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##### 1. Assume that you own an annuity that will pay y...

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1. Assume that you own an annuity that will pay you \$15,000 per year for 12 years, with the first payment being made today. You need money today to start a new business, and your uncle offers to give you \$80,000 for the annuity. If you sell it, what rate of return would your uncle earn on his investment? a 23.15% b 16.17% c 20.96% d 19.96% e 22.16% ________________________________________ 2. Your grandmother just died and left you \$132,500 in a trust fund that pays 6.5% interest. You must spend the money on your college education, and you must withdraw the money in 4 equal installments, beginning immediately. How much could you withdraw today and at the beginning of each of the next 3 years and end up with zero in the account? a \$37,769.20 b \$39,221.86 c \$37,406.03 d \$33,774.38 e \$36,316.54 ________________________________________ 3. TSW Inc. had the following data for last year: Net income = \$800; Net operating profit after taxes (NOPAT) = \$700; Total assets = \$3,000; and Total operating capital = \$2,000. Information for the just-completed year is as follows: Net income = \$1,000; Net operating profit after taxes (NOPAT) = \$925; Total assets = \$2,600; and Total operating capital = \$2,500. How much free cash flow did the firm generate during the just-completed year? a \$383 b \$425 c \$468 d \$514 e \$566 ________________________________________ 4. Chang Corp. has \$375,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were \$520,000, and its net income was \$25,000. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15.0%. What profit margin would the firm need in order to achieve the 15% ROE, holding everything else constant? a 10.71% b 9.41% c 10.82% d 8.11% e 12.66% ________________________________________ 5. Suppose you inherited \$870,000 and invested it at 8.25% per year. How much could you withdraw at the beginning of each of the next 20 years? a \$67,543.38 b \$76,715.94 c \$99,230.40 d \$83,386.89 e \$97,562.66 ________________________________________ 6. Your aunt has \$350,000 invested at 5.5%, and she now wants to retire. She wants to withdraw \$45,000 at the beginning of each year, beginning immediately. She also wants to have \$50,000 left to give you when she ceases to withdraw funds from the account. For how many years can she make the \$45,000 withdrawals and still have \$50,000 left in the end? a 9.47 b 10.76 c 13.35 d 11.41 e 12.38 ________________________________________ 7. Your father is about to retire, and he wants to buy an annuity that will provide him with \$91,000 of income a year for 25 years, with the first payment coming immediately. The going rate on such annuities is 5.15%. How much would it cost him to buy the annuity today? a \$1,248,843.27 b \$1,408,270.07 c \$1,474,697.91 d \$1,328,556.67 e \$1,169,129.87 ________________________________________ 8. Your uncle has \$1,025,000 and wants to retire. He expects to live for another 25 years, and he also expects to earn 7.5% on his invested funds. How much could he withdraw at the beginning of each of the next 25 years and end up with zero in the account? a \$85,538.08 b \$65,864.32 c \$88,104.22 d \$103,501.08 e \$73,562.75 ________________________________________ 9. What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of \$2,500? a \$138.13 b \$191.75 c \$144.63 d \$199.88 e \$162.50 ________________________________________ 10. Your Aunt Ruth has \$450,000 invested at 6.5%, and she plans to retire. She wants to withdraw \$40,000 at the beginning of each year, starting immediately. How many years will it take to exhaust her funds, i.e., run the account down to zero? a 13.82 b 15.11 c 23.03 d 15.29 e 18.43 ________________________________________ 11. Wells Water Systems recently reported \$8,250 of sales, \$4,500 of operating costs other than depreciation, and \$950 of depreciation. The company had no amortization charges, it had \$3,250 of outstanding bonds that carry a 6.75% interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to spend \$750 to buy new fixed assets and to invest \$250 in net operating working capital. How much free cash flow did Wells generate? a \$1,770.00 b \$1,858.50 c \$1,951.43 d \$2,049.00 e \$2,151.45 ________________________________________ 12. Last year Altman Corp. had \$205,000 of assets, \$303,500 of sales, \$18,250 of net income, and a debt-to-total-assets ratio of 41%. The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets to \$152,500. Sales, costs, and net income would not be affected, and the firm would maintain the 41% debt ratio. By how much would the reduction in assets improve the ROE? a 4.69% b 4.93% c 5.19% d 5.45% e 5.73% ________________________________________ 13. Bae Inc. has the following income statement. How much net operating profit after taxes (NOPAT) does the firm have? Sales \$2,000.00 Costs 1,200.00 Depreciation 100.00 EBIT \$ 700.00 Interest expense 200.00 EBT \$ 500.00 Taxes (35%) 175.00 Net income \$ 325.00 a \$370.60 b \$390.11 c \$410.64 d \$432.25 e \$455.00 ________________________________________ 14. A new firm is developing its business plan. It will require \$635,000 of assets, and it projects \$450,000 of sales and \$355,000 of operating costs for the first year. Management is reasonably sure of these numbers because of contracts with its customers and suppliers. It can borrow at a rate of 7.5%, but the bank requires it to have a TIE of at least 4.0, and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt. What is the maximum debt ratio the firm can use? (Hint: Find the maximum dollars of interest, then the debt that produces that interest, and then the related debt ratio.) a 50.87% b 59.34% c 49.87% d 62.34% e 42.89% ________________________________________ 15. Last year Rennie Industries had sales of \$240,000, assets of \$175,000, a profit margin of 5.3%, and an equity multiplier of 1.2. The CFO believes that the company could reduce its assets by \$51,000 without affecting either sales or costs. Had it reduced its assets by this amount, and had the debt ratio, sales, and costs remained constant, how much would the ROE have changed? a 3.55% b 3.19% c 3.66% d 3.01% e 3.59% ________________________________________ 16. Rao Corporation has the following balance sheet. How much net operating working capital does the firm have? Cash \$ 10 Accounts payable \$ 20 Short-term investments 30 Accruals 20 Accounts receivable 50 Notes payable 50 Inventory 40 Current liabilities \$ 90 Current assets \$130 Long-term debt 0 Net fixed assets 100 Common equity 30 Retained earnings 50 Total assets \$230 Total liab. & equity \$230 a \$54.00 b \$60.00 c \$66.00 d \$72.60 e \$79.86 ________________________________________ 17. Last year Harrington Inc. had sales of \$325,000 and a net income of \$19,000, and its year-end assets were \$250,000. The firm's total-debt-to-total-assets ratio was 60.0%. Based on the DuPont equation, what was the ROE? a 22.61% b 17.86% c 19.00% d 23.18% e 23.56% ________________________________________ 18. Last year Ann Arbor Corp had \$300,000 of assets, \$305,000 of sales, \$20,000 of net income, and a debt-to-total-assets ratio of 37.5%. The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to \$33,000. Assets, sales, and the debt ratio would not be affected. By how much would the cost reduction improve the ROE? a 5.34% b 5.82% c 6.59% d 8.67% e 6.93% ________________________________________ 19. Orono Corp.'s sales last year were \$435,000, its operating costs were \$362,500, and its interest charges were \$12,500. What was the firm's times interest earned (TIE) ratio? a 4.72 b 4.97 c 5.23 d 5.51 e 5.80 ________________________________________ 20. Brookman Inc's latest EPS was \$2.75, its book value per share was \$22.75, it had 280,000 shares outstanding, and its debt ratio was 44%. How much debt was outstanding? a \$4,704,700 b \$5,355,350 c \$5,205,200 d \$4,054,050 e \$5,005,000 ________________________________________

Paper#11893 | Written in 18-Jul-2015

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