Group Number: ________________ Names: (Include only the people that actually participated in the extra credit assignment)

_______________________________________ _______________________________________ _______________________________________ _______________________________________

THE UNIVERSITY OF TOLEDO COLLEGE OF BUSINESS AND INNOVATION

BUAD 6200-001: Corporate Finance

- Fall 2011 Practice Problems for Midterm Exam
Instructions: These problems should help you prepare for the midterm exam. It should take you no more than 1 hour and 15 minutes to go through these problems. If you want to receive extra-credit points, submit these problems in class on Monday, Oct 10th (we will discuss your questions during the review). Answers, but not solutions, will be available on Blackboard before October 10th, for you to be able to check your work. Make sure you show me how you solved the problems, and not just write down the right answer! We will discuss the solutions during our review class. Make sure you keep a copy of your solutions in case you think it will help you during the exam (remember, the exam is open book, open notes). You can solve these with your group or individually. However, if you submit a group copy, I strongly suggest that you first do the work individually and only meet with your group to compare answers!!!

1. Marthas Enterprises spent $2,400 to purchase equipment three years ago. This equipment is
currently valued at $1,800 on todays balance sheet but could actually be sold for $2,000. Net working capital is $200 and long-term debt is $800. Assuming the equipment is the firms only fixed asset, what is the book value of shareholders equity?

2. Your firm has net income of $198 on total sales of $1,200. Costs are $715 and depreciation is
$145. The tax rate is 34%. What is the operating cash flow?

BUAD6200-001: Corporate Finance, Fall 2011

3. Thompsons Jet Skis has operating cash flow of $218. Depreciation is $45 and interest paid is
$35. A net total of $69 was paid on long-term debt. The firm spent $180 on fixed assets and increased net working capital by $38. What is the amount of the cash flow to stockholders?

4. You want to have $10,000 saved ten years from now. How much less do you have to deposit
today to reach this goal if you can earn 6% rather than 5% on your savings?

5. The government has imposed a fine on the Not-So-Legal Company. The fine calls for annual
payments of $100,000, $250,000, and $250,000, respectively over the next three years. The first payment is due one year from today. The government plans to invest the funds until the final payment is collected and then donate the entire amount, including investment earnings, to a national health center. The government will earn 3.5% on the funds held. How much will the national health center receive three years from today?

6. You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $50,000 today or receive payments of $641 a month for ten years. You can earn an APR of 6.5% on your money, compounded monthly. Which option should you take and why?

BUAD6200-001: Corporate Finance, Fall 2011

7. You are paying an effective annual rate of 13.8% on your credit card. The interest is compounded monthly. What is the annual percentage rate on your account?

8. A 12-year, 5% coupon bond pays interest annually. The bond has a face value of $1,000. What
is the change in the price of this bond (give me a percentage change) if the market yield rises to 6% from the current yield of 4.5%?

9. Winston Enterprises has a 15-year bond issue outstanding that pays a 9% coupon. The bond is currently priced at $894.60 and has a par value of $1,000. Interest is paid semiannually. What is the yield to maturity?

10. The MerryWeather Firm wants to raise $10 million to expand its business. To accomplish this, it plans to sell 30-year, $1,000 face value zero-coupon bonds. The bonds will be priced to yield 6%. What is the minimum number of bonds it must sell to raise the $10 million it needs? (assume semi-annual bonds)

BUAD6200-001: Corporate Finance, Fall 2011

11. The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 20% a year for the next four years and then decreasing the growth rate to 5% per year. The company just paid its annual dividend in the amount of $1.00 per share. What will be the price of one share in year 4 if the required rate of return is 9.25%?

12. B&K Enterprises will pay an annual dividend of $2.08 a share on its common stock next year. Last week, the company paid a dividend of $2.00 a share. The company adheres to a constant rate of growth dividend policy. What will one share of B&K common stock be worth ten years from now if the applicable discount rate is 8%?

13. Turnips and Parsley common stock sells for $39.86 a share at a market rate of return

of 9.5%. The company just paid its annual dividend of $1.20. What is the rate of growth of its dividend?

14. The Winston Co. is considering two mutually exclusive projects with the following cash flows. The incremental IRR is _____ and if the required rate is higher than the crossover rate then project _____ should be accepted. Year 0 1 2 3 Project A Cash Flow -$75,000 $30,000 $35,000 $35,000 Project B Cash Flow -$60,000 $25,000 $30,000 $25,000

BUAD6200-001: Corporate Finance, Fall 2011

15. A $25 investment produces $27.50 at the end of the year with no risk. Which of the following is true? a. NPV is positive if the interest rate is less than 10%. b. NPV is negative if the interest rate is less than 10%. c. NPV is zero if the interest rate is equal to 10%. d. Both A and C. e. None of the above.

16. Consider an investment with an initial cost of $20,000 and is expected to last for 5 years. The
expected cash flow in years 1 and 2 are $5,000, in years 3 and 4 are $5,500 and in year 5 is $1,000. The total cash inflow is expected to be $22,000 or an average of $4,400 per year. Compute the payback period in years.

17. Based on the profitability index (PI) rule, should a project with the following cash flows be accepted if the discount rate is 8%? Why or why not?

18. Kurts Kabinets is looking at a project that will require $80,000 in fixed assets and another $20,000 in net working capital. The project is expected to produce sales of $110,000 with associated costs of $70,000. The project has a 4-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 35%. What is the operating cash flow for this project?

BUAD6200-001: Corporate Finance, Fall 2011

19. Ronnies Custom Cars purchased some fixed assets two years ago for $39,000. The assets are classified as 5-year property for MACRS. Ronnie is considering selling these assets now so he can buy some newer fixed assets which utilize the latest in technology. Ronnie has been offered $19,000 for his old assets. What is the net cash flow from the salvage value if the tax rate is 34%? MACRS 5-year property Year Rate 1 20.00% 2 32.00% 3 19.20% 4 11.52% 5 11.52% 6 5.76%

20. Tool Makers, Inc. uses tool and die machines to produce equipment for other firms. The initial cost of one customized tool and die machine is $850,000. This machine costs $10,000 a year to operate. Each machine has a life of 3 years before it is replaced. What is the equivalent annual cost of this machine if the required return is 9%? (Round your answer to whole dollars.)

BUAD6200-001: Corporate Finance, Fall 2011