Answer Key

1. E

2. A

3. C

4. D

5. A
NWC = CA – CL = (Cash + Accounts receivable + Inventory) – (Accounts payable + Notes
Payable) = (167 + 728 + 885) – (371 + 314) = 1,780 – 685 = $1,095

6. E
Book value = Common Stock and Capital Surplus + Retained Earnings = 960 + 2,112 = 3,072
$million
Market value = Shares Outstanding x Stock Price = 500 x 24.65 = $12,325 million

7. B
Net income = Sales Revenue - Cost of Goods Sold - SG&A Expense - Depreciation Expense -
Interest Expense - Income Tax Expense = 2,414 – 750 – 450 – 104 – 110 – 210 = $790
Addition to Retained Earning = Net Income – Dividend = 790 – 340 = $450 million

8. B
Operating Cash Flow = EBIT + Depreciation – Current Tax = Sales Revenue – Cost of Goods
Sold – SG&A Expense – Depreciation Expense + Depreciation Expense – Income Tax Expense
= 2,414 – 750 – 450 – 104 + 104 – 210 = $1,004 million

9. B
Total Debt in 2017 = Total Asset in 2018 x 0.4 = $1,764 million
Total Debt in 2018 = Current Liabilities + Long-Term Debt = 685 + 653 = $1,338 million

10. A
ROA = Net Income/Total Assets = 146,000/1,604,000 = 0.091
Retention ratio = 1 – (Dividend/Net Income) = 1 – (58,400/146,000) = 0.6
Internal Growth Rate = (ROA x b)/(1 – ROA x b) = (0.091 x 0.6)/(1 – 0.091 x 0.6) = 0.058

11. C
EFN = Asset x g – Net Income x (1 + g) x b = 385,500 x 0.12 – (77,100 – 61,680) x (1.12) x 1 =
$28,990

12. B

13. D
PV2 = 250,000/0.13 = $1,923,077
PV0 = PV2/(1.13)2 = 1,923,077/(1.13)2 = $1,506,051

14. C
 1 − [1⁄(1 + 𝑟𝑟)𝑇𝑇 ]
PV of Annuity = C × � �
𝑟𝑟
17×12
⎧ 1 − �1��1 + 0.08� �⎫
⎪ 12 ⎪
400,000 = C × = 𝐶𝐶 × 111.33
⎨ 0.08 ⎬
⎪ 12 ⎪
⎩ ⎭
C = $3,593

15. A
𝐶𝐶 1 + 𝑔𝑔 𝑇𝑇
PV of Growing Annuity = �1 − � � �
𝑟𝑟 − 𝑔𝑔 1 + 𝑟𝑟

650,000 1 + 0.03 8
�1 − � � � = 3,946,050
0.09 − 0.03 1 + 0.09

16. D
1
𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 = 𝑅𝑅�𝐺𝐺 = [(1 + 𝑅𝑅1 ) × (1 + 𝑅𝑅2 ) × ⋯ × (1 + 𝑅𝑅𝑇𝑇 )]𝑇𝑇 − 1
= [(1 + 0.07) × (1 − 0.22) × (1 + 0.11)]1/3 − 1 = −0.025

17. A

18. B
1 − [1⁄(1 + 𝑟𝑟)]𝑇𝑇 𝐹𝐹
Bond Value = C × � �+
𝑟𝑟 (1 + 𝑟𝑟)𝑇𝑇
20
1 − 1⁄(1.015) 1,000
= (1,000 × 0.03) × � �+ = $1,257.53
0.015 (1.015)20

19. B

20. E

21.
Limited liability for owners
Ease of transferring ownership (liquid secondary market)

22.
Sole proprietorship
(General) partnership

23.
A perpetuity gives cash forever, whereas annuity gives for a limited number of years.

24.
(bond price < par value) if (yield > coupon rate)
25.
Beta measures the responsiveness of a security to movements in the market portfolio, or the
non-diversifiable or systematic risk of a security