DEVRY FIN 515 Week 4 Midterm

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FIN 515 Week 4 Midterm

1. (TCO G) The firm’s asset turnover measures

2. (TCO G) Suppose Novak Company experienced a reduction in its ROE over the last
year. This fall could be attributed to

3. (TCO B) You plan on retiring in 20 years. You currently have $275,000 and think
you will need $1,000,000 to retire. Assuming you don’t deposit any additional money
into the account, what annual return will you need to earn to meet this goal?

4. (TCO B) You take out a 4 year car loan for $18,000. The loan has a 4% annual
interest rate. The payments are made monthly. What are the monthly payments?
Show your work

5. (TCO B) You currently have $10,000 in your retirement account. If you deposit
$500 per month and the account pays 5% interest, how much will be in the account
in 10 years? Show your work.

6. (TCO B) You have a two children, A and B. Child A is not going to college but is
working in a business to learn the ropes. Child A plans on opening a business
someday. Child B is attending college. You put a certain amount of money into an
 account. From this account, Child B will receive $2,000 per month for the next four
years. Whatever is left at that time will go to Child A to help start the business. You
want Child A to receive $96,000 at that time. The account pays 7% annually,
compounded monthly. How much money do you need to start the account? Show your
work.

7. (TCO F) A project requires an initial cash outlay of $95,000 and has expected cash
inflows of $20,000 annually for 9 years. The cost of capital is 10%. What is the
project’s NPV? Show your work.

8. (TCO F) A project requires an initial cash outlay of $60,000 and has expected cash
inflows of $15,000 annually for 8 years. The cost of capital is 10%. What is the
project’s payback period? Show your work.

9. (TCO F) A project requires an initial cash outlay of $95,000 and has expected cash
inflows of $20,000 annually for 9 years. The cost of capital is 10%. What is the
project’s IRR? Show your work.

10. (TCO F) A project requires an initial cash outlay of $40,000 and has expected cash
inflows of $12,000 annually for 7 years. The cost of capital is 10%. What is the
project’s discounted payback period? Show your work.

11. (TCO F) Company A has the opportunity to do any, none, or all of the projects for
which the net cash flows per year are shown below. The projects are not mutually
exclusive. The company has a cost of capital of 15%. Which should the company do
and why? You must use at least two capital budgeting methods. Show your work.
Explain your answer thoroughly.

(1 ) (TCO A) Which of the following statements is CORRECT? (Points : 10)

(a) It is generally more expensive to form a proprietorship than a corporation

because, with a proprietorship, extensive legal documents are required.
(b) Corporations face fewer regulations than sole proprietorships.
(c) One disadvantage of operating a business as a sole proprietorship is that the firm
is subject to double taxation, at both the firm level and the owner level.
(d) One advantage of forming a corporation is that equity investors are usually
exposed to less liability than in a regular partnership.
(e) If a regular partnership goes bankrupt, each partner is exposed to liabilities only
up to the amount of his or her investment in the business.

(2) (TCO G) A security analyst obtained the following information from Prestopino
Products’ financial statements:
Retained earnings at the end of 2009 were $700,000, but retained earnings at the
end of 2010 had declined to $320,000.
 • The company does not pay dividends.
• The company’s depreciation expense is its only non-cash expense; it has no
amortization charges.
• The company has no non-cash revenues.
• The company’s net cash flow (NCF) for 2010 was $150,000.

On the basis of this information, which of the following statements is CORRECT?

(Points : 10)
(a) Prestopino had negative net income in 2010.
( b ) Prestopino’s depreciation expense in 2010 was less than $150,000.

(c) Prestopino had positive net income in 2010, but its income was less than its 2009
income.
(d) Prestopino’s NCF in 2010 must be higher than its NCF in 2009.

(e) Prestopino’s cash on the balance sheet at the end of 2010 must be lower than the
cash it had on the balance sheet at the end of 2009.

(3) TCO G) Beranek Corp. has $410,000 of assets, and it uses no debt—it is financed
only with common equity. The new CFO wants to employ enough debt to bring the
debt/assets ratio to 40%, using the proceeds from the borrowing to buy back
common stock at its book value. How much must the firm borrow to achieve the
target debt ratio? (Points : 10)

$155,800
$164,000
$172,200
$180,810
$189,851

(4) (TCO B) You deposit $1,000 today in a savings account that pays 3.5% interest,
compounded annually. How much will your account be worth at the end of 25 years?
(Points : 10)

$2,245.08
$2,363.24
$2,481.41
$2,605.48
$2,735.75

(5). (TCO B) You sold a car and accepted a note with the following cash flow stream as
your payment. What was the effective price you received for the car assuming an
interest rate of 6.0%?
Years: 0 1 2 3 4
 |———–|————–|————–|————–|
CFs: $0 $1,000 $2,000 $2,000 $2,000 (Points : 10)

$5,987
$6,286
$6,600
$6,930
$7,277

(6) (TCO B) Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in
four equal installments at the end of each of the next four years. How large would
your payments be? (Points : 10)

3,704.02
$3,889.23
$4,083.69
$4,287.87
$4,502.26

(7 ) (TCO D) Which of the following statements is CORRECT? (Points : 10)

(a) If a bond is selling at a discount, the yield to call is a better measure of return
than the yield to maturity.
(b) On an expected yield basis, the expected capital gains yield will always be positive
because an investor would not purchase a bond with an expected capital loss.
(c) On an expected yield basis, the expected current yield will always be positive
because an investor would not purchase a bond that is not expected to pay any cash
coupon interest.
(d) If a coupon bond is selling at par, its current yield equals its yield to maturity.
(e) The current yield on Bond A exceeds the current yield on Bond B; therefore, Bond
A must have

(8 ) (TCO D) Ezzell Enterprises’ noncallable bonds currently sell for $1,165. They
have a 15-year maturity, an annual coupon of $95, and a par value of $1,000. What is
their yield to maturity? (Points : 10)

6.20%
6.53%
6.87%
7.24%
7.62%

(9 ) (TCO C) Niendorf Corporation’s five-year bonds yield 6.75%, and five-year T-

bonds yield 4.80%. The real risk-free rate is r* = 2.75%, the inflation premium for
five-year bonds is IP = 1.65%, the default risk premium for Niendorf’s bonds is DRP =
1.20% versus zero for T-bonds, and the maturity risk premium for all bonds is found
with the formula MRP = (t – 1) x 0.1%, where t = number of years to maturity. What is
the liquidity premium (LP) on Niendorf’s bonds? (Points : 10)

0.49%
0.55%
0.61%
0.68%
0.75%

(10 ) (TCO C) Assume that investors have recently become more risk averse, so the
market risk premium has increased. Also, assume that the risk-free rate and
expected inflation have not changed. Which of the following is most likely to occur?
(Points : 10)

(a) The required rate of return for an average stock will increase by an amount equal
to the increase in the market risk premium.

(b) The required rate of return will decline for stocks whose betas are less than 1.0.

(c) The required rate of return on the market, rM, will not change as a result of these
changes.

(d) The required rate of return for each individual stock in the market will increase
by an amount equal to the increase in the market risk premium.

(e) The required rate of return on a riskless bond will decline.