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.

This
** preview**
has intentionally

**sections.**

*blurred***to view the full version.**

*Sign up*
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