Middletown, USA currently has a population of 1.5 million people. It has been one of the fastest growing cities in the nation

Middletown, USA currently has a population of 1.5 million people. It has been one of the fastest growing cities in the nation, growing by an average of 4% per year for the last five years. If this city's population continues to grow at 4% per year, what will the population be 10 years from now?

A) 1,560,000

B) 2,220,366

C) 2,100,000

D) 1,824,979

You bought a painting 10 years ago as an investment. You originally paid $85,000 for it. If you sold it for $484,050, what was your annual return on investment?

A) 47%

B) 4.7%

C) 19%

D) 12.8%

You deposit $5,000 today in an account drawing 12% compounded quarterly. How much will you have in the account at the end of 2 1/2 years?

A) $7,401

B) $5,523

C) $7,128

D) $6,720

How many years will it take for an initial investment of $200 to grow to $544 if it is invested today at 8% compounded annually?

A) 8 years

B) 10 years

C) 11 years

D) 13 years

When using a financial calculator, which of the following is the correct way to find the future value of $200 deposited today in an account for four years paying annual interest of 3% ?

A) N=4, i=.03, PV=-200, PMT=0, solve for FV

B) N=4, i=3, PV=-200, PMT=0, solve for FV

C) N=4, i=3, PV=0, PMT = $200, solve for FV

D) N=4, i=3, FV=200, PMT=0, solve for PV

The future value of a single sum:

A) increases as the compound rate decreases.

B) decreases as the compound rate increases.

C) increases as the number of compound periods decreases.

D) increases as the compound rate increases.

Shorty Jones wants to buy a one-way bus ticket to Mule-Snort, Pennsylvania. The ticket costs $142, but Mr. Jones

Shorty Jones wants to buy a one-way bus ticket to Mule-Snort, Pennsylvania. The ticket costs $142, but Mr. Jones has only $80. If Shorty puts the money in an account that pays 9% interest compounded monthly, how many months must Shorty wait until he has $142 (round to the nearest month)?

A) 73 months

B) 75 months

C) 77 months

D) 79 months

If you put $600 in a savings account that yields an 8% rate of interest compounded weekly, what will the investment be worth in 37 weeks (round to the nearest dollar)?

A) $648

B) $635

C) $634

D) $645

Which of the following formulas represents the future value of $500 invested at 8% compounded quarterly for five years?

A) 500(1 + .08)5 

B) 500(1 + .08)20 

C) 500(1 + .02)5 

D) 500(1 + .02)20 

What is the value of $750 invested at 7.5% compounded quarterly for 4.5 years (round to the nearest $1)?

A) $1,048

B) $1,010

C) $1,038

D) $808

If you want to have $10,000 in 10 years, which of the following formulas represents how much money you must put in a savings account today? Assume that the savings account pays 6% and it is compounded monthly.

A) 10,000/(1 + .05)10 

B) 10,000/(1 + .005)120 

C) 10,000/(1 + .06)10 

D) 10,000/(1 + .006)120 

Dawn Swift discovered that 20 years ago, the average tuition for one year at an Ivy League school was $4,500. Today, the average cost is $29,000. What is the growth rate in tuition cost over this 20-year period? Round off to the nearest 0.1%.

A) 15.5%

B) 4.2%

C) 9.8%

D) 10.6%

If you put $700 in a savings account with a 10% nominal rate of interest compounded monthly, what will the investment

If you put $700 in a savings account with a 10% nominal rate of interest compounded monthly, what will the investment be worth in 21 months (round to the nearest dollar)?

A) $827

B) $833

C) $828

D) $1,176

Which of the following is the formula for compound value?

A) FVn = P(1 + i)n 

B) FVn = (1 + i)/P

C) FVn = P/(1 + i)n 

D) FVn = P(1 + i)-n 

At 8% compounded annually, how long will it take $750 to double?

A) 6.5 years

B) 48 months

C) 9 years

D) 12 years

At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years?

A) 6%

B) 5%

C) 7%

D) 8%

An increase in future value can be caused by an increase in the

A) annual interest rate.

B) number of compounding periods.

C) original amount invested.

D) both A and B.

A friend plans to buy a big-screen TV/entertainment system and can afford to set aside $1,320 toward the purchase today. If your friend can earn 5.0%, compounded yearly, how much can your friend spend in four years on the purchase? Round off to the nearest $1.

A) $1,444

B) $1,604

C) $1,764

D) $1,283

You just purchased a parcel of land for $10,000. If you expect a 12% annual rate of return on your investment, how much will you sell the land for in 10 years?

A) $25,000

B) $31,060

C) $38,720

D) $34,310

If you place $50 in a savings account with an interest rate of 7% compounded weekly, what will the investment be worth at the end of five years (round to the nearest dollar)?

A) $72

B) $70

C) $71

D) $57

An investor will invest $1,000 now and expect to receive $10 for each of the next 10 years plus $1,000

An investor will invest $1,000 now and expect to receive $10 for each of the next 10 years plus $1,000 at the end of the 10th year.  Her cash flow at time period 0 is

A) $1,000

B) -$1,000

C) $-990

D) $1,010

Financial managers use the time value of money to

A) make business decisions.

B) compare cash flows of different projects.

C) determine the price of common stock.

D) both A and B.

E) all of the above.

The time value of money is created by

A) the existence of profitable investment alternatives and interest rates.

B) the fact that the passing of time increases the value of money.

C) the elimination of the opportunity cost as a consideration.

D) the fact that the value of saving money for tomorrow could be more or less than spending it today. 

Which of the following statements is FALSE?

A) A dollar received one year from now will be worth more than a dollar received today.

B) On monthly compounding loans, the annual percentage yield will be less than the nominal or quoted rate of interest.

C) Compounding essentially means earning interest on interest on an initial balance.

D) Perpetuities pay an equal payment forever.

An investor will invest $1,000 now and expect to receive $10 for each of the next 10 years plus $1,000 at the end of the 10th year.  Her cash at time period 10 is

A) $10

B) $1,000

C) $-990

D) $1,010

Answer:  D

Should you prefer to receive $100,000 right now or $10,000 at the end of each of the next 12 years?

A) $100,000 now

B) $10,000 at the end of each of the next 12 years

C) The answer depends on the time value of money.

D) Either alternative is equally valuable.

Money has a greater time value time value

A) when rates of return are higher.

B) when rates of return are lower.

C) when the future is uncertain.

D) when investors are willing to assume greater risks.

A diagram for visualizing future cash flows is known as

A) a future value vector.

B) a cash flow chart.

C) an FV/PV plot.

D) a timeline.

Answer:  D

On timeline, the present is represented as

A) time sub n

B) time zero

C) time sub i

D) time 1

A timeline typically represents cash flows as an exponential growth curve.

Answer:  FALSE

A timeline is a linear representation of the timing of cash flows.

Answer:  TRUE

A timeline represents the value of a sum invested now at the end of a series of time periods.

Answer:  FALSE

The end of one time period and the beginning of the next occupy the same place on a timeline.

Answer:  TRUE

Timelines are always expressed in years.

Answer:  FALSE

Timelines used to visualize cash flows normally represent present values on the left and future values on the right.

Answer:  TRUE

The last amount shown on a timeline represents the future value of all amounts invested up to that point.

Answer:  FALSE

The first amount on a timeline represent the present value of all the future amounts at a given interest rate.

Answer:  TRUE

Sketch a timeline that represents an immediate investment of $20,000 with $25,000 to be received at the end of 4 years.

Answer: 

_0__________1__________2_________3__________4

-$20,000                                                                          $25,000

Discuss the limitations of ratio analysis.

 Which of the following is NOT a reason why financial analysts use ratio analysis?

A) Ratios help to pinpoint a firm's strengths.

B) Ratios restate accounting data in relative terms.

C) Ratios are ideal for smoothing out the differences that may exist when comparing firms that use different accounting practices.

D) Some of a firm's weaknesses can be identified through the usage of ratios.

Which of the following is NOT a limitation related to the usage of ratios when reviewing a firm's performance?

A) Many firms experience seasonality in their operations.

B) Ratios cannot be used to compare firms that are in the same industry if one firm's sales are higher than another firm's.

C) Some firms operate in a variety of business lines, which makes it difficult to make comparisons.

D) Accounting practices differ widely among firms.

Which of the following statements is FALSE?

A) The calculation of the accounts receivable average collection period (ACP) would generally produce a more realistic assessment of how a firm is managing its accounts receivable if the analyst were to calculate the ACP for each month and average the results, than if the analyst were to solely use the fiscal year-end accounts receivable value.

B) If an analyst were to compare the inventory turnover of one firm to that of another, the comparison can be distorted if the two firms use different methods of valuing ending inventory.

C) Assume that two firms are in the same industry and one reports a higher debt ratio than the other. We can safely say that the firm that has the highest debt ratio is the riskier of the two firms.

D) A firm that has a current ratio that is significantly above the industry norm will, as a direct consequence, also have a significantly better return on assets than if its current ratio was below the industry norm.

E) All of the above statements are true.

Which of the following is a limitation related to the usage of ratios when reviewing a firm's performance?

A) Ratios reveal differences in policy and performance between years.

B) Ratios can be used to compare firms that are in the same industry if one firm's sales are higher than another firm's.

C) Financial ratios are designed for the use of creditors, not for managers.

D) Different accounting practices between firms can distort comparisons.

A serious pitfall in the interpretation of financial ratios arises when a company, whose business is seasonal, ends its accounting year on March 31, while most companies in the same industry end their accounting period on December 31.

Differences in accounting practices limit the use of ratio analysis.

Answer:  TRUE

Discuss the limitations of ratio analysis.

Answer:  It is often difficult to find adequate benchmarks to use, as companies in the same industry can be structured quite differently. Conglomerates are difficult to classify, as they are involved in many different businesses. Firms in different countries use different accounting methods, so ratio analysis can be difficult when trying to compare multinational firms. Many firms have seasonal business, which can skew results, and one-time restructurings are difficult to account for.

Which of the following industries has the highest average inventory turnover ratio?

Which of the following industries has the highest average inventory turnover ratio?

A) Retail clothing stores

B) Jewelry stores

C) Automobile dealerships

D) Supermarkets

Which of the following would be most responsible for a company's average collection period being higher than the industry average?

A) If a company's growth in sales is greater than the growth of sales in the industry.

B) Being more aggressive in collecting its accounts receivable than its competitors.

C) Having credit policy standards that are more restrictive than its competitors.

D) Being more lenient in extending credit to its customers than its competitors.

When the present financial ratios of a firm are compared with similar ratios for another firm in the same industry, it is called trend analysis.

Answer:  FALSE

Firms that engage in multiple lines of business make it difficult to assign them to an industry category for ratio analysis.

Answer:  TRUE

A small start-up company should choose an industry leader in the same industry as a benchmark.

Answer:  FALSE

 Companies chosen for benchmmarks should be of similar size and in the same or a similar industry.

Answer:  TRUE

Baker & Co. has applied for a loan from the Trust Us Bank to invest in several potential opportunities

Baker & Co. has applied for a loan from the Trust Us Bank to invest in several potential opportunities. To evaluate the firm as a potential debtor, the bank would like to compare Baker & Co. to the industry. The following are the financial statements given to Trust Us Bank:

Balance Sheet                                           12/31/13                12/31/14

Cash                                                             $305                         270

Accounts receivable                                  275                         290

Inventory                                                      600                         580

Current assets                                          1,180                      1,140

Plant and equipment                             1,700                      1,940

Less: acc depr                                           (500)                       (600)

Net plant and equipment                     1,200                      1,340

Total assets                                             $2,380                    $2,480

Liabilities and Owners' Equity

Accounts payable                                    $150                       $200

Notes payable                                             125                              0

Current liabilities                                       275                         200

Bonds                                                             500                         500

Owners' equity

Common stock                                            165                         305

Paid-in-capital                                            775                         775

Retained earnings                                      665                         700

Total owners' equity                              1,605                      1,780

Total liabilities and owners' equity $2,380                   $2,480

Income Statement

Sales (100% credit)                               $1,100                    $1,330

Cost of goods sold                                      600                         760

Gross profit                                                  500                         570

Operating expenses                                     20                            30

Depreciation                                                160                         200

Net operating income                               320                         340

Interest expense                                            64                            57

Net income before taxes                           256                         283

Taxes                                                                87                            96

Net income                                                $169                       $187

a. What are the firm's financial strengths and weaknesses?

b. Should the bank make the loan? Why or why not?

Answer: 

a. The firm's liquidity has improved significantly, as indicated by the current ratio and the acid test ratio. However, the current ratio is a bit deceiving since it relies on inventory in part for liquidity. Since the inventory is not particularly liquid (low inventory turnover), the quick ratio is a better measure of liquidity, which is still below the industry norm. Management has done a less-than-average job of generating operating profits on its assets (low operating income return on investment). The cause for the low OIROI is the inefficient use of assets (low asset turnover), especially inventory (low inventory turnover). However, this ineffectiveness is countered by efficiencies in keeping operating expenses low (high operating profit margin). From a balance sheet perspective, the company has less financial risk than the average firm in the industry (slightly lower debt ratio). However, owing to the firm's lower profitability, it is not covering its interest charges as well as the average firm in the industry (low times interest earned). Owing to the low return on investment, the firm's return on assets and return on equity are low relative to its competition.

b. The answer is not an easy one. The firm has improved its liquidity, but it is still having problems at effectively managing its inventory. It may be that the loan is not needed to the extent thought, but rather management should work at reducing its investment in inventories. The bank would also want to know why the operating profit margin, which is still high, is falling. Nevertheless, the loan decision could go either way.