1.

(TCO A) In the United States, which of the following types of organization has the greatest
revenue in total? (Points : 5)
a. Sole proprietorship
b. C corporation
c. S corporation
d. Limited partnership
2. (TCO A) Sole proprietorships have all of the following advantages except (Points : 5)
a. easy to set up.
b. single taxation of income.
c. limited liability.
d. ownership and control are not separated.
3. (TCO B) Which of the following would cause the present value of an annuity to decrease? (Points :
5)
a. Reducing the number of payments.
b. Increasing the number of payments.
c. Decreasing the interest rate.
d. Decreasing the liquidity of the payments.
4. (TCO B) In a TVM calculation, if incoming cash flows are positive, outgoing cash flows must be
(Points : 5)
a. positive.
b. negative.
c. either positive or negative. It really doesnt matter.
d. stated in time units that are different from the time units in which the interest rates are stated.
5. If you were a manager of a company, which of the three right side components of the DuPont
Identity would you want to increase and which would you want to decrease, other things being
equal? Give a specific example for how to do that for each of the three. (Points : 20)
6. A stock pays an annual dividend of $2.50 and that dividend is not expected to change. Similar
stocks pay a return of 10%. What is P0? (Points : 20)
P0 = 2.50/0.1 = 25.00

7. A stock has just paid a dividend and has declared an annual dividend of $2.00 to be paid one year
from today. The dividend is expected to grow at a 5% annual rate. The return on equity for similar
stocks is 12%. What is P0? (Points : 20)
2(1+0.05)/ (0.12 0.05)
2(1.05)/ (0.07) = $30
8. A bond has 5 years to maturity and has a YTM of 8%. Its par value is $1,000. Its semiannual
coupons are $50. What is the bonds current market price? (Points : 10)

FV = 1,000
PMT = 50
N= 5*2 = 10
I = 8%/2 = 4.5%
Pv = ?
PV = 50 x 1/0.045 (1 1/1+ 0.045)^10) + 1000/(1 + 0.045)^10
395.64 +

643.93

1039.57

9. A bond currently sells for $1,000 and has a par of $1,000. It was issued two years ago and had a
maturity of 10 years. The coupon rate is 7% and the interest payments are made semiannually. What
is its YTM? (Points : 10)
N = 10 * 2 = 20
PMT = 35 (0.07 x 1000/2)
FV = -1000
PV = 1000
RATE =RATE(20,35,1000,-1000)

Rate = 0.035% semiannually and 0.07 annually

10. A company has 10 million shares outstanding trading for $7 per share. It also has $300 million in
outstanding debt. If its equity cost of capital is 15%, and its debt cost of capital is 9%, and its
effective corporate tax rate is 40%, what is its weighted average cost of capital? (Points : 30)
Rd = 0.09 x (1-.40) = 0.054 or 5.4%
Equity = 70 Million
Debt = 300 Million
Rwacc = E/E+D x Re + D/E+D x Rd
=

70/300+70 x 0.15 + 300/300+70 x 0.054

70/370 x 0.15 + 300/370 x 0.054

0.02838 + 0.043784 = 0.072164 or 7.2%

11. Name and describe the three functions of managerial finance. For each, give an example other
than those used in the text and lecture. (Points : 25)
12. Explain thoroughly how stock portfolios affect the risk to an investor. (Points : 30)
13. What is the Cash Conversion Cycle (CCC)? Name the components of the CCC and explain why
the CCC is important to business.
14. A company has the opportunity to do any of the projects for which the net cash flows per year are
shown below. The company has a cost of capital of 12%. Which should the company do and why?
You must use at least two capital budgeting methods. Show your work.
Year A B C
0 -300 -100 -300
1 100 -50 100
2 100 100 100
3 100 100 100
4 100 100 100
5 100 100 100
6 100 100 100

7 -100 -200 0
(Points : 40)

Payback: A:3, B: 2.5, C: 3 B

NPV: A: -300+(100*4.1114)-(100*..4523)=65.91 positive; it could be accepted as return
exceeds 12% cost of capital
B: -100-(50*.8929)+(100*3.2185)-(200*.4523)=-100-44.645+321.85-90.46=86.745
positive, superior to A, acceptable.
C: -300+(100*4.1114)=111.14 positive; best of the three alternatives.

Set 4
Question 1. 1. (TCO G) If Company A and Company B are in the same industry and use the same production
method, and Company As asset turnover is higher than that of Company B, then all else equal we can
conclude.
Company A is more efficient than Company B.
Company A has a lower dollar amount of assets than Company B.
Company A has higher sales than Company B.
Company A has a lower ROE than Company B.

Question 2. 2. (TCO G) If Moon Corporation has an increase in sales, which of the following would result in no
change in its EBIT margin?
A proportional increase in its net income.
A proportional decrease in its EBIT.
A proportional increase in its EBIT.
An increase in its operating expenses.

Question 3. 3. (TCO B) If today you put $10,000 into an account paying 10% annually, how much will there be
in the account after 5 years? Show your work.
Student Answer:
Instructor Explanation:

PV = 10000 I = 0.1 n = 5 FV= ? FV = PV(1+i)^n =10000(1.1)^5 =

16105.10

Week 2 Lecture and Chapter 4

PV
FV answer
N
I
PMT

10000
16105
5
.10
0

Question 4. 4. (TCO B) You take out a 5 year car loan for $20,000. The loan has a 5% annual interest rate. The
payments are made monthly. What are the monthly payments? Show your work.

Monthly Interest rate = 5%/12 = 0.4167% n = 60 PV = 20,000 FV = 0

PMT = ? C = P/I/R(1-1/(1+R)^n = 20000/1/0.004167(1-1/
(1+0.004167)^60 = 377.43
Week 2 Lecture and Chapter 4
PV
FV
N
I

20000
0
5*12=60
.
05/12=.0041667
$377.42

PMT answer

Question 5. 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.
PV = 10,000
FV=

N = 120 (10 x 12)

I

= 0.05/12 = 0.0041667

PMT = 500
Using excel Answer is = 94,111

Question 6. 6. (TCO B) A homebuyer is taking out a mortgage with a balloon payment. The loan amount is
$100,000 and the annual interest rate is 5%. The homebuyer will make equal monthly payments for 5 years
except the last payment will include an additional payment of $20,000. How much will the equal monthly
payments be? Show your work.
Instructor
Explanation:

Week 2 Lecture and Chapter 4

PV
FV
N
I
PMT

100000
20000
60
.
05/12=.0041667
1593.03

Question 7. 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 projects NPV? Show your work.
Student
Answer:

PV = 115,180 (Calculated) FV N = 9 I = .10 PMT = 20000

20,000/1.1+20000/1.1^2+20000/1.1^3+20000/1.1^4+20000/1.1^5+20000/1.1^6
+20000/1.1^7+20000/1.1^8+20000/1.1^9 NPV = 115,180 - 95000 = 20,180

Instruct Week 3 Lecture and Chapters 7 and 8

or
PV
115,180
Explana
(calculated)
tion:
FV
N
9
I
.10
PMT
20000

NPV= 115,180-95,000=20,180

Question 8. 8. (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 projects payback period? Show your
work.
Payback Period = $40,000/$12,000 = 3.33 years
Question 9. 9. (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 projects IRR? Show your work.
in calculating IRR Net present value is zero, so O=-$40,000+ 12000/(1+IRR)+(12000/
(1+IRR)^2)+(12000/(1+IRR)^3)+(12000/(1+IRR)^4)+(12000/(1+IRR)^5)+(12000/
(1+IRR)^6)+(12000/(1+IRR)^7)
Using Excel the project IRR is =

Week 3 Lecture and Chapters 7 and 8

Using Excel,

Question 10. 10. (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 projects discounted payback period?
Show your work.

period=+(15000/1.1)+(15000/1.1^2)+(15000/1.1^3)+(15000/1.1^4)+(15000/1.1^5)+(15000/1.1
^6)+(15000/(1.1^7)+(15000/1.1^8) =
13636.36+12396.69+11269.72+10245.20+9313.82+8467.11+7697.37+6997.61
Year

Discounted
CF
-60000

CF0-CFi

Original
CF
-60000

15000

$13,636.36

$46,363.64 ( -60,000 + 13,636.36)

15000

$12,396.69

$33,966.94 (46363.64 12396.69)

15000

$11,269.72

$22,697.22 (33966.94 11269.72)

15000

$10,245.20

$12,452.02 (22697.22 10245.22)

15000

$9,313.82

$3,138.20 (12452.02 9313.82)

15000

$8,467.11

($5,328.91) (3138.20 8467.11)

15000

$6,997.61

60000

Question 11. 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. Projects A and C can be done together. Projects B and C can be
done together. But Projects A and B are mutually exclusive. The company has a cost of capital of 18%. Which
should the company do and why? You must use at least two capital budgeting methods. Show your work.
ABC
0 -500 -500 -600
1 200 -200 100
2 200 600 100
3 200 400 100
4 200 200 100
5 200 -300 100
6 200 100
7-300 100 100

Years

Project

Payback
NPV
IRR

2.5
794
36%
-500

200

200

200

-500
169.49
15
143.63
69
121.72
62

B
0.8333
33
545
21%
-500
-200
600
400

C
6
381
4%
-600
169.49
2
430.91
07
243.45
23

100
100
100

84.745
76
71.818
44
60.863
09

200

200

200

300

103.15
78
87.421
84
74.086
31
94.177
51
793.6
98

200
-300
100
100

103.15
78
131.13
3
37.043
15
31.392
5
545.3
321

100
100
100
100

51.578
89
43.710
92
37.043
15
31.392
5
381.1
528