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1) Total assets are $1000, fixed assets are $700, long-term debt is $250, and short-term debt is $300. What is the amount of net working capital?

A $0

 

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B. $50

 

C. $300

 

D. $650

 

E. $700

Net working capital = $1000 – $700 – $300 = $0

 

3) Your parents are giving you $100 a month for four years while you are in college. At a 6% discount rate, what are these payments worth to you when you first start college?

A. $3,797.40

 

B. $4,167.09

 

C. $4,198.79

 

D. $4,258.03

 

E. $4,279.32

 

 

.4) The great, great grandparents of one of your classmates sold their factory to the government 104 years ago for $150,000. If these proceeds had been invested at 6%, how much would this legacy be worth today? Assume annual compounding.

A. $936,000.00

 

B. $1,086,000.00

 

C. $60,467,131.54

 

D. $60,617,131.54

 

E. $64,254,159.44

 

 

5) An investment project has the cash flow stream of $-3250, $80, $200, $75, and $90. The cost of capital is 12%. What is the discounted payback period?

A. 1.24 years

 

B. 1.85 years

 

C. 2.24 years

 

D. 2.85 years

 

E. 3.05 years

 

 

6) An investment cost $12,000 with expected cash flows of $4,000 for 4 years. The discount rate is 15.2382%. The NPV is ______ and the IRR is ______ for the project.

A. -$634.89; 12.60%

 

B. $0; 15.2382%

 

C. $4,000; 0%

 

D. Can not answer without one or the other value as input.

 

E. None of these.

 

7)  Thornley Machines is considering a 3-year project with an initial cost of $618,000. The project will not directly produce any sales but will reduce operating costs by $265,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated $60,000. The tax rate is 34%. The project will require $23,000 in extra inventory for spare parts and accessories. Should this project be implemented if Thornley’s requires a 9% rate of return? Why or why not?

A. No; The NPV is -$2,646.00.

 

B. Yes; The NPV is $27,354.00.

 

C. Yes; The NPV is $32,593.78.

 

D. Yes; The NPV is $43,106.54.

 

E. Yes; The NPV is $196,884.40.

 

8)

A project will produce operating cash flows of $45,000 a year for four years. During the life of the project, inventory will be lowered by $30,000 and accounts receivable will increase by $15,000. Accounts payable will decrease by $10,000. The project requires the purchase of equipment at an initial cost of $120,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. The equipment will be salvaged at the end of the project creating a $25,000 after-tax cash flow. At the end of the project, net working capital will return to its normal level. What is the net present value of this project given a required return of 14%?

A. $3,483.48

 

B. $16,117.05

 

C. $27,958.66

 

D. $32,037.86

 

E. $49,876.02

 

9) What are the arithmetic and geometric average returns for a stock with annual returns of 5%, 8%, -3%, and 16%?

A. 6.5%; 6.28%

 

B. 6.5%; 9.21%

 

C. 9.3%; 6.28%

 

D. 9.3%; 9.21%

 

E. 10.25%; 8.31%

 

10) A year ago, you purchased 300 shares of IXC Technologies, Inc. stock at a price of $10.05 per share. The stock pays an annual dividend of $.10 per share. Today, you sold all of your shares for $29.32 per share. What is your total dollar return on this investment?

A. $8,781

 

B. $8,796

 

C. $8,811

 

D. $8,832

 

E. $8,921

 

11)

What is the expected return on a portfolio comprised of $3,000 in stock K and $5,000 in stock L if the economy is normal?

A. 3.75%

 

B. 5.25%

 

C. 5.63%

 

D. 5.88%

 

E. 6.80%

 

12) You have a $1,000 portfolio which is invested in stocks A and B plus a risk-free asset. $400 is invested in stock A. Stock A has a beta of 1.3 and stock B has a beta of .7. How much needs to be invested in stock B if you want a portfolio beta of .90?

A. $0

 

B. $268

 

C. $482

 

D. $543

 

E. $600

 

13) Gail’s Dance Studio is currently an all equity firm that has 80,000 shares of stock outstanding with a market price of $42 a share. The current cost of equity is 12% and the tax rate is 34%. Gail is considering adding $1 million of debt with a coupon rate of 8% to her capital structure. The debt will be sold at par value. What is the levered value of the equity?

A. $2.4 million

 

B. $2.7 million

 

C. $3.3 million

 

D. $3.7 million

 

E. $3.9 million

 

14) The Winter Wear Company has expected earnings before interest and taxes of $2,100, an unlevered cost of capital of 14% and a tax rate of 34%. The company also has $2,800 of debt that carries a 7% coupon. The debt is selling at par value. What is the value of this firm?

A. $9,900

 

B. $10,852

 

C. $11,748

 

D. $12,054

 

E. $12,700

 

15) The Montana Hills Co. has expected earnings before interest and taxes of $8,100, an unlevered cost of capital of 11%, and debt with both a book and face value of $12,000. The debt has an annual 8% coupon. The tax rate is 34%. What is the value of the firm?

A. $48,600

 

B. $50,000

 

C. $52,680

 

D. $56,667

 

E. $60,600

 

16) Your firm has a debt-equity ratio of .75. Your pre-tax cost of debt is 8.5% and your required return on assets is 15%. What is your cost of equity if you ignore taxes?

A. 11.25%

 

B. 12.21%

 

C. 16.67%

 

D. 19.88%

 

E. 21.38%

 

 

18) Regional Power wants to raise $10 million in new equity. The subscription price is $20. There are currently 3 million shares outstanding, each with 1 right. How many rights are needed to purchase 1 share?

A. 1

 

B. 3

 

C. 5

 

D. 6

 

E. 8

19) For a particular stock the old stock price is $20, the ex-rights price is $15, and the number of rights needed to buy a new share is 2. Assuming everything else constant, the subscription price is ______.

A. $5

 

B. $13

 

C. $17

 

D. $18

 

E. $20

 

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