FIN 571 WEEK 1 CONNECT PROBLEMS

16 Jun FIN 571 WEEK 1 CONNECT PROBLEMS

. For a firm to create value it must:

Avoid the issuance of debt securities.

Avoid payments to the government so dividends can be increased.

Create more cash flow than it uses.

Reduce its investment in fixed assets since fixed assets require the use of cash.

Have a greater cash inflow from its stockholders than its outflow to them.

2 One disadvantage of the corporate form of business ownership is the:

Difficulties encountered when changing ownership.

Limited liability protection provided for all owners.

Firm’s ability to raise cash.

Unlimited life of the firm.

Double taxation of profits.

3 Which one of these is a cash outflow from a corporation?

Issuance of debt

Sale of an asset

Dividend payment

Sale of common stock

Profit retained by the firm

4. The Sarbanes-Oxley Act requires public corporations to:

File annual audit reports if the firm has “gone dark”.

Assess the company’s internal control structure at least quarterly.

Distribute at least 90 percent of their profits in dividends on an annual basis.

Disclose all personal loans to corporate officers or directors made after 2002.

List any deficiencies in internal controls.

5.The primary goal of financial management is to:

Maximize current dividends per share of the existing stock.

Maintain steady growth in both sales and net earnings.

Maximize the current value per share of the existing stock.

Avoid financial distress.

Minimize operational costs and maximize firm efficiency.

6. Which one of the following business types is best suited to raising large amounts of capital?

Sole proprietorship

Limited liability company

Corporation

Limited partnership

General partnership

7. Accounting profits and cash flows are generally:

Different because of GAAP rules regarding the recognition of income.

Different because cash inflows must occur before revenue recognition.

The same due to the requirements of GAAP.

The same since accounting profits reflect when cash flows occur.

The same since they reflect current laws and accounting standards.

8. You just paid $344,000 for an annuity that will pay you and your heirs $11,700 a year forever. What rate of return are you earning on this policy?

3.40 percent

3.46 percent

3.55 percent

3.74 percent

3.15 percent

9.Some time ago, Julie purchased eleven acres of land costing $14,490. Today, that land is valued at $59,643. How long has she owned this land if the price of the land has been increasing at 5 percent per year?

28.72 years

29.13 years

29.00 years

28.67 years

28.51 years

10.Your credit card company charges you 1.00 percent per month. What is the annual percentage rate on your account?

11.00 percent

12.00 percent

10.00 percent

13.50 percent

10.20 percent

11.

First City Bank pays 7 percent simple interest on its savings account balances, whereas Second City Bank pays 7 percent interest compounded annually.

If you made a $73,000 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of 9 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

12.(A) Compute the future value of $2,000 compounded annually for 10 years at 7 percent. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

(B) Compute the future value of $2,000 compounded annually for 10 years at 12 percent. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

(C) Compute the future value of $2,000 compounded annually for 15 years at 7 percent. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

13. For each of the following, compute the present value (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.):

14.

Wilkinson Co. has identified an investment project with the following cash flows:

Year

Cash Flow

1

$

810

2

1,110

3

1,370

4

1,500

If the discount rate is 11 percent, what is the present value of these cash flows? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

If the discount rate is 17 percent, what is the present value of these cash flows? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

If the discount rate is 25 percent, what is the present value of these cash flows? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

15.Four months ago, you purchased 1,100 shares of Lakeside Bank stock for $21.20 a share. You have received dividend payments equal to $.62 a share. Today, you sold all of your shares for $22.20 a share. What is your total dollar return on this investment?

$682

$3,564

$1,100

$1,782

$1,364

16.

Suppose a stock had an initial price of $64 per share, paid a dividend of $1.40 per share during the year, and had an ending share price of $76.

Compute the percentage total return. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

17.

You’ve observed the following returns on SkyNet Data Corporation’s stock over the past five years: 18 percent, –14 percent, 20 percent, 22 percent, and 10 percent. Suppose the average inflation rate over this period was 3.1 percent, and the average T-bill rate over the period was 4.4 percent.

a.

What was the average real return on the stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

b. What was the average nominal risk premium on the stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.)