father's 1.
Your employer was just acquired, and he was given a severance payment of $397,500, which he
invested at a 7.5% annual rate. He now plans to retire, and he wants to withdraw $35,000 at the end of
each year, starting at the end of this year. How many years will it take to exhaust his funds, i.e., run the
account down to zero?
27.19
24.55
26.13
21.38
26.40
Feedback:
I/YR 7.5%
PV
$397,500
PMT $35,000
FV
$0.00
N
26.40
Score: 1 of 1
2.
Your uncle has $1,135,000 and wants to retire. He expects to live for another 25 years and to earn 7.5%
on his invested funds. How much could he withdraw at the end of each of the next 25 years and end up
with zero in the account?
$98,766.96
$93,675.88
$92,657.67
$101,821.61
$120,149.50
N
25
I/YR 7.5%
PV
$1,135,000
FV
$0.00
PMT $101,821.61
Score: 1 of 1
3.
Last year Harrington Inc. had sales of $325,000 and a net income of $19,000, and its year-end assets were
$250,000. The firm's total-debt-to-total-assets ratio was 60.0%. Based on the DuPont equation, what was
the ROE?
22.61%
17.86%
19.00%
23.18%
23.56%
Sales
$325,000
Assets
$250,000
Net income
$19,000
Debt ratio
60.0%
Debt = Debt% Assets =
$150,000
Equity = Assets - Debt =
$100,000
Profit margin = NI / Sales =
5.85%
TATO
1.30
Equity multiplier = Assets / Equity
=
2.50
ROE
19.00%
Score: 1 of 1
4.
Suppose you inherited $870,000 and invested it at 8.25% per year. How much could you withdraw at the
beginning of each of the next 20 years?
$67,543.38
$76,715.94
$99,230.40
$83,386.89
$97,562.66
N
20
I/YR 8.25%
PV
$870,000
FV
$0.00
PMT $83,386.89
Score: 1 of 1
5.
Last year Jandik Corp. had $295,000 of assets, $18,750 of net income, and a debt-to-total-assets ratio of
37%. Now suppose the new CFO convinces the president to increase the debt ratio to 48%. Sales and total
assets will not be affected, but interest expenses would increase. However, the CFO believes that better
cost controls would be sufficient to offset the higher interest expense and thus keep net income
unchanged. By how much would the change in the capital structure improve the ROE?
2.63%
2.13%
1.69%
2.22%
1.90%
Assets
$295,000
Old debt ratio
37%
Old debt = Assets Old debt% =
$109,150
Old equity
$185,850
New debt ratio
48%
New debt = Assets New debt% =
$141,600
New Equity = Assets - New debt =
$153,400
Net income
$18,750
New ROE = New income / New
Equity
12.22%
Old ROE = Old income / Old Equity
10.09%
Increase in ROE
2.13%
Score: 1 of 1
6.
Edwards Electronics recently reported $11,250 of sales, $5,500 of operating costs other than depreciation,
and $1,250 of depreciation. The company had no amortization charges, it had $3,500 of bonds that carry a
6.25% interest rate, and its federal-plus-state income tax rate was 35%. How much was its net cash flow?
$3,284.75
$3,457.63
$3,639.61
$3,831.17
$4,032.81
Bonds $ 3,500.00
Interest rate 6.25%
Tax rate 35.00%
Sales $11,250.00
Operating costs excluding depr'n $ 5,500.00
Depreciation $ 1,250.00
Operating income (EBIT) $ 4,500.00
Interest charges $ 218.75
Taxable income $ 4,281.25
Taxes $ 1,498.44
Net income $ 2,782.81
Net cash flow = Net income + deprn $ 4,032.81
Score: 1 of 1
7.
Your father is about to retire, and he wants to buy an annuity that will provide him with $91,000 of
income a year for 25 years, with the first payment coming immediately. The going rate on such annuities
is 5.15%. How much would it cost him to buy the annuity today?
$1,248,843.27
$1,408,270.07
$1,474,697.91
$1,328,556.67
$1,169,129.87
BEGIN Mode
N
25
I/YR 5.15%
PMT $91,000
FV
$0.00
PV
$1,328,556.67
Score: 1 of 1
8.
Han Corp's sales last year were $395,000, and its year-end receivables were $52,500. The firm sells on
terms that call for customers to pay 30 days after the purchase, but some delay payment beyond Day 30.
On average, how many days late do customers pay? Base your answer on this equation: DSO - Allowed
credit period = Average days late, and use a 365-day year when calculating the DSO.
15.92
15.18
13.88
18.51
14.07
Sales
$395,000
Sales/day = Sales / 365 =
$1,082.19
Receivables
$52,500
Company DSO = Receivables / Sales per day
=
48.51
Credit period
30
DSO - Credit period = Days late
18.51
Score: 1 of 1
9.
Brookman Inc's latest EPS was $2.75, its book value per share was $22.75, it had 280,000 shares
outstanding, and its debt ratio was 44%. How much debt was outstanding?
$4,704,700
$5,355,350
$5,205,200
$4,054,050
$5,005,000
EPS
$2.75
BVPS
$22.75
Shares outstanding
280,000
Debt ratio
44.0%
Total equity = Shares outstanding BVPS =
$6,370,000
Total assets = Total equity / (1 - Debt ratio) = $11,375,000
Total debt = Total assets - Equity =
$5,005,000
Score: 1 of 1
10.
Last year Hamdi Corp. had sales of $500,000, operating costs of $450,000, and year-end assets of
$420,000. The debt-to-total-assets ratio was 17%, the interest rate on the debt was 7.5%, and the firm's
tax rate was 35%. The new CFO wants to see how the ROE would have been affected if the firm had used
a 50% debt ratio. Assume that sales, operating costs, total assets, and the tax rate would not be affected,
but the interest rate would rise to 8.0%. By how much would the ROE change in response to the change
in the capital structure?
1.95%
1.99%
1.70%
1.48%
1.80%
Old
New
Interest rate
7.5%
8.0%
Tax rate
35%
35%
Assets
$420,000 $420,000
Debt ratio
17%
Debt = Assets Debt ratio =
50%
$71,400 $210,000
Equity = Assets - Debt =
$348,600 $210,000
Sales
$500,000 $500,000
Operating costs
450,000 450,000
EBIT = Sales - Operating costs =
$50,000 $50,000
Interest paid = Interest rate Debt =
5,355
16,800
Taxable income
$44,645 $33,200
Taxes
15,626
Net income
$29,019 $21,580
ROE
8.32%
Change in ROE
Score: 0 of 1
11,620
10.28%
1.95%
11.
Last year Ann Arbor Corp had $300,000 of assets, $305,000 of sales, $20,000 of net income, and a debtto-total-assets ratio of 37.5%. The new CFO believes a new computer program will enable it to reduce
costs and thus raise net income to $33,000. Assets, sales, and the debt ratio would not be affected. By
how much would the cost reduction improve the ROE?
5.34%
5.82%
6.59%
8.67%
6.93%
Assets
$300,000
Debt ratio
37.5%
Debt = Assets Debt% =
$112,500
Equity = Assets - Debt =
$187,500
Sales
$305,000
Old net income
$20,000
New net income
$33,000
New ROE = New NI / Equity =
17.600%
Old ROE = Old NI / Equity =
10.667%
Increase in ROE = New ROE - Old
ROE 0 =
6.93%
Score: of 1
12.
Last year Kruse Corp had $355,000 of assets, $403,000 of sales, $28,250 of net income, and a debt-tototal-assets ratio of 39%. The new CFO believes the firm has excessive fixed assets and inventory that
could be sold, enabling it to reduce its total assets to $252,500. Sales, costs, and net income would not be
affected, and the firm would maintain the same debt ratio (but with less total debt). By how much would
the reduction in assets improve the ROE?
5.67%
5.30%
4.40%
4.18%
5.98%
Original New
Assets
$355,000 $252,500
Sales
$403,000 $403,000
Net income
$28,250 $28,250
Debt ratio
39.00%
Debt = Assets debt% =
39.00%
$138,450 $98,475
Equity = Assets - Debt = $216,550 $154,025
ROE = NI / Equity =
13.045% 18.341%
Increase in ROE
5.30%
Score: 0 of 1
13.
Last year Kruse Corp had $275,000 of assets, $403,000 of sales, $28,250 of net income, and a debt-tototal-assets ratio of 39%. The new CFO believes the firm has excessive fixed assets and inventory that
could be sold, enabling it to reduce its total assets to $252,500. Sales, costs, and net income would not be
affected, and the firm would maintain the same debt ratio (but with less total debt). By how much would
the reduction in assets improve the ROE?
1.50%
1.23%
1.85%
1.13%
1.19%
Original New
Assets
$275,000 $252,500
Sales
$403,000 $403,000
Net income
$28,250 $28,250
Debt ratio
39.00%
39.00%
Debt = Assets debt% =
$107,250 $98,475
Equity = Assets - Debt = $167,750 $154,025
ROE = NI / Equity =
16.841% 18.341%
Increase in ROE
1.50%
Score: 0 of 1
14.
Tibbs Inc. had the following data for the year ending 12/31/07: Net income = $300; Net operating profit
after taxes (NOPAT) = $400; Total assets = $2,500; Short-term investments = $200; Stockholders' equity
= $1,800; Total debt = $700; and Total operating capital = $2,300. What was its return on invested capital
(ROIC)?
14.91%
15.70%
16.52%
17.39%
18.26%
NOPAT $400
Total operating capital $2,300
ROIC = NOPAT/ Total operating capital
ROIC = $400/$2,300
ROIC = 17.39%
Score: 1 of 1
15.
Quigley Inc. is considering two financial plans for the coming year. Management expects sales to be
$300,000, operating costs to be $265,000, assets to be $200,000, and its tax rate to be 35%. Under Plan A
it would use 25% debt and 75% common equity. The interest rate on the debt would be 8.8%, but under a
contract with existing bondholders the TIE ratio would have to be maintained at or above 4.5. Under Plan
B, the maximum debt that met the TIE constraint would be employed. Assuming that sales, operating
costs, assets, the interest rate, and the tax rate would all remain constant, by how much would the ROE
change in response to the change in the capital structure?
2.72%
2.59%
2.96%
3.22%
3.14%
Work down the Plan A column, find the Max Debt, then use it to complete Plan B and the ROEs.
Plan A
Plan B
Interest rate
8.80%
8.80%
Tax rate
35%
35%
Assets
$200,000
$200,000
Debt ratio: Plan A given, Plan B
calculated
25%
44.2
Debt
$50,000
$88,384
Equity
$150,000
$111,616
Sales
$300,000
$300,000
Operating costs
265,000
265,000
EBIT
$35,000
$35,000
Interest
4,400
7,778
Taxable income
$30,600
$27,222
Taxes
10,710
9,528
Net income
$19,890
$17,694
ROE = NI / Equity =
13.26%
15.85%
TIE = EBIT/Interest =
7.95
Minimum TIE
4.50
$ of Interest consistent with
$7,778
minimum TIE = EBIT/Min TIE =
Max debt = Interest/interest rate
=
Change in ROE
$88,384
2.59%
Score: 0 of 1
16.
Sam was injured in an accident, and the insurance company has offered him the choice of $49,000 per
year for 15 years, with the first payment being made today, or a lump sum. If a fair return is 7.5%, how
large must the lump sum be to leave him as well off financially as with the annuity?
$437,070.42
$576,560.98
$506,815.70
$427,771.05
$464,968.53
N
15
I/YR 7.5%
PMT $49,000
FV
$0.00
PV
$464,968.53
Score: 1 of 1
17.
Last year Tiemann Technologies reported $10,500 of sales, $6,250 of operating costs other than
depreciation, and $1,300 of depreciation. The company had no amortization charges, it had $5,000 of
bonds that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 35%. This year's data
are expected to remain unchanged except for one item, depreciation, which is expected to increase by
$750. By how much will net after-tax income change as a result of the change in depreciation? The
company uses the same depreciation calculations for tax and stockholder reporting purposes.
-463.13
-487.50
-511.88
-537.47
-564.34
Change in depreciation $750
Tax rate 35%
Reduction in net income -$487.50
We can also get the answer a longer way, which explains things more clearly:
Item Old New Change
Bonds $ 5,000.00 $ 5,000.00 $ 0.00
Interest rate 6.5% 6.5% 0.0%
Tax rate 35% 35% 0%
Sales $10,500.00 $10,500.00 $ 0.00
Operating costs excluding depr'n $ 6,250.00 $ 6,250.00 $ 0.00
Depreciation $ 1,300.00$ 2,050.00$ 750.00
Operating income (EBIT) $ 2,950.00 $ 2,200.00 -$ 750.00
Interest charges $ 325.00$ 325.00$ 0.00
Taxable income $ 2,625.00 $ 1,875.00 -$ 750.00
Taxes $ 918.75$ 656.25 -$ 262.50
Net income $ 1,706.25$ 1,218.75-$ 487.50
Score: 1 of 1
18.
Over the years, Janjigian Corporation's stockholders have provided $15,250 of capital, part when they
purchased new issues of stock and part when they allowed management to retain some of the firm's
earnings. The firm now has 1,000 shares of common stock outstanding, and it sells at a price of $42.00
per share. How much value has Janjigian's management added to stockholder wealth over the years, i.e.,
what is Janjigian's MVA?
$21,788
$22,935
$24,142
$25,413
$26,750
Total book value of equity $15,250
Stock price per share $42.00
Shares outstanding 1,000
Market value of equity 42,000
MVA = 26,750
Score: 1 of 1
19.
Branch Corp.'s total assets at the end of last year were $315,000 and its net income after taxes was
$22,750. What was its return on total assets?
7.22%
7.58%
7.96%
8.36%
8.78%
Total assets $315,000
Net income $22,750
ROA 7.22%
Score: 1 of 1
20.
What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $2,950 at the
end of Year 4 if the interest rate is 5%?
$11,133.74
$8,740.50
$10,405.36
$8,532.40
$12,590.49
Alternative setup:
N
4
0
I/YR 5.0%
$10,405.36
Score: 1 of 1
Back
75.00%
3
4
$3,000
$2,950
PV
2
$2,250 $2,250 $2,250 $2,250
PMT $2,250
FV
1
$2,250 $2,250 $2,250 $5,250
PV
$10,405.36
=