Practice test yanais

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Western Governors University *

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C214

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Finance

Date

Jan 9, 2024

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docx

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Uploaded by DeaconLightning13032

 Statement of Cash Flows 1. Define Statement of Cash Flows? The SCF is the third of the three basic financial statements. It is also the most honest. After all, it is cash flow, not net income, that reveals the true health of a company. 2. Define Cash Flows from Operating, Investing, and Financing Activities A. Operational decisions for a company include what to produce, how to produce it, whom to sell it to, whom to use for suppliers, etc. CFO measures the net cash impact of operating decisions. B. Investing activities involve decisions concerning the purchase and sale of long-term assets, such as conveyor belts or the construction of new production facilities. CFI measures the net cash impact of investing decisions. C. Financing decisions deal with the issuance of debt and equity, the repayment of debts or repurchase stock, and the payment of dividends. CFF measures the net cash impact of financing decisions. 3. How does an increase in Accounts receivable impact CFO? Merchandise hasn’t be pay/Customer hasn’t pay 4. How does an increase in Accounts payable impact CFO? Account payable is when I haven’t pay the supplier 5. Net Income: 100,000 Depreciation: 10,000 Change in Operating Assets = 15,000 Change in Operating Liabilities = (5,000) PPE (net) on 1/1/15 = 40,000 PPE(net) on 12/31/15 = 80,000 Change in Long Term Liabilities = 20,000 Change in common stock = 15,000 Dividends paid = 6,000 a. Calculate CFO? CFO = Net Income + Depreciation +/- current assets +/- current liabilities 100,000 + 10,000 - 15,000 = 90,000 b. Calculate CFI? FI = Net Change in PPE + depreciation (80,000 - 40,000) + 10,000 = 50,000 c. Calculate CFF? CFF = Change in common stock + change in long-term liabilities - dividends 1 | P a g e

15,000 + 20,000 - 6,000 = 29,000  Financial Statements 1. A high-quality customer just purchased $500,000 worth of product from your company. The contract calls for immediate delivery of the product with a cash payment of $300,000 today and $200,000 to be paid 60 days. The expense associated with the product is $300,000, of which $100,000 has not been paid to your supplier. Under accrual based accounting system, how much revenue and expense will the company report? A: 500,000 in revenue and 300,000 in expenses 2. A firm reported retained earnings of $500 in 12/31/20x2. For 12/31/20x3, the firm reports sales of $2,000, margin of 25% and dividend payout ratio of 50%. What is the retained earnings on 12/31/x3? A: Ending retained earnings = beginning retained earnings + net income - dividends = $500 + (.25$2,000) - (.50(.25*$2,000) = $750 3. What financial statement is prepared at a point in time? Balance Statement - Firms assets, liabilities, and equity at any point of time. 4. What financial statements are prepared for a period of time? Income statement - Covers a period of time and starts with sales, takes out expenses, and ends with net income.  Time Value of Money 1. A stock will be worth $50 at the end of the year and will pay a dividend of $5. How much should an investor pay for the stock if the investor expects a rate of return of 15%? FV = $50 ; PMT = $5 ; N = 1 ; I/Y = 15% = CPT = PV = -47.83 2. An investor paid $45 for a stock today that will pay a dividend of $5 at the end of the year. How much should the stock be worth at the end of the year if the investor expects a rate of return of 15%? PV = -$45 ; PMT = $5 ; N = 1 ; I/Y = 15% = CPT = FV = $46.75 3. An investor will receive $15,000 at the end of every year for the next 10 years from an investment. If the interest rate is 8%, what is the present value of the investment? PMT = $15,000 ; N = 10 ; I/Y = 8% = CPT = PV = $100,651.22 2 | P a g e

4. An investor expects $80,000 from an investment in 10 years. If the interest rate is 8% what is the present value of the investment. Formula: PV = FV / (1 + r)n (need fix) 5. A person wants to retire 15 years from today and would like to have an annual income of $250,000 per year for 10 years starting in 15 years. The discount rate is 6%. What is the present value? 2 Steps process: Step 1 = PMT = $250,000 ; N = 10 ; I/Y = 6 = CPT = PV = $1,840,021.76 Step 2 = FV = $1,840,021.76 ; N = 15 ; I/Y = 6 = CPT = PV = $767,776.79  CAPM Model and Efficient market hypothesis a. Define efficient Frontier? The frontier where various portfolios have the highest ratio of return relative to risk. b. Where would a risk averse investor fall on the efficient frontier? 100% Bonds c. Where would a risk taking investor fall on the efficient frontier? 100% Stocks d. What is Beta? A measure of systematic risk for a particular security (or portfolio) that quantifies the security’s (or portfolio’s) price sensitivity to price changes in the market. A Measure of Risk - A Beta 1 is the average risk of all stocks. Anytime a beta is below 1, it is less risk. If it is more than 1, it is high risk. e. Define efficient market hypothesis as it relates to a firm? For any company to survive, they need to make profitable decisions. Otherwise, investors will shun their business. The firm needs to invest where the return is more than the cost. 3 | P a g e

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f. What is the intrinsic value of a stock under efficient market hypothesis? The intrinsic value of stock is the present value of the stock's after tax net cash flows.  Equity and Valuation 1. An investor wishes to know what the value of a common stock is if it pays a dividend of $7.00 today. The company’s dividend growth rate is 5.5% and the investor expects the stock to earn 7%. What is the value? Formula: Value of Stock = Dividend / (Required Rate of Return - Dividend Growth Rate) V= 7/ (0.07-0.055) = 466.66 2. If a common stock is worth $80 and the dividend growth rate is 5% with a dividend expected to pay $2.00 in a year’s time, what is the expected rate of return? Formula: Recent dividend * (1+Growth rate) 2 * (1+0.05)= 2.1% 3. An investor wishes to know what the value of preferred stock, when the dividend is $3.00 per share and the expected rate of return is 6.5%? Formula: Stock Value=dividend/ERR $3/0.065= 46.15  Debt and interest rates 1. A bond issued with a face value of $1,000 pays a 5% coupon rate and matures in seven years. If an investor wants a yield of 5%, what is the investor willing to pay for the bond? The coupon rate of a bond is its interest rate, or the amount of money it pays the bondholder each year, expressed as a percentage of its par value. A bond with a $1,000 par value and coupon rate of 5% pays $50 in interest each year until maturity. 2.An investor wants to know what the yield to maturity is for a $1,000 bond with a 4.5% coupon rate that matures in 5 years if the current market price is $955? Fv= 1,000 PV= -955 PMT= 55 N= 5 CPT= I/Y= 6.59 4 | P a g e

3. A $1,000 bond matures in six years. The coupon rate is 6% and interest is paid semi-annually. The current market price is 1,075. What is the yield? Fv= 1,000 PMT= (1000*0.06)/2= 30 N= 6x2= 12 PV= -1075 CPT= I/Y= 2.28x2= 4.56  Capital Budgeting 1. What is capital budgeting? Is the process of selecting long-lived projects that will enhance firm value. The end result is a "thumbs up" to projects that increase value or "thumbs down" to projects that decrease value. In simplest terms, capital budgeting is just cost benefit analysis applied to long-lived projects. / The process of making decisions regarding long-term investments. 2. What information is needed for capital budgeting? Consist of Initial Outlay, Differential Annual Cash Flow, and Terminal Cash Flow 3. Define NPV? NPV is exactly what the name implies—it is the sum (or net) of the present values of all of the cash flows. Given the direction and magnitude, just discount all the cash flows to time 0 and find the net value. 3. A company plans to invests $10,000 in a project that will generate cash flows of 6,000, 5,000, and 4,000 during its three year useful life. If the discount rate is 8%, what is the NPV for the project? watch the video 4. A company plans to invests $10,000 in a project that will generate cash flows of 6,000, 5,000, and 4,000 during its three-year useful life. What is the IRR for the project? Watch the video NPV video 5.x A company reports the following as a result of a new project: Increase in revenues = 100,000 Increase in variable and fixed costs = 30,000 Depreciation = 10,000 Tax rate = 35% Increase in working capital = 10% of increase in revenue What is the differential annual cash flow? 5 | P a g e

Formula: Differential Cash Flow = Increase in revenue - increase in variable and fixed costs - income tax expense - increase in working capital 100,000 - 30,000 - ((100,000-30,000-10,000)35) 21,000 - (.10100,00) 10,000 = $39,000  Firm Valuation 1. Define free cash flow? Cash flows from operating activities minus cash necessary for reinvestment in PPE It is distributed to the firm, or it can be given to equity. 2. Financial data for Intel is given below for 2014 EBIT 800,000 Depreciation 30,000 Change in working capital (10,000) Net capital expenditures 15,000 Tax rate 35% What is the free cash flow? Formula: FCFF = EBIT (1 - tax rate) + Depreciation - CAPEX - Increases in NWC. 800,000 (1-.35) + 30,000 - 15,000 - 10,000 = $525,000 need corection slice 65 3. What ratio is used to value a firm using the comparable method? Price Earnings ratio.  Cost of Capital 1. Define WACC? The weighted average cost of capital and it represents a firm's average after-tax cost of capital from ALL sources. 2. If a company has a capital structure of $5 million common stock with a cost of 17%, $2 million bonds at 4%, $1 million of Short Term Debt with a cost of 7%, and $2 million preferred stock with a cost of 3%, what is the Weighted Average after tax Cost of Capital? The company has a 35% tax rate. WACC= ((5/10)*.17)+((2/10)*.04*(1-.4))+((/10)*.07*(1-.4))+((2/10)*.03)= .1000 6 | P a g e

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3. If a company has a capital structure of $5 million common stock with a cost of 17%, $2 million bonds at 4%, $1 million of Short Term Debt with a cost of 7%, and $2 million preferred stock with a cost of 3%, what is the Weighted Average after tax Cost of long term debt? The company has a 35% tax rate. 104 4. How does a rating downgrade/upgrade impact the cost of capital? A positive credit rating lowers the cost of capital and the downgrade will increase the cost of capital.  Financial Forecasting 1. What is the Sustainable Growth Rate given the following:  Net income is 600,000  Total Assets are 3.0 million  Equity is 2 million  Dividend is 100,000 Formula: SGR=ROE(1−b)=NIS×SA×AE×(1−b) GR = Return on Equity * (1 - Dividend Payout Ratio) ROE = Net Income / Owner's Equity ; Dividend Payout Ratio = Dividend / Net Income = (600,000 / 2,000,000) * (1 - (100,000 / 600,000) = .30 * (1 - .17) = .30 * .83 = .25 2. A firm reports projected sales of 200 million. A/R is expected to be 20% of sales, PPE is expected to be 50% of sales, and A/P is expected to be 10% of sales and proforma income is expected to be 20 million. The firm has 15 million in equity and 12 million in debt. What is the DFN? Formula: DFN=Projected Total Assets−Projected Total Liabilities−Projected Owners' Equity • 200,000,000 sales • A/R 20% of sales = 40,000,000 • PPE 50% of sales = 100,000,000 • A/P 10% of sales = 20,000,000 • Proforma income 20,000,000 • Equity 15,000,000 • Debt 12,000,000 = (40,000,000 + 100,000,000) - (20,000,000 + 12,000,000) - (15,000,000 + 20,000,000) = 140,000,000 - 32,000,000 - 35,000,000 = 73,000,000 3. APY also known as EAY If APR is 15% and interest is compounded monthly what is the APY? 7 | P a g e

= (1 + .15/12)12 - 1 = = (1 + .0125)12 - 1 = (1.0125)12 (yx) - 1 = 1.1608 - 1 = 16.08%  Capital Structure 1. What is the Degree of Financial Leverage given Sales of 200,000. Variable Costs of 60,000, fixed costs of 20,000 and interest expense of 10,000? DFL = EBIT / (EBIT - Interest Expense) EBIT = 200,000 - 60,000 - 15,000 = 125,000 = 125,000 / (125,000 - 10,000) = 125,000 / 115,000 = 1.09 2. What is the risk posed by excessive debt? Firm inability to meet its debt obligations. So, if debt levels increase, firms face greater financial risk 3. What is the Degree of Operating Leverage given Sales of 100,000. Variable Costs of 60,000 and EBIT of 10,000? DOL = (100,000 - 60,000) / 10,000 = 4.00 4.Based on the DOL above, what is the relationship between increases or decreases in sales revenue and increases or decreases in EBIT? A DOL 4.00 means that if there is a 1% increase/decrease in Sales will lead to a 4.00 increase/decrease in EBIT  Working Capital Management 1. How do firms manage working capital? Collect quickly and pay slowly 2. What ratios are used to determine effective working capital management? Current Ratio, Cash Ratio and Receivable Turnover Ratio are used to manage working capital. Efficiently managing their working capital. 3. A/R (Account Receivable) = 15,000 Inventory = 25,000 Equipment = 100,000 Land = 60,000 A/P (Account Payable) = 20,000 Long term debt = 50,000 Equity = 75,000 8 | P a g e

What is the current ratio? Assests: Equipment, Inventory, Land, A/C Liabilities: Equity, LTD, A/P Formula: current ratio = Assests/ Liabilities 200,000/145,000 = 1.37 needs to be fixed slice 81 9 | P a g e

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