Finance Final Exam

Practice Final

1. Mr. Dubofsky just won a “Name That Tune” contest with a grand prize of $250,000. However, the contest stipulates that the winner will receive $100,000 immediately, and $15,000 at the end of each of the next 10 years. Assuming that he can earn 5% on his money, how much has he actually won? PV = 215,826.02

2. Suppose a firm had equity of $12,000 at the beginning of the year. Net income for the year was a loss of $200, dividends paid totaled $400, and the firm raised $1,000 from the sale of new equity. What is the year-end equity value?

12,000+1,000-200-400=12,400

3. Which of the following is/are considered a benefit of the corporate form of organization?

1 Ease of the transfer of ownership

I. Limited life

II. Double taxation

Answer (I)

4. What is the effective annual rate of 12% compounded monthly? 12.68%

5. What is the cost of equity for a firm for which the required return on assets (RA) is 14%, the cost of debt is 11%, and a target debt/equity ratio of .50? Ignore taxes.

RE=0.14+.5(.14-.11)=15.5%

6. BDJ, Inc. has 31,000 shares of stock outstanding with a market price of $15 per share. If net income for the year is $155,000 and the dividend per share is $2.00, what is the retention ratio for BDJ, Inc.? 93,000/155,000=60%

7. You are considering an investment with the following cash flows. Your required return is 10%, you require a payback of 3 years and a discounted payback of 4 years. If your objective is to maximize your wealth, should you take this investment? No NPV is negative. IRR=6.88%, Payback = 2.5years, Discounted payback = 3.02years.

|Year |Cash Flow |

|0 |-$100,000 |

|1 |40,000 |

|2 |40,000 |

|3 |40,000 |

|4 |40,000 |

|5 |-50,000 |

8. ToysRYou plans to raise $8 million in a rights offering. If management sets...