Quiz #4

Quiz #4.

QUESTION 1

1. Jay Coleman just graduated. He plans to work for five years and then leave for the Australian “Outback” country. He figures that he can save $3,500 a year for the first three years and $5,000 a year for the next two years. These savings will start one year from now. In addition, his family gave him a $2,500 graduation gift. If he puts the gift, and the future savings when they start, into an account that pays 7.75% compounded annually, what will his financial “stake” be when he leaves for Australia five years from now? Round off to the nearest $1.

	1.	$36,082
	2.	$30,003
	3.	$27,178
	4.	$24,725

10 points   

QUESTION 2

1.  Find the present vale of the following stream of cash flows assuming that the firm’s cost is 14% and that these amounts are received at the end of each year.

Year                            Amount

1 – 5                            $20,000/yr

6 – 10                          $35,000/yr

	1.	$135,450
	2.	$187,500
	3.	$126,465
	4.	$131,067
	5.	$98,690

10 points   

QUESTION 3

1. If the NPV of a project is positive, then the project’s IRR ________ the required rate of return.

	1.	must be greater than
	2.	must be less than
	3.	could be greater or less than
	4.	cannot be determined without actual cash flows

5 points   

QUESTION 4

1. Table 1

Jones Company Financial Information

	December 2008	December 2009
Net income	$1,500	$3,000
Accounts receivable	750	750
Accumulated depreciation	1,125	1,500
Common stock	4,500	5,250
Paid-in capital	7,500	8,250
Retained earnings	1,500	2,250
Accounts payable	750	750

Based on the information in Table 1, calculate the after tax cash flow from operations for 2009 (no assets were disposed of during the year, and there was no change in interest payable or taxes payable)

	1.	$4,500
	2.	$3,375
	3.	$3,900
	4.	$2,980

10 points   

QUESTION 5

1. Below are the expected after-tax cash flows for Projects Y and Z. Both projects have an initial cash outlay of $20,000 and a required rate of return of 17%.

	Project Y	Project Z
Year 1	$12,000	$10,000
Year 2	$8,000	$10,000
Year 3	$6,000	0
Year 4	$2,000	0
Year 5	$2,000	0

• Project Y’s IRR is:

	1.	12.51%
	2.	less than zero.
	3.	22.51%.
	4.	less than 17%.

10 points   

QUESTION 6

1. Wright’s Warehouse has the following projections for Year 1 of a capital budgeting project.

Year 1 Incremental Projections:

Sales $200,000 
Variable Costs $120,000 
Fixed Costs $40,000 
Depreciation Expense $20,000 
Tax Rate 40%

Calculate the operating cash flow for Year 1.

	1.	$52,000
	2.	$32,000
	3.	$72,000
	4.	$12,000

15 points   

QUESTION 7

1. Armadillo Mfg. Co. has a target capital structure of 50% debt and 50% equity. They are planning to invest in a project which will necessitate raising new capital. New debt will be issued at a before-tax yield of 12%, with a coupon rate of 10%. The equity will be provided by internally generated funds. No new outside equity will be issued. If the required rate of return on the firm’s stock is 15% and its marginal tax rate is 40%, compute the firm’s cost of capital.

	1.	11.1%
	2.	7.2%
	3.	13.5%
	4.	12.5%

10 points   

QUESTION 8

1. $1,200 is received at the beginning of year 1, $2,200 is received at the beginning of year 2, and $3,300 is received at the beginning of year 3. If these cash flows are deposited at 12 percent, what will be their combined future value at the end of year 3?

	1.	$12,520
	2.	$9,413
	3.	$8,342
	4.	$8,735

10 points   

QUESTION 9

1. The degree of operating leverage is defined as:

	1.	% change in EBIT/ % change in contribution margin
	2.	% change in EBIT/ % change in variable cost
	3.	% change in sales/ % change in EBIT
	4.	% change in EBIT/ % change in sales

10 points   

QUESTION 10

1. What price must a company typically pay to buy another company? The price will:

	1.	include some premium over the current market value of the target’s equity.
	2.	include some discount relative to the current market value of the target’s equity.
	3.	be the book value of the target’s equity.
	4.	be the market value of the target’s equity.

5 points   

QUESTION 11

1. If a loan is compounded monthly, the effective annual rate will always be ____________ the nominal rate.

	1.	equal to
	2.	less than
	3.	greater than
	4.	There is no correct answer.
	5.	you cannot tell without further information

5 points   

QUESTION 12

1. You are considering the purchase of Hytec bonds that were issued 14 years ago. When the bonds were originally sold, they had a 30-year maturity and a 14.375% coupon interest rate that is payable semiannually. The bond is currently selling for $1,508.72. What is the yield to maturity on the bonds?

	1.	8.50%
	2.	7.67%
	3.	14.38%
	4.	11.11%

10 points   

QUESTION 13

1. The Seattle Corporation has been presented with an investment opportunity which will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm’s cost of capital is 10%. Assume cash flows occur evenly during the year, 1/365th each day. What is the payback period for this investment?

	1.	4.35 years
	2.	3.35 years
	3.	3.72 years
	4.	4.86 years
	5.	5.23 years

10 points   

QUESTION 14

1. Seven Eleven Stores is planning an expansion project that it desires to finance with newly issued preferred stock. The firm has an outstanding issue of preferred stock that pays a dividend of $4.25 per share, which is trading for $65 per share. The investment bankers have advised Seven Eleven that flotation costs will be 8% per share. What will be the cost of the newly issued preferred shares?

	1.	8.3%
	2.	7.1%
	3.	9.7%
	4.	6.5%

10 points   

QUESTION 15

1. If you purchased a share of Mico.com stock on March 1, 1993 for $45 and you sold the stock at $168 on February 28, 1998, what was your annual rate of return on the stock?

	1.	50%
	2.	75%
	3.	30%
	4.	20%
	5.	83%

5 points   

QUESTION 16

1. Lambda Co. has bonds outstanding that mature in 10 years. The bonds have $1,000 par value, pay interest annually at a rate of 9%, and have a current selling price of $1,125. The yield to maturity on the bonds is:

	1.	7.20%.
	2.	14.40%.
	3.	10.12%.
	4.	9%.

10 points   

QUESTION 17

1. The director of capital budgeting of South Park Development Corporation is evaluating a project that will cost $200,000; it is expected to last for 10 years and produce after-tax cash flows, including depreciation, of $44,503 per year. If the firm’s cost of capital is 14% and its tax rate is 40%, what is the project’s IRR?

	1.	12%
	2.	-5%
	3.	14%
	4.	8%
	5.	18%

10 points   

QUESTION 18

1. Recently, Ohio Hospitals filed for bankruptcy. The firm was reorganized as American Hospitals, Inc., and the court permitted a new indenture on an outstanding bond issue to be put into effect. The issue has 10 years to maturity and coupon rate of 10 percent (I = $100) paid annually. The new agreement allows the firm to pay no interest for the first 5 years, then to resume interest payments for the next five years, and at maturity in 10 years, to repay the principal plus the interest that was not paid for the first five years, but without paying “interest on the deferred interest.” If the required rate of return is 20 percent, what should the bonds sell for in market today?

	1.	$576
	2.	$895
	3.	$362
	4.	$456

15 points   

QUESTION 19

1. The IRR assumes that cash flows are reinvested at the cost of capital.

 True

 False

5 points   

QUESTION 20

1. No adjustment is made in the cost of preferred stock for taxes since preferred stock dividends are not tax-deductible.

 True

 False

Quiz #4

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