| 1) | Total assets are $1000, fixed assets are $700, long-term debt is $250, and short-term debt is $300. What is the amount of net working capital?
Net working capital = $1000 – $700 – $300 = $0 |
| 3) | Your parents are giving you $100 a month for four years while you are in college. At a 6% discount rate, what are these payments worth to you when you first start college?
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| .4) | The great, great grandparents of one of your classmates sold their factory to the government 104 years ago for $150,000. If these proceeds had been invested at 6%, how much would this legacy be worth today? Assume annual compounding.
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| 5) | An investment project has the cash flow stream of $-3250, $80, $200, $75, and $90. The cost of capital is 12%. What is the discounted payback period?
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6) An investment cost $12,000 with expected cash flows of $4,000 for 4 years. The discount rate is 15.2382%. The NPV is ______ and the IRR is ______ for the project.
| A. | -$634.89; 12.60% |
| B. | $0; 15.2382% |
| C. | $4,000; 0% |
| D. | Can not answer without one or the other value as input. |
| E. | None of these. |
7) Thornley Machines is considering a 3-year project with an initial cost of $618,000. The project will not directly produce any sales but will reduce operating costs by $265,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated $60,000. The tax rate is 34%. The project will require $23,000 in extra inventory for spare parts and accessories. Should this project be implemented if Thornley’s requires a 9% rate of return? Why or why not?
| A. | No; The NPV is -$2,646.00. |
| B. | Yes; The NPV is $27,354.00. |
| C. | Yes; The NPV is $32,593.78. |
| D. | Yes; The NPV is $43,106.54. |
| E. | Yes; The NPV is $196,884.40. |
8)
A project will produce operating cash flows of $45,000 a year for four years. During the life of the project, inventory will be lowered by $30,000 and accounts receivable will increase by $15,000. Accounts payable will decrease by $10,000. The project requires the purchase of equipment at an initial cost of $120,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. The equipment will be salvaged at the end of the project creating a $25,000 after-tax cash flow. At the end of the project, net working capital will return to its normal level. What is the net present value of this project given a required return of 14%?
| A. | $3,483.48 |
| B. | $16,117.05 |
| C. | $27,958.66 |
| D. | $32,037.86 |
| E. | $49,876.02 |
9) What are the arithmetic and geometric average returns for a stock with annual returns of 5%, 8%, -3%, and 16%?
| A. | 6.5%; 6.28% |
| B. | 6.5%; 9.21% |
| C. | 9.3%; 6.28% |
| D. | 9.3%; 9.21% |
| E. | 10.25%; 8.31% |
10) A year ago, you purchased 300 shares of IXC Technologies, Inc. stock at a price of $10.05 per share. The stock pays an annual dividend of $.10 per share. Today, you sold all of your shares for $29.32 per share. What is your total dollar return on this investment?
| A. | $8,781 |
| B. | $8,796 |
| C. | $8,811 |
| D. | $8,832 |
| E. | $8,921 |
11)
What is the expected return on a portfolio comprised of $3,000 in stock K and $5,000 in stock L if the economy is normal?
| A. | 3.75% |
| B. | 5.25% |
| C. | 5.63% |
| D. | 5.88% |
| E. | 6.80% |
12) You have a $1,000 portfolio which is invested in stocks A and B plus a risk-free asset. $400 is invested in stock A. Stock A has a beta of 1.3 and stock B has a beta of .7. How much needs to be invested in stock B if you want a portfolio beta of .90?
| A. | $0 |
| B. | $268 |
| C. | $482 |
| D. | $543 |
| E. | $600 |
13) Gail’s Dance Studio is currently an all equity firm that has 80,000 shares of stock outstanding with a market price of $42 a share. The current cost of equity is 12% and the tax rate is 34%. Gail is considering adding $1 million of debt with a coupon rate of 8% to her capital structure. The debt will be sold at par value. What is the levered value of the equity?
| A. | $2.4 million |
| B. | $2.7 million |
| C. | $3.3 million |
| D. | $3.7 million |
| E. | $3.9 million |
14) The Winter Wear Company has expected earnings before interest and taxes of $2,100, an unlevered cost of capital of 14% and a tax rate of 34%. The company also has $2,800 of debt that carries a 7% coupon. The debt is selling at par value. What is the value of this firm?
| A. | $9,900 |
| B. | $10,852 |
| C. | $11,748 |
| D. | $12,054 |
| E. | $12,700 |
15) The Montana Hills Co. has expected earnings before interest and taxes of $8,100, an unlevered cost of capital of 11%, and debt with both a book and face value of $12,000. The debt has an annual 8% coupon. The tax rate is 34%. What is the value of the firm?
| A. | $48,600 |
| B. | $50,000 |
| C. | $52,680 |
| D. | $56,667 |
| E. | $60,600 |
16) Your firm has a debt-equity ratio of .75. Your pre-tax cost of debt is 8.5% and your required return on assets is 15%. What is your cost of equity if you ignore taxes?
| A. | 11.25% |
| B. | 12.21% |
| C. | 16.67% |
| D. | 19.88% |
| E. | 21.38% |
18) Regional Power wants to raise $10 million in new equity. The subscription price is $20. There are currently 3 million shares outstanding, each with 1 right. How many rights are needed to purchase 1 share?
| A. | 1 |
| B. | 3 |
| C. | 5 |
| D. | 6 |
| E. | 8 |
19) For a particular stock the old stock price is $20, the ex-rights price is $15, and the number of rights needed to buy a new share is 2. Assuming everything else constant, the subscription price is ______.
| A. | $5 |
| B. | $13 |
| C. | $17 |
| D. | $18 |
| E. | $20 |
