FIN 515 MIDTERM EXAM(LATEST UPDATE)

Grading Summary FIN 515 MIDTERM EXAM Grade Details - All Questions Question 1. Question : (TCO G) The firm's equity multiplier measures The value of assets held per dollar of shareholder equity. The return the firm has earned on its past investments. The firm's ability to sell a product for more than the cost of producing it. How efficiently the firm is utilizing its assets to generate sales. Instructor Explanation: Chapter 2 Question 2. Question : (TCO G) Suppose Novak Company experienced a reduction in its ROE over the last year. This fall could be attributed to a decrease in asset turnover. an increase in leverage. a decrease in equity. Instructor Explanation: Chapter 2 Question 3. Question : (TCO B) A certain investment will pay $10,000 in 20 years. If the annual return on comparable investments is 8%, what is this investment currently worth? Show your work. Student Answer: FV = 10000 NPER = 20 Rate = 8% PV = (8%,20,0,10000,0) = $2145 Instructor Explanation: Week 2 Lecture & Chapter 4 PV answer 2145 FV 10000 N 20 I .08 PMT 0 Points Received: 20 of 20 Comments: Question 4. Question : (TCO B) You start saving $100 per month in an account that pays 5% interest, compounded monthly. You make the payment at the beginning of each month & interest is applied at the end of each month. How much money will you have in the account in 5 years? Show your work. mt = 12 * 5 = 60 i = 0.05 / 12 = 0.004 F = P [(1 + i / m) ^t - 1) / (i / m) F = 100 * ((1 + 0.05 / 12) ^60 − 1) / (0.05 / 12) F = 100 * (0.28) / (0.004) = $7,000 There will be $7,000 in the account 5 years from now. Instructor Explanation: Week 2 Lecture & Chapter 4 PV 0 FV answer $6800.61 N 5*12=60 I .05/12=. PMT 100 Question 5. Question : (TCO B) You currently have $10,000 in your retirement account. If you deposit $500 per month & the account pays 5% interest, how much will be in the account in 10 years? Show your work. FV = C * 1/r *((1+r)^n - 1) Future Value of money after 20 months = 500 * 12/ 0.05 * ((1.) ^20 - 1) Future Value of money after 20 months = $ 10405.91 The money that will be there in the account in 10 years = 10405.91 * (1.)^100 The money that will be there in the account in 10 years = $ 15770.92 Instructor Explanation: Week 2 Lecture & Chapter 4 PV 10000 FV answer 94,111 N 120 I .05/12=. PMT 500 Points Received: 10 of 20 Comments: Week 2 Lecture & Chapter 4 PV 10000 FV answer 94,111 N 120 I .05/12=. PMT 500 Question 6. Question : (TCO B) A homebuyer is taking out a mortgage with a balloon payment. The loan amount is $100,000 & the annual interest rate is 5%. The homebuyer will make equal monthly payments for 5 years except the last payment will include an additional payment of $20,000. How much will the equal monthly payments be? Show your work. (Monthly payment * 12 / 0.05) * [1 – 1 / (1.)^60] + 20000 / (1.)^60 = 100,000 100,000 = (Monthly payment * 12 / 0.05) * (1 – 0.) + 20000 * 0. 84415.8922 = (Monthly payment * 12 / 0.05) * 0. Monthly payment = $1593.03 Instructor Explanation: Week 2 Lecture & Chapter 4 PV FV 20000 N 60 I .05/12=. PMT 1593.03 Points Received: 20 of 20 Comments: Week 2 Lecture & Chapter 4 PV FV 20000 N 60 I .05/12=. PMT 1593.03 Question 7. Question : (TCO F) A project requires an initial cash outlay of $60,000 & has expected cash inflows of $15,000 annuall for 8 years. The cost of capital is 10%. What is the project’s NPV Show your work. Student Answer: Cost of Capital: 10% = 15000 / (1.10^1 = 13,636.36 15000 / (1.10^2) = 12,396.69 15000 / (1.10^3) = 11,269.72 15000 / (1.10^4) = 10,245.20 15000 / (1.10^5)= 9,313.82 15000 / (1.10^6) = 8,467.11 15000 / (1.10^7) 7,697.37 15000 / (1.10^8) = 6,997.61 =================== 80,023.88 80023.88 - 60000 = 20,023.88 NPV = $20,023.88 Instructor Explanation: Week 3 Lecture & Chapters 7 & 8PV 80,023 (calculated) FV N 8 I .10 PMT -15000 80,023-60,000=20,023=NPV Question 8. Question : (TCO F) A project reuires an initial cash outlay of $60,000 & has expected cash inflow of $15,000 annually for 8 years. The cost of capital is 10%. What s the project’s payback period? Show your work. Question 9. Question : (TCO F) A project requires an initial cash outlay of $40,000 & has expected cash inflows of $12,000 annually for 7 years. The cost of capital is 10%. What is the project’s IRR? Show your work. Student Answer: Cost of Capital: 12000 / (1.10^1) = 10909.09 12000 / (1.10^2) = 9917.36 12000 / (1.10^3) = 9015.78 12000 / (1.10^4) = 8196.16 12000 / (1.10^5) = 7451.06 12000 / (1.10^6) = 6773.69 12000 / (1.10^7) = 6157.90 12000 / (1.10^8) = 5598.09 ==================== 64,019.13 64019.13 - 40000 = 24,019.13 NPV = $24,019.13 (40000 / 24019) + 0.10 = 1.67 + 0.10 = 1.77 IRR = 17.7% Instructor Explanation: Week 3 Lecture & Chapters 7 & 8 Using Excel, 23% Points Received: 20 of 20 Comments: Week 3 Lecture & Chapters 7 & 8 Using Excel, 23% Question 10. Question : (TCO F) A project requires an initial cash outlay of $95,000 & has expected cash inflows of $20,000 annually for 9 years. The cost of capital is 10%. What is the project’s discounted payback period? Show your work. Student Answer: Discounted Csh Inflow = Actual Cash Inflow / (1 + i)n Year CF PV CFxPV CCF 0 95000) 1 (95000) .91 18181.82 76818..83 16528.93 60289..75 15026.30 45262..68 13660.27 31602..62 12418.43 19184..56 11289.48 7894..51 10263.16 (2368.38) Discounted Payback Period = 6.77 years Instructor Explanation: Week 3 Lecture & Chapters 7 & 8 The discounted payback is about 6.75 years. Year Original CF Discounted CF CF0-∑CFi 0 -95000 -95000 95000 1 20000 $18,181.82 $76,818.18 2 20000 $16,528.93 $60,289.26 3 20000 $15,026.30 $45,262.96 4 20000 $13,660.27 $31,602.69 5 20000 $12,418.43 $19,184.26 6 20000 $11,289.48 $7,894.79 7 20000 $10,263.16 ($2,368.38) Points Received: 20 of 20 Comments: Question 11. Question : (TCO F) Company A has the opportunity to do any, none, or all of the projects for which the net cash flows per year are shown below. Projects A & B can be done together. Projects B & C can be done together. But Projects A & C are mutually exclusive. The company has a cost of capital of 12%. Which should the company do & why? You must use at least two capital budgeting methods. Show your work. A B C 0 -500 -500 -600 1 200 -200 100 2 200 200 100 3 200 200 100 4 200 200 100 5 200 200 100 6 200 200 100 7 -300 -300 100 Student Answer: Project A B C Discounted Payback 3.6 NA NA Payback 2.4 5.5 6 NPV IRR 28% 0 4.01% The only project with a positive NPV is A. Also the IRR is the highest with project A. Instructor Explanation: Week 3 Lecture & Chapters 7 & 8 Student answers will vary. But only Project A should be undertaken. The others have negative NPV or IRR below the hurdle rate. Project A B C Discounted Payback 3.3 NA NA Payback 2.4 5.5 6 NPV 187 -171 -144 IRR 28% 0 4.01% 0 -500 -500 -500 -500 -600 -600 1 200 $178.57 -200 ($178.57) 100 $89.29 2 200 $159.44 200 $159.44 100 $79.72 3 200 $142.36 200 $142.36 100 $71.18 4 200 $127.10 200 $127.10 100 $63.55 5 200 $113.49 200 $113.49 100 $56.74 6 200 $101.33 200 $101.33 100 $50.66 7 -300 ($135.70) -300 ($135.70) 100 $45.23 8 $0.00 $0.00 0 9 $0.00 $0.00 0 10 $0.00 $0.00 0 $186.58 -170.566 -143.624 Points Received: 40 of 40 Comments: Week 3 Lecture & Chapters 7 & 8 Student answers will vary. But only Project A should be undertaken. The others have negative NPV or IRR below the hurdle rate. Project A B C Discounted Payback 3.3 NA NA Payback 2.4 5.5 6 NPV IRR 28% 0 4.01% 0 -500 -500 -500 -500 - $178.57 -200 ($178.57) 100 $89.29 2 200 $159.44 200 $159.44 100 $79.72 3 200 $142.36 200 $142.36 100 $71.18 4 200 $127.10 200 $127.10 100 $63.55 5 200 $113.49 200 $113.49 100 $56.74 6 200 $101.33 200 $101.33 100 $50.66 7 -300 ($135.70) -300 ($135.70) 100 $45.23 8 $0.00 $0.00 0 9 $0.00 $0.00 0 10 $0.00 $0.00 0 $186.58 -170.566 -143.624