Week 4 Problem Set

Set 1

Week 4 : Stocks and Bonds – Midterm

Question 1. (TCO G) If Company A and Company B are in the same industry and use the same production method, and Company A’s asset turnover is higher than that of Company B, then all else equal we can conclude
Company A is more efficient than Company B.
Company A has a lower dollar amount of assets than Company B.
Company A has higher sales than Company B.
Company A has a lower ROE than Company B.

Question 2. The firm’s asset turnover 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.

Question 3. (TCO G) If Moon Corporation has an increase in sales, which of the following would result in no change in its EBIT margin?
A proportional increase in its net income.
A proportional decrease in its EBIT.
A proportional increase in its EBIT.
An increase in its operating expenses.

Question 3. Your daughter is currently 8 years old. You anticipate that she will be going to college in 10 years. You would like to have $100,000 in a savings account to fund her education at that time. If the account promises to pay a fixed interest rate of 3% per year, how much money do you need to put into the account today to ensure that you will have $100,000 in 10 years?

Question 4. (TCO B) If today you put $10,000 into an account paying 10% annually, how much will there be in the account after 5 years? Show your work.

Question 5. You would like to buy the house and take the mortgage described in Problem 36. You can afford to pay only $23,500 per year. The bank agrees to allow you to pay this amount each year, yet still borrow $300,000. At the end of the mortgage (in 30 years), you must make a balloon payment; that is, you must repay the remaining balance on the mortgage. How much will this balloon payment be?

Question 6. You take out a 5 year car loan for $20,000. The loan has a 5% annual interest rate. The payments are made monthly. What are the monthly payments? Show your work.

Question 7. (TCO B) You currently have $10,000 in your retirement account. If you deposit $500 per month and the account pays 5% interest, how much will be in the account in 10 years?

Question 8. A homebuyer is taking out a mortgage with a balloon payment. The loan amount is $100,000 and 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.

Question 9. (TCO F) A project requires an initial cash outlay of $95,000 and has expected cash inflows of $20,000 annually for 9 years. The cost of capital is 10%. What is the project’s NPV?

Question 10. (TCO F) A project requires an initial cash outlay of $40,000 and has expected cash inflows of $12,000 annually for 7 years. The cost of capital is 10%. What is the project’s payback period? Show your work.

Question 11. A certain bond pays a semiannual coupon rate at a 10% annual rate. The bond has a par value of $1,000. There are eight years to maturity. The yield to maturity is 9%. What is the current price of the bond?

Question 12. (TCO F) A project requires an initial cash outlay of $40,000 and 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.

Question 13. (TCO F) A project requires an initial cash outlay of $60,000 and has expected cash inflows of $15,000 annually for 8 years. The cost of capital is 10%. What is the project’s discounted payback period? Show your work.

Set 2

Week 4 : Stocks and Bonds – Midterm

Question 1. 1. (TCO G) If Company A and Company B are in the same industry and use the same production method, and Company A’s asset turnover is higher than that of Company B, then all else equal we can conclude (Points : 10)
Company A is more efficient than Company B.
Company A has a lower dollar amount of assets than Company B.
Company A has higher sales than Company B.
Company A has a lower ROE than Company B.

Question 2. 2. (TCO G) If Moon Corporation has an increase in sales, which of the following would result in no change in its EBIT margin? (Points : 10)
A proportional increase in its net income.
A proportional decrease in its EBIT.
A proportional increase in its EBIT.
An increase in its operating expenses.

Question 3. 3. (TCO B) If today you put $10,000 into an account paying 10% annually, how much will there be in the account after 5 years? Show your work. (Points : 20)

Question 4. 4. (TCO B) You take out a 5 year car loan for $20,000. The loan has a 5% annual interest rate. The payments are made monthly. What are the monthly payments? Show your work. (Points : 20)

Question 5. 5. (TCO B) You currently have $10,000 in your retirement account. If you deposit $500 per month and the account pays 5% interest, how much will be in the account in 10 years? Show your work. (Points : 20)

Question 6. 6. (TCO B) A homebuyer is taking out a mortgage with a balloon payment. The loan amount is $100,000 and 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. (Points : 20)

Question 7. 7. (TCO F) A project requires an initial cash outlay of $95,000 and has expected cash inflows of $20,000 annually for 9 years. The cost of capital is 10%. What is the project’s NPV? Show your work. (Points : 10)

Question 8. 8. (TCO F) A project requires an initial cash outlay of $40,000 and has expected cash inflows of $12,000 annually for 7 years. The cost of capital is 10%. What is the project’s payback period? Show your work. (Points : 10)

Question 9. 9. (TCO F) A project requires an initial cash outlay of $40,000 and 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. (Points : 20)

Question 10. 10. (TCO F) A project requires an initial cash outlay of $60,000 and has expected cash inflows of $15,000 annually for 8 years. The cost of capital is 10%. What is the project’s discounted payback period? Show your work. (Points : 20)

Question 11. 11. (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 and C can be done together. Projects B and C can be done together. But Projects A and B are mutually exclusive. The company has a cost of capital of 18%. Which should the company do and why? You must use at least two capital budgeting methods. Show your work.
A B C
0 -500 -500 -600
1 200 -200 100
2 200 600 100
3 200 400 100
4 200 200 100
5 200 -300 100
6 200 100
7 -300 100
(Points : 40)