Final Exam FINC 330 Spring 2014 OL4-US2

Name___________________________________

I. MULTIPLE CHOICE (30 questions, 2 points each). Choose the one alternative that best

completes the statement or answers the question.

1) Cash and Equivalents are $1,561, Short-Term Investments are $1,052, Accounts Receivables are $3,616, Accounts Payable is

$5,173, Short-Term Debt is $288, Inventories are $1,816, Other Current Liabilities are $1,401, and Other Current Assets are $707.

What are the Total Current Assets? 1) _______

A) $6,862 B) $5,136 C) $8,752 D) $6,936

2) You intend to buy a vacation home in seven years and plan to have saved $50,000 for a down payment. How much money would

you have to place today into an investment that earns 8% per year to have enough for your desired down payment? 2) _______

A) $29,175 B) $25,000 C) $37,065 D) $29,100

3) You gave your little sister two rabbits for Easter three years ago and now she has 84 of the cute little bunnies. What is the average

annual rate of increase in the number of rabbits your sister owns? Note: Your parents are not very pleased with you right now.

3) _______

A) 247.60%

B) 410.00%

C) 14.00%

D) The TVM equations are designed for currency amounts and cannot be used for non-financial calculations such as this one.

4) You need $32,000 at the end of 6 years. If you can earn 0.625% per month, how much would you need to invest today to meet your

objective? 4) _______

A) $20,433 B) $18,319 C) $17,600 D) $20,735

5) In two years Rocky plans to enroll at Whatsamatta U., a prestigious university in Frostbite Falls, MN. If the current tuition is

$23,500 per year and is expected to increase at a rate of 6% per year, how much will Rocky pay in tuition his first year of school? (His

first tuition payment is exactly two years from today.) In his fourth year? (His last tuition payment is exactly 5 years from today)

(Rounded to the nearest dollar.) 5) _______

A) $26,405 and $31,448 B) $23,500 and $31,448

C) $23,500 and $29,668 D) $26,405 and $29,668

6) You have just won the Reader's Digest lottery of $5,000 per year for twenty years, with the first payment today followed by

nineteen more start-of-the-year cash flows. At an interest rate of 5%, what is the present value of your winnings? 6) _______

A) $62,311.05 B) $100,000.00 C) $65,426.60 D) $47,641.18

7) Your parents have an investment portfolio of $400,000, and they wish to take out cash flows of $50,000 per year as an ordinary

annuity. How long will their portfolio last if the portfolio is invested at an annual rate of 4.50%? Use Excel or financial calculator to

determine your answer. 7) _______

A) 9.10 years B) 8.00 years C) 9.60 years D) 10.14 years

8) You are saving money for a down payment on a new house. You intend to place $5,000 at the end of each year for three years into

an account earning 6% per year. At the end of the fourth year, you will place $10,000 into this account. How much money will be in

the account at the end of the fourth year? 8) _______

A) $25,918.00 B) $26,518.17 C) $25,000.00 D) $26,873.08

9) You are paid to teach classes for the university and wonder how much money the university makes from your graduate-level

classes. Based on historical data, you determine that your summer classes for the next seven years will generate an average annual

revenue of $93,850. If you discount these cash flows at an annual rate of 8.30%, what is the present value of the expected cash flows?

9) _______

A) $483,644.36 B) $656,950.00 C) $845,133.52 D) $523,786.85

10) Suppose you invest $3,500 today, compounded semiannually, with an annual interest rate of 8.50%. What amount of interest will

you earn in one year? 10) ______

A) $307.12 B) $313.82 C) $303.82 D) $309.13

11) Delagold Corporation is issuing a zero-coupon bond that will have a maturity of fifty years. The bond's par value is $1,000, and

the current yield on similar bonds is 7.5%. What is the expected price of this bond, using the semiannual convention? 11)

______

A) $250.19 B) $750.00 C) $1,000.00 D) $25.19

12) Curtis Equipment Inc., $1,000 par value, 15% annual coupon bonds, have 6 years remaining to maturity and are currently selling

for $938.45. What is the firm's yield to maturity for these bonds? 12) ______

A) 15.00% B) 15.47% C) 16.66% D) 16.70%

13) Endicott Enterprises Inc. has issued 30-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is

14% and the current yield to maturity is 8%, what is the firm's current price per bond? 13) ______

A) $1,675.47 B) $579.84 C) $1,678.70 D) $578.82

14) The Belgium Bike Company just paid an annual dividend of $1.12. If you expect a constant growth rate of 4% and have a required

rate of return of 13%, what is the current stock price according to the constant growth dividend model? 14) ______

A) $13.46

B) $12.44

C) $12.94

D) There is not enough information to answer this question.

15) In a stream of past dividends, the initial dividend is $0.75 and the most recent dividend is $1.25. The number of years between

these two dividends (n) is 8 years. What is the average growth rate during this eight-year period? Use a calculator to determine your

answer. 15) ______

A) 6.69% B) 6.62% C) 6.59% D) 6.72%

16) Kip owns the following portfolio of securities. What is the beta for the portfolio?

Company Beta Percent of Portfolio

Apple .82 50%

Ford 2.53 30%

Federal Express 1.67 20%

16) ______

A) 1.98 B) 1.00 C) 1.50 D) 1.74

17) George is considering an investment in Vandelay Inc. and has gathered the information in the following table. What is the

expected standard deviation for a share of the firm's stock?

State of the Economy Probability of the State

Conditional Expected Return

Vandelay Inc.

Recession .25 -20%

Steady .60 10%

Boom .15 35%

17) ______

A) 31.62% B) 22.48 C) 17.46% D) 27.54%

18) Alice purchased Hampton Industries Inc. stock for $14.65 and sold it 6 months later for $17.38 after receiving a $0.25 dividend.

What was Alice's holding period return (HPR), Annual Percentage Rate (APR), and Effective Annual Rate (EAR)? 18) ______

A) 20.34%, 40.68%, 44.82% B) 18.63%, 37.27%, 40.74%

C) 17.15%, 34.29%, 37.23% D) 20.34%, 40.68%, 9.70%

19) Acme, Inc. is considering a four-year project that has an initial outlay or cost of $100,000. The respective future cash inflows from

its project for years 1, 2, 3 and 4 are: $50,000, $40,000, $30,000 and $20,000. Will it accept the project if its payback period is 31

months? 19) ______

A) No, because it pays back in over 31 months.

B) Yes, because it pays back in 25 months.

C) No, because it pays back in over 35 months.

D) Yes, because it pays back in 28 months.

20) Morgan, Inc. is considering an eight-year project that has an initial after-tax outlay or after-tax cost of $180,000. The future

after-tax cash inflows from its project for years 1 through 8 are the same at $35,000. Morgan uses the net present value method and

has a discount rate of 12%. Will Morgan accept the project? 20) ______

A) Morgan rejects the project because the NPV is below -$7,000.

B) Morgan rejects the project because the NPV is about -$6,133.

C) Morgan accepts the project because the NPV is about $6,141.

D) Morgan accepts the project because the NPV is over $10,000.

21) Consider the following four-year project. The initial outlay or cost is $180,000. The respective cash inflows for years 1, 2, 3 and 4

are: $100,000, $80,000, $80,000 and $20,000. What is the discounted payback period if the discount rate is 11%? 21) ______

A) About 1.667 years B) About 2.427 years

C) About 2.000 years D) About 2.135 years

22) Lennon, Inc. is considering a five-year project that has an initial outlay or cost of $80,000. The respective future cash inflows from

its project for years 1, 2, 3, 4 and 5 are: $15,000, $25,000, $35,000, $45,000, and $55,000. Lennon uses the internal rate of return

method to evaluate projects. What is Lennon's IRR? 22) ______

A) The IRR is less than 22.50%. B) The IRR is about 26.16%.

C) The IRR is about 24.16%. D) The IRR is over 26.50%.

23) Mulligan, Inc. is currently considering an eight-year project that has an initial outlay or cost of $140,000. The cash inflows from

its project for years 1 through 8 are the same at $35,000. Mulligan has a discount rate of 12%. Because there is a shortage of funds to

finance all good projects, Mulligan wants to compute the profitability index (PI) for each project. That way Mulligan can get an idea

as to which project might be a better choice. What is the PI for Mulligan's current project? 23) ______

A) About 1.21 B) About 1.09 C) About 1.24 D) About 1.19

24) Dweller, Inc. is considering a four-year project that has an initial after-tax outlay or after-tax cost of $80,000. The future cash

inflows from its project are $40,000, $40,000, $30,000 and $30,000 for years 1, 2, 3 and 4, respectively. Dweller uses the net present

value method and has a discount rate of 12%. Will Dweller accept the project? 24) ______

A) Dweller rejects the project because the NPV is -$3,021.

B) Dweller accepts the project because the NPV is greater than $28,000.

C) Dweller accepts the project because the NPV is greater than $30,000.

D) Dweller rejects the project because the NPV is less than -$4,000.

25) Bacon Signs Inc., purchases a machine for $70,000. This machine qualifies as a five-year recovery asset under MACRS with the

fixed depreciation percentages as follows: year 1 = 20.00%; year 2 = 32.00%; year 3 = 19.20%; year 4 = 11.52%, etc. The firm has a

tax rate of 40%. If the machine is sold at the end of two years for $50,000, what is the cash flow from disposal? 25) ______

A) $39,875 B) $33,600 C) $43,440 D) $50,000

26) The following market information was gathered for the Blender Corporation. The firm has 1,000 bonds outstanding, each selling

for $1,100.00 with a required rate of return of 8.00%. Blenders has 5,000 shares of preferred stock outstanding, selling for $40.00 per

share and 50,000 shares of common stock outstanding, selling for $18.00 per share. If the preferred stock has a required rate of return

of 11.00% and the common stock requires a 14.00% return, and the firm has a corporate tax rate of 30%, then calculate the firm's

WACC adjusted for taxes. 26) ______

A) 6.77%

B) 9.53%

C) 10.73%

D) There is not enough information to answer this question because there is no information provided about the amount of retained

earnings held by the firm.

27) Ready Tees, an on line retailer of t-shirts, orders 100,000 t-shirts per year from its manufacturer. The carrying cost is $0.10 per

shirt per year. The order cost is $500 per order. What is the optimal order quantity for the t-shirt inventory (rounded to the nearest

dollar)? 27) ______

A) 15,841 B) 31,623 C) 1,581 D) 8,333

28) Oregon Saw Mills Inc. has credit terms of 2/10 net 60. Customers should take the discount and pay in 10 days if they CANNOT

earn more than ________ (APR) or ________ (EAR) on their investments. 28) ______

A) 13.08% APR or 12.42% EAR B) 15.89% APR or 14.90% EAR

C) 12.42% APR or 13.08% EAR D) 14.90% APR or 15.89% EAR

29) Robertson Lumber has a $250,000 compensating balance loan with its bank. The terms of the loan call for Robertson to keep 10%

of the loan as a compensating balance and pay interest at an annual rate of 6.50% on the entire amount. If the firm borrows the

maximum amount for one year, what is the EAR on this loan? 29) ______

A) 6.87% B) 7.22% C) 6.50% D) 7.39%

30) Firewall Corp. is a small company looking at two possible capital structures. Currently, the firm is an all-equity firm with

$900,000 in assets and 100,000 shares outstanding. The market value of each share is $9.00. The CEO of Firewall is thinking of

leveraging the firm by selling $270,000 of debt financing and retiring 30,000 shares, leaving 70,000 shares outstanding. The cost of

debt is 6% annually, and the current corporate tax rate for Donat is 30%. The CEO believes that Donat will earn $100,000 per year

before interest and taxes. Which of the statements below is TRUE? 30) ______

A) All-equity EPS is $0.70.

B) Shareholders will be better off by almost $0.14 per share under a firm with $270,000 in debt financing versus a firm that is

all-equity.

C) 50/50 debt-to-equity EPS is $0.838.

D) Statements (A) through (C) are all true.

II. SHORT ANSWER and FREE RESPONSE QUESTIONS (8 questions, 5 points each).

Please show your work! Please write a separate paragraph to explain your answer to each of

the following questions.

31) Complete the equal-payments three-year amortization table.

Year

Beginning

Principal Payment

Interest

Expense

Principal

Reduction

Ending

Principal

1 $6,000.00 $480.00 $4,151.80

2 $2,328.20 $1,996.06

3 $2,155.74

31) _____________

32) Assume that today's date is August 15, 2010 and that the Rite Aid Bond is an annual-coupon bond. Describe what each of the

following terms mean and how each value was determined if appropriate.

Company Price Coupon Rate Maturity Date YTM Current Yield Rating

Rite Aid 84.00 6.875% 8-15-2015 10.576% 8.185% B2

32) _____________

33) Complete the following zero-coupon amortization schedule.

T (Periods)

Beginning

Price

Interest Earned

(6%)

Ending

Price

1 $839.62 $890.00

2 $53.40

3 $943.40 $1,000.00

33) _____________

34) Your bank offers discount loans at a discount rate of 7.50%.

a) If you borrowed $50,000 as a discount loan from the bank today at this rate (you receive less than the face value today and repay

the face value in one year), how much money would you receive today?

b) What is the EAR of this loan? 34) _____________

35) Describe the principal-agent relationship. In your answer, give an example of how a principal-agent problem arises in the

corporate world. Can such a problem become costly? Please explain.

36) The target capital structure of Orange Corporation is 40 percent common stock, 10 percent preferred stock, and 50 percent debt.

Orange Corporation is issuing new common stock at a market price of $52. Dividends last year were $6.30 and are expected to grow

at an annual rate of 6% forever. Flotation costs will be $5 per share.

Orange Corporation is issuing a bond. Beforetax cost of debt is 12.87%. The firms tax rate is 34%.

The preferred stock of Orange Corporation sells for $49 and pays $4.90 in dividends. Flotation costs will be $5 per share.

a) What is Oranges cost of common equity?

b) What will be the Oranges after-tax cost of debt on the bond?

c) What is the Oranges cost of capital for the preferred stock?

d) What is the Oranges weighted average cost of capital?

37) Consider the information below from a firm's balance sheet for 2012 and 2013.

Current Assets 2012 2013 Change

Cash and Equivalents $1,561 $1,800 -$ 239

Short-Term Investments $1,052 $3,010 -$ 1,958

Accounts Receivable $3,616 $3,129 $ 487

Inventories $1,816 $1,543 $ 273

Other Current Assets $ 707 $ 601 $ 106

Total Current Assets $8,752 $10,083 -$1,331

Current Liabilities

Accounts Payable $5,173 $5,111 $ 62

Short-Term Debt $ 288 $ 277 $ 11

Other Current Liabilities $1,401 $1,098 $ 303

Total Current Liabilities $6,862 $6,486 $ 376

a) What is the Net Working Capital for 2013? What is it for 2012?

b) What is the Change in Net Working Capital (NWC)?

c) Assuming the Operating Cash Flows (OCF) are $7,155 and the Net Capital Spending (NCS) is $2,372,

what is the Cash Flow from Assets?

d) Why is an understanding of cash flow so important in the study of finance?

38) Amistad Inc manufactures custom golf clubs and orders 250,000 graphite shafts per year from its manufacturer. The CEO at

Amistad wishes to know the optimal EOQ. The carrying cost is $0.45 per shaft per year. The order cost is $750 per order.

a) What is the EOQ for Amistad?

b) What are the total annual carrying costs?

c) What are the total annual ordering costs?