Exam – Solving the question’s.

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Equipment cost: $200,000
Project Life: 5 years
Salvage Value: 0
Depreciation Method: Straight-line 5 years
Cash operating expenses: 5,000 per year
Revenues: 360,000 per year
Growth Rate for revenues: 0% per year
Cost of goods sold/revenue: 60%
Investment in net operating working capital (year 0): 78,000
Required rate of return 20%
Tax Rate 30%
1. What is the Net Present Value of the above investment?
annual cost of deficits
net operating income
book value of equipment
salvage value (today)
Salvage value (year 5)
shipping cost
installation cost
remaining project life
net operating working capital
fringe benefits
2. If the discount rate is 15% should you buy the new equipment or keep the old equipment?
$100 today is worth the same as $100 in the future (True or False)?
4. To compare cash flows at different time periods we must take the ______________________ of
future cash flows.
5. The bank pays 5.60%, compounded daily (based on 360 days), on a 9-month
certificate of deposit. If you deposit $20,000 you would expect to earn
around __________ in interest.
a. 840
b. 858
c. 1,032
d. 1,121
6. Newborn baby Gregory, born today, has doting grandparents who want to
start saving for his college education. They calculate that he will need
$25,000 per year for 4 years beginning at age 18. In addition, they’d like to
give him a lump sum of $50,000 at age 22 so he can buy a car for his
graduation. They want to make 18 equal annual payments into a 10%
interest-paying account (starting today and ending on Gregory’s
17th birthday) that will just cover these plans. How much will they need to
invest each year?
7. What is the market value of a $1,000 face-value bond with a 10 percent
coupon rate when the market’s rate of return is 9 percent?
8. The market value of a firm is equal to the common stock equity account on
its balance sheet. (true or false)
9. You are considering the purchase of a $1,000 par value bond of AuContraire,
Inc. The bond is currently selling for $905 and (very atypically) pays $20
quarterly. It matures in 20 years.
What is the coupon rate of this bond?
What is the current yield?
Why is the current yield higher than the stated coupon rate?
10.The firm of Sun and Moon purchased a share of Acme.com common stock
exactly one year ago for $45. During the past year the common stock paid
an annual dividend of $2.40. The firm sold the security today for $85. What
is the rate of return the firm has earned?
11. The return on common stocks is a combination of income paid to the
stockholder plus any appreciation in stock price. (true or false)
12. You have invested in a ski resort that has the following distribution of
returns under different snow conditions:
What is the expected value of return on your investment?
13. What is the most appropriate goal of the firm?
a. Shareholder value maximization
b. Profit maximization
c. Stakeholder maximization
d. EPS maximization
14. The greater the ownership percentage of managers, then the more likely the
managers will behave in a shareholder wealth maximizing behavior. (true or
According to the accounting profession, which of the following would be
considered a cash-flow item from a “financing” activity?
a. A cash outflow to the government for taxes
b. A cash outflow to repurchase the firm’s own common stock
c. A cash outflow to lenders as interest
d. A cash outflow to purchase bonds issued by another company
16. Which of the following would not improve the current ratio:
a. Borrow short term to finance additional fixed assets
b. Issue long-term debt to buy inventory
c. Sell common stock to reduce current liabilities
d. Sell fixed assets to reduce accounts payable
17. The current ratio is never bigger than the quick ratio (True or False)?
18. You have the following information on Brunger Beninese Batik Corp.:
Current ratio
Quick ratio
Current liabilities
Inventory turnover
Gross profit margin
Given these figures, calculate the firm’s net sales.
19. If you want a form of reducing the book value of equipment faster than straight-line
depreciation you can use _____________________________________.
20. When managers pursue their own interests instead of what owners want them to do we have a
___________________________ problem.

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