1. A firm reported the following:
Net Income 100,000
Depreciation 25,000
Change in NWC 15,000
What is the CFO (cash flow from operations)?
a. 100,000
b. 110,000
c. 120,000
d. (130,000) - ANSWER-CFO = Net Income + Depreciation - Increase NWC
=100,000 + 25,000 - 15,000
2. What is the Cash Flow from Investing?
Beginning Net PP&E 50,000
Ending Net PP&E 200,000
Depreciation Expense 40,000
a. (190,000)
b. 150,000
c. 200,000
d. (150,000) - ANSWER-Cash Flow Investing (CFI)
Change in Investment = (Change in Net PPE + Depreciation)
=(200,000 - 50,000) + 40,000
Change Invest = 190,000
CFI = (-1) * Change in Invest = (190,000)
3. What is the Cash Flow from Financing?
Accounts Payable 50,000
Stock Issuance 75,000
Increase in Bonds Payable 125,000
Dividends Paid 80,000
a. 150,000
b. 120,000
c. 100,000
d. 145,000 - ANSWER-Cash Flow Financing
CFF = Increase in Stock + Increase in Debt - Dividends Paid
,=75,000+125,000-80,000
=120,000
4. A couple wants to save for a down payment on a house. They think they need to
accumlate 100,000 in five years. If the interest rate is 5% and they start at the end of the
year when they both get bonuses from their employers, what do they have to put aside
annually?
a. 22,096
b. 17,752
c. 18,097
d. 18,462 - ANSWER-100,000 FV
5N
5 I/Y
Cpt PMT = 18,097
5. Hedgeco had sales of 70,000,000, expenses of 50,000,000 and has a 40% tax rate. It
has equity of 40,000,000. The board approved dividends of 4,000,000. What is the
company's Sustainable Growth Rate?
a. 20%
b. 15%
c. 25%
d. 14% - ANSWER-SGR = ROE * ( 1 - Payout Ratio )
ROE = Net Income / Equity
Payout Ratio = Dividends Paid / Net Income
Net Income = (70 - 50)*(1-0.4) = 12 ROE = 12/40 = 0.30
Payout Ratio = 4/12 = .33
SGR = .30 * (1 - 0.33) = .20
6. A company wishes to issue 10 year semi-annual pay bonds with a face value of
$1,000 and a coupon rate of 5%. The market has shifted before the issuance and the
bonds will sell at 95% of face value. What is the YTM of the bonds when they are sold?
a. 6.71%
b. 5.50%
c. 5.66%
d. 6.33% - ANSWER-20 N
1000 FV
25 PMT
(950) PV
Cpt I/Y = 2.83 * 2 = 5.66%
7. What does a stock have to sell for one year in the future, if it currently sells for $75,
has a planned dividend of $2 a share and an expected return of 12%?
a. 75
b. 79
c. 82
d. 85 - ANSWER-1 N
(75) PV
2 PMT
12 I/Y
, Cpt FV = 82
8. A company just paid a dividend of 2.00 to its shareholder. It estimates that future
growth will be at 5%. What is the value of the stock if you are looking for an 10% return
on your investment?
a. 41.75
b. 42
c. 41
d. 39 - ANSWER-Price = Projected Next Div / (Req Return - Growth Rate)
Next Dividend = Last Dividend x (1+growth rate)
= (2 * 1.05) / (0.10 - 0.05)
= 42
9. To create a fund for annual college scholarships of $100,000 that will last forever,
how much must be invested today if the interest rate is 5%?
a. 1,000,000
b. 5,000,000
c. 500,000
d. 2,000,000 - ANSWER-Perpetuity: Present Value = Payments / Interest Rate
PV = 100,000 / .05
PV = 2,000,000
10. The market yield is 15% and Treasury bonds are yielding 3%. If a stock has a beta
of 1.5. What is that stock's expected return?
a. .17
b. .18
c. .21
d. .15 - ANSWER-E(r) = Risk Free Rate + Beta * ( Market Yield - Risk Free Rate)
E(r) = Risk Free Rate + Beta * ( Market Risk Premium)
=.03 + 1.5 * (.15 - .03)
=.03 + .18
=.21
11. Common stock is valued at 500,000 and Long-term debt is valued at 300,000. What
is the WACC if common stock costs .15 and long-term debt costs .07? The tax rate is
40%.
a. .1275
b. .125
c. .1225
d. .1095 - ANSWER-WACC = (Stock/Total Funds) x Rate + (Debt/Total Funds) x Rate x
(1-tax rate)
=(500/800)*.15 + (300/800)*.07*(1-0.4)
=0.625*.15 + (0.375*.07*0.6)
= 0.0938 + 0.0158
= 0.1095
12. What is the Initial Cash Flow (ICF) given the following information:
· Equipment Price 400,000
· Installation 10,000
· Shipping 5,000
Net Income 100,000
Depreciation 25,000
Change in NWC 15,000
What is the CFO (cash flow from operations)?
a. 100,000
b. 110,000
c. 120,000
d. (130,000) - ANSWER-CFO = Net Income + Depreciation - Increase NWC
=100,000 + 25,000 - 15,000
2. What is the Cash Flow from Investing?
Beginning Net PP&E 50,000
Ending Net PP&E 200,000
Depreciation Expense 40,000
a. (190,000)
b. 150,000
c. 200,000
d. (150,000) - ANSWER-Cash Flow Investing (CFI)
Change in Investment = (Change in Net PPE + Depreciation)
=(200,000 - 50,000) + 40,000
Change Invest = 190,000
CFI = (-1) * Change in Invest = (190,000)
3. What is the Cash Flow from Financing?
Accounts Payable 50,000
Stock Issuance 75,000
Increase in Bonds Payable 125,000
Dividends Paid 80,000
a. 150,000
b. 120,000
c. 100,000
d. 145,000 - ANSWER-Cash Flow Financing
CFF = Increase in Stock + Increase in Debt - Dividends Paid
,=75,000+125,000-80,000
=120,000
4. A couple wants to save for a down payment on a house. They think they need to
accumlate 100,000 in five years. If the interest rate is 5% and they start at the end of the
year when they both get bonuses from their employers, what do they have to put aside
annually?
a. 22,096
b. 17,752
c. 18,097
d. 18,462 - ANSWER-100,000 FV
5N
5 I/Y
Cpt PMT = 18,097
5. Hedgeco had sales of 70,000,000, expenses of 50,000,000 and has a 40% tax rate. It
has equity of 40,000,000. The board approved dividends of 4,000,000. What is the
company's Sustainable Growth Rate?
a. 20%
b. 15%
c. 25%
d. 14% - ANSWER-SGR = ROE * ( 1 - Payout Ratio )
ROE = Net Income / Equity
Payout Ratio = Dividends Paid / Net Income
Net Income = (70 - 50)*(1-0.4) = 12 ROE = 12/40 = 0.30
Payout Ratio = 4/12 = .33
SGR = .30 * (1 - 0.33) = .20
6. A company wishes to issue 10 year semi-annual pay bonds with a face value of
$1,000 and a coupon rate of 5%. The market has shifted before the issuance and the
bonds will sell at 95% of face value. What is the YTM of the bonds when they are sold?
a. 6.71%
b. 5.50%
c. 5.66%
d. 6.33% - ANSWER-20 N
1000 FV
25 PMT
(950) PV
Cpt I/Y = 2.83 * 2 = 5.66%
7. What does a stock have to sell for one year in the future, if it currently sells for $75,
has a planned dividend of $2 a share and an expected return of 12%?
a. 75
b. 79
c. 82
d. 85 - ANSWER-1 N
(75) PV
2 PMT
12 I/Y
, Cpt FV = 82
8. A company just paid a dividend of 2.00 to its shareholder. It estimates that future
growth will be at 5%. What is the value of the stock if you are looking for an 10% return
on your investment?
a. 41.75
b. 42
c. 41
d. 39 - ANSWER-Price = Projected Next Div / (Req Return - Growth Rate)
Next Dividend = Last Dividend x (1+growth rate)
= (2 * 1.05) / (0.10 - 0.05)
= 42
9. To create a fund for annual college scholarships of $100,000 that will last forever,
how much must be invested today if the interest rate is 5%?
a. 1,000,000
b. 5,000,000
c. 500,000
d. 2,000,000 - ANSWER-Perpetuity: Present Value = Payments / Interest Rate
PV = 100,000 / .05
PV = 2,000,000
10. The market yield is 15% and Treasury bonds are yielding 3%. If a stock has a beta
of 1.5. What is that stock's expected return?
a. .17
b. .18
c. .21
d. .15 - ANSWER-E(r) = Risk Free Rate + Beta * ( Market Yield - Risk Free Rate)
E(r) = Risk Free Rate + Beta * ( Market Risk Premium)
=.03 + 1.5 * (.15 - .03)
=.03 + .18
=.21
11. Common stock is valued at 500,000 and Long-term debt is valued at 300,000. What
is the WACC if common stock costs .15 and long-term debt costs .07? The tax rate is
40%.
a. .1275
b. .125
c. .1225
d. .1095 - ANSWER-WACC = (Stock/Total Funds) x Rate + (Debt/Total Funds) x Rate x
(1-tax rate)
=(500/800)*.15 + (300/800)*.07*(1-0.4)
=0.625*.15 + (0.375*.07*0.6)
= 0.0938 + 0.0158
= 0.1095
12. What is the Initial Cash Flow (ICF) given the following information:
· Equipment Price 400,000
· Installation 10,000
· Shipping 5,000
