FIN 260 FINAL EXAM PRACTICE
CORRECT 100%
New Town Instruments is analyzing a proposed project. The company expects to sell
2,100 units, ±4 percent. The expected variable cost per unit is $270 and the expected
fixed costs are $548,000. Cost estimates are considered accurate within a plus or minus
3 percent range. The depreciation expense is $118,000. The sales price is estimated at
$789 per unit, plus or minus 5 percent. What is the sales revenue under the worst case
scenario? - ANSWER Sales Revenue = Sales price * no. of Units
Sales Price: 789 * 0.95 = 749.55
No. of Units: 2100 * 0.96 = 2016
749.55 * 2016 = 1,511,092.8
Precise Machinery is analyzing a proposed project. The company expects to sell 2,100
units, give or take 5 percent. The expected variable cost per unit is $260 and the
expected fixed costs are $589,000. Cost estimates are considered accurate within a
plus or minus 4 percent range. The depreciation expense is $129,000. The sales price
is estimated at $750 per unit, give or take 2 percent. The tax rate is 35 percent. The
company is conducting a sensitivity analysis on the sales price per unit using a sales
price estimate of $755. What is the operating cash flow based on this analysis? -
ANSWER OCF = (((Sales Price - Variable Cost) *Total Units) - Fixed Costs) * ((1- Tax)
+ (Depreciation * Tax))
(((755 - 260) * 2100) - 589,000) * ((1-35%) + (129,000 * 35%) = $337,975
We are evaluating a project that costs $932,000, has a 12-year life, and has no salvage
value. Assume depreciation is straight-line to zero over the life of the project. Sales are
projected at 75,000 units per year, the price per unit is $39, variable cost per unit is $26,
and fixed costs are $778,900 per year. The tax rate is 35 percent and we require a
return of 13.5 percent on this project. Suppose the projections given for price, quantity,
variable costs, and fixed costs are all accurate to within ±2 percent. What is the worst-
case NPV? - ANSWER Annual Depreciation = Initial Cost/Number of useful years
932,000/12 = $77,666.67
NPV = PV of Future cash flow - Initial cash layout
69,740.13 x PVIFA (13.5 %, 12) - $ 932,000 = $528,438
Assume you graph a project's net present value given various sales quantities. Which
one of the following is correct regarding the resulting function? - ANSWER The slope of
the function measures the sensitivity of the net present value to a change in sales
quantity.
,Which one of the following characteristics best describes a project that has a low
degree of operating leverage? - ANSWER High variable costs relative to the fixed costs.
Precise Machinery is analyzing a proposed project. The company expects to sell 1,100
units, ±5 percent. The expected variable cost per unit is $174 and the expected fixed
costs are $218,000. Cost estimates are considered accurate within a plus or minus 4
percent range. The depreciation expense is $76,000. The sales price is estimated at
$335 per unit, give or take 2 percent. What is the contribution margin per unit under the
best case scenario? - ANSWER 102% -- 2% higher than 100%
96% - - 4% lower than 100%
Sales Price: 102% * 335 = 341.7
Variable Cost: 174 * 96% = 167.04
341.7 - 167.04 = 174.66
A forward PE is based on: - ANSWER estimated future earnings
The Shore Hotel just paid a dividend of $2 per share. The company will increase its
dividend by 6 percent next year and will then reduce its dividend growth rate by 2
percentage points per year until it reaches the industry average of 2 percent dividend
growth, after which the company will keep a constant growth rate forever. What is the
price of this stock today given a required return of 12 percent? - ANSWER Dividend:
2.00
Growth rate (Y1): 6%
2.00 * (1+6%) = 2.12
Growth Rate (Y2) : 6% - 2% = 4%
2.12 * (1+4%) = 2.2048
Growth Rate (Y3): 4%-2% = 2%
2.2048 * (1+2%) = 2.248896
Growth Rate (Y--): 2%
2.248896 * (1+2%) = 2.29387392
( (2.12/(1+12%)) + (2.2048/(1+12%)) + (2.248896/(1+12%)) ) ( (2.29387392/12% -
2%)/(1+12%) ) = $21.58
A preferred stock pays an annual dividend of $6.75 and sells for $58.60 a share. What
is the rate of return on this security? - ANSWER pO = 58.6
D1 = 6.75
pO = D1/ke
, 58.6 = 6.75/ke
ke = 11.52%
The common stock of Dayton Repair sells for $43.19 a share. The stock is expected to
pay $2.28 per share next year when the annual dividend is distributed. The firm has
established a pattern of increasing its dividends by 2.15 percent annually and expects to
continue doing so. What is the market rate of return on this stock? - ANSWER D1 =
2.28
P = 43.19
G = 2.15%
RoR = D1/P + G
RoR = (2.28/43.19) + 2.15%
RoR = 7.43%
Future Motors is expected to pay a $3.30 a share annual dividend next year. Dividends
are expected to increase by 2.75 percent annually. What is one share of this stock
worth to you today if your required rate of return is 15 percent? - ANSWER Share Value
= Annual Div. / (RoR - Growth Rate)
= 3.30 / (0.15 - 0.0275)
= $26.94
Home Services common stock offers an expected total return of 14.56 percent. The last
annual dividend was $2.27 a share. Dividends increase at a constant 2.1 percent per
year. What is the dividend yield? - ANSWER 14.56 = Dividend yield + 2.1
Dividend yield = 14.56 - 2.1
= 12.46
A preferred stock pays a $4.50 annual dividend. What is the maximum price you are
willing to pay for one share of this stock today if your required return is 8.5 percent? -
ANSWER Preferred Stock = Dividend/Req. Rate
= 4.50/8.5%
= $52.94
Which one of the following statements related to risk is correct? - ANSWER The
systematic risk of a portfolio can be effectively lowered by adding T-bills to the portfolio.
Which one of the following risks is irrelevant to a well-diversified investor? - ANSWER
Unsystematic Risk
You own a stock that you think will produce a return of 11 percent in a good economy
and 3 percent in a poor economy. Given the probabilities of each state of the economy
occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of
the following terms applies to this 6.5 percent? - ANSWER Expected Return
CORRECT 100%
New Town Instruments is analyzing a proposed project. The company expects to sell
2,100 units, ±4 percent. The expected variable cost per unit is $270 and the expected
fixed costs are $548,000. Cost estimates are considered accurate within a plus or minus
3 percent range. The depreciation expense is $118,000. The sales price is estimated at
$789 per unit, plus or minus 5 percent. What is the sales revenue under the worst case
scenario? - ANSWER Sales Revenue = Sales price * no. of Units
Sales Price: 789 * 0.95 = 749.55
No. of Units: 2100 * 0.96 = 2016
749.55 * 2016 = 1,511,092.8
Precise Machinery is analyzing a proposed project. The company expects to sell 2,100
units, give or take 5 percent. The expected variable cost per unit is $260 and the
expected fixed costs are $589,000. Cost estimates are considered accurate within a
plus or minus 4 percent range. The depreciation expense is $129,000. The sales price
is estimated at $750 per unit, give or take 2 percent. The tax rate is 35 percent. The
company is conducting a sensitivity analysis on the sales price per unit using a sales
price estimate of $755. What is the operating cash flow based on this analysis? -
ANSWER OCF = (((Sales Price - Variable Cost) *Total Units) - Fixed Costs) * ((1- Tax)
+ (Depreciation * Tax))
(((755 - 260) * 2100) - 589,000) * ((1-35%) + (129,000 * 35%) = $337,975
We are evaluating a project that costs $932,000, has a 12-year life, and has no salvage
value. Assume depreciation is straight-line to zero over the life of the project. Sales are
projected at 75,000 units per year, the price per unit is $39, variable cost per unit is $26,
and fixed costs are $778,900 per year. The tax rate is 35 percent and we require a
return of 13.5 percent on this project. Suppose the projections given for price, quantity,
variable costs, and fixed costs are all accurate to within ±2 percent. What is the worst-
case NPV? - ANSWER Annual Depreciation = Initial Cost/Number of useful years
932,000/12 = $77,666.67
NPV = PV of Future cash flow - Initial cash layout
69,740.13 x PVIFA (13.5 %, 12) - $ 932,000 = $528,438
Assume you graph a project's net present value given various sales quantities. Which
one of the following is correct regarding the resulting function? - ANSWER The slope of
the function measures the sensitivity of the net present value to a change in sales
quantity.
,Which one of the following characteristics best describes a project that has a low
degree of operating leverage? - ANSWER High variable costs relative to the fixed costs.
Precise Machinery is analyzing a proposed project. The company expects to sell 1,100
units, ±5 percent. The expected variable cost per unit is $174 and the expected fixed
costs are $218,000. Cost estimates are considered accurate within a plus or minus 4
percent range. The depreciation expense is $76,000. The sales price is estimated at
$335 per unit, give or take 2 percent. What is the contribution margin per unit under the
best case scenario? - ANSWER 102% -- 2% higher than 100%
96% - - 4% lower than 100%
Sales Price: 102% * 335 = 341.7
Variable Cost: 174 * 96% = 167.04
341.7 - 167.04 = 174.66
A forward PE is based on: - ANSWER estimated future earnings
The Shore Hotel just paid a dividend of $2 per share. The company will increase its
dividend by 6 percent next year and will then reduce its dividend growth rate by 2
percentage points per year until it reaches the industry average of 2 percent dividend
growth, after which the company will keep a constant growth rate forever. What is the
price of this stock today given a required return of 12 percent? - ANSWER Dividend:
2.00
Growth rate (Y1): 6%
2.00 * (1+6%) = 2.12
Growth Rate (Y2) : 6% - 2% = 4%
2.12 * (1+4%) = 2.2048
Growth Rate (Y3): 4%-2% = 2%
2.2048 * (1+2%) = 2.248896
Growth Rate (Y--): 2%
2.248896 * (1+2%) = 2.29387392
( (2.12/(1+12%)) + (2.2048/(1+12%)) + (2.248896/(1+12%)) ) ( (2.29387392/12% -
2%)/(1+12%) ) = $21.58
A preferred stock pays an annual dividend of $6.75 and sells for $58.60 a share. What
is the rate of return on this security? - ANSWER pO = 58.6
D1 = 6.75
pO = D1/ke
, 58.6 = 6.75/ke
ke = 11.52%
The common stock of Dayton Repair sells for $43.19 a share. The stock is expected to
pay $2.28 per share next year when the annual dividend is distributed. The firm has
established a pattern of increasing its dividends by 2.15 percent annually and expects to
continue doing so. What is the market rate of return on this stock? - ANSWER D1 =
2.28
P = 43.19
G = 2.15%
RoR = D1/P + G
RoR = (2.28/43.19) + 2.15%
RoR = 7.43%
Future Motors is expected to pay a $3.30 a share annual dividend next year. Dividends
are expected to increase by 2.75 percent annually. What is one share of this stock
worth to you today if your required rate of return is 15 percent? - ANSWER Share Value
= Annual Div. / (RoR - Growth Rate)
= 3.30 / (0.15 - 0.0275)
= $26.94
Home Services common stock offers an expected total return of 14.56 percent. The last
annual dividend was $2.27 a share. Dividends increase at a constant 2.1 percent per
year. What is the dividend yield? - ANSWER 14.56 = Dividend yield + 2.1
Dividend yield = 14.56 - 2.1
= 12.46
A preferred stock pays a $4.50 annual dividend. What is the maximum price you are
willing to pay for one share of this stock today if your required return is 8.5 percent? -
ANSWER Preferred Stock = Dividend/Req. Rate
= 4.50/8.5%
= $52.94
Which one of the following statements related to risk is correct? - ANSWER The
systematic risk of a portfolio can be effectively lowered by adding T-bills to the portfolio.
Which one of the following risks is irrelevant to a well-diversified investor? - ANSWER
Unsystematic Risk
You own a stock that you think will produce a return of 11 percent in a good economy
and 3 percent in a poor economy. Given the probabilities of each state of the economy
occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of
the following terms applies to this 6.5 percent? - ANSWER Expected Return
