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Quiz #2

Quiz #2 - Finance 351 Financial Management Fall 2011...

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1 Finance 351: Financial Management Fall 2011 Instructor: Shuming Liu QUIZ 2 QUIZ PAPER A 1 A 6 B 11 C 16 B 2 D 7 C 12 C 17 D 3 C 8 A 13 B 18 C 4 D 9 D 14 C 19 B 5 A 10 C 15 A 20 C QUIZ PAPER B 1 B 6 A 11 B 16 C 2 C 7 D 12 D 17 C 3 A 8 C 13 C 18 B 4 D 9 D 14 B 19 C 5 C 10 A 15 C 20 A See the next few pages for detailed answers.

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2 QUIZ 2 Quiz Paper A 1, Quiz Paper B 6 The NPV break-even level of sales will be _____ the accounting break-even level. A) higher than B) lower than C) equal to D) either higher or lower than Answer: A Quiz Paper A 2, Quiz Paper B 7 A firm had after-tax income last year of \$1.5 million. Its depreciation expenses were \$0.8 million, its total cash flow was \$1.5 million, and the cash flow from investments (disinvestment) was 0, what happened to working capital during the year? A) Working capital did not change. B) Working capital decreased by \$0.8 million. C) Working capital decreased by \$1.5 million. D) Working capital increased by \$0.8 million. Answer: D Cash flow = net income + depreciation – increase in NWC 1.5 = 1.5 + 0.8 – Δ NWC Δ NWC = \$0.8 million Therefore, working capital increased by \$0.8 million. Quiz Paper A 3, Quiz Paper B 8 Calculate the NPV break-even level of sales for a project requiring an investment of \$3,000,000 today and providing as cash flows: .15 × sales less – \$250,000 every year from year 1. Assume the project will generate these cash flows for 10 years and that the discount rate is 10%. A) \$ 3,254,890 B) \$ 3,504,890 C) \$ 4,921,575 D) \$19,686,667 Answer: C NPV = PV (10-year cash flows) – Investment = 0 Therefore: PV (10-year cash flows) = Investment = 3,000,000 Cash flows each year from year 1 to 10 is computed as follows: I = 10, N = 10, FV = 0, PV = (-)3,000,000 Î PMT = 488,236.18 Cash flows every year = 488,236.18 = (.15 sales - 250,000) So sales = 4,921,575 every year Quiz Paper A 4, Quiz Paper B 9 Given the following information, calculate the depreciation tax shield Revenue 2,000 -Cash Expenses 800 -Depreciation 300 =Profit before tax 900