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1. Who has the ultimate control over a corporation?
a. shareholders b. chief executive officer c. chairman of the board d. board of directors
2. An agency problem is most apt to exist in which one of the following situations?
a. an employee asks for a raise and is denied
b. a management decision increases the market value of the firm’s stock
c. a board member resigns for personal reasons
d. a firm’s board decides to increase management bonuses and forego the normal stock dividend
3. The credit default swap (CDS) spread on ABC Corp is 200 basis points. What annual payment does a buyer of credit protection have to pay to insure $1 million of ABC Corp bonds?
4. (continued from 3) In the event of default, the recovery rate is 50%. If investors are risk-neutral, what is the probability of default per year?
5. Redding Industrial Supply had common stock of $6,800 and retained earnings of $4,925 at the beginning of the year. At the end of the year, the common stock balance is $7,000 and the retained earnings account balance is $5,498. The net income for the year is $938. What is the retention ratio? (Hint Retention Ratio = Addition to Retained Earnings/Net Income)
a. 17.59 percent b. 38.91 percent c. 61.09 percent d. 82.41 percent
6. A firm has sales of $26,800, depreciation of $2,200, interest expense of $330, cost of goods sold of $14,970, other costs of $5,800, and a tax rate of 34 percent. What is the firm’s profit margin?
a. 7.79 percent b. 7.87 percent c. 8.08 percent d. 8.62 percent
7. A firm has sales of $46,700 and inventory of $5,600. Cost of goods sold is 62 percent of sales and depreciation is 8 percent of sales. What is this firm’s inventory turnover ratio? (Inventory turnover=Cost of Goods Sold/Inventory)
a. 5.17 b. 4. 3 c. 17 d. -4
8. You currently have $7,200 in your investment account. You can earn an average rate of return of 11.7 percent per year. How long will you have to wait until your account is worth $50,000?
a. 9.47 years b. 11.28 years c. 14.67 years d. 17.51 years
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9. Bridgewater Bank pays 4 percent simple interest on its savings accounts. Tidewater Bank pays 4 percent interest, compounded annually on its savings accounts. Four years ago, Lew invested $3,000 in each bank. What is the difference, if any, in his account balances today?
a. $17.16 b. $29.58 c. $34.06 d. $35.42
10. Steve invested $2,500 this morning with The Branch Bank at 7 percent interest, compounded annually. After making this investment, he discovered that he could have invested his money with Tyler Bank and earned 7 percent interest, compounded quarterly. How much additional interest could Steve have earned over the next 5 years if he had invested with the Tyler Bank instead of with The Branch Bank?
a. $30.57 b. $48.11 c. $52.60 d. $57.20
II. (15 points)
a. You want to endow a scholarship that will pay $10,000 per year forever, starting one year from now. If the school’s endowment discount rate is 7%, what amount must you donate to endow the scholarship? (10 points)
b. How would your answer change if you endow the scholarship now, but it makes the first award to a student 10 years from today? (5 points)
III. (35 points)
You are trying to decide how much to save for retirement. You have determined that you can save $5,000 per year with the first investment made 1 year from now. You think that you can earn 10% annually on your investments and you plan to retire in 43 years, immediately after making your last $5,000 investment.
a. How much will you have in your retirement account on the day you retire? (10 points)
b. If, instead of investing $5,000 per year, you wanted to make one lump-sum investment today for your retirement that will result in the same retirement saving, how much would that lump-sum need to be? (10 points)
c. If you hope to live for 20 years in retirement, how much can you withdraw every year in retirement (starting one year after retirement) so that you will just exhaust your savings with the 20th withdrawal (assume your savings will continue to earn 10% in your retirement) (10 points)
d. If, instead, you decide to withdraw $300,000 per year in retirement (again with the first withdrawal one year after retiring), how many years will it take until you exhaust your savings? (5 points)
IV. (20 points, 2.5 points for each question). 3103 Printing, Inc., had sales totaling $40,000,000 in fiscal year 2014. Some ratios for the company are listed below. Use this information to determine the dollar values of various income statement and balance sheet accounts as requested.
3103 Printing, Inc.
Year Ended December 31, 2014
Gross profit margin 80%
Operating profit margin 35%
Net profit margin 8%
Return on total assets (ROA) 16%
Return on equity (ROE) 20%
Total asset turnover 2
Average collection period 62.2 days
Calculate values for the following
a. Gross profits
b. Cost of goods sold
c. Operating profits
d. Operating expenses
e. Earnings available for common stockholders
f. Total assets
g. Total common stock equity
h. Accounts receivable
Extra Credit (5 points). You are thinking of purchasing a house. The house costs $350,000. You have $50,000 in cash that you can use as a down payment on the house, but you need to borrow the rest of the purchase price. The bank is offering a 30-year mortgage at a fixed interest rate of 7% per year. You have determined that you can only afford annual mortgage payments of $23,500. The bank agrees to allow you pay this amount each year, yet still borrow $300,000. However, at the end of the mortgage period (in 30 years), you must make a balloon payment; that is you must repay the remaining balance on the mortgage. How much will this balloon payment be?
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