FIN 3100 Final Exam

Net Working Capital for 2016 is $1,890 and Net Working Capital for 2017 is $3,597. What is the change in Net Working Capital?

$1,707 Change in Net Working Capital is $3,597 - $1,890 = $1,707

Five years ago, CleanEnergy Corporation issued an 12% coupon per year (paid semi-annually), 25-year, AA-rated bond at its par value of $1000. Currently, the annual yield to maturity (APR) on these bonds is 10%. What is the current price per bond?

$1171.59 Price = 1000/1.05^40 + 60[1-1/1.05^40]/0.05 = $1171.59

Bartlett Batteries Inc. just paid an annual dividend of $1.12. If you expect a constant growth rate of 4% and have a required rate of return of 13%, what is the current stock price according to the constant growth dividend model?

$12.94 The Dividend Growth Model states that P0 = (Div0 x (1 + g)) / r - g Inserting our values gives: P0 = (Div0 x (1 + g)) / r - g = ($1.12 x (1.04)) / 0.13 - 0.04 = $1.165 / 0.09 = $12.94

What is the total payment each year?

$4021.15 10,000 = PMT [(1 - 1/1.13 ) / 0.1 ] 10,000 = PMT [2.48685]

You have accumulated $1,200,000 for your retirement. How much money can you withdraw in equal annual beginning-of-the-year cash flows if you invest the money at a rate of 5% for thirty years?

$74,344.50

Assume the following information about the market and Lithium Motors Stock. Lithium's beta = 1.80, the risk-free rate is 2.50%, the market risk premium is 8.0%. Using the SML, what is the expected return for the firm's stock?

16.90% The equation for the SML is E(ri) = rf + βi × [E(rm) - rf] = 2.50% + 1.80 ∗ (10.50% - 2.50%) = 16.90%.

Given annual returns of -10%, 14%, 9% and -1%, what is the geometric average?

2.578% [(1-0.1)(1+0.14)(1+0.09)(1-0.01)]1/4-1 = 0.02578

Given annual returns of -9%, 14%, 0% and 7%, what is the geometric average?

2.64% [(1-0.09)(1+0.14)(1+0)(1+0.07)]1/4-1 = 2.64%

If your nominal rate of return is 6.59 percent and the inflation rate is 2.0 percent, what is the real rate of return?

4.50% (1+0.0659)/(1+0.02)-1=0.045

Given annual returns of -9%, 14%, 12% and 7%, what is the geometric average?

5.593% [(1-0.09)(1+0.14)(1+0.12)(1+0.07)]1/4-1 = 0.05593

Find the standard deviation of annual returns of -9%, 14%, 0% and 7%.

9.38% Mean = (-0.09+0.14+0+0.07)/4 = 0.03 Variance = [(-0.09-0.03)2 + (0.14-0.03)2 + (0-0.03)2 + (0.07-0.03)2]/3 = 0.00966667 Standard deviation = 0.0983

Tony is offering Phil two repayment plans for a long overdue loan. Offer 1 is a visit from an enforcer and the debt is due in full at once. Offer 2 is to pay back $4,000 at the end of each year at 15% interest rate until the loan principal is paid off. Phil owes Tony $20,000. How long will it take for Phil to pay off the loan if he takes Offer 2?

9.92 years 20,000=4,000(1-1/1.15^n)/0.15 1/1.15^n=0.25 n=ln(1/0.25)/ln1.15=9.92

A bond may be issued by ________.

All of the above

Amortization tables are useful for each of the following reasons EXCEPT ________.

All of these are useful purposes of an amortization table.

To project the appropriate anticipated cash flow for a project, we must put all cash flow knowledge together. This includes ________ of the incremental cash flow.

Both the amount and timing

If an asset's disposal value is less than its ________, a loss on disposal occurs.

Current book value

Which of the following statements is TRUE about variance? A) Variance describes how spread out a set of numbers are around their mean or average. B) Variance is essentially the variability from the average. C) The larger the variance, the greater the dispersion. D) All of these statements are true.

D) All of these statements are true

When a company borrows money from a bank or sells bonds, it is called ________.

Debt financing

The question "How much will I have in my account at a specific point in the future, given a specific interest rate?" is best answered by which form of the TVM equation?

FV = PV × (1 + r)n

A bond is a ________ instrument by which a borrower of funds agrees to pay back the funds with interest on specific dates in the future.

long-term debt

Which of the following are tax-deductible expenses for corporations?

Interest. Expense

The advantage of ________ over ________ depreciation is that you can write off more of your capital costs in the earlier years.

MACRS; straight-line depreciation

The common objective of borrowing and lending is to ________.

Make all parties better of

The crossover rate is the discount rate where both projects have the same ________.

NPV

The ________ model is usually considered the best of the capital budgeting decision-making models.

Net Present Value (NPV)

When a company is in financial difficulty and cannot fully pay all of its creditors, the first lenders to be paid are the ________.

Senior debtholders

Which of the following is NOT true of a sole proprietorship?

Sole proprietors have limited liability.

Stocks A, B, C, and D have standard deviations, respectively, of 20%, 5%, 10%, and 15%. Which one presents the most total risk?

Stock A

To find operating cash flow for the business for the year, add depreciation expense to EBIT and then ________.

Subtract the taxes

________ is risk that cannot be diversified away.

Systematic risk

Monthly interest on a loan is equal to ________.

The beginning balance times the monthly interest rate

Which of the following investments is considered to be default risk-free?

Treasury bills

Bonds are sometimes called ________ securities because they pay set amounts on specific future dates.

fixed-income

At the end of a project's life, we will recover any initial changes in ________ from the beginning of the project.

Working capital

Pricing preferred stock is most similar to pricing ________.

a perpetuity

A sole proprietor ________.

assumes personal liability for all of the debts of the business.

When the ________ is less than the yield to maturity, the bond sells at a/the ________ the par value.

coupon rate; discount to

The ________ is the annual coupon payment divided by the current price of the bond, and is not always an accurate indicator.

current yield

Bonds are bought and sold in _____ markets.

debt

The value of a financial asset is the ________.

present value of all of the future cash flows that will be received The value, or price, of a financial asset is the present value of all of the future cash flows that you will receive while you maintain ownership of the asset. If you sell the asset, then your selling price becomes one of the future cash flows you receive.

In agency theory, the owners of the business are referred to as ________, and the managers are referred to as ________.

principals; agents

Stocks are different from bonds because ________.

stocks, unlike bonds, represent residual ownership

Stocks are different from bonds because ________.

stocks, unlike bonds, represent residual ownership Stocks and bonds are both major sources of funds. Bonds do not represent residual ownership. Bonds, unlike stocks, give owners legal claims to payments. Stocks, unlike bonds, represent voting ownership.

The type of risk that can be diversified away is called ________.

unsystematic risk

The ________ is the return the bondholder receives on the bond if held to maturity.

yield to maturity

You borrow $40,000 at an annual interest rate of 11% for seven years, and promise to pay an equal amount back at the end of each year. What should be the amount of each annual payment?

$8,488.61

A project has cash flows of $5,200, $5,000, and $4,800 in years 1, 2, and 3. If the cost is $13,500 and the required return is 8%, what is the NPV?

-$588.10

Use the dividend growth model to determine the required rate of return for equity. Your firm intends to pay a dividend of $1.50 per share one year from today. Further, the recent stock price is $31.82 per share, and you anticipate a growth rate in dividends of 4.00% per year for the foreseeable future.

8.71%

________ is at the heart of corporate finance, because it is concerned with making the best choices about project selection.

Capital budgeting

Whenever a new product competes against a company's already existing products and reduces the sales of those products, ________ occur.

Erosion costs

Which of the following is the CORRECT formula for calculating the future value?

FV = PV × (1 + r)n

A loss on disposal is recognized when the selling price of the asset is ________ the book value.

Less than

Which of the statements below is FALSE?

Long-term assets are accounts that will normally be turned into cash over the course of the operating or business cycle of the firm, and current liabilities are the accounts that will come due for payment over the operating or business cycle. CURRENT ASSETS are accounts that will normally be turned into cash over the course of the operating or business cycle of the firm, and current liabilities are the accounts that will come due for payment over the operating or business cycle.

The best rule for choosing projects when a firm has a limited amount of funds is to accept the group of projects with the greatest combined ________.

NPV

Which of the statements below describes the IRR decision criterion?

The decision criterion is to accept a project if the IRR exceeds the desired or required return rate

Which of the statements below is FALSE?

The profits for common stock owners come before payment to employees, suppliers, government, and creditors.

The ________ is the interest rate printed on the bond.

coupon rate

Bonds are bought and sold in ________ markets.

debt

________ cash flow is the increase in cash generated by a new project above the current cash flow without the new project.

incremental

The ________ is the written contract between the bond issuer and the bondholder.

indenture

The number of periods for a consumer loan (n) is equal to the ________

number of years times compounding periods per year

________ of a project are those that have already been incurred and cannot be reversed.

sunk costs

A financial manager examines concepts such as sunk costs, opportunity costs, and erosion costs to help understand how to estimate the incremental cash flow of a project, which is ________.

the additional money the firm receives from taking on a new project

The ________ is a market derived interest rate used to discount the future cash flows of the bond.

yield to maturity

Five years ago, CleanEnergy Corporation issued an 12% coupon per year (paid semi-annually), 20-year, AA-rated bond at its par value of $1000. Currently, the annual yield to maturity (APR) on these bonds is 8%. What is the current price per bond?

$1345.84 Price = 1000/1.04^30 + 60[1-1/1.04^30]/0.04 = $1345.84

The future value three years from today of a $200 three-year annuity due compounded at a rate of 10% is equal to ________.

$728.20

If you can earn 5.25% per year on your investments, how long will it take to double your money?

13.55 years

Which of the statements below is FALSE?

Book value is the original cost of the asset plus the accumulated depreciation.

Fully depreciated assets ________, and so any proceeds from sale at disposal are taxable gains.

Have a book value of zero

Historically, the ________ risk an investor is willing to accept the ________ the potential return for the investment.

More, greater

Which of the following identities is TRUE?

Net Working Capital (NWC) = Current Assets - Current Liabilities Operating Cash Flow = EBIT + Depreciation - Taxes Net Capital Spending = Ending Net Fixed Assets - Beginning Net Fixed Assets + Depreciation Cash Flow from Assets = Operating Cash Flow - Net Capital Spending - Change in NWC

Which of the statements below is FALSE?

No stock has multiple classes with unequal voting rights.

A project provides cash inflows of $2,822 each year for four years. What is the payback period if the cost is $12,500?

None of the above

A project provides cash inflows of $2,822 each year for four years. cost is $12,500?

None of the above

MacroMedia Inc. $1,000 par value bonds are selling for $832. Which of the following statements is TRUE?

None of these is true.

Net income is ________.

Not cash flow Net income is not cash flow. Net income is the ACCOUNTING PROFIT from the operations of the company during the period. Cash flow is the increase or decrease in CASH for the period.

Which of the following formulas is CORRECT for finding the present value of an investment?

PV = FV × 1/(1+r)n

Which of the items below is sometimes termed hybrid equity financing?

Preferred stock

The sale of "used" securities, where the financial asset is being traded from one individual to another and the proceeds do not go to the original issuer of the security, is said to take place in the ________ market.

Secondary

Most U.S. corporate and government bonds choose to make ________ coupon payments.

Semiannual

Which of the following types of bonds, as characterized by a feature, by definition has two coupon payments per year?

Semiannual

Which of the following classifications of securities had the largest range of annual returns, historically speaking?

Small-company stock

Which of the following is an ADVANTAGE of a sole proprietorship?

The ease of startup A and B are disadvantages, and D is an advantage of a corporation.

An investment of $100 today is worth $116.64 at the end of two years if it earns an annual interest rate of 8%. How much interest is earned in the first year and how much in the second year of this investment?

The interest earned in year one is $8.00 and the interest earned in year two is $8.64. FV = PV ∗ (1 + r)n = $100 ∗ (1.08)1 - $100 = $8.00 and $108(1.08)1 - $108 = $8.64

Which of the statements below is FALSE?

The payment of cash dividends to shareholders is a deductible expense for the company.

In ________, current prices reflect the price history and trading volume of the stock. It is of no use to chart historical stock prices to predict future stock prices such that you can identify mispriced stocks and routinely outperform the market.

Weak-form efficient markets

Which of the below statements is FALSE?

Whenever a new product competes against a company's already existing products and reduces the sales of other products, opportunity costs occur. Whenever a new product competes against a company's already existing products and reduces the sales of other products, EROSION OCCURS.

A company selling a bond is ________ money.

borrowing

________ may be defined as a measure of uncertainty in a set of potential outcomes for an event in which there is a chance for some loss.

risk

A negative cash flow to owners indicates that a firm has ________.

sold additional shares of stock.

Quality Production Products Inc. has issued 20-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 12% and the yield to maturity today is 10%, what is the firm's current price per bond?

$1,171.59

Five years ago, CleanEnergy Corporation issued an 10% coupon per year (paid semi-annually), 15-year, AA-rated bond at its par value of $1000. Currently, the annual yield to maturity (APR) on these bonds is 8%. What is the current price per bond?

$1135.9 Price = 1000/1.04^20 + 50[1-1/1.04^20]/0.04 = $1135.90

Your parts supplier gives you one-quarter of a year to pay for parts ordered today, or offers you a discount if you pay cash at purchase. You have just purchased $94,500 worth of parts from your supplier and the discount is at an annual rate of 10%. How much will you pay for the parts if you pay today?

$94,275

Use the security market line to determine the required rate of return for the following firm's stock. The firm has a beta of 0.80, the required return in the market place is 12.50%, and the risk-free rate of return is 3.50%.

10.70%

You are running short of cash and really need to pay your rent. A friend suggests that you check out the local title pawn shop. At the shop they offer to loan you $5,000 if you pay them back $6,000 in one week. It seems like a good idea to you because you don't want to sell your car and you are sure you will be able to pay the money back in a week. What is the APR on this loan?

1040% Weekly rate = (6000-5000)/5000 = 0.2 APR=0.2×52 = 10.40 = 1040%

Takelmer Industries has a different WACC for each of three types of projects. Low-risk projects have a WACC of 8.00%, average-risk projects a WACC of 10.00%, and high-risk projects a WACC of 12%. Which of the following projects do you recommend the firm accept?

A, D, E, F, G

You want to invest in a stock that pays $1.50 annual cash dividends for the next six years. At the end of the six years, you will sell the stock for $18.50. If you want to earn 7.5% on this investment, what is a fair price for this stock if you buy it today?

About $19.03

The initial outlay or cost is $1,000,000 for a four-year project. The respective future cash inflows for years 1, 2, 3 and 4 are: $500,000, $300,000, $300,000 and $300,000. What is the payback period without discounting cash flows?

About 2.67 years

William wishes to save enough money to purchase a retirement lake cabin. He is willing to spend $200,000 for the cabin and he can save $20,000 per year and invest the money into an account earning 7.00% per year. If his investments come in the form of equal annual end-of-the-year cash flows and the first cash flow is in exactly one year, how long will it take him to save enough money to buy the lake cabin?

Between 7 and 8 years

Present value calculations do which of the following?

Discount all future cash flows back to the present

The practice of not putting all of your eggs in one basket is an illustration of ________.

Diversification

For estimating NPV, the IRR is the appropriate discount rate to use for an average-risk project.

False

From 1925-2006, the portfolio of large U.S. stocks has had a greater variance than the portfolio of small U.S. stocks.

False

Which of the following is NOT an example of an equity market transaction?

Grant contacts his broker and requests a purchase of IBM bonds. Mark contacts his broker and requests a purchase of IBM bonds—this is a debt market transaction.

Which of the statements below is TRUE?

Investors want to maximize return and minimize risk.

The ________ method is simple and fast but economically unsound as it ignores all cash flow after the cutoff date and ignores the time-value of money.

Payback period

Asking how much must be deposited today in order to have a future sum is a.

Present value problem

The problem of motivating one party to act in the best interest of another party is known as the ________.

Principal-agent problem

________ is a modification of NPV to produce the ratio of the present value of the benefits (future cash inflow) to the present value of the costs (initial investment).

Profitability index (PI)

Which method is designed to give the dollar amount of return for every $1.00 invested in the project in terms of current dollars?

Profitability index method

Stocks A, B, C, and D have standard deviations, respectively, of 20%, 5%, 10%, and 15%. Which one is the riskiest?

Stock A

When estimating the cost of debt financing from bonds, a firm can use the yield-to-maturity as the before-tax cost of debt.

True

When evaluating an average-risk project using IRR, a firm should use the WACC as the hurdle rate.

True

Professor Gaston, your History teacher, borrows money at a rate of 6% per year from the Valley State Bank for a tuition loan for her son. You have $1,200 deposited into your checking account at the same bank earning a rate of 0.5% per year. Which of the following statements is TRUE?

You benefit from earning interest on your deposit, safety for your funds, and having a recognizable means for paying for your financial obligations without having to hold cash. Both you and your professor are using services typically provided by banks. There is no conflict of interest.

Which of the following actions will INCREASE the present value of an investment?

a decrease in the interest rate

Whenever a new product competes against a company's already existing products and reduces the sales of those products, ________ occur.

erosion costs

________ are the forums where buyers and sellers of financial assets and commodities meet.

financial markets

All else constant, the present value will __________ as the period of time decreases, given an interest rate greater than zero.

increase

________ has to do with the speed and accuracy of processing a buy or sell order at the best available price.

operational efficiency

________ involve(s) a cash flow that never occurs, but we need to add it as a cost or outflow of a new project.

opportunity costs

A/An ________ is a series of equal end-of-the-period cash flows.

ordinary annuity

The sale of "new" securities, where the financial asset is being traded for the very first time, is said to take place in the ________ market.

primary

The cycle of money is

the movement of money from lender to borrower and back again

Assume you just bought a new boat and now have a boat loan to repay. The amount of the principal is $68,000, the loan is at 6.75% APR, and the monthly payments are spread out over 7 years. What is the monthly loan payment?

$1,018.01

Ten years ago Salmon Acqua Farming Inc. issued twenty-five-year 8% annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have fallen and the yield to maturity on the Bacon bonds is now 7%. Given this information, what is the price today for such a bond?

$1,091.08

The Canadian Government has once again decided to issue a consol (a bond with a never- ending interest payment and no maturity date). The bond will pay $60 in interest each year (at the end of the year), but it will never return the principal. The current discount rate for Canadian government bonds is 4%. What should this consol bond sell for in the market?

$1,500

Northern Inc. purchases an asset for $150,000. This asset qualifies as a five-year recovery asset under MACRS with the fixed depreciation percentages as follows: year 1 = 20.00%; year 2 = 32.00%; year 3 = 19.20%; year 4 = 11.52%. The firm has a tax rate of 20%. If the asset is sold at the end of four years for $40,000, what is the after-tax cash flow from disposal?

$37,184 The four-year sale is at $40,000. To begin with, the book value of the asset must be established to determine if a gain or loss has been incurred at disposal. The depreciation schedule for the $150,000 asset is: Year 1: $150,000 × 0.2000 = $30,000 Year 2: $150,000 × 0.3200 = $48,000 Year 3: $150,000 × 0.1920 = $28,800 Year 4: $150,000 × 0.1152 = $17,280 Accumulated Depreciation = $30,000 + $48,000 + $28,800 + $17,280 = $124,080 Book Value of asset = $150,000 - $124,080 = $25,920 Gain on disposal is $40,000 - $25,920 = $14,080 Tax on Gain = Gain on disposal × Tax rate = $14,080 × 0.20 = $2,816 After-Tax Cash Flow at disposal = $40,000 - $2,816 = $37,184

The managers of Classic Autos Incorporated plan to manufacture classic Thunderbirds (1957 replicas). The purchase price of the necessary foundry equipment is $4,000,000. The equipment also requires delivery and installation costs of $100,000. Net working capital increases by $800,000 at the beginning of the project (Year 0) . What is the incremental cash flow of the project at the beginning of the project (Year 0)?

$4,900,000 4,000,000+100,000+800,000=4,900,000

Kenna invests $5,000 today, compounded monthly, with an annual interest rate of 8.52%. What amount of interest will she earn in one year?

$443.04 With PV = -$5,000, Monthly Rate =8.52%/12, Periods = 12, compounding monthly solve for FV = $5,443.04. To solve for the interest earned use FV - PV = $5,443.04 - $5,000 = $443.04.

Your manufacturing firm has just secured a sale to the federal government with payment of $480,000 due in nine months. You have asked your bank for cash today with the stipulation that you will give the proceeds from the government contract to the bank in nine months. The bank has agreed to your request if you allow them to discount the cash flows at an annual rate of 6%. How much will the bank pay you today under this agreement?

$459,475

Western Inc. purchases a machine for $70,000. This machine qualifies as a five-year recovery asset under MACRS with the fixed depreciation percentages as follows: year 1 = 20.00%; year 2 = 32.00%; year 3 = 19.20%; year 4 = 11.52%. The firm has a tax rate of 20%. If the machine is sold at the end of two years for $50,000, what is the after-tax cash flow from disposal?

$46,720 The four-year sale is at $50,000. To begin with, the book value of the machine must be established to determine if a gain or loss has been incurred at disposal. The depreciation schedule for the $70,000 machine is: Year 1: $70,000 × 0.2000 = $14,000 Year 2: $70,000 × 0.3200 = $22,400 Accumulated Depreciation = $14,000 + $22,400 = $36,400 Book Value of machine = $70,000 - $36,400 = $33,600 Gain on disposal is $50,000 - $33,600 = $16,400 Tax on Gain = Gain on disposal × Tax rate = $16,400 × 0.20 = $3,280 After-Tax Cash Flow at disposal = $50,000 - $3,280 = $46,720

Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2 and a dividend in year 2 of $3. After year 2, dividends are expected to grow at the rate of 4% per year. An appropriate required return for the stock is 10%. Using the DDM, the stock should be worth _______ today.

$47.27 V1 = $3/(.1 - .04) = $50, which is the present value at t=1 of D2, D3, . . . ∞ The total value at time 1 is $2 + 50 = $52. So at time 0, V0=52/(1+.1)=52/1.1=47.27

You are paid to teach graduate-level classes for the university and want to determine how much money the university makes from your graduate-level classes. Based on historical data, you estimate that your graduate classes for the next six years will generate an average annual revenue of $99,850. If you discount these cash flows at an annual rate of 7.30%, what is the present value of the expected cash flows?

$471,562.95

Your firm has an average-risk project under consideration. You choose to fund the project in the same manner as the firm's existing capital structure. If the cost of debt is 9.50%, the cost of preferred stock is 10.00%, the cost of common stock is 12.00%, and the WACC adjusted for taxes is 11.50%, what is the NPV of the project, given the expected cash flows listed here?

$48,415

Susan's goal is to retire with $500,000 in her retirement account. The local bank advertises an APR of 6% with monthly compounding on retirement fund accounts. If she retires in 30 years how much should Susan save each month to reach her goal?

$497.75 Monthly rate = 6%/12 = 0.5% =0.005, Number of months = 360, 500,000 = PMT [ (1.0005^360 - 1) / 0.005] PMT = $497.75

The Jones Brothers paid $123,600 in interest over the year, along with $88,000 in dividends. The company issued $130,000 of stock and $50,000 of new long-term debt. During the year, the company reduced the balance due on the old long-term debt by $435,000. What is the amount of the cash flow to creditors for the year?

$508,600 Cash flow to creditors = Interest - Net Long-Term Debt Issued $123,600 − $50,000 + $435,000 = $508,600

Use the information below for the Michigan Auto Corporation (MAC) to answer the following questions. Balance Sheet Accounts of Michigan Auto Corporation (MAC) Corporation Account Balance 12/31/2017 Accumulated depreciation $7,650 Accounts payable $6,875 Accounts receivable $8,000 Cash $3,750 Common stock $15,625 Inventory $11,250 Long-Term debt $17,750 Plant, property, and equipment $37,000 Retained earnings $12,100 Refer to the Balance Sheet Accounts of MAC Corporation. The value of total assets for the year-end is ________.

$52,350

Fat Tire Bicycle Company currently sells 40,000 bicycles per year. The current bike is a standard balloon tire bike, selling for $100 with a production and shipping cost of $35. The company is thinking of introducing an off-road bike with a projected selling price of $410 and a production and shipping cost of $360. The projected annual sales for the off-road bike are 12,000. The company will lose sales in fat-tire bikes of 8,000 units per year if it introduces the new bike, however. What is the erosion cost from the new bike?

$520,000 8,000(100-35)=520,000

Nash Inc. has an 12% required rate of return. It does not expect to initiate dividends for 15 years, at which time it will pay $3.00 per share in dividends. At that time, Nash expects its dividends to grow at 6% forever. What is an estimate of Nash's price in 15 years (P15) if its dividend at the end of year 15 is $3.00?

$53.00 We use the formula: P15 = (Div20 x (1 + g)) / r-g. Inserting our values, we get: P15 = ($3.00 x (1 + 0.06)) / (0.12 - 0.06) = $3.18 / 0.06 = $53.00.

What is the present value today of an ordinary annuity cash flow of $4,000 per year for thirty years at an interest rate of 6.0% per year?

$55,059.32

Fat Tire Bicycle Company currently sells 40,000 bicycles per year. The current bike is a standard balloon tire bike, selling for $80 with a production and shipping cost of $25. The company is thinking of introducing an off-road bike with a projected selling price of $410 and a production and shipping cost of $360. The projected annual sales for the off-road bike are 12,000. The company will lose sales in fat-tire bikes of 10,000 units per year if it introduces the new bike, however. What is the erosion cost from the new bike?

$550,000 10000(80-25)=550,000

Your employer has agreed to place year-end deposits of $1,000, $2,000 and $3,000 into your retirement account. The $1,000 deposit will be one year from today, the $2,000 deposit two years from today, and the $3,000 deposit three years from today. If your account earns 5% per year, how much money will you have in the account at the end of year three when the last deposit is made?

$6,202.50 FV = Σ PV × (1 + r)n = $1,000 × (1.05)2 + $2,000 × (1.05)1 + $3,000 × (1.05)0 = $6,202.50.

Plimpton has an annuity due that pays $800 per year for 11 years. What is the present value of the cash flows if they are discounted at an annual rate of 7.50%?

$6,291.26

Cash and Equivalents are $1,561; Short-Term Investments are $1,000; Accounts Receivables are $3,616; Accounts Payable are $5,121; Short-Term Debt is $288; Inventories are $1,816; Other Current Liabilities are $1,401; and Other Current Assets are $707. What is the amount of Total Current Liabilities?

$6,810 Total Current Liabilities = Accounts Payable + Short-Term Debt + Other Current Liabilities = $5,121 + $288 + $1,401 = $6,810.

Lauer's have decided to expand their retail shop by building on a vacant lot they own. The company will build a new building at an estimated cost of $4 million. The firm will spend another $500 thousand on the parking and access roads. The land was purchased ten years ago at a cost of $1 million. Today, that land is worth 1.5 million. What is the total cost of this expansion project?

$6.0 million

Baldwin Co. purchases an asset for $50,000. This asset qualifies as a five-year recovery asset under MACRS, with the fixed depreciation percentages as follows: year 1 = 20.00%; year 2 = 32.00%; year 3 = 19.20%; year 4 = 11.52%. Baldwin has a tax rate of 35%. If the asset is sold at the end of four years for $5,000, what is the after-tax cash flow from disposal?

$6274.00 The four-year sale is at $50,000. To begin with, the book value of the asset must be established to determine if a gain or loss has been incurred at disposal. The depreciation schedule for the $50,000 asset is: Year 1: $50,000 × 0.2000 = $10,000 Year 2: $50,000 × 0.3200 =$16,000 Year 3: $50,000 × 0.1920 = $9,600 Year 4: $50,000 × 0.1152 = $5,760 Accumulated Depreciation = $10,000 + $16,000 + $9,600 + $5,760 = $41,360 Book Value of asset = $50,000 - $41,360 = $8,640 Loss on disposal (expressing loss as positive number) = $8,640 - $5,000 = $3,640 Tax Savings = Loss on disposal × Tax rate = $3,640 × 0.35 = $1,274 After-Tax Cash Flow at disposal = $5,000 + $1,274 = $6,274.00

A firm is estimating the total increment cash flow in the terminal year for a 3-year project. The managers estimate that the required net fixed assets for the project will have a book value of $120,000 at the end of the 3 years. The estimated salvage value of the fixed assets is $180,000. The project also requires $200,000 of net working capital, all of which will be recouped at the end of the 3 years. Management estimates that the operating cash flow will be $300,000 per year for years 1, 2, and 3. The capital gain tax rate is 30 percent. What is this project's total incremental cash flow in the terminal year (year 3)?

$662,000 Gain (loss) = Salvage value - Book value = 180,000 - 120,000 = 60,000 Taxes = 0.30×60,000 = 18,000 After-tax salvage value = 180,000 - 18,000 = 162,000 Total incremental cash flow in year 3 = 300,000+162,000+200,000 = 662,000

What is the operating cash flow with earnings before interest and taxes of $718,000, net income of $460,000, depreciation expense of $160,000, and taxes of $200,000?

$678,000 OCF = EBIT + Dep. - Taxes = 718,000 + 160,000 - 200,000 = 678,000

Assume that Ray is 20 years old and has 45 years for saving until he retires. He expects an APR of 6% on his investments. How much does he need to save if he puts money away monthly in equal end-of-the-month amounts to achieve a future value of $2,000,000 dollars in 45 years' time?

$725.69

You put down 20% on a home with a purchase price of $150,000, or $30,000. The remaining balance will be $120,000. The bank will loan you this remaining balance at 4.375% APR. You will make monthly payments with a 20-year payment schedule. What is the monthly annuity payment under this schedule?

$751.11 The bank will loan you $120,000 and this is the PV. r = 4.375%/12 = 0.36458%, n = 20 × 12 = 240 periods PMT = 120000/ [(1-1/1.0036458^240)/.003658] = 120000/159.763 = $751.11.

You want to invest in a stock that pays $6.00 annual cash dividends for the next five years. At the end of the five years, you will sell the stock for $90.00. If you want to earn 10% on this investment, what is a fair price for this stock if you buy it today?

$78.63 Today's price (P) =6[1 - 1/1.1^5] / .1 + 90 / 1.1^5 = ($6 × 3.790787) + ($90 × 0.620921) = $22.745 + $55.883 = $78.63

How much is the interest payment at the end of year 1?

$1000 10000*.1 = $1000

You put 20% down on a home with a purchase price of $250,000. The down payment is thus $50,000, leaving a balance owed of $200,000. The bank will loan the remaining balance at 3.91% APR. You will make annual payments with a 30-year payment schedule. What is the annual annuity payment under this schedule?

$11,439.96 PV=PMT[1-1/(1+r)^n]/r

Use the information below for the Michigan Auto Corporation (MAC) to answer the following questions. Balance Sheet Accounts of Michigan Auto Corporation (MAC) Corporation Accumulated depreciation - $7,650 Accounts payable - $6,875 Accounts receivable - $8,000 Cash - $3,750 Common stock - $15,625 Inventory - $11,250 Long-Term debt - $17,750 Plant, property, and equipment - $37,000 Retained earnings - $12,100 Refer to the Balance Sheet Accounts of MAC Corporation. The value of net working capital at the year-end is ________.

$16,125

Lily invested $10,000 ten years ago with an insurance company that has paid her 10 percent (APR), compounded semi-annually (twice per year). How much interest did Lily earn over the ten years?

$16,533 6-month rate = 10%/2 = 5% = 0.05, Number of 6-month periods = 20 FV= 10,000(1.05)^20 = $26532.98 Interest earned = $26532.98- $10,000 = $16532.98

The EBIT is $16,000, depreciation is $4,000, interest payments are $6,000, and taxes are $2,000. What is the operating cash flow (OCF)?

$18,000 OCF = EBIT + Depreciation - Taxes = $16,000 + $4,000 - $2,000 = $18,000. OCF = EBIT + Depreciation - Taxes = $16,000 + $4,000 - $2,000 = $18,000.

Severson has an annuity due that pays $400 per year for 20 years. What is the value of the cash flows 20 years from today if they are placed in an account that earns 7.50%? Note: You are asked to find the FV one year after the last cash flow is realized.

$18,621.01

Tesla is expected to pay no dividends over the next 4 years, pay a dividend of $5 at the end of year 5, and then grow the dividends by 6% each year afterwards. The required rate of return (r) is 8%. What should be the stock price today according to the two-stage growth model?

$183.76 P4 = D5/(r-g) = 5/(0.08-0.06)= $250. P0 = $250/1.08^4 = $183.76

Lily invested $10,000 five years ago with an insurance company that has paid her 4 percent (APR), compounded semi-annually (twice per year). How much interest did Lily earn over the 5 years?

$2,189.94 6-month rate = 4%/2 = 2% = 0.02, Number of 6-month periods = 10 FV= 10,000(1.02)^10 = $12189.94 Interest earned = $12189.94- $10,000 = $2189.94

Lauer's have decided to expand their retail shop by building on a vacant lot they own. The company will build a new building at an estimated cost of $5 million. The firm will spend another $500 thousand on the parking and access roads. The land was purchased ten years ago at a cost of $1 million. Today, that land is worth 2.5 million. What is the total cost of this expansion project?

$8.0 million

You want to buy a new Tesla car for $100,000. The contract is in the form of a 60-month annuity due at a monthly interest rate of 1%. What will your monthly payment be?

$2202.42 100,000 = (1+0.01) PMT [(1 - 1/1.0160) / 0.01] 100,000 = (1.01) PMT [44.955], So PMT = 2202.42

Use the information below for the Michigan Auto Corporation (MAC) to answer the following questions. Balance Sheet Accounts of Michigan Auto Corporation (MAC) Corporation Account Balance 12/31/2017 Accumulated depreciation $7,650 Accounts payable $6,875 Accounts receivable $8,000 Cash $3,750 Common stock $15,625 Inventory $11,250 Long-Term debt $17,750 Plant, property, and equipment $37,000 Retained earnings $12,100 Refer to the Balance Sheet Accounts of MAC Corporation. The value of current assets for the year-end is ________.

$23,000

You want to invest in a stock that pays $2.00 annual cash dividends for the next four years. At the end of the four years, you will sell the stock for $27.00. If you want to earn 11% on this investment, what is a fair price for this stock if you buy it today?

$23.99

RadicaL CREATIONS Inc. just issued zero-coupon bonds with a par value of $1,000. If the bond has a maturity of 15 years and a yield to maturity of 10%, what is the current price of the bond if it is priced in the conventional manner?

$231.38 The conventional way to price a zero-coupon bond is to discount the par value assuming semiannual compounding

Delagold Corporation is issuing a zero-coupon bond that will have a maturity of fifty years. The bond's par value is $1,000, and the current annual yield on similar bonds is 7.5%. What is the expected price of this bond, using the semiannual convention?

$25.19

Flashstream Productions Inc. is issuing a zero-coupon bond that will have a maturity of fifty years. The bond's par value is $1,000, and the current yield on similar bonds is 7.5%. What is the expected price of this bond, using the semiannual convention?

$25.19

Use the information below to answer the following questions about the Canary Cruises Corporation. The Canary Cruises Corporation Income Statement Accounts for the year ending December 31, 2017 Account Balance Cost of goods sold $345,000 Interest expense $79,000 Taxes $57,100 Revenue $836,000 Selling, general, and administrative expenses $93,000 Depreciation $126,000 Refer to the Canary Cruises Corporation Corporation Income Statement Accounts. What is the EBIT for the Canary Cruises Corporation for 2017?

$272,000 EBIT = Revenue - COGS - SGA - Depreciation

The present value of a $100 three-year annuity due (first cash flow occurs today) discounted at a rate of 10% is equal to ________.

$273.55

Craftwell Inc. pays a $0.75 dividend every quarter and will maintain this policy forever. What price should you pay for one share of common stock if you want an annual return of 10.5% on your investment?

$28.57 We use the perpetuity formula to derive the answer. When computing a perpetuity, we have to make sure that both the payment and the discount rate represent the same period. In this problem, let us use a quarter of a year (or three months) as our period. Thus, we restate the annual required rate of 10.5% as a quarterly rate of 10.5% / 4 = 2.625% (or 0.02625). Applying the constant dividend model with infinite horizon and with the quarterly rate of return and a quarterly dividend of $0.75, we get: Price = Dividend / r = P = $0.75 / 0.02625 = $28.57

Lily invested $10,000 seven years ago with an insurance company that has paid her 4 percent (APR), compounded semi-annually (twice per year). How much interest did Lily earn over the 7 years?

$3,194.79 6-month rate = 4%/2 = 2% = 0.02, Number of 6-month periods = 14 FV= 10,000(1.02)^14 = $13194.79 Interest earned = $13194.79- $10,000 = $3194.79

Upstate University charges $25,000 a year in graduate tuition. Tuition rates are growing at 4% each year. You plan to enroll in graduate school in 5 years. What is your expected graduate tuition in 5 years?

$30,416 FV = $25,000(1+4%)5 = $30,416

Suppose you invest $3,500 today, compounded semiannually, with an annual interest rate of 8.50%. What amount of interest will you have earned in one year?

$303.82 PV = $3,500, APR = 8.50%, periodic interest rate = r = APR/2 = 0.0425, (1.0425)2 = 1.086806. Multiplying this number times PV gives $3,803.82. Thus, the interest earned is $3,803.82 - $3,500 = $303.82.

Creative Solutions Inc. has issued 10-year $1,000 face value, 8% annual coupon bonds, with a yield to maturity of 9.0%. The annual interest payment for the bond is ________.

$80 The annual interest or coupon payment is equal to the coupon rate multiplied by the par value of the bond. Here that is (0.08) × ($1,000) = $80.

The last dividend (Div0) is $1.80, the growth rate (g) is 6%, and the required rate of return (r) is 12%. What is the stock price according to the constant growth dividend model?

$31.80

Giant Motorcycles Inc. pays a $0.77 preferred dividend every quarter and will maintain this policy forever. What price should you pay for one share of preferred stock if you want an annual return of 9.25% on your investment?

$33.30 We use the perpetuity formula to derive the answer. When computing a perpetuity, we have to make sure that both the payment and the discount rate represent the same period. In this problem, let us use 3 months as our period. Thus, we restate the annual required rate of 9.25% as a quarterly (or three-month) rate of = 2.3125% (or 0.023125). Applying the constant dividend model with infinite horizon and with the quarterly rate of return and a quarterly dividend of $1.77, we get: = $33.30. We use the perpetuity formula to derive the answer. When computing a perpetuity, we have to make sure that both the payment and the discount rate represent the same period. In this problem, let us use 3 months as our period. Thus, we restate the annual required rate of 9.25% as a quarterly (or three-month) rate of = 2.3125% (or 0.023125). Applying the constant dividend model with infinite horizon and with the quarterly rate of return and a quarterly dividend of $1.77, we get: = $33.30.

Assume you just bought a new car and now have a car loan to repay. The amount of the principal is $22,000, the loan is at 6% APR, and the monthly payments are spread out over 6 years. What is the monthly loan payment?

$364.6

A firm has revenue of $50,000, the cost of goods sold is $23,000, other expenses (from selling and administration) are $14,000, interest expenses are $4,000 and depreciation is $5,000. What is the EBIT?

$8000 EBIT = Revenue - Cost of Goods Sold - Other Expenses - Depreciation = $50,000 - $23,000 - $14,000 - $5,000 = $8,000. Interest is not considered when computing the EBIT.

Big House Nursery Inc. has issued 20-year $1,000 face value, 8% annual coupon bonds, with a yield to maturity of 10%. The current price of the bond is ________.

$829.73

The Cougar Corporation has issued 20-year semi-annual coupon bonds with a face value of $1,000. If the annual coupon rate is 10% and the current annual yield to maturity is 12%, what is the firm's current price per bond?

$849.54

Susan's goal is to retire with $1,000,000 in her retirement account. The local bank advertises an APR of 12% with monthly compounding on retirement fund accounts. If she retires in 40 years how much should Susan save each month to reach her goal?

$85 Monthly rate = 12%/12 = 1% =0.01, Number of months = 40*12=480 1,000,000 = PMT [ (1.01^480 - 1) / 0.01] PMT = $85

Five years ago, Simpson Warehouses Inc. issued twenty-five-year 10% annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have risen and the yield to maturity on the Thompson bonds is now 12%. Given this information, what is the price today for a Thompson Tarps bond?

$850.61

Five years ago, Thompson Tarps Inc. issued twenty-five-year 10% annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have risen and the annual yield to maturity on the Thompson bonds is now 12%. Given this information, what is the price today for a Thompson Tarps bond?

$850.61

Douglas Distributing Inc. has issued 30-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 6% and the yield to maturity today is 7%, what is the firm's current price per bond?

$875.28

A firm is considering purchasing an asset that will cost $5 million. Other depreciable costs include $800,000 in installation costs. If the asset is classified in the 5-year class, what is the annual depreciation for years 1, 3, and 6 for this asset, using the fixed depreciation percentages given by MACRS? (The percentages are 20.00%, 19.20%, and 5.76%, respectively.)

$1,160,000, $1,113,600, and $334,080 for years 1, 3, and 6, respectively The total depreciable value equals the asset cost plus installation costs. Adding these, we get $5 million plus $0.8 million = $5.8 million. The factor for year 1 is 20%. Thus, the depreciation for year 1 is: 0.2 × $5.8 million = $1,160,000. The factor for year 3 is 19.20%. Thus, the depreciation for year 3 is: 0.192 × $5.8 million = $1,113,600. The factor for year 6 is 5.76%. Thus, the depreciation for year 6 is: 0.0576 × $5.8 million = $334,080.

What is the future value at the end of year thirty-five of an ordinary annuity cash flow of $4,000 per year at an interest rate of 11.0% per year?

$1,366,358.22

What if Jennifer were to invest $2,750 today, compounded semiannually, with an annual interest rate of 5.25%. What amount of interest will Jennifer earn in one year?

$146.27 With PV = $2,750, Rate =5.25%/2, Periods = 2, compounding semiannually solve for FV = $2,896.27. To solve for the interest earned use FV - PV = $2,896.27 - $2,750 = $146.27.

You are saving up for retirement and decide to deposit $3,000 each year for the next 20 years, starting today (annuity due), into an account which pays a rate of interest of 8% per year. What is the total value of your investments in the account 20 years from today?

$148,268.76 FV = PMT × [(1+r)n-1]/1 × (1 + r) = $3,000 × [((1.08)20 - 1)/0.08]× (1.08) =$3,000 × 45.76196×1.08 = $137,285.89×1.08 = $148,268.76

You wish to make a substantial down payment on a lake cottage and you currently have $15,725 invested at an annual rate of 2.50%. How much money will be in the account in 3.5 years if it continues to earn at its present rate?

$17,144

A preferred stock is currently priced at $28.00 per share. The firm is expected to pay a constant dividend every year in the future. If the required rate of return is 10%, what is the dividend?

$2.8 P=D/r 28=D/0.1 D=2.8

Will invested $10,000 for 20 years at 8% compound interest per year. How much interest on interest did he earn over the 20 years?

$20,609.57 FV with compound interest = $10,000(1+8%)20 = 46,609.57 FV with simple interest = $10,000 + 8%×$10,000×20 = $26,000 Interest on interest = FV with compound interest - FV with simple interest = 46,609.57 - 26,000 = $20,609.57

Walmart is expected to pay a dividend of $2.12 next year, and then grow the dividend by 3% each year afterwards. The required rate of return (r) is 4%. What should be the stock price today?

$212 P0 = D1/(r-g) = 2.12/(0.04-0.03)= $212

Fat Tire Bicycle Company currently sells 40,000 bicycles per year. The current bike is a standard balloon tire bike, selling for $90 with a production and shipping cost of $35. The company is thinking of introducing an off-road bike with a projected selling price of $410 and a production and shipping cost of $360. The projected annual sales for the off-road bike are 12,000. The company will lose sales in fat-tire bikes of 4,000 units per year if it introduces the new bike, however. What is the erosion cost from the new bike?

$220000

You buy a stock for which you expect to receive an annual dividend of $2.10 for the ten years that you plan on holding it. After 10 years, you expect to sell the stock for $26.15. What is the present value of a share for this company if you want an 8% return?

$26.20

Use the information below for the Michigan Auto Corporation (MAC) to answer the following questions. Balance Sheet Accounts of Michigan Auto Corporation (MAC) Corporation Account Balance 12/31/2017 Accumulated depreciation $7,650 Accounts payable $6,875 Accounts receivable $8,000 Cash $3,750 Common stock $15,625 Inventory $11,250 Long-Term debt $17,750 Plant, property, and equipment $37,000 Retained earnings $12,100 Refer to the Balance Sheet Accounts of MAC Corporation. The value of equity for the year-end is ________.

$27,725

The managers of Classic Autos Incorporated plan to manufacture classic Thunderbirds (1957 replicas). The purchase price of the necessary foundry equipment is $3,000,000. The equipment also requires delivery and installation costs of $100,000. Net working capital increases by $400,000 at the beginning of the project (Year 0) . What is the incremental cash flow of the project at the beginning of the project (Year 0)?

$3,500,000 3,000,000+100,000+400,000=3,500,000

Use the information below to answer the following questions about the Canary Cruises Corporation. The Canary Cruises Corporation Income Statement Accounts for the year ending December 31, 2017 Cost of goods sold $345,000 Interest expense $79,000 Taxes $57,100 Revenue $836,000 Selling, general, and administrative expenses $93,000 Depreciation $126,000 Refer to the Canary Cruises Corporation Corporation Income Statement Accounts. What is the operating cash flow for the Canary Cruises Corporation for 2017?

$340,900 EBIT + Depreciation - Taxes = $340,900

A firm is considering a project that requires $400,000 of fixed assets that are classified as 7-year property for MACRS. How much is the accumulated depreciation at the end of year 6? Year 1, 2, 3, 4, 5, 6, 7, 8 Percent 14.29, 24.49, 17.49, 12.49, 8.93, 8.93, 4.45

$346,480

Your firm intends to finance the purchase of a new construction crane. The cost is $2,500,000. What is the size of the annual ordinary annuity payment if the loan is amortized over a ten-year period at a rate of 7.50%?

$364,214.82 PMT = PV / (1-1/[1+r]n)/r = $2,500,000 / (1-1/[1.075]10)/.075 = $364,214.82

A firm is considering purchasing an asset that will cost $1 million. Other depreciable costs include $100,000 in installation costs. If the asset is classified in the 3-year class, what is the annual depreciation for each year for this asset using the fixed depreciation percentages given by MACRS? (The percentages are 33.33%, 44.45%, 14.81%, and 7.41%, respectively.)

$366,630, $488,950, $162,910, and $81,510 for years 1, 2, 3, and 4, respectively

Tesla is expected to pay no dividends over the next 4 years, pay a dividend of $5 at the end of year 5, and then grow the dividends by 7% each year afterwards. The required rate of return (r) is 8%. What should be the stock price today according to the two-stage growth model?

$367.51 P4 = D5/(r-g) = 5/(0.08-0.07)= $500. P0 = $500/1.08^4 = $367.51

You intend to buy a vacation home in eight years and plan to have saved $75,000 for a down payment. How much money would you have to place today into an investment that earns 9% per year to have enough for your desired down payment?

$37,640

You have $1,200,000 to invest in a stock portfolio. Your choices are stock X with an expected return of 15% and stock Y with an expected return of 9%. Your goal is to create a portfolio with an expected return of 13%. How much money do you invest in stock Y?

$400,000 E(rP) = wX E(rX) + wY E(rY) E(rP) = wX E(rX) + (1-wX )E(rY) 0.13= wX 0.15+ (1-wX )0.09 0.13 = 0.06 wX + 0.09 wX =2/3,wY =1/3 (1/3)×$1,200,000 = $400,000

You want to invest in a stock that pays $6.00 annual cash dividends for the next five years. At the end of the five years, you will sell the stock for $30.00. If you want to earn 10% on this investment, what is a fair price for this stock if you buy it today?

$41.37

Rogue Motors Inc. has a 11% required rate of return. The firm does not expect to initiate dividends for 10 years, at which time it will pay $2.00 per share in dividends. At that time, the firm expects its dividends to grow at 6% forever. What is an estimate of the firms' price in 10 years (P10) if its dividend at the end of year 10 is $2.00?

$42.40 We use the formula: P10 = (Div10 x (1+g)) / r-g. Inserting our values, we get: P10 = ($2.00 x (1 + 0.06)) / 0.11 - 0.06 = $212 / 0.05 = $42.40.

Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2 and a dividend in year 2 of $3. After year 2, dividends are expected to grow at the rate of 4% per year. An appropriate required return for the stock is 9%. Using the DDM, the stock should be worth _______ today.

$56.9 V1 = $3/(.09 - .04) = $60, which is the present value at t=1 of D2, D3, . . . ∞ The total value at time 1 is $2 + 60 = $62. So at time 0, V0=62/(1+0.09)=62/1.09=56.9

Assume a five-year equal payment amortization schedule with an annual interest rate of 7% and annual payments. If the beginning principal is $8,000, then the first interest payment will be how large?

$560.00 The first payment will be equal to the beginning balance times the annual interest rate = $8,000 × 0.07 = $560.00.

How much is the loan balance the end of year 1?

$6978.85 10000 - (4021.15-1000) = 6978.85

Four years ago, CleanEnergy Corporation issued an 10% coupon per year (paid semi-annually), 15-year, AA-rated bond at its par value of $1000. Currently, the annual yield to maturity (APR) on these bonds is 12%. What is the current price per bond?

$879.58 Price = 1000/1.06^22 + 50[1-1/1.06^22]/0.06 = $879.58

Twenty years ago Bison Enterprises Inc. issued thirty-year 9% annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have risen and the yield to maturity on the firm's bonds is now 11%. Given this information, what is the price today for a bond from this issue?

$882.22

Ten years ago Pancake House Inc. issued twenty-five-year 8% annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have risen and the yield to maturity on the Bacon bonds is now 9%. Given this information, what is the price today for such a bond?

$919.39

TravelEasy Enterprises Inc. has issued 30-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 14% and the yield to maturity today is 15%, what is the firm's current price per bond?

$934.20

You put 20% down on a home with a purchase price of $250,000. The down payment is thus $50,000, leaving a balance owed of $200,000. A bank will loan you this remaining balance at 3.9% APR. You will make monthly end-of-the-period payments with a 30-year payment schedule. What is the monthly annuity payment under this schedule?

$943.34

The dividend to be paid at the end of the year (Div1) is $0.75, the growth rate (g) is 5%, and the stock price is $25. What is the required rate of return (r) according to the constant growth dividend model?

0.08 P0 = 0.75/(r-0.05)= $25. r=0.08 or r = Dividend yield + g = 0.75/25 + 0.05 = 0.03 + 0.05 = 0.08

Mark owns the following portfolio of securities. What is the beta for the portfolio? Americas - Beta: 0.75; Percent of portfolio: 10% Atlantic Industries - Beta: 1.00; Percent fo Portfolio: 55% TGIS Restaurants - Beta: 1.55; Percent of Portfolio: 35%

1.1675 βp = Σ βi ∗ wi = .75 ∗ 10% + 1.00 ∗ 55% + 1.55 ∗ 35% = 1.1675

A project requires an initial investment of $40,000 and has cash inflows of $10,000 each year for 10 years. What is the profitability index if the required return is 12%?

1.4126

A project requires an initial investment of $40,000 and has cash inflows of $10,000 each year for 10 years. What is the profitability index if the required return is 12%?

1.4126 PI=PV/cost PV= 10,000[1-1/1.12^10]/0.12 = 56,502.23 PI=56502.23/40000 = 1.4126

You can invest your money at a rate of 7% per year. At this rate it will take you just over ________ years to double your money. Use the Rule of 72 to determine your answer.

10 72/7 = 10.3 years via the Rule of 72.

Your firm has preferred stock outstanding that pays a current dividend of $2.50 per year and has a current price of $25.00. Currently, preferred stock makes up approximately 5% of your firm's long-term financing. What is the market required rate of return on your firm's preferred stock?

10.00%

Builder's Warehouse, Inc has an adjusted WACC of 9.70%. The company has a capital structure consisting of 50% equity and 50% debt, a cost of equity of 13.00%, a before-tax cost of debt of 8.00%, and a tax rate of 20%. Builder's Warehouse is considering expanding by building a new outlet in a distant city and considers the project to be riskier than current operations. The firm estimates the existing beta to be 1.0, the required return on the market portfolio to be 12.00%, the risk-free rate to be 3.00%, and the beta for the new project to be 1.25. Given this information, and assuming the cost of debt will not change if the firm undertakes the new project, what adjusted WACC should be used in the decision-making?

10.45% Re = E(ri) = rf + [E(rm) - rf] βi = 3.00% + [13.00% - 3.00%] × 1.25 = 15.50%. WACC = × Rd × (1 - Tc) + × Re = 0.50 × (8.00%) × (1 - .20) + 0.50 × (15.50%) = 10.45%

Builder's Warehouse, Inc has an adjusted WACC of 9.70%. The company has a capital structure consisting of 50% equity and 50% debt, a cost of equity of 13.00%, a before-tax cost of debt of 8.00%, and a tax rate of 20%. Builder's Warehouse is considering expanding by building a new outlet in a distant city and considers the project to be riskier than current operations. The firm estimates the existing beta to be 1.0, the required return on the market portfolio to be 12.00%, the risk-free rate to be 3.00%, and the beta for the new project to be 1.25. Given this information, and assuming the cost of debt will not change if the firm undertakes the new project, what adjusted WACC should be used in the decision-making?

10.45% Re = E(ri) = rf + [E(rm) - rf] βi = 3.00% + [13.00% - 3.00%] × 1.25 = 15.50%. WACC = × Rd × (1 - Tc) + × Re = 0.50 × (8.00%) × (1 - .20) + 0.50 × (15.50%) = 10.45%.

You are running short of cash and really need to pay your rent. A friend suggests that you check out the local title pawn shop. At the shop they offer to loan you $1,000 if you pay them back $1,200 in one week. It seems like a good idea to you because you don't want to sell your car and you are sure you will be able to pay the money back in a week. What is the APR on this loan?

1040% (1200-1000)/1000=20% 20%*52=1040%

Use the security market line to determine the required rate of return for the following firm's stock. The firm has a beta of 1.20, the required return in the market place is 10.00%, and the risk-free rate of return is 1.50%.

11.70% Re = Rf + β × (Rm - Rf) = 1.50% +1.20 × (10.00% - 1.50%) = 11.70%.

Find the standard deviation for a security that has three one-year returns of -5%, 15%, and 20%.

13.23% Average return = Σrt/n = (-5% + 15% + 20%)/3 = 10% Std Dev(r) = [Σ (ri - average)2 / (n - 1) ]^(1/2) = [[(-5% - 10%)2 + (15% - 10%)2 + (20% - 10%)2]/(3 - 1)]^(1/2) = (175%)^(1/2) = 13.23%.

You purchased 100 shares of stock for $10 per share. After holding the stock for 10 years and not receiving any dividends, you sell the stock for $42 per share. What is the effective annual rate of return on this investment?

15.43% HPR = (Ending price + Distributions - Beginning Price) / Beginning Price = ($42 - $10)/$10 = 320% EAR = (1 + hpr) (1/n) - 1 = (1+3.2)(1/10) - 1 = 15.43%.

Given an expected market return of 10.0%, a beta of 1.75 for Carlson Industries, and a risk-free rate of 2.0%, what is the expected return for the firm?

16.0% The equation for the SML is E(ri) = rf + βi × [E(rm) - rf] = 2.00% + 1.75 ∗ (10.00% - 2.00%) = 16.00%.

Sahali Shopping Center Corporation is expected to grow its dividends by 5% per year forever. The required rate of return on the stock is 7%. What is the dividend yield?

2% r= dividend yield + g dividend yield = r- g = 7% - 5% = 2%

When you were born, your grandparents opened an investment account in your name and deposited $500 into the account. The account has earned an average annual rate of return of 5.8 percent. Today, the account is valued at $1,544.13. How old are you?

20 years n=ln(1544.13/500)/ln1.058=20

Your firm has preferred stock outstanding that pays a current dividend of $3.00 per year and has a current price of $35.90. You anticipate that the economy will grow steadily at a rate of 2.00% per year for the foreseeable future. What is the market required rate of return on your firm's preferred stock?

8.36%

Use the dividend growth model to determine the required rate of return for equity. Yesterday your firm paid a dividend of $1.50 per share. Further, the recent stock price is $31.82 per share, and you anticipate a growth rate in dividends of 4.00% per year for the foreseeable future.

8.90%

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

APR of 6 percent compounded daily

The initial outlay or cost is $1,500,000 for a four-year project. The respective future cash inflows for years 1, 2, 3 and 4 are: $400,000, $500,000, $600,000 and $200,000. What is the payback period without discounting cash flows?

About 3.00 years

In the equation r = (FV/PV)1/n - 1, the r is sometimes referred to as the ________.

All of these

MicroMedia Inc. $1,000 par value bonds are selling for $1,265. Which of the following statements is TRUE?

All of these are true.

Which of the following is NOT true regarding the total payment in an equal payment amortization table?

All of these are true.

You wish to diversify your single-security portfolio in a way that will maximize your reduction in risk. Which of the following securities should you add to your portfolio?

Alpha Company stock that has a correlation coefficient of -0.25 with your current security

A finite series of equal payments that occur at regular intervals is called a(n) .

Annuity

Which of the following statements is TRUE? A) Individuals do not have to pay taxes on dividend income. B) Dividend payments are not tax deductible. C) A firm that skips a dividend is bankrupt. D) Dividends are a liability of a firm.

B) Dividend payments are not tax deductible

Which of the statements below is FALSE?

Cash flow to owners shows cash paid to owners plus any new borrowing from owners. Cash flow to owners COMPLETES the overview of financing and examines any additional contributions by the owners and the return of capital to the owners

________ is simply the interest earned in subsequent periods on the interest earned in prior periods.

Compound interest

The following market information was gathered for the ACME corporation. The common stock is selling for $40.00 per share and there are 100,000 shares outstanding. Retained earnings equal $400,000, preferred stock has 1,000 shares outstanding selling at $120.00 per share, and 500 outstanding long-term bonds are selling for $1,035.00 each. For purposes of estimating the firm's WACC, what are the market value weights of long-term debt, preferred stock, and equity?

D/V = 11.16%, PS/V = 2.59%, and E/V = 86.25%

Which of the statements below is FALSE?

Despite all of the advantages of using the NPV model, it is inconsistent with the concept of the time-value-of-money.

The practice of not putting all of your eggs in one basket is an illustration of _______.

Diversification

Fat Tire Bicycle Company currently sells 40,000 bicycles per year. The current bike is a standard balloon tire bike, selling for $90 with a production and shipping cost of $35. The company is thinking of introducing an off-road bike with a projected selling price of $410 and a production and shipping cost of $360. The projected annual sales for the off-road bike are 12,000. The company will lose sales in fat-tire bikes of 8,000 units per year if it introduces the new bike, however. What is the erosion cost from the new bike? Should Fat Tire start producing the off-road bike?

Erosion Cost = ($90 - $35) × 8,000 = $440,000 Net Annual Cash Flow with standard bike: ($90 - $35) × 40,000 = $2,200,000 Net Annual Cash Flow with standard and off-road bikes: ($90 - $35) × (40,000 - 8,000) = $1,760,000 ($410 - $360) × 12,000 = $600,000 Net Annual CF = $1,760,000 + $600,000 = $2,360,000 Increase of $160,000 per year so add new off-road bike to production.

The dividends per share paid by Artisan Industries Inc. (AI) doubled from a starting value of $1.50 in 2010 to a value of $3.00 in 2016 (a six-year period). What was the approximate average annual rate of growth of AI's dividends per share? Use the Rule of 72 to determine your answer.

FFF's dividends grew at an annual rate of approximately 12% per year. 72/6 = 12% via the Rule of 72.

When a company borrows from a bank or sells bonds, it is called equity financing.

False

A bull market is a prolonged declining market.

False A BEAR market is a prolonged declining market.

The goal of diversification is to eliminate

Firm-specific risk

Geronimo, Inc. is considering a project that has an initial after-tax outlay or after-tax cost of $220,000. The respective future cash inflows from its four-year project for years 1 through 4 are: $50,000, $60,000, $70,000 and $80,000. Geronimo uses the net present value method and has a discount rate of 11%. Will Geronimo accept the project?

Geronimo rejects the project because the NPV is about -$22,375.73.

A gain on disposal is recognized when the selling price of the asset is ________ the book value.

Greater than

In capital budgeting, the appropriate decision rule for an average-risk project is to accept if the ________ is greater than the WACC.

IRR

Which is NOT a step in the estimation of after-tax cash flow at disposal?

If book value is less than selling price: Selling Price + Tax Credit on Loss. In general, we have the following steps in the estimation of after-tax cash flow at disposal: (1) If selling price is greater than book value: Selling Price - Tax on Gain. (2) If SELLING PRICE is less than BOOK VALUE: Selling Price + Tax Credit on Loss. (3) If selling price equals book value: Selling Price. NOTE: If book value is less than selling price: SELLING PRICE - TAX ON GAIN.

Depreciation for a tax-paying firm:

Increases expenses and lowers taxes.

Which of the following is NOT an example of ordinary annuity cash flows?

Insurance payments due at the start of the period Insurance payments due at the start of the period are an annuity due.

In finance, we separate operating decisions from financing decisions and thus exclude ________ as a part of operating income from the income statement.

Interest expense

The phrase "price to rent money" is sometimes used to refer to ________.

Interest rates

John borrows $500,000 at an annual rate of 7.62% for a 10 year term. At the end of each year interest payments of $38,100 are paid. At the maturity of the loan the principal amount is repaid, in addition to an interest payment. What type of loan is this?

Interest-only

You are comparing two separate investments. Each one is for a period of 10 years and pays $2,500 a year. You require a 10 percent return on these investments. Investment A pays at the beginning of each year and investment B pays at the end of each year. Given this situation, which one of the following statements is accurate?

Investment A has both a higher present value and a higher future value than investment B

Which of the statements below is TRUE of the payback period method?

It ignores the cash flow after the initial outflow has been recovered

You just entered into a $150,000 30-year home mortgage at an annual interest rate of 4.25% making monthly payments of $737.91. Suppose you add an additional payment of $295.97 each month to the $737.91 house payment making your total monthly payments equal to $1,033.88. This extra amount is applied against the principal of the original loan. How long will it take you to pay off your loan of $150,000?

It will take about 204 months. n=ln[1/(1-PV×r/PMT)]/ln(1+r)

The advantage of ________ over ________ depreciation is that you can write off more of your capital costs in the earlier years.

MACRS over straight-line depreciation

Financial assets that will mature within a year are bought and sold in the ________ market.

Money Debt, capital, and the stock markets are longer term in nature.

The owner of Perfect Images Salon has a dilemma. She wants to start offering tanning services and has to decide between purchasing a tanning bed and a tanning booth. In either case, she figures that the cost of capital will be 10%. The relevant annual cash flows with each option are listed below: Year 0, 1, 2, 3, 4 Tanning Bed -10,000 4,000 4,500 10,000 8,000 Tanning Booth -12,500 4,400 4,800 11,000 9,500 2 Can you help her make the right decision? Since these are mutually exclusive options, the one with the higher NPV would be the best choice.

NPV bed = -$10,000 + $4,000/(1.10)+ $4,500/(1.10)2 + $10,000/(1.10)3 + $8,000/(1.10)4 = -$10,000 +$3636.36+$3719.01+$7513.15+$5464.11 = $10,332.62 NPV booth = -$12,500 + $4,400/(1.10)+ $4,800/(1.10)2 + $11,000/(1.10)3+$9,500/(1.10)4 =-$12,500 +$4,000+$3,966.94+$8,264.46+$6,488.63 =$10,220.03 Thus, the less expensive tanning bed with the higher NPV (10,332.62>10,220.03) is the better option

Cranium, Inc. is considering a four-year project that has an initial outlay or cost of $100,000. The respective future cash inflows from its project for years 1, 2, 3 and 4 are: $50,000, $40,000, $30,000 and $20,000. Will it accept the project if it's payback period is 26 months?

No, because it pays back in 28 months

Three fundamental issues separate net income and cash flow. Which of the answers below is NOT one of these three fundamental issues?

Noncash accounting

Which of the following would be classified as equity financing for a firm?

Preferred shareholders, common shareholders, and retained earnings

________ are an accounting measure of performance during a specific period of time, while ________ is the actual inflow or outflow of money.

Profits, cash flow

________ are an accounting measure of performance during a specific period of time, while ________ is the actual inflow or outflow of money.

Profits; cash flow

________ refers to a method of matching a single project of a company to another company with a single business focus in an effort to assign an appropriate level of risk to the project.

Pure play

Rocket Red, Inc. is considering a five-year project that has initial after-tax outlay or after-tax cost of $170,000. The future after-tax cash inflows from its project for years 1 through 5 are $45,000 for each year. Rocket Red uses the net present value method and has a discount rate of 11.25%. Will Rocket Red accept the project?

Rocket Red rejects the project because the NPV is about -$4,725.

What is the EAR if the APR is 10.52% and compounding is daily?

Slightly above 11.09% Using the EAR formula, we get 11.0916% or slightly above 11.09%. EAR = [(1 + APR/m)m] -1 = [(1 + 0.1052/365)365] -1 = 11.0916%.

What is the EAR if the APR is 5% and compounding is quarterly?

Slightly above 5.09%

What is the EAR if the APR is 5% and compounding is quarterly?

Slightly above 5.09% Using the EAR formula, we get 5.0945% or slightly above 5.09%. = (1 + APR/m)m -1 = (1 + .05/4)4 - 1 = 5.0945%.

Rank the average annual returns on different types of securities from the highest to lowest from 1925 through 2006 in the US.

Small-company stocks, large-company stocks, long-term government bonds, 3-month U.S. Treasury bills

Assume the CAPM holds. Stock A has a beta of 1.28 and standard deviation of returns of 35%. Stock B has a beta of 1.15 and a standard deviation of returns of 43%. Stock C has a beta of 0 and a standard deviation of returns of 0%. Which stock should have the highest expected return?

Stock A

Which of the statements below is FALSE?

The balance sheet reports the performance of the firm over the past period. It summarizes and categorizes a company's revenues and expenses for that period. The income statement reports the performance of the firm over the past period. It summarizes and categorizes a company's revenues and expenses for that period.

Double taxation refers to which of the following scenarios?

The corporation pays taxes on its earnings, and shareholders pay taxes on dividends received

Which of the statements below describes the IRR decision criterion?

The decision criterion is to accept a project if the IRR exceeds the desired or required return rate.

Which of the statements below describes the IRR decision criterion?

The decision criterion is to accept a project if the IRR exceeds the hurdle rate or required return rate.

Which one of the following statements is correct concerning MACRS?

The depreciation percentages are applied to the initial cost of the asset.

If you invest $3,650 today, how much money will you have in 4 years?

This question cannot be answered because it is missing an annual rate of return.

Which of the following statements is TRUE?

Three fundamental issues separate net income and cash flow: accrual-based accounting, noncash expense items, and interest expense.

If the company had a large depreciation expense during the period, the income statement could show a loss for the period, even though the cash account may have grown during the same period.

True

The "Truth in Savings Law" requires banks to advertise their rates on investments such as CDs and savings accounts as annual percentage yields (APY).

True

The adjusted WACC is the correct discount rate to use when evaluating a firm's average-risk projects.

True

The income statement reports the performance of the firm over a past period. It summarizes and categorizes a company's revenues and expenses.

True

The simplest application of assigning a beta to an individual project is called a "pure play," in which a manager finds the beta of a firm whose sole business is similar to the project in question and assigns that beta to the project.

True

When quoting rates on loans, the "Truth in Lending Law" requires the bank to state the rate as an APR, effectively understating the true cost of the loan when interest is computed more often than once a year.

True

Your trust fund will pay you $100,000 in six years when you turn 25. A shady financial institution has encouraged you to sign away the rights to your trust fund in exchange for cash today. Would you prefer that the financial institution use a discount rate of 8% or 10% to determine the value of your lump sum payment? Why?

Use 8% because the lump sum payment of $63,017 is greater than the 10% discounted value of $56,447. PV = FV/(1+r)n = $100,000/(1.08)^6 = $63,016.96, whereas $100,000/(1.10)^6 = $56,447.39

In capital budgeting, the ________ is the appropriate discount rate to use when calculating the NPV of an average risk project.

WACC

Project A has an NPV of $20,000 and a PI of 1.2. Project B has an NPV of $10,000 and a PI of 1.3. The two projects are independent of one another and both projects have equal lives. We have enough capital to fund project A, project B, or both projects. Which of the following statements is true?

We should accept both project a and project b

Project A has an NPV of $20,000 and a PI of 1.2. Project B has an NPV of $10,000 and a PI of 1.3. Both projects have equal lives. What should the best decision if we are NOT concerned with capital rationing (that is, we are NOT concerned with being short of funds)?

We should accept both projects

Webster, Inc. is considering an eight-year project that has an initial after-tax outlay or after-tax cost of $180,000. The future after-tax cash inflows from its project for years 1 through 8 are the same at $35,000. Webster uses the net present value method and has a discount rate of 12%. Will Webster accept the project?

Webster rejects the project because the NPV is about -$6,133.

________ means that the percentage increase in the dividend is the same each year.

constant growth

The ________ is the cost of each financing component multiplied by that component's percent of the total funding amount.

cost of capital

The ________ is the return that the bank or bondholder demands on new borrowing.

cost of debt

Net working capital is defined as the:

difference between a firm's current assets and its current liabilities.

________ is a major disadvantage of the corporate form of business.

double taxation

Which of the following is NOT an ADVANTAGE of a sole proprietorship?

limited liability Sole proprietorships have UNLIMITED liability.

To determine the interest paid each compounding period, we take the advertised annual percentage rate and simply divide it by the ________ to get the appropriate periodic interest rate.

number of compounding periods per year

The value of a financial asset is the ________.

present value of all of the future cash flows that will be received

As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means that ________.

the credit rating increases, the default risk decreases, and the required rate of return decreases

The movement of money from lender to borrower and back again is known as ________.

the cycle of money

Jepsen, Inc., has current assets of $3,600, current liabilities of $4,800, and total assets of $17,200. Owner's equity is $11,000. What is the value of the long-term debt?

$1,400 Long-term debt = $17,200 − $11,000 − $4,800 = $1,400

The revenue is $42,000, the cost of goods sold is $21,000, other expenses (from selling and administration) are $6,000, and depreciation is $2,000. What is the EBIT?

$13000

Use the information below to answer the following questions about the Canary Cruises Corporation. The Canary Cruises Corporation Income Statement Accounts for the year ending December 31, 2017 Account Balance Cost of goods sold $345,000 Interest expense $79,000 Taxes $57,100 Revenue $836,000 Selling, general, and administrative expenses $93,000 Depreciation $126,000 Refer to the Canary Cruises Corporation Income Statement Accounts. What is the net income for the Canary Cruises Corporation for 2017?

$135,900 Revenue - COGS-SGA-Interest-Depreciation -Taxes = Net Income

Susan's goal is to retire with $500,000 in her retirement account. The local bank advertises with an interest rate of 1% per month and monthly compounding on retirement fund accounts. If she retires in 30 years how much should Susan save each month to reach her goal?

$143.06 Number of months = 360 500,000 = PMT [ (1.01360 - 1) / 0.01] PMT = $143.06

Taylor invested $10,000 five years ago in a fund that has paid him 6.2 percent simple interest per year on funds. How much interest did Taylor earn?

$3,100.00 10,000×6.2%×5=$3,100.00

In 1970, before the era of major league baseball free agency, the minimum player salary was $12,000. In 1975, the minimum salary was $16,000. What was the average annual growth in the minimum salary in major league baseball over those five years?

5.92%

The Jones Brothers Inc. had net fixed assets of $4,000,000 and $4,300,000 at the end of 2011 and 2012, respectively. Its depreciation expense in 2012 was $200,000. What was the company's net capital spending in 2012?

500,000 NCS = Net fixed assets at the end of 2012 - Net fixed assets at the end of 2011 + Depreciation in 2012= $4,300,000 − $4,000,000 + $200,000 = $500,000

Buying your own home is often mentioned as "the best investment you can make." In 1964, the average home sale price was $19,600. By 2009, the average home sale price had risen to $272,900. What was the average annual rate of change in the price of houses over this 45 year time period?

6.03% per year

The stock of Hybrid Motors, Inc. has a beta of 0.84. The market risk premium is 5.2 percent and the risk-free rate is 2.6 percent. What is the expected return on this stock?

6.968% E(ri) = rf + i(E(rM) - rf) = 0.026 + 0.84×0.052 =0.06968

You purchased 100 shares of stock for $5 per share. After holding the stock for 8 years and not receiving any dividends, you sell the stock for $42 per share. What are the holding period and annual return on this investment?

740%, 30.48%

Elway Electronics has debt with a market value of $400,000, preferred stock with a market value of $100,000, and common stock with a market value of $500,000. If debt has a cost of 6%, preferred stock a cost of 7%, common stock a cost of 12%, and the firm has a tax rate of 30%, what is the adjusted WACC?

8.38% WACC = (400/1000)× 6% × (1 - .30) + (100/1000) × 7% + (500/1000) × 12% = 8.38%.

In regards to the fact that the pricing of stocks is more difficult than the pricing of bonds, which of the below statements is FALSE?

A stock's final sale is fixed in time on its maturity date.

Your firm has $4,000,000 available for investment in capital projects. Which combination of projects is the best, given this budget constraint? Project Initial Investment NPV A $1,000,000 $150,000 B $500,000 $200,000 C $1,500,000 $175,000 D $1,750,000 $135,000

A, B, C

Your firm has $2,000,000 available for investment in capital projects. Which combination of projects is the best, given this budget constraint?

A, C, D

The income statement begins with revenue and subtracts various operating expenses until arriving at Earnings Before Interest and Taxes. Next, interest expense is subtracted to find the taxable income for the period. Then the appropriate taxes are calculated and subtracted. We finally arrive at the ________, the so-called bottom line of the income statement.

Net income The income statement begins with revenue and subtracts various operating expenses until arriving at Earnings Before Interest and Taxes (EBIT). Next, interest expense is subtracted to find the taxable income for the period. Then the appropriate taxes are calculated and subtracted. We finally arrive at the net income, the so-called bottom line of the income statement.

The income statement begins with revenue and subtracts various operating expenses until arriving at Earnings Before Interest and Taxes. Next, interest expense is subtracted to find the ________ for the period.

Taxable income The income statement begins with revenue and subtracts various operating expenses until arriving at Earnings Before Interest and Taxes (EBIT). Next, interest expense is subtracted to find the taxable income for the period. Then the appropriate taxes are calculated and subtracted. We finally arrive at the net income, the so-called bottom line of the income statement.

A manufacturer of Virtual Reality headsets has seen sales increase from 25,000 units per year to 100,000 units per year in 8 years. What has been the firm's average annual rate of increase in the number of television sets sold? Use the Rule of 72 to determine your answer.

The average annual rate of change has been between 18% and 19%. Unit sales doubled from 25,000 to 50,000 and doubled again to 100,000 in 8 years. Thus, at a doubling rate of every four years the Rule of 72 suggests an annual rate of 72/4 = 18%. Via the formula the actual growth rate is 18.92% per year.

Theresa borrows $800 today in exchange for one payment of $1,000 five years from now. This is an example of a(n):

pure discount loan

Richard bought a share of stock for $47.50 that paid a dividend of $.72 and sold one year later for $51.38. What was Richard's dollar profit or loss and holding period return?

$4.60, 9.68%

You dream of endowing a chair in finance at the local university that will provide a salary of $250,000 per year forever, with the first cash flow to be one year from today. If the university promises to invest the money at a rate of 4% per year, how much money must you give the university today to make your dream a reality?

$6,250,000 PV = PMT/r = $250,000/.04 = $6,250,000

Cash and Equivalents are $1,561, Short-Term Investments are $1,000, Accounts Receivables are $3,616, Accounts Payable is $5,121, Short-Term Debt is $288, Inventories are $1,816, Other Current Liabilities are $1,401, and Other Current Assets are $707. What are the Total Current Assets?

$8,700 Total Current Assets = Cash and Equivalents + Short-Term Investments + Accounts Receivables + Inventories + Other Current Assets = $1,561 + $1,000 + $3,616 + $1,816 + $707 = $8,700.

Richard owns the following portfolio of securities. What is the beta for the portfolio?Apple - 2.50; 25% Wells Fargo - 0.65; 50% eBay - 1.70; 25%

1.38 βp = Σ βi ∗ wi = 2.5 ∗ 25% + .65 ∗ 50% + 1.70 ∗ 25% = 1.38

Johnson's Diner has an adjusted WACC of 10.08%. The company has a capital structure consisting of 70% equity and 30% debt, a cost of equity of 12.00%, a before-tax cost of debt of 8.00%, and a tax rate of 30%. Johnson is considering expanding by building a new diner in a distant city and considers the project to be riskier than his current operation. He estimates his existing beta to be 1.0, the required return on the market portfolio to be 12.00%, the risk-free rate to be 3.00%, and the beta for the new project to be 1.40. Given this information, and assuming the cost of debt will not change if Johnson undertakes the new project, what adjusted WACC should he use in his decision-making?

12.60%

Tony is offering Phil two repayment plans for a long overdue loan. Offer 1 is a visit from an enforcer and the debt is due in full at once. Offer 2 is to pay back $5,000 at the end of each year at 20% interest rate until the loan principal is paid off. Phil owes Tony $20,000. How long will it take for Phil to pay off the loan if he takes Offer 2?

8.83 years n=ln[1/(1-PV×r/PMT)]/ln(1+r) =ln[1/(1-20000×0.2/5000)]/ln(1+0.2)=ln5/ln1.2=8.83

Dividend growth rate is important to many investors. You are considering investing in a firm after looking at the firm's dividends over a six-year period. At the end of the year 2010, the firm paid a dividend of $0.98. At year-end 2016, it paid a dividend of $1.64. What was the average annual growth rate of dividends for this firm?

8.96%

Elway Electronics has debt with a market value of $350,000, preferred stock with a market value of $150,000, and common stock with a market value of $450,000. If debt has a cost of 8%, preferred stock a cost of 10%, common stock a cost of 12%, and the firm has a tax rate of 30%, what is the WACC?

9.33%

Which of the following is NOT an example of annuity cash flows?

The grocery bill that changes every week

Which of the following is NOT true with regard to an amortization table?

The remaining principal balance at the end of a payment period is equal to the beginning-of-the-period principal less the total payment. The remaining principal balance at the end of a payment period is equal to the beginning of the period principal less the principal payment.

TravelEasy Inc. has issued 30-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 14% and the yield to maturity today is 8%, what is the firm's current price per bond?

$1,678.70

You dream of endowing a chair in finance at the local university that will provide a salary of $250,000 per year forever, with the first cash flow to be one year from today. If the university promises to invest the money at a rate of 4% per year, how much money must you give the university today to make your dream a reality?

$6,250,000 PV = PMT/r = $250,000/.04 = $6,250,000.

Elway Electronics has debt with a market value of $200,000, preferred stock with a market value of $100,000, and common stock with a market value of $700,000. If debt has a cost of 6%, preferred stock a cost of 7%, common stock a cost of 12%, and the firm has a tax rate of 30%, what is the adjusted WACC?

9.94% WACC = (200/1000)× 6% × (1 - .30) + (100/1000) × 7% + (700/1000) × 12% = 9.94%.

________ is the name given to the processes surrounding recognition of the principal-agent problem and ways to align agents with the interests of the principals.

Agency theory

The market value of a car is equal to the ________.

anticipated selling price if the car were sold today.

Unsystematic risk ________.

can be diversified away

Which of the statements below is TRUE concerning risk-averse investors? A) Investors want to minimize return and maximize risk. B) Investors want to minimize return and minimize risk. C) Investors want to maximize return and maximize risk. D) Investors want to maximize return and minimize risk.

D) Investors want to maximize return and minimize risk

Which of the statements below is FALSE? A) For the shareholder, receipt of dividends is a taxable event. B) Unlike coupon payments on bonds, which are treated as an interest expense of the firm, common stock dividends are considered a return of capital to shareholders and not an expense of the firm. C) A typical practice of many companies is to distribute part of the earnings to shareholders through cash dividends. D) The payment of cash dividends to shareholders is a deductible expense for the company.

D) The payment of cash dividends to shareholders is a deductible expense for the company. The payment of cash dividends to shareholders is NOT a deductible expense for the company.

Which of the statements below is FALSE? A) Common stock's ownership claim on the assets and cash flow of a company is often referred to as a residual claim. B) Stock is a major financing source for public companies. C) Shareholders elect the board of directors, which ultimately selects the management team that runs the day-to-day operations of the company. D) The profits for common stock owners come before payment to employees, suppliers, government, and creditors.

D) The profits for common stock owners come before payment to employees, suppliers, government, and creditors. The profits for common stock owners come AFTER payment to the employees, suppliers, government, and creditors

Which of the following in NOT a potential problem suffered by the IRR method of capital budgeting?

Disagreement with the NPV as to whether a project with ordinary cash flows is profitable or not

Which of the following in NOT a potential problem suffered by the IRR method of capital budgeting?

Disagreement with the NPV as to whether a project with ordinary cash flows is profitable or not.

A decrease in the interest rate will decrease the present value, other things equal.

False

Among the three principal repayments, the principal repayment at the end of year 3 is the lowest.

False

In a bull market stock prices have been falling for a prolonged period of time.

False

In the agency model, the owners of corporations are the agents and the stockholders are the principals.

False

To be considered acceptable, a project must have an NPV greater than 1.0.

False

Using the WACC to evaluate all projects has the effect of making low-risk projects look MORE attractive and high-risk projects look LESS attractive.

False

Which of the statements below is FALSE?

In accrual-based accounting, revenue is recorded at the time of sale if the revenue has been received in cash. In accrual-based accounting, revenue is recorded at the time of sale WHETHER OR NOT the revenue has been received in cash.

Diversification is most effective when security returns are _________.

Negatively correlated

Which one of the answers below is NOT one of the three components of the "Cash Flow from Assets"?

Noncash expenses

Which of the following identities is TRUE?

Operating Cash Flow = EBIT + Depreciation - Taxes Net Capital Spending = Ending Net Fixed Assets - Beginning Net Fixed Assets + Depreciation Change in Net Working Capital (NWC) = Ending NWC - Beginning NWC Cash Flow from Assets = Operating Cash Flow - Net Capital Spending - Change in NWC

The ________ model answers one basic question: How soon will I recover my initial investment?

Payback period

Which of the statements below is NOT true?

Retained earnings are a form of hybrid equity financing.

Rene owns the following portfolio of securities. What is the beta for the portfolio? Company Beta Percent of Portfolio Microsoft - Beta: 1.82; Percent of Portfolio: 50% GM - Beta: 0.53; Percent of Portfolio: 30% Dullco - Beta: 0.67; Percent of Portfolio: 20%

1.20 βp = Σ βi ∗ wi = 1.82 ∗ 50% + 0.53 ∗ 30% + 0.67 ∗ 20% = 1.20.

Joan owns the following portfolio of securities. What is the beta for the portfolio? Alphabet - Beta: 2.00; Percent of Portfolio: 25% Chase - Beta: 0.75; Percent of Portfolio: 50% Amazon - Beta: 1.40; Percent of Portfolio: 25%

1.225 βp = Σ βi ∗ wi = 2.00 ∗ 25% + 0.75 ∗ 50% + 1.40 ∗ 25% = 1.225.

Kip owns the following portfolio of securities. What is the beta for the portfolio? Apple - Beta: .82; Percent of Portfolio: 50% Ford - Beta: 2.53; Percent of Portfolio: 30% Federal Express - Beta: 1.67; Percent of Portfolio: 20%

1.50

What is the standard deviation of the returns in question 6?

10.677% Variance = [(-0.1-0.03)2 + (0.14-0.03)2 + (0.09-0.03)2 + (-0.01-0.03)2]/3 = 0.0114 Standard deviation = 0.01141/2 = 0.10677

Suppose you postpone consumption and invest at 14% when inflation is 2%. What is the approximate real rate of your reward for saving?

12%

The stock of Hybrid Motors, Inc. has a beta of 0.8. The market risk premium is 10 percent and the risk-free rate is 6 percent. What is the expected return on this stock?

14% [(1-0.05)(1+0.23)(1+0.12)(1+0.18)]1/4-1 = 0.1148

The managers of Classic Autos Incorporated plan to manufacture classic Thunderbirds (1957 replicas). The purchase price of the necessary foundry equipment is $2,000,000. The equipment also requires delivery and installation costs of $100,000. Net working capital increases by $300,000 at the beginning of the project (Year 0) . What is the incremental cash flow of the project at the beginning of the project (Year 0)?

2,400,000

Upon taking his first job out of college, your Dad earned an annual salary of $33,000 and set a goal to earn $100,000 per year. If his salary increased at an average annual rate of 5.5%, how long did it take to reach his goal?

20.71 years

Gary bought a share of stock for $15.75 that paid a dividend of $.45 and sold three months later for $18.65. What was his holding period return?

21.27% Profit = Ending Value + Distributions - Original Cost Profit = $18.65 + $0.45 - $15.75 = $3.35. HPR = (ending Price + distributions - Beginning Price) / Beginning Price= ($18.65 _ $0.45 - $15.75) / $15.75 = 21.27%.

You gave your little sister two rabbits for Easter three years ago and now she has 64 of the cute little bunnies. What is the average annual rate of increase in the number of rabbits your sister owns? Note: Your parents are not very pleased with you right now.

217.5%

What is the arithmetic average of the returns in question 6?

3.0% (-0.1+0.14+0.09-0.01)/4=0.03

A project has the following cash flows. What is the payback period? Year 0, 1, 2, 3, 4 Cash flow -$300,000, $120,000, $100,000, $60,000, $60,000

3.33 years

Consider the following four-year project. The initial after-tax outlay or after-tax cost is $1,000,000. The future after-tax cash inflows for years 1, 2, 3 and 4 are: $400,000, $300,000, $200,000 and $200,000, respectively. What is the payback period without discounting cash flows?

3.5 years We can see that after three years, we will have paid back $900,000. Thus, we only need $100,000 in after-tax cash flows in the 4th year. Because we get $200,000 in the fourth year, the rule of thumb is to divide what is needed by what cash inflows we will get next period and add the results to the number of previous periods of cash inflows, e.g., ($100,000 divided by $200,000) + 3 which gives 3.500. Thus, the payback period is 3.5 years.

Consider the following ten-year project. The initial after-tax outlay or after-tax cost is $1,500,000. The future after-tax cash inflows each year for years 1 through 10 are $400,000 per year. What is the payback period without discounting cash flows?

3.75 years

Your grandfather likes to tell the story about how he started his ranch with 100 head of cattle and grew the ranch to 2,500 head of cattle. He said "My plan was simple: grow the number of head of cattle at a rate of 10% per year." How long did it take him?

33.77 years n=ln(FV/PV)/ln(1=r) = ln(2500/100) / ln(1+0.1) = 33.77

Suppose you postpone consumption and invest at 6% when inflation is 2%. What is the approximate real rate of your reward for saving?

4% We can see that an inflation rate of 2% is 4% less than our 6% investment rate. Thus, 4% is the real rate of your reward for saving.

Sahali Shopping Center Corporation is expected to grow its dividends by 3% per year forever. The required rate of return on the stock is 7%. What is the dividend yield?

4% r= dividend yield + g dividend yield = r- g = 7% - 3% = 4%

Becky is seeking to expand her stamp collection. Each year, stamps increase in price at a seven percent rate. She believes that if she invests her money for one year, she should be able to buy 24 stamps for what 23 stamps would cost today. What is her real interest rate or reward for waiting?

4.35% 24/23 - 1

Five years ago, Maria's annual salary was $73,500. Today, she earns $91,900. What has been the average annual percentage rate of growth of Maria's salary?

4.57%

You currently have $3,500 invested at an annual rate of 8%. How long will it take for this investment to grow to a value of $5,000?

4.63 years

Find the standard deviation for a security that has three one-year returns of 5%, 10%, and 15%.

5.00% Average return = Σrt/n = (5% + 10% + 15%)/3 = 10% Std Dev(r) = [Σ (ri - average)2 / (n - 1) ]^(1/2) = [[(5% - 10%)2 + (10% - 10%)2 + (15% - 10%)2]/(3 - 1) ]^(1/2) = 25%^(1/2) = 5%

In 1972, Bob purchased a new Datsun 240Z for $3,200. Datsun later changed its name to Nissan, and the 1972 Datsun 240Z became a classic. Bob kept his car in excellent condition and in 2002 could sell the car for 5 times what he originally paid. What was Bob's annualized rate of return for the 30 years he owned this car?

5.51% r = (FV/PV)1/n - 1 = 51/30 - 1 = 7.37%

You are running short of cash and really need to pay your rent. A friend suggests that you check out the local title pawn shop. At the shop they offer to loan you $2,000 if you pay them back $2,200 in one week. It seems like a good idea to you because you don't want to sell your car and you are sure you will be able to pay the money back in a week. What is the APR on this loan?

520% (2200-2000)/1000=10% 10%*52=52%

Drew is taking over as Chief Marketing Officer at SouthWest Foods. She has pledged to increase sales from their current level of $8,000,000 at a rate of 11% per year until the firm hits sales of $15,000,000 per year. How long will it take the firm to hit the target goal at this rate of increase?

6.02 years

The real rate is 1.25% and inflation is 5.25%. What is the approximate nominal rate?

6.50% Roughly speaking, the nominal rate is the real rate plus inflation. Thus, the nominal rate is 1.25% plus 5.25% equals 6.50%.

For much of the 20th century, new car prices rose at an average annual rate of 5.89%. Given a beginning new car price of $900, how long did it take for the average new car price to rise to $27,865? Please round to the nearest year.

60 years

Suppose you postpone consumption and invest at 9% when inflation is 2%. What is the approximate real rate of your reward for saving?

7%

In 1930, the highest paid player in major league baseball was Babe Ruth of the New York Yankees, with an annual salary of $80,000. In 2017, the highest paid player in major league baseball was Clayton Kershaw of the Los Angeles Dodgers with a salary of $35,571,000. What was the average annual rate of growth in the top baseball salary over this time period?

7.26%

At 10 percent, how long does it take for you to double your money?

7.3 years Use the Rule of 72: 72 / 10 =7.2 years or 2 = (1+0.1)n → n = ln2 / ln1.1 = 7.3 years

Your firm has preferred stock outstanding that pays a current dividend of $3.00 per year and has a current price of $39.50. You anticipate that the economy will grow steadily at a rate of 3.00% per year for the foreseeable future. What is the market required rate of return on your firm's preferred stock?

7.59%

Rogue Industries, Inc has an adjusted WACC of 8.56%. The company has a capital structure consisting of 80% equity and 20% debt, a cost of equity of 10.00%, a before-tax cost of debt of 6.00%, and a tax rate of 20%. The firm is considering expanding by building a new shop in a distant city and considers the project to be less risky than the current operation. The firm has an existing beta of 1.0, the required return on the market portfolio to be 10.00%, the risk-free rate to be 3.00%, and the beta for the new project to be 0.90. Given this information, and assuming the cost of debt will not change if the firm undertakes the new project, what adjusted WACC should be used in decision-making?

8.40% Re = E(ri) = rf + [E(rm) - rf] βi = 3.00% + [10.00% - 3.00%] × 0.90 = 9.30%. WACC = × Rd × (1 - Tc) + × Re = 0.20 × (6.00%) × (1 - .20) + 0.80 × (9.30%) = 8.40%

Use the dividend growth model to determine the required rate of return for equity. Your firm intends to pay a dividend of $2.25 per share one year from now, has a recent price of $40.20 per share, and anticipates a growth rate in dividends of 3.00% per year for the foreseeable future.

8.60%

Your parents have an investment portfolio of $450,000, and they wish to take out cash flows of $60,000 per year as an ordinary annuity. How long will their portfolio last if the portfolio is invested at an annual rate of 4.50%?

9.35 years 450,000=60,000(1-1/1.045^n)/0.045 1/1.045^n=0.6625 n=ln(1/0.6625)/ln1.045=9.35

The following market information was gathered for the Blender Corporation. The firm has 1,000 bonds outstanding, each selling for $1,100.00 with a required rate of return of 8.00%. Blenders has 5,000 shares of preferred stock outstanding, selling for $40.00 per share and 50,000 shares of common stock outstanding, selling for $18.00 per share. If the preferred stock has a required rate of return of 11.00% and the common stock requires a 14.00% return, and the firm has a corporate tax rate of 30%, calculate the firm's WACC adjusted for taxes.

9.53%

Janet bought a share of stock for $47.50 that paid a dividend of $.72 and sold one year later for $51.38. What was her holding period return?

9.68% Profit = Ending Value + Distributions - Original Cost Profit = $51.38 + $0.72 - $47.50 = $4.60. HPR = (Ending Price + Distributions - Beginning Price) / Beginning Price = ($51.38 + $0.72 - $47.50) / $47.50 = 9.68%.

Elway Electronics has debt with a market value of $350,000, preferred stock with a market value of $200,000, and common stock with a market value of $450,000. If debt has a cost of 7%, preferred stock a cost of 9%, common stock a cost of 14%, and the firm has a tax rate of 30%, what is the adjusted WACC?

9.82% WACC = (350/1000)× 7% × (1 - .30) + (200/1000) × 9% + (450/1000) × 14% = 9.82%.

Which of the following is NOT a definition of beta?

A measure of risk that can be avoided

B&H, Inc. is currently considering an five-year project that has an initial outlay or cost of $220,000. The future cash inflows from its project for years 1 through 5 are the same at $50,000. B&H has a discount rate of 8%. Because of capital rationing (shortage of funds for financing), B&H wants to compute the profitability index (PI) for each project. What is the PI for B&H's current project?

About 0.91

InnerC, Inc. is currently considering an five-year project that has an initial outlay or cost of $60,000. The future cash inflows from its project for years 1 through 5 are the same at $20,000. InnerC has a discount rate of 15%. Because of concerns about funds being short to finance all good projects, InnerC wants to compute the profitability index (PI) for each project. What is the PI for InnerC's current project?

About 1.12

Nodak, Inc. is currently considering an eight-year project that has an initial outlay or cost of $160,000. The cash inflows from its project for years 1 through 5 are the same at $55,000. Nodak has a discount rate of 11%. Because there is a shortage of funds to finance all good projects, Nodak wants to compute the profitability index (PI) for each project. That way Nodak can get an idea as to which project might be a better choice. What is the PI for Nodak's current project?

About 1.27

Which of the following statements is true about variance?

All of the above statements are true.

If all projects are assigned the same discount rate for purposes of evaluation, which of the following could occur?

All of the choices could occur when using a single discount rate for all projects.

In regards to the fact that the pricing of stocks is more difficult than the pricing of bonds, which of the below statements is FALSE? A) Cash dividends, unlike coupons for bonds, typically change from year to year. B) The ending price of the stock at any point in time is not fixed like the par value of the principal. C) A stock's final sale is fixed in time on its maturity date. D) Because a stock has no maturity date, the number of its payments are unknown.

C) A stock's final sale is fixed in time on its maturity date. Technically, a stock does not have a "maturity" date like a bond. Thus, the final sale of a stock by an investors is NOT fixed in time on a maturity date. An investor is free to choose his or her own selling point in time, and the point in time is not limited by a maturity date.

Which of the statements below is TRUE? A) Shareholders elect the board of directors, which ultimately selects the bondholder team that runs the day-to-day operations of the company. B) Stockholders are paid before debt holders (bondholders) if a company fails. C) The profits for common stock owners come after payment to the employees, suppliers, government, and creditors. D) Stock is a minor financing source for public companies.

C) The profits for common stock owners come after payment to the employees, suppliers, government, and creditors. Shareholders elect the board of directors that ultimately selects the MANAGEMENT team that runs the day-to-day operations of the company. Stock is a MAJOR financing source for public companies. Common stockholders are low in terms of priority of claims to assets in the case of company failure. Debt holders will be paid first.

The process of planning, evaluating, selecting, and managing the long-term operating projects of the company is termed ________.

Capital budgeting

________ is at the heart of corporate finance, because it is concerned with making the best choices about project selection.

capital budgeting

________ refers to the way a company finances itself through some combination of loans, bond sales, preferred stock sales, common stock sales, and retention of earnings.

capital structure

A series of equal periodic finite cash flows that occur at the beginning of the period are known as a/an ________.

annuity due

Project A has an NPV of $20,000 and a PI of 1.2. Project B has an NPV of $10,000 and a PI of 1.3. Both projects have equal lives. What should the best decision if we are NOT concerned with capital rationing (that is, we are NOT concerned with being short of funds)?

She should accept both projects

Sportswear Online, Inc. is considering a project that has an initial after-tax outlay or after-tax cost of $220,000. The respective future cash inflows from its four-year project for years 1 through 4 are: $50,000, $60,000, $70,000 and $80,000. Sportswear Online uses the net present value method and has a discount rate of 11%. Will Sportswear Online accept the project?

Sportswear Online rejects the project because the NPV is about -$22,375.73.

Stock A has a beta of 0.98 and standard deviation of returns of 35%. Stock B has a beta of 1.15 and a standard deviation of returns of 23%. Which stock has more total risk?

Stock A

Which of the following would be classified as debt lenders for a firm?

Suppliers, nonbank lenders, and commercial banks Preferred stockholders are hybrid equity lenders, common shareholders are owners, and the rest of the choices may be considered a form of debt lender.

When calculating the after-tax weighted average cost of capital (WACC), which of the following costs is adjusted for taxes in the equation?

The before-tax cost of debt

Which of the following statements is TRUE?

The capital market is the term for the market for longer-term financial assets such as stocks and bonds.

Revolution Records will build a new recording studio on a vacant lot next to the operations center. The land was purchased five years ago for $450,000. Today the value of the land has appreciated to $780,000. Revolutionary Records did not consider the value of the land (it had already spent the money to acquire the land long before this project was considered). The NPV of the recording studio was $600,000. Should Revolution Records consider the land as part of the cash flow of the recording studio? If yes, what value should be used, $450,000 or $780,000? How will the value affect the project?

The land needs to be included as part of the cash flow for the studio project because there is an opportunity cost here. If Revolution Records does not want to keep the land it can sell it for $780,000. So this current market value of $780,000 is the opportunity cost that the studio must cover. If the NPV without considering this cost is $600,000 for the studio then Revolution Records should just sell the land and have $780,000 as cash income (unless there are taxes that would reduce the net cash flow below $600,000).

Which is greater, the present value of a five-year ordinary annuity of $300 discounted at 10%, or the present value of a five-year ordinary annuity of $300 discounted at 0% that has its first cash flow six years from today?

The second annuity because the cash flows are discounted at a 0% interest rate.

______ belong to money market securities.

Treasury bills

A home improvement firm has quoted a price of $14,700 to fix up Eric's backyard. Five years ago, Eric put $12,500 into a home improvement account that has earned an average of 4.75% per year. Does Eric have enough money in his account to pay for the backyard fix-up?

Yes; Eric has $15,764.50 in his home improvement account.

Pricing preferred stock is most similar to pricing ________.

perpetuity

The ________ is the market of first sale in which companies first sell their authorized shares to the public.

primary market There are two major markets for the sale of stock, the primary market and the secondary market. The primary market is the market of first sale, in which companies first sell their authorized shares to the public. The secondary market is the after-sale market of the existing outstanding shares in which individual or institutional owners of stocks sell their shares to other investors.

The question "At what rate is my money growing over time?" is best answered by which form of the TVM equation?

r = (FV/PV)1/n - 1

The typical payments on a consumer loan are made at ________.

the end of each month

Cash flow is ________.

the increase or decrease in cash for the period Net income is the accounting profits from the operations of the company during the period and thus would not typically be the cash flow (except by coincidence). Cash flow can be positive or negative and thus is the increase or decrease in cash for the period.

The IRR is the discount rate that produces a zero NPV or the specific discount rate at which the present value of the cost equals ________.

the present value of the future benefits or cash inflows

The constant growth dividend model requires that ________.

the return rate r is greater than the growth rate g of the dividend stream

Stimulus Industries Inc. has 2017 total current assets of $14,871,000. Last year the total current assets were equal to $12,462,000. The change in total current assets is a ________ of cash in the amount of ________.

use; $2,409,000

The revenue is $94,000, the cost of goods sold is $51,000, other expenses (from selling and administration) are $21,000, and depreciation is $12,000. What is the EBIT?

$10,000 EBIT = Revenue - Cost of Goods Sold - Other Expenses - Depreciation = $94,000 - $51,000 - $21,,000 - $12,000 = $10,000. Interest is not considered when computing the EBIT.

Walker Laboratories, Inc. pays a $2.00 dividend every quarter and will maintain this policy forever. What price should you pay for one share of common stock if you want an annual percentage return (APR) of 8% on your investment?

$100 Quarterly rate of 8%/4 = 2% (or 0.02). Price = Dividend / r = P = 2/0.02 = $100

The Jones Brothers Inc. had net fixed assets of $4,000,000 and $4,300,000 at the end of 2011 and 2012, respectively. Its depreciation expense in 2012 was $100,000. What was the company's net capital spending in 2012?

$400,000 NCS = Net fixed assets at the end of 2012 - Net fixed assets at the end of 2011 + Depreciation in 2012 = $4,300,000 − $4,000,000 + $100,000 = $400,000

On your first through fifth birthdays your parents placed $2,000 into your college fund (five total deposits of $2,000 each). The account has earned an average of 8.5% per year until today, your twenty-first birthday. How much money is in the account today?

$43,714.09

Walker Laboratories, Inc. pays a $1.37 dividend every quarter and will maintain this policy forever. What price should you pay for one share of common stock if you want an annual percentage return (APR) of 12.5% on your investment?

$43.84

Which of the statements below is TRUE?

An increase in working capital can be brought about by an increase in inventory.

An annuity is a series of ________.

equal cash payments at regular intervals across time

Stocks are bought and sold in ________ markets.

equity