# FINA3313-005 Homework 2 Chapter 04 Measuring Corporate Performance

FINA3313-005 Homework 2 Fall 20151FINA3313-005 Homework 2Chapter 04 Measuring Corporate PerformanceTrue / False Questions1. The higher the times interest earned ratio, the higher the interest expense.True False2. The asset turnover ratio and inventory turnover ratio are both efficiency ratios.True False3. Return on assets and return on equity are both profitability ratios. True False4. Market value added is the difference between the market value of the firm’s equity and its bookvalue.True False5. The difference between the current and quick ratios is that inventory has been subtracted fromcurrent assets.True False6. Residual income is another term for economic value added. True False7. EVA is the net profit of the firm adjusted for the cost of capital. True False8. ROE is equal to ROA when the firm has no debt. True FalseMultiple Choice Questions9. When a firm’s long-term debt-equity ratio is .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.10. If a firm’s total debt ratio is greater than .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.11. 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. FINA3313-005 Homework 2 Fall 2015212. 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 cashB. Paying accounts payable with cashC. Buying inventory on creditD. Selling inventory at cost13. A firm’s quick ratio of .49 suggests the firm: A. has a low level of current liabilities.B. has been overstating the value of its inventory.C. faces a potentially serious liquidity crisis.D. should reduce its holdings of cash and/or marketable securities.14. The inventory turnover ratio compares: A. current assets to average inventory.B. cost of goods sold to average inventory.C. average receivables to average inventory.D. average assets to average inventory.15. What is the residual income for a firm with $1 million in total capital, $300,000 in net income,and a 20% cost of capital? A. $100,000B. $140,000C. $240,000D. $500,00016. What is the residual income for a firm with $1 million in total capital, $300,000 in net income,and a 20% cost of capital? A. $100,000B. $140,000C. $240,000D. $500,00017. Which of these indicates that a firm is efficient? A. A high average collection periodB. A high day’s sales in inventoriesC. A low asset turnoverD. A high inventory turnoverChapter 05 The Time Value of MoneyTrue / False Questions18. Compound interest pays interest for each time period on the original investment plus theaccumulated interest. True False19. For a given amount, the lower the discount rate, the less the present value. FINA3313-005 Homework 2 Fall 20153 True False20. Comparing the values of undiscounted cash flows is analogous to comparing apples to oranges. True False21. Converting an annuity to an annuity due decreases the present value. True False22. Nominal dollars refer to the amount of purchasing power. True False23. An effective annual rate must be greater than an annual percentage rate. True False24. A dollar tomorrow is worth more than a dollar today. True False25. You should never compare cash flows occurring at different times without first discounting themto a common date. True False26. The Excel function for present value is PV (rate, nper, pmt, FV). True False27. An annuity due must have a present value at least as large as an equivalent ordinary annuity. True FalseMultiple Choice Questions28. What is the future value of $10,000 on deposit for 5 years at 6% simple interest? A. $7,472.58B. $10,303.62C. $13,000.00D. $13,382.2629. Under which of the following conditions will a future value calculated with simple interestexceed a future value calculated with compound interest at the same rate? A. The interest rate is very high.B. The investment period is very long.C. The compounding is annually.D. This is not possible with positive interest rates.30. How much interest is earned in just the third year on a $1,000 deposit that earns 7% interestcompounded annually? A. $70.00B. $80.14C. $105.62D. $140.0031. Assume the total expense for your current year in college equals $20,000. How much wouldyour parents have needed to invest 21 years ago in an account paying 8% compounded annually tocover this amount? A. $952.46B. $1,600.00 FINA3313-005 Homework 2 Fall 20154C. $1,728.08D. $3,973.1132. How long must one wait (to the nearest year) for an initial investment of $1,000 to triple invalue if the investment earns 8% compounded annually?A. 9.81 yearsB. 14.27 yearsC. 22.01 yearsD. 25.00 years33. Given a set future value, which of the following will contribute to a lower present value?A. Higher discount rateB. Fewer time periodsC. Less frequent discountingD. Lower discount factor34. If the future value of an annuity due is $25,000 and $24,000 is the future value of an ordinaryannuity that is otherwise similar to the annuity due, what is the implied discount rate?A. 1.04%B. 4.17%C. 5.00%D. 8.19%35. 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. $3,604.78B. $3,746.25C. $4,037.35D. $4,604.7836. You will be receiving cash flows of: $1,000 today, $2,000 at end of year 1, $4,000 at end of year3, and $6,000 at end of year 5. What is the present value of these cash flows at an interest rate of 7%?A. $9,731.13B. $10,412.27C. $10,524.08D. $11,524.9137. A perpetuity of $5,000 per year beginning today is said to offer a 15% interest rate. What is itspresent value?A. $33,333.33B. $37,681.16C. $38,333.33D. $65,217.3938. A corporation has promised to pay $1,000 20 years from today for each bond sold now. Nointerest will be paid on the bonds during the 20 years, and the bonds are discounted at an interest rateof 7%, compounded semiannually. Approximately how much should an investor pay for each bond?A. $70.00B. $252.57 FINA3313-005 Homework 2 Fall 20155C. $629.56D. $857.4339. Your retirement account has a current balance of $50,000. What interest rate would need to beearned in order to accumulate a total of $1,000,000 in 30 years, by adding $6,000 annually?A. 5.02%B. 7.24%C. 9.80%D. 10.07%40. The present value of an annuity stream of $100 per year is $614 when valued at a 10% rate. Byapproximately how much would the value change if these were annuities due?A. $10B. $61.40C. $10 × Number of years in annuity streamD. $6.14 × Number of years in annuity stream41. If inflation in Wonderland averaged about 3% per month in 2013, what was the annual rate ofinflation?A. 36.00%B. 42.58%C. 40.09%D. 41.27%42. Approximately how much should be accumulated by the beginning of retirement to provide a$2,500 monthly check that will last for 25 years, during which time the fund will earn 6% interest withmonthly compounding?A. $361,526.14B. $388,017.16C. $402,766.67D. $414,008.2443. With $1.5 million in an account expected to earn 8% annually over the retiree’s 30 years of lifeexpectancy, what annual annuity can be withdrawn, beginning today?A. $112,148.50B. $120,000.00C. $123,371.44D. $133,241.1544. Real interest rates:A. always exceed inflation rates.B. can decline to zero but no lower.C. can be negative, zero, or positive.D. traditionally exceed nominal rates. FINA3313-005 Homework 2 Fall 20156Chapter 06 Valuing Bonds True / False Questions45. When the market interest rate exceeds the coupon rate, bonds sell for less than face value toprovide enough compensation to investors. True False46. A bond’s rate of return is equal to its coupon payment divided by the price paid for the bond. True False47. A long-term investor would more likely be interested in a bond’s current yield rather than itsyield to maturity. True False48. Bonds that have a Standard & Poor’s rating of BBB or better are considered to be investmentgradebonds. True False49. It would be realistic to read an ask price listed as 100.127 and a bid price of 100.143. True False50. Even when the yield curve is upward-sloping, investors might rationally stay away from longtermbonds. True False51. Zero-coupon bonds are issued at prices below face value, and the investor’s return comes fromthe difference between the purchase price and the payment of face value at maturity. True False52. Bond ratings measure a bond’s credit risk. True FalseMultiple Choice Questions53. The coupon rate of a bond equals: A. its yield to maturity.B. a defined percentage of its face value.C. the yield to maturity when the bond sells at a discount.D. the annual interest divided by the current market price.54. Assume a bond is currently selling at par value. What will happen if the bond’s expected cashflows are discounted at a rate lower than the bond’s coupon rate?A. The price of the bond will increase.B. The coupon rate of the bond will increase.C. The par value of the bond will decrease.D. The coupon payments will be adjusted to the new discount rate.55. When an investor purchases a $1,000 par value bond that was quoted at 97.162, the investor:A. receives 97.162% of the stated coupon payments.B. receives $971.62 upon the maturity date of the bond.C. pays 97.162% of face value for the bond. FINA3313-005 Homework 2 Fall 20157D. pays $10,971.62 for a $10,000 face value bond.56. What happens to a discount bond as the time to maturity decreases?A. The coupon rate increases.B. The bond price increases.C. The coupon rate decreases.D. The bond price decreases.57. How much should you pay for a $1,000 bond with 10% coupon, annual payments, and 5 years tomaturity if the interest rate is 12%?A. $927.90B. $981.40C. $1,000.00D. $1,075.8258. A bond’s yield to maturity takes into consideration:A. current yield but not any price changes.B. price changes but not the current yield.C. both the current yield and any price changes.D. neither the current yield nor any price changes.59. What is the yield to maturity for a bond paying $100 annually that has 6 years until maturity andsells for $1,000?A. 6.0%B. 8.5%C. 10.0%D. 12.5%60. Consider a 3-year bond with a par value of $1,000 and an 8% annual coupon. If interest rateschange from 8 to 6% the bond’s price will:A. increase by $51.54.B. decrease by $51.54.C. increase by $53.46.D. decrease by $53.46.61. What is the rate of return for an investor who pays $1,054.47 for a 3-year bond with coupon of6.5% and sells the bond 1 year later for $1,037.19?A. 4.53%B. 5.33%C. 5.16%D. 4.92%62. When the yield curve is upward-sloping, then:A. short-maturity bonds offer the highest coupon rates.B. long-maturity bonds are priced above par value.C. short-maturity bonds yield less than long-maturity bonds.D. long-maturity bonds increase in price when interest rates increase. FINA3313-005 Homework 2 Fall 2015863. Nominal U.S. Treasury bond yields:A. are constant over time.B. are equal to the real yields.C. include a default premium.D. include an inflation premium.64. Which one of the following bonds would be likely to exhibit a greater degree of interest rate risk?A. A zero-coupon bond with 20 years until maturityB. A coupon-paying bond with 20 years until maturityC. A floating-rate bond with 20 years until maturityD. A zero-coupon bond with 30 years until maturity65. Investors who purchase bonds having lower credit ratings should expect:A. lower yields to maturity.B. higher default possibilities.C. lower coupon payments.D. higher purchase prices.66. What is the amount of the annual coupon payment for a bond that has 6 years until maturity,sells for $1,050, and has a yield to maturity of 9.37%?A. $98.64B. $95.27C. $101.38D. $104.97Chapter 07 Valuing StocksTrue / False Questions67. The dividend discount model indicates that the value of a stock is the present value of thedividends it will pay over the investor’s horizon, plus the present value of the expected stock price at theend of that horizon. True False68. An excess of market value over the book value of equity can be attributed to going concernvalue. True False69. Securities with the same expected risk should offer the same expected rate of return.True False70. If the stock prices follow a random walk, successive stock prices are not related.True False71. Sustainable growth rates can be estimated by multiplying a firm’s ROE by its dividend payoutratio.True False72. If the market is efficient, stock prices should be expected to react only to new information thatis released. FINA3313-005 Homework 2 Fall 20159True False73. The intent of technical analysis is to discover patterns in past stock prices.True False74. Strong-form market efficiency implies that one could earn above-average returns by examiningthe history of a firm’s stock price.True FalseMultiple Choice Questions75. The growth of mature companies is primarily funded by:A. issuing new shares of stock.B. issuing new debt securities.C. reinvesting company earnings.D. increasing accounts payable.76. Wilt’s has earnings per share of $2.98 and dividends per share of $.35. What is the firm’ssustainable rate of growth if its return on assets is 14.6% and its return on equity is 18.2%?A. 2.14%B. 1.71%C. 12.89%D. 16.06%77. What is the difference between a fundamental analyst and a technical analyst?A. Only a fundamental analyst believes markets are inefficient.B. A technical analyst focuses on financial statement analysis.C. Only a technical analyst helps keep the market efficient.D. A fundamental analyst analyzes information such as earnings and asset values.78. According to the semistrong form of market efficiency, when new information becomesavailable in the market, the related stock prices will:A. remain unchanged because they already reflect this information.B. accurately and rapidly adjust to include this new information.C. adjust to accurately reflect this new information over the course of the next few days.D. most likely increase because all new information has a positive effect on stock prices.79. What dividend yield would be reported in the financial press for a stock that currently pays a $1dividend per quarter and the most recent stock price was $40?A. 2.5%B. 4.0%C. 10.0%D. 5.0%80. If a stock’s P/E ratio is 13.5 at a time when earnings are $3 per year and the dividend payoutratio is 40%, what is the stock’s current price?A. $24.30B. $18.00C. $22.22D. $40.50 FINA3313-005 Homework 2 Fall 20151081. With respect to the notion that stock prices follow a random walk, several researchers haveconcluded that:A. stock prices reflect a majority of available information about the firm.B. successive price changes are predictable.C. past stock price changes provide little useful information about current stock prices.D. stock prices always rise excessively in January.82. Firms with valuable intangible assets are more likely to show a(n):A. excess of book value over market value of equity.B. high going-concern value.C. low liquidation value.D. low P/E ratio.83. A stock paying $5 in annual dividends currently sells for $80 and has an expected return of 14%.What might investors expect to pay for the stock one year from now?A. $82.20B. $86.20C. $87.20D. $91.2084. The expected return on a common stock is equal to:A. [(1 + dividend yield) × (1 + capital appreciation rate)] – 1.B. the capital appreciation rate + dividend yield.C. (1 + capital appreciation rate)/(1 + dividend yield).D. the capital appreciation rate – dividend yield.85. If the dividend yield for year 1 is expected to be 5% based on a stock price of $25, what will theyear 4 dividend be if dividends grow annually at a constant rate of 6%?A. $1.33B. $1.49C. $1.58D. $1.6786. What price would you pay today for a stock if you require a rate of return of 13%, the dividendgrowth rate is 3.6%, and the firm recently paid an annual dividend of $2.50?A. $27.55B. $30.28C. $26.60D. $31.3787. What rate of return is expected from a stock that sells for $30 per share, pays $1.54 annually individends, and is expected to sell for $32.80 per share in one year?A. 15.03%B. 14.28%C. 14.09%D. 14.47%88. A positive value for PVGO suggests that the firm has:A. a positive return on equity. FINA3313-005 Homework 2 Fall 201511B. a positive plowback ratio.C. investment opportunities with superior returns.D. a high rate of constant growth.89. What proportion of earnings is being plowed back into the firm if the sustainable growth rate is8% and the firm’s ROE is 20%?A. 60%B. 80%C. 20%D. 40%90. How much of a stock’s $30 price is reflected in PVGO if it expects to earn $4 per share, has anexpected dividend of $2.50, and a required return of 20%?A. $0B. $6C. $8D. $10