1.True or false and explain:

(1) All assets are liquid at some price. (3 Points)

(2) It is always bad for the cash flow from assets to be negative .(3 Points)

2. If you invest $50 for 3 years at 12% compounded semi-annually, How much will your investment grow to? (5 Points)

3. Hughes Co. is growing quickly. Dividends are expected to grow at a 25 percent rate for the next three years, with the growth rate falling off to a constant 7 percent thereafter. If the required return is 12 percent and the company just paid a $2.40 dividend, what is the current share price? (10 Points)

4. Cusic Industries had the following operating results for 2010: sales =$15,300; cost of goods sold = $10,900; depreciation expense = $2,100; interest expense = $520;dividends paid = $500. At the beginning of the year, net fixed assets were $11,800, current assetswere $3,400, and current liabilities were $1,900. At the end of the year, net fixed assets were$12,900, current assets were $3,950, and current liabilities were $1,950. The tax rate for 2010 was40 percent.

a. What is net income for 2010? (3 Points)

b. What is the operating cash flow for 2010? (4 Points)

5.A prestigious investment bank designed a new security that pays a quarterly dividend of $5 in perpetuity. The first dividend occurs one quarter from today. What is the price of the security if the stated annual interest rate is 7 percent, compounded quarterly? (10 Points)

6.What is the present value of an annuity of $5,000 per year, with the first cash flow received three years from today and the last one received 25 years from today? Use a discount rate of 8 percent. (10 Points)

7.How is the future value of a single cash flow computed? (3 Points) How is the present value of a series of cash flows computed. (3 Points)

8.Consider an investment that costs $100,000 and has a cash inflow of

$25,000 every year for 5 years. The required return is 9%, and payback cutoff is 4 years.

(1)What is the payback period? (3 Points)

(2)What is the discounted payback period? (3 Points)

(3)What is the NPV? (3 Points)

(4)What is the IRR? (3 Points) (5)Should we accept the project? (3 Points)

9. Consider a factory that must have an air cleaner that is mandated by law. There are two choices:

The Cadillac cleaner costs $4,000 today, has annual operating costs of $100, and lasts 10 years.

The Cheapskate cleaner costs $1,000 today, has annual operating costs of $500, and lasts 5 years.

Assuming a 10% discount rate, which one should we choose? (10 Points)

10.Which of the following should be treated as an incremental cash flow when computing the NPV of an investment?

a. A reduction in the sales of a companys other products caused by the investment. (3 Points)

b. An expenditure on plant and equipment that has not yet been made and will be made only if the project is accepted. (3 Points)

c. Costs of research and development undertaken in connection with the product during the past three years. (3 Points)

d. Annual depreciation expense from the investment. (3 Points)

e. Dividend payments by the firm. (3 Points)

f. The resale value of plant and equipment at the end of the projects life. (3

Points)

g. Salary and medical costs for production personnel who will be employed

only if the projectis accepted. (3 Points)