FinMan Exam 1

The owner of the Krusty Krab is considering selling his restaurant and retiring. An investor has offered to buy the Krusty Krab for $350,000 whenever the owner is ready for retirement. The owner is considering the following three alternatives:1- Sell the restaurant now and retire.2- Hire someone to manage the restaurant for the next year and retire. This will require the owner to spend $50,000 now, but will generate $100,000 in profit next year. In one year the owner will sell the restaurant.3- Scale back the restaurant's hours and ease into retirement over the next year. This will require the owner to spend $40,000 on expenses now, but will generate $75,000 in profit at the end of the year. In one year the owner will sell the restaurant.If the discount rate is 15%, the alternative with the highest NPV is: a. #1 with an NPV of approximately $350,000 b. #2 with an NPV of approximately $341,300 c. #3 with an NPV of approximately $329,570 d. #2 with an NPV of approximately $400,000 e. None of the above

a. #1 with an NPV of approximately $350,000 NPV#1 = $350,000 (No TVM here) NPV#2 = -50,000 + ((100,000 + 350,000) / 1.15) = 341,304 NPV#3 = -40,000 + ((75,000 + 350,000) / 1.15) = 329, 565 Correct answer is #1 with NPV of 350,000.

In November 2009, Perrigo Co. (PRGO) had a share price of $39.20. They had 191.33 million shares outstanding, a market-to-book ratio of 3.76. In addition, PRGO had $845.01 million in outstanding debt, $163.82 million in net income, and cash of $257.09 million. Perrigo's earnings per share (EPS) is closest to: a. $0.86 b. $1.79 c. $2.81 d. $3.76

a. $0.86 EPS = (Net Income)/(Shares Outstanding) $163.82/191.33 = 0.86

At an annual interest rate of 7%, the present value of $5,000 received in five years is closest to: a. $3,565 b. $6,750 c. $7,015 d. $7,035

a. $3,565 PV = FV/(1 + i)N 5000(/1.07)5 = 3,564.93

The owner of the Krusty Krab is considering selling his restaurant and retiring. An investor has offered to buy the Krusty Krab for $350,000 whenever the owner is ready for retirement. The owner is considering the following three alternatives:1- Sell the restaurant now and retire.2- Hire someone to manage the restaurant for the next year and retire. This will require the owner to spend $50,000 now, but will generate $100,000 in profit next year. In one year the owner will sell the restaurant for $350,000.3- Scale back the restaurant's hours and ease into retirement over the next year. This will require the owner to spend $40,000 on expenses now, but will generate $75,000 in profit at the end of the year. In one year the owner will sell the restaurant for $350,000.If the interest rate is 7%, the NPV of alternative #1 is closest to: a. $350,000 b. $357,000 c. $375,500 d. $400,000

a. $350,000 There is no TVM for alternative #1. The NPV = $350,000.

You are thinking about investing in a mine that will produce $10,000 worth of ore in the first year. As the ore closest to the surface is removed it will become more difficult to extract the ore. Therefore, the value of the ore that you mine will decline at a rate of 8% per year forever. If the appropriate interest rate is 6%, then the value of this mining operation is closest to: a. $71,429 b. $500,000 c. $166,667 d. This problem cannot be solved.

a. $71,429 PVP = C/r - g 10,000/(.06 - -.08) 10,000/.14 = $71,429

In November 2009, Perrigo Co. (PRGO) had a share price of $39.20. They had 91.33 million shares outstanding, a market-to-book ratio of 3.76. In addition, PRGO had $845.01 million in outstanding debt, $163.82 million in net income, and cash of $257.09 million. Perrigo's book value of equity is closest to: a. $952.16 million b. $3,580.14 million c. $4,168.06 million d. $4,425.15 million

a. $952.16 million Market to Book = (MV Equity)/(BV Equity) ($39.2 × 91.33 million)/(BV Equity) = 3.76 BV Equity = $952.16 million.

Rearden Metal needs to order a new blast furnace that will be delivered in one year. The $1,000,000 price for the blast furnace is due in one year when the new furnace is installed. The blast furnace manufacturer offers Rearden Metal a discount of $50,000 if they pay for the furnace now. If the interest rate is 7%, then the NPV of paying for the furnace now is closest to: a. ($15,421) b. $15,421 c. ($46,729) d. $46,729

a. ($15,421) Solution: $1,000,000/1.07 - $950,000 = -$15,420.56

Recycle America Inc. has the opportunity to trade 8,000 pounds of plastic pellets made from recycled soda bottles for 5,000 pounds of aluminum cans. If the current market price of scrap aluminum is $0.83 per pound and the current market price for plastic pellets is $0.57 per pound, then the added benefit (cost) of making this trade is: a. ($410) b. $410 c. ($780) d. $780

a. ($410) Added Benefit = 5,000 × $0.83 - 8,000 × $0.57 = -$410

Use the table for the question(s) below. Eenie Cash flow today: -10 Cash flow in one year: 15 Meenie Cash flow today: 10 Cash flow in one year: -8 Mighty Cash flow today:-15 Cash flow in one year: 20 Moe Cash flow today: 10 Cash flow in one year: -15 If the risk-free interest rate is 10%, then the NPV for Moe is closest to: a. -3.64 b. 2.73 c. 3.18 d. 3.64

a. -3.64 NPV = 10 - 15/1.1 = -3.64

Francisco d'ansonia is considering an investment opportunity that costs $10,000 today and will pay $11,500 in two years. The IRR of this opportunity is closest to: a. 7.25% b. 7.5% c. 10% d. 9.25%

a. 7.25%

You are looking for a new truck and see the following advertisement. "Own a new truck! No money down. Just five easy annual payments of $8000." You know that you can get the same truck from the dealer across town for only $31,120. The interest rate for the deal advertised is closest to: a. 9% b. 8% c. 8.5% d. 10%

a. 9% PV = 31120 FV = 0 N = 5 PMT = -8000 Compute I = 8.9965%

Which of the following are subject to double taxation? a. Corporation b. Partnership c. Sole proprietorship d. A and B

a. Corporation

Your great aunt Matilda put some money in an account for you on the day you were born. This account pays 8% interest per year. On your 21st birthday the account balance was $5,033.83. The amount of money that would be in the account if you left the money there until your 65th birthday is closest to: a. $29,556 b. $148,780 c. $168,824 d. $748,932

b. $148,780

In November 2009, Perrigo Co. (PRGO) had a share price of $39.20. They had 91.33 million shares outstanding, a market-to-book ratio of 3.76. In addition, PRGO had $845.01 million in outstanding debt, $163.82 million in net income, and cash of $257.09 million. Perrigo's market capitalization is closest to: a. $952.16 million b. $3,580.14 million c. $4,168.06 million d. $4,425.15 million

b. $3,580.14 million Market cap = price × shares outstanding $39.2 × 91.33 million = $3,580.14 million

Suppose you will receive $500 in one year and the risk-free interest rate (rf) is 5%. The equivalent value today is closest to: $475 a. $475 b. $476 c. $500 d. $525

b. $476 $500/(1.05) = $476

You are interested in purchasing a new automobile that costs $35,000. The dealership offers you a special financing rate of 6% APR (0.5%) per month for 48 months. Assuming that you do not make a down payment on the auto and you take the dealer's financing deal, then your monthly car payments would be closest to: a. $729 b. $822 c. $842 d. $647 e. Title 2-19.2

b. $822 PV = 35000 I = .5N = 48 FV = 0 Compute Payment = $821.98

Nielson Motors is considering an opportunity that requires an investment of $1,000,000 today and will provide $250,000 one year from now, $450,000 two years from now, and $650,000 three years from now. If the appropriate interest rate is 10%, then the NPV of this opportunity is closest to: a. ($88,000) b. $88,000 c. $300,000 d. $1,300,000

b. $88,000 NPV = -1,000,000 + 250,000/(1.10)1 + 450,000/(1.10)2 + 650,000/(1.10)3 = 87,528.17

Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $45,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this year's salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 7%. The future value at retirement (age 65) of your savings is closest to: a. $497,530 b. $928,895 $1,263,236 $108,000

b. $928,895 First deposit = .08 × $45,000 = $3,600 $3,600 × (1/(.07 - .05)(1-((1 + .05)/(1 + .07)^35)(1.07)35 = $928,895 or PVA (growing) = $3,600 x (1/(.07 - .05)(1-((1 + .05)/(1 + .07)^35) = $87,003FV PV(1 + i)N = $87,003(1.07)35 = $928,895

In November 2009, Perrigo Co. (PRGO) had a share price of $39.20. They had 91.33 million shares outstanding, a market-to-book ratio of 3.76. In addition, PRGO had $845.01 million in outstanding debt, $163.82 million in net income, and cash of $257.09 million. Perrigo's price-earnings ratio (P/E) is closest to: a. 15.96 b. 21.85 c. 29.77 d. 35.64

b. 21.85 price-earnings ratio (P/E): (MV Equity)/(Net Income) ($39.2 × 91.33)/$163.82 = 21.85408

Luther Corp total sales for 2009 were $610.1, and gross profit was $109. Inventory days for 2009 is closest to: a. 27.5 b. 33.4 c. 153.7 d. 10.9

b. 33.4 Inventory Days = Inventory/Average Daily Cost of Sales Average Daily Cost of Sales = (Sales-gross profit)/365 Inventory Days = 45.9/((610.1-109)/365) = 33.4

Use the following information for ECE incorporated Assets: $200 million Shareholder Equity: $100 million Sales: $300 million Net Income: $15 million Interest Expense: $2 million ECE's Return on Assets (ROA) is: a. 5% b. 8.5% c. 7.5% d. 15%

b. 8.5% ROA= (NI + Interest Expense)/Assets ($15 million+2 million)/$200 million = 0.085 = 8.5%

Which of the following statements regarding the valuing of costs and benefits is NOT correct? a. The first step in evaluating a project is to identify its costs and benefits. b. In the absence of competitive markets, we can use one-sided prices to determine exact cash values. c. Competitive market prices allow us to calculate the value of a decision without worrying about the tastes or opinions of the decision-maker. d. Because competitive markets exist for most commodities and financial assets, we can use them to determine cash values and evaluate decisions in most situations.

b. In the absence of competitive markets, we can use one-sided prices to determine exact cash values.

Walgreen Company (NYSE: WAG) is currently trading at $48.75 on the NYSE. Walgreen Company is also listed on NASDAQ and assume it is currently trading on NASDAQ at $48.50. Does an arbitrage opportunity exists and if so how would you exploit it and how much would you make on a block trade of 100 shares? a. No, no arbitrage opportunity exists. b. Yes, buy on NASDAQ and sell on NYSE, make $25. c. Yes, buy on NYSE and sell on NASDAQ, make $25. d. Yes, buy on NASDAQ and sell on NYSE, make $250.

b. Yes, buy on NASDAQ and sell on NYSE, make $25. Yes, buy 100 shares × 48.50 and sell 100 shares × 48.75 = $25.00

The distinguishing feature of a corporation is that: a. there is no legal difference between the corporation and its owners. b. it is a legally defined, artificial being, separate from its owners. c. it spreads liability for its corporate obligations to all shareholders d. provides limited liability only to small shareholders

b. it is a legally defined, artificial being, separate from its owners.

The British government has a consol bond outstanding that pays ₤100 in interest each year. Assuming that the current interest rate in Great Britain is 5% and that you will receive your first interest payment immediately upon purchasing the consol bond, then the value of the consol bond is closest to: a. ₤2000 b. ₤2100 c. ₤1000 d. ₤1100

b. ₤2100 PVP = C/r 100/.05 = 2000 + 100 immediate interest payment = ₤2100

Your great aunt Matilda put some money in an account for you on the day you were born. This account pays 8% interest per year. On your 21st birthday the account balance was $5,033.83.The amount of money that your great aunt Matilda originally put in the account is closest to: a. $600 b. $800 c. $1,000 d. $1,200

c. $1,000 PV = FV/(1 + i)N 5033.83(/1.08)21 = 1,000

An independent film maker is considering producing a new movie. The initial cost for making this movie will be $20 million today. Once the movie is completed, in one year, the movie will be sold to a major studio for $25 million. Rather than paying for the $20 million investment entirely using its own cash, the film maker is considering raising additional funds by issuing a security that will pay investors $11 million in one year. Suppose the risk-free rate of interest is 10%. Assuming that the film maker issues the new security, the NPV for this project is closest to what amount? Should the film maker make the investment? a. $1.7 million; Yes b. $1.7 million; No c. $2.7 million; Yes d. $2.7 million; No

c. $2.7 million; Yes NPV = -10 + (25 - 11)/1.10 = 2.7 million, since NPV > 0 then invest

If the risk-free rate of interest (rf) is 6%, then you should be indifferent between receiving $250 today or a. $235.85 in one year. b. $250.00 in one year. c. $265.00 in one year. d. None of the above

c. $265.00 in one year. $250.00 × (1.06) = $265.00

You own 100 shares of a Sub Chapter "S" corporation. The corporation earns $5.00 per share before taxes. Once the corporation has paid any corporate taxes that are due, it will distribute the rest of its earnings to its shareholders in the form of a dividend. If the corporate tax rate is 40% and your personal tax rate on (both dividend and non-dividend) income is 30%, then how much money is left for you after all taxes have been paid? a. $210 b. $300 c. $350 d. $500

c. $350 EPS × number of shares × (1 - Individual Tax Rate) $5.00 per share × 100 shares × (1 - .30) = $350

An exchange traded fund (ETF) is a security that represents a portfolio of individual stocks. Consider an ETF for which each share represents a portfolio of two shares of International Business Machines (IBM), three shares of Merck (MRK), and three shares of Citigroup Inc. (C). Suppose the current market price of each individual stock are shown below: Stock: IBM Current Price: $121.57 Stock: MRK Current Price: $36.59 Stock: C Current Price: $3.15 The price per share of the ETF in a normal market is closest to: a. $161.31 b. $322.62 c. $362.36 d. $483.93

c. $362.36 = 2 × 121.57 + 3 × 36.59 + 3 × 3.15 = $362.36

Consider the following prices from a McDonald's Restaurant: Big Mac Sandwich $2.99 Large Coke $1.39 Large Fry $1.09 A McDonald's Big Mac value meal consists of a Big Mac Sandwich, Large Coke, and a Large Fry. Assuming that there is a competitive market for McDonald's food items, at what price must a Big Mac value meal sell to insure the absence of an arbitrage opportunity and uphold the law of one price? a.$4.08 b. $4.38 c. $5.47 d. $5.77

c. $5.47 2.99 + 1.39 + 1.09 = 5.47

In November 2009, Perrigo Co. (PRGO) had a share price of $39.20. They had 91.33 million shares outstanding, a market-to-book ratio of 3.76. In addition, PRGO had $845.01 million in outstanding debt, $163.82 million in net income, and cash of $257.09 million. Perrigo's return on equity (ROE) is closest to: a. 4.6% b. 9.1% c. 17.2% d. 27%

c. 17.2% ROE = (Net Income)/(BV Equity) $163.82/(($39.20 × 91.33)/3.76) = 0.172 = 17.2%

Use the following information for ECE incorporated Assets: $200 million Shareholder Equity: $100 million Sales: $300 million Net Income: $15 million Interest Expense: $2 million If ECE's stock is currently trading at $24 and ECE has 25 million shares outstanding, then ECE's market-to-book ratio is closest to: a. 0.24 b. 4 c. 6 d. 30

c. 6 Market to Book = (MV Equity)/(BV Equity) ($24 X 25 million)/100 million = 6

If the current rate of interest is 8%, then the present value (PV) of an investment that pays $1000 per year and lasts 20 years is closest to: a. 18,519 b. 45,761 c. 9,818 d. 20,000

c. 9,818

If we use future value rather than present value to decide whether to make an investment: a. we will make a bad decision, since the future value will always be higher if the discount rate is positive. b. we will make a bad decision, since the future value will always be lower if the discount rate is positive. c. we will make the same decision using either future value or present value. d. There is not enough information given to answer the question.

c. we will make the same decision using either future value or present value.

Suppose you have $1,000 today and the risk-free rate of interest (rf) is 3.5%. The equivalent value in one year is closest to: a. $965.00 today. b. $966.18 today. c. $1000.00 today. d. $1035.00 today.

d. $1035.00 today. $1000 × 1.035 = $1035.00

Consider the following two quotes for XYZ stock: November 11th Ask: 25.25 Bid: 25.20 November 18th Ask: 26.00 Bid: 25.93 How much would you have to pay to purchase 100 shares of XYZ stock on November 18th? a. $2520 b. $2525 c. $2593 d. $2600

d. $2600 100 shares × $26.00 (ask price) = $2600

Use the information for the question(s) below. Alaska North Slope Crude Oil (ANS) $71.75/Bbl West Texas Intermediate Crude Oil (WTI) $73.06/Bbl As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Assuming you currently have 10,000 Bbls of WTI crude, the added benefit (cost) to you if you were to sell the 10,000 Bbls of WTI crude and use the proceeds to purchase and refine ANS crude is closest to: a. ($1,400) b. $1,400 c. ($3,908) d. $3,908

d. $3,908 No trade and refine WTI crude (Base Case): (10,000 Bbls × $77 of gasoline/Bbl) = $770,000 Total Benefits: Sell WTI and use proceeds to buy ANS: (10,000 Bbls WTI × $73.06/Bbl) = $730,600 Buy ANS crude: ($730,600/$71.75/BblANS) = 10,182.57Bbl or approx 10,183 Bbls ANS 10,183 Bbls × $76 of gasoline/Bbl = $773,908 Added Benefits: = Total Benefits - Base CaseSell WTI and use proceeds to buy: ANS= $773,908 - $770,000 = $3,908

You are offered an investment opportunity in which you will receive $25,000 in one year in exchange for paying $23,750 today. Suppose the risk-free interest rate is 6% per year. Should you take this project? The NPV for this project is closest to: a. Yes; NPV = $165 b. No; NPV = $165 c. Yes; NPV = -$165 d. No; NPV = -$165

d. No; NPV = -$165 NPV = -23,750 + 25,000/1.06 = -165, since NPV < 0 you should reject project

Which of the following statements regarding value additivity is FALSE? a. The value of a portfolio is equal to the sum of the values of its parts. b. The price or value of the entire firm is equal to the sum of the values of all projects and investments within the firm. c. To maximize the value of the entire firm, managers should make decisions that maximize NPV. d. Value additivity does not have important consequences for the value of the entire firm, only on portfolios of firms.

d. Value additivity does not have important consequences for the value of the entire firm, only on portfolios of firms.