1) From the following income statement, calculate the:

Degree of Financial Leverage and describe in one sentence or less what the answer indicates

Degree of Operating Leverage and describe in one sentence or less what the answer indicates

Degree of Combined Leverage and describe in one sentence or less what the answer indicates

Income Statement

For year ended 12/31/15

Sales $575,000

Total Variable Costs 260,000

Fixed Costs 94,000

EBIT 221,000

Interest 19,500

EBT 201,500

Taxes (35%) 70,525

Net Income $ 130,975

Shares Outstanding 20,000

EPS $6.55

2) Heister Corporation produces class rings to sell to college students. These rings sell for $75 each and cost $30 each to produce. Heister has FC of $45,000.

Calculate Heisters break-even point.

How much profit (loss) will Heister have if it sells 800 rings? 6,000 rings?

Heisters CEO expects an annual profit of $200,000. How many rings must be sold to attain this profit? (round up to the nearest whole number)

3) You purchase an IBM bond with a par value of $1,000 that carries a semiannual coupon rate of 4%, has a 5-year maturity and sells at par.

What will be the bonds price one year later if the YTM has decreased by 1%

If you sell the bone at the price (a) above, what was is your HPR (Holding Period Return)? Round your answer to two (2) decimal places.

4 ) The Nickelodeon Manufacturing Corp. has a series of $1,000 par value bonds outstanding. Each bond pays interest (coupon payment) semi-annually and carries an annual coupon rate of 6%. Some bonds have a maturity date of 4 years and some have a maturity date of 10 years. If the YTM is 10%, what is the current price of: Round your answers to 2 decimal points:

The bonds with 4 year maturity

The bonds with 10 year maturity

Are the bonds selling at a discount, at par, or at a premium? Briefly explain.

Which of the bonds has a higher selling price under the current market conditions? Briefly explain.

5) What is the value after 3 years of a $500 deposit earning an APR or 10% compounded semi-annually? 8 points (3/5)

N = 6

I = 10

PV = -500

PMT =0

FV

P/Y = 2

Allocate the interest between ORIGINAL DEPOSIT, SIMPLE INTEREST, COMPOUND INTEREST

Original Deposit
Simple Interest
Compound Interest

6) An issue of common stock is selling for $57.20 per share. The year-end dividend is expected to be $2.32, assuming a constant growth rate of 4%, what is the required rate of return?

7) An issue of preferred stock is paying an annual dividend of $1.50 per share. The growth rate for the firms common stock is 5%. What is the preferred stock price if the required rate is 7%?

8) In the Third Column, put the number of the term that best answers the definition.

		CORRECT NUMBER
Fixed Costs	Interest or return that is accumulated every six months
Financial Leverage	The result of subtracting all variable expenses from revenues. It indicates the amount available from sales to cover the fixed expenses and then profit
Contribution margin	The percentage rate at which future sums or annuities are brought back to their present value
Variable Costs	Based on the concept that a dollar you have today is worth more than the promise or expectation that you will receive a dollar in the future
Combined Leverage	A series of consecutive equal cash flows that occur at the end of a period for a fixed number of periods
Break-even Analysis	Costs that change directly and proportionately with a change in sales volume
Present Value	Interest payable on principle
Discount Rate	The value of an asset is equal to the present discounted value of the cash flows that the asset is expected to generate
Annuity	The use of fixed charge obligations (borrowing) with the intent of magnifying the potential returns to the firms investors
Future Value of an Annuity	A numerical and graphical technique used to determine at what point the firm will equate costs and revenues
Future Value	Costs that remain relatively constant regardless of the volume of sales
Semi-annual compounding	The amount of money that an investment with a fixed compounded interest rate will grow to by some future date
Time Value of Money (TVM)	A measure of the amount of debt used in the capital structure of a firm
Leverage	Interest added to the principal of a deposit or loan so that the added interest also earns interest
Fundamental Principle of Finance	A series of constant equal cash flows into a fund that increase in size up to a future point in time
Compound Interest	The total impact of financial and operating leverage
Simple Interest	The discounted value of a future sum as of todays values