financefinal

# Financefinal - 1 Question The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to Your Answer maxi

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1. Question: The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to _________.

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Your Answer: maxi mize its expe cted total corp orate inco me maxi mize its expe cted EPS mini mize the chan ces of losse s max imiz e the stoc
Instructor Explanation: See page 6 of the book. Points Received: 5 of 5 Comments: 2. Question: What's the future value of \$2,000 after 3 years if the appropriate interest rate is 8%, compounded semiannually?

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Your Answer: \$2,8 54.1 3 \$2,7 81.4 5 \$2,3 24.8 9 \$2,0 11.8 7 \$2,5 30.6 4 C ORR ECT
Instructor Explanation: FV = PV * (1+i/n)t*n = \$2,000 * (1+.08/2)3*2 = \$2,000*1.2653 = \$2,530.64 Points Received: 5 of 5 Comments: 3. Question: You own an oil well that will pay you \$25,000 per year for 8 years, with the first payment being made today. If you think a fair return on the well is 7%, how much should you ask for if you decide to sell it?

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Your Answer: \$159 ,732 C ORR ECT \$116 ,110 \$217 ,513 \$315 ,976 \$288 ,349
Instructor Explanation: PVA = PMT * [(1 – {1 / (1+i)n}) / i ] Since the first payment is made today, there are 7 more payments of \$25,000. PVA = \$25,000 * [(1 – {1 / (1+.07)7}) /.07] PVA = \$25,000 * [.3773 / .07] PVA = \$25,000 * 5.3893 = \$134,732.24 + \$25,000 payment today = \$159,732.24 Points Received: 5 of 5 Comments: 4. Question: Suppose you borrowed \$25,000 at a rate of 8% and must repay it in 4 equal installments at the end of each of the next 4 years. How large would your payments be?

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Your Answer: \$7,6 91.4 5 \$7,5 48.0 2 C ORR ECT \$7,3 24.8 9 \$7,0 11.8 7 \$7,8 54.1 3
Instructor Explanation: PVA = PMT * [(1 – {1 / (1+i)n}) / i ] \$25,000 = PMT * [(1 – {1 / (1+.08)4}) / .08] \$25,000 = PMT * [.2650 / .08] \$25,000 = PMT * 3.3121 PMT = \$7,548.02 Points Received: 5 of 5 Comments: 5. Question: If a bank loan officer were considering a company's request for a loan, which of the following statements would you consider to be CORRECT?

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Your Answer: The lowe r the com pany 's TIE ratio, other thing s held cons tant, the lowe r the inter est rate the bank woul d char ge the firm. The lowe r the com pany 's EBI TDA cove rage ratio, other
Instructor Explanation: A low debt ratio would imply that a company has less risk for bankruptcy so would earn a higher credit rating and lower interest rate on any borrowings. Points Received: 5 of 5 Comments: 6. Question: During the latest year Ruth Corp. had sales of \$300,000 and a net income of \$20,000, and its year-end assets were \$200,000. The firm's total debt to total assets ratio was 40%. Based on the Du Pont equation, what was the firm's ROE?

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Your Answer: 15.3 3% 15.6 7% 16.0 0% 16.3 3% 16.6 7% C ORR ECT
Instructor Explanation: DuPont ratio = (Profit margin)(Total asset turnover)(Equity multiplier) Debt / Total assets = 40% implies that Equity/Total assets = 60% \$200,000 * .60 = \$120,000 (\$20,000 / \$300,000) * (\$300,000 / \$200,000) * (\$200,000 / \$120,000) = .1667 or 16.67% Points Received: 5 of 5 Comments: 7. Question: Rangoon Corp's sales last year were \$400,000, and its year-end total assets

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## This note was uploaded on 08/06/2011 for the course MT 217 taught by Professor Finance during the Spring '11 term at Kaplan University.

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Financefinal - 1 Question The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to Your Answer maxi

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