Practice Examination Questions
1) Consider the information below from a firm's balance sheet for 2007 and 2008.
Current Assets
Cash and Equivalents
Short-Term Investments
Accounts Receivable
Inventories
Other Current Assets
Total Current Assets
Current Liabilities
Accounts Payable
Short-Term Debt
Other Current Liabilities
Total Current Liabilities
2008
$1,561
$1,052
$3,616
$1,816
$ 707
$8,752
2007
$1,800
$3,010
$3,129
$1,543
$ 601
$10,083
Change
-$ 239
-$1,958
$ 487
$ 273
$ 106
-$1,331
$5,173
$ 288
$1,401
$6,862
$5,111
$ 277
$1,098
$6,486
$ 62
$ 11
$ 303
$ 376
What is the Net Working Capital for 2008? What is it for 2007? What is the Change in Net
Working Capital (NWC)? Assuming the Operating Cash Flows (OCF) are $7,155 and the
Net Capital Spending (NCS) is $2,372, what is the Cash Flow from Assets?
Answer:
Net Working Capital for 2008 is $8,752 - $6,862 = $1,890
Net Working Capital for 2007 is $10,083 - $6,486 = $3,597
Decrease in Net Working Capital (NWC) = $1,890 - $3,597= -$1,707
Assuming that Operating Cash Flows (OCF) are $7,155, Net Capital Spending (NCS) is
$2,372, and Decrease in Net Working Capital is -$1,707, we get:
Cash Flow from Assets = OCF - NCS – Decrease in NWC = $7,155 - $2,372 - (-$1,707) =
$6,490.
2) Your family recently won the $10,000,000 lottery and chose to accept the annual payout
plan of $500,000 today plus 19 more year-end cash flows of $500,000. If you discount these
cash flows at an annual rate of 8.0%, what is their present value?
Answer: PV = PMT ×
× (1 + r)1 = $500,000 ×
× (1.08)1 =
$5,301,799.60.
3) If for the next 40 years you place $3,000 in equal year-end-deposits into an account
earning 8% per year, how much money will be in the account at the end of that time period?
Comment: FV = PMT ×
= $3,000 ×
= $777,169.56.
40Johnson has an annuity due that pays $600 per year for 15 years. (Note: There are 15
annual cash flows with the first cash flow occurring today.) What is the value of the cash
flows 14 years from today (immediately after the last deposit is made) if they are placed in an
account that earns 7.50%?
Comment: FV = PMT ×
= $600 ×
= $15,671.02.
4) You put down 20% on a home with a purchase price of $150,000, or $30,000. The
remaining balance will be $120,000. The bank will loan you this remaining balance at
4.375% APR. You will make monthly payments with a 20-year payment schedule. What is
the monthly annuity payment under this schedule?
= 0.36458% and n = 20 × 12 = 240 periods is 159.7643.
The PVIFA using r =
The monthly annuity payment = PMT =
=
= $751.11.
5) Ten years ago Bacon Signs Inc. issued twenty-five-year 8% annual coupon bonds with a
$1,000 face value each. Since then, interest rates in general have risen and the yield to
maturity on the Bacon bonds is now 9%. Given this information, what is the price today for a
Bacon Signs bond?
Comment: Bond Price = PMT × (
)+
= $80 × (
)+
6) Endicott
Enterprises Inc. has issued 30-year semiannual coupon bonds with a face value of
$1,000. If the annual coupon rate is 14% and the current yield to maturity is 8%, what is the
firm's current price per bond?
Comment: Bond Price = PMT × (
= $70 × (
)+
)+
= $1,678.70.
6) Endicott Enterprises Inc. has twenty years remaining on $1,000 par value semiannual
coupon bonds paying an annual coupon of $80. If the yield to maturity on these bonds is 6%
per year, what is the current price?
Answer: Bond Price = PMT × (
)+
= $40 × (
)+
= $1,231.15.
7) Walker Laboratories, Inc. pays a $1.37 dividend every quarter and will maintain this
policy forever. What price should you pay for one share of common stock if you want an
annual return of 12.5% on your investment?
We use the perpetuity formula to derive the answer. When computing a perpetuity, we have
to make sure that both the payment and the discount rate represent the same period. In this
problem, let us use a quarter of a year (or three months) as our period. Thus, we restate the
annual required rate of 12.5% as a quarterly rate of
= 3.125% (or 0.03125). Applying
the constant dividend model with infinite horizon and with the quarterly rate of return and a
quarterly dividend of $1.37, we get: Price =
=P=
= $43.84. We can get
the same answer using annual data. For example, the annual dividend is 4 × $1.37 = $5.48.
Thus, price =
= $43.84.