Question

1. You expect to receive the following payments:

end of year
1 $10,000
2 $10,000
3 $10,000
4 $10,000

You plan to invest these payments in stock funds. If your investments earn 9% per year, how much will you have at the end of the 15th year?

a) $166,574
b) $108,261
c) $118,005
d) $152,820
e) $128,625

2. Your neighbor Bob has two annuities. The first annuity will pay him $10,000 per month for the next 10 years. The second annuity will pay him $15,000 per month for the following 10 years (years 11 through 20). Assuming a discount rate of 6%, what is the present value of the annuities?

a) $2,251,837
b) $906,288
c) $900,735
d) $3,000,000
e) $1,643,345

3. Hype-Tech Corporation's common stock dividends are expected to grow by 5% per year. Recently, the firm paid a $2.40 common stock dividend. Hype-Tech has a beta of 1.60. The expected return on the S&P 500 index is 10% and the rate of return on U.S. Treasury securities is 3%. What is the stock's intrinsic value?

a) $27.39
b) $50.40
c) $26.09
d) $30.36
e) $18.05

4. A corporate bond has a 7.5% coupon rate, pays interest semiannually, and matures in 20 years. The bond's par value is $1,000 and the corporate tax rate is 21%. If investors require a 9% rate of return on these bonds, what should be the bond’s value?

a) $1,552.05
b) $902.44
c) $863.07
d) $518.13
e) $861.99

5. Earthscape Corporation plans to spend $2 million for new equipment. Shipping and installation charges will amount to $200,000 and an initial increase in net working capital of $50,000 will be required. The equipment will replace older, less efficient equipment. The old equipment has a book value of $75,000, but Earthscape can sell it for $100,000. If Earthscape has a 21% corporate tax rate, what is the amount of their initial outlay for this project?

a) $2,250,000
b) $2,150,000
c) $2,144,750
d) $2,155,250
e) $184,475

6. Wellington Corporation’s latest capital investment will require them to purchase new, advanced production machines. The machines cost $8,000,000. They have a 5-year class life, and will be depreciated using simplified straight-line. The firm’s corporate tax rate is 21%. The incremental cash inflows expected over the 5-year life of the project are $2,500,000 per year, and cash expenses are $800,000 per year. In addition, the new machines will reduce defects costs by $150,000 per year. The new machines will require a $200,000 increase in net working capital at the time of installation. At the end of 5 years, the machines will be worthless. Calculate the annual cash flow resulting from this project.

a) $250,000
b) $1,797,500
c) $1,550,000
d) $1,597,500
e) $197,500

7. Your firm is selling a 6-year old machine that has a 10-year class life. The machine originally cost $6,000,000 and required an investment in net working capital of $70,000 at the time of installation. Your firm is selling the asset for $2,000,000. Your firm’s tax rate is 21%. What is the terminal cash flow?

a) $1,986,000
b) $2,154,000
c) $2,084,000
d) $2,406,000
e) $554,000

8. A firm recently issued $1,000 par value, 20-year bonds with a coupon rate of 7% and semi-annual payments. The bonds sold at par value, but flotation costs amounted to 4% of par value. The firm has a marginal tax rate of 21%. What is the firm's cost of debt for these bonds?

a) 5.83%
b) 11.55%
c) 5.45%
d) 6.91%
e) 7.39%

9. Consider the following information:

Sales: $2,000,000
Interest expense: $80,000
Variable costs: $600,000
Taxes: 88,000
Fixed costs: 900,000

If sales increase by 7%, what should be the increase in earnings per share?

a) 2.80%
b) 8.33%
c) 29.52%
d) 23.33%
e) 23.79%

10. Your firm’s goal is to earn $6,320,000 in net income next year. Your sales forecast is $24,000,000. Your firm makes electronic components that sell for $5,000 each. Your firm has a 60% contribution margin, a 21% tax rate, and no outstanding debt. What will your fixed costs be next year if you reach your goal?

a) $6,400,000
b) $1,440,000
c) $9,600,000
d) $4,800,000
e) $8,000,000

Answer 1

1.

Given,
CF₁ = 10000
CF₂ = 10000
CF₃ = 10000
CF₄ = 10000

Rate of Return = r = 9%

Value after 15 years = CF₁(1+r)¹⁴ + CF₂(1+r)¹³ + CF₃(1+r)¹² + CF₄(1+r)¹¹
= 10000(1+0.09)¹⁴ + 10000(1+0.09)¹³ + 10000(1+0.09)¹² + 10000(1+0.09)¹¹
= $118006.23

Hence, option (c) $118,005