Assignment
Part 1
Question 1. In the United States, which of the following types of organization has the greatest revenue in total?
a. Sole proprietorship
b. C corporation
c. S corporation
d. Limited partnership
Question 2. Sole proprietorships have all of the following advantages except
a. easy to set up.
b. single taxation of income.
c. limited liability.
d. ownership and control are not separated.
Question 3. Which of the following would cause the present value of an annuity to decrease?
a. Reducing the number of payments.
b. Increasing the number of payments.
c. Decreasing the interest rate.
d. Decreasing the liquidity of the payments.
Question 4. In a TVM calculation, if incoming cash flows are positive, outgoing cash flows must be
a. positive.
b. negative.
c. either positive or negative. It really doesn't matter.
d. stated in time units that are different from the time units in which the interest rates are stated.
5. If you were a manager of a company, which of the three right side components of the DuPont Identity would you want to increase and which would you want to decrease, other things being equal? Give a specific example for how to do that for each of the three.
6. A stock pays an annual dividend of $2.50 and that dividend is not expected to change. Similar stocks pay a return of 10%. What is P0?
7. A stock has just paid a dividend and has declared an annual dividend of $2.00 to be paid one year from today. The dividend is expected to grow at a 5% annual rate. The return on equity for similar stocks is 12%. What is P0?
8. A bond has 5 years to maturity and has a YTM of 8%. Its par value is $1,000. Its semiannual coupons are $50. What is the bonds current market price?
9. A bond currently sells for $1,000 and has a par of $1,000. It was issued two years ago and had a maturity of 10 years. The coupon rate is 7% and the interest payments are made semiannually. What is its YTM?
10. A company has 10 million shares outstanding trading for $7 per share. It also has $300 million in outstanding debt. If its equity cost of capital is 15%, and its debt cost of capital is 9%, and its effective corporate tax rate is 40%, what is its weighted average cost of capital?
11. Name and describe the three functions of managerial finance. For each, give an example other than those used in the text and lecture.
12. Explain thoroughly how stock portfolios affect the risk to an investor.
13. What is the Cash Conversion Cycle (CCC)? Name the components of the CCC and explain why the CCC is important to business.
14. A company has the opportunity to do any of the projects for which the net cash flows per year are shown below. The company has a cost of capital of 12%. Which should the company do and why? You must use at least two capital budgeting methods. Show your work.
Year A B C
0 -300 -100 -300
1 100 -50 100
2 100 100 100
3 100 100 100
4 100 100 100
5 100 100 100
6 100 100 100
7 -100 -200 0
Part 2
Question 1. In the United States, which of the following types of organization has the greatest revenue in total?
Sole proprietorship
C corporation
S corporation
Limited partnership
Question 2. A sole proprietorship is owned by
one person.
one or two people, but if there are two owners, they must be married to each other.
up to 100 owners.
up to 64 owners.
Question 3. Which of the following would cause the present value of an annuity to increase?
Reducing the number of payments.
Increasing the interest rate.
Decreasing the interest rate.
Decreasing the liquidity of the payments.
Question 4. Which of the following is an annuity due?
A typical car loan.
A typical mortgage.
A typical apartment rental agreement.
A credit card balance.
Question 5. If net income, total assets, and book value of equity stayed the same, what would be the effect on the DuPont Identity of an increase in sales?
Question 6. A stock has just paid a dividend and will pay a dividend of $3.00 in a year. The dividend will stay constant for the rest of time. The return on equity for similar stocks is 14%. What is P0?
Question 7. A stock has just declared an annual dividend of $2.25 to be paid one year from today. The dividend is expected to grow at a 7% annual rate. The return on equity for similar stocks is 12%. What is P0?
Question 8. A bond has 5 years to maturity and has a YTM of 8%. Its par value is $1,000. Its semiannual coupons are $50. What is the bonds current market price?
Question 9. A bond currently sells for $1,030 even though it has a par of $1,000. It was issued two years ago and had a maturity of 10 years. The coupon rate is 7% and the interest payments are made semiannually. What is its YTM?
Question 10. Explain thoroughly how stock portfolios affect the risk to an investor. (Points : 30)
Question 11. A company has 30 million shares outstanding trading for $8 per share. It also has $90 million in outstanding debt. If its equity cost of capital is 15%, and its debt cost of capital is 9%, and its effective corporate tax rate is 40%, what is its weighted average cost of capital?
Question 12. Name and describe the three functions of managerial finance. For each, give an example other than those used in the text and lecture.
Question 13. What is the difference between the cash cycle and the operating cycle? Under what condition would they be the same?
Question 14. A company has the opportunity to do any of the projects for which the net cash flows per year are shown below. The company has a cost of capital of 12%. Which should the company do and why? You must use at least two capital budgeting methods. Show your work.
Year A B C
0 -300 -100 -300
1 100 -50 100
2 100 100 100
3 100 100 100
4 100 100 100
5 100 100 100
6 100 100 100
7 -100 -200 0
Part 3
Question 1. If Company A and Company B are in the same industry and use the same production method, and Company A's asset turnover is higher than that of Company B, then all else equal we can conclude
Company A is more efficient than Company B.
Company A has a lower dollar amount of assets than Company B.
Company A has higher sales than Company B.
Company A has a lower ROE than Company B.
Question 2. The firm's asset turnover measures
the value of assets held per dollar of shareholder equity.
the return the firm has earned on its past investments.
the firm's ability to sell a product for more than the cost of producing it.
how efficiently the firm is utilizing its assets to generate sales.
Question 3. If Moon Corporation has an increase in sales, which of the following would result in no change in its EBIT margin?
A proportional increase in its net income.
A proportional decrease in its EBIT.
A proportional increase in its EBIT.
An increase in its operating expenses.
Question 4. If today you put $10,000 into an account paying 10% annually, how much will there be in the account after 5 years? Show your work.
Question 5. You would like to buy the house and take the mortgage described in Problem 36. You can afford to pay only $23,500 per year. The bank agrees to allow you to pay this amount each year, yet still borrow $300,000. At the end of the mortgage (in 30 years), you must make a balloon payment; that is, you must repay the remaining balance on the mortgage. How much will this balloon payment be?
Question 6. You take out a 5 year car loan for $20,000. The loan has a 5% annual interest rate. The payments are made monthly. What are the monthly payments? Show your work.
Question 7. You currently have $10,000 in your retirement account. If you deposit $500 per month and the account pays 5% interest, how much will be in the account in 10 years?
Question 8. A homebuyer is taking out a mortgage with a balloon payment. The loan amount is $100,000 and the annual interest rate is 5%. The homebuyer will make equal monthly payments for 5 years except the last payment will include an additional payment of $20,000. How much will the equal monthly payments be? Show your work.
Question 9. A project requires an initial cash outlay of $95,000 and has expected cash inflows of $20,000 annually for 9 years. The cost of capital is 10%. What is the project's NPV?
Question 10. A project requires an initial cash outlay of $40,000 and has expected cash inflows of $12,000 annually for 7 years. The cost of capital is 10%. What is the project's payback period? Show your work.
Question 11. A certain bond pays a semiannual coupon rate at a 10% annual rate. The bond has a par value of $1,000. There are eight years to maturity. The yield to maturity is 9%. What is the current price of the bond?
Question 12. A project requires an initial cash outlay of $40,000 and has expected cash inflows of $12,000 annually for 7 years. The cost of capital is 10%. What is the project's IRR? Show your work.
Question 13. A project requires an initial cash outlay of $60,000 and has expected cash inflows of $15,000 annually for 8 years. The cost of capital is 10%. What is the project's discounted payback period? Show your work.
Question 14. Your daughter is currently 8 years old. You anticipate that she will be going to college in 10 years. You would like to have $100,000 in a savings account to fund her education at that time. If the account promises to pay a fixed interest rate of 3% per year, how much money do you need to put into the account today to ensure that you will have $100,000 in 10 years?
Part 4
Question 1. If Company A and Company B are in the same industry and use the same production method, and Company A's asset turnover is higher than that of Company B, then all else equal we can conclude
Company A is more efficient than Company B.
Company A has a lower dollar amount of assets than Company B.
Company A has higher sales than Company B.
Company A has a lower ROE than Company B.
Question 2. If Moon Corporation has an increase in sales, which of the following would result in no change in its EBIT margin?
A proportional increase in its net income.
A proportional decrease in its EBIT.
A proportional increase in its EBIT.
An increase in its operating expenses.
Question 3. If today you put $10,000 into an account paying 10% annually, how much will there be in the account after 5 years? Show your work.
Question 4. You take out a 5 year car loan for $20,000. The loan has a 5% annual interest rate. The payments are made monthly. What are the monthly payments? Show your work.
Question 5. You currently have $10,000 in your retirement account. If you deposit $500 per month and the account pays 5% interest, how much will be in the account in 10 years? Show your work.
Question 6. A homebuyer is taking out a mortgage with a balloon payment. The loan amount is $100,000 and the annual interest rate is 5%. The homebuyer will make equal monthly payments for 5 years except the last payment will include an additional payment of $20,000. How much will the equal monthly payments be? Show your work.
Question 7. A project requires an initial cash outlay of $95,000 and has expected cash inflows of $20,000 annually for 9 years. The cost of capital is 10%. What is the project's NPV? Show your work.
Question 8. A project requires an initial cash outlay of $40,000 and has expected cash inflows of $12,000 annually for 7 years. The cost of capital is 10%. What is the project's payback period? Show your work.
Question 9. A project requires an initial cash outlay of $40,000 and has expected cash inflows of $12,000 annually for 7 years. The cost of capital is 10%. What is the project's IRR? Show your work.
Question 10. A project requires an initial cash outlay of $60,000 and has expected cash inflows of $15,000 annually for 8 years. The cost of capital is 10%. What is the project's discounted payback period? Show your work.
Question 11. Company A has the opportunity to do any, none, or all of the projects for which the net cash flows per year are shown below. Projects A and C can be done together. Projects B and C can be done together. But Projects A and B are mutually exclusive. The company has a cost of capital of 18%. Which should the company do and why? You must use at least two capital budgeting methods. Show your work.
A B C
0 -500 -500 -600
1 200 -200 100
2 200 600 100
3 200 400 100
4 200 200 100
5 200 -300 100
6 200 100
7 -300 100