Use the following information for Italy’s Manor National Bank (MNB) at the year-end to calculate the performance measures:

Business Finance

PART I: MULTIPLE CHOICE / SHORT-ANSWER QUESTIONS

 

1. Shell Corp’s 2008 sales were $12 millions ($MM). Its 2003 sales were $6MM. At which rate have the sales been growing?

a). 15%

b). 16%

c). 17%

d). 16.5%

e). 14%

 

2. All of the following are operating performance ratios except:
3. Total asset turnover
4. Net profit margin
5. Fixed asset turnover
6. Return on Assets (ROA)
7. All above are operating performance ratios

 

3. A company has run a multiple regression analysis between units sold (Y), advertising spent (X1), and sale price (X2), obtaining the function: Y = 30,005 + 0.4(X1) – 0.5(X2) The company has decided to use this function to predict future sales. How much revenue would the company generate if it assigns an advertising budget of $200,000 and defines the sales price of its product at $10?
4. $1,000,000
5. $1,100,000
6. $1,200,000
7. $1,300,000
8. $1,400,000

 

4. EBITDA in a firm’s income statement stands for earnings before interest, taxes, depreciation, and amortization.
5. True
6. False

 

5. Typically, the statement of stockholders’ equity starts with retained earnings at the beginning of the year, adds net income, subtracts dividends paid, and ends up with retained earnings at the end of the year.
6. True
7. False

 

6. Use the following information for Italy’s Manor National Bank (MNB) at the year-end to calculate the performance measures:

• Net income: $185,600,000
• Cash dividends: $21,400,000
• Shares of stock outstanding: 30,191,000
• Market price of the stock: $84.87
• Book value of the common stock: $63.67

 

The European Bank’s stock P/E ratio is:

9. 9.8 x
10. 12.4 x
11. 11.0 x
12. 13.8 x
13. 15.2 x

 

7. Other things held constant, if a bond indenture contains a call provision, the yield to maturity that would exist with such a call provision will generally be _____ the YTM without a call provision.

A). Lower than.

B). Higher than.

C). The same as.

D). Either higher or lower (depending on the level of the call premium) than.

E). None of above

 

8. Alice Johnson has $500 now. How much would she have after 6 years if he leaves it invested at 5.5% with annual compounding?
9. $591.09
10. $622.20
11. $654.95
12. $689.42
13. $723.89

 

9. Which of the following statements is CORRECT?
10. The more depreciation a firm reports, the higher its tax bill, other things held constant.
11. People sometimes talk about the firm’s cash flow, which is shown as the lowest entry on the income statement, hence it is often called “the bottom line.”
12. Depreciation reduces a firm’s cash balance, so an increase in depreciation would normally lead to a reduction in the firm’s cash flow.
13. Gross profit margin is a financial metric used to assess a firm’s financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold (COGs).
14. Depreciation is not a cash charge, so it does not have an effect on a firm’s reported profits.

 

10. Assume that you are considering the purchase of a 20-year, non-callable bond with an annual coupon rate of 9.5%. The bond has a face value of $1,000, and it makes semiannual interest payments. If you require an 8.4% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?
11. $1,105.69
12. $1,133.34
13. $1,161.67
14. $1,190.71
15. $1,220.48

 

11. How much would $5,000 due in 25 years be worth today if the discount rate were 5.5%? Assume annual interest compounding.
12. $1,067.95
13. $1,124.16
14. $1,183.33
15. $1,245.61
16. $1,311.17

 

12. Suppose the U.S. Treasury offers to sell you a bond for $747.25. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price?  Assume annual interest compounding.
13. 4.37%
14. 4.86%
15. 5.40%
16. 6.00%
17. 6.60%

 

13. Which of the following statements is CORRECT, other things held constant?
14. If companies have fewer good investment opportunities, interest rates are likely to increase.
15. If expected inflation increases, interest rates are likely to increase.
16. Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities.
17. Interest rates on long-term bonds are less volatile than rates on short-term debt securities like T-bills.

 

14. A price-linked derivative security pays $300 if the oil price over the next year increases by more than 5%, an event that can happen with a 60% probability. Otherwise, it pays $50. If the expected return on the security is 15%, how much does the security cost?

A). $133.9

B). $143.9

C). $153.9

D). $163.9

E). $173.9

 

15. ABC Inc.’s bond currently sells for $1,180 and has a par value of $1,000. The coupon rate is 10.5% and it has a 15-year maturity, but they can be called in 5 years at $1,100.  What is their yield to call (YTC)?
16. 6.63%
17. 6.98%
18. 7.35%
19. 7.74%
20. 8.12%
21. Flagship Company is located in Paris, France. The firm had the following Statement of Cash Flows data as of 12/31/2019:

 

Cash payments for interest	12
Retirement of common stock	32
Cash payments to merchandise suppliers	85
Purchase of building	8
Sale of equipment	30
Payments of dividends	37
Cash payment for expenses	35
Cash collection from customers	260
Purchase of equipment	40

 

Using the data above, cash flows from investing activities are?
A). ($49).
B).  ($10).
C).  ($81).
D).  ($18).

E). None of above

 

17. An investment analyst estimates the following regression between the return on a stock (R) and the return on S&P 500 index (RSP): R = 5% + 1.2 RSP + error term. Assuming error term is zero (“0”), Estimate the change in the return on the stock when the return on the S&P 500 index changes from 11% to 14%.

A). 4.5%

B). 3.6%

C). 5.3%

D). 6.8%

E). 3.4%

 

18. A corporate bond currently yields 8.5 percent. Municipal bonds with the same risk, maturity, and liquidity currently yield 5.5 percent. At what tax rate would investors be indifferent between the two bonds?
19. 35.29%
20. 40.00%
21. 24.67%
22. 64.71%
23. 30.04%

 

19. Suppose that you have generated the estimates listed below from a pro forma analysis for a company that had requested a three year loan. The loan is a $1.5 million term loan with the equal annual payments of principals. The P&I payments are due at the end of each year with the annual interest rate = Prime rate + 2%.

 

	Yr.1		Yr. 2		Yr. 3
Capital expenditure	250,000		125,000		75,000
Cash dividends	140,000		140,000		140,000
Cash flow from operations before interest expense	750,000		780,000		800,000

 

Assuming the Prime rate = 8% each year. What will be the interest payment at year 2?

1. $60,000
2. $70,000
3. $80,000
4. $90,000
5. $100,000

 

20. What’s the future value of $1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually?
21. $1,819
22. $1,915
23. $2,016
24. $2,117
25. $2,223

 

2      21. A real estate investment has the following expected cash flows:

Year           Cash Flows

1             $10,000

2              25,000

3              50,000

4              35,000

The initial cost is $85,000. The discount rate is 8.25 percent. What is the investment’s present value?

a). $10,479

b). $13,479

c.) $16,479

d). $14,479

1. $15,479

 

22. New Jersey Utility reported $2.3 million of retained earnings on its 2012 balance sheet. In 2013, the company lost money-—its net income was -$500,000 (negative $500,000). Despite the loss, the company still paid a $1.00 per share dividend.  The company’s earnings per share for 2013 were -$2.50 (negative $2.50).  What was the level of retained earnings on the company’s 2013 balance sheet?

a). 1,500,000

b). 1,600,000

c). 1,700,000

d). 1,775,000

e). 1,800,000

 

23. You sold a car and accepted a note with the following cash flow stream as your payment. What was the effective price you received for the car assuming an interest rate of 6.0%?

 

Years:                          0                      1                      2                      3                      4

|                       |                       |                       |                       |

CFs:                           $0                 $1,000              $2,000              $2,000              $2,000

 

1. $5,987
2. $6,286
3. $6,600
4. $6,930
5. $7,277
6. At a rate of 6.5%, what is the future value of the following cash flow stream?

 

Years:                          0                      1                      2                      3                      4

|                       |                       |                       |                       |

CFs:                           $0                   $75                  $225                   $0                  $300

 

526. $526.01
527. $553.69
528. $582.83
529. $613.51
530. $645.80

Question 25-27

A bond security has a $1000 par value, 10 years to maturity, 7% coupon payments (annual compounding), and currently sells for $985.

 

25. What’s the yield to maturity (YTM)?

a). 7.22%

b). 7.75%

c). 8.5%

d). 6.75%

e). 5.75%

 

26. Briefly explain the business meaning of YTM, assuming that you are providing an investment seminar to an audience with little or no financial background.

a). Same as the current yield

b). Same as the bond price appreciation

c). Same as the bond capital appreciation

d). same as the dividend yield

e). total return if you hold the bond until it matures.

 

27. Assuming that YTM is constant for the next 3 years, what will be the price three years from today?

a). $880

b). $780

c). $857

d). $950

e). $988

 

28. Suppose your father has just retired and has a retirement nest egg currently worth $1,100,000. If he plans to take out $95,000 at the end of each of the next 20 years beginning one year from today so that his nest egg is worth $100,000 after making the 20th withdrawal, what interest rate must his nest egg earn? Assuming annual interest rate compounding.

 

8. 8.0%
9. 8.5%
10. 7.5%
11. 5.5%
12. 6.8%

 

29-30. Assume a Discount Rate of 11%

 

0	1	2	3	4	5	6
	|	|	|	|	|	|
0	150	150	150	250	300	500
PV = ?						FV = ?

29. What’s the PV of the above cash flow streams?
30. 956.6
31. 946.6
32. 986.6
33. 996.6
34. 976.6

 

30. What’s the FV of the above cash flow streams?
31. 1,526.86
32. 1,626.86
33. 1,726.86
34. 1,826.86
35. 1,926.86

 

 

PART II: ESSAY QUESTIONS / BONUS QUESTIONS

Note: A bonus question carry the same weight as an individual question (#1-30). For example, a simple True / False question from Part 1 (e.g.) #3 is weighted the same as more time-consuming bonus question such as Question #34.

 

31. Suppose someone makes the following statement: “Sales doubled in 5 years. This represents a growth of 100% in 5 years; so dividing 100% by 5, we conclude the growth rate to be 20% per year”. Is this statement correct and what is the actual annual growth rate?
32. No; actual annualized growth rate is around 12%
33. No; actual annualized growth rate is around 13%
34. No; actual annualized growth rate is around 14%
35. No; actual annualized growth rate is around 15%
36. No; actual annualized growth rate is around 16%

 

32. Julie Smith has collected the following data about the firm

EBITDA  = $3.5 million

Tax rate  = 38%

Debt outstanding  = $2.5 million

Cost of debt = 10.5%

Cost of common equity = 14%

Shares of stock outstanding = 800,000

BV of the stock per share = $12

 

The firm’s product market is considered stable, and the firm expects no growth, and all earnings are paid out as dividends. Calculate the firm’s net income and EPS, assuming depreciation & amortization costs of $500,000 per year.

2. $2.12
3. $2.62
4. $2.92
5. $3.42
6. $5.21

 

33. Excel Technology is considering seller-finance for an existing customer with the following information. The net income is $120MM. The depreciation cost is $10MM. What is the subject firm’s cash flow from operations (CFO)?
34. $113
35. $123
36. $134
37. $143
38. $153

Decrease in accounts receivable	$30 MM
Issuance of new stocks	17
Proceeds from the sale of fixed assets	5
Increase in inventory	17
Increase in accounts payable	15
Dividends paid out	35
Decrease in wages payable	15

29. Horizon Corporation has $500,000 of debt outstanding, and it pays an interest rate of 8% annually. The company’s annual sales are $2 millions, and its average tax rate is 30%, and its net profit margin on sales is 5%. What’s the TIE ratio?
30. $4.47
31. $4.57
32. $4.67
33. $4.77
34. $4.87

 

35. ABC Systems is forecasting the following income statement for the upcoming year:

Sales                                                                        $5,000,000

Operating costs (excluding depreciation)         $3,000,000

Gross margin                                                          $2,000,000

Depreciation                                                           $500,000

EBIT                                                                        $1,500,000

Interest                                                                    $500,000

EBT                                                                          $1,000,000

Taxes (40%)                                                           $400,000

Net income                                                             $ 600,000

 

The company’s president is disappointed with the forecast and would like to see ABC firm generate higher sales and a forecasted net income of $2,000,000. Assume that operating costs (excluding depreciation) are always 60 percent of sales.  Also, assume that depreciation ($500,000), interest expense ($500,000), and the company’s tax rate (which is 40 percent) will remain the same even if sales change.  What level of sales would ABC Firm have to obtain to generate $2,000,000 in net income?

1. $10,833,333
2. $11,833,333
3. $12,833,333
4. $13,833,333
5. $14,833,333