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Finance Questions of Harvard Business
An increase in financial leverage generally results in a higher return on equity (ROE).
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True
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False
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A company’s return on assets should be greater than its return on equity.
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True
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False
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An optimal current ratio should be greater than 1.0.
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True
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False
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GoodTimes, Inc. has asset turnover of 0.5 times, a net profit margin of 10% and average total assets of $100, what is its net income (assuming no unusual items)?
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$50
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$500
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$5
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The answer cannot be determined with the information provided
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Common-size financial statements are constructed in order to:
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Adjust for inflation and risk
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Facilitate comparisons of different-sized companies
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To comply with SEC requirements
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All of the above
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A company builds a new plant and finances its construction by issuing stock. Which ratio is least likely to be affected, all else being equal?
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Current ratio
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Debt to equity ratio
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Debt to asset ratio
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Net fixed assets to total assets
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A company has net working capital of $0, current liabilities of $25 and total assets equal to $100. What is its current ratio?
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0.0
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1.0
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0.5
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4.0
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Analysis of a company’s financial statements: Below are simplified versions of the balance sheet and income statement for Toys by Tom, Inc. Use this information to answer question 9.
Sales in 2003 were $10,000. Therefore, the compounded average growth rate is:
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8.6%
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6.7%
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6.3%
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Not enough information available
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The cash cycle measures the days required to produce finished goods or delivered services.
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True
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False
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In general, an increase in a liability is a source of funds.
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True
False[removed]
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Jay Miller Insured His Pizza Shop
Question 1
Jay Miller insured his pizza shop for $200,000 for fire insurance at an annual rate per $100 of $0.49. At the end of 10 months, Jay canceled the policy since his pizza shop went out of business. By using the table in the handbook, the refund to Jay is __________.
$980
$852.60
$127.40
$186.20
Question 2
Al Roy bought five bonds of Jort Co. 11 3/4 at 93.25 and four bonds of Inst. System 12×08 for 81.125. If the commission on the bonds is $2.50 per bond, the total cost of all the purchases is __________.
$4,662.50
$3,425.00
$7,930.00
$7,907.50
Question 3
Al Smith, who lives in Territory five, carries 10/20/5 compulsory liability insurance along with optional collision that has a $300 deductible. Al, who was at fault in an accident, caused $4,000 damage to the other auto, as well as $900 damage to his own. Also, the courts awarded $15,000 and $7,000 respectively to the two passengers in the other car for personal injuries. Al is responsible to pay a total of:
$5,000
$5,600
$2,000
$5,300
Question 4
Bill Jones buys a fishing rod that sells for $70 subject to a 6% sales tax and an excise tax of 10%. The total amount Bill paid for the rod is __________.
$77.00
$74.20
$81.20
$75.00
Question 5
Randy Smith bought 180 shares of a mutual fund with a NAV of $14.85. This fund has a load charge of 6%. What is the offer price?
$17.54
$15.47
$15.74
$17.45
FINANCE : 20 QUESTIONS :
QUESTIONS :
1.Your firm spends $473,000 per year in regular maintenance of its equipment. Due to the economic downturn, the firm considers forgoing these maintenance expenses for the next 3 years. If it does so, it expects it will need to spend $1.9 million in year 4 replacing failed equipment. What is the IRR of the decision to forgo maintenance of the equipment?
The IRR of the decision is 15.94%
The IRR of the decision is 14.18%
The IRR of the decision is 15.32%.
The IRR of the decision is 18.36%
2.Your firm spends $473,000 per year in regular maintenance of its equipment. Due to the economic downturn, the firm considers forgoing these maintenance expenses for the next 3 years. If it does so, it expects it will need to spend $1.9 million in year 4 replacing failed equipment. Does the IRR rule work for this decision?
Only if the replacement cost is below $2 million.
No.
Yes.
3.The last four years of returns for a stock are as follows:
| Year 1 | Year 2 | Year 3 | Year 4 |
| -3.9% | +27.6% | +11.5% | +3.8% |
Note: Notice that the average return and standard deviation must be entered in percentage format. The variance must be entered in decimal format. What is the average annual rate? (Round to two decimal places.)
The average return is 10.15%.
The average return is 10.25%.
The average return is 10.05%.
The average return is 9.95%.
4.In mid-2009, Rite Ad had CCC-rated, 20-year bonds outstanding with a yield to maturity of 17.3%. At the time, similar maturity Treasuries had a yield of 3%. Suppose the mark risk premium is 5% and you believe Rite Aid’s bonds have a beta of 0.38. If the expected loss rate of these bonds in the event of default is 58%. What annual probability of default would be consistent with the yield to maturity of these bonds in mid-2009?
The required return for this investment is 4.90%. The annual probability of default is 23.38%.
The required return for this investment is 4.90%. The annual probability of default is 20.38%.
The required return for this investment is 4.90%. The annual probability of default is 22.38%.
The required return for this investment is 4.90%. The annual probability of default is 21.38%.
5.Weston Enterprises is an all-equity firm with two divisions. The soft drink division has an asset beta of 0.54, expects to generate free cash flow of $66 million this year, and anticipated a 3% perpetual growth rate. The individual chemicals division has an asset beta of 1.15, expects to generate free cash flow of $71 million this year, and anticipates a 4% perpetual growth rate. Suppose the risk free rate is 2% and the market premium is 5%. Estimate Weston’s current cost of capital.
Weston’s current cost of capital is 4.70%.
Weston’s current cost of capital is 3.70%.
Weston’s current cost of capital is 5.70%.
Weston’s current cost of capital is 2.70%.
6.Consider an investment with the following returns over four years:
| Year | 1 | 2 | 3 | 4 |
| Return | 15% | 7% | 9% | 11% |
Which is a better measure of the investment’s past performance? If the investment’s returns are independent and identically distributed, which is a better measure of the investment’s expected return next year?
Arithmetic average is a better measure of the investment’s past performance while CAGR is a better measure of the investment’s expected return next year.
CAGR is a better measure of the investment’s past performance while arithmetic average is a better measure of the investment’s expected return next year.
7.Pisa Pizza, a seller of frozen pizza, is considering introducing a healthier version of its pizza that will be low in cholesterol and contain no trans fats. The firm expects that sales of the new pizza will be $15 million per year. While many of these sales will be to new customers, Pisa Pizza estimates that 27% will come from customers who switch to the new, healthier pizza instead of buying the original version. Assume customers will spend the same amount on either version. What level of incremental sales is associated with introducing the new pizza?
The incremental sales are $3 million.
The incremental sales are $9 million.
The incremental sales are $15 million.
The incremental sales are $11 million.
8.You need to estimate the equity cost of capital for XYZ Corp. Unfortunately, you only have the following data available regarding past returns:
| Year | Risk-free Return | Market Return | XYZ Return |
| 2007 | 4% | 6% | 8% |
| 2008 | 1% | -43% | -50% |
Estimate XYZ’s historical alpha.
XYZ’s historical alpha is 1.1%.
XYZ’s historical alpha is 1.6%.
XYZ’s historical alpha is 1.9%.
XYZ’s historical alpha is 1.3%.
9.The figure below shows the one-year return distribution of Startup, Inc.
| Probability | 40% | 20% | 20% | 10% | 10% |
| Return | -100% | -75% | -50% | -30% | 1,000% |
Calculate the standard deviation of the return.
The standard deviation is 324%.
The standard deviation is 330%.
The standard deviation is 328%.
The standard deviation is 326%.
10.A bicycle manufacturer currently produces 356,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $2.10 a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Direct in-house production costs are estimated to be only $1.50 per chain. The necessary machinery would cost $290,000 and would be obsolete after 10 years. This investment could be depreciated to zero for tax purposed using a 10-year straight-line depreciation schedule. The plant manager estimates that the operation would require additional working capital of $40,000, but argues that this sum can be ignored since it is recoverable at the end of the 10 years. Expected proceeds from scrapping the machinery after 10 years are $21,750. If the company pays tax at a rate of 35% and the opportunity cost of capital is 15%, what is the net present value of the decision to produce the chains in-house instead of purchasing them from the supplier?
Compute the NPV of buying the chains from the FCF.
The NPV of buying the chains from the FCF is $-438,850.
The NPV of buying the chains from the FCF is $-438,820.
The NPV of buying the chains from the FCF is $-1,438,820.
The NPV of buying the chains from the FCF is $-2,438,820.
11.Consider an investment with the following returns over four years:
| Year | 1 | 2 | 3 | 4 |
| Return | 15% | 7% | 9% | 11% |
What is the average annual return of the investment over the four years?
The average annual return is 1.50%.
The average annual return is 0.50%.
The average annual return is 10.50%.
The average annual return is 5.50%.
12.Bay Properties is considering starting a commercial real estate division. It has prepared the following four-year forecast of free cash flows for this division:
| Year 1 | Year 2 | Year 3 | Year 4 | |
| Free cash flow | $-122,000 | $-9,000 | $100,000 | $219,000 |
Assume cash flows after year 4 will grow at 3% per year, forever. If the cost of capital for this division is 17%, what is the value today of this division?
The value today is $528,283.
The value today is $928,283.
The value today is $228,283.
The value today is $728,283.
13.You need to estimate the equity cost of capital for XYZ Corp. Unfortunately, you only have the following data available regarding past returns:
| Year | Risk-free Return | Market Return | XYZ Return |
| 2007 | 4% | 6% | 8% |
| 2008 | 1% | -43% | -50% |
Would you base your estimate of XYZ’s equity cost of capital on historical return or expected return?
Expected return because the CAPM provides a better estimate of expected returns.
Historical return because the average past returns provides a better estimate of expected returns.
14.You need to estimate the equity cost of capital for XYZ Corp. Unfortunately, you only have the following data available regarding past returns:
| Year | Risk-free Return | Market Return | XYZ Return |
| 2007 | 4% | 6% | 8% |
| 2008 | 1% | -43% | -50% |
Compute the market’s and XYZ’s excess returns for each year. Estimate XYZ’s beta.
The market’s excess return for 2007 is 2%. The market’s excess return for 2008 is -44%. XYZ’s excess return for 2007 is 4%. XYZ’s excess return for 208 is -51%. XYZ’s beta is 1.20.
The market’s excess return for 2007 is 2%. The market’s excess return for 2008 is -44%. XYZ’s excess return for 2007 is 4%. XYZ’s excess return for 2008 is -51%. XYZ’s beta is 1.40.
The market’s excess return for 2007 is 2%. The market’s excess return for 2008 is -44%. XYZ’s excess return for 2007 is 4%. XYZ’s excess return for 2008 is -51%. XYZ’s beta is 1.10.
The market’s excess return for 2007 is 2%. The market’s excess return for 2008 is -44%. XYZ’s excess return for 2007 is 4%. XYZ’s excess return for 208 is -51%. XYZ’s beta is 1.30.
15.The last four years of returns for a stock are as follows:
| Year 1 | Year 2 | Year 3 | Year 4 |
| -3.9% | +27.6% | +11.5% | +3.8% |
Note: Notice that the average return and standard deviation must be entered in percentage format. The variance must be entered in decimal format. What is the variance of the stock’s returns? (Round to five decimal places.)
The variance of the returns is 0.01602.
The variance of the returns is 0.01702.
The variance of the returns is 0.01902.
The variance of the returns is 0.01802.
16.Consider an investment with the following returns over four years:
| Year | 1 | 2 | 3 | 4 |
| Return | 15% | 7% | 9% | 11% |
What is the compound annual growth rate (CAGR) for this investment over the four years?
The compound annual growth rate is 10.46%.
The compound annual growth rate is 10.36%.
The compound annual growth rate is 10.26%.
The compound annual growth rate is 10.16%.
17.Weston Enterprises is an all-equity firm with two divisions. The soft drink division has an asset beta of 0.54, expects to generate free cash flow of $66 million this year, and anticipated a 3% perpetual growth rate. The individual chemicals division has an asset beta of 1.15, expects to generate free cash flow of $71 million this year, and anticipates a 4% perpetual growth rate. Suppose the risk-free rate is 2% and the market premium is 5%. Estimate Weston’s current equity beta.
Weston’s current equity beta is 0.74.
Weston’s current equity beta is 0.66.
Weston’s current equity beta is 0.79.
Weston’s current equity beta is 0.70.
18.You are considering opening a new plant. The plant will cost $100.3 million upfront. After that, it is expected to produce profits of $31.9 million at the end of every year. The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 7.1%.
The NVP of this investment opportunity is $349.0 million.
The NVP of this investment opportunity is $349.0 million.
The NVP of this investment opportunity is $349.0 million.
The NVP of this investment opportunity is $349.0 million.
19.You need to estimate the equity cost of capital for XYZ Corp. Unfortunately, you only have the following data available regarding past returns:
| Year | Risk-free Return | Market Return | XYZ Return |
| 2007 | 4% | 6% | 8% |
| 2008 | 1% | -43% | -50% |
What was XYZ’s average historical return?
XYZ’s average historical return was -18.0%.
XYZ’s average historical return was -15.0%.
XYZ’s average historical return was -21.0%.
XYZ’s average historical return was -20.0%.
20.Weston Enterprises is an all-equity firm with two divisions. The soft drink division has an asset beta of 0.54, expects to generate free cash flow of $66 million this year, and anticipated a 3% perpetual growth rate. The individual chemicals division has an asset beta of 1.15, expects to generate free cash flow of $71 million this year, and anticipates a 4% perpetual growth rate. Suppose the risk-free rate is 2% and the market premium is 5%. Estimate the value of each division.
The estimated value of the soft drink division is $70.3 million and the estimated value of the industrial chemicals division is $76.3 million.
The estimated value of the soft drink division is $3,882.4 million and the estimated value of the industrial chemicals division is $1,893.3 million.
The estimated value of the soft drink division is $3,796.2 million and the estimated value of the industrial chemicals division is $8,774.5 million.
The estimated value of the soft drink division is $1,893.3 million and the estimated value of the industrial chemicals division is $3,882.4 million.