Sample Problems for Midterm #1
BUAD 306, Spring 2008
Introduction
I
strongly
recommend that your review for the first midterm include doing these
problems.
They resemble midterm questions, and many of them have been taken from
my past exams.
The questions are not in any particular order.
The questions on this review sheet are representative of the questions asked on exams.
The question distribution is
not
representative of the question distribution for an exam.
I
have not repeated some of the problems I solved in class and some of the homework
problems; that does not mean those problems are not useful.
Unless otherwise started, assume that any given interest rates are APRs, compounded as
often as you make or receive payments.
So, you may only need to “match payment and
compounding” if I mention the compounding period.
Questions
1.
Savitevic Limo Co. had sales of $700,000, while costs of good sold,
administrative expenses, and depreciation expenses were $400,000, $140,000, and
$100,000, respectively.
The company also had a debt interest payment of
$40,000.
If Savitevic Limo Co. began the period with no current assets, is it
possible for them to pay a dividend of $50,000 to shareholders?
If it is possible,
what is the required change in the company’s level of debt?
2.
At the end of 2001, Serena’s Tennis Shop showed $3.1 million in long term debt,
while at the end of 2002, it showed $3.6 million in long term debt.
If the 2002
income statement showed an interest expense of $400,000, what was the total
cash flow to creditors during 2002?
3.
A company makes a capital acquisition that costs $1 million dollars, and the
company’s tax rate is 35%, which is paid at the end of the year.
The relevant
discount rate is 6%.
The company can take depreciation charges of $500,000
both this year and next, or it can take a depreciation charge of $300,000 this year
and $700,000 next year.
Which would the company prefer to do?
How much
does the company save by using the better option?
Assume the corporation’s net
income is high enough that it always pays taxes.
4.
There is a 10-year (10 annual payments) annuity due with the first payment
occurring four years from now.
If the current value is $50,000 and the discount