1. According to the text, the primary goal for a firms financial managers is to: a. b. c. d. e.

Maximize the firms reported net income per share of common stock. Minimize the price of the companys outstanding bonds. Maximize dividends paid to stockholders. Smooth the firms earnings so they are positive and always growing. Maximize shareholder wealth. Use the following financial statements to answer questions 2 and 3. Genoda, Inc. Balance Sheets for the Years Ending December 31, 2004 and 2005 2004 6,000 59,200 104,600 169,800 388,600 558,400 12,000 62,200 8,500 10,200 92,900 185,900 62,900 129,900 86,800 558,400 2005 9,000 72,800 95,200 177,000 402,500 579,500 8,600 60,500 9,600 9,200 87,900 195,800 68,200 138,500 89,100 579,500

Cash Accounts receivable Inventories Current assets Net fixed assets Total assets Notes payable Accounts payable Accruals Current portion of Long-term debt Current liabilities Long-term debt Common stock Additional paid-in capital Retained earnings Total liabilities and equity

Selected Income Statement for Genoda, Inc: Sales (as recorded on year 2005 income statement): Net income (as recorded on year 2005 income statement): Depreciation (as recorded on year 2005 income statement):

1,520,400 35,400 24,600

2. What is the Net Cash Flow from Operating Activities for Genoda Inc. in 2005? a. b. c. d. e. 82,400 53,000 55,200 35,600 None of the above is within $100 of the correct answer

3. What is the Net Cash Flow from Financing Activities for Genoda Inc. in 2005? a. b. c. d. e. (5,300) (30,900) 22,800 19,400 (13,700)

4. Assume you are given the following information for the company E-Toscali: Return on Equity (ROE): 40% Debt Ratio (DR): 60% Compute the Return on Assets (ROA) for E-Toscali a. b. c. d. e. 100% 16% 24% 33% 40%

5. Mike Moneyminder has a 25-year, $200,000 mortgage with a nominal interest rate of 8 percent and monthly compounding. Which of the following statements regarding his mortgage is most correct? a. The proportion of the monthly payment that represents interest will be lower for the last payment than for the first payment on the loan. b. The monthly payments will increase over time. c. The total dollar amount of principal being paid off each month gets larger as the loan approaches maturity. d. Statements a and c are correct. e. Statements b and c are correct. 6. You plan to deposit money in a savings account earning 6% annually. You will make 4 equal deposits of $8,000 each. The first deposit will be made today (t = 0). No deposits will be made after the fourth deposit. What will be the accumulated sum available at the end of 10 years? (Round your answer to the nearest $1) a. b. c. d. e. $45,469 $46,997 $50,053 $53,841 $52,622

7. Due to the rising price of gasoline, Miss Savealot has decided to purchase a more fuel efficient car. This cars sticker price is $35,180 and Miss Savealot has $3,060 for down payment. To finance her car purchase, Miss Savealot has entered into a loan agreement that requires her to make quarterly payments over a 6 year period. The nominal annual interest rate on the loan is 10% p.a. How much will Miss Savealot pay each quarter? a. b. c. d. e. $ 595.05 $1,795.92 $1,843.75 $2,831.39 $7,374.99

8. You make an investment of $43,000 into an account that pays 8 percent interest per year with yearly compounding. The investment generates the following cash flows. You are told that the missing cash flows are equal. Find the missing cash flow. At the end of the year 1 2 3 4 5 What is the cash flow received at the end of year 3? a. b. c. d. e. $5,960.61 $6,089.37 $3,342.53 $6,952.46 $4,397.30 Cash flow 15,000 15,000 ??? ??? 14,000

First, find the NPV, replacing the missing cash flows with zeros. You will get -$6,722.86. This means that the missing cash flows have present value (at t=0) of +$6,722.86. This is so because the NPV of the investment using the investments rate of return (IRR) should be zero. To enable you use the third row keys (for annuities), find the value of the $6,722.86 at time t=2. You should obtain $7,841.54. Now, you can set PV = -7841.54; N=2; I/Y =8; FV = 0; CPT PMT. You should get the answer $4,397.30. 9. You deposit $3,200 in your account today. You want to have exactly $7,000 in the account after two years (t=2). How much should you deposit at the end of the current year (t=1) to achieve your goal? Assume that the interest rate is 4% per year. a. b. c. d. e. $3,402.77 $3,461.12 $3,515.12 $3,538.88 $3,800.00

10. The stated interest rate for a bank account is 5 percent per year and interest is paid monthly. How many years will it take to double your money in this account? a. b. c. d. e. 2.00 3.11 8.65 14.21 13.89

11. An asset yields the following year-end cash flows: $8,000 per year for years 1-3; $10,000 per year for years 4-7; $12,000 per year for years 8-15; $15,000 per year for years 16-20; and then $30,000 per year from year 21 forever. Use a discount rate of 12 percent per year to determine the present value of these cash flows. a. b. c. d. e. $77,677.89 $80,454.67 $91,658.21 $103,594.58 $259,789.97

12. Which of the following statements is most correct? a. A zero coupon bond is a promise to pay a single lump sum at some point in the future b. The price of a bond moves in the opposite direction to changes in market interest rates c. If a semi-annual coupon bond and an annual coupon bond have identical coupon rates, maturities, and yields to maturities, the two bonds will always sell for the same price. d. (a) and (b) are correct e. (a), (b), and (c) are all correct 13. In order to use the constant dividend growth model for stock valuation which of the following must be true:

a.
b. c. d. e.

The dividend is expected to stop growing and stay constant after some point in the future.
The required rate of return is less than the expected dividend growth rate. The required rate of return must equal the expected dividend growth rate The dividend just paid is the same as the dividend D1 in the formula. The expected dividend growth rate is less than the firms cost of equity capital.

14. McNoll Inc just paid a $1 per share dividend. Dividends are expected to increase by 15% annually the next two years and 5% annually forever thereafter. The firms cost of equity capital is 10 %. What is the most you would pay for one share of this stock? a. b. c. d. e. $24.05 $26.45 $23.00 $27.65 $25.09

15. OIL Drilling Inc expects to pay dividends of $2, $1.5, $2.5, $3.5 at time t=1, t=2, t=3, and t=4 respectively. Dividends are then expected to grow at a constant rate of 8% per year forever. Due to a major hit in the Alaska Arctic region, they also paid a one time extraordinary dividend of $10 yesterday. Shareholders are ecstatic and like the companys prospects. If you have a required rate of return of 14% how much would you pay for the stock? a. b. c. d. e. $53.97 $43.97 $22.49 $58.15 $31.00

16. The common stock of Uncle Georgies Rib Shack just paid a $1 dividend. Uncle George eats his own cooking and is convinced he can increase operating cash flows each year. The dividend is expected to grow at a constant rate forever according to the Wall Street Analyst community. Other similar Rib Shack style restaurants have an equity cost of capital of 11 %. Trading of the stock takes place on NASDAQ and is currently trading at $21.20. What is the expected growth rate in dividends? a. b. c. d. e. 3.00 % 4.00 % 5.00 % 6.00 % 7.00 %

17. A $1,000 par value bond sells for $1,092. It matures in 20 years, has a 10 percent coupon rate, and pays interest semi-annually. What is the bonds yield to maturity? a. b. c. d. e. 4.50% 9.30% 9.00% 10.51% 10.75%

18. Chicago Corp. is considering the issue of $1,000 face value, 20 year, 8 percent coupon bonds. The bonds will make coupon payments on a semi-annual basis. Chicago Corp. observes that bonds of Barrett Company are trading at $1,196.36, have the same maturity date and pay an annual coupon of 10 percent. If the two bonds are expected to be similar in risk, what price will a bond of Chicago Corp. sell for? a. b. c. d. e. $1,000.00 $ 988.73 $1,196.36 $1,503.63 $ 908.01

19. Which of the following statements is most correct concerning a project with normal cash flows (i.e., a cash outflow in Year 0 followed by cash inflows in all subsequent years)? a. If the NPV of a project is positive then the payback period rule will always accept the project. b. If the NPV of a project is negative, then the profitability index of the project will always be greater than one. c. If the profitability index of a project is greater than one, then the IRR will always be less than the projects cost of capital. d. If the NPV of a project is zero, then the IRR of the project will be equal to the discount rate for the project. e. If the discount rate of a project is zero, then the project will always be accepted. 20. You are attempting to reconstruct a project analysis of a co-worker who was fired. You have found the following information: The IRR is 12%. The project life is 4 years. The initial cost is $20,000. In years 1, 3 and 4 you will receive cash inflows of $6,000. You know there will be a cash flow in year 2, but the amount is not in the file. The appropriate discount rate is 10%.

What is the NPV of the project? a. $860 b. $970 c. $1,050 d. $2,500 e. $3,300 21. A five-year project, if undertaken, will require an initial investment of $500,000. The expected end-of-year cash flows are: Year 1: Year 2: Year 3: Year 4: Year 5: $120,000 $120,000 $150,000 $150,000 $180,000 First, find the missing cash flow at t=2. Use the IRR to make the argument that the NPV should be zero. You should get $8,227.69. Then use the discount rate (cost of capital) to find the NPV. You get $860.26

Given a discount rate of 11.5%, what is the NPV of this project? a. b. c. d. e. $11,030.70 $15,399.20 $16,241.19 $13,852.98 $10,955.43

22. Consider the following projects, for a firm using a discount rate of 10%: Project A B C D NPV $200,000 $200,000 $60,000 $(135,000) IRR 10.20% 11.00% 10.02% 9.00% PI 1.04 1.11 1.01 .95

If the projects are independent, which, if any, project(s) should the firm accept? a. b. c. d. e. A, B only A, B, and C only B, C, D only A, B, C, and D None

Use the following information to answer questions 23 to 25.

Plastico Inc. manufactures a variety of plastic cases and distributes them to retail stores like Walmart. A survey conducted by the company revealed that plastic dvd cases are in high demand by consumers and not many companies currently manufacture this type of product. The company hired a consultant to determine whether or not they should undertake the manufacture of the dvd cases. He charged the company $120,000 for his services and provided them with the following information. The company currently has factories that are operating at full capacity and therefore they would need to build an additional factory on land that they own valued at $400,000. Machines and equipment would cost the company $500,000 and they would need to immediately increase their inventory of glue and other items by $100,000. The increase in net working capital will be recovered when the project ends in 10 years. The consultant estimated that they could sell 2 million cases at a price of $0.40 per case each year. The company could move some of their current employees over to the new plant. Their salaries cost the company $600,000 each year. Other operating costs not including depreciation amount to $300,000 each year. The company would have to take out a loan to finance the project and the consultant estimates that they would have to make interest payments of $60,000 each year to service the loan. He also estimates that they could sell the machine and equipment for $10,000 when the project ends. The company uses the straight line method to calculate depreciation and has a cost of capital of 10% and a tax rate of 40%.

Record your final numerical answer to each of the following questions on the answer sheet. Show your work on the back of the answer sheet for possible partial credit. 23. What is the initial outlay at t = 0 for the project? ___$1,000,000__________ Land=$400,000; Equipment = $500,000; increase in NWC = $100,000

24. What is the t = 2 incremental operating cash flow? _$320,000__ R=2,000,000(0.40) = $800,000; Costs = 300,000; D = (500,000-10000)/10 = $49,000; OCF = (800,000-300,000)(1-0.40) + 0.4(49,000) = $319,600

25. What is the t = 10 incremental non operating cash flow? ___$110,000___ Recovery of NWC = $100,000; Salvage Value = $10,000. Total = $110,000