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Name: ________________THE UNIVERSITY OF TOLEDO COLLEGE OF BUSINESS ADMINISTRATION BUAD 6200-002: Finance and Business Economics - Fall 2011 Practice Problems for Midterm Exam 1. Martha’s Enterprises spent $2,400 to purchase equipment three years ago. This equipment is currently valued at $1,800 on today’s balance sheet but could actually be sold for $2,000. Net working capital is $200 and long-term debt is $800. Assuming the equipment is the firm’s only fixed asset, what is the book value of shareholders’ equity? 2. Your firm has net income of $198 on total sales of $1,200. Costs are $715 and depreciation is $145. The tax rate is 34%. What is the operating cash flow? 3. Thompson’s Jet Skis has operating cash flow of $218. Depreciation is $45 and interest paid is $35. A net total of $69 was paid on long-term debt. The firm spent $180 on fixed assets and increased net working capital by $38. What is the amount of the cash flow to stockholders? 4. You want to have $10,000 saved ten years from now. How much less do you have to deposit today to reach this goal if you can earn 6% rather than 5% on your savings? BUAD6200-001: Corporate Finance, Spring 2011 1 to a national health center. You are paying an effective annual rate of 13. 5% coupon bond pays interest annually. What is the change in the price of this bond (give me a percentage change) if the market yield rises to 6% from the current yield of 4. including investment earnings.5. and $250. The government has imposed a fine on the Not-So-Legal Company.000. compounded monthly.000. The government will earn 3. Which option should you take and why? 7. The first payment is due one year from today. The bond has a face value of $1.5% on the funds held.5%? BUAD6200-001: Corporate Finance. How much will the national health center receive three years from today? 6. A 12-year.000.000 today or receive payments of $641 a month for ten years. You can receive a lump sum of $50. The insurance company informs you that you have two options for receiving the insurance proceeds. You can earn an APR of 6.8% on your credit card. respectively over the next three years. You are the beneficiary of a life insurance policy. $250. The interest is compounded monthly. What is the annual percentage rate on your account? 8. The government plans to invest the funds until the final payment is collected and then donate the entire amount. The fine calls for annual payments of $100. Spring 2011 2 .000.5% on your money. 25%? 12. What will be the price of one share in year 4 if the required rate of return is 9. $1. Winston Enterprises has a 15-year bond issue outstanding that pays a 9% coupon. it plans to sell 30-year. To accomplish this. The company adheres to a constant rate of growth dividend policy. The bond is currently priced at $894. The bonds will be priced to yield 6%. Interest is paid semiannually. What is the minimum number of bonds it must sell to raise the $10 million it needs? (assume semi-annual bonds) 11. is a new firm in a rapidly growing industry. The Bell Weather Co. The company is planning on increasing its annual dividend by 20% a year for the next four years and then decreasing the growth rate to 5% per year. What is the yield to maturity? 10.000.60 and has a par value of $1. the company paid a dividend of $2. The MerryWeather Firm wants to raise $10 million to expand its business. What will one share of B&K common stock be worth ten years from now if the applicable discount rate is 8%? BUAD6200-001: Corporate Finance.00 per share. The company just paid its annual dividend in the amount of $1. Last week.00 a share.000 face value zero-coupon bonds.08 a share on its common stock next year. Spring 2011 3 . B&K Enterprises will pay an annual dividend of $2.9. 000 Project B Cash Flow -$60.5%.400 per year. The Winston Co.000 $35.000 $25.000 $25. Spring 2011 4 . Compute the payback period in years. A $25 investment produces $27.000 and is expected to last for 5 years. b. The total cash inflow is expected to be $22. The incremental IRR is _____ and if the required rate is higher than the crossover rate then project _____ should be accepted.20.000. c. Consider an investment with an initial cost of $20.13. e. NPV is positive if the interest rate is less than 10%. in years 3 and 4 are $5.500 and in year 5 is $1. is considering two mutually exclusive projects with the following cash flows. Year 0 1 2 3 Project A Cash Flow -$75. What is the rate of growth of its dividend? 14. Turnips and Parsley common stock sells for $39. None of the above. NPV is negative if the interest rate is less than 10%.000 or an average of $4.000 $30. Which of the following is true? a.000 $30. NPV is zero if the interest rate is equal to 10%. The company just paid its annual dividend of $1. BUAD6200-001: Corporate Finance.000. Both A and C. d.86 a share at a market rate of return of 9.000 15. The expected cash flow in years 1 and 2 are $5. 16.000 $35.50 at the end of the year with no risk. 000.52% 6 5.17. The project has a 4-year life. What is the net cash flow from the salvage value if the tax rate is 34%? MACRS 5-year property Year Rate 1 20. The project is expected to produce sales of $110. Ronnie has been offered $19.00% 3 19. Kurt’s Kabinets is looking at a project that will require $80. The assets are classified as 5-year property for MACRS. Based on the profitability index (PI) rule.000 in fixed assets and another $20.52% 5 11.000 in net working capital.000 with associated costs of $70. should a project with the following cash flows be accepted if the discount rate is 8%? Why or why not? 18.000.76% BUAD6200-001: Corporate Finance. Spring 2011 5 . Ronnie’s Custom Cars purchased some fixed assets two years ago for $39.00% 2 32. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 35%.20% 4 11.000 for his old assets. Ronnie is considering selling these assets now so he can buy some newer fixed assets which utilize the latest in technology. What is the operating cash flow for this project? 19. What is the equivalent annual cost of this machine if the required return is 9%? (Round your answer to whole dollars. uses tool and die machines to produce equipment for other firms. Each machine has a life of 3 years before it is replaced. Tool Makers. This machine costs $10. Inc.000 a year to operate.20.) BUAD6200-001: Corporate Finance.000. The initial cost of one customized tool and die machine is $850. Spring 2011 6 .