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. 12. 13. 14. 15. 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