1.

Answer
(with
Letter)
F
E
O
M
N
H
C
L
G
A
P
J
Q
B
D
K
I

Term
1. Prime

Definition

A. How Harrahs and Stations

Casinos became private entities
2. LIBOR
B. Co-signer
3. Basis points
C. Debt considered to be highyield and below investment
grade
4. Cross-collateral
D. Using debt to magnify
returns
5. Revolver or
E. Also known as the European
"Evergreen"
prime rate
6. Non-performing loan F. Interest rate banks charge
their best customers
7. Junk bond
G. Surety company
8. Seed money
H. Debt more than 90 days in
arrears
9. Outside indemnitor
I. Owing more on an asset than
the asset is worth
10. LBO
J. Wealth that improves the
ability to produce more wealth
11. Commercial paper
K. Value that can transfer
quickly
12. Capital
L. Also known as start-up
capital
13. Operating capital
M. Assets of one company
secure loan for another
company
14. Guarantor
N. Secured by receivables or
inventory and keeps refreshing
15. Leveraging
O. Characterizes commercial
bond/paper market by spread
over Treasuries
16. Liquidity
P. Short-term corporate debt
17. Negative equity
Q. CA - CL

2.
$2,500,000 (P/A, 8.8%, 5)

= X(1.16416)-1 + 0.8X(1.16416)-2 + 0.64X(1.16416)-3 + 0.512X(1.16416)-4 +

0.4096X(1.16416)-5
$2,500,000 (3.9099)
= X(0.8589) + X(0.5902) + X(0.4056) + X(0.2787) + X(0.1915)
$9,774,800.49 = X(2.3249)
X = $4,204,396.10
3.
0.152 (2,125,000 - 900,000)
= $186,200 in capital gains tax
$900,000 x 0.004
= $3,600 property taxes
1 + iequivalent
= (2,125,000 - 186,200) / 900,000)1/4
= 1.21149 21.15%
FW = 3,600 (F/A, 21.15%, 4)
= $19,646.60
1 + iequivalent
= ((2,125,000 - 186,200 - 19,646.60) / 900,00)1/4
= 1.2084 20.84%
i' = (i - f)(1 + f)
i' = (0.2084 - 0.07)(1 + 0.07)
= 0.1480 14.80% as the rate of return
4.
i' = (i - f)(1 + f)
i' = (0.06 - 0.16)(1 + 0.16)
i' -11.6%
$10,000 (F/P, -11.6%, 8) = $3,729.22
($3729.22 x 0.25) - $3729.22
= $2,796.95
i' = (0.06 + 0.18)(1 - 0.18)
i' 19.6%
$10,000 (F/P, 19.6%, 8) = $41,864.84
$41,864.84 - ($41,864.84 x 0.25)
= $31,398.63

5.
Alternative A

$180,000 + $16,000 (P/A, 10%, 10) - $53,000 (P/A, 10%, 10) = $47,365
Alternative B
$100,000 + $12,000 (P/A, 10%, 10) - $35,000 (P/A, 10%, 10) = $41,335
Alternative C
$280,000 + $28,000 (P/A, 10%, 10) - $77,000 (P/A, 10%, 10) = $21,105
6.
WACCbefore = (0.35)(0.17) + (0.30)(0.08) + (0.35)(0.12)
= 0.0595 + 0.024 + 0.042
12.55%
Loans = 0.17 (1 - 0.50) = 0.085
Bonds = 0.08 (1 - 0.50) = 0.04
Stock = 0.12 (1 - 0.50) = 0.06
WACCafter = (0.35)(0.085) + (0.30)(0.04) + (0.35)(0.06)
= 0.0297 + 0.012 + 0.021
6.27%
7.
$15,000 x 0.12 = $1,800
$1,800 / 4 = $450
$450 (P/A, i, 20) + $15,000 (P/F, i, 20) = $8,000
by use of trial and error, i = 7.5%
ia = [1 + 0.075 / 20]20 - 1
7.77%
8.
46.25 (P/F, 10%, 5)
= 46.25 (.6209)
= $28.71
70.25 (P/F, 10%, 9.5)
= 70.25 (.4022)
= $28.71
n = 9.5 years

9.
S/L = ($85,000 - $5,000) / (9 years)
= $8,888.88

SOYD = 9 x (10 / 2) = 45
d1 = 9 - 1 + (1 / 45)
= 0.2 x ($80,000)
= $16,000
d2 = 9 - 2 + (1 / 45)
= 0.17 x $80,000
= $14,222.22
d3 = 9 - 3 + (1 / 45)
= 0.15 x $80,000
= $12,444.44
d4 = 6 / 45
= 0.13 x $80,000
= $10,666.66
d5 = 5 / 45
= 0.11 x $80,000
= $8,888.88
d6 = 4 / 45
= 0.08 x $80,000
= $7,111.11
d7 = 3 / 45
= 0.06 x $80,000
= $5,333.33
d8 = 2 / 45
= 0.04 x $80,000
= $3,555.55
d9 = 1 / 45
= 0.02 x $80,000
= $1,777.77

DDB
d1 = (2/9)(85000) = $18,870
d2 = (2/9)(66130) = $14,680

18,870
33,550.86

d3 = (2/9)(51449.14) = $11,421.71
d4 = (2/9)(40027.43) = $8,886.09
d5 = (2/9)(31141.34) = $6,913.37
d6 = (2/9)(24227.97) = $5,378.60
d7 = (2/9)(18849.37) = $4,184.56
d8 = (2/9)(14664.81) = $3,255.58
d9 = (2/9)(11409.23) = $2,532.84

44,972.57
53,858.66
60,772.03
66,150.63
70,335.19
73,590.77
76,123.61

$85,000 / 11.52 = $7,378.47

10.
$2,000,000 / 500,000 tons
= $4 /ton
50,000 tons x $4 /ton
= $200,000 for the depletion allowance for year 1
$2,000,000 / 400,000 tons
= $5 /ton
50,000 tons x $5 /ton
= $250,000 for the depletion allowance for year 2
11.
$5,270,000 - $2,927,500 - $1,874,300
= $468,200 of taxable income
Federal income tax rate = 39%
12.
$78,600 - $190,000 = -$111,400
13.
ATCF = [ (1 - 0.4) (10,000 - 4,000 - 2,000)]
= $2,400 + $2,000
= $4,400
NIAT = $4,400 - $2,000
= $2,400

14.
Net working capital = $20,000 - $15,000
= $5,000
Current ratio = $20,000 / $15,000
= 4/3

Acid-test ratio = $10,000 / $15,000

= 2/3
Debt ratio = $35,000 / $70,000
= 1/2
15.
$5,000 of accounts receivable in cash
current ratio = $65,000 / $30,000
= 13/6
$10,000 of inventory on short-term credit
current ratio = $70,000 / $30,000
= 7/3
$90,000 of common stock for cash
current ratio = $90,000 / $30,000
= 3/1
$15,000 of fixed assets for cash
current ratio = $75,000 / $30,000
= 5/2
16.
CPA = Certified Public Accountant
AICPA = American Institute of Certified Public Accountants
FASB = Financial Accounting Standards Board
GAAP = Generally Accepted Accounting Principles
SOYD = Sum of years digits
DDB = Double Declining Balance
CR = Current Ratio
17.
(1 - 0.20)
= 0.80
$4,000 / 0.80
= $5,000

18.
Within 10 days there is a 2% discount
Within 30 days there is a 0% discount
360 days / 20 days
= 18 periods x 2%
= 36% return

36% > 21%

We should take advantage of the discount.
19.
Current assets
= $100,000 + $3,200,000 + $1,500,000 + $150,000
= $4,950,000
Current liabilities
= $1,950,000 + 5,500,000
= $7,450,000
$4,950,000 / $7,450,000
= 0.664
Their current ratio is not optimal. To obtain a typical ratio of 2.0, they must cash out
some of their fixed assets.
20.
TA = $4,000,000 + $4,200,000
= $8,200,000
TL = $1,800,000 + $2,700,000
= $4,500,000
$4,500,000 / $8,200,000 = 54.87%
21.
Capacity = Refers to how much debt a borrower can handle and whether or not they will
have the ability to pay it back.
Collateral = Refers to the lender keeping something in case the borrower does not pay the
money back. For example the bank owns the house if you do not pay your mortgage.
Capital = Lender will want to know if you have valuable assets to repay debt if income is
not enough
22.
d.

23.
b.
24.
b.
25.

b.
26.
a.
27.
e.
28.
e.
29.
d.
30.
d.
31.
c.
32.
c.