CORPORATE FINANCE STUDY QUESTIONS
WITH QUESTIONS AND ANSWERS PROVIDED,
2024 UPDATE
1. You are given the following data for year 1: Revenues = 100;
fixed costs = 30; Total variable cost = 50; Depreciation = $10; Tax
rate = 21 percent. Calculate the after-tax cash flow for the project
for year 1.: $17.90
2. A project requires an initial investment in equipment of
$90,000 and then requires an initial investment in working
capital of $10,000 (at t = O). You expect the project to produce
sales revenue of $120,000 per year for three years. You estimate
manufacturing costs at 60 percent of revenues. (Assume all
revenues and cost occur at year-end. i.e. t=l, t=2, and t =3). The
equipment depreciates using straight-line depreciation over
three years. At the end of the project, the firm can sell the
equipment for $10,000 and also recover the investment in net
working capital. The corporate tax rate is 21 percent and the cost
of capital is 15 percent. Cash flows from the project are: CF= -
100,000; CFI= 44,220;
120
3. You are planning to produce a new action figure called
"Hillary." However, you are very uncertain about the demand for
the product. If it is a hit, you will have net cash flows of $50
million per year for three years (starting next year [i.e. at t=l]. If it
fails, you will only have net cash flows of $10 million per year for
two years (also starting next year). There is an equal chance that
it will be a hit or failure (probability = 50 percent). You will not
know whether it is a hit or failure until the first year's cash flows
are in (i.e., at t=1). You have to spend $80 million immediately for
equipment and the rights to produce the figure. If you can sell
your equipment for $60 million once the first year's cash flow is
, CORPORATE FINANCE STUDY QUESTIONS
WITH QUESTIONS AND ANSWERS PROVIDED,
2024 UPDATE
received, calculate the value of the abandonment option. (The
discount rate is 10 percent): +23.14
4. Firms with higher fixed cost tend to have higher degrees of
operating leverage: True
5. A project requires an initial investment in equipment of
$90,000 and then requires an initial investment in working
capital of $10,000 (at t=O). You expect the project to produce
sales revenue of $120,000 per year for three years. You estimate
manufacturing cost at 60 percent of revenues. (Assume all
revenues and cost occur at year-end [i.e., t=l, t=2, and t=3]. the
equipment depreciates using straight-line depreciation over
three years. At the end of the project, the firm can sell the
equipment for $10,000 and also recover the investment in net
working capital. The corporate tax rate is 21 percent and the cost
of capital is 15 percent. Calculate the NPV of the project: $12,734
6. A project requires an initial investment in equipment of
$90,000 and then requires an initial investment in working
capital of $10,000 (at t=O). You expect the project to produce
sales revenue of $120,000 per year for three years. You estimate
manufacturing cost at 60 percent of revenues. (Assume all
revenues and cost occur at year-end [i.e., t=l, t=2, and t=3]. The
equipment depreciates using straight-line depreciation over
three years. At the end of the project, the firm can sell the
equipment for $10,000 and also recover the investment in net
working capital. The corporate tax rate is 21 percent and the cost
of capital is 12 percent. Calculate the NPV of the project: $18,950
7. You are planning to produce a new action figure called
"Hillary." However, you are very uncertain about the demand for
WITH QUESTIONS AND ANSWERS PROVIDED,
2024 UPDATE
1. You are given the following data for year 1: Revenues = 100;
fixed costs = 30; Total variable cost = 50; Depreciation = $10; Tax
rate = 21 percent. Calculate the after-tax cash flow for the project
for year 1.: $17.90
2. A project requires an initial investment in equipment of
$90,000 and then requires an initial investment in working
capital of $10,000 (at t = O). You expect the project to produce
sales revenue of $120,000 per year for three years. You estimate
manufacturing costs at 60 percent of revenues. (Assume all
revenues and cost occur at year-end. i.e. t=l, t=2, and t =3). The
equipment depreciates using straight-line depreciation over
three years. At the end of the project, the firm can sell the
equipment for $10,000 and also recover the investment in net
working capital. The corporate tax rate is 21 percent and the cost
of capital is 15 percent. Cash flows from the project are: CF= -
100,000; CFI= 44,220;
120
3. You are planning to produce a new action figure called
"Hillary." However, you are very uncertain about the demand for
the product. If it is a hit, you will have net cash flows of $50
million per year for three years (starting next year [i.e. at t=l]. If it
fails, you will only have net cash flows of $10 million per year for
two years (also starting next year). There is an equal chance that
it will be a hit or failure (probability = 50 percent). You will not
know whether it is a hit or failure until the first year's cash flows
are in (i.e., at t=1). You have to spend $80 million immediately for
equipment and the rights to produce the figure. If you can sell
your equipment for $60 million once the first year's cash flow is
, CORPORATE FINANCE STUDY QUESTIONS
WITH QUESTIONS AND ANSWERS PROVIDED,
2024 UPDATE
received, calculate the value of the abandonment option. (The
discount rate is 10 percent): +23.14
4. Firms with higher fixed cost tend to have higher degrees of
operating leverage: True
5. A project requires an initial investment in equipment of
$90,000 and then requires an initial investment in working
capital of $10,000 (at t=O). You expect the project to produce
sales revenue of $120,000 per year for three years. You estimate
manufacturing cost at 60 percent of revenues. (Assume all
revenues and cost occur at year-end [i.e., t=l, t=2, and t=3]. the
equipment depreciates using straight-line depreciation over
three years. At the end of the project, the firm can sell the
equipment for $10,000 and also recover the investment in net
working capital. The corporate tax rate is 21 percent and the cost
of capital is 15 percent. Calculate the NPV of the project: $12,734
6. A project requires an initial investment in equipment of
$90,000 and then requires an initial investment in working
capital of $10,000 (at t=O). You expect the project to produce
sales revenue of $120,000 per year for three years. You estimate
manufacturing cost at 60 percent of revenues. (Assume all
revenues and cost occur at year-end [i.e., t=l, t=2, and t=3]. The
equipment depreciates using straight-line depreciation over
three years. At the end of the project, the firm can sell the
equipment for $10,000 and also recover the investment in net
working capital. The corporate tax rate is 21 percent and the cost
of capital is 12 percent. Calculate the NPV of the project: $18,950
7. You are planning to produce a new action figure called
"Hillary." However, you are very uncertain about the demand for
