1. Use the following information for Old World, Inc., to answer the questions below. Assume that the tax rate is 20%.

	2010	2011
Sales	20,200	21,450
Depreciation	3,220	3,200
Cost of goods sold	11,700	12,850
Other expenses	330	400
Interest expenses	350	364
Current assets	3,950	4,425
Current liabilities	1,720	2,150
Net fixed assets	11,200	16,400
Dividends paid	550	600

(a) [5 points] Draw up an income statement and find out net income for 2011.

(b) [5 points] Calculate the operating cash flow for 2011.

(c) [5 points] Calculate the cash flow from assets for 2011. Compare the cash flow from assets in 2011 with the operating cash flow in 2011 you calculated in (b) and explain the difference.

(d) [5 points] If there was no stock issue or share repurchase (i.e.: net new equity = 0) in 2011, what is the cash flow to creditors in 2011? What is the amount of net new borrowing in 2011?

2. Below are the comparative balance sheets for Redmond Corporation and Wishart Company in the year 2004. Answer the following questions using the information given in these balance sheets.

	Redmond Corp.	Wishart Company
Current Assets
Cash and equivalents	200	300
Accounts Receivable	1,100	2,400
Inventory	4,600	2,000
Total Current Assets	5900	4700
Property, Plant and Equipment	10,000	11,200
Total Assets	15,900	15,900
Current Liabilities
Accounts Payable	3,000	3,200
Current portion of LT debt	200	400
Total Current Liabilities	3200	3600
Notes payable	2,000	7,000
Total Liabilities	5200	10,600
Common Stock	6,000	2,000
Additional Paid-in Capital	1,000	1,000
Retained Earnings	3,700	2,300
Total Stockholders Equity	10,700	5300
Total Liab & SE	15,900	15,900

(a) [6 points] What are the current ratios for both Redmond Corporation and Wishart Company? Which company appears to be more solvent when looking at the current ratio?

(b) [6 points] What is the total debt ratio for each company? Which company appears to have higher default risk when looking at the debt ratio?

(c) [8 points] In order to investigate how efficiently the firms manage their inventories, we want to check how many days it takes for the firms to sell out their inventories. Choose an appropriate measure and determine which firm is managing its inventory more efficiently when looking at the ratio. Costs of goods sold for both firms are $20,000.

3. Suppose you have just won the lottery and must choose one of the following prizes. The appropriate annual discount rate is 6%. Which prize has the greatest present value? (Show the calculations justifying your answer.) Calculate value of each prize and make your choice.

(a) [7 points] $200,000 paid once each year for a total of ten years with the first payment arriving today.

(b) [7 points] Annual payments of $120,000 paid once each year forever, with the first payment starting exactly 3 years from today (i.e., starting at the end of year 3)

(c) [6 points] Monthly payments of $10,000 paid each month forever, with the first payment starting one month from now (i.e., starting at the end of the first month)

4. Suppose that you want to enter a three-year executive MBA program in 10 years from now.

(a) [7 points] You anticipate that the annual costs to attend the program are $30,000 per year. The annual costs will be paid at the beginning of each year from Year 11 to Year 13. How much will you need to have in your account to cover the entire costs when you enter the program on the first day of Year 11? Assume that your account will pay 5 % annual interest rates during the period that you attend the program.

(b) [6 points] Suppose that you have $50,000 to invest today. What annual rate of return must your investment yield to cover the entire costs of your executive MBA education? (Hint: I am asking what annual return you need to earn to have the amount of money you computed in (a) at the end of year 10.)

(c) [7 points] Suppose that you have no money to invest today but instead you plan to make an equal amount of investment at the end of each year for 10 years. If you expect a 7% annual rate of return for your investments, how much should you invest each year to cover the entire costs of your executive MBA education?

5. Consider the following projects:

Cash Flow

Project C₀ C₁ C₂ C₃ C₄ C₅

A -1,000 +1,000 0 0 0 0

B -2,000 +1,000 +1,000 +4,000 +1,000 +1,000

C -3,000 +1,000 +1,000 0 +1,000 +1,000

(a) [8 points] If the discount rate is 10%, which projects have a positive NPV?

(b) [8 points] Calculate the payback period for each project.

(c) [4 points] Which project(s) would a firm using the payback rule accept if the cutoff period were three years?