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1. DEVRY FIN 515 Week 4 Midterm
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1. (TCO G) The firm’s asset turnover measures
2. (TCO G) Suppose Novak Company experienced a reduction in
its ROE over the last year. This fall could be attributed to
3. (TCO B) You plan on retiring in 20 years. You currently have
$275,000 and think you will need $1,000,000 to retire.
Assuming you don’t deposit any additional money into the
account, what annual return will you need to earn to meet this
goal?
4. (TCO B) You take out a 4 year car loan for $18,000. The loan
has a 4% annual interest rate. The payments are made
monthly. What are the monthly payments? Show your work
5. (TCO B) You currently have $10,000 in your retirement
account. If you deposit $500 per month and the account pays
5% interest, how much will be in the account in 10 years? Show
your work.
6. (TCO B) You have a two children, A and B. Child A is not going
to college but is working in a business to learn the ropes. Child
A plans on opening a business someday. Child B is attending
college. You put a certain amount of money into an account.

2. From this account, Child B will receive $2,000 per month for the
next four years. Whatever is left at that time will go to Child A to
help start the business. You want Child A to receive $96,000 at
that time. The account pays 7% annually, compounded
monthly. How much money do you need to start the account?
Show your work.
7. (TCO F) A project requires an initial cash outlay of $95,000
and has expected cash inflows of $20,000 annually for 9 years.
The cost of capital is 10%. What is the project’s NPV? Show your
work.
8. (TCO F) A project requires an initial cash outlay of $60,000
and has expected cash inflows of $15,000 annually for 8 years.
The cost of capital is 10%. What is the project’s payback
period? Show your work.
9. (TCO F) A project requires an initial cash outlay of $95,000
and has expected cash inflows of $20,000 annually for 9 years.
The cost of capital is 10%. What is the project’s IRR? Show your
work.
10. (TCO F) A project requires an initial cash outlay of $40,000
and has expected cash inflows of $12,000 annually for 7 years.
The cost of capital is 10%. What is the project’s discounted
payback period? Show your work.
11. (TCO F) Company A has the opportunity to do any, none, or
all of the projects for which the net cash flows per year are
shown below. The projects are not mutually exclusive. The
company has a cost of capital of 15%. Which should the
company do and why? You must use at least two capital
budgeting methods. Show your work. Explain your answer
thoroughly.

3. (1 ) (TCO A) Which of the following statements is CORRECT?
(Points : 10)
(a) It is generally more expensive to form a proprietorship than
a corporation because, with a proprietorship, extensive legal
documents are required.
(b) Corporations face fewer regulations than sole
proprietorships.
(c) One disadvantage of operating a business as a sole
proprietorship is that the firm is subject to double taxation, at
both the firm level and the owner level.
(d) One advantage of forming a corporation is that equity
investors are usually exposed to less liability than in a regular
partnership.
(e) If a regular partnership goes bankrupt, each partner is
exposed to liabilities only up to the amount of his or her
investment in the business.
(2) (TCO G) A security analyst obtained the following
information from Prestopino Products’ financial statements:
Retained earnings at the end of 2009 were $700,000, but
retained earnings at the end of 2010 had declined to $320,000.
• The company does not pay dividends.
• The company’s depreciation expense is its only non-cash
expense; it has no amortization charges.
• The company has no non-cash revenues.
• The company’s net cash flow (NCF) for 2010 was $150,000.
On the basis of this information, which of the following
statements is CORRECT? (Points : 10)
(a) Prestopino had negative net income in 2010.

4. ( b ) Prestopino’s depreciation expense in 2010 was less than
$150,000.
(c) Prestopino had positive net income in 2010, but its income
was less than its 2009 income.
(d) Prestopino’s NCF in 2010 must be higher than its NCF in
2009.
(e) Prestopino’s cash on the balance sheet at the end of 2010
must be lower than the cash it had on the balance sheet at the
end of 2009.
(3) TCO G) Beranek Corp. has $410,000 of assets, and it uses no
debt—it is financed only with common equity. The new CFO
wants to employ enough debt to bring the debt/assets ratio to
40%, using the proceeds from the borrowing to buy back
common stock at its book value. How much must the firm
borrow to achieve the target debt ratio? (Points : 10)
$155,800
$164,000
$172,200
$180,810
$189,851
(4) (TCO B) You deposit $1,000 today in a savings account that
pays 3.5% interest, compounded annually. How much will your
account be worth at the end of 25 years? (Points : 10)
$2,245.08
$2,363.24
$2,481.41
$2,605.48
$2,735.75

5. (5). (TCO B) You sold a car and accepted a note with the
following cash flow stream as your payment. What was the
effective price you received for the car assuming an interest
rate of 6.0%?
Years: 0 1 2 3 4
|———–|————–|————–|————–|
CFs: $0 $1,000 $2,000 $2,000 $2,000 (Points : 10)
$5,987
$6,286
$6,600
$6,930
$7,277
(6) (TCO B) Suppose you borrowed $12,000 at a rate of 9.0%
and must repay it in four equal installments at the end of each
of the next four years. How large would your payments be?
(Points : 10)
3,704.02
$3,889.23
$4,083.69
$4,287.87
$4,502.26
(7 ) (TCO D) Which of the following statements is CORRECT?
(Points : 10)
(a) If a bond is selling at a discount, the yield to call is a better
measure of return than the yield to maturity.
(b) On an expected yield basis, the expected capital gains yield
will always be positive because an investor would not purchase
a bond with an expected capital loss.

6. (c) On an expected yield basis, the expected current yield will
always be positive because an investor would not purchase a
bond that is not expected to pay any cash coupon interest.
(d) If a coupon bond is selling at par, its current yield equals its
yield to maturity.
(e) The current yield on Bond A exceeds the current yield on
Bond B; therefore, Bond A must have
(8 ) (TCO D) Ezzell Enterprises’ noncallable bonds currently sell
for $1,165. They have a 15-year maturity, an annual coupon of
$95, and a par value of $1,000. What is their yield to maturity?
(Points : 10)
6.20%
6.53%
6.87%
7.24%
7.62%
(9 ) (TCO C) Niendorf Corporation’s five-year bonds yield
6.75%, and five-year T-bonds yield 4.80%. The real risk-free
rate is r* = 2.75%, the inflation premium for five-year bonds is
IP = 1.65%, the default risk premium for Niendorf’s bonds is
DRP = 1.20% versus zero for T-bonds, and the maturity risk
premium for all bonds is found with the formula MRP = (t – 1) x
0.1%, where t = number of years to maturity. What is the
liquidity premium (LP) on Niendorf’s bonds? (Points : 10)
0.49%
0.55%
0.61%
0.68%
0.75%

7. (10 ) (TCO C) Assume that investors have recently become
more risk averse, so the market risk premium has increased.
Also, assume that the risk-free rate and expected inflation have
not changed. Which of the following is most likely to occur?
(Points : 10)
(a) The required rate of return for an average stock will
increase by an amount equal to the increase in the market risk
premium.
(b) The required rate of return will decline for stocks whose
betas are less than 1.0.
(c) The required rate of return on the market, rM, will not
change as a result of these changes.
(d) The required rate of return for each individual stock in the
market will increase by an amount equal to the increase in the
market risk premium.
(e) The required rate of return on a riskless bond will decline.