Fin 3320 Practice Questions 1 Total Course

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1 Fin 3320 Practice Questions 1 Total Course 1. Your wealthy uncle has set up a special account that will give you $500,000 on your 35 th birthday. Assuming you are age 21 (thus 14 years from receiving this), what is the present value of this gift if the appropriate discount rate is 8.0%? (Ch5) a. $170,231 b. $282,449 c. $442,619 d. $191,206 e. $734, You need $10,900 for the down payment on a new car. You presently have $5,000 in savings for which you expect to earn 6% (annual rate, compounded monthly). If you deposit a further $500 each month to this account, how long, approximately, before you will accumulate enough to meet your down payment requirement? (Ch6) a Years b. 8 Months c. 11 Months d. 16 Months e Years 3. Which of the following are included in current liabilities? (Ch2) I. note payable to a supplier in eight months II. amount due from a customer in 30 days III. account payable to a supplier that is due next week IV. loan payable to the bank in sixteen months A. I and III only B. II and III only C. I, II, and III only D. I, III, and IV only E. I, II, III, and IV 4. ABC Inc. has net working capital of $360; current liabilities of $190. What is the Current Ratio? (Ch3) a. 0.3 b. 0.5 c. 1.9 d. 2.1 e Intentionally limited to computational questions. Concept type questions excluded. 1

2 5. You just got lucky and won $80,000 on a TV game show. You wonder if this will be adequate to fund your retirement in 40 years. You can conservatively invest the money and earn 4.0% (compounded annually) during this period. How much will your game show winnings be worth upon your retirement date? (Ch5) a. $345,346 b. $268,943 c. $223,990 d. $384,082 e. $521, You are considering the purchase of a new car with a price of $48,200. You can make a down payment of $10,000 and finance the remaining balance over 5 years (60 months) at 6.0%. You wonder if you can afford the monthly payments. How much will the monthly payment be? (Ch6) a. $1,082 b. $1,146 c. $ 739 d. $ 819 e. $ Bob wants to begin accumulating an emergency fund in case he loses his job. He will save $ at the end of each month and can invest to earn at a rate of 7%. He believes his job is not at risk for the next 10 years. How much will he have in his account in 10 years? (Ch 6) a. $61,376 b. $29,476 c. $23,732 d. $51,925 e. $41, You are comparing two annuities that are available to you at the same price (thus with equal present values). The applicable discount rate is 8 percent. One annuity pays $5,000 on the first day of each year for 20 years. How much does the second annuity pay each year for 20 years if it pays at the end of each year? (Ch 6) a. $5,000 b. $5,267 c. $5,309 d. $5,390 e. $5,400 2

3 9. The bonds issued by Bluefish Incorporated have a 7.0 percent coupon, payable semiannually. The bonds mature in 10 years and have a $1,000 face value. Currently, the bonds are quoted at 98.9 (thus sell for $989). What is the yield to maturity? (Ch7) a. 4.24% b. 3.97% c. 5.08% d. 6.14% e. 7.16% 10. Bamba Equipment offers 7.5 percent coupon bonds with semiannual payments and a yield to maturity of 7.88 percent. The bonds mature in 6 years. What is the market price per bond if the face value is $1,000? (Ch 7) a. $ b. $ c. $ d. $1, e. $1, Newco Inc. is a startup firm that is still in a period of rapid development. The company plans on retaining all of its earnings and pay no dividends for the next 5 years. Six years from now, the company projects paying an annual dividend of $1.00 a share and then increasing that amount by 3 % annually thereafter. What is the value of their stock if the discount rate is 10%? (Ch8) a. $3.41 b. $4.92 c. $6.19 d. $8.87 e. $ Samson Inc. just paid $1.80 to their shareholders as the annual dividend. The company also announced that future dividends will be increasing by 3% percent. If you require an 8% rate of return, how much are you willing to pay to purchase one share of the stock? (Ch 8) a. $37.08 b. $32.40 c. $40.00 d. $49.01 e. $ Benson Inc. is growing quickly. Dividends are expected to grow at 25% rate for the next 3 years, with the growth rate then leveling at a constant 4% thereafter. The required return is 12% and the company just paid a $2.50 annual dividend. What is the current share price? (Ch 8) a. $34.92 b. $54.56 c. $68.14 d. $92.12 e. $

4 14. You are considering two independent projects both of which have been assigned a discount rate of 14% percent. Based on the project NPV, what is your recommendation concerning these projects? (Ch 9) Project A Project B Year Cash Flow Year Cash Flow 0 -$40, $39,000 1 $22,000 1 $28,000 2 $28,000 2 $21,000 a. You should accept both projects. b. You should reject both projects. c. You should accept project A and reject project B. d. You should accept project B and reject project A. e. You should accept project A and be indifferent to project B. 15. Referring to the above question and table, if the projects under consideration are mutually exclusive, then what would your answer be? (Ch 9) a. You should accept both projects. b. You should reject both projects. c. You should accept project A and reject project B. d. You should accept project B and reject project A. e. You should accept project A and be indifferent to project B. 16. Drake Builders, Inc. purchased a lot in Tucson, Arizona 10 years ago at a cost of $380,000. At the time of the purchase, the company spent $15,000 to level the lot and another $20,000 to install storm drains. Today, that lot has a market value of $650,000. The company now wants to build a new facility on that site. The building cost is estimated at $1.9 million. What amount should be used as the initial cash flow for this project? (Ch10) a. $1,900,000 b. -$1,835,000 c. -$2,550,000 d. -$2,295,000 e. $2,085, Consider a profitable company with an asset that cost $500,000 that is being depreciated straight-line to zero over its 8-year depreciable tax life. The asset is to be used in a 5-year project; and then be sold for $90,000. If the relevant tax rate is 35%, what is the after tax cash flow from the sale of this asset (after-tax salvage)? (Ch 10) a. $68,250 b. $124,125 c. $140,175 d. $69,825 e. None of the above 4

5 18. Fabrique Inc. common stock is currently trading at $30.00 a share. The company just paid $1.75 per share as its annual dividend. The dividends have been increasing by 3 percent annually and are expected to continue doing the same. What is this firm's cost of equity? (Ch 8 and Ch14) a percent b percent c percent d percent e. Not enough information given 19. Star Corporation has a target capital structure of 30 percent common stock, 10 percent preferred stock, and 60 percent debt. Its cost of equity is 14 percent, the cost of preferred stock is 8.0 percent, and the pre-tax cost of debt is 7.0 percent. What is the firm's WACC given a tax rate of 35 percent? (Ch14) a percent b percent c percent d percent e % percent 20. The expected market rate of return is 12%, the risk-free rate is 3%. Stock A has a beta of 1.3. If stock A is priced to yield a rate of return of 16% (expected return), then: (Ch13) a. Stock A is overpriced b. Stock A is underpriced c. Stock A lies on the SML d. Stock A lies below the SML e. Stock A is fairly priced 21. According to CAPM theory (Capital Asset Pricing Model), if a stock has a beta of 1.5, the expected return on the overall market is 10% and the risk free rate is 3.2%, what would the expected return on the stock be? (Ch13) a. 8.6 percent b percent c percent d percent e. Not enough information given 5

6 Use the following information for the next three questions: (ch10) Needle and Thread Inc. is considering expanding one of its production facilities to build a new line of sewing kits. The project would require a $9,000,000 capital investment and will be fully depreciated (straight-line) over its 3 year life. They believe they can salvage $300,000 for the equipment at that time. Incremental sales are expected to be $10,000,000 annually for the 3 year period with costs (excluding depreciation) of 42%. The company would also have to commit initial working capital to the project of $1,000,000. The company has a 36% tax rate. 22) Project cash flow for Year 0 is: a) $9,000,000 b) -$9,000,000 c) -$10,000,000 d) -$10,300,000 e) -$1,000,000 23) Project cash flow for Year 1 is: a) $5,800,000 b) $4,792,000 c) $2,800,000 d) $3,800,000 e) $3,712,000 24) Project cash flow for Year 3 is: a) $5,800,000 b) $4,792,000 c) $2,800,000 d) $3,800,000 e) $5,

7 Use the following information to answer the next five questions below: (Ch 9) A capital investment project is estimated to have the following after-tax cash flows: Year 0 Year 1 Year 2 Year 3 Year4 ($35,000) 13,000 $14,000 $15,000 16,000 The company utilizes a 8% discount rate for capital project analysis. 25) The PAYBACK for the project shown above is: a) 2.57 b) 2.00 c) 3.00 d) ) The DISCOUNTED PAYBACK for the project shown above is: a) 2.57 b) 2.92 c) 3.00 d) ) For the project shown above, the NET PRESENT VALUE is: a) $12,708 b) $45,672 c) $46,527 d) $11,213 28) For the project shown above, the INTERNAL RATE OF RETURN is: a) 21.49% b) 21.42% c) 19.27% d) 22.81% 29) For the project shown above, the PROFITABILITY INDEX is: a).33 b) 1.36 c) 1.60 d)

8 Use the following information to answer the next five questions (assume Co. tax rate of 35%): (Ch14) Debt Common Stock Preferred Stock Market 50,000 bonds with 7.5 percent coupon rate, $1,000 par value, 20 years to maturity, selling for 96.3 percent of par; the bonds make annual coupon payments 1,000,000 shares of common stock outstanding. The stock sells for a price of $50 per share and has a beta of ,000 shares of preferred stock outstanding, currently selling for $110 per share; with annual dividend payment of $ percent market risk premium and 4 percent risk free rate 30) The before tax cost of debt is: a) 7.50% b) $5,055,750 c) $5,305,167 d) 7.87% 31) The after tax cost of debt is: a) 4.88% b) $51.20 c) 5.12% d) $ ) The company s cost of common stock is: a) 14.80% b) 9.40% c) $50.00 d) 2.08% 33) The company s cost of preferred stock is: a) $ b) 7.27% c) 13.72% d) 7.96% 34) The WACC of the company is: a) 10.03% b) 8.68% c) 9.65% d) 11.72% 8

9 Use the following information to answer the following 3 questions. Your profitable company is considering acquiring a new computer system that will initially cost $1,000,000 and will save $400,000 per year in inventory and receivables management costs. The system will last for four years. The system is expected to have a salvage value of $100,000 at the end of year 4 and will be depreciated to zero using three year MACRS (rates are: Year 1:.3333, Year 2:.4445, Year 3:.1481, Year 4:.0741). The marginal tax rate is 40%. Assume a required rate of return of 12%. 35) Cash Flow From Assets in Year 4 is: a) $182,910 b) $280,419 c) $329,640 d) $400,000 36) Net Present Value is: a) $88,874 b) $42,744 c) $32,465 d) $27,682 37) Internal Rate of Return is: a) 10.0% b) 16.3% c) 9.7% d) 14.6% 9

10 38) Stock X has a return of 20% and stock Y has a return of 30%. If you put 60% of your money in X and 40% in Y, what is the return of your portfolio? (Ch13) a. 28.0% b. 19.6% c. 24.0% d. 25.6% e. 17.0% 39) You have the following information on a portfolio. You put 20% of your money in A and 80% in B. Find the expected return on your portfolio. (Ch13) Economy Probability Return on A Return on B State 1 (Bust).60 5% -10% State 2 (Boom).40 30% 65% a. 21.5% b. 19.0% c. 17.5% d. 25.5% e. 22.5% 40) You have the following information on a stock. Find the standard deviation on the stock. (Ch13) Economy Probability Return on A State 1 (Bust).60-10% State 2 (Boom).40 40% a. 15% b. 28% c. 24.5% d. 29.9% e. 35.4% 10

Example 3.1. You deposit $110 into a bank that pays 7% interest per year. How much will you have after 1 year? (117.70)

Fin 3014 Principles of Finance Practice Examples Chapter 3: Example 3.1. You deposit $110 into a bank that pays 7% interest per year. How much will you have after 1 year? (117.70) Example. 3.2. You deposit