FINA4315 Midterm Exam 2
Temporary Housing Services Incorporated (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost $5 million to set up and will generate $20 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $12 million during this year and depreciation expense will be another $3 million. THSI will require no working capital for this investment. THSI's marginal tax rate is 21%.Assume that THSI's cost of capital for this project is 15%. The NPV of this temporary housing project is closest to:
$1,043,500.
An asset used in a four-year project falls in the five year MACRS class for tax purposes. The asset has an acquisition cost of $9,300,000 and will be sold for $2,700,000 at the end of the project. The tax rate is 35 percent. If the project lasts for three years instead of four years, what is the after-tax salvage value of the asset when the project is finished? MACRS Applicable Percentage for Property Class Recovery Year 3-Year Property 5-Year Property 1 33.33 20.00 2 44.45 32.00 3 14.81 19.20 4 7.41 11.52 5 11.52 6 5.76
$2,692,440
Shepard Industries is evaluating a proposal to expand its current distribution facilities. Management has projected the project will produce the following cash flows for the first two years (in millions). Year 1 2 Revenues 1200 1400 Operating Expense 450 525 Depreciation 240 280 Increase in working capital 60 70 Capital expenditures 300 350 Marginal corporate tax rate 21% 21% The free cash flow from the Shepard Industries project in year one is closest to:
$283 million.
Casa Grande Farms is considering purchasing multiple tractors for a total purchase price of $540,000. These tractors are expected to generate EBITDA of $250,000 for each of the next three years. Casa Grande Farms has a 21% tax rate and has a cost of capital of 10%. Assuming that Casa Grande Farms depreciates these tractors straight line over the three-year life, then the NPV of buying the tractors is closest to:
$45,156.
Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projections: Year0123Sales (Revenues in $)100,000100,000100,000- Cost of Goods Sold (50% of Sales)50,00050,00050,000- Depreciation30,00030,00030,000= EBIT20,00020,00020,000- Taxes (21%)420042004200= Unlevered Net Income15,80015,80015,800+ Depreciation30,00030,00030,000+ Changes to Working Capital-5000-500010,000- Capital Expenditures-90,000 The free cash flow for the last year of Epiphany's project is closest to:
$55,800.
Shepard Industries is evaluating a proposal to expand its current distribution facilities. Management has projected the project will produce the following cash flows for the first two years (in millions). Year 1 2 Revenues 1200 1400 Operating Expense 450 525 Depreciation 240 280 Increase in working capital 60 70 Capital expenditures 300 350 Marginal corporate tax rate 21% 21% The incremental EBIT for the Shepard Industries project in year two is closest to:
$595 million.
An asset used in a four-year project falls in the five year MACRS class for tax purposes. The asset has an acquisition cost of $9,300,000 and will be sold for $2,700,000 at the end of the project. If the tax rate is 35 percent, what is the after-tax salvage value of the asset when the project is finished? MACRS Applicable Percentage for Property Class Recovery Year 3-Year Property 5-Year Property 1 33.33 20.00 2 44.45 32.00 3 14.81 19.20 4 7.41 11.52 5 11.52 6 5.76
. None of the above
Maturity (years),Zero-Coupon YTM 1 3.25% 2 3.50% 3 3.90% 4 4.25% 5 4.40% A default-free security has an annual coupon rate of 3.25% and sells for par. This bond will mature in:
1 year
Consider the following two projects with cash flows in $: Project Year 0C/F -79 -80 Year 1C/F 20 25 Year 2C/F 25 25 Year 3C/F 30 25 Year 4C/F 35 25 Year 5C/F 40 25 Year 6C/F N/A 25 Year 7C/F N/A 25 Alpha Beta Discount Rate 15% 16% The payback period for project Alpha is closest to:
3.1 YEARS
You are considering adding a microbrewery on to one of your firm's existing restaurants. This will entail an investment of $40,000 in new equipment. This equipment will be depreciated straight line over five years. If your firm's marginal corporate tax rate is 21%, then what is the value of the microbrewery's depreciation tax shield in the first year of operation?
40,000/5= 8,000 8,000*.21= 1680 $1680
Ford Motor Company is considering launching a new line of Plug-in Electric SUVs. The heavy advertising expenses associated with the new SUV launch would generate operating losses of $35 million next year. Without the new SUV, Ford expects to earn pre-tax income of $80 million from operations next year. Ford pays a 21% tax rate on its pre-tax income. The amount that Ford Motor Company will owe in taxes next year without the launch of the new SUV is closest to:
80million* .21= 16.8
A three-month treasury bill sold for a price of $99.311998 per $100 face value. The yield to maturity of this bond expressed as an EAR is closest to:
=1+((100-99.311998/99.311998))^12/3)-1= 2.80
Which of the following statements is FALSE?
A budget is meant to summarize the saving and spending that has taken place over the past year. TRUE The marginal corporate tax rate is the tax rate the firm will pay on an incremental dollar of pre-tax income. We begin the capital budgeting process by determining the incremental earnings of a project. The opportunity cost of using a resource is the value it could have provided in its best alternative use.
Which of the following statements is FALSE?
A project's unlevered net income is equal to its incremental revenues less costs and depreciation, evaluated on a pre-tax basis. Managers sometimes continue to invest in a project that has a negative NPV because they have already invested a large amount in the project and feel that by not continuing it, the prior investment will be wasted. With straight-line depreciation the asset's cost is divided equally over its life. Sales will ultimately decline as the product nears obsolescence or faces increased competition.
Wesley Mouch's auto loan requires monthly payments and has an effective annual rate of 6.43%. The APR on this auto loan is closest to
APR =12*((1+0.0643)^(1/12)-1)=6.25%
The effective annual rate (EAR) for a loan with a stated APR of 10% compounded quarterly is closest to:
APR(quarterly) = 10.00% EAR = 4[(1 + 0.10/4)⁴ - 1] EAR = 0.1038 Effective Annual Rate = 10.38%
Which of the following formulas is INCORRECT?
Accrued interest = coupon amount × (days since last coupon PMT/360) TRUE Invoice price = dirty price Clean price = dirty price - accrued interest Cash price = clean price + accrued interest
Really Big Conglomerate (RBC) is considering acquiring POP, Inc., a smaller unsuccessful Internet firm. POP has outstanding tax loss carryforwards of $320 million from losses over the past six years. RBC has pre-tax income of $100 million per year, a cost of capital of 10%, and pays 21% in taxes. The Tax Cuts and Jobs Act of 2017 will limit RBC's ability to write off the carryforwards to 80% of RBC's annual pre-tax income.If RBC acquires POP, in what year will RBC completely use up the tax loss carryforward?
Answer Allowable write off the carryforwards = 80% * 100 = $80 million per year Outstanding Loss Carryforwards = $320 million Number of years to completely use up the loss carryforward = 320/80 = 4 years
Consider the following four bonds that pay annual coupons: Bond, Years to maturity, Coupon, YTM A 1 0% 5% B 5 6% 7% C 10 10% 9% D 20 0% 8% The amount that the price of bond "B" will change if its yield to maturity increases from 7% (Price0) to 8% (Price1) is closest to:
B @ 7% N=5 PMT=.06*1000=-60 I/Y=7 FV=-1000 cpt pv= 959.998 B@ 8% N=5 PMT=.06*1000=-60 I/Y=8 FV=-1000 cpt pv= 920.145 DIFFERENCE= 959.998-920.145= 39.853
Consider the following cash flows of two mutually exclusive projects for the Doorley Company. Assume the discount rate for this company is 10%. Year A B 0 -$200,000 -$500,000 1 $200,000 $200,000 2 $150,000 $300,000 3 $150,000 $300,000
Based on the NPV method, project A should be taken.
Rearden Metals is considering opening a strip-mining operation to provide some of the raw materials needed in producing Rearden metal. The initial purchase of the land and the associated costs of opening up mining operations will cost $100 million today. The mine is expected to generate $16 million worth of ore per year for the next 12 years. At the end of the 12th year Rearden will need to spend $20 million to restore the land to its original pristine nature appearance. One of the IRRs for Rearden's mining operation is closest to:
CF0= -100,000,00 CF1= 16,000,000 F01= 11 CF2= -4,000,000 BECAUSE (16,000,000-20,000,000=-4,000,000) FO2= 1 CPT IRR= 10.58
Consider the following zero-coupon yields on default-free securities: Maturity (years), Zero-Coupon YTM 1 5.80% 2 5.50% 3 5.20% 4 5.00% 5 4.80% Zero-Coupon YTM The YTM of a 4-year default-free security with a face value of $1000 and an annual coupon rate of 5.25% is closest to:
Coupon amount= 1000*.0525= 52.50 Bond price= (52.20/1+.058)+(52.20/(1+.055)^2)+(52.20/(1+.052)^3)+(52.20+1000/(1+.050)^4)=1007.78 Use calc N=4 PMT= -52.5 PV= 1007.78 FV= -1000 CPT I/Y= 5.03
Casa Grande Farms is considering purchasing multiple tractors for a total purchase price of $540,000. These tractors are expected to generate EBITDA of $250,000 for each of the next three years. Casa Grande Farms has a 21% tax rate and has a cost of capital of 10%.Assuming that Casa Grande Farms depreciates these tractors using MACRS depreciation method for three-year property starting immediately, then the annual depreciation tax shield in year 2 is closest to:
Depreciation tax shield: = $540,000×14.81%×21% = $79,974×21% = $16,795 Hence, correct option is $16,795
Which of the following statement is wrong?
Discounted payback period method does not have any of the disadvantages that payback period method has. TRUE Payback period method ignores the time value of money. You might accept a negative NPV project based on the payback period method. Payback period method ignores the cash flows after the payback period. You might reject the highest NPV project based on the payback period method.
Allen, Co. has 4,000 7% semiannual bonds outstanding. The bonds have 20 years to maturity and sell for 103% of par. Assume the company's tax rate is 35%. What is the company's after-tax cost of debt?
Don't know how to solve yet answer is 4.37%
Consider the following investment alternatives: Investment Rate Compounding A 6.25% Annual B 6.10% Daily C 6.125 Quarterly D 6.120 Monthly The lowest effective rate of return you could earn on any of these investments is closest to:
EAR =( 1 + r )^n - 1 A)Compounded AnnualEAR=( 1 + 6.25%)^1 - 1EAR=6.250% B)Compounded DailyEAR=( 1 + 6.10%/365)^365 - 1EAR=6.289% C)Compounded QuarterlyEAR=( 1 + 6.125%/4)^4 - 1EAR=6.267% D)Compounded MonthlyEAR=( 1 + 6.120%/12)^12 - 1EAR=6.295%6.250%.
Wyatt Oil is contemplating issuing a 20-year bond with semiannual coupons, a coupon rate of 8%, and a face value of $1000. Wyatt Oil believes it can get a AAA rating from Standard and Poor's for this bond issue. If Wyatt Oil is successful in getting a AAA rating, then the issue price for these bonds would be closest to:
FV = 1,000 PMT = 8% / 2 x 1,000 (Since the bond is semi annual, we need to divide it by 2 )= 40 I/Y = 7% / 2 (Since for AAA rated bonds it is 7%, but the bond is semi annual hence we need to divide it by 2 ) = 3.5 N = 20 x 2 = 40 Finally press CPT PV, which will the value of the bond as = 1,107 Approximately
The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semiannually.Assuming the appropriate YTM on the Sisyphean bond is 7.5%, then this bond will trade at:
FV= -1000 N= 15*2= 30 I/Y=7.5/2= 3.75 PMT= (1000*.08)/2=-40 cpt PV= 1044.573 TRADING AT PREMIUM BC 1000< 1044.573
The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semiannually. Assuming that this bond trades for $903, then the YTM for this bond is closest to:
FV= -1000 N=15*2=30 PV=903 PMT= (.08*1000)/2=-40 cpt I/I= 4.602*2= 9.205
Which of the following statements is FALSE?
Fundamentally, interest rates are determined by the Federal Reserve. TRUE - The interest rates that are quoted by banks and other financial institutions are nominal interest rates. - The Federal Reserve determines very short-term interest rates through its influence on the federal funds rate. - The interest rates that banks offer on investments or charge on loans depends on the horizon of the investment or loan.
Suppose below are the cash flows of an independent project considered by Stalla exam review company. Which statement is correct? Year Cash Flows ($) 0 5,000 1 -2,500 2 -2,000 3 -1,000 4 -1,000
If the appropriate discount rate is 20%, the company should accept this project.
Which of the following statements is FALSE?
In general, the IRR rule works for a stand-alone project if all of the project's positive cash flows precede its negative cash flows. TRUE No investment rule that ignores the set of alternative investment opportunities can be optimal. The payback rule is primarily used because of its simplicity. There is no easy fix for the IRR rule when there are multiple IRRs.
Which of the following statements is FALSE?
Income Tax = EBIT × (1 - τc). Overhead expenses are often allocated to the different business activities for accounting purposes. A capital budget lists the projects and investments that a company plans to undertake during the coming year. When sales of a new product displace sales of an existing product, the situation is often referred to as cannibalization.
Wyatt Oil is contemplating issuing a 20-year bond with semiannual coupons, a coupon rate of 5%, and a face value of $1000. Wyatt Oil believes it can get a AAA rating from Standard and Poor's for this bond issue. If Wyatt Oil is successful in getting a AAA rating, then the issue price for these bonds would be closest to:
N= 2*20=40 FV= -1000 PMT= (1000*.05)/2= -25 I/Y= 4.8/2= 2.4 cpt pv= 1025.53 note: Treasury: 4.6% yiled AAA: 4.8% yield BBB: 5.6% yield B: 6.2% yield
A project has the following forecasted values for its first year: revenue: $500,000; costs and expenses (not including depreciation): $300,000; depreciation: $80,000. Suppose its tax rate is 34%. What is its operating cash flow during the first year?
None of the above.
Two years ago, you purchased a new SUV. You financed your SUV for 60 months (with payments made at the end of the month) with a loan at 5.9% APR. You monthly payments are $617.16 and you have just made your 24th monthly payment on your SUV. Assuming that you have made all of the first 24 payments on time, then the outstanding principal balance on your SUV loan is closest to:
Number of periods remaining = 60 - 24 = 36 Monthly rate = 5.9% / 12 = 0.49167% Present value = Annuity * [1 - 1 / (1 + rate)^periods] / rate Present value = 617.16 * [1 - 1 / (1 + 0.0049167)^36] / 0.0049167 Present value = 617.16 * [1 - 0.83814] / 0.0049167 Present value = 617.16 * 32.9198 Present value = $20,316.92 Outstanding principal is $20,316.92. ANSWER: $20,300.
Maturity (years),Zero-Coupon YTM 1 3.25% 2 3.50% 3 3.90% 4 4.25% 5 4.40% Consider a five-year, default-free bond with an annual coupon rate of 5% and a face value of $1000. The YTM on this bond is closest to:
PMT= .05*1000=50 Y1= 50/(1.0325)= 48.43 Y2= 50/(1.035)^2= 46.68 Y3= 50/(1.039)^3= 44.58 Y4= 50/(1.0424)^4= 42.33 Y5= 1050/(1.0404)^5= 846.62 PV=48.43+46.68+44.58+42.33+846.62=1028.63 USE CALC PV= -1028.63 FV=1000 PMT=50 N=5 CPT I/Y =4.35
Rearden Metals is considering opening a strip-mining operation to provide some of the raw materials needed in producing Rearden metal. The initial purchase of the land and the associated costs of opening up mining operations will cost $100 million today. The mine is expected to generate $16 million worth of ore per year for the next 12 years. At the end of the 12th year Rearden will need to spend $20 million to restore the land to its original pristine nature appearance. The payback period for Rearden's mining operation is closest to:
Payback Period = Cash Outflow / Annual Cash Inflows= $100 million / $16 million = 6.25 years
Which of the following statement is wrong?
Payback period is better than NPV method TRUE Payback period method ignores the time value of money. You might accept a negative NPV project based on the payback period method. Payback period method ignores the cash flows after the payback period. You might reject the highest NPV project based on the payback period method.
Which of the following statements is FALSE?
Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value. TRUE The simplest type of bond is a zero-coupon bond. The amount of each coupon payment is determined by the coupon rate of the bond. Treasury bills are U.S. government bonds with a maturity of up to one year.
Galt Motors currently produces 500,000 electric motors a year and expects output levels to remain steady in the future. It buys armatures from an outside supplier at a price of $2.50 each. The plant manager believes that it would be cheaper to make these armatures rather than buy them. Direct in-house production costs are estimated to be only $1.80 per armature. The necessary machinery would cost $700,000 and would be obsolete in 10 years. This investment would be depreciated to zero for tax purposes using a 10-year straight line depreciation. 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 ten years. The expected proceeds from scrapping the machinery after 10 years are estimated to be $10,000. Galt Motors pays tax at a rate of 21% and has an opportunity cost of capital of 14%.What decision should Galt Motors take regarding manufacturing the armatures in house?
Proceed with in-house manufacture since NPV is positive
Consider the following list of projects: Project Investment ($) NPV ($) A 135,000 6000 B 200,000 30,000 C 125,000 20,000 D 150,000 2000 E 175,000 10,000 F 75,000 10,000 G 80,000 9000 H 200,000 20,000 I 50,000 4000 Assuming that your capital is constrained, which investment tool should you use to determine the correct investment decisions?
Profitability Index
Consider the following list of projects: Project Investment ($) NPV ($) A 135,000 6000 B 200,000 30,000 C 125,000 20,000 D 150,000 2000 E 175,000 10,000 F 75,000 10,000 G 80,000 9000 H 200,000 20,000 I 50,000 4000 Assuming that your capital is constrained, which project should you invest in first?
Project C
Which of the following statements is FALSE?
Project externalities are direct effects of the project that may increase or decrease the profits of the business activities of other firms. TRUE The average selling price of a product and its cost of production will generally change over time. Incremental earnings are the amount by which the firm's earnings are expected to change as a result of the investment decision. Any money that has already been spent is a sunk cost and therefore irrelevant in the capital budgeting process.
Assume that you presently have a monthly home mortgage with a stated interest rate of 7% APR. Also assume that you are able to deduct your interest on your tax return. If your income tax rate is 20%, then the after-tax EAR for your home mortgage is closest to:
R=7 N= 12 EAR Formula= (1+R/n)^n -1 =(1+.07/12)^12 -1 =7.22 After tax= R(1-Tax) .0722*(1-.20) = 5.783 %
Lettieri, Inc. must choose between two copiers, the XX40 or the RH45. The XX40 costs $700 and will last for 3 years. There will be maintenance expenses of $100 to be paid at the end of each of the 3 years. The RH45 costs $900 and will last 5 years. There will be maintenance expenses of $110 to be paid at the end of each of the 5 years. Assume both copiers do the same job, and they can be bought at the above prices any time. The discount rate is 10%. Which copier should be chosen?
RH45, since its EAC (equivalent annual cost) is less than the EAC of XX40.
Which of the following statements is FALSE?
Real interest rates indicate the rate at which your money will grow if invested for a certain period. TRUE -The shape of the yield curve will be strongly influenced by interest rate expectations. -The relationship between the investment term and the interest rate is called the term structure of interest rates. -The yield curve is a potential leading indicator of future economic growth.
Which of the following statements is FALSE?
Scenario analysis breaks the NPV calculation into its component assumptions and shows how the NPV varies as each one of the underlying assumptions change. TRUE The difference between the IRR of a project and the cost of capital tells you how much error in the cost of capital it would take to change the investment decision. Scenario analysis considers the effect on NPV of changing multiple project parameters. We can use scenario analysis to evaluate alternative pricing strategies for our project.
Which of the following statements is FALSE?
Since the IRR rule is based upon the rate at which the NPV equals zero, like the NPV decision rule, the IRR decision rule will always identify the correct investment decisions. TRUE The IRR investment rule states that you should take any investment opportunity where the IRR exceeds the opportunity cost of capital. The IRR investment rule states you should turn down any investment opportunity where the IRR is less than the opportunity cost of capital. There are situations in which multiple IRRs exist.
Suppose the term structure of risk-free interest rates is given as: Term1 year2 years3 years5 years10 years Rate2.25%2.80%3.20%4.10%6.30% The present value of an investment that pays $1000 in two years and $5000 in ten years for certain is closest to:
So present value of $ 1,000 receive in 2nd year, Here interest rate for 2nd year is 2.8% PV = FV / (1+r)^n = $ 1000 / (1+2.8%)^2 = $ 946.27 Now present value fo $ 5,000 receive in 10th year Here interest rate for 10th year is 6.3% PV = FV / (1+r)^n = $ 5000 / (1+6.3%)^10 = $ 2,714.17 So total of both's present value is, = $ 946.27 + $ 2,714.17 = $ 3660.44
Consider the following cash flows of two mutually exclusive projects for the Doorley Company. Assume the discount rate for this company is 10%. Year A B 0 -$200,000 -$500,000 1 $200,000 $200,000 2 $150,000 $300,000 3 $150,000 $300,000 For the above problem, which of the following statements is correct?
The IRR for project A is 70.04%. USE CALC
Larry the Cucumber has been offered $14 million to star in the lead role of the next three Larry Boy adventure movies. If Larry takes this offer, he will have to forgo acting in other Veggie movies that would pay him $5 million at the end of each of the next three years. Assume Larry's personal cost of capital is 10% per year. The NPV of Larry's three-movie Larry Boy offer is closest to:
The NPV is computed as shown below: = $ 14 million - $ 5 million / 1.101 - $ 5 million / 1.102 - $ 5 million / 1.103 (The cash flows in year 1 to 3 are taken as negative since he has to forego these cash flows) = $ 1.6 million Approximately So the correct answer is option of 1.6 million
Which of the following statements is FALSE?
The highest interest rate, for a given horizon, is the rate paid on U.S. Treasury securities. TRUE -The equivalent after-tax interest rate is r(1 - τ). -The amount of earned interest kept by an investor will depend on how the interest is taxed. -It is important to use a discount rate that matches both the horizon and the risk of the cash flows.
Which of the following statements is FALSE?
The internal rate of return (IRR) investment rule is based upon the notion that if the return on other alternatives is greater than the return on the investment opportunity, you should undertake the investment opportunity. TRUE If the payback period is less than a pre-specified length of time, you accept the project. It is possible that there is no discount rate that will set the NPV equal to zero. It is possible that an IRR does not exist for an investment opportunity.
Which of the following statements is FALSE?
The plot of the relationship between the investment risk and the interest rate is called the yield curve. TRUE -The nominal interest rate does not represent the increase in purchasing power that will result from investing. -A risk-free cash flow received in two years should be discounted at the two-year interest rate. -Each of the last seven recessions in the United States was preceded by a period with an inverted yield curve.
Which of the following statements is FALSE?
The profitability index can be easily adapted for determining the correct investment decisions when multiple resource constraints exist. TRUE The profitability index measures the value created in terms of NPV per unit of resource consumed. The profitability index measures the "bang for your buck." The profitability index is the ratio of value created to resources consumed.
Which of the following statements is FALSE?
The yield curve tends to be inverted as the economy comes out of a recession. TRUE -We can use the term structure to compute the present and future values of a risk-free cash flow over different investment horizons. -The formulas for computing present values of annuities and perpetuities cannot be used in situations in which cash flows need to be discounted at different rates. -The yield curve changes over time.
Which of the following statements is FALSE?
Unlevered Net Income = EBIT × τc. TRUE The decision to continue or abandon a project should be based only on the incremental costs and benefits of the project going forward. A sunk cost is any unrecoverable cost for which the firm is already liable. A simple method often used to calculate depreciation is the straight-line method.
Dagny Taggart has just purchased a home and taken out a $400,000 mortgage. The mortgage has a 30-year term with monthly payments and has an APR of 5.4%. Dagny's monthly payments are closest to:
Use Calculator N=30*12= 360 PV= 400,000 I/Y= 5.4/12= .45 FV=0 CPT PMT PMT aprox= 2245
Dagny Taggart has just purchased a home and taken out a $400,000 mortgage. The mortgage has a 30-year term with monthly payments and has an APR of 5.4%. The total amount of principal that Dagny will pay during the first month of her mortgage is closest to:
Use Calculator N=30*12= 360 PV= 400,000 I/Y= 5.4/12= .45 FV=0 CPT PMT PMT aprox= 2245 2nd AMORT P1=1 P2=1 PRN= 446.123
Dagny Taggart has just purchased a home and taken out a $400,000 mortgage. The mortgage has a 30-year term with monthly payments and has an APR of 5.4%. The total amount of principal that Dagny will pay during the first three months of her mortgage is closest to:
Use Calculator N=30*12= 360 PV= 400,000 I/Y= 5.4/12= .45 FV=0 CPT PMT PMT aprox= 2245 2nd AMORT P1=1 P2=3 PRN= 1344.401
You are considering purchasing a new automobile that will cost you $28,000. The dealer offers you 4.9% APR financing for 60 months (with payments made at the end of the month). Assuming you finance the entire $28,000 and finance through the dealer, your monthly payments will be closest to:
Use calculator PV=28,000 I/Y= 4.9/12= .4083 N= 60 FV=0 Cpt PMT $527
Taggart Transcontinental is considering adding a trucking division to expand the coverage of its existing rail lines. The trucking division will cost $1,000,000 and is expected to generate free cash flows of $100,000 for each of the next five years. Taggart Transcontinental forecasts that future free cash flows after year 5 will grow at 2% per year, forever. Taggart Transcontinental's cost of capital is 10%.The NPV for the trucking division is closest to:
Year, Cash Flows, PV Factor @ 10%, PV 0 -1000000 1 -1000000 1 100000 0.9091 90909.09091 2 100000 0.8264 82644.6281 3 100000 0.7513 75131.48009 4 100000 0.6830 68301.34554 5 100000 0.6209 62092.13231 6 1275000 0.6209 791674.6869 NPV 170753.3638
Consider the following zero-coupon yields on default-free securities: Maturity (years), Zero-Coupon YTM 1 5.80% 2 5.50% 3 5.20% 4 5.00% 5 4.80% A 3-year default-free security with a face value of $1000 and an annual coupon rate of 6% will trade:
at a premium.
Sovereign debt is:
debt issued by national governments.
A tax-free municipal bond pays an effective annual rate of 7.2%. If your tax rate is 30%, then the effective annual rate that a comparable corporate bond would have to offer you to earn an equivalent after-tax return would be closest to:
effective annual rate that a comparable corporate bond would have to offer=municipal bond yield/(1-tax rate) =7.2/(1-0.3) which is equal to =10.29%(Approx)
An exception to the key difference between sovereign default and corporate default is:
member states of the EMU.
According to Figure 6.5 in the text, the percent of countries in default or restructuring debt:
peaked during World War II.
Which of the following formulas is INCORRECT?
rr ≈ i - r TRUE
The NPV profile:
shows the internal rate of return-the point at which NPV is zero and shows the NPV over a range of discount rates are correct.
Consider two mutually exclusive projects A & B. If you subtract the cash flows of opportunity B from the cash flows of opportunity A, then you should:
take opportunity A if the incremental IRR exceeds the cost of capital.
If a bond is currently trading at its face (par) value, then it must be the case that:
the bond's yield to maturity is equal to its coupon rate.
A key difference between sovereign default and corporate default is:
unlike a corporation, a country facing difficulty meeting its financial obligations typically has the option to print more currency.
