Fin 3320
Practice Questions1 – Total Course
1. Your wealthy uncle has set up a special account that will give you $500,000 on your 35th birthday. Assuming you are age 21 (thus 14 years from receiving this), what is the present value of this gift if the appropriate discount rate is 8.0%? (Ch5)
a. $170,231
b. $282,449
c. $442,619
d. $191,206
e. $734,664
2. You need $10,900 for the down payment on a new car. You presently have $5,000 in savings for which you expect to earn 6% (annual rate, compounded monthly). If you deposit a further $500 each month to this account, how long, approximately, before you will accumulate enough to meet your down payment requirement? (Ch6)
a. 17.6 Years
b. 8 Months
c. 11 Months
d. 16 Months
e. 1.84 Years
3. Which
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Dividends are expected to grow at 25% rate for the next 3 years, with the growth rate then leveling at a constant 4% thereafter. The required return is
12% and the company just paid a $2.50 annual dividend. What is the current share price?
(Ch 8)
a. $34.92
b. $54.56
c. $68.14
d. $92.12
e. $126.21
3
14. You are considering two independent projects both of which have been assigned a discount rate of 14% percent. Based on the project NPV, what is your recommendation concerning these projects? (Ch 9)
Year
0
1
2
a.
b.
c.
d.
e.
Project A
Cash Flow
-$40,000
$22,000
$28,000
Year
0
1
2
Project B
Cash Flow
-$39,000
$28,000
$21,000
You should accept both projects.
You should reject both projects.
You should accept project A and reject project B.
You should accept project B and reject project A.
You should accept project A and be indifferent to project B.
15. Referring to the above question and table, if the projects under consideration are mutually exclusive, then what would your answer be? (Ch 9)
a.
b.
c.
d.
e.
You should accept both projects.
You should reject both projects.
You should accept project A and reject project B.
You should accept project B and reject project A.
You should accept project A and be indifferent to project B.
16. Drake Builders, Inc. purchased a lot in Tucson, Arizona 10 years ago at a cost of $380,000.
At the time of the purchase, the company spent $15,000 to level the lot and another
$20,000 to install storm drains. Today, that lot
1. Given the proposed financing plan, describe your approach (qualitatively) to value AirThread. Should Ms. Zhang use WACC, APV or some combination thereof? Explain. (2 points)
2. Architect paid $250K and has completed an unknown, but small amount of renovation work so far. He has not invested anywhere near $150K into renovations
live comfortably on the $500,000 in dividends paid on the stock plus retirement and other income he
"a. If each project's cost of capital is 12%, which project should be selected? If the cost of capital is 18%, what
$2.51. Often investors are willing to pay a Premium for a company that has a high dividend or
Account A - Present Value with Discount rate of 6% = 6500/(1+6%) = 6500/1.06 = $6,132.08
2. Compute the NPV of both projects. Which would you recommend? What if they are not mutually exclusive?
Therefore, if Joe continues to invest $5,000 annually ($416.67 monthly) into his saving account for the next 25 years, his investment, assuming a current balance of $5,000 compounded daily at 0.01% (as currently being offered by WellsFargo), will amount to about $130,170 . Now, Joe has also invested in certificate of deposits (CDs). He reported as simply been reinvesting his original $5,000 for the past six years. Assuming a stated 0.30% interest rate on a two year CD with daily compounding, his $5,000 investment is now worth about $5,091 . However, he seeks to reinvest this until retirement. Performing similar calculations, we obtain a grand total of $5,488 . This is what his CD invest would amount to if he were to reinvest the current $5,091 at a 0.30% interest rate with daily compounding for the next 25 years.
will not be able to survive in the long run. In order to show others
A lady named Susan Wong is budgeting for the coming year (Year X). During year X, she has to cover monthly expenses as well as irregular monthly financial obligations, and she plans to do so by investing the money not used to cover monthly expenses in either a 1-month, 3-month or 7-month investment scheme whose yields are 6%, 8% and 12% per year nominal respectively. When the investments mature, Susan will use the principals as part of her budget and invest all the interests in a long-term investment that is not considered in her budgeting process.
During the early steps of the projects until reaching commercial and financial close, the parties initiating the project and the developer will have to make critical decision to structure the project. An important part of the negotiation will focus on the risk allocation to the various stakeholders of the project in order to satisfy the prim objectives and drivers of the parties involved and distribute the risk to the party most able to manage and bear them.
5. How does the attractiveness of the project vary under different economic scenarios and financing arrangements?
Since it will involve technology in service delivery, there will reduced costs such as the cost of labor.
3. Do the organizational have the resources with the knowledge and skills to support the project?