1
Managerial Finance ─ Mock Final Exam Solutions
1.
[4 points] Prepare an amortization schedule for a three-year loan of $57,000. The interest
rate is 8 percent per year, and the loan calls for equal annual payments.
Year
1
2
3
Beginning
Balance
Total
Payment
Interest
Payment
Principal
Payment
Ending
Balance
Principal
Payment
$17,557.91
18,962.54
20,479.55
Ending
Balance
$39,442.09
20,479.55
0
Answer: $57,000 = C{[1 – 1/(1 + .08)3]/.08}, C = $22,117.91
Year
1
2
3
2.
Beginning
Balance
$57,000.00
39,442.09
20,479.55
Total
Payment
$22,117.91
22,117.91
22,117.91
Interest
Payment
$4,560.00
3,155.37
1,638.36
[2 points] Treasury bills are currently paying 4.7 percent and the inflation rate is 1.9 percent.
a. [1 point] What is the approximate real rate of interest?
b. [1 point] What is the exact real rate?
Answer:
a. Approximate r = .047 – .019 = .028, or 2.80%
b. Exact r = [(1 + .047)/(1 + .019)] – 1 = .0275, or 2.75%
3.
[2 points] Vulcan, Inc., has 7 percent coupon bonds on the market that have 13 years left
to maturity. The bonds make annual payments and have a par value of $1,000. If the YTM
on these bonds is 8.4 percent, what is the current bond price?
Answer:
P = $70({1 – [1/(1 + .084)]13}/.084) + $1,000[1/(1 + .084)13] = $891.74
2
4.
[2 points] Sunset Corp. currently has an EPS of $3.85, and the benchmark PE for the
company is 19. Earnings are expected to grow at 6 percent per year.
a. [1 point] What is your estimate of the current stock price?
b. [1 point] What is the target stock price in one year?
Answer:
a. P = 19($3.85) = $73.15
b. EPS1 = $3.85(1 + .06) = $4.08, P1 = 19($4.08) = $77.54
5.
[5 points] H. Cochran, Inc., is considering a new three-year expansion project that requires
an initial fixed asset investment of $2.15 million. The fixed asset will be depreciated
straight-line to zero over its three-year tax life, after which time it will be worthless. The
project is estimated to generate $2.23 million in annual sales, with costs of $1.25 million.
a. [2 points] If the tax rate is 23 percent, what is the OCF for this project?
b. [2 points] Suppose the required return on the project is 14 percent. What is the project’s
NPV?
c. [1 point] Should the firm accept this project? Why?
Answer:
a. OCF = ($2,230,000 – 1,250,000)(1 – .23) + .23($2,150,000/3) = $919,433
b. NPV = –$2,150,000 + $919,433/0.14(1 – 1/1.143) = –$15,414.13
c. No, the NPV is negative.
3
6.
[5 points] Coore Manufacturing has the following two possible projects. The required
return is 12 percent. The projects are mutually exclusive.
Year
Project Y
Project Z
0
–$47,600
–$81,000
1
23,900
34,000
2
18,600
32,800
3
20,700
30,500
4
14,600
27,300
a. [2 points] What is the profitability index for each project?
b. [2 points] What is the NPV for each project?
c. [1 point] Which, if either, of the projects should the company accept? Why?
Answer:
a. PIY = ($23,900/1.12 + $18,600/1.122 + $20,700/1.123 + $14,600/1.124)/$47,600 = 1.264
PIZ = ($34,000/1.12 + $32,800/1.122 + $30,500/1.123 + $27,300/1.124)/$81,000 = 1.180
b. NPVY = –$47,600 + $23,900/1.12 + $18,600/1.122 + $20,700/1.123 + $14,600/1.124 =
$12,579.51
NPVz = –$81,000 + $34,000/1.12 + $32,800/1.122 + $30,500/1.123 + $27,300/1.124 =
$14,564.04
c. Accept Project Z since the NPV is higher. The profitability index cannot be used to rank
mutually exclusive projects.