2022 Financia] Management aun Department Nan =, RHE (60%) isi | 1 Will bo, tne. just purchasé some equipment ata cost of $650,000. What is the proper methodology for computing the deprecation expense for year 3 if the equipment is classified as 5-year property ER MaGRS? MACRS 5-year property Nar le 1 20.00% 2 s200% 4 1920% 4 13% 6 5.76% ‘A, $650,000 x (1 = 20) x (1 32) x (1=.192) B. $650,000 x (1 - 192) C, $650,000 x (1 + 20) x (1 +.32)x (1 +.192) 'D, $650,000 x .192 E. $650,000 x (1 -.20) x (1 = .32) E) Tax shield refers toa reduction in taxes ereated by: Se = cost Xp ‘8 reduction in sales. Ba decrease in intrest expense CC. noncash expenses. Dea projest’ incremental expenses opportunity costs, 1D 3. The normal interest rate is 10%. Which form of compounding will give the highest effective rate of interest? 2 annual compounding a monthly compounding C. daily compounding D. continuous compounding E. Itis impossible to tell without knowing the term ofthe loan. ‘The pri ny ote is to: A maximize current. B. avoid financial D VD. maximize the maintainproblem. Es. Annuities where the payments occur at he end ofeach time period ae called __ whereas refer to annuity steams with payments occurring atthe beginning of each time period. “Acordinary annuities; early annuities _-B, late annuities; straight annuities . straight annuities; late annuities D. annuities due; ordinary arnuities E. ordinary annuities; annuities due B 7. Net present value: A. cannot be used when deciding between two mutually exclusive projects B. is more useful to decision makers than the internal rate of return when comparing different sized projects C. is easy to explain to non-financial managers and thus isthe primary method of analysis used by the lowest levels of management. D. is not an as widely used tool as payback and discounted payback E. is very similar in its methodology to the average accounting return Biqo0« Lbs eae 9s C & A project will increase sales by $60,000 and cash expenses by $51,000. The project will cost $40,000 and will be depreciated using straight-line depreciation to a zero book value over the 4-year life of the project. The company has a marginal tax rate of 35%, What is the operating cash flow of the project using the tax shield approach? A. $5,850 B.$8,650, €.39,350 D. $9,700 E. $10,350, B 9 An investor holds two bonds, one with five years until maturity and the other with 20 years until ‘maturity. Which of the following is more likely if interest rates suddenly increase by 2%? A. The five-year bond will decrease more in price./8. The 20-year bond will decrease more in price. C. Both bonds will decrease in price similarly. D. Neither bond will decrease in price, but ‘yields will increase, bonds are as follows: 64%, tw-BBB = 10.18%, ly by ©. Maturity risk differences. coupon bonds (expressed as aco On. 13. UM mm Maturity Gears) i 89.68, 18.6 (per $100 face value) 452% 85.40 86S The yield to maturity for the two year zero-coupon bond is closest to: A, 6.0% B. 5.8% VC. 5.6% B,5.3% Based upon the information provided in the table above, you can conclude BB, nothing about the shape of the yield curve, A. that the yield curve is flat. 1D, that the yield eurve is upward sloping. . that the yield curve is downward sloping. [A projects payback period is four years. If it is later discovered that additional cash flows will be generated in years five and six, then: |A. the project's payback period will be reduced. . the project's payback period will be unchanged. D. the di whether the payback period changes. B. the project's payback period will be increased, iscount rate must be known to determine Which of the following statements is correct? 'A. Ifa project has “normal” cash flows, then its IRR must be positive. B Ifa project has “normal” cash flows, then its MIRR must be positive. C. Ifa project has “normal” cash flows, then it will have exactly two real IRRs. . The definition of “normal” cash flows is that the cash flow stream has one or more negative cash flows followed by a stream of positive cash flows ‘and then one negative cash flow at the end of . cement is than long-term bonds. that the yield curve will be it premiums, the corporate expect inflation to ‘that additional cashthe discount rate must be known to determine whether the payback period changes: . the project's payback period will be reduced equired to enable a 18. Which of the following would be most likely to increase the coupon rate that is required t bond to be issued at par? YA The rating age ®Adding additional restrictive covenants that limit managen C. Adding a sinking fund, D. Adding a eall provision. y es change the bond's rating from Baa to Aaa (E19. which one ofthe following will decrease net working capital ofa firm? Aan inerease in the firm's checking aceount balance “Ba decrease in fixed assets (Can increase in inventory UB. a decrease in accounts payable 5 Dia decent a eccouni receivable ‘Questions and Problems (40%) 1. 40%) £1 @) A corporate bond with a face value of $1,000 matures in 5 years and has a coupon rate of 4.5 percent, The current price of the bond is $1,109.77 and interest is paid sensiannually. What is the ‘yield to maturity? hae LD @) Allison's wants to raise $10 million to expand its business. To accomplish this, he plans to sell new bonds that have the same information in (3). What isthe minimum number of bonds the fim ooo By. 0.545% YM as Ye 2.10% 5 200, 196141.) i ieA. an inci : ase in the firm's checking account balance B. a decrease in fixed assets l iC. an inerease in inventory D..a decrease in accounts receivable VE. a decrease in accounts payable | 20. A project will increase sales by $60,000 and cash expenses by $51,000. The project will cost $40,001 and be depreciated using straight-line depreciation to a zero book value over the 4-year life of th project. The company has a marginal tax rate of 35%. What is the operating cash flow of the projet using the tax shield approach? A. $9,350 B. $9,700 C. $8,650 D. $5,850. B. $1035 Questions and Problems (40%) 1. (10%) (@) A corporate bond with a face value of $1,000 matures in 5 years and has a coupon rate of percent. The current price of the bond is $1,109.77 and interest is paid semiannually. What is yield to maturity? 4 { (b) Allison's wants to raise $10 million to expand its business. To accomplish this, he plans to new bonds that have the same information in (a). What is the minimum number of bonds the must sell to raise the $10 million it needs? (c) What is the capital yield if the bond yield raises to 7% immediately after you bought the bon Hoan= Wes« K x — ue x Kw \.20845 9 ¥ C= [12,500 ve (2 = (12500 * Joost 1 005) Xm 1.00545 ) ji BPo= 1109-19 Pam po == 0-0 \_ oye” OT = 94524 Bh = [ees Lot pang! * IP ? x2, (20%) As one of its major projects for the year, Steinbeck Depot is considering opening up a new store. ‘The company’s CFO hha collected the following information, and is proceeding to evaluate the projec. © The building would have an up-front cost at (= 0) of $14 million. For tax purposes, depreciated over seven years using straight-line depreciation ‘The store is expected to remain open for five years. At t= 5, the company plans to sell the store for an estimated pre-tax salvage value of $8 million is cost will be 4+ The project also requires the company to spend $5 million in cash at t= 0 to purchase additional inventory for the store. After purehasing the inventory, the company’s net operating working capital , will be zero until = 5. Att= 5, the company willbe able to fully recover this $5 milion. “£7 + The store is expected to generate sale revenues of $15 million per year atthe end ofeach of te next five yeas. Operating costs (excloing deprecation) ae expect to be $10 millon pe eat. © Thecompany’s tax rte is 40% in What the projects NPV ifthe required rte of return {9H Should we accor this projet? Depreciniey [Home a poop00 > at T=5 , renal Av oopre Soe 1 Tax from selling asset, frertax salvage valve = 8:00006°~ [hoe, enh > ftosce? (00,200 4, 009005) x OH = j,bo6 000 sales tats Year 0 - 14,000,000 —Sio90,080 Beaded x Dy ' 3,600,200 = akomirg fom pfoopes ny wer EE 3gpopoo Nes Nwe ocr OCF = ['5:000,000 > 19,060,009 x 0.63. Suppose you borrowed $5,000 at a rate of 4.5% and must repay it in 3 equal installments at the end ‘ofeach year. Could you fil up the amortization schedule? Beginning Total Interest Principal Ending. Balance Payment Paid Balance sooo / 16.4) ew ae a oe BET igaand bess po *) 1 1pe.S4 ished never dost 20 Year Oars XK: \04s!x sGp0o Xa 1518-361