FIN Test Questions
Matterhorn Mountain Gear is evaluating two projects with the following cash flows: Y0−$ 318,200−$ 296,950 1 146,700 137,600 2 164,200 154,800 3 129,300 120,550 What interest rate will make the NPV for the projects equal?
13.64%
Matterhorn Mountain Gear is evaluating two projects with the following cash flows: Year X Y 0 -318,200 -296,950 1 146,700 137,600 2 164,200 154,800 3 129,300 120,550 What interest rate will make the NPV for the projects equal?
13.64% 0 = (−$318,200 − (−$296,950)) + ($146,700 − 137,600)/(1 + IRR) + ($164,200 − 154,800)/(1 + IRR)2 + ($129,300 − 120,550)/(1 + IRR)3 0 = −$21,250 + $9,100/(1 + IRR) + $9,400/(1 + IRR)2 + $8,750/(1 + IRR)3 IRR = .1364, or 13.64%
The tax rates for an individual for a particular year are shown below: Taxable Income Tax Rate $0 − 9,950 10% 9,950 − 40,525 12% 40,525 − 86,375 22% 86,375 − 164,925 24% What is the average tax rate for an individual with taxable income of $95,250?
17.72% Taxes paid = .10($9,950) + .12($40,525 − 9,950) + .22($86,375 − 40,525) + .24($95,250 − 86,375) Taxes paid = $16,881.00 Average tax rate = $16,881.00/$95,250 Average tax rate = .1772, or 17.72%
Castaway Resort common stock is selling for $42.50 a share. The company has earnings per share of $.79 and a book value per share of $17.50. What is the market-to-book ratio?
2.43 Market-to-book ratio = $42.50/$17.50 = 2.43
Chasteen, Incorporated, is considering an investment with an initial cost of $145,000 that would be depreciated straight-line to a zero book value over the life of the project. The cash inflows generated by the project are estimated at $75,000 for the first two years and $30,000 for the following two years. What is the internal rate of return?
20.62% Year Cash Flow 0 145,000 1 75,000 2 75,000 3 30,000 4 30,000 IRR20.62%
In 2021, what was the maximum average tax rate for corporations?
21%
Frey's has a profit margin of 3.8 percent on sales of $287,200. The firm currently has 5,000 shares of stock outstanding at a market price of $7.11 per share. What is the price-earnings ratio?
3.26 Price-earnings ratio = $7.11/[(.038 × $287,200)/5,000] = 3.26
For the past six years, the price of Slippery Rock stock has been increasing at a rate of 8.21 percent a year. Currently, the stock is priced at $43.40 a share and has a required return of 11.65 percent. What is the dividend yield?
3.44% Dividend yield = .1165 − .0821 = .0344, or 3.44%
AB Builders has 15-year bonds outstanding with a face value of $1,000 and a market price of $985. The bonds pay interest semiannually and have a yield to maturity of 4.03 percent. What is the coupon rate?
3.90% N= 30 I/Y= 2.015 PV= -985 FV= 1,000 PMT= ? =19.48 $19.48 × 2 = $38.96; $38.96/$1,000 = .0390, or 3.90%
A taxable bond has a coupon rate of 5.83 percent and a YTM of 5.53 percent. If an investor has a marginal tax rate of 28 percent, what is the equivalent aftertax yield?
3.98% Aftertax yield = 5.53% × (1 − .28) = 3.98%
There is a zero coupon bond that sells for $4,522.53 and has a par value of $10,000. If the bond has 19 years to maturity, what is the yield to maturity? Assume semiannual compounding.
4.22% N= 38 PV= -4,522.53 FV= 10,000 I/Y=? = 2.11%
A firm has sales of $4,740, costs of $2,615, interest paid of $169, and depreciation of $473. The tax rate is 25 percent. What is the cash coverage ratio?
12.57 times EBIT = $4,740 − 2,615 − 473 = $1,652 Cash coverage ratio = ($1,652 + 473)/$169 = 12.57 times
You want to purchase a new condominium that costs $285,000. Your plan is to pay 30 percent down in cash and finance the balance over 30 years at 5.2 percent. What will be your monthly mortgage payment including principal and interest?
$1,095.48 Amount financed = (1 − .30) × $285,000 = $199,500 Calc: N= 30x12 I/Y= 5.2%/12 PV= -199,500 FV=0 PMT= ? = 1,095.48
McCanless Company recently purchased an asset for $2,700,000 that will be used in a 3-year project. The asset is in the 3-year MACRS class. The depreciation percentage each year is 33.33 percent, 44.45 percent, 14.81 percent, and 7.41 percent, respectively. What is the amount of depreciation in Year 2?
$1,200,150 Year 2 depreciation = .4445($2,700,000) Year 2 depreciation = $1,200,150
Sherpa Outfitters sells specialty equipment for mountain climbers. Its sales for last year included $488,500 of tents and $800,000 of climbing gear. For next year, management has decided to sell specialty sleeping bags also. As a result of this change, sales projections for next year are $537,350 of tents, $880,000 of climbing gear, and $150,000 of sleeping bags. How much of next year's sales are derived from the side effects of adding the new product to its sales offerings?
$128,850
Lee's currently sells 13,800 motor homes per year at $87,900 each, and 1,100 luxury motor coaches per year at $139,900 each. The company wants to introduce a low-range camper to fill out its product line; it hopes to sell 7,200 of these campers per year at $17,500 each. An independent consultant has determined that if the company introduces the new campers, it should boost the sales of its existing motor homes by 1,100 units per year and reduce the sales of its luxury motor coaches by 610 units per year. What amount should be used as the annual sales figure when evaluating this project?
$137,351,000
Bubbly Waters currently sells 320 Class A spas, 470 Class C spas, and 220 deluxe model spas each year. The firm is considering adding a mid-class spa and expects that if it does, it can sell 395 units per year. However, if the new spa is added, Class A sales are expected to decline to 235 units while the Class C sales are expected to increase to 495. The sales of the deluxe model will not be affected. Class A spas sell for an average of $12,300 each. Class C spas are priced at $6,200 and the deluxe models sell for $17,200 each. The new mid-range spa will sell for $8,200. What annual sales figure should you use in your analysis?
$2,348,500 Sales = 395($8,200) + (235 − 320)($12,300) + (495 − 470)($6,200) Sales = $2,348,500
Industrial Products has both common and noncumulative preferred stock outstanding. The dividends on these stocks are $1.10 per quarter per share of common and $2.25 per quarter per share of preferred. The company has not paid any dividends for the past two quarters but is expected to pay dividends on both the common and the preferred stock next quarter. What is the minimum amount the firm must pay per share to its preferred stockholders next quarter if it plans to pay a common dividend?
$2.25 Minimum preferred dividend = $2.25 The firm needs to pay only the current dividend as the preferred stock is noncumulative.
Assuming an interest rate of 5.7 percent, what is the value of the following cash flows five years from today? Year Cash Flow 1 3,390 2 4,535 3 5,480 4 6,730
$22,823.21 FV = $3,390(1.057)4 + $4,535(1.057)3 + $5,480(1.057)2 + $6,730(1.057) = $22,823.21
You are analyzing a project and have developed the following estimates. The depreciation is $17,340 a year and the tax rate is 21 percent. What is the best-case operating cash flow?
$224,051.40
You are analyzing a project and have developed the following estimates. The depreciation is $17,340 a year and the tax rate is 21 percent. What is the best-case operating cash flow? Base-Case Lower Bound Upper Bound Unit sales 5,200 4,500 5,900 Sales price per unit$ 109$ 99$ 119Variable cost per unit$ 71$ 69$ 73Fixed costs$ 16,500$ 16,000$ 17,000
$224,051.40 Best-case OCF = [5,900 × ($119 − 69) − $16,000] × [1 − .21] + [$17,340 × .21] = $224,051.40
The Corner Shop is considering a new four-year expansion project that requires an initial fixed asset investment of $210,000. The fixed asset will be depreciated straight-line to zero over its four-year life, after which time it will be worthless. The project is estimated to generate $48,000 in annual sales, with costs of $31,000. If the tax rate is 21 percent, what is the OCF for this project?
$24,455 OCF = ($48,000 − 31,000)(1 − .21) + ($210,000/4)(.21) = $24,455
The Corner Shop is considering a new four-year expansion project that requires an initial fixed asset investment of $210,000. The fixed asset will be depreciated straight-line to zero over its four-year life, after which time it will be worthless. The project is estimated to generate $48,000 in annual sales, with costs of $31,000. If the tax rate is 21 percent, what is the OCF for this project?
$24,455 OCF = ($48,000 − 31,000)(1 − .21) + ($210,000/4)(.21) = $24,455
What were the total dividends paid for 2022? Windswept, Incorporated2022 Income Statement(in millions)
$803 million Retention ratio = ($730 million − 480 million)/$1,053 million = .237 Dividends paid = (1 − .237) × $1,053 million = $803 million
The manager of Steve's Audio has approved Daisy's application for 24 months of credit with maximum monthly payments of $45. If the APR is 19.2 percent, what is the maximum initial purchase that Daisy can buy on credit?
$890.99 Calc: N= 24 I/Y= 19.2/12 PMT= -45 FV= 0 PV= 890.99
Outdoor Sports is considering adding a miniature golf course to its facility. The course would cost $138,000, would be depreciated on a straight-line basis over its five-year life, and would have a zero salvage value. The estimated income from the golfing fees would be $72,000 a year with $24,000 of that amount being variable cost. The fixed cost would be $11,600. In addition, the firm anticipates an additional $14,000 in revenue from its existing facilities if the golf course is added. The project will require $3,000 of net working capital, which is recoverable at the end of the project. What is the net present value of this project at a discount rate of 12 percent and a tax rate of 21 percent?
$25,123.33 OCF = ($72,000 − 24,000 − 11,600 + 14,000) × (1 − .21) + ($138,000/5) × .21 = $45,612 NPV = −$138,000 − 3,000 + ($45,612 × {1 − [1/1.125]}/.12) + ($3,000/1.125) = $25,123.33
River Rock, Incorporated, just paid an annual dividend of $2.80. The company has increased its dividend by 2.7 percent a year for the past 10 years and expects to continue doing so. What will a share of this stock be worth 6 years from now if the required return is 16 percent?
$25.37 P6 = ($2.80 × 1.0277)/(.16 − .027) = $25.37
Newton Industries is considering a project and has developed the following estimates: unit sales = 4,800, price per unit = $67, variable cost per unit = $42, annual fixed costs = $11,900. The depreciation is $14,700 a year and the tax rate is 21 percent. What effect would an increase of $1 in the selling price have on the operating cash flow?
$3,792 Change in OCF = (4,800 × $1) × (1 − .21) = $3,792
A bond has a par value of $1,000, a current yield of 6.45 percent, and semiannual coupon payments. The bond is quoted at 95.32. What is the amount of each coupon payment?
$30.74 Coupon payment = [.0645 × (.9532 × $1,000)/2] = $30.74
The 6.4 percent bond of Berberich, Incorporated, has a yield to maturity of 6.9 percent. The bond matures in eleven years, has a face value of $1,000, and pays semiannual interest payments. What is the amount of each coupon payment?
$32.00 Coupon payment = ($1,000 × .064)/2 = $32.00
The Milwaukee Printing Company has net income of $26,310 for the year. At the beginning of the year, the firm had common stock of $55,000, paid-in surplus of $11,200, and retained earnings of $48,420. At the end of the year, the firm had total equity of $142,430. The firm paid dividends of $32,500. What is the amount of the net new equity raised during the year?
$34,000 Net new equity = $142,430 − 55,000 − 11,200 − ($48,420 + 26,310 − 32,500) = $34,000
Cinram Machines has the following estimates for its new gear assembly project: price = $1,870 per unit; variable costs = $949 per unit; fixed costs = $1.4 million; quantity = 42,000 units. Suppose the company believes all its estimates are accurate only to within ± 3 percent. What value should the company use for its total variable costs when performing its best-case scenario analysis?
$39,822,128
Windswept, Incorporated, has 300 million shares of stock outstanding. Its price-earnings ratio for 2022 is 16. What is the market price per share of stock?
$40.05 Earnings per share = $751/300 = $2.503333 Price = $2.503333 × 16 = $40.05
Shay Hand Outfitters has a proposed project that will generate sales of 3,100 units annually at a selling price of $37.00 each. The fixed costs are $25,000 and the variable costs per unit are $11.95. The project requires $72,000 of fixed assets that will be depreciated on a straight-line basis to a zero book value over the four-year life of the project. The salvage value of the fixed assets is $9,700 and the tax rate is 21 percent. What is the operating cash flow for Year 4?
$45,377.45
The Tattle Teller has a printing press sitting idly in its back room. The press has no market value to another printer because the machine utilizes old technology. The firm could get $480 for the press as scrap metal. The press is six years old and originally cost $174,000. The current book value is $3,570. The president of the firm is considering a new project and feels he can use this press for that project. What value, if any, should be assigned to the press as an initial cost of the new project?
$480
Bennett Company has a potential new project that is expected to generate annual revenues of $247,700, with variable costs of $137,600, and fixed costs of $56,500. To finance the new project, the company will need to issue new debt that will have an annual interest expense of $16,500. The annual depreciation is $22,000 and the tax rate is 23 percent. What is the annual operating cash flow?
$58,660 OCF = ($247,700 − 137,600 − 56,500)(1 − .23) + .23($22,000) OCF = $58,660
Trident Office is considering remodeling the office building it leases to Robert Roberts, CPA. The remodeling costs are estimated at $225,000. If the building is remodeled, Robert Roberts, CPA has agreed to pay an additional $75,000 per year in rent for the next five years. The discount rate is 10 percent. What is the benefit of the remodeling project to Professional Properties?
$59,309.01
You are going to deposit $4,300 in an account that pays .49 percent interest per month. How much will you have in 6 years?
$6,113.83 FV = $4,300 × 1.004972 = $6,113.83 N= 6x12 I/Y= .49% PV= -4,300 FV= ? = 6,113.83
You want to have $16,500 in 9 years for a dream vacation. If you can earn an interest rate of .9 percent per month, how much will you have to deposit today?
$6,269.57 PV = $16,500/1.0099 × 12 = $6,269.57 Calc: N= 9x12 I/Y= .9% FV= -16,500 PV= ? = 6,269.57
What is the net present value of a project with the following cash flows if the discount rate is 9 percent? Year Cash Flow 0−$ 55,000 1 21,500 2 24,750 3 29,450
$8,297.15 NPV = −$55,000 + $21,500/1.09 + $24,750/1.092 + $29,450/1.093 NPV = $8,297.15
A project costs $2.43 million and has no salvage value. Depreciation is straight-line to zero over the five-year life of the project. Sales are projected at 64,000 units per year, price per unit is $73.29, variable cost per unit is $42.93, and fixed costs are $623,000 per year. The tax rate is 21 percent, and the required rate of return is 11 percent. What is the sensitivity of NPV to a 100-unit increase in the sales figure?
$8,864.39
You are analyzing a project and have developed the following estimates. The depreciation is $5,800 a year and the tax rate is 21 percent. What is the best-case operating cash flow? Base-Case Lower Bound Upper Bound Unit sales 800 750 850 Sales price per unit$ 29$ 28$ 30 Variable cost per unit$ 13$ 11 $ 15 Fixed costs$ 6,800$ 6,000$ 7,600
$9,236.50 Best-case operating cash flow = [850 × ($30 − 11) − $6,000] × [1 − .21] + [$5,800 × .21] = $9,236.50
Flash Freeze Frozen Foods is expected to pay annual dividends of $1.34 and $1.45 at the end of the next two years, respectively. After that, the company expects to pay a constant dividend of $1.50 a share. What is the value of this stock at a required return of 15.1 percent?
$9.76 P2 = ($1.50/.151) = $9.93 P0 = [$1.34/1.151] + [($1.45 + 9.93)/1.1512] P0 = $9.76
A bond that pays interest semiannually has a coupon rate of 4.93 percent and a current yield of 5.17 percent. The par value is $1,000. What is the bond's price?
$953.58 Coupon payment = .0493 × $1,000 = $49.30 Price = $49.30/.0517 = $953.58
A $1,000 face value bond currently has a yield to maturity of 7.14 percent. The bond matures in sixteen years and pays interest semiannually. The coupon rate is 6.95 percent. What is the current price of this bond?
$982.05 N= 32 I/Y= 3.57% PMT= -34.75 FV= -1,000 PV= ? = 982.05
The Black Horse is currently considering a project that will produce cash inflows of $11,000 a year for three years followed by $6,500 in Year 4. The cost of the project is $38,000. What is the profitability index if the discount rate is 9 percent?
.85
Bob has been investing $4,500 in stock at the end of every year for the past 11 years. If the account is currently worth $84,300, what was his annual return on this investment?
10.20% $84,300 = $4,500{[(1 + r)11 − 1]/r} r = .1020, or 10.20% N= 11 PMT= 4,500 FV= -84,300 I/Y= 10.2%
The inflation rate over the past year was 2.6 percent. If an investment had a real return of 7.8 percent, what was the nominal return on the investment?
10.60% R = [(1 + .078) × (1 + .026)] − 1 = .1060, or 10.60%
The common stock of Sweet Treats is selling for $49.25 per share. The company is expected to have an annual dividend increase of 3.4 percent indefinitely and pay a dividend of $3.70 in one year. What is the total return on this stock?
10.91% R = ($3.70/$49.25) + .034 = .1091, or 10.91%
Lee Sun's has sales of $3,450, total assets of $3,150, and a profit margin of 6 percent. The firm has a total debt ratio of 42 percent. What is the return on equity?
11.33% Net income = $3,450 × .06 = $207.00 Total debt ratio = .42 = ($3,150 − Total equity)/$3,150 Total equity = $1,827.00 Return on equity = $207.00/$1,827.00 = .1133, or 11.33%
Which statement is true?
An indenture is a contract between a bond's issuer and its holders.
You have a credit card with a balance of $15,400 and an APR of 18.6 percent compounded monthly. You have been making monthly payments of $290 per month, but you have received a substantial raise and will increase your monthly payments to $365 per month. How many months quicker will you be able to pay off the account?
43.62 months Calc: (for 290) I/Y= 18.6%/2 PV= -15,400 PMT= 290 N= ? = 112.62 (for 365) I/Y= 18.6/121 PV= -15,400 PMT= 365 N= ? = 69 112.62 - 69= 43.62
The 5 percent semiannual coupon bonds of Under The Counter, Incorporated, are selling for $995.25. The bonds have a face value of $1,000 and mature in 12 years. What is the yield to maturity?
5.05% N= 24 PV= -995.25 PMT= 25 FV= 1,000 I/Y= ? = 2.527% 2.527% × 2 = 5.05%
A bond that pays interest semiannually has a price of $1,066.57 and a semiannual coupon payment of $27.50. If the par value is $1,000, what is the current yield?
5.16% Current yield = ($27.50 × 2)/$1,066.57 = .0516, or 5.16%
New Markets has $1,000 face value bonds outstanding that pay interest semiannually, mature in 20 years, and have a 5.8 percent coupon. The current price is quoted at 103.25. What is the yield to maturity?
5.53% Calc: N= 40 PV= -1,032.5 PMT= 29 FV= 1,0000 I/Y= 2.765% 2.765% × 2 = 5.53%
Greenbriar Cotton Mill is spending $284,000 to update its facility. The company estimates that this investment will improve its cash inflows by $50,500 a year for 8 years. What is the payback period?
5.62 years
The $1,000 face value bonds of Galaxies International have coupon of 5.5 percent and pay interest semiannually. Currently, the bonds are quoted at 98.02 and mature in 12 years. What is the yield to maturity?
5.73% N= 24 PV= -980.2 PMT= 27.5 PV= 1,000 I/Y= ? = 2.865% 2.865% × 2 = 5.73%
The $1,000 face value bonds of Universe International have coupon of 6.8 percent and pay interest semiannually. Currently, the bonds are quoted at 103.5 and mature in 16 years. What is the yield to maturity?
6.45% N=32 PV= -1,035 PMT= 34 FV= 1,000 I/Y= ? = 3.223% 3.223% × 2 = 6.45%
There is a bond that has a quoted price of 105.039 and a par value of $2,000. The coupon rate is 6.87 percent and the bond matures in 25 years. If the bond makes semiannual coupon payments, what is the YTM of the bond?
6.46% $2,100.78 = $68.70{[1 − 1/(1 + r)50]/r} + $2,000/(1 + r)50 r = .0323, or 3.23% N= 25x2 PV= -2,100.78 PMT= 68.70 FV= 2,000 I/Y= ? = 3.23%
Warson Motors wants to raise $2 million by selling 20-year coupon bonds at par. Comparable bonds in the market have a coupon rate of 6.3 percent, semiannual payments, 20 years to maturity, and are selling at 96.5 percent of par. What coupon rate should Warson Motors set on its bonds?
6.62% N= 40 PV= -965 PMT= 31.5 FV= 1,000 I/Y= 3.309% 3.309% × 2 = 6.62% Since the current yield to maturity on comparable bonds is 6.62 percent, Warson Motors should set its coupon rate at 6.62 percent if it wants its bonds to sell at par.
A firm has a return on equity of 17.8 percent, a return on assets of 11.3 percent, and a 65 percent dividend payout ratio. What is the sustainable growth rate?
6.64% Sustainable growth rate = [.178 × (1 − .65)]/{1 − [.178 × (1 − .65)]} = .0664 or 6.64%
Smiley Industrial Goods has $1,000 face value bonds on the market with semiannual interest payments, 13.5 years to maturity, and a market price of $1,023. At this price, the bonds yield 6.4 percent. What must be the coupon rate on these bonds?
6.66% PV = $1,023 = C × {(1 − {1/[1 + (.064/2)]27})/(.064/2)} + $1,000/[1 + (.064/2)]27 C = $33.28 Coupon rate = ($33.28 × 2)/$1,000 Coupon rate = .0666, or 6.66%
A firm has net income of $4,238 and interest expense of $898. The tax rate is 21 percent. What is the firm's times interest earned ratio?
6.97 Times interest earned ratio = {[$4,238/(1 − .21)] + $898}/$898 = 6.97
Lawler's BBQ has sales of $311,800, a profit margin of 3.9 percent, and dividends of $4,500. What is the plowback ratio?
62.99% Plowback ratio = 1 − [$4,500/(.039 × $311,800)] = .6299, or 62.99%
Mario's Home Systems has sales of $2,890, costs of goods sold of $2,230, inventory of $518, and accounts receivable of $437. How many days, on average, does it take Mario's to sell its inventory? Assume a 365-day year.
84.78 days Inventory turnover = $2,230/$518 = 4.3050 Days' sales in inventory = 365 days/4.3050 = 84.78 days
Whitts BBQ would like to issue some 10-year, semiannual coupon bonds at par. Comparable bonds have a current yield of 9.16 percent, an effective annual yield of 9.68 percent, and a yield to maturity of 9.50 percent. What coupon rate should Whitts BBQ set on its bonds?
9.50% To sell bonds at par, the coupon rate must be set equal to the yield to maturity on comparable bonds, which in this case is 9.50 percent.
The Golf Range is considering adding an additional driving range to its facility. The range would cost $229,000, would be depreciated on a straight-line basis over its seven-year life, and would have a zero salvage value. The anticipated revenue from the project is $62,500 a year with $18,400 of that amount being variable cost. The fixed cost would be $15,700. The firm believes that it will earn an additional $22,500 a year from its current operations should the driving range be added. The project will require $3,000 of net working capital, which is recoverable at the end of the project. What is the internal rate of return on this project at a tax rate of 21 percent?
9.84% OCF = ($62,500 − 18,400 − 15,700 + 22,500) × (1 − .21) + ($229,000/7) × .21 = $47,081 NPV = 0 = −$229,000 − 3,000 + $47,081(PVIFA7,IRR) + $3,000/(1 + IRR)7 IRR = 9.84%
CrossTown Builders is considering remodeling an old building it currently owns. The building was purchased ten years ago for $1.2 million. Over the past ten years, the firm rented out the building and used the rent to pay off the mortgage. The building is now owned free and clear and has a current market value of $1.9 million. The company is considering remodeling the building into industrial-type apartments at an estimated cost of $1.6 million. The estimated present value of the future income from these apartments is $4.1 million. Which one of the following defines the opportunity cost of the remodeling project?
Current market value of the building
The required return on a stock is equal to which one of the following if the dividend on the stock decreases by a constant percent per year?
Dividend yield + Capital gains yield
LaVerne's Candies reduced its fixed assets this year without affecting the shop's operations, sales, or equity. This reduction will increase which of the following ratios? I. Capital intensity ratio II. Return on assets III. Total asset turnover IV. Return on equity
II and III only
A real rate of return is defined as a rate that has been adjusted for which one of the following?
Inflation
Which one of the following features applies to Nasdaq but not the NYSE?
Multiple market maker system
Which one of the following statements is correct?
Nasdaq has more listed stocks than does the NYSE.
An investment has an initial cost of $2.7 million and net income of $189,400, $178,600, and $172,500 for Years 1 to 3. This investment will be depreciated by $900,000 a year over the three-year life of the project. Should this project be accepted based on the average accounting rate of return if the required rate is 12.5 percent? Why or why not?
Yes, because the AAR is greater than 12.5 percent
Net working capital decreases when:
a dividend is paid to current shareholders.
A debenture is:
an unsecured bond.
Bond ratings classify bonds based on:
default risk only.
Municipal bonds are:
generally callable.
Corporate shareholders:
have the ability to change the corporation's bylaws.
The operating cash flows of a project:
include erosion effects.
When a bond's yield to maturity is less than the bond's coupon rate, the bond:
is selling at a premium.
A protective covenant:
limits the actions of the borrower.
Sun Brite has a new pair of sunglasses it is evaluating. The company expects to sell 6,800 pairs of sunglasses at a price of $163 each and a variable cost of $115 each. The equipment necessary for the project will cost $355,000 and will be depreciated on a straight-line basis over the 7-year life of the project. Fixed costs are $290,000 per year and the tax rate is 24 percent. How sensitive is the operating cash flow to a $1 increase in variable costs per pairs of sunglasses?
−$5,168 Base OCF = [6,800($163 − 115) − 290,000](1 − .24) + .24($355,000/7) Base OCF = $39,835 New OCF = [6,800($163 − 116) − 290,000](1 − .24) + .24($355,000/7) Base OCF = $34,667 Change in OCF = ($39,835 − 34,667)/(115 − 116) Change in OCF = −$5,168
Rossdale Flowers has a new greenhouse project with an initial cost of $395,000 that is expected to generate cash flows of $48,900 for 12 years and a cash flow of $64,300 in Year 13. If the required return is 8.2 percent, what is the project's NPV?
−$7,193.07 NPV = −$395,000 + $48,900(PVIFA8.20%, 12) + $64,300/(1 + .082)13 NPV = −$7,193.07
Lakeside Winery is considering expanding its winemaking operations. The expansion will require new equipment costing $708,000 that would be depreciated on a straight-line basis to a zero balance over the four-year life of the project. The equipment can be sold for $220,000 after the four years. The project requires $46,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $211,500 a year. What is the net present value of this project if the relevant discount rate is 13 percent and the tax rate is 21 percent?
−$9,908.14 NPV = −$708,000 − 46,000 + ($211,500 × {1 − [1/(1 + .13)4]}/.13) + {$46,000 + [$220,000 × (1 − .21)]}/(1 + .13)4 NPV = −$9,908.14
One year ago, Alpha Supply issued 20-year bonds at par. The bonds have a coupon rate of 6.5 percent, paid semiannually, and a face value of $1,000. Today, the market yield on these bonds is 7.2 percent. What is the percentage change in the bond price over the past year?
−7.19% N= 38 I/Y= 3.6% PMT= 32.5 FV= 1,000 PV= ? = -928.13 −$928.13 + 1,000.00 = $71.87; $71.87/$1,000.00 = −.0719, or −7.19%
