3000: FINA FINANCIAL MANAGEMENT
TEST 1
February 7, 2011
Rules of the Test:
1.
This test is governed by the UGA Honor Code. Violations will be reported
to the Office of Academic Affairs and the penalty will be a zero on this test
at a minimum.
2.
On the scantron, fill in your NAME and your 810 number. Doublecheck to
make sure all letters and numbers are bubbled in correctly.
3.
You have 1:15 to complete this exam. Please return your exam when time is
called.
4.
You may use ONE page of hand-written notes and any calculator you
choose.
SECTION 1: TRUE/FALSE ( 4 points each)
Select answer A if the question is TRUE, and select answer B if the question is
FALSE.
1.
Increasing the compound frequency increases the future value of an
investment. (assuming APR is the same)
2.
The present value of an annuity due is greater than the present value of an
ordinary annuity.
3.
The rule of 72 describes how long it takes an investment to triple.
4.
For a mortgage, the amount of principal reduction declines with each
payment over the life of the loan.
5.
In running a firm, we would like the current ratio to be as large as possible.
6.
The balance of a loan is the PV of all payments that have been made to that
point in time.
SECTION 2: TIME VALUE OF MONEY BASICS (5 points each)
7.
An investment is made of $1,000 this morning. The investment will earn
9% APR with annual compounding over the next three years. What is the value of
the account at the end of the third year?
a. $1,295.03
b
.
$1,367.63
c. $1,411.58
d
.
$1,518.07
e. $1,605.23
Consider the following set of cashflows for questions 8-10:
YEAR
1
2
3
Cashflow
$100
$200
$300
4
$400
8.
If an investor needs 10% return on his invested money, how much would be
willing to pay you today for this cashflow stream?
a. $754.80
b
$775.10
.
c. $830.28
d
$844.86
.
e. $841.06
9.
Suppose an investor just wants to buy the year three cash flow. He will let
you keep the rest. How much can he offer for the just year 3 today?
a. $275.23
b
.
$272.73
c. $247.93
d
.
$231.66
e. $225.39
10.
a.
b
.
c.
d
.
e.
What is the future value of the entire contract at year 4?
$1,061.82
$1,094.12
$1,105.10
$1,192.59
$1,215.61
11.
A salesman just sold your sweet grandmother the following deal: She will
pay the salesman $200,000 today in exchange for a thirty year annuity of $10,000
per year. Assuming end of year payments, what return is the salesman offering?
a. 0.93%
b
.
1.22%
c. 1.80%
d
.
2.84%
e. 2.99%
12.
You are thinking about a piece of art that costs $30,000. The art dealer
proposes the following deal: He will lend you the money, and you will repay the loan
by making the same payment every two years for the next 20 years (i.e. 10 total
payments). If the interest rate is 6%, how much will you have to pay every two
years?
a. $4,924
b $5,231
.
c. $5,310
d $5,388
.
e. None of the above are correct
SECTION 3: CONCEPTS (5 points each)
Use the following DAWG, INC. financials to answer questions 13-14:
2010 Income Statement
Sales
$905,000.00
Costs
$710,000.00
Other expenses
$ 12,000.00
EBIT
$183,000.00
Interest paid
$ 19,700.00
Taxable Income
$163,300.00
Taxes (35%)
$ 57,155.00
Net Income
$106,145.00
Balance Sheet 12/31/2010
Assets
Cash
$ 25,000.00
Accounts receivable
$ 43,000.00
Inventory
$ 76,000.00
Total current assets
$144,000.00
Long term assets
$364,000.00
Total assets
$508,000.00
Liabilities and Shareholder Equity
Accounts payable
$ 65,000.00
Notes payable
$ current 9,000.00
Total liabilities
$ 74,000.00
Long term Debt
$156,000.00
Total Liabilities
$230,000.00
Book value of common stock
Retained earnings
Total shareholder equity
Total liabilities and shareholder equity
$ 21,000.00
$257,000.00
$278,000.00
$508,000.00
13.
Suppose that inventory is very liquid for Dawg, calculate the best liquidity
ratio.
a. 0.92
b 1.95
.
c. 2.20
d 9.29
.
14.
Suppose that Dawg, Inc. paid a 25% dividend in 2010. What was the
addition to retained earnings for the year?
a. $21,000
b $26,536
.
c. $79,609
d $106,145
.
e. $278,000
Use the following information for questions 15-16:
In June 2007, General Electric (GE) had a book value of equity of $111.2 billion,
10.9 billion shares outstanding, and a market price of $42.54 per share. GE had cash
of $15.5 billion, and a total debt of $436.8 billion.
15.
a.
b
.
c.
d
.
e.
16.
a.
b
.
c.
d
.
e.
What is GEs market-to-book ratio?
1.14
2.58
3.30
3.65
4.17
What is GEs enterprise value?
$406 billion
$885 billion
$869 billion
$854 billion
$559 billion
17.
Suppose you decide to invest $1,000 in an account that pays 12% APR with
monthly compounding. Which expression shows the future value of your account in
3 years?
a.
b.
c.
d.
e.
18.
Suppose the interest rate is 9%APR with monthly compounding. What is
the present value of an annuity that pays $100 every 3 months for 8 years?
a. $1,927.37
b $2,258.30
.
c. $2,417.45
d $2,835.57
.
e. $2,944.15
SECTION 4: ADVANCED TIME VALUE OF MONEY PROBLEMS (8 points
each)
19.
A baseball player is offered a 4-year contract that pays him the following
amounts:
Year 1:
$4.0 million
Year 2:
$4.5 million
Year 3:
$5.0 million
Year 4:
$6.0 million
Under the terms of the agreement all payments are made at the end of each year.
Instead of accepting the contract, the baseball player asks his agent to negotiate a
contract that has a present value of $4.5 million more than that which has been
offered. Moreover, the player wants to receive his payments in the form of a 4-year
ANNUITY DUE. All cash flows are discounted at 10 percent. If the team were to
agree to the player's terms, what would be the player's annual salary (in millions of
dollars)?
a. $5.65 million
b
.
$6.18 million
c. $6.22 million
d
.
$6.55 million
e. $6.84 million
20.
As a talented graduate from the University of Georgia, you have plans of
pursuing a law degree from an Ivy League school three years from today. You have
done some research and the cost of law school is $55,000 per year currently and is
expected to grow at 4% annually. Tuition payments are made at the beginning of the
year.
Your goal is save enough money in the next three years to be debt-free after law
school is complete. To get you started, a generous relative gives you $10,000 to
invest. You will put your money into a bond fund that pays 7.2% APR with quarterly
compounding. You will also make quarterly contributions to the account. ASSUME
that your first quarterly deposit is TODAY. How much will you have to invest each
quarter to reach your goal? You may also assume that the money will remain
invested earning interest at 7.2% APR with quarterly compounding while you are
enrolled in law school.
a. $10,922
b $11,505
.
c. $12,400
d $12,424
.
e. $12,623
21. (EXTRA CREDIT---1 point) Coaching which sport has caused Dr. Pope great
amounts of stress in the past year?
a.
b
.
c.
d
.
e.
Golf
Girls Softball
Baseball
Girls Basketball
Curling