Grading Summary
FIN 515 MIDTERM EXAM
Grade Details - All Questions
Question 1. Question : (TCO G) The firm's equity multiplier measures
The
... [Show More] 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.
Instructor Explanation: Chapter 2
Question 2. Question : (TCO G) Suppose Novak Company experienced a reduction in its ROE over the last year. This fall could be attributed to
a decrease in asset turnover.
an increase in leverage.
a decrease in equity.
Instructor Explanation: Chapter 2
Question 3. Question : (TCO B) A certain investment will pay $10,000 in 20 years. If the annual return on comparable investments is 8%, what is this investment currently worth? Show your work.
Student Answer: FV = 10000 NPER = 20 Rate = 8% PV = (8%,20,0,10000,0) = $2145
Instructor Explanation: Week 2 Lecture & Chapter 4
PV answer 2145
FV 10000
N 20
I .08
PMT 0
Points Received: 20 of 20
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 & interest is applied at the end of each month. How much money will you have in the account in 5 years? Show your work.
mt = 12 * 5 = 60 i = 0.05 / 12 = 0.004 F = P [(1 + i / m) ^t - 1) / (i / m) F = 100 * ((1 + 0.05 / 12) ^60 − 1) / (0.05 / 12) F = 100 * (0.28) / (0.004) = $7,000 There will be $7,000 in the account 5 years from now.
Instructor Explanation: Week 2 Lecture & Chapter 4
PV 0
FV answer $6800.61
N 5*12=60
I .05/12=.0041667
PMT 100
Question 5. Question : (TCO B) You currently have $10,000 in your retirement account. If you deposit $500 per month & the account pays 5% interest, how much will be in the account in 10 years? Show your work.
FV = C * 1/r *((1+r)^n - 1) Future Value of money after 20 months = 500 * 12/ 0.05 * ((1.0041666) ^20 - 1) Future Value of money after 20 months = $ 10405.91 The money that will be there in the account in 10 years = 10405.91 * (1.0041666)^100 The money that will be there in the account in 10 years = $ 15770.92
Instructor Explanation: Week 2 Lecture & Chapter 4
PV 10000
FV answer 94,111
N 120
I .05/12=.0041667
PMT 500
Points Received: 10 of 20
Comments: Week 2 Lecture & Chapter 4 PV 10000 FV answer 94,111 N 120 I .05/12=.0041667 PMT 500
Question 6. Question : (TCO B) A homebuyer is taking out a mortgage with a balloon payment. The loan amount is $100,000 & 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.
(Monthly payment * 12 / 0.05) * [1 – 1 / (1.00041666)^60] + 20000 / (1.00041666)^60 = 100,000 100,000 = (Monthly payment * 12 / 0.05) * (1 – 0.7792054) + 20000 * 0.7792054 84415.8922 = (Monthly payment * 12 / 0.05) * 0.2207946 Monthly payment = $1593.03
Instructor Explanation: Week 2 Lecture & Chapter 4
PV 100000
FV 20000
N 60
I .05/12=.0041667
PMT 1593.03
Points Received: 20 of 20
Comments: Week 2 Lecture & Chapter 4 PV 100000 FV 20000 N 60 I .05/12=.0041667 PMT 1593.03
Question 7. Question : (TCO F) A project requires an initial cash outlay of $60,000 & has expected cash inflows of $15,000 annuall for 8 years. The cost of capital is 10%. What is the project’s NPV Show your work.
Student Answer: Cost of Capital: 10% = 15000 / (1.10^1 = 13,636.36 15000 / (1.10^2) = 12,396.69 15000 / (1.10^3) = 11,269.72 15000 / (1.10^4) = 10,245.20 15000 / (1.10^5)= 9,313.82 15000 / (1.10^6) = 8,467.11 15000 / (1.10^7) 7,697.37 15000 / (1.10^8) = 6,997.61 =================== 80,023.88 80023.88 - 60000 = 20,023.88 NPV = $20,023.88
Instructor Explanation: Week 3 Lecture & Chapters 7 & 8PV 80,023 (calculated)
FV
N 8
I .10
PMT -15000
80,023-60,000=20,023=NPV
Question 8. Question : (TCO F) A project reuires an initial cash outlay of $60,000 & has expected cash inflow of $15,000 annually for 8 years. The cost of capital is 10%. What s the project’s payback period? Show your work.
Question 9. Question : (TCO F) A project requires an initial cash outlay of $40,000 & 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.
Student Answer: Cost of Capital: 12000 / (1.10^1) = 10909.09 12000 / (1.10^2) = 9917.36 12000 / (1.10^3) = 9015.78 12000 / (1.10^4) = 8196.16 12000 / (1.10^5) = 7451.06 12000 / (1.10^6) = 6773.69 12000 / (1.10^7) = 6157.90 12000 / (1.10^8) = 5598.09 ==================== 64,019.13 64019.13 - 40000 = 24,019.13 NPV = $24,019.13 (40000 / 24019) + 0.10 = 1.67 + 0.10 = 1.77 IRR = 17.7%
Instructor Explanation: Week 3 Lecture & Chapters 7 & 8
Using Excel, 23%
Points Received: 20 of 20
Comments: Week 3 Lecture & Chapters 7 & 8 Using Excel, 23%
Question 10. Question : (TCO F) A project requires an initial cash outlay of $95,000 & 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: Discounted Csh Inflow = Actual Cash Inflow / (1 + i)n Year CF PV CFxPV CCF 0 95000) 1 (95000) 95000 1 20000 0.91 18181.82 76818.18 2 20000 0.83 16528.93 60289.26 3 20000 0.75 15026.30 45262.96 4 20000 0.68 13660.27 31602.69 5 20000 0.62 12418.43 19184.26 6 20000 0.56 11289.48 7894.79 7 20000 0.51 10263.16 (2368.38) Discounted Payback Period = 6.77 years
Instructor Explanation: Week 3 Lecture & Chapters 7 & 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: 20 of 20
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 & B can be done together. Projects B & C can be done together. But Projects A & C are mutually exclusive. The company has a cost of capital of 12%. Which should the company do & 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: Project A B C Discounted Payback 3.6 NA NA Payback 2.4 5.5 6 NPV 187 -234 -219 IRR 28% 0 4.01% The only project with a positive NPV is A. Also the IRR is the highest with project A.
Instructor Explanation: Week 3 Lecture & Chapters 7 & 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 3.3 NA NA
Payback 2.4 5.5 6
NPV 187 -171 -144
IRR 28% 0 4.01%
0 -500 -500 -500 -500 -600 -600
1 200 $178.57 -200 ($178.57) 100 $89.29
2 200 $159.44 200 $159.44 100 $79.72
3 200 $142.36 200 $142.36 100 $71.18
4 200 $127.10 200 $127.10 100 $63.55
5 200 $113.49 200 $113.49 100 $56.74
6 200 $101.33 200 $101.33 100 $50.66
7 -300 ($135.70) -300 ($135.70) 100 $45.23
8 $0.00 $0.00 0
9 $0.00 $0.00 0
10 $0.00 $0.00 0
$186.58 -170.566 -143.624
Points Received: 40 of 40
Comments: Week 3 Lecture & Chapters 7 & 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 3.3 NA NA Payback 2.4 5.5 6 NPV 187 -171 -144 IRR 28% 0 4.01% 0 -500 -500 -500 -500 -600 -600 1 200 $178.57 -200 ($178.57) 100 $89.29 2 200 $159.44 200 $159.44 100 $79.72 3 200 $142.36 200 $142.36 100 $71.18 4 200 $127.10 200 $127.10 100 $63.55 5 200 $113.49 200 $113.49 100 $56.74 6 200 $101.33 200 $101.33 100 $50.66 7 -300 ($135.70) -300 ($135.70) 100 $45.23 8 $0.00 $0.00 0 9 $0.00 $0.00 0 10 $0.00 $0.00 0 $186.58 -170.566 -143.624 [Show Less]