Exam

Name___________________________________

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
1)
Calculat e the future value of $4,600 received today if it is deposited at 9 percent for three years.

2)
Calculat present value of $89,000 to be received in 15 years, assuming an opportunity cost of 14 percent.
e the

3)
Calculat e the future value of an annuity of $5,000 each year for eight years, deposited at 6 percent.

4)
Mr. been awarded a bonus for his outstanding work. His employer offers him a choice of a lump-sum
Handym of $5,000 today, or an annuity of $1,250 a year for the next five years. Which option should Mr.
an has Handyman choose if his opportunity cost is 9 percent?

5)
During s of money at the end of each year from her grandmother. She deposited her money in a saving
her four account paying 6 percent rate of interest. How much money will Rose have on graduation day?
years at
college,
Rose
received
the
followin
g
amount

6)
You Your friend offers you the following cash flow instead of paying $8,500 today. Should you accept
have his offer if your opportunity cost is 8 percent?
provide
d your
friend
with a
service
worth
$8,500.

7)
Marc ed a new car for $15,000. He paid $2,500 as down payment and he paid the balance by a loan
has from his hometown bank. The loan is to be paid on a monthly basis for two years charging 12
purchas percent interest. How much are the monthly payments?

8)
Find the equal annual end-of-year payment on $50,000, 15 year, and 10 percent loan.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers
the question.
9)
What
approxi
mate
annual
interest
rate
would
you
have to
earn in
order to
double
your
money
in six
years?
9) ______ _
A )
7 percent
B)
16 percent
C)
12 percent
D) 1 0 e c
e
10 )
Suppos
e you
wish to
set
aside
$2,000
at the
end of
each of
the next
10
years in
an
account
paying
12
percent
compou
nded
annually
. You
accumul
ate at
the end
of 10
years
an
amount
closest
to
10) ______
A )
$28,324.
B)
$20,324.
C)
$22,456.
D) $ 3 , 9
8
11 )
What is
the
future
value of
$1
investe
d for 10
years if
the 12
percent
annual
rate of
interest
is
compou
nded
quarterl
y?
11) ______
A )
$2.30
B)
$3.25
C)
$3.26
D) $ 2 3
.
SHORT
ANSWER.
Write the
word or
phrase that
best
completes
each
statement or
answers the
question.
12 )
A firm's
earning
s were
$1.00 a
share in
1980
and
$3.87 a
share
20
years
later.
What
was the
compou
nd
annual
growth
rate in
earning
s per
share
during
this
period?
12) ______ _______ B T ration,
r o International
ESSAY. Write your answer in the space provided or on a separate 14) Tools Inc.
sheet of paper. e has applied
13 x to the
) p International
a Bank for a 3-
n year,
d $3,500,000
loan.
i Prepare a
t loan
s amortization
table
o assuming 10
p percent rate
e of interest.

SHORT
ANSWER.
Write the
word or
phrase that
best
completes
each
statement
or answers
the
question.
)
As the
producti
on
manage
r for
Welbilt
Widgets
, you
have
been
asked
to
project
when
addition
al
producti
on
capacity
will be
needed.
Last
year
Welbilt
sold
150,000
widgets.
If sales
are
expecte
d to
grow at
a
compou
nd
annual
rate of 5
percent,
how
long will
it take
to
exceed
the
current
capacity
of
200,000
widgets
per
year?
15) ______ _______

1 6)
A
security
has the
followin
g
distribut
ion of
possible
one-
year
rates of
return:

Possible
return: -
3
percent
0
percent
+3
percent
+6
percent

Probabil
ity:
0.2
0.3
0.3
0.2
Calculat
e the
expecte
d return
and
standar
d
deviatio
n for
this
security
.
16) ______ _______

1 7)
The
risk-free
rate is 5
percent
and the
expecte
d return
on the
market
portfolio
is 9
percent.
If a
compan
y has a
beta of
0.90,
what is
the
stock's
expecte
d rate of
return
accordi
ng to
CAPM?
17) ______ _______

1 8)
How
much
should
you pay
for the
preferre
d stock
of the
Dakota
Doorkno
b
Compan
y if it
has
$100
par
value,
pays
$8.50 a
share in
annual
dividen
ds, and
your
required
rate of
return is
10
percent
?
18) ______ _______

1 9)
NDV
Corp.'s
commo
n stock
is
expecte
d to pay
a $2
dividen
d, which
will
grow at
a
compou
nd rate
of 4
percent
indefinit
ely.
a. If the
market
requires
a 14
percent
return,
what
should
be the
current
market
price of
the
stock?
b. If the
current
market
price of
the
stock is
$40,
what
rate of
return is
the
market
requirin
g?
19) ______ _______

2 0)
The learned that Flying Carpet common stock is selling today for $64.50 per
CEO of share. Given your answer in part a. above and assuming that you require a
Flying 10 percent rate of return for similar investments, would you buy stock in
Carpet Flying Carpet?
Transpo
rt, Inc.
recently
told
financial
analysts
that he
expects
the
compan
y's
dividen
ds to
grow at
a
compou
nd rate
of 12
percent
for
three
years
and a
rate of 8
percent
thereaft
er. The
most
recent
annual
dividen
d
(twelve
months
ago)
was $1
per
share.
a.
Assumin
ga
required
rate of
return
of 10
percent,
what is
the
present
value of
a share
of Flying
Carpet
commo
n stock?
b. You
have
20) ______ _______

2 1)
The
stock of
Macbet
h
Cleanin
g Corp.
is
currentl
y selling
for $25
a share.
The
compan
y is
expecte
d to pay
a
dividen
d of
$0.75 at
the end
of this
year. If
you
bought
Macbet
h stock
today
and sold
it for
$29
after
receivin
g the
dividen
d, what
rate of
return
would
you
earn?
21) ______ _______

2 2)
The
commo
n stock
of the
Padlock
Corpora
tion is
currentl
y selling
for $80
a share
and
paid a
$4
dividen
d last
year. If
dividen
ds are
expecte
d to
grow
indefinit
ely at a
6
percent
compou
nd
annual
rate,
what is
the
firm's
cost of
equity?
22) ______ _______

MULTIPLE CHOICE. Choose the one alternative that best completes

the statement or answers the question.
2 3)
The $30,000,000 $34,000,000
capital
structur In addition: 1) its bonds currently provide a yield to maturity of 10 percent; preferred
e of stock is yielding 9 percent; common stock is yielding 13 percent; 4) its marginal tax
Golden rate is 40 percent; and 5) its capital structure is considered optimal. The firm's
Gate weighted average cost of capital is closest to
Windsur
fing, TOTALS
Inc.
(given
in terms
of both
book
value
and
market
value) is
as
follows:

BOOK
VALUE

MARKE
T
VALUE
Bonds

$15,000
,000

$13,000
,000
Preferre
d stock

2,000,0
00

2,500,0
00
Commo
n stock
equity

9,000,0
00

18,500,
000
Retaine
d
earning
s

4,000,0
00

TOTAL
S
23) ______
A )
10.0 percent
B)
11.2 percent
C)
9.2 percent
D) 1 1 e A C n two asset F A pected T P he following
. r s h purchases. a dividend next h r financial
ESSAY. Write a The annual 27) f year of $3.60 29) o data:
your answer mrate of return i and a m
in the space 25) p and related r required o
provided or i probabilities mreturn of 12
on a separate o given below percent. P
sheet of n summarize h Calculate the a
paper. the firm's a value of a k
24 B analysis. s share of
r common h
(a) Calculate
e a stock a
the weighted
w n assuming a s
average cost
e zero growth
of capital
r e rate of c
using book
i x dividends. o
value
e m
weights.
s 28 p
For each (b) Calculate
i
asset, the weighted
m l
compute average cost
u e
(a) the of capital
s d
expected rate using market
t
of return. value
c t
(b) the weights.
h
standard
o
deviation of 30
o
the expected
s
return.
e
(c) the
coefficient of
b
variation of
e
the return.
t
(d) Which
w
asset should
e
Champion
e
select?

26
A year.
corporat The project has an internal rate of return of 14 percent. If the firm has the following target capital
ion is structure and costs, what should their decision be and why?
consider
ing a
capital
project
for the
coming

Table 9.5

31)
Given ion in Table 9.5 and 15 percent cost of capital,
the (a) compute the net present value.
informat (b) should the project be accepted?
1)
FV = $4,600(1.295) = $5,957
2)
PV = 89,000(1.40) = $12,460
3)
FV = 5,000(9.897) = $49,485
4)
PVA $1,250(PVIFA) = 1,250(3.890) = $4,862.50
= Mr. Handyman should choose a lump-sum of $5,000 today.
5)
6)
7)
PV = 00 - 2,500 = $12,500, i = 12%, n = 2, m = 12
15,0 PMT = PVA/PVIFA = 12,500/21.244 = $588.40
8)
PMT = PVA/PVIFA = 50,000/7.606 = $6,573.76
9)
C
10)
D
11)
C
12)
This ires a search of the future value interest factor table, to find the i which will satisfy the following
prob equation:
lem ($1)(1 + i)20 = $3.87
requ The future value interest factor for 7 percent, 20 years = 3.870.
13)
PMT
=
5,00
0/3.
993
=
$1,2
52.1
The principal paid in the third year is $993.99
9
14)
PMT 07,318.05
=
3,50
0,00
0/2.
487
=
$1,4
15)
First n:
solv
e PV0(FVIFi%,n) = FVn, so (150,000)(1.05)n = 200,000
the
Thus, the (FVIFi%,n) = (1.05)n = 1.3333
follo
wing
equ The future value interest factor of $1 at 5 percent at the end of 6 periods is 1.340. Since LAST YEAR's
atio sales were 150,000, Welbilt will exceed capacity in about six years.
n for
Actual, N = 5.9 years
16)
R = (0.3)(0 percent) + (0.3)(+3 percent)
(0.2) + (0.2)(+6 percent)
(-3 = 1.5 percent
perc σ = [(0.2)(-3 - 1.5)2 + (0.3)(0 - 1.5)2 + (0.3)(3 - 1.5)2
ent) + (0.2)(6 - 1.5)2]1/2 = (9.45)1/2
+ = 3.07 percent
17)
Base the CAPM of kRf + Beta (kRM - kRf):
d on 5% + (0.90)(9% - 5%) = 8.6 percent
18)
$8.5 0/0.10 = $85 per share
19)
a. (0.14 - 0.04) = $20
$2/ b. ($2/$40) + .04 = .09, or 9 percent
20)
a. Year 1: ($1)(1.12)(0.909) = $1.018
Year 2: ($1)(1.12)2(0.826) = $1.036
PV Year 3: ($1)(1.12)3(0.751) = $1.055
of Dividend at end of Year four = ($1.055)(1.08) = $1.5173
divid PV of $1.5173 growing at 8 percent forever, at end of:
end Year 3: [$1.5173/(0.10 - 0.08)](0.751) = $57.00
at Total PV = $1.018 + $1.036 + $1.055 + $57.00 = $60.11
end b. No, because the market price is higher than the intrinsic value of the stock.
of:
21)
ke (D1/PO) + g
= ($.75/$25) + ($29-$25)/$2
= = (.03)+(.16) = .19 or 19 percent
22)
ke = ($4)(1.06)/$80 + 0.06 = 0.113, or 11.3 percent
23)
A
24)
 SD = 3.91%
CV = SD/K = 3.91/13.5 = 0.29

25)
(a) (b) Asset A
× 0.30 = 7.5%
× 0.40 = 0%
× 0.30 = 7.5%
15%
Standard Deviation of A = 3.87%
Expe Asset B
cted
× 0.40 = 40%
Retu
rn = × 0.20 = 0%
15% × 0.40 = 40%
Expe 80%
cted Standard Deviation of B = 8.94%
Retu (c) CVA = 3.87/15 = 0.26 CVB = 8.94/15 = 0.60
rn = (d) Asset A; for 15% rate of return and lesser risk.
15%
26)
Cou t = 1,000 × 0.09 = $90
pon Semi-annual coupon payment = 90/2 $45
pay
P = 45 20) + 1,000 20)
men
= 45(11.470) + 1,000(0.312) = $828.15
27)
 = $30

28)
D1 6.75 (1 + 0.05) = $7.09
= P = D1/(k - g) = 7.09/(0.08 - 0.05) = $236.33
29)
(a) (5) + (0.05)(14) + (0.45)(20) = 2.5 + 0.7 + 9 = 12.2%
(b)

ka =
(0.5) ka = (0.34)(5) + (0.06)(14) + (0.60)(20) = 1.7 + 0.84 + 12 = 14.5%
30)
ka = (10%) + (0.10)(15%) + (0.50)(20%) = 15.5%
(0.4 They should reject this project, because the weighted average cost of capital is 15.5 percent and the
0) internal rate of return is 14 percent.
31)
(a)

NPV
=
98,8
20 -
100,
000
=-
$1,1
80 <
0
(b)

Sinc
e
NPV
< 0,
the
proj
ect
shou
ld
be
rejec
ted.