FIN 610 Midterm Exam
Instructions: Write your name on your exam.
STUDENT NAME:______________________
The exam is individual work. It is to be your work and your work alone, with no assistance from classmates, family, friends or others. Your completed exam is due by 11:59 PM, (upload to your Assignments folder). Exams submitted late will be penalized 5 points for each day up to three days late. Exams received more than three days after the due date will automatically receive an F. Furthermore, by proceeding with the exam you are agreeing not to share the exam content or your answers with anyone, including students who may take FIN 610 in the future.
If the question involves a spreadsheet, you can attach the Excel spreadsheet.
Please read the questions carefully; there may be a little more to it than might be obvious at first reading. If you find a question challenging, don’t panic. Try to take the question in parts, working from what you know to what you are trying to solve.
Each question is worth 5 points. Please submit the answer sheet provided at the end of this exam only.
Please use the following Income Statement and Balance sheet for Questions 2 to 6
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Income Statement for Fair Company |
2016 |
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Revenue |
$ 9,610 |
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less |
COGS |
$ 6,310 |
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less |
Depreciation |
$ 1,370 |
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Gross Income |
$ 1,930 |
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less |
S,G&A |
$ – |
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EBIT |
$ 1,930 |
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less |
Interest Expense |
$ 630 |
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taxable income |
$ 1,300 |
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Taxes |
$ 455 |
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Net Income |
$ 845 |
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Balance Sheet for Fair Company |
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Assets |
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Liabilities and Shareholder Equity |
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2015 |
2016 |
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2015 |
2016 |
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Cash |
310 |
405 |
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Accounts Payable |
2720 |
2570 |
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Accounts receivable |
2640 |
3055 |
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Notes Payable |
100 |
0 |
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Inventory |
3275 |
3850 |
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total current |
2820 |
2570 |
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Pre-paid expenses |
0 |
0 |
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Long-term debt |
7875 |
8100 |
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total current |
$ 6,225 |
$ 7,310 |
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Common Stock |
5000 |
5250 |
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Next fixed assets (PPE) |
$ 10,960 |
10670 |
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Retained Earnings |
1490 |
2060 |
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Total Assets |
$ 17,185 |
$ 17,980 |
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$ 17,185 |
$ 17,980 |
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A. 10.3
B. 3.44
C. 3.15
D. 3.37
E. cannot compute with numbers given
A. 80.7%
B. 55.0%
C. 59.3%
D. 60.7%
E. cannot compute with numbers given
A. 22.72%
B. 13.02%
C. 59.80%
D. 18.75%
E. cannot compute with numbers given
8. You are scheduled to receive annual payments of $10,000 for each of the next 25 years. Your interest rate is 8.5%. What is the value of this stream of payments?
A. $778,699
B. $900,217.67
C. $1,000,567.88
D. $786,677.92
E. cannot answer with given information
9. Consider a bond which pays 7% annually and has 8 years to maturity. The market requires an interest rate of 8% on bonds of this risk. What is this bond’s price?
A. $ 942.53
B. $ 911.52
C. $ 941.74
D. $1,064.81
E. None of the above.
10. A General Co. bond has an 8% coupon and pays interest annually. The face value is $1,000 and the current market price is $1,020.50. The bond matures in 20 years. What is the yield to maturity?
A. 7.79%
B. 7.82%
C. 8.00%
D. 8.04%
E. 8.12%
11. All else equal, the payback period for a project will decrease whenever the:
A. duration of a project is lengthened.
B. cash inflows are moved earlier in time.
C. assigned discount rate decreases.
D. required return for a project increases.
E. initial cost increases.
12. Graphing the NPVs of mutually exclusive projects over different discount rates helps demonstrate:
A. how decisions concerning mutually exclusive projects are derived.
B. how the incremental IRR varies with changes in the discount rate.
C. how the payback period and the initial cash outflow of a project are related.
D. how the duration of a project affects the decision as to which project to accept.
E. how the profitability index and the net present value are related.
13. Matt is analyzing two mutually exclusive projects of similar size and has prepared the following data. Both projects have 5 year lives.
Matt has been asked for his best recommendation given this information. His recommendation should be to accept:
A. project B because it has the shortest payback period.
B. project A and reject project B based on their net present values.
C. both projects as they both have positive net present values.
D. project B and reject project A based on their average accounting returns.
E. project B and reject project A based on both the payback period and the average accounting return.
14. What is the net present value of a project with the following cash flows and a required return of 12%?
A. -$287.22
B. -$177.62
C. $177.62
D. $204.36
E. $287.22
15. What is the net present value of a project that has an initial cash outflow of $12,670 and the following cash inflows? The required return is 12.5%.
A. $-218.68
B. $-124.46
C. $-76.10
D. $549.65
E. $671.02
16. You are considering the following two mutually exclusive projects that will not be repeated. The required rate of return is 11.25% for project A and 10.75% for project B. Which project should you accept and why?
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Year |
Cash Flow Project A |
Cash Flow Project B |
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0 |
-$48,000 |
-$126,900 |
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1 |
$18,400 |
$69,700 |
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2 |
$31,300 |
$80,900 |
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3 |
$11,700 |
$0 |
A. project A; because its NPV is about $335 more than the NPV of project B
B. project A; because it has the higher required rate of return
C. project B; because it has the largest total cash inflow
D. project B; because it returns all its cash flows within two years
E. project B; because it is the largest sized project
17. It will cost $2,600 to acquire a small ice cream cart. Cart sales are expected to be $1,400 a year for three years. After the three years, the cart is expected to be worthless as that is the expected remaining life of the cooling system. What is the payback period of the ice cream cart?
A. .86 years
B. 1.46 years
C. 1.86 years
D. 2.46 years
E. 2.86 years
18. Jamestown Ltd. currently produces boat sails and is considering expanding its operations to include awnings for homes and travel trailers. The company owns land beside its current manufacturing facility that could be used for the expansion. The company bought this land ten years ago at a cost of $250,000. Today, the land is valued at $425,000. The grading and excavation work necessary to build on the land will cost $15,000. The company currently has some unused equipment which it currently owns valued at $60,000. This equipment could be used for producing awnings if $5,000 is spent for equipment modifications. Other equipment costing $780,000 will also be required. What is the amount of the initial cash flow for this expansion project?
A. $800,000
B. $1,050,000
C. $1,110,000
D. $1,225,000
E. $1,285,000
19. A project will increase sales by $140,000 and cash expenses by $95,000. The project will cost $200,000 and be depreciated using the straight-line method to a zero book value over the 5-year life of the project. The company has a marginal tax rate of 34%. What is the yearly value of the depreciation tax shield?
A. $8,500
B. $13,600
C. $22,500
D. $25,000
E. $37,750
20. Leslie’s Unique Clothing Stores offers a common stock that pays an annual dividend of $2.00 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn 12% return on your equity investments?
A. $10.00
B. $13.33
C. $16.67
D. $18.88
E. $20.00
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