Exam 2 FRL with HW, Quizes, and Practice Exam questions

HW #14. A company purchased an asset for $3,500,000 that will be used in a 3-year project. The asset is in the 3-year MACRS class. The depreciation percentage each year is 33.33 percent, 44.45 percent, and 14.81 percent, respectively. What is the book value of the equipment at the end of the project?

Book Value = $3,500,000 - $3,500,000(.3333 + .4445 + .1481) Book Value = $259,350

HW #13. A company has a project available with the following cash flows: Year - Cash Flow 0 - -$36,880 1 - 12,450 2 - 14,670 3 - 19,380 4 - 10,760 7.5 percent, required return

$11,053.05

Quiz #6. Antonia's Fashions is considering a project that will require $41,000 in net working capital and $57,000 in fixed assets. The project is expected to produce annual sales of $62,000 with associated cash costs of $35,000. The project has a three-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 20 percent. What is the operating cash flow for this project?

$25,400.00

Quiz #6. Webster & Moore paid $148,000, in cash, for equipment three years ago. At the beginning of last year, the company spent $21,000 to update the equipment with the latest technology. The company no longer uses this equipment in its current operations and has received an offer of $51,000 from a firm that would like to purchase it. The firm is debating whether to sell the equipment or to expand its operations so that the equipment can be used. The equipment, including the updates, has a book value of $44,500. When evaluating the expansion option, what value, if any, should the firm assign to this equipment as an initial cost of the project?

$51,000

HW #15. A project will reduce costs by $36,400 but increase depreciation by $16,900. What is the operating cash flow if the tax rate is 21 percent?

-Costs = -$36,400 -Depreciation = -$16,900 = EBIT = 19,500 Tax = 19,500(.21) = 4,095 EBIT - Taxes + Depreciation = OCF $19,500 - 4,095 + 16,900 = $32,305

HW #12. Filter Corporation has a project available with the following cash flows: Year | Cash Flow 0 | -$14,500 1 | 7,400 2 | 8,700 3 | 2,500 4 | 2,100 What is the project's IRR?

0 = -$14,500 + $7,400 / (1+IRR) + $8,700 / (1+IRR)^2 + $2,500 / (1+IRR)^3 + $2,100 / 1+IRR)^4 IRR = .2076, or 20.76%

HW #12. Your company has a project available with the following cash flows: Year | Cash Flow 0 | -$81,700 1 | 21,200 2 | 24,400 3 | 30,200 4 | 25,700 5 | 19,200 If the required return is 13 percent, should the project be accepted based on the IRR?

0 = -$81,700 + $21,200 / (1+IRR) + $24,400 / (1+IRR)^2 + $30,200 / (1+IRR)^3 + $25,700 / (1+IRR)^4 + $19,200 / (1+IRR)^5 IRR = .1463, or 14.63% Because the IRR is greater than the required return, accept the project

Quiz #6. It will cost $6,000 to acquire a ice cream cart at Angels Stadium. Cart profits are expected to be $3,600 a year for three years. After the three years, the cart is expected to be worthless as the expected life of the popping machine is only three years. What is the payback period?

1.67 years

Quiz #6. A project has an initial cash outflow of $39,800 and produces cash inflows of $18,304, $19,516, and $14,280 for years 1 through 3, respectively. What is the NPV at a discount rate of 11 percent?

2,971.13

HW #12. Guerilla Radio Broadcasting has a project available with the following cash flows: Year | Cash Flow 0 | -$15,900 1 | 6,500 2 | 7,800 3 | 4,300 4 | 3,900 What is the payback period

Amount short after 2 years = $15,900 - 6,500 - 7,800 Amount short after 2 years = $1,600 Payback period = 2 + $1,600 / $4,300 Payback period = 2.37

HW #12. A project with an initial cost of $25,500 is expected to generate cash flows of $6,100, $8,200, $8.850, $7,750, and $6,900 over each of the next five years, respectively. What is the project's payback period?

Amount short after 3 years = $25,500 - 6,100 - 8,200 - 8,850 Amount short after 3 years = $2,350 Payback period = 3 + $2,350 / $7,750 Payback period = 3.30 years

HW #16. What are the arithmetic and geometric average returns for a stock with annual returns of 15 percent, 9 percent, −7 percent, and 14 percent?

Arithmetic Return = (.15 + .09 − .07 + .14) ÷ 4 Arithmetic Return = .0775, or 7.75% Geometric Return =[(1+.15)×(1+.09)×(1−.07)×(1+.14)]14−1Geometric Return =[1+.15×1+.09×1−.07×1+.14]14-1 Geometric Return = .0737, or 7.37%

HW #16. A bond had a price of $1,946.89 at the beginning of the year and a price of $1,984.45 at the end of the year. The bond's par value is $2,000 and its coupon rate is 6.4 percent. What was the percentage return on the bond for the year?

Bond return = ($1,984.45 − 1,946.89 + 128) ÷ $1,946.89 Bond return = .0850, or 8.50%

HW #14. A company is evaluating a new 4-year project. The equipment necessary for the project will cost $3,950,000 and can be sold for $760,000 at the end of the project. The asset is in the 5-year MACRS class. The depreciation percentage each year is 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company's tax rate is 21 percent. What is the after-tax salvage value of the equipment?

Book value = $3,950,000 - $3,950,000(.1152 + .0576) Book value = $3,267,440 Tax refund (due) = ($682,560 - 760,000)(.21) Tax refund (due) = -$16,262 Aftertax salvage value = $760,000 - 16,262 Aftertax salvage value = $743,738

HW #13. Blink of an Eye Company is evaluating a 5-year project that will provide cash flows of $37,300, $70,230, $62,770, $60,700, and $43,820, respectively. The project has an initial cost of $168,960 and the required return is 8.7 percent. What is the project's NPV?

CFo = $168,960, CFo1 = $37,300 , CFo2 = $70,230, CFo3 = $62,770, CFo4 = $60,700, CFo5 = $43,820, I = 8.7, Compute NPV $46,028.20

HW #16. You purchased a stock at a price of $52.39. The stock paid a dividend of $2.11 per share and the stock price at the end of the year is $58.69. What is the capital gains yield?

Capital gains yield = ($58.69 − 52.39) ÷ $52.39 Capital gains yield = .1203, or 12.03%

HW #10. Red Barchetta Company paid $27,500 in dividends and $28,311 in interest over the past year. During the year, net working capital increased from $13,506 to $18,219. The company purchased $42,000 in fixed assets and had a depreciation expense of $16,805. During the year, the company issued $25,000 in new equity and paid off $21,000 in long-term debt. What was the company's cash flow from assets?

Cash flow from assets = ($28,311 + 21,000) + ($27,500 - 25,000) = $51,811

HW #11. Red Barchetta Company paid $28,040 in dividends and $29,067 in interest over the past year. During the year, net working capital increased from $13,794 to $18,519. The company purchased $43,320 in fixed assets and had a depreciation expense of $17,345. During the year, the company issued $25,300 in equity and paid off $21,420 in long-term debt. What was the company's cash flow from assets?

Cash flow from assets = ($29,067 + 21,420) + ($28,040 - 25,300) = $53,227

HW #11. Muffy's Muffins had a net income of $2,500. The firm retains 65 percent of its net income. During the year, the company sold $445 in common stock. What was the cash flow to shareholders?

Cash flow to stockholders = (1- .65) * $2,500 - 445 = $430

HW #10. At the beginning of the year, a firm has current assets of $316 and current liabilities of $220. At the end of the year, the current assets are $469, and the current liabilities are $260. What is the change in networking capital?

Change in net working capital = ($469 - 260) - (316 - 220) = $113

HW #18. You recently purchased a stock that is expected to earn 20 percent in a booming economy, 15 percent in a normal economy, and lose 2 percent in a recessionary economy. There is 21 percent probability of a boom, 72 percent chance of a normal economy, and 7 percent chance of a recession. What is your expected rate of return on this stock?

E(R) = .21(.20) + .72(.15) + .07(−.02) E(R) = .1486, or 14.86%

HW #19. A stock will have a loss of 12.4 percent in a recession, a return of 11.1 percent in a normal economy, and a return of 25.8 percent in a boom. There is 21 percent probability of a recession, 48 percent probability of normal economy, and 31 percent probability of boom. What is the standard deviation of the stock's returns?

E(R) = .21(−.124) + .48(.111) + .31(.258) E(R) = .1072, or 10.72% σ^2=.21(−.124−.1072)^2+.48(.111−.1072)^2+.31(.258−.1072)^2 σ^2=.01828 σ=.0182812σ=.01828^(1/2) σ = .1352, or 13.52%

HW #18. If the economy booms, Meyer & Company stock will have a return of 18.5 percent. If the economy goes into a recession, the stock will have a loss of 7.6 percent. The probability of a boom is 71 percent while the probability of a recession is 29 percent. What is the standard deviation of the returns on the stock?

E(R) = .71(.185) + .29(-.076) E(R) = .1093, or 10.93% σ2=.29(−.076−.1093)^2+.71(.185−.1093)^2 σ2=.014026 σ=.014026^(1/2) σ = .1184, or 11.84%

HW #18. If the economy booms, RTF, Incorporated, stock is expected to return 11 percent. If the economy goes into a recessionary period, then RTF is expected to only return 4 percent. The probability of a boom is 72 percent while the probability of a recession is 28 percent. What is the variance of the returns on RTF, Incorporated, stock?

E(R) = .72(.11) + .28(.04) E(R) = .0904 σ2=.72(.11-.0904)^2+.28(.04-.0904)^2 σ2=.000277+.000711 σ2=.000988

HW #15. Lakeside Winery is considering expanding its winemaking operations. The expansion will require new equipment costing $651,000 that would be depreciated on a straight-line basis to zero over the 5-year life of the project. The equipment will have a market value of $169,000 at the end of the project. The project requires $39,000 initially for net working capital, which will be recovered at the end of the project. The operating cash flow will be $165,300 a year. What is the net present value of this project if the relevant discount rate is 13 percent and the tax rate is 21 percent?

OFC - NWC - NCS = CFt Y0: OFC = 0; NWC = 39,000; NCS = 651,000; CF0 = -690,000 Y1: OFC = 165,300; C01 = 165,300 Y2: OFC = 165,300; C02 = 165,300 Y3: OFC = 165,300; C03 = 165,300 Y4: OFC = 165,300; C04 = 165,300 Y5: OFC = 165,300; NWC = -39,000; NCS = -133,510. CF5 = 337,810 *NCS @ Y5 = ATSV = 169,000 - (169,000 - 0) (.21) = 133,510* IRR = 13% compute NPV = -$14,970

Quiz #6. Which one of the following is NOT included in cash flow from assets? Accounts payable. Inventory. Sales. Interest expense. Cash account.

Interest expense

HW #10. You are examining a company's balance sheet and find that it has total assets of $20,280, a cash balance of $2,1000, an inventory of $4,785, current liabilities of $5,573, and accounts receivable of $2,623. What is the company's net working capital?

NWC = Current Assets - Current Liabilities NWC = ($2,100 + 2,623 + 4,785) - 5,573 NWC = $3,935

HW #10. Teddy's Pillows had beginning net fixed assets of $476 and ending net fixed assets of $560. Assets valued at $324 were sold during the year. Depreciation was $52. What is the amount of net capital spending?

Net Capital spending = $560 (ending net fixed assets) + 52 (Depreciation) - 476 (beginning net fixed assets) Net Capital spending = $136

HW #10. Micro, incorporated, started the year with net fixed assets of $75,425. At the end of the year, there was $96,875 in the same account, and the company's income statement showed depreciation expenses of $13,365 for the year. What was the company's net capital spending for the year?

Net Capital spending = $96,875 - 75,425 + 13,365 = $34,815

HW #16. You purchased shares of stock one year ago at a price of $62.48 per share. During the year, you received dividend payments of $1.79 and sold the stock for $69.60 per share. If the inflation rate during the year was 2.11 percent, what was your real return?

Nominal total return = ($69.60 − 62.48 + 1.79) ÷ $62.48 Nominal total return = .1426, or 14.26% Real return = [(1 + .1426) ÷ (1 + .0211)] − 1 Real return = .1190, or 11.90%

HW #15. Circle Corporation is considering opening a branch in another state. The operating cash flow will be $147,600 a year. The project will require new equipment costing $547,000 that would be depreciated on a straight-line basis to zero over the 6-year life of the project. The equipment will have a market value of $147,000 at the end of the project. The project requires an initial investment of $33,500 in net working capital, which will be recovered at the end of the project. The tax rate is 21 percent. What is the project's IRR?

OFC - NWC - NCS = CFt Y0: OFC = 0; NWC = 33,500; NCS = 547,000; CF0 = -580,500 Y1: OFC = 147,600; C01 = 147,600 Y2: OFC = 147,600; C02 = 147,600 Y3: OFC = 147,600; C03 = 147,600 Y4: OFC = 147,600; C04 = 147,600 Y5: OFC = 147,600; C05 = 147,600 Y5: OFC = 147,600; NWC = -33,500; NCS = -116,130. CF5 = 297,230 *NCS @ Y5 = ATSV = 147,000 - (147,000 - 0) (.21) = -116,130* compute IRR = 17.46%

HW #19. You own a portfolio that has a total value of $235,000 and it is invested in Stock D with a beta of .82 and Stock E with a beta of 1.43. The beta of your portfolio is equal to the market beta. What is the dollar amount of your investment in Stock D?

βPortfolio=1.0=.82wD+(1−wD)(1.43)βPortfolio=1.0=.82wD+1−wD1.43 wD=.704918wD=.704918 Dollar investment in Stock D = .704918($235,000) Dollar investment in Stock D = $165,655.74

HW #19. You have a portfolio that is equally invested in Stock F with a beta of .90, Stock G with a beta of 1.32, and the risk-free asset. What is the beta of your portfolio?

βPortfolio=1/3(.90)+1/3(1.32)+1/3(0) βPortfolio=.74

HW #15. Bruno's Lunch Counter is expanding and expects operating cash flows of $27,900 a year for 4 years as a result. This expansion requires $66,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $4,200 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 10 percent?

OFC - NWC - NCS = CFt Y0: OFC = 0; NWC = 4,200; NCS = 66,000; CF0 = -70,200 Y1: OFC = 27,900; C01 = 27,900 Y2: OFC = 27,900; C02 = 27,900 Y3: OFC = 27,900; C03 = 27,900 Y4: OFC = 27,900; NWC = -4,200; NCS = -0. CF5 = 32,100 IRR = 10% compute NPV = $21,108

HW #14. Bennett Company has a potential new project that is expected to generate annual revenues of $249,500, with variable costs of $138,400, and fixed costs of $57,100. To finance the new project, the company will need to issue new debt that will have an annual interest expense of $17,500. The annual depreciation is $22,400 and the tax rate is 21 percent. What is the annual operating cash flow?

OFC = ($249,500 - 138,400 - 57,100 (1 - .21) + .21($22,400) OCF = $47,364

HW #12. A project with an initial cost of $30,700 is expected to provide cash flows of $10,950, $11,800, $14,900, and $9,400 over the next four years, respectively. If the required return in 9.2 percent, what is the project's profitability index?

PI = [($10,950/(1+.092)) + ($11,800/(1+.092)^2) + ($14,900/(1+.092)^3) + ($9,400/(1+.092)^4) ]/ $30,700 PI = 1.237

HW #18. You have $17,400 to invest and would like to create a portfolio with an expected return of 11.05 percent. You can invest in Stock K with an expected return of 9.9 percent and Stock L with an expected return of 13.6 percent. How much will you invest in Stock K?

Portfolio expected return=11.05%=9.9%(wL)+13.6%(1−wL) wL=.6892 Amount to invest in L = .6892($17,400) Amount to invest in L = $11,991.89

HW #16. An asset has an average return of 9.79 percent and a standard deviation of 18.78 percent. What range of returns should you expect to see with a 68 percent probability?

Range = 9.79% +/− 18.78% Range = −8.99% to 28.57%

HW #15. Bi-Lo Traders is considering a project that will produce sales of $50,550 and have costs of $28,700. Taxes will be $5,000 and the depreciation expense will be $3,025. An initial cash outlay of $2,350 is required for networking capital. What is the project's operating cash flow?

Sales +$50,550 Costs -$28,700 Depreciation -$3,025 EBIT = +$18,825 Tax = -$5,000 EBIT - Taxes + Depreciation = OCF $18,825 - $5,000 + $3,025 = $16,850

HW #14. Bubbly Waters currently sells 410 Class A spas, 560 Class C spas, and 310 deluxe model spas each year. The firm is considering adding a mid-class spa and expects that if it does, it can sell 485 units per year. However, if the new spa is added, Class A sales are expected to decline to 280 units while Class C sales are expected to increase to 585. The sales of the deluxe model will not be affected. Class A spas sell for an average of $14,100 each. Class C spas are priced at $7,100 and the deluxe models sell for $18,100 each. The new mid-range spa will sell for $9,100. What annual sales figure should you use in your analysis?

Sales = 485($9,100) + (280-410) * ($14,100) + (585 - 560) * ($7,100) Sales = $2,758,000

HW #11. Sean Yoo is single and has $189,000 in taxable income. Using the rates from Table 2.3 in the chapter, calculate his income taxes. a. What is the average tax rate? b. What is the marginal tax rate?

Taxes = .10($11,000) + .12($44,725 - 11,000) + .22($95,375 - 44,725) + .24($182,100 - 95,375) + .32($189,000 - 1872,100) The average tax rate is the total tax paid divided by the taxable income, so: Average tax rate = $39,312 / $189,000 Average tax rate = .2080, or 20.80% The marginal tax rate is the tax rate on the next $1 of earnings, so the marginal tax rate is 32%

HW #18. A portfolio consists of 250 shares of Stock C that sells for $47 and 215 shares of Stock D that sells for $28. What is the portfolio weight of Stock C?

Weight of C = 250($47) ÷ [250($47) + 215($28)] Weight of C = .6612

HW #18. A portfolio consists of $17,600 in Stock M and $29,400 invested in Stock N. The expected return on these stocks is 10.10 percent and 13.70 percent, respectively. What is the expected return on the portfolio?

Weight of M = $17,600 ÷ ($17,600 + 29,400) Weight of M = .3745 Portfolio expected return = .3745(10.1%) + (1 − .3745)(13.7%) Portfolio expected return = 12.35%

HW #15. The Lumber Yard is considering adding a new product line that is expected to increase annual sales by $367,000 and expenses by $256,000. The project will require $165,000 in fixed assets that will be depreciated using the straight-line method to a zero-book value over the 8-year life of the project. The company has a marginal tax rate of 34 percent. What is the depreciation tax shield?

Depreciation tax shield = .34($165,000 / 8) Depreciation tax shield = $7,013

HW #19. The risk-free rate is 4.1 percent and the market expected return is 11.2 percent. What is the expected return of a stock that has a beta of 1.26?

E(R) = .041 + 1.26(.112 − .041) E(R) = .1305, or 13.05%

HW #19. The common stock of Flavorful Teas has an expected return of 19.65 percent. The return on the market is 14.5 percent and the risk-free rate of return is 4.2 percent. What is the beta of this stock?

E(R) = .1965 = .042 + β(.145 − .042) .1545 = .103β β = 1.50

HW #10. Distributed, Incorporated, had the following operating results for the past year: sales = $22,569; depreciation = $1,370; interest expense = $1,104; costs = $16,520. The tax rate for the year was 21 percent. What was the company's operating cash flow?

EBIT = $22,569 - 16,520 - 1,370 = $4,679 EBT = $4,679 - 1,104 = $3,575 Taxes = $3,575(.21) = $751 OCF = $4,679 + 1,370 - 751 = $5,298

HW #10. For the past year, Kayla, Incorporated, has sales of $44,042, interest expense of $2,198, costs of goods sold of $14,559, selling and administrative expense of $10,626, and depreciation of $4,675. If the tax rate is 21 percent, what is the operating cash flow?

EBIT = $44,042 - 14,559 - 10,626 - 4,675 = $14,182 EBT = $14,182 - 2,918 = $11,264 Taxes = $11,264(.21) = $2,365 OFC = $14,182 + 4,675 - 2,365 = $16,492

HW #10. Nakatomi, Incorporated, has sales of $757,000, costs of $316,000, depreciation of $41,000, interest expense of $36,000, and a tax rate of 21 percent, and paid out $125,000 in cash dividends. The firm has 75,000 shares of common stock outstanding. a. What is the earnings per share, or EPS, figure? b. What is the dividends per share figure?

EBIT = $757,000 - 316,000 - 41,000 = $400,000 EBT = $400,000 - 36,000 = $364,000 Taxes = $364,000(.21) = $76,440 Net Income = $287,560 EPS = Net Income / Shares = $287,560 / 75,000 = $3.83 per share DPS = Dividend / Shares = $125,000 / 75,000 = $1.67 per share

HW #14. Shelton Company purchased a parcel of land six years ago for $859,500. At that time, the firm invested $131,000 in grading the site so that it would be usable. Since the firm wasn't ready to use the site itself at that time, it decided to lease the land for $47,000 a year. The company is now considering building a warehouse on the site as the rental lease is expiring. The current value of the land is $911,000. What value should be included in the initial cost of the warehouse project for the use of this land?

The opportunity cost of the building is what it could be sold for today, or $911,000

HW #19. Stock Y has a beta of 1.2 and an expected return of 11.8 percent. Stock Z has a beta of .80 and an expected return of 9.8 percent. If the risk-free rate is 3.9 percent and the market risk premium is 6.8 percent, the reward-to-risk ratios for Stocks Y and Z are _____________ and ____________ percent, respectively. Since the SML reward-to-risk is _____________ percent, Stock Y is ________________ and Stock Z is _________________.

The reward-to-risk ratio for Stock Y is too low, which means the stock plots below the SML, and the stock is overvalued. Its price must decrease until its reward-to-risk ratio is equal to the market reward-to-risk ratio. For Stock Z, we find: Reward-to-risk ratio Z = (.0980 − .039) ÷ .80 Reward-to-risk ratio Z = .0738, or 7.38% The reward-to-risk ratio for Stock Z is too high, which means the stock plots above the SML, and the stock is undervalued. Its price must increase until its reward-to-risk ratio is equal to the market reward-to-risk ratio.

HW #10. A company has total equity of $1,980, net working capital of $180, long-term debt of $950, and current liabilities of $1,980. What is the company's net fixed assets?

Total liabilities and equity = Total assets $1,980 + 950 + 1,980 = $4,910 NWC = Current assets - Current Liabilities $180 = CA - $1,980 Current assets = $2,160

HW #11. Jansen Corporation shows the following information on its 2024 income statements: Sales = $373,000; Costs = $200,300; Other expenses = $10,200; Depreciation = $21,900; Interest expense = $15,700; Taxes = $26,299; Dividends = $21,450. In addition, you're told that the firm issued $7,300 in new equity during 2024 and redeemed $5,400 in outstanding long-term debt. a. What is the 2024 operating cash flow? b. What is the 2024 cash flow to creditors? c. What is the 2024 cash flow to stockholders? D. If net fixed assets increased by $75,600 during the year, what was the addition to NWC?

a. OCF = EBIT + Depreciation - Taxes OCF = 140,600 + 21,900 - 26,299 OCF = $136,201 b. CFC = Interest - Net new LTD CFC = $15,700 - (-5,400) CFC = $21,100 *Note that the net new long-term debt is negative because the company repaid part of its long-term debt c. CFS = Dividend - Net new equity CFS = $21,450 - 7,300 CFS = $14,150 d. We know that CFA = CFC + CFS so: CFA = $21,000 + 14,150 CFA = $35,250 CFA is also equal to OFC - Net capital spending - Change in NWC. We already know OFC. Net capital spending is equal to: Net capital spending = Increase in NFA + Depreciation Net capital spending = $75,600 + 21,900 Net capital spending = $97,500 Now we can use CFA = OFC - Net capital spending - Change in NWC. $32,250 = $136,201 - 97,500 - Change in NWC Change in NWC = $3,451 That means that the company increased its NWC by $3,451