FIN 480 UPDATED COMPREHENSIVE QUESTIONS AND
SOLUTIONS GUARANTEE A+
✔✔Ronnie's Coffee House is considering a project which will produce sales of $6,000
and increase cash expenses by $2,500. If the project is implemented, taxes will
increase by $1,300. The additional depreciation expense will be $1,000. An initial cash
outlay of $2,000 is required for net working capital. What is the amount of the operating
cash flow using the top-down approach? - ✔✔$2,200
OCF = $6,000 ?2,500 ?1,300 = $2,200
✔✔Walks Softly sells customized shoes. Currently, it sells 14,800 pairs of shoes
annually at an average price of $59 a pair. It is considering adding a lower-priced line of
shoes that will be priced at $39 a pair. Walks Softly estimates it can sell 6,000 pairs of
the lower-priced shoes but will sell 3,500 less pairs of the higher-priced shoes by doing
so. What annual sales revenue should be used when evaluating the addition of the
lower-priced shoes? - ✔✔$27,500
Sales = (6,000 �$39) + (?3,500 � $59) = $27,500
✔✔Wexford Industrial Supply is considering a new project with estimated depreciation
of $33,000, fixed costs of $35,000, and total sales of $75,000. The variable costs per
unit are estimated at $5.00. What is the accounting break-even level of production? -
✔✔1,400 units
Qaccounting break even = $35,000 + $33,000 = $75,000 - ($5.00 × Q)
✔✔Stellar Plastics is analyzing a proposed project. The company expects to sell 11,000
units, give or take 4 percent. The expected variable cost per unit is $7.00 and the
expected fixed cost is $36,000. The fixed and variable cost estimates are considered
accurate within a plus or minus 4 percent range. The depreciation expense is $33,000.
The tax rate is 34 percent. The sale price is estimated at $16.00 a unit, give or take 3
percent.
What is the operating cash flow for a sensitivity analysis using total fixed costs of
$32,000? - ✔✔$55,440.00
OCF = [(11,000 x ($16.00 - $7.00)] - $32,000][1- .34] +($33,000 x .34) = $55,440.00
✔✔Including the option to expand in your project analysis will tend to: - ✔✔increase the
net present value of a project.
✔✔Fixed costs for a new project: - ✔✔will remain constant on a per unit basis over a
given range of output.
✔✔Which one of the following statements is correct? - ✔✔At the accounting break-even
level, the pretax profit is equal to the aftertax profit.
, ✔✔Utilizing a decision tree, the NPV used to make the decision to commence the
testing for a project is dependent on: - ✔✔all project cash flows and probabilities over
the project's entire life.
✔✔Which one of the following statements is correct when a project is operating at its
financial break-even point? - ✔✔The present value of the cash flows subsequent to the
initial cash flow equals the amount of the initial investment.
✔✔The investment timing decision relates to: - ✔✔when a project should commence.
✔✔In order to make a decision utilizing a decision tree, you must: - ✔✔start at the most
distant point in time and work backwards to Time 0.
✔✔All else equal, the contribution margin must increase as: - ✔✔the variable cost per
unit declines.
✔✔The yield to maturity on a bond is currently 7.75 percent. The real rate of return is
3.70 percent. What is the rate of inflation? - ✔✔3.91 percent r= 1.0775/1.037 -1 =
3.91%
✔✔Oil Well Supply offers a 8 percent coupon bond with semiannual payments and a
yield to maturity of 8.73 percent. The bonds mature in 9 years. What is the market price
per bond if the face value is $1,000? - ✔✔$955.13
Enter 9 × 2 8.73/2 80/2 1,000
N I/Y PV PMT FV
Solve for -955.13
✔✔A bond that pays interest annually yielded 6.75 percent last year. The inflation rate
for the same period was 5.80 percent. What was the actual real rate of return on this
bond for last year? - ✔✔.90 percent (1.0675)/1.058 -1 = .9%
✔✔The outstanding bonds of Winter Time Products provide a real rate of return of 3.30
percent. The current rate of inflation is 2.30 percent. What is the nominal rate of return
on these bonds? - ✔✔5.68 percent
(1 + 0.033) x (1 + 0.023) - 1 = 5.68 percent
✔✔Northern Warehouses wants to raise $12 million to expand its business. To
accomplish this, it plans to sell 35-year, $1,000 face value zero-coupon bonds. The
bonds will be priced to yield 5 percent. What is the minimum number of bonds it must
sell to raise the $12 million it needs? - ✔✔67,585
PV= 1000/(1+ (.05/2))^35x2= 177.553576
Number 12000000/177.553576= 67585
SOLUTIONS GUARANTEE A+
✔✔Ronnie's Coffee House is considering a project which will produce sales of $6,000
and increase cash expenses by $2,500. If the project is implemented, taxes will
increase by $1,300. The additional depreciation expense will be $1,000. An initial cash
outlay of $2,000 is required for net working capital. What is the amount of the operating
cash flow using the top-down approach? - ✔✔$2,200
OCF = $6,000 ?2,500 ?1,300 = $2,200
✔✔Walks Softly sells customized shoes. Currently, it sells 14,800 pairs of shoes
annually at an average price of $59 a pair. It is considering adding a lower-priced line of
shoes that will be priced at $39 a pair. Walks Softly estimates it can sell 6,000 pairs of
the lower-priced shoes but will sell 3,500 less pairs of the higher-priced shoes by doing
so. What annual sales revenue should be used when evaluating the addition of the
lower-priced shoes? - ✔✔$27,500
Sales = (6,000 �$39) + (?3,500 � $59) = $27,500
✔✔Wexford Industrial Supply is considering a new project with estimated depreciation
of $33,000, fixed costs of $35,000, and total sales of $75,000. The variable costs per
unit are estimated at $5.00. What is the accounting break-even level of production? -
✔✔1,400 units
Qaccounting break even = $35,000 + $33,000 = $75,000 - ($5.00 × Q)
✔✔Stellar Plastics is analyzing a proposed project. The company expects to sell 11,000
units, give or take 4 percent. The expected variable cost per unit is $7.00 and the
expected fixed cost is $36,000. The fixed and variable cost estimates are considered
accurate within a plus or minus 4 percent range. The depreciation expense is $33,000.
The tax rate is 34 percent. The sale price is estimated at $16.00 a unit, give or take 3
percent.
What is the operating cash flow for a sensitivity analysis using total fixed costs of
$32,000? - ✔✔$55,440.00
OCF = [(11,000 x ($16.00 - $7.00)] - $32,000][1- .34] +($33,000 x .34) = $55,440.00
✔✔Including the option to expand in your project analysis will tend to: - ✔✔increase the
net present value of a project.
✔✔Fixed costs for a new project: - ✔✔will remain constant on a per unit basis over a
given range of output.
✔✔Which one of the following statements is correct? - ✔✔At the accounting break-even
level, the pretax profit is equal to the aftertax profit.
, ✔✔Utilizing a decision tree, the NPV used to make the decision to commence the
testing for a project is dependent on: - ✔✔all project cash flows and probabilities over
the project's entire life.
✔✔Which one of the following statements is correct when a project is operating at its
financial break-even point? - ✔✔The present value of the cash flows subsequent to the
initial cash flow equals the amount of the initial investment.
✔✔The investment timing decision relates to: - ✔✔when a project should commence.
✔✔In order to make a decision utilizing a decision tree, you must: - ✔✔start at the most
distant point in time and work backwards to Time 0.
✔✔All else equal, the contribution margin must increase as: - ✔✔the variable cost per
unit declines.
✔✔The yield to maturity on a bond is currently 7.75 percent. The real rate of return is
3.70 percent. What is the rate of inflation? - ✔✔3.91 percent r= 1.0775/1.037 -1 =
3.91%
✔✔Oil Well Supply offers a 8 percent coupon bond with semiannual payments and a
yield to maturity of 8.73 percent. The bonds mature in 9 years. What is the market price
per bond if the face value is $1,000? - ✔✔$955.13
Enter 9 × 2 8.73/2 80/2 1,000
N I/Y PV PMT FV
Solve for -955.13
✔✔A bond that pays interest annually yielded 6.75 percent last year. The inflation rate
for the same period was 5.80 percent. What was the actual real rate of return on this
bond for last year? - ✔✔.90 percent (1.0675)/1.058 -1 = .9%
✔✔The outstanding bonds of Winter Time Products provide a real rate of return of 3.30
percent. The current rate of inflation is 2.30 percent. What is the nominal rate of return
on these bonds? - ✔✔5.68 percent
(1 + 0.033) x (1 + 0.023) - 1 = 5.68 percent
✔✔Northern Warehouses wants to raise $12 million to expand its business. To
accomplish this, it plans to sell 35-year, $1,000 face value zero-coupon bonds. The
bonds will be priced to yield 5 percent. What is the minimum number of bonds it must
sell to raise the $12 million it needs? - ✔✔67,585
PV= 1000/(1+ (.05/2))^35x2= 177.553576
Number 12000000/177.553576= 67585
