1. Janice Leo is the head of bond valuation at UMB Investments Management LLC. She has been very frustrated by the number of investment analysts who seem to have a little understanding of financial statement analysis and corporate finance concepts. She has written a set of conceptual questions and simple problems to screen for the better candidates in the applicant pool. A few of the questions related to cash flow statements, present value, future value and problems are given below:
   In response to a few question regarding cash flow statements Mike Grillo, one of the analysts at UMB Investments made the following statements.Statement -1: Cash flows are generally considered more sustainable if they are generated by a firm investing and financing activities.
   Statement -2: If a firm is profitable and reports positive cash flow, this is sustainable over the long term.
   Statement -3: The act of factoring accounts receivable will generally result in a decrease in operating cash flows in the current year, and a decrease in operating cash flows in subsequent years.
   Statement – 4: The fundamental drivers that underlie operating cash flow are ROE, growth, sustainability, profitability and efficiency.Is Leo correct with respect to statements 1 and 2?

   A.	No for statement 2 because a firm with negative earnings can report positive cash flow, but in the long run this is not sustainable.
   B.	Both statements  1 and 2 are correct.
   C.	No for statement 1 because more sustainable cash flows are generated by a firm investment activities.

1 points   

QUESTION 2

1. With respect to statement 3, Leo is incorrect.

   A.	Because the receivables causes the firm to recognize positive operating cash flows when the receivables are sold. Nevertheless, had the receivables not been sold, they would have been collected in the future. A corollary to that, operating cash flows will be lower during future years than they would have been had the receivables not been sold.
   B.	Because the receivables causes the firm to recognize positive operating cash flows when the receivables are sold. Nevertheless, had the receivables not been sold, they would have been collected in the future. A corollary to that, operating cash flows will be higher during future years than they would have been had the receivables not been sold.
   C.	Because the receivables causes the firm to recognize positive operating cash flows when the receivables are not sold. Nevertheless, had the receivables not been sold, they would have been collected in the future. A corollary to that, investing cash flows will be lower during future years than they would have been had the receivables not been sold.

1 points   

QUESTION 3

1. Leo’s statement 4 is correct with respect to

   A.	ROE Profitability Growth Efficiency Sustainability YES NO YES YES NO
   B.	YES YES NO NO YES
   C.	NO YES YES YES NO

1 points   

QUESTION 4

1. Leo was wondering whether candidates are familiar with accounting estimates and assumptions that a firm’s management could use to manipulate the firm’s profitability.  MicroMoon (MM) is one of the firms that UMB is considering in investing. In its December 31, 2011 annual report MM reported the following year-end data:

   Depreciation expenseÂ	$30 millionÂ
   Net incomeÂ	$30 millionÂ
   DividendsÂ	$5 millionÂ
   Total assetsÂ	$535 millionÂ
   Shareholder’s equityÂ	$150 millionÂ
   Effective tax rateÂ	35 percentÂ

   Last year, MM purchased equipment for $140 million. For the first year, straight-line depreciation was used assuming a depreciable life of 7 years with no salvage value. However, at year-end MM’s management determined that assumptions of a useful life of 5 years with a salvage value of 10 percent of the original value were more appropriate.How would the return on assets (ROA) and return on equity (ROE) for last year change due to the change in depreciation assumptions? ROA decreases to:

   A.	5.0% from 5.6% and ROE decreases to 18.4% from 20.0
   B.	5.7% from 21.43% and ROE increases to 21.0% from 20.0
   C.	5.7% from 5.6% and ROE decreases to 19.7% from 20.0

1 points   

QUESTION 5

1. Questions 5 to 7In response to a few questions regarding present value, future value, simple interest and compounding interest Grillo made the following points.Point 1: The present value decreases as the time period increases and the interest rate is inversely related to the future value.Pont 2:  An annuity due has payments that occur at the beginning of each time period. The present value of an annuity will increase when either the amount of the annuity payment increases or the interest rate increases.Point 3: A premium bond has a coupon rate that exceeds the yield to maturity and the market price that exceeds the face value. When a bond’s yield to maturity is greater than the bond’s coupon, the bond is selling at a discount.Point4:  Municipal bonds generally have a lower coupon rate than comparable corporate bonds and are appealing to individuals with low marginal tax rates.Is Grillo’s Point 1 most likely correct?

   A.	Yes
   B.	No,the present value does not decrease as the time period increases.
   C.	No,interest rate is not inversely related to the future value.

1 points   

QUESTION 6

1. The Point 2 from Grillo’s statement is most likely incorrect with respect to: 

   A.	An annuity due.
   B.	Annuity payments.
   C.	Interest rate.

1 points   

QUESTION 7

1. Are the statements identified as Point 3 and Point 4 correct?

   A.	Yes for Point 3, but no for Point 4.
   B.	No for Point 3, but yes for Point 4.
   C.	No for Point 3 and 4.

1 points   

QUESTION 8

1. Troy Skinner is one the pension fund manager at UMB Corporation anticipates that benefits of £1 million per year must be paid to retirees. Retirements will not occur until 10 years from now. Once benefits begin to be paid, they will extend until year 39 for a total of 30 payments. What is the present value of the pension liability if the appropriate annual discount rate for plan liabilities is 5 percent compounded annually?

   A.	£15,372,451.03  Â
   B.	 £15,592,772    Â
   C.	£9,909,219
   D.	£9,572,609   Â

1 points   

QUESTION 9

1. Lisa deposits $2,500 into an account paying 5 percent interest, compounded annually. At the same time, Jill deposits $2,500 into an account paying 2.5 percent interest, compounded annually. At the end of five years:

   A.	Lisa will have earned somewhere between 1 and 2 times the amount of interest that Jill earned.
   B.	Lisa will have earned more than twice the amount of interest that Jill earned.
   C.	Lisa will have earned exactly twice the amount of interest as Jill earned.

1 points   

QUESTION 10

1. You want to invest an amount of money today and receive back twice that amount in the future. You expect to earn 6 percent interest. Approximately how long must you wait for your investment to double in value?

   A.

   6 years   Â

   Â

   B.

   8 years

   Â

   C.

   9 years

   Â

   D.

   12 years

   Â

1 points   

QUESTION 11

1. Donald Jones invested $3,500 ten years ago with an insurance company that has paid him 2 percent simple interest on his funds. Darla Ward invested $3,500 ten years ago in a fund that has paid her 2 percent interest, compounded annually. How much more interest has Darla earned than Donald over the 10 years?

   A.

   $72.78

   Â

   B.

   $64.12

   Â

   C.

   $74.20

   Â

   D.

   $66.48    Â

   Â

1 points   

QUESTION 12

1. Which one of the following has the highest effective annual rate?

   A.	7 percent compounded quarterly
   B.	7 percent compounded annually
   C.	7 percent compounded daily
   D.	7 percent compounded semi-annually      Â

1 points   

QUESTION 13

1. Your grandparents loaned you money at 0.5 percent interest per month. The APR on this loan is percent and the EAR is percent

   A.	6.00 and 6.17
   B.	6.17 and 6.09
   C.	6.00 and 6.14   Â
   D.	6.09 and 6.00

1 points   

QUESTION 14

1. The condominium at the beach that you want to buy costs $249,500. You plan to make a cash down payment of 20 percent and finance the balance over 10 years at 6.75 percent. What will be the amount of your monthly mortgage payment?

   A.

   $2,809.10   Â

   Â

   B.

   $3,287.46

   Â

   C.

   $3,412.67

   Â

   D.

   $2,291.89

   Â

1 points   

QUESTION 15

1. You want to save $75 a month for the next 15 years and hope to earn an average rate of return of 14 percent. How much more will you have at the end of the 15 years if you invest your money at the beginning of each month rather than the end of each month?

   A.	$1,125.00
   B.	$530.06
   C.	$514.29    Â
   D.	$562.50

1 points   

QUESTION 16

1. The following end of month payments of $400, $700, and $300, respectively, are due. Given a stated annual interest rate of 3.60 percent, the minimum amount of money needed in an account today to satisfy these future payments is closest to:

   A.	$1,308
   B.	$1,391
   C.	$1,387

1 points   

QUESTION 17

1. Leo now turns her attention to other two UMB summer interns, Bill Jennings and Tim Kane. Leo was wondering whether the interns know how to calculate annuity due, effective interest rate and annual percentage rate and asked Kane to solve the following problems. 
   One of the UMB’s clients Rabu Hassan lives in Greece and was not sure whether she should invest her €100,000 in British pound or in the U.S. dollar? Rabu was wondering which of the following investment option will yield highest value of her €100,000?

   CD-1	5.65%	Compounded continuously
   CD-2	5.70%	Compounded semi-annually
   CD-3	5.66%	Compounded quarterly
   CD-4	5.70%	Compounded monthly

   A.

   CD-2

   Â

   B.

   CD-3          Â

   Â

   C.

   CD-4

   Â

   D.

   CD-1

   Â

1 points   

QUESTION 18

1. Questions 18 to 23:Celestila Moonn is looking at the capital budgeting analysis for her firm. Her firm, SchoolStreet, is considering in upgrading the firm’s production capacity in an effort to improve the company’s competitive position. Moonn is being assisted by Amy Sun, an UMB MBA intern at SchoolStreet. While evaluating the capital budgeting analysis, Sun gathered the data below:
   • Sun estimates that the new HP-450N2 copy machine will costs $335,000 and an additional $165,000 is needed for shipping and install it. The HP-450N2 will be depreciated straight-line to zero over a five-year life. The HP-450N2 will generate additional annual revenues of $295,000, and it will have annual cash operating expenses of $113,000.
   • SchoolStreet borrowed $200,000 to purchase the equipment. The discount rate for this Capital budgeting is 10%.
   • The firm's inventories would have to be increased by $65,000 to handle the new line; however, its accounts payable would rise by $28,000.
   • The HP-450N2 will be sold for $95,000 after five years
   • The firm's tax rate IS 40%
   Factor -1: Before making the final calculations, Moon and Sun discussed the net present value analysis for the projects SchoolStreet is considering. Moonn tells Sun that we should include any financial flows such as interest expense or dividends paid to the investors who furnished the capital for the project under consideration.Factor -2: Moonn was not sure whether Sun’s estimated depreciable lives of 5-year was correct and the straight-line depreciation method is appropriate for this project and was wondering what would have been the impact on NPV had Sun used 7-year depreciable lives and 5-MARCS depreciation schedule instead of 5-year straight-line method?Factor -3: Moonn also tells Sun that we should include the revitalization cost of $100,000 in the capital budgeting analysis that SchoolStreet had spent last year to revitalize the production line site.Based on her estimates on new HP-450N2 copy machine, what was the initial investment?

   A.

   $593,000

   Â

   B.

   $500,000

   Â

   C.

   $537,000

   Â

1 points   

QUESTION 19

1. The incremental annual after-tax operating cash flow is closest to:

   A.

   $92,000

   Â

   B.

   $89,200

   Â

   C.

   $149,200

   Â

1 points   

QUESTION 20

1. The fifth year’s after-tax non-operating cash flow is closest to:

   A.

   $150,000

   Â

   B.

   $94,000

   Â

   C.

   $75,500

   Â

1 points   

QUESTION 21

1. With respect to Moon’s concerns in Factor 1, was Moonn correct to include interest expense in the capital budgeting analysis?

   A.	No, the return required by the investors provided the capital is already accounted for when we applied the 10 % discount rate, as a result, including financing cash flows would be double counted.
   B.	Yes, operating cash flow is calculated by adding back all non-cash transactions to net income, which excluded interest expense because interest expense is tax deduct edible.
   C.	Yes, if 10% borrowing cost of capital was not included on the analysis, net income and operating cash flows would have been reduced and the income tax would have been higher.

1 points   

QUESTION 22

1. With respect to $100,000 revitalization cost, in Factor 3, are Moon and Sun correct?

   A.	No, because the revitalization cost is a sunk cost and it should not be included as cash out flow in the analysis.
   B.	Yes, Sun is correct because SchoolStreet had invested $100,000 to revitalize the production line site and it should be included as cash out flow in the analysis.
   C.	Yes, Moonn is correct.

1 points   

QUESTION 23

1. Sun calculates followings

   A.	NPV IRR PI Payback $65,723 13.8% 1.13 3.4 years
   B.	$56,723 13.1% 1.2 3.1 years
   C.	$86,950 12.0% 1.16 4.0 years

1 points   

QUESTION 24

1. Questions 24 to 27:Bill Jennings made the following statements regarding zero coupon bonds and the term structure of interest rates.
   Statement 1: bond that sells at par consists entirely of an interest yield.  However, if the bond sells at any
   price other than its par value, the YTM consists of the interest yield together with a positive or negative capital gains yield.Statement 2:  A downward-sloping term structure of interest rates indicates long-term yield are higher than short-term yields.Statement 3:  Zero coupon bonds provide an annual tax deduction to the investor and are issued at a deep discount.Statement 4: A 10-year zero coupon bond with face value of $1,000 and the 1-year interest rate is 5%. If the interest rate remains constant, the value of the zero coupon bond would be closed $632.Is Jennings correct with respect to?

   A.	Statement   1 Statement 2   YES   NO
   B.	  YES  YES Â
   C.	  NO   NO      Â
   D.	  NO   YES Â

1 points   

QUESTION 25

1. Is Jennings correct with respect to?

   A.	Statement   3 Statement 4   NO   YES
   B.	  YES  NO Â
   C.	  YES    YES Â
   D.	  NO   NO Â

1 points   

QUESTION 26

1. Today you are buying a $1,000 face value bond at an invoice price of $955. The bond has a 7% coupon and pays interest semiannually. There are 3 months until the next coupon date. What is the clean price of this bond?

   A.	$885.00
   B.	$937.50
   C.	$943.33
   D.	$955.00

1 points   

QUESTION 27

1. A bond has a 10-year maturity, a $1,000 face value, and a 7% coupon rate. If the market requires a yield of 8% on the bond, it will most likely trade at a:

   A.	Premium.
   B.	Discount.
   C.	Discount or premium, depending on its duration.

1 points   

QUESTION 28

1. Questions 28 to 31:Celestila Moonn, an UMB MBA student doing her second internship as an equity analyst at SchoolStreet.Moonn was assigned several tasks of developing mean return estimates for 20 stocks as preparation for a portfolio optimization.Task -1: UMA CorporationThe current dividend of $2.30 is expected to grow at 6 percent indefinitely and the required rate of return on the stock is 13 percent. The current price of the UMA stock is trading at $50. Moon was wondering what constant dividend growth rate that would be required to justify the current market price of $50.Task -2: UML, Inc.UML currently pays no dividend and will not pay one for several years. Moonn believes that UML begins paying a dividend of $2.50 five years from now, and the dividend is expected to grow at 5 percent thereafter. The required rate of return on UML stock is 12 percent.Moonn wants to use the dividend model to value UML, however, she was not sure whether dividend discount model is relevant for UML because the firm will not pay dividend until year-5 and whether this future dividend stream needs to be discounted back to find the value of UML stock.1.      Using the information in Task-1, Moonn calculates the value of UMA stock close is to:

   A.

   $33.05

   Â

   B.

   $34.82

   Â

   C.

   $34.05

   Â

1 points   

QUESTION 29

1. Using the information in Task-1, Moonn calculates the growth rate that justify the market price of $50.

   A.

   8.03%

   Â

   B.

   7.35%

   Â

   C.

   7.09%

   Â

1 points   

QUESTION 30

1. Using the information in Task- 2, Moonn calculates the value of UML stock that an investor will be willing to pay for today is close to

   A.

   $22.70

   Â

   B.

   $35.71

   Â

   C.

   $32.53

   Â

1 points   

QUESTION 31

1. In which circumstance is a dividend discount model (DDM) least likely to be an appropriate measure of a stock’s value?

   A.	The company has a clear dividend policy related to the firm's earnings
   B.	The company is a mature firm that generates excess cash flow
   C.	The investor is a majority shareholder
   D.	The company has a long history of dividend payments