1 Suppose you deposit $2000 into an account at the end of each of the next 10 years. If the account earns 12%, how much will be in the account at the end of 30 years?

35,097

192,926

338,560

482,665

2 Assume the following for your corporation:

sales (aka revenue) = $250

Cost of goods sold = 160

depreciation = 35

Interest Expense = 20

tax rate = 34%

What is the corporation's total after tax net income?

23.10

11.90

35.00

46.20

36.30

Insufficient information to compute

3 Bank A charges 16% APR on auto loans with monthly compounding. What is the Effective Annual Interest Rate (EAR)?

16%, since EAR = APR for monthly compounding

13.3%

1.33%

17.23%

18.12%

none of the other responses are reasonably close answers to the correct EAR

4 Simple Corporation has an outstanding debt obligation (total of principle and interest due) to the Complex Corporation of $250 (Assume this is Simple's only debt.). It is year end and the total cash flow of Simple from all sources is $325. The contingent payoff to the debt and equity holders of Simple Corporation is:

$250; $75

$250; $325

$75; $250

$325; $250

none of the other responses are reasonable

5 The capital budgeting director of Sparrow Corporation is evaluating a project which costs $200,000, is expected to last for 10 years and produce net after-tax cash flows of $44,503 per year. If the firm's cost of capital is 14 percent, what is the project's IRR? (Hint: Is the firm's cost of capital relevant to an IRR calculation? )

8%

14%

18%

-5%

12%

6 Worldwide Inc. has decided to acquire another firm by purchasing the firm's outstanding stock. Analysts forecast a period of 2 years of extraordinary growth (20 percent), followed by 1 year of unusual growth (10 percent), and finally a normal (sustainable) growth rate of 6.5 percent annually indefinitely. The last dividend was D0= $1.00 per share and the required return is 8.6%. What is D4 (i.e., the dividend expected at end of period 4)?

1.0000

1.286

1.584

1.687

1.440

7 A new project is being considered by Stanton Corp. An outlay of $40,000 is required for equipment and an additional net working capital investment of $1000 is required. What is the total cost at time zero of accepting this project?

40,000

41,000

30,000

31,000

8 Assume that you invested $5000 in an account that is expected to average 10% return per year for the next 30 years. How much do you expect to have in the account at the end of the 30 years?

5,000

87,247

150,000

822,470

insufficient information to compute

9 Assume the following regarding a growing annuity valuation problem:

Your salary at the end of the last year that you work is $90,000.

You would like your income stream to begin at the end of your first year of retirement with a payment equal to 70% of your last working year's salary.(Assume all amounts are "end-of-year" payments.)

You plan to be retired for 25 years.

You would like your retirement income will grow at a constant rate equal to a 3.5% (to compensate for expected inflation).

Using a discount rate of 8%, what is the present value at the beginning of your first year of retirement, (i.e. one period prior to the first retirement payment) of your projected 25 year retirement income stream?

960,730

916,893

672,511

211,573

3,308,543

483,107

10 Assume the following for a project under evaluation:

** The project's life is 4 years.

** The total time zero, initial cost of $55,000.

** The total net operating cash flow each year is $15,000.

** In addition to the terminal year operating cash flow, there is a non-operating, terminal year cash flow of $8,000.

What is the project's IRR? Accept or reject the project? Again, assume the cost of capital for a project of this risk is 7%.

7%; indifferent to accept or reject

8.4%; reject

8.4%; accept

15.75%, reject

15.75%: accept

11 Assume that D0, which was just paid, = $1.00, D1= $1.20, D2 = = $1.40, D3 = $1.55, D4 = $2.00, D5 = $2.13, D6 = $2.27, and P3 = $80.00. If the required return is 8.6%, then, based on this information and security valuation concepts, what should be the stock's expected value (price) today, (i.e.. P0)? I encourage you to draw a time line clearly indicating the situation.(Notation: Dtis Dividend at end of period t, Pt is expected price at end of period t.)

87.15

65.96

66.96

79.14

68.4

12 ASSUME that in 25 years you will need $500,000 for your retirement (i.e. retirement is actually 25 years away, and you want to have saved $500,000). If you will make equal MONTHLY payments at the end of each MONTH for the next 25 years to fund your retirement, what is the amount of the MONTHLY payments required to fund your retirement? Assume the 8% APR discount rate with monthly compounding for this question.

3859

3903

570

526

13 You currently earn $35,000 per year. If your salary grows at an assumed 3.5% average inflation rate, how much will your annual salary be in 25 years?

$82,713

$79,916

$1,363,245

$1,445,960

Insufficient information to compute

14 If a tax paying firm pays $100,000 in interest, what is the after tax interest cost for the firm assuming they are in a 40% tax bracket?

100,000 since interest is paid after taxes are paid and thus there is no tax shield

40,000 since there is a tax shield on interest

60,000 since there is a tax shield on interest

15 The government has issued a bond that will pay $1000 in 25 years. The bond will pay no interim coupon payment. What is the present value of the bond if the discount rate is 10%?

92.30

1000

9077

9169

16 Assume the risk free rate is 4.5% and the expected return on the market is 14%. Based on the CAPM, what should be the rate of return for security having a beta of 1.25?

11.88%

16.38%

18.5%

17.5%

22%

17 In 10 years you will begin receiving $155 dollars per year in perpetuity from your grandparent's family trust fund (first payment is exactly 10 years from today). You consider these payments essentially risk free and have decided to discount them at a constant risk free rate of 6.5%. What is the present value today of these future cash flows? (Hint: draw a time line to illustrate exactly the cash flows for this problem.)

1353

2385

1270

146

1550

18 Capital Budgeting Analysis: ASSUME a 4 year project's after-tax operating cash flow during years 1-4 = $8,000 and there is an after tax salvage value = $7,000 in year 4. The project also had an initial net working capital (NWC) investment of $1,000. Under conventional assumptions, what is the TOTAL cash flow expected from this project in the terminal year (year 4)?

7,000

8,000

15,000

16,000

none of the other options are accurate

19 You are considering the purchase of an investment that would pay you $5,000 per year for Years 1-5, $3,000 per year for Years 6-8, and $2,000 per year for Years 9 and 10. If you require a 14 percent rate of return, and the cash flows occur at the end of each year, then what is the most that you would be willing to pay for this investment?

$15,819.27

$21,937.26

$32,415.85

$38,000.00

$52,815.71

20 Consider the following: state of the economy - bad - average - good

probability of that state .2 .5 .3

Go Fwd's expected return in that state -5% 15% 25%

What is the overall expected return for Go Forward Corp?

11.7%

14.0

15

16.0

Insufficient information to compute.

21 Assume D4 ( I.e., the dividend at end of period 4) is expected to be $2.00 and is forecasted to grow at a constant rate of 6.5%. If investors' required return is 8.6%, what is P3 (i.e., expected price at the end of period 3)?

0.95

2.00

23.26

30.77

95.24

Insufficient information to compute

22 Consider the following information for the BU Scholarship Investment Fund. The total investment in the fund is $1 million.

stock - investment - beta - expected return

A 200,0000 1.5 25%

B 300,000 -.5 4%

C 500,000 1.2515%

Based on the allocation of dollars among the three stocks and their expected return, calculate the expected rate of return for the BU Scholarship Investment Fund.

14.67%

18.8

13.7

44.0

Insufficient information to compute

23 ASSUME that in 25 years you will need $500,000 for your retirement (i.e. retirement is actually 25 years away, and you want to have saved $500,000). How much money would you have to put into a bank today to accumulate this if your money will earn 8% per year (assume annual compounding)?

73,009

166,365

211, 573

676,001

insufficient information to compute

24 Assume your firm's dividends per share are expected to grow indefinitely by 3% a year. Next year's dividend is $4.50 and the required rate of return (i.e. equity holder's opportunity cost of capital) is 8%. Assuming this is the best information available regarding the future of this firm, what would be the most economically rational value of the stock today (i.e. today's "price")?

56.25

150.00

90.00

92.70

45.00

25 A new capital budgeting project is being considered. The project will reduce current manufacturing expenses by $5,000 annually and increase earnings (revenue) before depreciation and taxes by $6,000 annually. The project will generate $8,000 per year in depreciation of the required equipment. The firm's marginal tax rate is 40 percent. What is the project's after-tax operating cash flows (OCF)?

11,000

3,000

6,600

14,600

9,800

insufficient information to compute OCF (Operating Cash Flows)

26 Assume the following for a project under evaluation:

** The project's life is 4 years.

** The total time zero, initial cost of $55,000.

** The total net operating cash flow each year is $15,000.

** In addition to the terminal year operating cash flow, there is a non-operating, terminal year

If the cost of capital for a project of this risk is 7%, what is the project's NPV? Accept or reject the project?

123,000; accept

13,000; accept

-56,911; reject

1,911; accept

13,355; accept

27 Your subscription to Jogger's World is about to run out and you have the choice of renewing it by sending in the $10 a year regular rate at the end of each year or of getting a lifetime subscription to the magazine by paying $100 today. Your cost of capital is 7 percent. How many years would you have to live to make the lifetime subscription the better buy? Assume payments for the regular subscription are made at the end of each year. (Round up if necessary to obtain a whole number of years.)

10 years

15 years

18 years

20 years

28 years

28 Someone offers to sell to you a financial contract that will pay $150 at the end of each of the next five years, plus an additional $500 at the end of the fifth year. If they will sell the contract for $950, what rate of return are they offering on the investment?

7.7%

9.6%

10.7%

31.6%

insufficient information to estimate a return rate