FIN 515 MIDTERM EXAM
FIN 515 MIDTERM EXAM
Question 1. Question : (TCO G) The firm's equity multiplier measures
Student Answer: the value of
... [Show More] 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.
Instructor Explanation: Chapter 2
Points Received: 10 of 10
Comments:
Question 2. Question : (TCO G) The DuPont Identity expresses the firm's ROE in terms of
Student Answer: profitability, asset efficiency, and leverage.
valuation, leverage, and interest coverage.
profitability, margins, and valuation.
equity, assets, and liabilities.
Instructor Explanation: Chapter 2
Points Received: 10 of 10
Comments:
Question 3. Question : (TCO B) You plan on retiring in 20 years. You currently have $275,000 and think you will need $1,000,000 to retire. Assuming you don’t deposit any additional money into the account, what annual return will you need to earn to meet this goal?
Student Answer: N = 20 PV = $275,000 FV = $1,000,000 CPT for i/y i/y = 6.67% If; I planned to retire in 20 and I dont deposit any additional money into the account my annual return would need to be 6.67% in order to meet my foal of $1,000,000.
Instructor Explanation: Week 2 Lecture and Chapter 4
PV 275000
FV 1000000
N 20
I answer 6.66%
PMT 0
Either PV or FV must be negative
Points Received: (not graded)
Comments:
Question 4. Question : (TCO B) You start saving $100 per month in an account that pays 5% interest, compounded monthly. You make the payment at the beginning of each month and interest is applied at the end of each month. How much money will you have in the account in 5 years? Show your work.
Student Answer: N = 5 (5 x 12) = 60 i/y = 5% (.05 / 2) = 2.50% PV = $100 PMT/CF = $100 FV = $6,497.35 If; I deposit $100 into an account that pays 5% compounded month and make a $100 monthly payment in five years I would have $6,497.35
Instructor Explanation: Week 2 Lecture and Chapter 4
PV 0
FV answer $6800.61
N 5*12=60
I .05/12=.0041667
PMT 100
Points Received: (not graded)
Comments:
Question 5. Question : (TCO B) A grandfather sets up a trust for his only grandchild. The trust consists of an annuity that will pay $5,000 monthly to the grandchild for 18 years. The annuity pays an annual return of 5% and makes the payments monthly at the end of the month. Return on the annuity is 5% annually. The payments to the grandchild are paid at the beginning of the month. The annuity will have a value of $0 at the end of the 18 years. How much needs to be deposited to set up the annuity? Show your work.
Student Answer:
Instructor Explanation: Week 2 Lecture and Chapter 4
PV answer 711,201
FV 0
N 216
I .05/12=.0041667
PMT 5000
Points Received: (not graded)
Comments:
Question 6. Question : (TCO B) You have a two children, A and B. Child A is not going to college but is working in a business to learn the ropes. Child A plans on opening a business someday. Child B is attending college. You put a certain amount of money into an account. From this account, Child B will receive $2,000 per month for the next four years. Whatever is left at that time will go to Child A to help start the business. You want Child A to receive $96,000 at that time. The account pays 7% annually, compounded monthly. How much money do you need to start the account? Show your work.
Student Answer: Child B Receiving = $2,000 x 48 = $96,000 in four years Child A receives $96,000 at that time Account pays 7% annually compounded monthly FV = -$96,000 N = 48 i/y = 7% (.07 / 12) = .00583 PMT = -2000 PV = $156,152 What is needed to start the account is $156,152
Instructor Explanation: Week 2 Lecture and Chapter 4
PV answer 156,152
FV -96000
N 48
I .07/12=.00583
PMT -2000
Points Received: (not graded)
Comments:
Question 7. Question : (TCO F) 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.
Student Answer: N = 9 i/y = 10% PMT = $20,000 NPV = $115,180 - $95,000 = $20,180 The project's NPV is $20,180
Instructor Explanation: Week 3 Lecture and Chapters 7 and 8
PV 115,180 (calculated)
FV
N 9
I .10
PMT 20000
NPV= 115,180-95,000=20,180
Points Received: (not graded)
Comments:
Question 8. Question : (TCO F) 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.
Student Answer: Year Original CF Discounted CF CF 0 -40000 -40000 40000 1 12000 10909.09 29090.91 2 12000 9917.36 19173.55 3 4 5 Discounted payback period = 4.25 years
Instructor Explanation: Week 3 Lecture and Chapters 7 and 8
40,000/12,000=3.33 years
Points Received: (not graded)
Comments:
Question 9. Question : (TCO F) 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 IRR? Show your work.
Student Answer:
Instructor Explanation: Week 3 Lecture and Chapters 7 and 8
Using Excel, 19%
Points Received: (not graded)
Comments:
Question 10. Question : (TCO F) 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 discounted payback period? Show your work.
Student Answer:
Instructor Explanation: Week 3 Lecture and Chapters 7 and 8
The discounted payback is about 6.75 years.
Year Original
CF Discounted CF CF0-∑CFi
0 -95000 -95000 95000
1 20000 $18,181.82 $76,818.18
2 20000 $16,528.93 $60,289.26
3 20000 $15,026.30 $45,262.96
4 20000 $13,660.27 $31,602.69
5 20000 $12,418.43 $19,184.26
6 20000 $11,289.48 $7,894.79
7 20000 $10,263.16 ($2,368.38)
Points Received: (not graded)
Comments:
Question 11. Question : (TCO F) 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 B can be done together. Projects B and C can be done together. But Projects A and C are mutually exclusive. 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.
A B C
0 -500 -500 -600
1 200 -200 100
2 200 200 100
3 200 200 100
4 200 200 100
5 200 200 100
6 200 200 100
7 -300 -300 100
Student Answer:
Instructor Explanation: Week 3 Lecture and Chapters 7 and 8
Student answers will vary. But only Project A should be undertaken. The others have negative NPV or IRR below the hurdle rate.
Project A B C
Discounted Payback 3.6 NA NA
Payback 2.4 5.5 6
NPV 105 -234 -219
IRR 28% 0 4.01%
Points Received: (not graded)
Comments: [Show Less]