1. DEVRY FIN 515 Week 4 Midterm
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FIN 515 Week 4 Midterm
1. (TCO G) The frm’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.
2. 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. 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.
(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 frm is subject to double taxation, at both
3. the frm 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’ fnancial 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.
( 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 fnanced 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 frm borrow to achieve the target debt
ratio? (Points : 10)
$155,800
$164,000
$172,200
$180,810
$189,851
4. (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). (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.
(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.
5. (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 fve-year bonds yield 6.75%, and
fve-year T-bonds yield 4.80%. The real risk-free rate is r* = 2.75%,
the inflation premium for fve-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%
(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.
