# Sample Exam 1 Detail Solution

```Review for Exam 1
Fin 320
Prof. Laura Liu
Sample Exam 1 – Question 1
• What is the most common type of firm in the United
States and the world?
A. sole proprietorships
B. partnerships
C. limited partnerships
D. corporations
2
Question 2
• A C corporation earns \$7.40 per share before taxes. The
corporate tax rate is 39%, the personal tax rate on
dividends is 15%, and the personal tax rate on nondividend income is 36%. What is the total amount of
taxes paid if the company pays a \$5.00 dividend?
A. \$0.75
Corporate tax = \$7.40 &times; 39% = \$2.89
B. \$2.89
Personal tax = \$5.00 &times; 15% = \$0.75
C. \$3.64
Total = \$2.89 + \$0.75 = \$3.64
D. \$4.00
3
Question 3
The goal of the financial manager is
to_____________.
A. Maximize managers’ wealth
B. Maximize shareholders’ wealth
C. Maximize the revenue of the company
D. Minimize all costs and expenses
4
Question 4
Which of the following is correct about book
value of equity and market capitalization?
A.Market capitalization partially depends
on historical cost of assets.
B.Market to book ratio is market
capitalization divided by book value of
equity.
C.Market capitalization is always greater
than book value of assets.
D.Firms are classified as value firms if
market to book ratio is high.
5
Question 5
• Assume that your parents want to have \$90,000 saved
for college by your 18th birthday and they started saving
on your 1st birthday. They saved the same amount each
year on your birthday and earned 8% per year on their
investments. How much would they have to save each
year to reach their goal? Annuity. Solve for PMT
A. \$2509.78. N = 18, I/Y = 8, FV = 90000
B. \$1900.00.
8
90000
C. \$5,000.00. INPUTS 18
D. \$2403.19.
N
I/Y
PV PMT FV
OUTPUT
2403.19
6
Question 6
U.S. public companies are required to file
their annual financial statements with the
U.S. Securities and Exchange Commission
on which form?
A. 10-A
B. 10-K
C. 10-Q
D. 10-SE
7
Question 7
Assets
Current Assets
Cash
2013
2012
63.6
58.5
Accounts receivable
55.5
39.6
45.9
6.0
171.0
42.9
3.0
144.0
Inventories
Other current assets
Total current assets
Long-Term Assets
Land
Buildings
Equipment
Less accumulated
depreciation
Net property, plant, and
equipment
Goodwill
Other long-term assets
Total long-term assets
Total Assets
66.6
62.1
Liabilities and Stockholders'
Equity
Current Liabilities
Accounts payable
Notes payable /
short-term debt
Current maturities of longterm debt
Other current liabilities
Total current liabilities
Long-Term Liabilities
Long-term debt
2013
2012
87.6
73.5
10.5
9.6
39.9
6.0
144.0
36.9
12.0
132.0
239.7
168.9
--239.7
--168.9
22.8
22.2
---
---
Total long-term liabilities
Total liabilities
262.5
406.5
191.1
323.1
Luther Corporation
109.5 Consolidated
91.5
Capital
lease
obligations
Balance
Sheet
119.1
99.6
December
31, 2006Total
andDebt
2005 (in \$ millions)
(56.1) (52.5)
Deferred taxes
239.1
200.7
Other long-term liabilities
60.0
63.0
-42.0
362.1
242.7
Stockholders' Equity
126.6
63.6
386.7
Total liabilities and
Stockholders' Equity
533.1
386.7
533.1
8
Question 7
• Refer to the balance sheet above. If in
2013 Luther has 10.2 million shares
outstanding and these shares are trading
at \$16 per share, then Luther's market-tobook ratio would be closest to:
A.
B.
C.
D.
0.39
0.76
1.29
2.57
MTB = market cap / book value of equity
= (10.2 million &times; 16) / 126.6 = 1.289
9
Question 8
Luther Corporation
Consolidated Income Statement
Year ended December 31 (in \$ millions)
2013
2012
Total sales
610.1
578.3
Cost of sales
(500.2) (481.9)
Gross profit
109.9
96.4
Selling, general, and
(39.0)
(40.5)
Research and development
(24.6)
(22.8)
Depreciation and amortization
(3.6)
(3.3)
Operating income
41.2
31.3
Other income
----Earnings before interest and taxes
31.3
(EBIT)
41.2
Interest income (expense)
(25.1)
(15.8)
Pretax income
16.1
15.5
Taxes
(5.5)
(5.3)
Net income
10.6
10.2
Price per share
Shares outstanding (millions)
Stock options outstanding (millions)
Stockholders' Equity
Total Liabilities and Stockholders'
Equity
\$16
10.2
0.3
\$15
8.0
0.2
126.6
63.6
533.1
386.7
Refer to the income statement
above. Luther's net profit
margin for the year ending
December 31, 2012 is closest
to:
A. 1.8%
B. 2.7%
C. 5.4%
D. 16.7%
Net profit margin = Net income
/ Sales
= 10.2 / 578.3 = 1.76%
10
Question 9
• Samantha enters a rent-to-own agreement for living
room furniture. She will pay \$60 per month for one year.
Which of the following shows the timeline for her
payments if the first payment is one month from now?
A) Date
(Months)
1
2
Cash Flows -\$60 -\$60
B) Date
(Months)
Cash Flows
C) Date
(Months)
Cash Flows
D) Date
(Months)
Cash
Flows
3
-\$60
4
-\$60
5
-\$60
6
-\$60
7
-\$60
8
-\$60
9
-\$60
10
-\$60
11
-\$60
12
-\$60
0
1
2
3
4
5
6
7
8
9
10
11
12
-\$60 -\$60 -\$60 -\$60 -\$60 -\$60 -\$60 -\$60 -\$60 -\$60 -\$60 -\$60 -\$60
0
0
1
2
3
4
5
6
7
8
9
10
11
12
-\$60 -\$60 -\$60 -\$60 -\$60 -\$60 -\$60 -\$60 -\$60 -\$60 -\$60 -\$60
0
1
2
3
4
5
6
7
8
9
10
11
12
-\$60 -\$120 -\$180 -\$240 -\$300 -\$360 -\$480 -\$540 -\$600 -\$660 -\$720 -\$780 -\$840
11
Question 10
• What is the present value (PV) of \$100,000 received five
years from now, assuming the interest rate is 8% per
year?
C
Solve PV of single CF
PV =
A. \$60,000.00
(1 + r ) n
B. \$68,058.32
100000
C. \$73,502.99
=
= 68,058.32
5
D. \$82,609.42
(1 + 0.08)
INPUTS 5
N
OUTPUT
8
I/Y
100000
PV
PMT
68058.32
FV
12
Question 11
• What is the future value (FV) of \$10,000 in eight years,
assuming the interest rate is 10% per year?
Solve FV of single CF
A. \$16,212.78
n
FV
=
C
&times;
(
1
+
r
)
B. \$18,000.00
n
C. \$18,756.22
8
FV8 = 10000(1 + 0.1) = \$21,435.89
D. \$21,435.89
INPUTS 8
N
OUTPUT
10
10000
I/Y
PV
PMT
FV
21,435.89
13
Question 12
• Jeff has the opportunity to receive one payment either
now or in the future. Which of the following opportunities
is the best, given that the interest rate is 7% per year?
Choose the CF with
A. one that pays \$1,000 now
B. one that pays \$1,200 in two yearsthe highest PV
C. one that pays \$1,500 in five years
D. one that pays \$1,800 in ten years
A: PV=1000
C
1200
=
= 1048.13
B. PV =
n
2
(1 + r )
(1 + 0.07)
1500
C
=
= 1069.48
C. PV =
n
5
(1 + r )
(1 + 0.07)
1800
C
=
= 915.03
D. PV =
n
10
(1 + r )
(1 + 0.07)
14
Question 13
• On the day Harry was born, his parents put \$1000 into an
investment account that promises to pay a fixed interest rate
of 4 percent per year. How much money will Harry have in
this account when he turns 18?
Solve FV of single CF
A. \$1,720
B. \$2,026
18
FV18 = 1000(1 + 0.04) = \$2026
C. \$2,804
D. \$4,806
INPUTS 18
N
OUTPUT
4
1000
I/Y
PV
PMT
FV
2026
15
Question 14
• If \$10,000 is invested in a certain business at the start of
the year, the investor will receive \$3000 at the end of
each of the next four years. What is the present value of
this business opportunity if the interest rate is 7% per
year?
A. \$148.53
Uneven CFs. Solve for PV
B. \$161.63
C. \$178.88
D. \$172.45
PV = −10000 +
3000 3000 3000 3000
+
+
+
= 161.63
2
3
4
1.07 1.07 1.07 1.07
16
Question 15
• Ally wishes to leave a provision in her will that \$2000 will
be paid annually in perpetuity to a local charity. How
much must she provide in her will for this perpetuity if the
interest rate is 6%?
A. \$3201.21
Solve PV of perpetuity
B. \$21,200.00
C. \$33,333.33
D. \$42,000.00
PMT
PV =
r
PV = 2,000 / 0.06 = \$33,333.33
17
Question 16
• You are borrowing money to buy a car. If you can make
payments of \$3600 per year starting one year from now at an
interest rate of 4%, how much will you be able to borrow for
the car today if you finance the amount over four years?
A. \$6,358.54
Annuity. Solve for PV
B. \$13,067.62
N = 4, I/Y = 4, PMT = 3600
C. \$15,587.88
D. \$13,286.65
INPUTS 4
N
OUTPUT
4
I/Y
3600
PV
PMT
FV
13067.62
18
Question 17
Suppose that a young couple has just had their first baby and
they wish to insure that enough money will be available to pay for
their child's college education. They decide to make deposits into
an educational savings account on each of their daughter's
birthdays, starting with her first birthday. Assume that the
educational savings account will return a constant 7%. The
parents deposit \$2000 on their daughter's first birthday and plan
to increase the size of their deposits by 5% each year. Assuming
daughter's 18th birthday, then the amount available for the
daughter's college expenses on her 18th birthday is closest to:
N
1  1+ g  
FV of growing annuity PV= C &times;
A. \$42,825
1 − 
 
r
g
1
r
+

 

18
  1 + 0.05  
B. \$97,331
1
1 − 
 = 28796.82
PV = 2000 &times;

0.07 − 0.05   1 + 0.07  
C. \$67,998
D. \$103,063 FV = 28796.82(1 + 0.07 )18 = 97,331
19
Question 18
• Dan buys a property for \$250,000. He is offered a 20-year
loan by the bank, at an interest rate of 6% per year. What
is the annual loan payment Dan must make?
A. \$21,796.14 Solve for PMT of annuity
B. \$24,864.98
C. \$32,684.66
D. \$64,486.34.
INPUTS 20
N
OUTPUT
6
250000
I/Y
PV
PMT FV
21796.14
20
Question 19
• A businessman wants to buy a truck. The dealer offers to sell
the truck for either \$120,000 now, or six yearly payments of
\$25,000. Which of the following is closest to the interest rate
being offered by the dealer?
Solve for I/Y of annuity
A. 5%
B. 7%
Pay attention to the signs!
C. 9%
D. 11%
INPUTS 6
N
OUTPUT
120000 -25000
I/Y
6.77
PV
PMT
FV
21
Question 20
• Which of the following is NOT one of the financial
statements that must be produced by a public
company?
A) the balance sheet
B) the income statement
C) the statement of cash flows
D) the statement of activities
22
Question 21
• If \$15,000 is invested at 10% per year, in approximately
how many years will the investment double?
A) 7.3 years Solve for N of a single CF
B) 8.4 years Pay attention to the signs!
C) 10.6 years
D) 14.8 years.
INPUTS
N
OUTPUT 7.3
10
-15000
I/Y
PV
PMT
30000
FV
23
Question 22
• Sara wants to have \$500,000 in her savings account when
she retires. How much must she put in the account now, if
the account pays a fixed interest rate of 8%, to ensure that
she has \$500,000 in 20 years’ time?
A) \$107,274
Solve for PV of a single CF
B) \$144,616
C) \$180,884
D) \$231,480
INPUTS 20
8
N
I/Y
OUTPUT
500,000
PV
PMT
107,274
FV
24
Question 23
• A lottery winner will receive \$1 million at the end of
each of the next ten years. What is the future value
(FV) of her winnings at the time of her final payment,
given that the interest rate is 8.5% per year?
A) \$13.84 million
B) \$14.84 million Solve for FV of annuity
C) \$18.95 million
D) \$19.95 million
INPUTS 10
8.5
N
I/Y
OUTPUT
1
PV
PMT
FV
14.84
25
Question 24
• You are investing in a project today. For the first two
years, the project generates no cash flows. Starting from
year 3, the project will generate \$1 million every year
forever. What is the value of the project today if the
annual interest rate is 4%?
Solve PV of a delayed perpetuity
A. \$25 million
B. \$23.11 million
Year 2’s value of the perpetuity is:
C. \$22.22 million
c/r = 1/0.04 = 25
D. \$24.03 million
The PV of \$25 million in 2 years is:
25/(1+0.04)2 =23.11 million
26
Question 25
• A rich relative has bequeathed you a growing perpetuity. The
first payment will occur in a year and will be \$1000. Each year
after that, you will receive a payment on the anniversary of the
last payment that is 8% larger than the last payment. This
pattern of payments will go on forever. If the interest rate is
12% per year. What is today’s value of the bequest?
A. \$8333
Solve PV of a growing perpetuity
B. \$12,500
PV = C/(r-g) = 1000/(.12-.08) = 25,000
C. \$25,000
D. \$5,000
27