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QUESTION 1
1. The NYSE is defined as a "primary" market because it is one of the largest and most
important stock markets in the world.

True

False

1 points
QUESTION 2
1. Free cash flow is the amount of cash that if withdrawn would harm the firm's ability to
operate and to produce future cash flows.

True

False

1 points
QUESTION 3
1. Which of the following items is NOT normally considered to be a current asset?

Accounts receivable.

Inventory.

Bonds.

Cash.

Short-term, highly-liquid, marketable

securities.

1 points
QUESTION 4
1. Which of the following statements is CORRECT?

The more depreciation a firm reports, the higher its tax bill, other things held constant.

People sometimes talk about the firm's cash flow, which is shown as the lowest entry on
the income statement, hence it is often called "the bottom line."

Depreciation reduces a firm's cash balance, so an increase in depreciation would

normally lead to a reduction in the firm's cash flow.

Operating income is derived from the firm's regular core business. Operating income is
calculated as Revenues less Operating costs. Operating costs do not include interest or
 taxes.

Depreciation is not a cash charge, so it does not have an effect on a firm's reported
profits.

1 points
QUESTION 5
1. Which of the following statements is CORRECT?

In the statement of cash flows, a decrease in accounts receivable is subtracted from net
income in the operating activities section.

Dividends do not show up in the statement of cash flows because dividends are
considered to be a financing activity, not an operating activity.

In the statement of cash flows, a decrease in accounts payable is subtracted from net
income in the operating activities section.

In the statement of cash flows, depreciation is subtracted from net income in the
operating activities section.

In the statement of cash flows, a decrease in inventories is subtracted from net income
in the operating activities section.

1 points
QUESTION 6
1. A start-up firm is making an initial investment in new plant and equipment. Assume
that currently its equipment must be depreciated on a straight-line basis over 10 years, but
Congress is considering legislation that would require the firm to depreciate the equipment
over 7 years. If the legislation becomes law, which of the following would occur in the year
following the change?

The firm's operating income (EBIT) would

increase.

The firm's taxable income would

increase.

The firm's cash flow would increase.

The firm's tax payments would increase.

The firm's reported net income would

increase.

1 points
QUESTION 7
1. Which of the following statements is CORRECT?
 Free cash flow (FCF) is, essentially, the cash flow that is available for interest and
dividends after the company has made the investments in current and fixed assets that
are necessary to sustain ongoing operations.

After-tax operating income is calculated as EBIT(1 − T) + Depreciation.

Two firms with identical sales and operating costs but with different amounts of debt
and tax rates will have different operating incomes by definition.

If a firm is reporting its income in accordance with generally accepted accounting

principles, then its net income as reported on the income statement should be equal to
its free cash flow.

Retained earnings as reported on the balance sheet represent cash and, therefore, are
available to distribute to stockholders as dividends or any other required cash payments
to creditors and suppliers.

1 points
QUESTION 8
1. Wu Systems has the following balance sheet. How much net operating working
capital does the firm have?

Cash $ 100Accounts payable $ 200

Accounts receivable 650Accruals 350

Inventory 550Notes payable 350

Current assets $1,300 Current liabilities $ 900

Net fixed assets 1,000Long-term debt 600

Common equity 300

Retained earnings 500

Total assets $2,300Total liab. & equity $2,300

$675

$750

$825

$908

$998

1 points
QUESTION 9
1. C. F. Lee Inc. has the following income statement. How much after-tax operating
income does the firm have?

Sales $2,850.00

Costs 1,850.00

Depreciation 192.00

EBIT $ 808.00

Interest expense 285.00

EBT $ 523.00

Taxes (35%) 183.05

Net income $ 339.95

$427.78

$450.29

$473.99

$498.94

$525.20

1 points
QUESTION 10
1. Hartzell Inc. had the following data for 2011, in millions: Net income = $600; after-tax
operating income [EBIT(1 − T)] = $700; and Total assets = $2,000. Information for 2012 is
as follows: Net income = $825; after-tax operating income [EBIT(1 − T)] = $925; and Total
assets = $2,500. How much free cash flow did the firm generate during 2012?

$38
3

$42
5

$46
8

$51
4

$56
6
 1 points
QUESTION 11
1. Casey Motors recently reported the following information:

• Net income = $600,000.

• Tax rate = 40%.
• Interest expense = $200,000.
• Total investor-supplied operating capital employed = $9 million.
• After-tax cost of capital = 10%.
2.
What is the company's EVA?
−
$171,00
0

−
$180,00
0

−
$189,00
0

−
$198,45
0

−
$208,37
3

1 points
QUESTION 12
1. Exhibit 4.1
The balance sheet and income statement shown below are for Koski Inc. Note that the firm
has no amortization charges, it does not lease any assets, none of its debt must be retired
during the next 5 years, and the notes payable will be rolled over.

Balance Sheet (Millions of $)

Assets 2012
Cash and securities $ 2,500
Accounts receivable 11,500
Inventories 16,000
Total current assets $30,000
Net plant and equipment $20,000
Total assets $50,000
Liabilities and Equity
Accounts payable $ 9,500
Notes payable 7,000
Accruals 5,500
Total current liabilities $22,000
Long-term bonds $15,000
 Total debt $37,000
Common stock $ 2,000
Retained earnings 11,000
Total common equity $13,000
Total liabilities and equity $50,000

Income Statement (Millions of $) 2012

Net sales $87,500
Operating costs except depreciation 81,813
Depreciation 1,531
Earnings bef interest and taxes (EBIT) $ 4,156
Less interest 1,375
Earnings before taxes (EBT) $ 2,781
Taxes 973
Net income $ 1,808

Other data:
Shares outstanding (millions) 500.00
Common dividends $632.73
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $43.39
2.

Refer to Exhibit 4.1. What is the firm's current ratio?

0.9
9

1.1
0

1.2
3

1.3
6

1.5
0

1 points
QUESTION 13
1. Exhibit 4.1
The balance sheet and income statement shown below are for Koski Inc. Note that the firm
has no amortization charges, it does not lease any assets, none of its debt must be retired
during the next 5 years, and the notes payable will be rolled over.

Balance Sheet (Millions of $)

Assets 2012
Cash and securities $ 2,500
Accounts receivable 11,500
Inventories 16,000
 Total current assets $30,000
Net plant and equipment $20,000
Total assets $50,000
Liabilities and Equity
Accounts payable $ 9,500
Notes payable 7,000
Accruals 5,500
Total current liabilities $22,000
Long-term bonds $15,000
Total debt $37,000
Common stock $ 2,000
Retained earnings 11,000
Total common equity $13,000
Total liabilities and equity $50,000

Income Statement (Millions of $) 2012

Net sales $87,500
Operating costs except depreciation 81,813
Depreciation 1,531
Earnings bef interest and taxes (EBIT) $ 4,156
Less interest 1,375
Earnings before taxes (EBT) $ 2,781
Taxes 973
Net income $ 1,808

Other data:
Shares outstanding (millions) 500.00
Common dividends $632.73
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $43.39
2.

Refer to Exhibit 4.1. What is the firm's quick ratio?

0.5
1

0.6
4

0.7
6

0.9
2

1.1
0

1 points
QUESTION 14
1. Exhibit 4.1
The balance sheet and income statement shown below are for Koski Inc. Note that the firm
has no amortization charges, it does not lease any assets, none of its debt must be retired
during the next 5 years, and the notes payable will be rolled over.

Balance Sheet (Millions of $)

Assets 2012
Cash and securities $ 2,500
Accounts receivable 11,500
Inventories 16,000
Total current assets $30,000
Net plant and equipment $20,000
Total assets $50,000
Liabilities and Equity
Accounts payable $ 9,500
Notes payable 7,000
Accruals 5,500
Total current liabilities $22,000
Long-term bonds $15,000
Total debt $37,000
Common stock $ 2,000
Retained earnings 11,000
Total common equity $13,000
Total liabilities and equity $50,000

Income Statement (Millions of $) 2012

Net sales $87,500
Operating costs except depreciation 81,813
Depreciation 1,531
Earnings bef interest and taxes (EBIT) $ 4,156
Less interest 1,375
Earnings before taxes (EBT) $ 2,781
Taxes 973
Net income $ 1,808

Other data:
Shares outstanding (millions) 500.00
Common dividends $632.73
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $43.39
2.

Refer to Exhibit 4.1. What is the firm's days sales outstanding? Assume a
365-day year for this calculation.
39.0
7

41.1
3

43.2
9
 45.5
7

47.9
7

1 points
QUESTION 15
1. Exhibit 4.1
The balance sheet and income statement shown below are for Koski Inc. Note that the firm
has no amortization charges, it does not lease any assets, none of its debt must be retired
during the next 5 years, and the notes payable will be rolled over.

Balance Sheet (Millions of $)

Assets 2012
Cash and securities $ 2,500
Accounts receivable 11,500
Inventories 16,000
Total current assets $30,000
Net plant and equipment $20,000
Total assets $50,000
Liabilities and Equity
Accounts payable $ 9,500
Notes payable 7,000
Accruals 5,500
Total current liabilities $22,000
Long-term bonds $15,000
Total debt $37,000
Common stock $ 2,000
Retained earnings 11,000
Total common equity $13,000
Total liabilities and equity $50,000

Income Statement (Millions of $) 2012

Net sales $87,500
Operating costs except depreciation 81,813
Depreciation 1,531
Earnings bef interest and taxes (EBIT) $ 4,156
Less interest 1,375
Earnings before taxes (EBT) $ 2,781
Taxes 973
Net income $ 1,808

Other data:
Shares outstanding (millions) 500.00
Common dividends $632.73
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $43.39
2.

Refer to Exhibit 4.1. What is the firm's total assets turnover?

 1.1
2

1.4
0

1.7
5

2.1
0

2.5
2

1 points
QUESTION 16
1. Exhibit 4.1
The balance sheet and income statement shown below are for Koski Inc. Note that the firm
has no amortization charges, it does not lease any assets, none of its debt must be retired
during the next 5 years, and the notes payable will be rolled over.

Balance Sheet (Millions of $)

Assets 2012
Cash and securities $ 2,500
Accounts receivable 11,500
Inventories 16,000
Total current assets $30,000
Net plant and equipment $20,000
Total assets $50,000
Liabilities and Equity
Accounts payable $ 9,500
Notes payable 7,000
Accruals 5,500
Total current liabilities $22,000
Long-term bonds $15,000
Total debt $37,000
Common stock $ 2,000
Retained earnings 11,000
Total common equity $13,000
Total liabilities and equity $50,000

Income Statement (Millions of $) 2012

Net sales $87,500
Operating costs except depreciation 81,813
Depreciation 1,531
Earnings bef interest and taxes (EBIT) $ 4,156
Less interest 1,375
Earnings before taxes (EBT) $ 2,781
Taxes 973
Net income $ 1,808

Other data:
 Shares outstanding (millions) 500.00
Common dividends $632.73
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $43.39
2.

Refer to Exhibit 4.1. What is the firm's inventory turnover ratio?

5.4
7

5.7
4

6.0
3

6.3
3

6.6
5

2 points
QUESTION 17
1. Exhibit 4.1
The balance sheet and income statement shown below are for Koski Inc. Note that the firm
has no amortization charges, it does not lease any assets, none of its debt must be retired
during the next 5 years, and the notes payable will be rolled over.

Balance Sheet (Millions of $)

Assets 2012
Cash and securities $ 2,500
Accounts receivable 11,500
Inventories 16,000
Total current assets $30,000
Net plant and equipment $20,000
Total assets $50,000
Liabilities and Equity
Accounts payable $ 9,500
Notes payable 7,000
Accruals 5,500
Total current liabilities $22,000
Long-term bonds $15,000
Total debt $37,000
Common stock $ 2,000
Retained earnings 11,000
Total common equity $13,000
Total liabilities and equity $50,000

Income Statement (Millions of $) 2012

Net sales $87,500
 Operating costs except depreciation 81,813
Depreciation 1,531
Earnings bef interest and taxes (EBIT) $ 4,156
Less interest 1,375
Earnings before taxes (EBT) $ 2,781
Taxes 973
Net income $ 1,808

Other data:
Shares outstanding (millions) 500.00
Common dividends $632.73
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $43.39
2.

Refer to Exhibit 4.1. What is the firm's TIE?

2.2
0

2.4
5

2.7
2

3.0
2

3.3
3

2 points
QUESTION 18
1. Exhibit 4.1
The balance sheet and income statement shown below are for Koski Inc. Note that the firm
has no amortization charges, it does not lease any assets, none of its debt must be retired
during the next 5 years, and the notes payable will be rolled over.

Balance Sheet (Millions of $)

Assets 2012
Cash and securities $ 2,500
Accounts receivable 11,500
Inventories 16,000
Total current assets $30,000
Net plant and equipment $20,000
Total assets $50,000
Liabilities and Equity
Accounts payable $ 9,500
Notes payable 7,000
Accruals 5,500
Total current liabilities $22,000
 Long-term bonds $15,000
Total debt $37,000
Common stock $ 2,000
Retained earnings 11,000
Total common equity $13,000
Total liabilities and equity $50,000

Income Statement (Millions of $) 2012

Net sales $87,500
Operating costs except depreciation 81,813
Depreciation 1,531
Earnings bef interest and taxes (EBIT) $ 4,156
Less interest 1,375
Earnings before taxes (EBT) $ 2,781
Taxes 973
Net income $ 1,808

Other data:
Shares outstanding (millions) 500.00
Common dividends $632.73
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $43.39
2.

Refer to Exhibit 4.1. What is the firm's debt/assets ratio?

48.55
%

53.95
%

59.94
%

66.60
%

74.00
%

2 points
QUESTION 19
1. Exhibit 4.1
The balance sheet and income statement shown below are for Koski Inc. Note that the firm
has no amortization charges, it does not lease any assets, none of its debt must be retired
during the next 5 years, and the notes payable will be rolled over.

Balance Sheet (Millions of $)

Assets 2012
Cash and securities $ 2,500
Accounts receivable 11,500
 Inventories 16,000
Total current assets $30,000
Net plant and equipment $20,000
Total assets $50,000
Liabilities and Equity
Accounts payable $ 9,500
Notes payable 7,000
Accruals 5,500
Total current liabilities $22,000
Long-term bonds $15,000
Total debt $37,000
Common stock $ 2,000
Retained earnings 11,000
Total common equity $13,000
Total liabilities and equity $50,000

Income Statement (Millions of $) 2012

Net sales $87,500
Operating costs except depreciation 81,813
Depreciation 1,531
Earnings bef interest and taxes (EBIT) $ 4,156
Less interest 1,375
Earnings before taxes (EBT) $ 2,781
Taxes 973
Net income $ 1,808

Other data:
Shares outstanding (millions) 500.00
Common dividends $632.73
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $43.39
2.

Refer to Exhibit 4.1. What is the firm's ROA?

3.62
%

3.98
%

4.37
%

4.81
%

5.29
%

2 points
QUESTION 20
1. Exhibit 4.1
The balance sheet and income statement shown below are for Koski Inc. Note that the firm
has no amortization charges, it does not lease any assets, none of its debt must be retired
during the next 5 years, and the notes payable will be rolled over.

Balance Sheet (Millions of $)

Assets 2012
Cash and securities $ 2,500
Accounts receivable 11,500
Inventories 16,000
Total current assets $30,000
Net plant and equipment $20,000
Total assets $50,000
Liabilities and Equity
Accounts payable $ 9,500
Notes payable 7,000
Accruals 5,500
Total current liabilities $22,000
Long-term bonds $15,000
Total debt $37,000
Common stock $ 2,000
Retained earnings 11,000
Total common equity $13,000
Total liabilities and equity $50,000

Income Statement (Millions of $) 2012

Net sales $87,500
Operating costs except depreciation 81,813
Depreciation 1,531
Earnings bef interest and taxes (EBIT) $ 4,156
Less interest 1,375
Earnings before taxes (EBT) $ 2,781
Taxes 973
Net income $ 1,808

Other data:
Shares outstanding (millions) 500.00
Common dividends $632.73
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $43.39
2.

Refer to Exhibit 4.1. What is the firm's ROE?

13.21
%

13.91
%

14.60
%
 15.33
%

16.10
%

2 points
QUESTION 21
1. Exhibit 4.1
The balance sheet and income statement shown below are for Koski Inc. Note that the firm
has no amortization charges, it does not lease any assets, none of its debt must be retired
during the next 5 years, and the notes payable will be rolled over.

Balance Sheet (Millions of $)

Assets 2012
Cash and securities $ 2,500
Accounts receivable 11,500
Inventories 16,000
Total current assets $30,000
Net plant and equipment $20,000
Total assets $50,000
Liabilities and Equity
Accounts payable $ 9,500
Notes payable 7,000
Accruals 5,500
Total current liabilities $22,000
Long-term bonds $15,000
Total debt $37,000
Common stock $ 2,000
Retained earnings 11,000
Total common equity $13,000
Total liabilities and equity $50,000

Income Statement (Millions of $) 2012

Net sales $87,500
Operating costs except depreciation 81,813
Depreciation 1,531
Earnings bef interest and taxes (EBIT) $ 4,156
Less interest 1,375
Earnings before taxes (EBT) $ 2,781
Taxes 973
Net income $ 1,808

Other data:
Shares outstanding (millions) 500.00
Common dividends $632.73
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $43.39
2.

Refer to Exhibit 4.1. What is the firm's BEP?

 7.50
%

7.90
%

8.31
%

8.73
%

9.16
%

2 points
QUESTION 22
1. Exhibit 4.1
The balance sheet and income statement shown below are for Koski Inc. Note that the firm
has no amortization charges, it does not lease any assets, none of its debt must be retired
during the next 5 years, and the notes payable will be rolled over.

Balance Sheet (Millions of $)

Assets 2012
Cash and securities $ 2,500
Accounts receivable 11,500
Inventories 16,000
Total current assets $30,000
Net plant and equipment $20,000
Total assets $50,000
Liabilities and Equity
Accounts payable $ 9,500
Notes payable 7,000
Accruals 5,500
Total current liabilities $22,000
Long-term bonds $15,000
Total debt $37,000
Common stock $ 2,000
Retained earnings 11,000
Total common equity $13,000
Total liabilities and equity $50,000

Income Statement (Millions of $) 2012

Net sales $87,500
Operating costs except depreciation 81,813
Depreciation 1,531
Earnings bef interest and taxes (EBIT) $ 4,156
Less interest 1,375
Earnings before taxes (EBT) $ 2,781
Taxes 973
Net income $ 1,808

Other data:
 Shares outstanding (millions) 500.00
Common dividends $632.73
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $43.39
2.

Refer to Exhibit 4.1. What is the firm's profit margin?

1.51
%

1.67
%

1.86
%

2.07
%

2.27
%

2 points
QUESTION 23
1. Exhibit 4.1
The balance sheet and income statement shown below are for Koski Inc. Note that the firm
has no amortization charges, it does not lease any assets, none of its debt must be retired
during the next 5 years, and the notes payable will be rolled over.

Balance Sheet (Millions of $)

Assets 2012
Cash and securities $ 2,500
Accounts receivable 11,500
Inventories 16,000
Total current assets $30,000
Net plant and equipment $20,000
Total assets $50,000
Liabilities and Equity
Accounts payable $ 9,500
Notes payable 7,000
Accruals 5,500
Total current liabilities $22,000
Long-term bonds $15,000
Total debt $37,000
Common stock $ 2,000
Retained earnings 11,000
Total common equity $13,000
Total liabilities and equity $50,000

Income Statement (Millions of $) 2012

Net sales $87,500
 Operating costs except depreciation 81,813
Depreciation 1,531
Earnings bef interest and taxes (EBIT) $ 4,156
Less interest 1,375
Earnings before taxes (EBT) $ 2,781
Taxes 973
Net income $ 1,808

Other data:
Shares outstanding (millions) 500.00
Common dividends $632.73
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $43.39
2.

Refer to Exhibit 4.1. What is the firm's operating margin?

3.12
%

3.46
%

3.85
%

4.28
%

4.75
%

2 points
QUESTION 24
1. Exhibit 4.1
The balance sheet and income statement shown below are for Koski Inc. Note that the firm
has no amortization charges, it does not lease any assets, none of its debt must be retired
during the next 5 years, and the notes payable will be rolled over.

Balance Sheet (Millions of $)

Assets 2012
Cash and securities $ 2,500
Accounts receivable 11,500
Inventories 16,000
Total current assets $30,000
Net plant and equipment $20,000
Total assets $50,000
Liabilities and Equity
Accounts payable $ 9,500
Notes payable 7,000
Accruals 5,500
Total current liabilities $22,000
 Long-term bonds $15,000
Total debt $37,000
Common stock $ 2,000
Retained earnings 11,000
Total common equity $13,000
Total liabilities and equity $50,000

Income Statement (Millions of $) 2012

Net sales $87,500
Operating costs except depreciation 81,813
Depreciation 1,531
Earnings bef interest and taxes (EBIT) $ 4,156
Less interest 1,375
Earnings before taxes (EBT) $ 2,781
Taxes 973
Net income $ 1,808

Other data:
Shares outstanding (millions) 500.00
Common dividends $632.73
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $43.39
2.

Refer to Exhibit 4.1. What is the firm's dividends per share?

$1.1
4

$1.2
7

$1.3
9

$1.5
3

$1.6
8

2 points
QUESTION 25
1. Exhibit 4.1
The balance sheet and income statement shown below are for Koski Inc. Note that the firm
has no amortization charges, it does not lease any assets, none of its debt must be retired
during the next 5 years, and the notes payable will be rolled over.

Balance Sheet (Millions of $)

Assets 2012
Cash and securities $ 2,500
Accounts receivable 11,500
 Inventories 16,000
Total current assets $30,000
Net plant and equipment $20,000
Total assets $50,000
Liabilities and Equity
Accounts payable $ 9,500
Notes payable 7,000
Accruals 5,500
Total current liabilities $22,000
Long-term bonds $15,000
Total debt $37,000
Common stock $ 2,000
Retained earnings 11,000
Total common equity $13,000
Total liabilities and equity $50,000

Income Statement (Millions of $) 2012

Net sales $87,500
Operating costs except depreciation 81,813
Depreciation 1,531
Earnings bef interest and taxes (EBIT) $ 4,156
Less interest 1,375
Earnings before taxes (EBT) $ 2,781
Taxes 973
Net income $ 1,808

Other data:
Shares outstanding (millions) 500.00
Common dividends $632.73
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $43.39
2.

Refer to Exhibit 4.1. What is the firm's EPS?

$3.2
6

$3.4
3

$3.6
2

$3.8
0

$3.9
9

2 points
QUESTION 26
1. Exhibit 4.1
The balance sheet and income statement shown below are for Koski Inc. Note that the firm
has no amortization charges, it does not lease any assets, none of its debt must be retired
during the next 5 years, and the notes payable will be rolled over.

Balance Sheet (Millions of $)

Assets 2012
Cash and securities $ 2,500
Accounts receivable 11,500
Inventories 16,000
Total current assets $30,000
Net plant and equipment $20,000
Total assets $50,000
Liabilities and Equity
Accounts payable $ 9,500
Notes payable 7,000
Accruals 5,500
Total current liabilities $22,000
Long-term bonds $15,000
Total debt $37,000
Common stock $ 2,000
Retained earnings 11,000
Total common equity $13,000
Total liabilities and equity $50,000

Income Statement (Millions of $) 2012

Net sales $87,500
Operating costs except depreciation 81,813
Depreciation 1,531
Earnings bef interest and taxes (EBIT) $ 4,156
Less interest 1,375
Earnings before taxes (EBT) $ 2,781
Taxes 973
Net income $ 1,808

Other data:
Shares outstanding (millions) 500.00
Common dividends $632.73
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $43.39
2.

Refer to Exhibit 4.1. What is the firm's P/E ratio?

12.
0

12.
6

13.
2
 13.
9

14.
6

2 points
QUESTION 27
1. Exhibit 4.1
The balance sheet and income statement shown below are for Koski Inc. Note that the firm
has no amortization charges, it does not lease any assets, none of its debt must be retired
during the next 5 years, and the notes payable will be rolled over.

Balance Sheet (Millions of $)

Assets 2012
Cash and securities $ 2,500
Accounts receivable 11,500
Inventories 16,000
Total current assets $30,000
Net plant and equipment $20,000
Total assets $50,000
Liabilities and Equity
Accounts payable $ 9,500
Notes payable 7,000
Accruals 5,500
Total current liabilities $22,000
Long-term bonds $15,000
Total debt $37,000
Common stock $ 2,000
Retained earnings 11,000
Total common equity $13,000
Total liabilities and equity $50,000

Income Statement (Millions of $) 2012

Net sales $87,500
Operating costs except depreciation 81,813
Depreciation 1,531
Earnings bef interest and taxes (EBIT) $ 4,156
Less interest 1,375
Earnings before taxes (EBT) $ 2,781
Taxes 973
Net income $ 1,808

Other data:
Shares outstanding (millions) 500.00
Common dividends $632.73
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $43.39
2.

Refer to Exhibit 4.1. What is the firm's book value per share?
 $22.
29

$23.
47

$24.
70

$26.
00

$27.
30

2 points
QUESTION 28
1. Exhibit 4.1
The balance sheet and income statement shown below are for Koski Inc. Note that the firm
has no amortization charges, it does not lease any assets, none of its debt must be retired
during the next 5 years, and the notes payable will be rolled over.

Balance Sheet (Millions of $)

Assets 2012
Cash and securities $ 2,500
Accounts receivable 11,500
Inventories 16,000
Total current assets $30,000
Net plant and equipment $20,000
Total assets $50,000
Liabilities and Equity
Accounts payable $ 9,500
Notes payable 7,000
Accruals 5,500
Total current liabilities $22,000
Long-term bonds $15,000
Total debt $37,000
Common stock $ 2,000
Retained earnings 11,000
Total common equity $13,000
Total liabilities and equity $50,000

Income Statement (Millions of $) 2012

Net sales $87,500
Operating costs except depreciation 81,813
Depreciation 1,531
Earnings bef interest and taxes (EBIT) $ 4,156
Less interest 1,375
Earnings before taxes (EBT) $ 2,781
Taxes 973
Net income $ 1,808

Other data:
 Shares outstanding (millions) 500.00
Common dividends $632.73
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $43.39
2.

Refer to Exhibit 4.1. What is the firm's market-to-book ratio?

0.8
7

1.0
2

1.2
1

1.4
2

1.6
7

2 points
QUESTION 29
1. Exhibit 4.1
The balance sheet and income statement shown below are for Koski Inc. Note that the firm
has no amortization charges, it does not lease any assets, none of its debt must be retired
during the next 5 years, and the notes payable will be rolled over.

Balance Sheet (Millions of $)

Assets 2012
Cash and securities $ 2,500
Accounts receivable 11,500
Inventories 16,000
Total current assets $30,000
Net plant and equipment $20,000
Total assets $50,000
Liabilities and Equity
Accounts payable $ 9,500
Notes payable 7,000
Accruals 5,500
Total current liabilities $22,000
Long-term bonds $15,000
Total debt $37,000
Common stock $ 2,000
Retained earnings 11,000
Total common equity $13,000
Total liabilities and equity $50,000

Income Statement (Millions of $) 2012

Net sales $87,500
 Operating costs except depreciation 81,813
Depreciation 1,531
Earnings bef interest and taxes (EBIT) $ 4,156
Less interest 1,375
Earnings before taxes (EBT) $ 2,781
Taxes 973
Net income $ 1,808

Other data:
Shares outstanding (millions) 500.00
Common dividends $632.73
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $43.39
2.

Refer to Exhibit 4.1. What is the firm's equity multiplier?

3.8
5

4.0
4

4.2
4

4.4
5

4.6
8

2 points
QUESTION 30
1. Suppose you inherited $275,000 and invested it at 8.25% per year. How much could
you withdraw at the beginning of each of the next 20 years?

$22,598.
63

$23,788.
03

$25,040.
03

$26,357.
92

$27,675.
82
 3 points
QUESTION 31
1. Your aunt has $500,000 invested at 5.5%, and she now wants to retire. She wants to
withdraw $45,000 at the beginning of each year, beginning immediately. She also wants to
have $50,000 left to give you when she ceases to withdraw funds from the account. For how
many years can she make the $45,000 withdrawals and still have $50,000 left in the end?

15.5
4

16.3
6

17.2
2

18.0
8

18.9
9

3 points
QUESTION 32
1. What's the future value of $1,200 after 5 years if the appropriate interest rate is 6%,
compounded monthly?

$1,537.
69

$1,618.
62

$1,699.
55

$1,784.
53

$1,873.
76

3 points
QUESTION 33
1. What's the present value of $1,525 discounted back 5 years if the appropriate
interest rate is 6%, compounded monthly?

$
969
 $1,0
20

$1,0
74

$1,1
31

$1,1
87

3 points
QUESTION 34
1. Master Card and other credit card issuers must by law print the Annual Percentage
Rate (APR) on their monthly statements. If the APR is stated to be 18.00%, with interest paid
monthly, what is the card's EFF%?

18.58
%

19.56
%

20.54
%

21.57
%

22.65
%

3 points
QUESTION 35
1. Riverside Bank offers to lend you $50,000 at a nominal rate of 6.5%, compounded
monthly. The loan (principal plus interest) must be repaid at the end of the year. Midwest
Bank also offers to lend you the $50,000, but it will charge an annual rate of 7.0%, with no
interest due until the end of the year. How much higher or lower is the effective annual rate
charged by Midwest versus the rate charged by Riverside?

0.52
%

0.44
%

0.36
%

0.30
 %

0.24
%

3 points
QUESTION 36
1. Suppose Community Bank offers to lend you $10,000 for one year at a nominal
annual rate of 8.00%, but you must make interest payments at the end of each quarter and
then pay off the $10,000 principal amount at the end of the year. What is the effective
annual rate on the loan?

8.24
%

8.45
%

8.66
%

8.88
%

9.10
%

3 points
QUESTION 37
1. Suppose your credit card issuer states that it charges a 15.00% nominal annual rate,
but you must make monthly payments, which amounts to monthly compounding. What is
the effective annual rate?

15.27
%

16.08
%

16.88
%

17.72
%

18.61
%

3 points
QUESTION 38
1. Your uncle will sell you his bicycle shop for $250,000, with "seller financing," at a
6.0% nominal annual rate. The terms of the loan would require you to make 12 equal end-of-
month payments per year for 4 years, and then make an additional final (balloon) payment
of $50,000 at the end of the last month. What would your equal monthly payments be?

$4,029.
37

$4,241.
44

$4,464.
67

$4,699.
66

$4,947.
01

3 points
QUESTION 39
1. Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal
installments at the end of each of the next 5 years. How much interest would you have to
pay in the first year?

$1,200.
33

$1,263.
50

$1,330.
00

$1,400.
00

$1,470.
00

3 points
QUESTION 40
1. Your child's orthodontist offers you two alternative payment plans. The first plan
requires a $4,000 immediate up-front payment. The second plan requires you to make
monthly payments of $137.41, payable at the end of each month for 3 years. What nominal
annual interest rate is built into the monthly payment plan?

12.31
%
 12.96
%

13.64
%

14.36
%

15.08
%

3 points
QUESTION 41
1. Your subscription to Investing Wisely Weekly is about to expire. You plan to subscribe
to the magazine for the rest of your life, and you can renew it by paying $85
annually, beginning immediately, or you can get a lifetime subscription for $850, also
payable immediately. Assuming that you can earn 6.0% on your funds and that the annual
renewal rate will remain constant, how many years must you live to make the lifetime
subscription the better buy?

7.48

8.80

10.3
5

12.1
8

14.3
3

3 points
QUESTION 42
1. Your sister turned 35 today, and she is planning to save $7,000 per year for
retirement, with the first deposit to be made one year from today. She will invest in a mutual
fund that's expected to provide a return of 7.5% per year. She plans to retire 30 years from
today, when she turns 65, and she expects to live for 25 years after retirement, to age 90.
Under these assumptions, how much can she spend each year after she retires? Her first
withdrawal will be made at the end of her first retirement year.

$58,6
01

$61,6
86
 $64,9
32

$68,1
79

$71,5
88

3 points
QUESTION 43
1. You agree to make 24 deposits of $500 at the beginning of each month into a bank
account. At the end of the 24th month, you will have $13,000 in your account. If the bank
compounds interest monthly, what nominal annual interest rate will you be earning?
7.62
%

8.00
%

8.40
%

8.82
%

9.26
%

3 points
QUESTION 44
1. Your company has just taken out a 1-year installment loan for $72,500 at a nominal
rate of 11.0% but with equal end-of-month payments. What percentage of the 2ndmonthly
payment will go toward the repayment of principal?

73.67
%

77.55
%

81.63
%

85.93
%

90.45
%
 3 points
QUESTION 45
1. One of the four most fundamental factors that affect the cost of money as discussed
in the text is the current state of the weather. If the weather is dark and stormy, the cost of
money will be higher than if it is bright and sunny, other things held constant.

True

False

2 points
QUESTION 46
1. One of the four most fundamental factors that affect the cost of money as discussed
in the text is the expected rate of inflation. If inflation is expected to be relatively high, then
interest rates will tend to be relatively low, other things held constant.

True

False

2 points
QUESTION 47
1. One of the four most fundamental factors that affect the cost of money as discussed
in the text is the risk inherent in a given security. The higher the risk, the higher the
security's required return, other things held constant.

True

False

2 points
QUESTION 48
1. The four most fundamental factors that affect the cost of money are (1) production
opportunities, (2) time preferences for consumption, (3) risk, and (4) the skill level of the
economy's labor force.

True

False

2 points
QUESTION 49
1. Kop Corporation's 5-year bonds yield 6.50%, and T-bonds with the same maturity
yield 4.40%. The default risk premium for Kop's bonds is DRP = 0.40%, the liquidity premium
on Kop's bonds is LP = 1.70% versus zero on T-bonds, the inflation premium (IP) is 1.50%,
and the maturity risk premium (MRP) on 5-year bonds is 0.40%. What is the real risk-free
rate, r*?
 2.04
%

2.14
%

2.26
%

2.38
%

2.50
%

2 points
QUESTION 50
1. 5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the
maturity risk premium (MRP) on 5-year T-bonds is 0.4%. There is no liquidity premium on
these bonds. What is the real risk-free rate, r*?

2.59
%

2.88
%

3.20
%

3.52
%

3.87
%

2 points

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