rate of
return when the rate of inflation is 6% annually?

A. 5.00%
B. 5.66%
C. 6.00%
D. 9.46%
Answer: B
33) What happens over time to the real cost of purchasing a home if the mortgage payments are
fixed in nominal terms and inflation is in existence?

A. The real cost is constant.

B. The real cost is increasing.
C. The real cost is decreasing.
D. The price index must be known to answer this question.
Answer: C

34) What is the minimum nominal rate of return that you should accept if you require a 4% real
rate of return and the rate of inflation is expected to average 3.5% during the investment period?

A. 7.36%
B. 7.50%
C. 7.64%
D. 8.01%
Answer: C

35) What APR is being earned on a deposit of $5,000 made 10 years ago today if the deposit is
worth $9,848.21 today? The deposit pays interest semiannually.

A. 3.56%
B. 6.76%
C. 6.89%
D. 7.12%
Answer: C

36) An interest rate that has been annualized using compound interest is termed the:

A. discount factor.
B. annual percentage rate.
C. discounted interest rate.
D. effective annual interest rate.
Answer: D

37) What is the APR on a loan that charges interest at the rate of 1.4% per month?

A. 10.20%
B. 14.00%
C. 16.80%
D. 18.16%
Answer: C

38) If the effective annual rate of interest is known to be 16.08% on a debt that has quarterly
payments, what is the annual percentage rate?

A. 4.02%
B. 10.02%
C. 14.50%
D. 15.19%
Answer: D

39) Other things being equal, the more frequent the compounding period, the:

A. higher the annual percentage rate.

B. lower the annual percentage rate.
C. higher the effective annual interest rate.
D. lower the effective annual interest rate.
Answer: C

40) A car dealer offers payments of $522.59 per month for 48 months on a $25,000 car after
making a $4,000 down payment. What is the loan's APR?

A. 6%
B. 9%
C. 11%
D. 12%
Answer: B