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FNCE > quiz 2 review > Flashcards

quiz 2 review Flashcards

1
Q

. Trade credit may be used to finance a major part of the firm’s working capital
when:
A. the firm extends less liberal credit terms than the supplier.
B. the firm extends more liberal credit terms than the supplier.
C. the firm and the supplier both extend the same credit terms.
D. neither the firm nor the supplier extends credit.

A

A. the firm extends less liberal credit terms than the supplier.

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2
Q 
2. In determining the cost of bank financing, which is the important factor?
A. Prime rate.
B. Nominal rate.
C. Annual rate.
D. Discount rate.
A

C. Annual rate.

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3
Q
  1. From the banker’s point of view, short-term bank credit is an excellent way of
    financing:
    A. capital assets.
    B. permanent working capital needs.
    C. repayment of long-term debt.
    D. seasonal bulges in inventory and receivables.
A

D. seasonal bulges in inventory and receivables.

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4
Q 
4. The bank rate is determined by:
A. the chartered banks.
B. the yield on 91-day Treasury bills.
C. the prime rate.
D. the Bank of Canada overnight rate.
A

D. the Bank of Canada overnight rate.

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5
Q
  1. The prime rate:
    A. is the annual rate of interest for banks’ best customers.
    B. changes infrequently.
    C. is usually lower than treasury bill rates.
    D. is the annual rate of interest for the bank.
A

A. is the annual rate of interest for banks’ best customers.

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6
Q
  1. If Analog computers can borrow at 9.5% for 3 years, what is the annual rate of
    interest on an $800,000 loan where a 15% compensating balance is required?
    A. 11.18%.
    B. 17.27%.
    C. 9.50%.
    D. 3.16%.
A

A. 11.18%.

.095/1-.15 = .1118
Formula Rcomp(8-4)
=I/ (1-c)

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7
Q
  1. When calculating a loan with a 20% compensating balance a firm would borrow
    ____ in order to have available funds of $200,000?
    A. $160,000
    B. $200,000
    C. $250,000
    D. $260,000
A

C
200,000/1-.2 = 250,000
FORMULA 8-4
Rcomp= I/(1-c)

C is comp balance %

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8
Q 
8. The cost of forgoing the discount on trade credit of 1/10, net 30 is equal to:
A. 22.35%.
B. 18.43%.
C. 20.52%.
D. 12.00%
A 
B
(.01/.99)*(365/20) = .1843
Rdis =I/P-I x365/d
8-3
Interest/ principal -interest x365
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9
Q 
9. Mrs. Robinson borrows $5,000 for 90 days and pays $80 interest. What is her
annual rate of interest?
A. 1.6%
B. 6.49%
C. 12.98%
D. 6.40%
A 
B
(80/5000)*(365/90) = .0649
Formula Rannual=(I/P) x(365/d)
8-2
Interest/principal x 365/days
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10
Q
  1. Laura’s Book Shoppe is going to borrow $50,000 for 90 days at an annual rate of
    9%. The amount of interest owing in 90 days will be:
    A. $4,500.00
    B. $1,109.59
    C. $1,225.00
    D. $1,009.59
A

50000.0990/365
= B. $1,109.59

Formula
principal x interest x

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11
Q
  1. A 10-year bond pays 8% annual interest (paid semi-annually). If similar bonds
    are currently yielding 6% annually, what is the market value of the bond?
    A. $1,000.00
    B. $1,147.20
    C. $1,148.77
    D. $1,080.00
A 
FV1000 
n20
 I = 6%/2=3%
pmt 1000x.08= 80 /2= 40
comp PV

Pays =Pament %
Yielding = I/Y

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12
Q
  1. A 14-year zero-coupon bond was issued with a $1,000 par value and a yield to
    maturity of 9%. If similar bonds are currently yielding 12%, what is the
    approximate market value of the bond?
    A. $205
    B. $299
    C. $801
    D. $1,000
A 
FV1000
n 14 
i 12 
pmt 0 
comp pv

Par Value = FV
currently yielding = I/Y
Zero coupon = PMT is zero
N = annual (#of yrs)

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13
Q
  1. A 10-year bond pays 11% interest on a $1,000 face value annually. If it currently
    sells for $1,195, what is its approximate yield to maturity?
    A. 8.33%
    B. 12.95%
    C. 11.00%
    D. 8.08%
A 
FV 1000
N 10
I/Y= Comp =8.08
PMT= 1000*.11= 110
PV -1195
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14
Q
  1. An issue of common stock has just paid a dividend of $3.75. Its growth rate is
    8%. What is its price if the market’s rate of return is 16%?
    A. $25.01
    B. $46.88
    C. $50.63
    D. $54.38
A

C. (3.75*1.08)/(.16-.08) =50.63

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15
Q
  1. An issue of common stock is selling for $57.20. The year-end dividend is
    expected to be $2.32 assuming a constant growth rate of 6%. What is the
    required rate of return?
    A. 10.30%
    B. 10.06%
    C. 4.09%
    D. 6.00%
A

B. (2.32/57.20) + .06= 10.06%
Ke= (D1/Po) + growth

ke = required rate of return
D1= next dividend paid
Po=c/s selling price per share
g= growth rate %

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16
Q
  1. The relationship between a bond’s price and the yield to maturity:
    A. changes at a constant level for each percentage change of yield to maturity.
    B. is an inverse relationship.
    C. is a linear relationship.
    D. changes at a constant level for each percentage change of yield to maturity
    and is an inverse relationship.
A

B. Is an Inverse Relationship

17
Q
  1. The cost of common stock is usually greater than the simple dividend yield
    because:
    A. investors perceive risk in common stock.
    B. investors expect both a current dividend and future growth.
    C. dividends are not tax-deductible.
    D. the company must make profits before it can pay dividends.
A

Investors expect both a current dividend and future growth

18
Q
  1. Which is a characteristic of the cost of preferred stock?
    A. Preferred stock dividends are fixed, they are tax deductible.
    B. Preferred stock has no maturity, the cost analysis is similar to that of debt.
    C. Preferred stock is valued as a perpetuity.
    D. The price earnings ratio stays the same.
A

Preferred stock is valued as a perpetuity

19
Q

SugarBush Maple Syrup Co. just paid a dividend of $1.12. This dividend is expected to
grow by 20% per year over the next three years. After 3 years, growth is expected to be
5% per year, for the foreseeable future. Shareholders require a return of 10% on their
investment. How much would you expect to pay for a share of SugarBush today?

A

Dividend expected to gro 20% for 3 years
D1=Do(1+Dg)
D1 = 1.121.20 = 1.344 1mark
D2 = 1.3441.20= 1.6128 1mark
D3 = 1.61281.20= 1.9354 1mark
P3 = 1.9354*1.05 = 2.0322 = 40.6434 2marks
/ .10-.05 /.05

CF0 = 0
CF1 = 1.344 F=1
CF2 = 1.6128 F=1
CF 3 = 40.6434+1.9354 = 42.5788 F=1
I = 10 NPV = 34.5448 PV = 1 mark

FNCE (8 decks)

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