Need some help answering this sample midterm as soon as possible.

1. What is the future value of a 5-year ordinary annuity with quarterly payments of $75 evaluated using quarterly compounding with a 16 percent annual interest rate? 2. In 1958, the average tuition for one year at an Ivy League school was $1,800. Fifty years later, in 2008, the average cost is $38,700. What was the growth rate in tuition over the 50-year period? 3. What is the price of a 10-year pure discount bond paying $1,000 at maturity if the YTM is 8%? 4. Calculate the price of a 20-year, 8% Bond with semiannual payments if the YTM is 10%. 5. Raines Umbrella Corp. issued 12-year bonds 2 years ago with an 8.6% coupon which sold at par. Currently if the bonds sell at 97% of par, what is the YTM? 6. You purchase a bond with an invoice price of $1,140. The bond has a coupon rate of 7.2%, and there are five months to the next semiannual coupon date. What is the clean price of the bond? 7. Anoi Inc. just paid a dividend of $1.40 per share on its common stock. The dividends are expected to grow at a constant rate of 6% per year indefinitely. If investors require a 12% return on this stock, what is the current price? 8. Anoi Inc. pays a $4.60 dividend on its $50 Par Preferred Issue. If you require 12% on this investment then what is the price you are willing to pay? 9. Anoi Inc. is contemplating buying the common stock of a new start-up firm it believes will complement its current activities. Anoi Inc. uses the dividend model to price the current outstanding shares of this new start-up. If the new start-up would pay no dividends for the first nine years so as to plow back all earnings into the firm and then pay an $8 dividend in the 10th year, increasing the dividend by 6% each year thereafter, what price should Anoi Inc. pay today? 10. Anoi Inc. is about to announce that it will expect to experience rapid growth for the near future with dividends growing at 27% for the next two years, 17% for the following two years, and then its current normal growth of 7% thereafter. The required return is 14% and the stock currently sells at $70 without this new information. What is the appropriate price for this stock after the announcement? Given the following Cash Flow: Year E(Cash Flow) 0 -7,500 1 4,000 2 3,500 3 1,500 For the given cash flow above, 11. Calculate the Payback Period: 12. Calculate the NPV at a discount rate of 12%: 13. Calculate the IRR 14. Anoi Inc. is considering the purchase of a $10,000 machine that will have an economic life of 5 years and will be fully appreciated at the end of five years using the straight-line method. The instrument will produce units at a cost of $2 per unit but sell for $5 each. If the discount rate is 20% and the tax rate is 34%, Should Anoi Inc. make the investment? 15. Given: Anoi Inc. has the following equity accounts: 5%, $50 Par Preferred $3,600,000 Common Stock, $0.50 par value $ 165,320 Capital Surplus (PIC) 2,876,145 Retained Earnings 2,370,025 Then, a. How many common shares are outstanding? b. What is the average market price? c. What is the current book value per share? 16. Given: Anoi Inc. has the following Liabilities on its Balance Sheet in addition to the Equity listed above. Short-Term Debt (Current Liabilities) $2,000,000 Long-Term Debt $5,000,000 Calculate Anoi Inc.'s Capital Structure. 17. If the 10-year Treasury offers 3% and the 10-year AAA Corporate bond offers 9%, the difference is primarily due to differences in: a. tax effects b. default risk c. inflation d. maturity 18. In terms of the decision of what to do with extra cash, the firm's managers should undertake projects if the a. project has a negative NPV value. b. internal rate of return on the project is greater than the required rate of return. c. expected PI on the project is less than one. d. IRR on the project is equal to or less than the return on an asset of similar risk. 19. The C.E. NPV formula for risky projects evaluates ______ using the _________ . a. expected certainty equivalent incremental cash flows; riskless discount rate. b. expected incremental cash flows; riskless discount rate. c. expected incremental cash flows; RADR discount rate. d. expected incremental cash flows; risky discount rate. 20. The yield to maturity on a bond is the single rate that: a. discounts the payments 9expected cash flow) on the bond to its purchase price. b. uses expected cash flows that reflect changes due to a firm's capital structure. c. is stated on the face (or coupon) of the bond. d. will recommend negative NPV if only equity is used for financing. 21. Positive Net Present Value projects are defined as a. those with a change in the firm's dividend payout over the year. b. those with a value greater than or equal to zero. c. those with an investment cost greater than the value of the annual cash flow d. those with a value greater than one. 22. If a firm is considered a cash cow with 200,000 shares outstanding, EPS of $12, and an investor required return of 12%, provide its value. 23. According to NPV, which of the following is the decision criteria in an independent decision environment: a. accept all positive present value projects; b. accept all positive internal rate of return projects; c. accept all non-positive net present value projects; d. accept all projects with a NPV equal to or greater than zero. 24. According to IRR, the decision criteria in a mutually exclusive environment is: a. accept all negative internal rate of return projects; b. accept all projects where RRR is greater than or equal to the IRR; c. accept the project with the highest IRR where IRR > RRR; d. reject all positive net present value projects. 25. The acceptance of one project which then requires the non-acceptance of the other project is referred to as: a. conventional b. independent c. dependent d. mutually exclusive 26. If the discount rate used for the NPV calculation were to rise, than the IRR would: a. fall b. not important c. rise d. stay the same Problem 1: 10 points (5 points for RADR & 5 points for CE) Use both risk-adjustment techniques, certainty equivalence and RADR, for the application of the Decision Criteria NPV using the following information and cash flow. The project is considered to be of high risk, the initial investment is $45,000, the Annual operating cash flow is expected to be $15,000 per year for four years, and the terminal value is expected to be $5,000. You are certain of the initial investment, but your certainty declines by 5% each year of the forecast (as such, you are 95% certain for the first AOCF). The risk free rate is currently 4%, low risk investments use a discount rate of 6%, medium risk of 8% and high risk of 14%. Problem 2: 20 points, 5 points each section You have been asked by the president of your company to evaluate a proposed acquisition of equipment that will cost $120,000, with another $30,000 for installation. This new equipment will replace your current equipment which is fully depreciated which currently has a $20,000 salvage value, but would have no salvage value if it were to be kept in use for another 5 years. The new equipment may be depreciated using a five-year straightline depreciation method. The equipment will have a salvage value of $30,000 at the end of the fifth year. Initially, the following changes would occur to net working capital: inventory will increase by $10,000 and Accounts Payables by $5,000. This project will decrease the company's costs by $20,000 per year, while increasing revenues by $80,000 due to filling back-orders that had often become lost sales. The current operating costs are 60 percent of revenues (hint: remember to adjust the resulting operating income by the cost savings) and the firm's marginal tax rate is 40 percent. Calculate: (5 points each) a. The initial outlay b. The incremental operating cash flows for each of the 5 years c. The terminal cash flows in year 3 d. Using the project's required rate of return of 14%, should the project be accepted? 1 Nper quarterly payments Rate Number of payments in year Calculating the FV FV = 5 75 16% 4 $ 2 PV FV Nper 1800 38700 50 Calculating the rate Rate = 6.33% 3 FV Nper Rate Calculating the pv of the bond PV = 1000 10 8% $ 4 FV Nper Rate Coupon rate Number of payments in year Calculating the pv of the bond PV = 5 Nper Coupon rate FV PV Calculating the YTM Rate = 6 PV Coupon rate Net coupon 2,233.36 463.19 1000 20 10% 8% 2 $ 828.41 10 8.60% 1000 970 9.07% 1140 7.20% 5 Calculating the clean price of the bond Accrued interest Clean price = 30 1110 Clean price 7 D0 = growth rate Required rate Calculating the price of the stock Price = 1.4 6% 12% $ 8 Dividend Preferred stock value Reqired return Calculating the PV of the preferred stock PV = 24.73 4.6 50 12% $ 9 Dividend in year 10 growth rate Required return 416.67 8 6% 12% Calculating the prce of stock ate year 10 P10 = $ 141.33 calculating the PV of the stock PV = $ 45.51 10 g1 27% 2 17% 2 7% 14% 70 g2 g3 Required return Current price Calculating the dividend Dividend = 3.5 D1 = D2 = D3 = D4 = D5 = $ $ $ $ $ 4.45 5.65 6.60 7.73 8.27 P4 = $ 118.12 Calculating price of the stock year 1 2 3 4 PV = 11 year $ $ $ $ 4.45 5.65 6.60 125.85 $ 87.21 cash flow 0 1 2 3 Payback NPV IRR -7500 4000 3500 1500 $ 14 Purchase Life Cost selling price Discount rate ta rate 2000 year Initial investment Revenue Cost Depreciation EBIT Tax After tax Add: Depreciation Cash flow 0 -10000 -10000 $ 15 Prefrred Common stock Capital surplus RE Outstanding shares Average market price 2 years -70.72 11.36% -10000 5 2 5 20% 34% Units produced NPV cumulative -7500 -3500 0 1500 3,876.44 3600000 165320 2876145 2370025 $ 330640 9.20 1 2 10000 4000 2000 4000 1360 2640 2000 4640 10000 4000 2000 4000 1360 2640 2000 4640 Current book value $ 16 Capital structure Debt Long term Value 16.37 Weight 2000000 0.2857143 5000000 0.7142857 7000000 17 defalt risk 18 internal rate of return on the project is greater than the required rate of return. 19 expected certainty equivalent incremental cash flows; riskless discount rate 20 discounts the payments 9expected cash flow) on the bond to its purchase price. 21 . those with a value greater than or equal to zero. 22 1 23 a. accept all positive present value projects; 24 a. accept all projects where RRR is greater than or equal to the IRR; 25 mutually exclusive 26 stay the same 3 4 5 10000 4000 2000 4000 1360 2640 2000 4640 10000 4000 2000 4000 1360 2640 2000 4640 10000 4000 2000 4000 1360 2640 2000 4640 Initial investment Cash flow Nper Terminal value Certain 45000 15000 4 5000 95% Risk free rate Low risk Medium riks High risk 4% 6% 8% 14% year initial investment Cash flow Terminal value Cash flow 0 -45000 -45000 Risk free rate NPV $ -45000 4 15000 15000 15000 15000 15000 15000 15000 5000 20000 1 2 3 4 15000 14250 15000 14250 1 2 15000 14250 15000 14250 1 2 15000 14250 15000 14250 13537.5 12860.625 5000 13537.5 17860.625 6% $ year initial investment Cash flow Terminal value Cash flow 7,347.03 0 -45000 -45000 Medium risk year initial investment Cash flow Terminal value Cash flow 3 13,722.45 0 -45000 low risk NPV 2 4% year initial investment Cash flow Terminal value Cash flow NPV 1 3 4 13537.5 12860.625 5000 13537.5 17860.625 8% $ 4,980.56 0 -45000 -45000 3 4 13537.5 12860.625 5000 13537.5 17860.625 High risk NPV 14% $ -1,164.84 Old equipment New equipment Installation Life Salvage value Increase in inventory Pyables Decrease in cost Revenue Operating cost Tax 40% Calculating initial outlay New equipment Add: Installation Less: Old equipment Initial outlay Add: Working capital Initial outlay 20000 120000 30000 5 30000 10000 5000 20000 80000 60% 120000 30000 20000 130000 5000 135000 Operating cash flows for all the years 39200 Terminal value 57200 Operating cash flows year Initial outlay Revenue Cost Savings Depreciation EBIT tax After ta income Add: Depreciation After tax salvage value Cash flows NPV Yes, accept the project 0 -135000 1 2 3 4 80000 48000 20000 20000 32000 12800 19200 20000 80000 48000 20000 20000 32000 12800 19200 20000 80000 48000 20000 20000 32000 12800 19200 20000 80000 48000 20000 20000 32000 12800 19200 20000 5 80000 48000 20000 20000 32000 12800 19200 20000 18000 -135000 39200 39200 39200 39200 57200 $ 8,925.41 1 Nper quarterly payments Rate Number of payments in year Calculating the FV FV = 5 75 16% 4 $ 2 PV FV Nper 1800 38700 50 Calculating the rate Rate = 6.33% 3 FV Nper Rate Calculating the pv of the bond PV = 1000 10 8% $ 4 FV Nper Rate Coupon rate Number of payments in year Calculating the pv of the bond PV = 5 Nper Coupon rate FV PV Calculating the YTM Rate = 6 PV Coupon rate Net coupon 2,233.36 463.19 1000 20 10% 8% 2 $ 828.41 10 8.60% 1000 970 9.07% 1140 7.20% 5 Calculating the clean price of the bond Accrued interest Clean price = 30 1110 Clean price 7 D0 = growth rate Required rate Calculating the price of the stock Price = 1.4 6% 12% $ 8 Dividend Preferred stock value Reqired return Calculating the PV of the preferred stock PV = 24.73 4.6 50 12% $ 9 Dividend in year 10 growth rate Required return 416.67 8 6% 12% Calculating the prce of stock ate year 10 P10 = $ 141.33 calculating the PV of the stock PV = $ 45.51 10 g1 27% 2 17% 2 7% 14% 70 g2 g3 Required return Current price Calculating the dividend Dividend = 3.5 D1 = D2 = D3 = D4 = D5 = $ $ $ $ $ 4.45 5.65 6.60 7.73 8.27 P4 = $ 118.12 Calculating price of the stock year 1 2 3 4 PV = 11 year $ $ $ $ 4.45 5.65 6.60 125.85 $ 87.21 cash flow 0 1 2 3 Payback NPV IRR -7500 4000 3500 1500 $ 14 Purchase Life Cost selling price Discount rate ta rate 2000 year Initial investment Revenue Cost Depreciation EBIT Tax After tax Add: Depreciation Cash flow 0 -10000 -10000 $ 15 Prefrred Common stock Capital surplus RE Outstanding shares Average market price 2 years -70.72 11.36% -10000 5 2 5 20% 34% Units produced NPV cumulative -7500 -3500 0 1500 3,876.44 3600000 165320 2876145 2370025 $ 330640 9.20 1 2 10000 4000 2000 4000 1360 2640 2000 4640 10000 4000 2000 4000 1360 2640 2000 4640 Current book value $ 16 Capital structure Debt Long term Value 16.37 Weight 2000000 0.2857143 5000000 0.7142857 7000000 17 defalt risk 18 internal rate of return on the project is greater than the required rate of return. 19 expected certainty equivalent incremental cash flows; riskless discount rate 20 discounts the payments 9expected cash flow) on the bond to its purchase price. 21 . those with a value greater than or equal to zero. 22 1 23 a. accept all positive present value projects; 24 a. accept all projects where RRR is greater than or equal to the IRR; 25 mutually exclusive 26 stay the same 3 4 5 10000 4000 2000 4000 1360 2640 2000 4640 10000 4000 2000 4000 1360 2640 2000 4640 10000 4000 2000 4000 1360 2640 2000 4640 Initial investment Cash flow Nper Terminal value Certain 45000 15000 4 5000 95% Risk free rate Low risk Medium riks High risk 4% 6% 8% 14% year initial investment Cash flow Terminal value Cash flow 0 -45000 -45000 Risk free rate NPV $ -45000 4 15000 15000 15000 15000 15000 15000 15000 5000 20000 1 2 3 4 15000 14250 15000 14250 1 2 15000 14250 15000 14250 1 2 15000 14250 15000 14250 13537.5 12860.625 5000 13537.5 17860.625 6% $ year initial investment Cash flow Terminal value Cash flow 7,347.03 0 -45000 -45000 Medium risk year initial investment Cash flow Terminal value Cash flow 3 13,722.45 0 -45000 low risk NPV 2 4% year initial investment Cash flow Terminal value Cash flow NPV 1 3 4 13537.5 12860.625 5000 13537.5 17860.625 8% $ 4,980.56 0 -45000 -45000 3 4 13537.5 12860.625 5000 13537.5 17860.625 High risk NPV 14% $ -1,164.84 Old equipment New equipment Installation Life Salvage value Increase in inventory Pyables Decrease in cost Revenue Operating cost Tax 40% Calculating initial outlay New equipment Add: Installation Less: Old equipment Initial outlay Add: Working capital Initial outlay 20000 120000 30000 5 30000 10000 5000 20000 80000 60% 120000 30000 20000 130000 5000 135000 Operating cash flows for all the years 39200 Terminal value 57200 Operating cash flows year Initial outlay Revenue Cost Savings Depreciation EBIT tax After ta income Add: Depreciation After tax salvage value Cash flows NPV Yes, accept the project 0 -135000 1 2 3 4 80000 48000 20000 20000 32000 12800 19200 20000 80000 48000 20000 20000 32000 12800 19200 20000 80000 48000 20000 20000 32000 12800 19200 20000 80000 48000 20000 20000 32000 12800 19200 20000 5 80000 48000 20000 20000 32000 12800 19200 20000 18000 -135000 39200 39200 39200 39200 57200 $ 8,925.41