FINA 3000: FINANCIAL MANAGEMENT
TEST 1
I agree to abide by the University of Georgia Culture of Honesty.
Signed:_____________________________________
SEPTEMBER13th, 2016
7 pm- 9 pm
INSTRUCTIONS:
BEFORE YOU BEGIN, FILL OUT YOUR SCANTRON:
1.
Enter your LAST name.
2.
Enter your FIRST name.
3.
Bubble in your 810 number.
4.
Verify that the test code bubbled on your test matches the 5
digit number in the top right corner of your test. The first two
numbers will be “0” (zero)
5.
Wait until the proctor says to begin.
PRINTED NAME:_______________________________
TEST INSTRUCTIONS:
1.
For true/false questions, enter A on the scantron if the answer
is TRUE, and enter B on the scantron if the answer is FALSE.
2.
For multiple choice questions, enter the answer that best
completes the question. For numerical answers, select the
choice that is closest to your answer as rounding may cause
slight differences in your result and my posted answer.
THINGS TO KNOW:
1.
Dr. Pope believes in the UGA Honor Code and will enforce it. If
you are suspicious (i.e. I can see your eyes), I reserve the right to
grade your test by hand and will assign a grade based on your work.
2.
When time is called, you must turn in your exam immediately
to receive a score. No exceptions.
3.
If you find an error on your test (it happens!), come down and
ask me to look at it. I will be happy to look at it.
You have TWO hours. Use the time. A few
extra minutes on a tough problem might make
a difference in December.
4.
7.
8.
9.
10.
11.
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16.
5.
Grades will be posted as soon as possible. Hopefully, late
afternoon tomorrow.
17.
Section I: TRUE/FALSE (2 points each)
Answer A if the answer is true, and answer B if the answer is false.
Section II: Multiple Choice Concepts (2 points each)
Select the answer that bests completes the question.
1.
Walmart has acquired Jet.com in an effort to improve its online
sales.
2.
A perpetuity is an annuity that never ends.
3.
When a borrower makes extra payments to principal, the size of
the required annuity payment for the remaining loan term is
reduced.
4.
One result of increasing leverage is that shareholders will expect
a greater return on their investment.
5.
The largest issue facing Target’s grocery line is that it is not
generating significant revenue for the company. (i.e. less than 5%
of revenue)
6.
In Caspian Sea, the main character is seeking an internship with
McDonalds.
18.
19.
20.
Lowe’s stock likely fell in value after their most recent
conference call.
For an investor, there is greater risk in forming a sole
proprietorship versus a corporation.
If we increase the interest rate, the present value of an ordinary
annuity increases.
A zero coupon bond is considered a discount bond.
The novel, “Flash Boys”, deals with a hypothetical merger
between Marvel and Disney.
A bond that matures in ten years would have a greater interest
rate risk than a bond that matures in five years.
Suppose that Moody’s changes the credit rating for Big Cat
Fireworks from BBB to BB. We would expect the price of Big Cat
bonds to increase.
Uber has lost over $1 billion this year due to issues in entering
the European market.
In Caspian Sea, the investing club run by the retirement group
represents an angel investor.
Suppose you are looking at two different car loans. One offers a
term of 60 payments while the other offers a term of 84
payments. Both loans have the same annual percentage rate
(APR). It is true that you will pay more interest with the 84
payment loan (assuming same priced car).
For an annuity due, each payment is received one period sooner
than with an ordinary annuity.
Ireland is quite happy that the European Union will force Apple
to pay over $13 billion in corporate taxes.
One result of Brexit was that S&P upgraded the debt rating of the
United Kingdom from BBB to A.
It is easier to transfer ownership in a corporation than a sole
proprietorship.
Section II: Basic Multiple Choice Questions (3 points each)
Consider the following simple financial statements for questions #21-25.
OLD SCHOOL, LLC. FINANCIAL STATEMENTS 2015
2015 Income Statement
Sales
Cost of Goods
Other expenses
EBIT
Interest paid
Taxable Income
Taxes (35%)
Net Income
Balance Sheet 12/31/2015
Assets
Cash
Accounts receivable
Inventory
Total current assets
Long term assets
Total assets
Liabilities and Shareholder Equity
Accounts payable
Notes payable
Total current liabilities
Long term Debt
Total Liabilities
Book value of common stock
Retained earnings
Total shareholder equity
Total liabilities and shareholder equity
$905,000.00
$710,000.00
$ 12,000.00
$183,000.00
$ 19,700.00
$163,300.00
$ 57,155.00
$106,145.00
$ 25,000.00
$ 43,000.00
$ 76,000.00
$144,000.00
$364,000.00
$508,000.00
$ 65,000.00
$ 9,000.00
$ 74,000.00
$156,000.00
$230,000.00
$ 21,000.00
$257,000.00
$278,000.00
$508,000.00
21.
a.
b.
c.
d.
e.
What is the quick ratio for Old School?
0.34
0.75
0.72
0.92
1.95
22.
a.
b.
c.
d.
e.
What is the net profit margin for Old School?
5.41%
7.64%
11.73%
16.52%
21.44%
23.
a.
b.
c.
d.
e.
What is the collections or days sales outstanding for Old School?
8.44 days
17.34 days
22.44 days
39.07 days
44.11 days
24.
a.
b.
c.
d.
e.
What is the TIE ratio for Old School?
6.11
7.47
9.29
10.16
12.44
25.
Old School currently has 10,000 shares of stock outstanding that
trade at $20 per share. What is the enterprise value for Old School?
a. $331,000
b. $340,000
c. $365,000
d. $400,000
e. $405,000
26.
Today, a college student decides to put $100 in a money market
fund that pays 2% APR per year. The student will leave the account
alone and make no other contributions for the next 40 years. What will
be the value of this account in exactly 40 years?
a. $212.50
b. $215.25
c. $220.80
d. $228.40
e. $234.70
30.
A couple needs $80,000 for a downpayment on a new house in
exactly four years. The couple can earn 6% APR on this account over the
life of the investment. How much should the couple contribute to the
account today in order to reach their downpayment goal?
a. $56,397
b. $61,703
c. $63,225
d. $63,368
e. $68,384
27.
An account will pay 6.00% APR and will provide monthly
compounding. What is the effective annual rate on this account?
a. 6.09%
b. 6.17%
c. 6.35%
d. 6.70%
e. 6.77%
Section III: Harder Multiple Choice (5 points each)
28.
A bond is currently priced at $1,025. The bond will mature in
exactly four years and pays a coupon rate of 4% APR with semi-annual
coupons. The bond has a face value of $1,000. What is the current yield
on this bond?
a. 3.32%
b. 3.90%
c. 4.52%
d. 5.42%
e. 6.02%
31.
a.
b.
c.
d.
e.
29.
A company reports an average collections period of 40 days. The
company also reports the average balance of accounts receivable at
$100,000, and the average balance of inventory at $80,000. The
company would like to reduce the average collections period to 30 days.
Assuming sales don’t change, what level of accounts receivable will they
need to target?
a. $50,000
b. $56,250
c. $60,000
d. $62,500
e. $75,000
Consider the following for questions 31-32:
A successful banker decides to purchase her dream house on the Florida
coast for $500,000 today. She will pay 20% down, and finance the
remainder of the home price with a 30-year mortgage. The mortgage
will have a 4.8% APR with monthly compounding.
What is the monthly payment for this mortgage?
$1,636.72
$1,877.83
$1,956.07
$2,014.71
$2,098.77
32.
The banker wants to construct a complete amortization table for
the loan. How much interest will the banker pay on the tenth (10th)
payment on the loan?
a. $1,065
b. $1,323
c. $1,382
d. $1,515
e. $1,582
33.
A successful businessman decides to invest in a fast food
franchise. The businessman will be a partial owner and will only invest
for the next five years. After careful analysis, the businessman projects
the following yearly cash flows from the business:
YEAR
Cash Flow
1
-$15,000
2
$24,000
3
$65,000
4
$120,000
5
$280,000
If the businessman wants a 12% annual return on his investment, how
much can he pay today?
a.
b.
c.
d.
e.
$269,353
$287,147
$292,071
$298,707
$310,853
34.
Today, an investor starts a mutual fund account with a $10,000
contribution. Going forward, the investor will contribute $1,000 at the
end of every month to the mutual fund. The fund is expected to pay 6%
APR with monthly compounding. How many contributions will need to
be made before the account reaches $125,000? (Round to the closest
number…)
a. 72
b. 83
c. 88
d. 92
e. 97
35.
A perpetuity pays $100 per month forever. The cost of the
perpetuity for an investor today is $10,000. What is the yearly APR on
this investment?
a. 1%
b. 10%
c. 11%
d. 12%
e. 13%
36.
A college student made an agreement with her grandfather to
finance law school. The cash flows required for law school are shown
below:
YEAR
0
1
2
Cash Flow
$30,000
$35,000
$42,000
Her grandfather wants to earn 1.50% per year on his investment, and
will let his granddaughter pay him a one-time or balloon payment in
exactly 10 years from the start of law school. How much will his
granddaughter owe him in exactly 10 years?
a. $122,148
b. $125,839
c. $127,950
d. $131,818
e. $135,299
37
Xavier Woods has just purchased life insurance. The next
premium payment is twelve months from today and will be $425. Mr.
Woods would like to put aside the money today in a savings account.
The savings account pays 3.0% APR (with monthly compounding). How
much will Mr. Woods need to put aside today to have enough to cover
the premium?
a.
b.
c.
d.
e.
$406.34
$408.36
$409.39
$412.45
$415.56
38.
A bond has a face value of $1,000 and will mature in 9 years. The
bond currently trades at 95% of its face value. If the coupon rate on the
bond is 7% APR (pays annual coupons), what is the yield to maturity at
the current trading price?
a. 6.26%
b. 6.39%
c. 7.31%
d. 7.65%
e. 7.79%
Use the following information to answer questions 39-40:
Crimson Tide Incorporated has a bond trading on the secondary market
that will mature in twenty years. The bond pays a semi-annual coupon
with a coupon rate of 9.50% APR. Based on the economy and risk
associated with Crimson Tide, investors seek an 8.50% APR return on
Crimson Tide debt. The face value of the bond is $1,000.
39.
Which answer shows the by-hand equation to price the bond
correctly?
a.
$95.00
1 20
$1,000
𝑃0 =
𝑥 (1 − (
) )+
(1.085)20
0.085
1.085
b.
c.
d.
e.
40.
a.
b.
c.
d.
e.
𝑃0 =
$47.50
1 40
$1,000
𝑥 (1 − (
) )+
(1.085)40
0.085
1.085
𝑃0 =
40
$47.50
1
$1,000
𝑥 (1 − (
) )+
(1.0425)40
0.0425
1.0425
𝑃0 =
40
$42.50
1
$1,000
𝑥 (1 − (
) )+
(1.0475)40
0.0475
1.0475
None of the above are correct.
What is the price of the bond based on this information?
$911.18
$920.90
$1,036.24
$1,083.90
$1,095.39
Section IV: Advanced Multiple Choice (5 points each)
Use the following information to answer questions 41-43:
A concerned father decides to start a 529 College Savings plan after his
daughter is born. He will contribute $150 at the end of each month (the
first payment is one month after birth) into an equity index fund. The
last contribution will be the day she starts college. The father believes
the fund will pay 7.8% APR (monthly compounding) on average. Let’s
assume that his daughter, Sammy, will start college in exactly 18 years.
College will last four years. The father expects that college tuition, room,
and board will be $35,000 per year for the great University of Georgia in
18 years. (Let’s assume it doesn’t change during college…)
41.
How much money will be in the 529 Savings plan account in
exactly 18 years?
a. $58,711.49
b. $66,013.09
c. $70,453.78
d. $77,015.27
e. $82,196.08
42.
What is the present value of the tuition payments the day that
Sammy starts UGA? (HINTS: 1) Tuition payments are at the BEGINNING
of the YEAR, or an annuity due. 2) Use the interest rate from the 529
account. Use the EAR!!!)
a. $115,705.50
b. $125,060.26
c. $125,524.90
d. $126,113.65
e. $126,516.46
43.
The father recognizes that he won’t have enough money in the
529 plan to finance college. He has decided to add extra money each
month in the equity index fund. How much “extra” (beyond the $150)
will he need to add to have enough in the account when Sammy starts
college?
a. $91.26
b. $111.57
c. $116.26
d. $136.57
e. $141.26
44.
A graduate from UGA is having a meeting with human resources
at her new job. The starting salary for this job will be $54,000. For
simplicity, let’s assume that you get one paycheck per year set up as an
ordinary annuity.
46.
A couple wants to withdraw $6,000 at the beginning of each
month during retirement. The couple expects retirement to last 25
years. During retirement, the couple will have their money in a savings
account that pays 1.2% APR (with monthly compounding).
The graduate believes that her salary will grow at 3% per year on
average, and she plans on working for the next 40 years. The graduate
informs human resources that she will invest in a retirement fund that
returns 8% per year on average. Now, she must decide what percentage
of her annual salary to contribute to the fund. The good news is that the
company will MATCH her contribution. (I.e if she puts in $100 this year,
the firm will contribute $100 to her fund also)
Currently, the couple has 20 years until retirement and has $100,000 in
their retirement mutual fund. The fund earns 7.2% APR (with monthly
compounding). The couple will make contributions to this account at
the end of each month. How much do they need to contribute each
month to reach their retirement goal?
Her goal is to accumulate $2,000,000 at retirement. What percentage of
her salary will have her reach this goal in exactly 40 years?
a.
b.
c.
d.
e.
3.48%
3.95%
4.38%
5.02%
6.32%
45.
An ambitious investor decides to take a chance on a creative
start-up opportunity. The owner of the start-up has made the following
promise in exchange for your capital today. The start-up will not make
any payments to you for 8 years. At the end of the 8th year, you will be
paid $10,000. This will be the first of 10 yearly payments. The start-up
promises that each payment will be 5% larger than the previous year. If
you require a 12% return on your capital, how much can you invest in
the start-up today?
a.
b.
c.
d.
e.
$24,498
$27,438
$27,777
$30,730
$32,937
a.
b.
c.
d.
e.
$1,003
$1,143
$1,204
$2,128
$3,703
47. (BONUS QUESTION) Dr. Pope offered a long list of things he has to
pay for with two young kids in his house. Which activity is NOT on his
list of activities?
a.
b.
c.
d.
e.
Trapeze
Soccer
Gymnastics
Piano
Cheerleading