QUESTION 1
Jay Coleman just
graduated. He plans to work for five years and then leave for the Australian
“Outback” country. He figures that he can save $3,500 a year for the
first three years and $5,000 a year for the next two years. These savings will start
one year from now. In addition, his family gave him a $2,500 graduation gift.
If he puts the gift, and the future savings when they start, into an account
that pays 7.75% compounded annually, what will his financial “stake”
be when he leaves for Australia five years from now? Round off to the nearest
$1.
1.
$36,082
2.
$30,003
3.
$27,178
4.
$24,725
10 points
QUESTION 2
Find
the present vale of the following stream of cash flows assuming that the
firm’s cost is 14% and that these amounts are received at the end of each
year.
Year Amount
1 – 5 $20,000/yr
6 – 10 $35,000/yr
1.
$135,450
2.
$187,500
3.
$126,465
4.
$131,067
5.
$98,690
10 points
QUESTION 3
If the NPV of a project
is positive, then the project’s IRR ________ the required rate of return.
1.
must be greater than
2.
must be less than
3.
could be greater or less than
4.
cannot be determined without
actual cash flows
5 points
QUESTION 4
Table
1
Jones
Company Financial Information
December
2008
December 2009
Net
income
$1,500
$3,000
Accounts
receivable
750
750
Accumulated
depreciation
1,125
1,500
Common
stock
4,500
5,250
Paid-in
capital
7,500
8,250
Retained
earnings
1,500
2,250
Accounts
payable
750
750
Based on the information in
Table 1, calculate the after tax cash flow from operations for 2009 (no assets
were disposed of during the year, and there was no change in interest
payable or taxes payable)
1.
$4,500
2.
$3,375
3.
$3,900
4.
$2,980
10 points
QUESTION 5
Below are the expected
after-tax cash flows for Projects Y and Z. Both projects have an initial cash
outlay of $20,000 and a required rate of return of 17%.
Project Y
Project Z
Year 1
$12,000
$10,000
Year 2
$8,000
$10,000
Year 3
$6,000
0
Year 4
$2,000
0
Year 5
$2,000
0
Project Y’s IRR is:
1.
12.51%
2.
less than zero.
3.
22.51%.
4.
less than 17%.
10 points
QUESTION 6
Wright’s Warehouse has
the following projections for Year 1 of a capital budgeting project.
Year 1 Incremental
Projections:
Sales $200,000
Variable Costs
$120,000
Fixed Costs
$40,000
Depreciation Expense
$20,000
Tax Rate 40%
Calculate the
operating cash flow for Year 1.
1.
$52,000
2.
$32,000
3.
$72,000
4.
$12,000
15 points
QUESTION 7
Armadillo Mfg. Co. has a
target capital structure of 50% debt and 50% equity. They are planning to
invest in a project which will necessitate raising new capital. New debt will
be issued at a before-tax yield of 12%, with a coupon rate of 10%. The equity
will be provided by internally generated funds. No new outside equity will be
issued. If the required rate of return on the firm’s stock is 15% and its
marginal tax rate is 40%, compute the firm’s cost of capital.
1.
11.1%
2.
7.2%
3.
13.5%
4.
12.5%
10 points
QUESTION 8
$1,200 is received at
the beginning of year 1, $2,200 is received at the beginning of year 2, and
$3,300 is received at the beginning of year 3. If these cash flows are
deposited at 12 percent, what will be their combined future value at the end of
year 3?
1.
$12,520
2.
$9,413
3.
$8,342
4.
$8,735
10 points
QUESTION 9
The degree of operating
leverage is defined as:
1.
% change in EBIT/ % change in contribution
margin
2.
% change in EBIT/ % change in
variable cost
3.
% change in sales/ % change in
EBIT
4.
% change in EBIT/ % change in
sales
10 points
QUESTION 10
What price must a
company typically pay to buy another company? The price will:
1.
include some premium over the
current market value of the target’s equity.
2.
include some discount relative to
the current market value of the target’s equity.
3.
be the book value of the target’s
equity.
4.
be the market value of the target’s
equity.
5 points
QUESTION 11
If a loan is
compounded monthly, the effective annual rate will always be ____________ the
nominal rate.
1.
equal to
2.
less than
3.
greater than
4.
There is no correct answer.
5.
you cannot tell without further information
5 points
QUESTION 12
You are considering the
purchase of Hytec bonds that were issued 14 years ago. When the bonds were
originally sold, they had a 30-year maturity and a 14.375% coupon interest rate
that is payable semiannually. The bond is currently selling for $1,508.72. What
is the yield to maturity on the bonds?
1.
8.50%
2.
7.67%
3.
14.38%
4.
11.11%
10 points
QUESTION 13
The Seattle Corporation
has been presented with an investment opportunity which will yield cash flows
of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through
9, and $40,000 in Year 10. This investment will cost the firm $150,000 today,
and the firm’s cost of capital is 10%. Assume cash flows occur evenly during
the year, 1/365th each day. What is the payback period for this investment?
1.
4.35 years
2.
3.35 years
3.
3.72 years
4.
4.86 years
5.
5.23 years
10 points
QUESTION 14
Seven Eleven Stores is
planning an expansion project that it desires to finance with newly issued
preferred stock. The firm has an outstanding issue of preferred stock that pays
a dividend of $4.25 per share, which is trading for $65 per share. The investment
bankers have advised Seven Eleven that flotation costs will be 8% per share.
What will be the cost of the newly issued preferred shares?
1.
8.3%
2.
7.1%
3.
9.7%
4.
6.5%
10 points
QUESTION 15
If you purchased a share
of Mico.com stock on March 1, 1993 for $45 and you sold the stock at $168 on
February 28, 1998, what was your annual rate of return on the stock?
1.
50%
2.
75%
3.
30%
4.
20%
5.
83%
5 points
QUESTION 16
Lambda Co. has bonds
outstanding that mature in 10 years. The bonds have $1,000 par value, pay
interest annually at a rate of 9%, and have a current selling price of $1,125.
The yield to maturity on the bonds is:
1.
7.20%.
2.
14.40%.
3.
10.12%.
4.
9%.
10 points
QUESTION 17
The director of capital budgeting
of South Park Development Corporation is evaluating a project that will cost
$200,000; it is expected to last for 10 years and produce after-tax cash flows,
including depreciation, of $44,503 per year. If the firm’s cost of capital is
14% and its tax rate is 40%, what is the project’s IRR?
1.
12%
2.
-5%
3.
14%
4.
8%
5.
18%
10 points
QUESTION 18
Recently, Ohio Hospitals
filed for bankruptcy. The firm was reorganized as American Hospitals,
Inc., and the court permitted a new indenture on an outstanding bond issue
to be put into effect. The issue has 10 years to maturity and coupon rate
of 10 percent (I = $100) paid annually. The new agreement allows the firm
to pay no interest for the first 5 years, then to resume interest payments
for the next five years, and at maturity in 10 years, to repay the
principal plus the interest that was not paid for the first five years,
but without paying “interest on the deferred interest.” If the required
rate of return is 20 percent, what should the bonds sell for in market
today?
1.
$576
2.
$895
3.
$362
4.
$456
15 points
QUESTION 19
The IRR assumes that
cash flows are reinvested at the cost of capital.
True
False
5 points
QUESTION 20
No adjustment is made
in the cost of preferred stock for taxes since preferred stock dividends are
not tax-deductible.
True
False
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