Finance Final Exam

You are considering the following two mutually exclusive projects. The required rate of return is 14.6 percent for project A and 13.8 percent for project B. Which project should you accept and why? Year Project A Project B 0 -$50,000 -$50,000 1 24,800 41,000 2 36,200 20,000 3 21,000 10,000 A. project A; because it has the higher required rate of return B. project A; because its NPV is about $4,900 more than the NPV of project B C. project B; because it has the largest total cash inflow D. project B; because it has the largest cash inflow in year one E. project B; because it has the lower required return

B. project A; because its NPV is about $4,900 more than the NPV of project B

Blackwell bonds have a face value of $1,000 and are currently quoted at 98.4. The bonds have a 5 percent coupon rate. What is the current yield on these bonds? A. 4.67 percent B. 4.78 percent C. 5.08 percent D. 5.33 percent E. 5.54 percent

C. 5.08 percent

You are purchasing a 25-year, zero-coupon bond. The yield to maturity is 8.68 percent and the face value is $1,000. What is the current market price? A. $106.67 B. $108.18 C. $119.52 D. $121.50 E. $128.47

D. $121.50

Peterson's Antiquities currently has a 31 day cash cycle. Assume the firm changes its operations such that it decreases its receivables period by 2 days, decreases its inventory period by 3 days, and decreases its payables period by 4 days. What will the length of the cash cycle be after these changes? A. 22 days B. 23 days C. 29 days D. 30 days E. 31 days

D. 30 days

11. Today, you are retiring. You have a total of $411,016 in your retirement savings and have the funds invested such that you expect to earn an average of 7.10 percent, compounded monthly, on this money throughout your retirement years. You want to withdraw $2,500 at the beginning of every month, starting today. How long will it be until you run out of money? A. 31.97 years B. 34.56 years C. 42.03 year D. 48.19 years E. You will never run out of money

D. 48.19 years

Electronics Galore has 950,000 shares of common stock outstanding at a market price of $38 a share. The company also has 40,000 bonds outstanding that are quoted at 106 percent of face value. What weight should be given to the debt when the firm computes its weighted average cost of capital? A. 42 percent B. 46 percent C. 50 percent D. 54 percent E. 58 percent

D. 54 percent

You are borrowing $17,800 to buy a car. The terms of the loan call for monthly payments for 5 years at 8.6 percent interest. What is the amount of each payment? A. $287.71 B. $291.40 C. $301.12 D. $342.76 E. $366.05

E. $366.05

What is the future value of $7,189 invested for 23 years at 9.25 percent compounded annually? A. $22,483.60 B. $27,890.87 C. $38,991.07 D. $51,009.13 E. $54,999.88

E. $54,999.88

Samuelson Engines wants to save $750,000 to buy some new equipment six years from now. The plan is to set aside an equal amount of money on the first day of each quarter starting today. The firm can earn 4.75 percent on its savings. How much does the firm have to save each quarter to achieve its goal? A. $26,872.94 B. $26,969.70 C. $27,192.05 D. $27,419.29 E. $27,911.08

A. $26,872.94

At the accounting break-even point, Swiss Mountain Gear sells 14,600 ski masks at a price of $10 each. At this level of production, the depreciation is $58,000 and the variable cost per unit is $4. What is the amount of the fixed costs at this production level? A. $29,600 B. $52,400 C. $61,300 D. $87,600 E. $145,600

A. $29,600

You want to have $35,000 saved 6 years from now to buy a house. How much less do you have to deposit today to reach this goal if you can earn 5.5 percent rather than 5 percent on your savings? Today's deposit is the only deposit you will make to this savings account. A. $733.94 B. $791.18 C. $824.60 D. $845.11 E. $919.02

A. $733.94

What is the net present value of a project that has an initial cash outflow of $34,900 and the following cash inflows? The required return is 15.35 percent. Year Cash Inflows 1 $12,500 2 19,700 3 0 4 10,400 A. -$3,383.25 B. -$2,784.62 C. -$2,481.53 D. $52,311.08 E. $66,416.75

A. -$3,383.25

A 16-year, 4.5 percent coupon bond pays interest annually. The bond has a face value of $1,000. What is the percentage change in the price of this bond if the market yield to maturity rises to 5.7 percent from the current rate of 5.5 percent? A. 2.14 percent decrease B. 1.97 percent decrease C. 0.21 percent increase D. 1.97 percent increase E. 2.14 percent increase

A. 2.14 percent decrease

Wind Power Systems has 20-year, semi-annual bonds outstanding with a 5 percent coupon. The face amount of each bond is $1,000. These bonds are currently selling for 114 percent of face value. What is the company's pre-tax cost of debt? A. 3.98 percent B. 4.42 percent C. 4.71 percent D. 5.36 percent E. 5.55 percent

A. 3.98 percent

The Purple Martin has annual sales of $687,400, total debt of $210,000, total equity of $365,000, and a profit margin of 5.20 percent. What is the return on assets? A. 6.22 percent B. 6.48 percent C. 7.02 percent D. 7.78 percent E. 9.79 percent

A. 6.22 percent

Miller Brothers Hardware paid an annual dividend of $1.15 per share last month. Today, the company announced that future dividends will be increasing by 2.6 percent annually. If you require a 12 percent rate of return, how much are you willing to pay to purchase one share of this stock today? A. $12.23 B. $12.55 C. $12.67 D. $12.72 E. $12.88

B. $12.55

32. Kwik 'n Hot Dogs is considering the installation of a new computerized pressure cooker that will cut annual operating costs by $23,000. The system will cost $39,900 to purchase and install. This system is expected to have a 4-year life and will be depreciated to zero using straight-line depreciation. What is the amount of the earnings before interest and taxes for this project? A. $10,525 B. $13,025 C. $15,525 D. $16,900 E. $19,400

B. $13,025

A company is considering a project with a cash break-even point of 22,600 units. The selling price is $28 a unit, the variable cost per unit is $13, and depreciation is $14,000. What is the projected amount of fixed costs? A. $325,000 B. $339,000 C. $342,000 D. $348,000 E. $353,000

B. $339,000

Oil Well Supply offers 7.5 percent coupon bonds with semiannual payments and a yield to maturity of 7.68 percent. The bonds mature in 6 years. What is the market price per bond if the face value is $1,000? A. $989.70 B. $991.47 C. $996.48 D. $1,002.60 E. $1,013.48

B. $991.47

Oscar's Dog House has a profit margin of 5.6 percent, a return on assets of 12.5 percent, and an equity multiplier of 1.49. What is the return on equity? A. 17.14 percent B. 18.63 percent C. 19.67 percent D. 21.69 percent E. 22.30 percent

B. 18.63 percent

West Chester Automation has an inventory turnover of 16 and an accounts payable turnover of 11. The accounts receivable period is 36 days. What is the length of the cash cycle? A. 5.67 days B. 25.63 days C. 41.00 days D. 52.00 days E. 58.81 days

B. 25.63 days

Assume the average vehicle selling price in the United States last year was $41,996. The average price 9 years earlier was $29,000. What was the annual increase in the selling price over this time period? A. 3.89 percent B. 4.20 percent C. 4.56 percent D. 5.01 percent E. 5.40 percent

B. 4.20 percent

44. Nelson's Landscaping has 1,200 bonds outstanding that are selling for $990 each. The company also has 2,500 shares of preferred stock at a market price of $28 a share. The common stock is priced at $37 a share and there are 28,000 shares outstanding. What is the weight of the common stock as it relates to the firm's weighted average cost of capital? A. 43.08 percent B. 45.16 percent C. 47.11 percent D. 54.00 percent E. 55.45 percent

B. 45.16 percent

A corporate bond is quoted at a price of 103.16 and carries a 6.50 percent coupon. The bond pays interest semiannually. What is the current yield on one of these bonds? A. 6.24 percent B. 6.30 percent C. 6.36 percent D. 6.62 percent E. 6.66 percent

B. 6.30 percent

Redesigned Computers has 5.25 percent coupon bonds outstanding with a current market price of $546.19. The yield to maturity is 16.28 percent and the face value is $1,000. Interest is paid semiannually. How many years is it until these bonds mature? A. 6.64 years B. 7.08 years C. 12.41 years D. 14.16 years E. 28.32 years

B. 7.08 years

The common stock of Auto Deliveries sells for $28.16 a share. The stock is expected to pay $1.35 per share next year when the annual dividend is distributed. The firm has established a pattern of increasing its dividends by 3 percent annually and expects to continue doing so. What is the market rate of return on this stock? A. 7.42 percent B. 7.79 percent C. 19.67 percent D. 20.14 percent E. 20.86 percent

B. 7.79 percent

Based on the profitability index rule, should a project with the following cash flows be accepted if the discount rate is 14 percent? Why or why not? Year Cash Flow 0 -$26,200 1 $11,800 2 $0 3 $24,900 A. Yes; The PI is 0.96. B. Yes; The PI is 1.04. C. Yes; The PI is 1.08. D. No; The PI is 0.96. E. No; The PI is 1.04.

B. Yes; The PI is 1.04.

You borrow $165,000 to buy a house. The mortgage rate is 7.5 percent and the loan period is 30 years. Payments are made monthly. If you pay the mortgage according to the loan agreement, how much total interest will you pay? A. $206,408 B. $229,079 C. $250,332 D. $264,319 E. $291,406

C. $250,332

Jefferson & Sons is evaluating a project that will increase annual sales by $138,000 and annual costs by $94,000. The project will initially require $110,000 in fixed assets that will be depreciated straight-line to a zero book value over the 4-year life of the project. The applicable tax rate is 32 percent. What is the operating cash flow for this project? A. $11,220 B. $29,920 C. $38,720 D. $46,480 E. $46,620

C. $38,720

How much are you willing to pay for one share of Jumbo Trout stock if the company just paid a $0.70 annual dividend, the dividends increase by 1.6 percent annually, and you require a 10 percent rate of return? A. $8.29 B. $8.33 C. $8.47 D. $8.53 E. $8.59

C. $8.47

The Beach House has sales of $784,000 and a profit margin of 11 percent. The annual depreciation expense is $14,000. What is the amount of the operating cash flow if the company has no long-term debt? A. $68,760 B. $72,240 C. $86,240 D. $100,240 E. $101,760

C. $86,240

Gerold invested $6,200 in an account that pays 5 percent simple interest. How much money will he have at the end of ten years? A. $8,710 B. $9,000 C. $9,300 D. $9,678 E. $10,099

C. $9,300

What is the net present value of a project with the following cash flows if the required rate of return is 12 percent? Year Cash Flow 0 -$41,398 1 13,407 2 21,219 3 17,800 A. -$1,574.41 B. -$1,208.19 C. -$842.12 D. $729.09 E. $1,311.16

C. -$842.12

31. What is the profitability index for an investment with the following cash flows given a 14.5 percent required return? Year Cash Flow 0 -$46,500 1 $12,200 2 $38,400 3 $11,300 A. 0.94 B. 0.98 C. 1.02 D. 1.06 E. 1.11

C. 1.02

Mullineaux Corporation has a target capital structure of 41 percent common stock, 4 percent preferred stock, and 55 percent debt. Its cost of equity is 19 percent, the cost of preferred stock is 6.5 percent, and the pre-tax cost of debt is 7.5 percent. What is the firm's WACC given a tax rate of 34 percent? A. 9.87 percent B. 10.43 percent C. 10.77 percent D. 13.38 percent E. 15.17 percent

C. 10.77 percent

Forty years ago, your mother invested $5,000. Today, that investment is worth $430,065.11. What is the average annual rate of return she earned on this investment? A. 11.68 percent B. 11.71 percent C. 11.78 percent D. 11.91 percent E. 12.02 percent

C. 11.78 percent

Northern Gas recently paid a $2.80 annual dividend on its common stock. This dividend increases at an average rate of 3.8 percent per year. The stock is currently selling for $26.91 a share. What is the market rate of return? A. 13.88 percent B. 14.03 percent C. 14.21 percent D. 14.37 percent E. 14.60 percent

C. 14.21 percent

Boulder Furniture has bonds outstanding that mature in 13 years, have a 6 percent coupon, and pay interest annually. These bonds have a face value of $1,000 and a current market price of $1,040. What is the company's aftertax cost of debt if its tax rate is 32 percent? A. 2.97 percent B. 3.24 percent C. 3.78 percent D. 5.21 percent E. 5.53 percent

C. 3.78 percent

The bonds issued by Stainless Tubs bear a 6 percent coupon, payable semiannually. The bonds mature in 11 years and have a $1,000 face value. Currently, the bonds sell for $989. What is the yield to maturity? A. 5.87 percent B. 5.92 percent C. 6.08 percent D. 6.14 percent E. 6.20 percent

D. 6.14 percent

Denver Shoppes will pay an annual dividend of $1.46 a share next year with future dividends increasing by 4.2 percent annually. What is the market rate of return if the stock is currently selling for $38.90 a share? A. 6.55 percent B. 7.13 percent C. 7.46 percent D. 7.95 percent E. 8.29 percent

D. 7.95 percent

46. Interior Designs has an inventory period of 46 days, an accounts payable period of 38 days, and an accounts receivable period of 32 days. Management is considering an offer from their suppliers to pay within 10 days and receive a 2 percent discount. If the new discount is taken, the accounts payable period is expected to decline by 26 days. If the new discount is taken, the operating cycle will be _____ days. A. 52 B. 62 C. 71 D. 78 E. 91

D. 78

40. Chelsea Fashions is expected to pay an annual dividend of $0.80 a share next year. The market price of the stock is $22.40 and the growth rate is 5 percent. What is the firm's cost of equity? A. 7.58 percent B. 7.91 percent C. 8.24 percent D. 8.57 percent E. 9.00 percent

D. 8.57 percent

Sweet Treats common stock is currently priced at $19.06 a share. The company just paid $1.15 per share as its annual dividend. The dividends have been increasing by 2.5 percent annually and are expected to continue doing the same. What is this firm's cost of equity? A. 6.03 percent B. 6.18 percent C. 8.47 percent D. 8.68 percent E. 8.82 percent

D. 8.68 percent

36. Marie's Fashions is considering a project that will require $28,000 in net working capital and $87,000 in fixed assets. The project is expected to produce annual sales of $75,000 with associated costs of $57,000. The project has a 5-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 30 percent. What is the operating cash flow for this project? A. -$1,520 B. -$580 C. $420 D. $15,680 E. $17,820

E. $17,820

2. Current Cap. Structure Proposed Cap. Structure Assets $ 15 million $15 million Debt $0 $6 million Shares O/S 600,000 ? Bond Int. Rate n/a 8% There are no taxes. EBIT is expected to be $2.5 million, but could be as high as $3.5 million if an economic expansion occurs, or as low as $2 million if a recession occurs. All values are market values. What is EPS during an expansion for the proposed capital structure? A. $4.17 B. $5.03 C. $5.83 D. $8.39 E. $9.72

E. $9.72

45. Wayco Industrial Supply has a pre-tax cost of debt of 7.6 percent, a cost of equity of 14.3 percent, and a cost of preferred stock of 8.5 percent. The firm has 220,000 shares of common stock outstanding at a market price of $27 a share. There are 25,000 shares of preferred stock outstanding at a market price of $41 a share. The bond issue has a face value of $550,000 and a market quote of 101.2. The company's tax rate is 37 percent. What is the firm's weighted average cost of capital? A. 10.18 percent B. 10.84 percent C. 11.32 percent D. 12.60 percent E. 12.81 percent

E. 12.81 percent

The common stock of Textile Mills pays an annual dividend of $1.65 a share. The company has promised to maintain a constant dividend even though economic times are tough. How much are you willing to pay for one share of this stock if you want to earn a 12 percent annual return? A. $13.75 B. $14.01 C. $14.56 D. $14.79 E. $15.23

A. $13.75

A firm has net working capital of $2,715, net fixed assets of $22,407, sales of $31,350, and current liabilities of $3,908. How many dollars worth of sales are generated from every $1 in total assets? A. $1.08 B. $1.14 C. $1.19 D. $1.26 E. $1.30

A. $1.08

22. Sessler Manufacturers made two announcements concerning its common stock today. First, the company announced that the next annual dividend will be $1.75 a share. Secondly, all dividends after that will decrease by 1.5 percent annually. What is the maximum amount you should pay to purchase a share of this stock today if you require a 14 percent rate of return? A. $11.29 B. $12.64 C. $13.27 D. $14.00 E. $14.21

A. $11.29

13. You just received an insurance settlement offer related to an accident you had six years ago. The offer gives you a choice of one of the following three offers:Option A: $1,565 a month for 72 Months Option B: $1,012 a month for 10 year Option C: $100,000 as a lump sum payment today You can earn 7.5 percent on your investments. You do not care if you personally receive the funds or if they are paid to your heirs should you die within the settlement period. Which one of the following statements is correct given this information? A. Option A is the best choice as it provides the largest monthly payment. B. Option B is the best choice because it pays the largest total amount. C. Option C is the best choice because it is has the largest current value. D. Option B is the best choice because you will receive the most payments. E. You are indifferent to the three options as they are all equal in value.

C. Option C is the best choice because it is has the largest current value.