FIN515 MANAGERIAL FINANCE MIDTERM

FIN515 MANAGERIAL FINANCE MIDTERM EXAM

1.

Question :

(TCO G) The firm's equity multiplier measures

Student Answer:

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

Points Received:

10 of 10

Comments:

Question 2.

Question :

(TCO G) The DuPont Identity expresses the firm's ROE in terms of

Student Answer:

profitability, asset efficiency, and leverage.

valuation, leverage, and interest coverage.

profitability, margins, and valuation.

equity, assets, and liabilities.
 

Instructor Explanation:

Chapter 2

Points Received:

10 of 10

Comments:

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 YRS RATE= 8% PV =? PV (Rate,Nper,Pmt,Fv,Type) -> (8%,20,0,10000,0)= ($2145)

Instructor Explanation:

Week 2 Lecture and 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 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.

Student Answer:

PMT(5%,60,-20000,0,0) = $1057 This doesn't make sense to me but this is what excel keeps giving me.... I'd expect it to be somewhere between $350-$450 range

Instructor Explanation:

Week 2 Lecture and Chapter 4

PV

20000

FV

0

N

5*12=60

I

.05/12=.0041667

PMT answer

$377.42

Points Received:

20 of 20

Comments:

The interest rate should have been reduced to the monthly rate -- or .05/12 = .0042

Question 5.

Question :

(TCO B) Someone leases a car with the following terms: monthly payment, five year term, 5% annual interest rate, initial value of the lease is $35,000, and value at the end of the lease is $10,000. What are the monthly payments? Show your work.

Student Answer:

PMT(5%,60,-35000,10000,0)= $1821/MO

Instructor Explanation:

Week 2 Lecture and Chapter 4

PV

35000

FV

-10000

N

60

I

.05/12=.0041667

PMT answer

513.45

Points Received:

20 of 20

Comments:

The interest rate should have been monthly -- .05/12 = .0042 --

Question 6.

Question :

(TCO B) An accident victim has received a structured settlement. According to the terms of the agreement, the victim will receive $10,000 per year at the end of each year for the next 15 years. Additionally, the victim will receive $20,000 in 10 years. The victim believes they could get 7% annually on an investment they could make if they had all the money now. What would the money be worth to them if they could get it now? Show your work.

Student Answer:

FV(7%,15,0,170000,0)= $469,035.36

Instructor Explanation:

Week 2 Lecture and Chapter 4

PV answer

80402

FV

20000

N

10

I

.07

PMT

10000

Points Received:

15 of 20

Comments:

Looking for PV not FV--- Two pieces -- First Piece -- I=7% N=15yrs PMT=10,000 FV=0 PV=? Second Piece -- I=7% N=10yrs PMT=0 FV=20,000 PV=? Sum of 2 Pieces = answer

Question 7.

Question :

(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 NPV? Show your work.

Student Answer:

NPV=(10%,15K,15K,15K,15K,15K,15K,15K,15K,0,$60000)= $56891 RATE=10% PV=-$60000 PMT=0 FV=

Instructor Explanation:

Week 3 Lecture and Chapters 7 and 8

PV

80,023 (calculated)

FV

N

8

I

.10

PMT

-15000

 
80,023-60,000=20,023=NPV
 

Points Received:

10 of 10

Comments:

=NPV(.10,8,15000,0) - 60000

Question 8.

Question :

(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 payback period? Show your work.

Student Answer:

Initial = $95000 1=20000 2=20000 3=20000 4=20000 5=20000 6=20000 7=20000 8=20000 9=20000 payback period is 5 yrs

Instructor Explanation:

Week 3 Lecture and Chapters 7 and 8
95,000/20,000=4.75 years
 

Points Received:

10 of 10

Comments:

Question 9.

Question :

(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.

Student Answer:

Instructor Explanation:

Week 3 Lecture and Chapters 7 and 8
Using Excel, 23%
 

Points Received:

0 of 20

Comments:

=IRR(CF0:CF7)

Question 10.

Question :

(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 discounted payback period? Show your work.

Student Answer:

Initial = $95000 1=20000 2=20000 3=20000 4=20000 5=20000 6=20000 7=20000 8=20000 9=20000 payback period is 5 yrs

Instructor Explanation:

Week 3 Lecture and Chapters 7 and 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:

15 of 20

Comments:

Discounted CFs for 7 yrs: 18,182, 16,529, 15,026, 13,660, 12,418 11,289, 10,263 Original Investment of 95,000 paid off in about 7 yrs

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. The projects are not mutually exclusive. The company has a cost of capital of 15%. Which should the company do and why? You must use at least two capital budgeting methods. Show your work. Explain your answer thoroughly.

A

B

C

0

-300

-100

-300

1

100

-100

100

2

100

100

100

3

100

100

100

4

100

100

100

5

100

100

100

6

100

100

-100

7

-300

-200

0

Student Answer:

Instructor Explanation:

Week 3 Lecture and Chapters 7 and 8
Student answers will vary. But only Project B should be undertaken. The others have negative NPV or IRR below the hurdle rate.
 

Project

A

B

C

Discounted Payback

         NA

3.8

3.8

Payback

6

3

5

NPV

-34

29

-8

IRR

0%

22.90%

13.62%

Points Received:

0 of 40

Comments:

Should have used two of the following: NPV, IRR, MIRR, Payback, Discounted Payback Results of NPV would give you the right choice.