Practise Questions for the Exam (A Mock Exam)
1) Your newborn daughter has received a total of £2,500 in cash from various friends and
relatives. If you deposit this money for her in an investment that returns an average return of
12% a year, what is the Future Value of her investment on her 21st birthday, to the nearest
pound?
a) £204,247
b) £32,104
c) £180,121
d) £24,116
e) £27,010
2) Utopia Enterprises is considering investing in a project that is expected to produce £15,000 in
cash flows each year for five years. If Freedom Enterprises' cost of capital is 12%, what is the
maximum the firm should be willing to invest in this project? Assume the first cash flow will
occur one year after the investment is made, and round your answer to the nearest pound.
a)
b)
c)
d)
e)
£54,072
£60,560
£45,560
£61,671
none of the above
3) Assume the prevailing interest rate is 12% per annum. A 4-year lease agreement requires you
to pay $1,000 up front, followed by payments of $800, $600, and $500 at the end of each of
the following three years, respectively. What would the payment on a 4-year lease with a
constant annual payment (the rental equivalent) have to offer for you to be indifferent
between the two lease options? Assume that the first payment on the constant annual
payment lease will be made at the end of the first year, and round your answer to the nearest
dollar.
a) $725
b) $228
c) $1,061
d) $839
e) none of the above
4) A firm is considering the purchase of one of two machines to replace an existing one. Machine
A will cost GBP £18,000 and has a four-year life. Annual net cash flows are expected to be GBP
£7,200, beginning one year after the machine is purchased. Machine B will cost GBP £26,000
and has a six-year life. Annual net cash flows are expected to be GBP £7,500, beginning one
year after the machine is purchased. Assume the firm's cost of capital is a constant 15%
forever, and there is no value to flexibility as these machines will continue to be manufactured.
Which of the following statements is incorrect?
a) The NPV of Machine A is greater than the NPV of Machine B
b) Machine B has a lower equivalent annual cash flow (or equivalent rental value) than
Machine A
c) Machine B has an equivalent annual cash flow (or equivalent rental value) greater than GBP
£700
d) Machine A has an equivalent annual cash flow (or equivalent rental value) greater than GBP
£700
e) Machine B has an equivalent annual cash flow (or equivalent rental value) that is less than
GBP £2000 per year higher than Machine A (to the nearest pound).
5) A firm is projected to have a cash flow of £5,100 next year, after which the cash flow is
expected to remain constant forever. What is the terminal value of this cash flow at the end of
this year if the cost of capital is 10%? Round your answer to the nearest pound.
a) £46,364
b) £4,636
c) £5,100
d) £51,000
e) none of the above
6) An investor is considering a short-term investment in a resort property on a Caribbean island.
If the weather is reasonably stable over the next year, the value of the investment is expected
to be $1.2 million; however, if this proves to be a heavy hurricane year, the value is expected
to be $0.5 million. According to the experts, there is a 40% chance that this will be a year of
many hurricanes. If the appropriate expected rate of return is 15%, what is the maximum
amount the investor should invest?
a) $739,000
b) $678,000
c) $800,000
d) $1,043,479
e) None of the above
7) Using the same information as in the previous equations, if the actual cost of the investment is
$750,000, what is the Internal Rate of Return (IRR) of the investment to the nearest percent?
a) 10%
b) 15%
c) 23%
d) 31%
e) None of the above
8) A firm with a P/E ratio of 25 wants to take over a firm that is half its size (in market
capitalization) that has a P/E ratio of 40. What would be the P/E ratio of the merged firm?
a) 27.3
b) 30.0
c) 32.5
d) 31.4
e) 28.6
9) A good manager should set the hurdle rate for a project
a)
b)
c)
d)
e)
Equal to the project's IRR.
Equal to the project's cost of capital.
Equal to project’s best case return.
As high as possible.
As low as possible.
10) A firm has a project cash flow of £1,000 today. This cash flow is expected to grow at a rate of
30% for the next five years and then taper off to a growth rate of 5% indefinitely. What is the
terminal value of this project at the end of the fifth year if the cost of capital is 10%? Round
your answer to the nearest pound.
a) £74,259
b) £38,986
c) £70,000
d) £77,972
e) none of the above
11) Kensington Toys’ free cash flow during the coming year is expected to be GBP £50,000. It is
then expected to grow at a rate of 10% for the following five years before tapering off to a
constant growth rate of 6% forever. If the firm's cost of capital is 15%, what should its fair
market value be? Round your answer to the nearest pound.
a)
b)
c)
d)
e)
£500,000
£627,954
£644,130
£740,749
None of the above
The following information is provided for the Delta Corporation (amounts are in millions):
Sales
Depreciation expense
Interest expense
Net income
Accounts receivable
Inventory
Accounts payable
Gross plant, property, and Equipment
Current
2010
£13.6
£0.4
£0.7
£1.6
£0.6
£2.7
£0.4
£8.5
2011
£15.0
£0.5
£0.8
£1.8
£0.7
£3.0
£0.4
£10.0
Projections
2012
£16.5
£0.6
£0.9
£2.0
£0.7
£3.3
£0.5
£11.8
2013
£18.1
£0.6
£0.9
£2.2
£0.8
£3.2
£0.5
£12.0
Assume corporate taxes are 20% , deferred taxes and any other non-cash asset accounts are
negligible.
12) Refer to the table above. What is the Net Operating Working Capital of Delta in 2012?
a) £0.2 million
b) £4.0 million
c) £1.5 million
d) £3.3 million
e) £3.5 million
13) Refer to the table above. What is the unlevered free cash flow in 2012?
a) £1.50 million
b) £3.12 million
c) £1.72 million
d) £0.12 million
e) £1.32 million
14) Refer to the table above. Cash flows are expected to grow indefinitely at 6% after 2013. The
firm's cost of capital is 10%. What is the terminal value of the firm at the end of 2013? Round
your answer to the nearest hundred thousand pounds.
a) £37.1 million
b) £88.0 million
c) £35.0 million
d) £87.5 million
e) £92.8 million
The income statements for Infonext Corporation for 2012 and 2013 are provided below:
Income Statement
for the years ending
December 31,
Sales
less Cost of goods sold
Gross profit
less Other operating expenses
Selling costs
Depreciation
Other expenses
Total other operating expenses
Earnings before interest and taxes
less Interest expense
Earnings before taxes
less Taxes (@ 40%)
Net income
(amounts in thousands)
2013
2012
£22,000
£20,000
14,170
13,000
£ 7,830
£ 7,000
1,200
800
700
£ 2,700
£ 5,130
1,200
£ 3,930
1,572
£ 2,358
1,000
600
500
£ 2,100
£ 4,900
1,000
£ 3,900
1,560
£ 2,340
Additional information from the balance sheets is as follows:
Gross plant, property, and equipment
less accumulated depreciation
Net plant, property, and equipment
£17,300
10,600
£ 6,700
£16,200
9,800
£ 6,400
15) Refer to the information above. Assume sales will grow at the same rate as they did last year.
Further assume all costs grow at the same rate as sales except depreciation which is expected
to increase to £850 and interest expense to £1,370. Also assume the tax rate will remain a flat
40% in 2014. Gross plant, property, and equipment is expected to increase by 6.8% and will be
the only capital expenditure. Infonext's additional investment in net working capital is
expected to be 2% of the change in sales. What is Infotext’s unlevered free cash flow expected
to be in 2014 to the nearest thousand?
a) £2,067
b) £5,021
c) £3,033
d) £2,183
e) £3,077
16) Using the same information above for Infotext. Further assume the cost of capital is 14%, and
Infonext's 2014 cash flows are expected to remain at that level forever. Calculate Infonext's
terminal value at the end of 2014. Round your answer to the nearest thousand pounds.
a) £15,000
b) £35,400
c) £21,667
d) £15,593
e) £21,979
17) To determine the appropriate cost of capital to use when calculating the value of a firm, you
should discount the project cash flows
a) at the equity premium.
b) at the weighted average cost of capital of the firm.
c) at the firm's cost of debt.
d) at the firm's cost of equity.
The balance sheet and income statement for Isnet Corporation are as follows:
Balance Sheet
as of December 31, 2007
ASSETS
Cash and marketable securities$100,000
Accounts receivable
700,000
Inventory
950,000
Total current assets
$1,750,000
Net plant, property, and
equipment
Total assets
$2,500,000
$4,250,000
LIABILITIES AND EQUITY
Accounts payable
$ 200,000
Taxes payable
85,000
Short-term borrowings
400,000
Total current liabilities
$ 685,000
Long-term debt
Total liabilities
Common stock at par
Additional paid-in capital
Retained earnings
TOTAL LIABILITIES
AND EQUITY
$ 1,300,000
$ 1,985,000
$ 800,000
$ 950,000
$ 515,000
$ 4,250,000
Income Statement
for the year ending December 31, 2007
Sales
Cost of goods sold
Gross profit
Selling, general, and administrative expenses
Operating profit
Interest expense
Earnings before tax
Taxes
Net income
$6,500,000
3,800,000
$2,700,000
1,200,000
$1,500,000
800,000
$ 700,000
280,000
$ 420,000
Isnet's stock was selling for $10 a share at the end of 2007,and there were 1 million shares
outstanding. Isnet paid dividends of $0.10 a share in 2007
18) Refer to the information above. Calculate Isnet's Current Ratio for 2007.
a) 0.39
b) 0.52
c) 2.55
d) 2.31
e) 2.00
19) Refer to the information above. Calculate Isnet's gross margin, based on the information
provided.
a) 0.57
b) 0.23
c) 0.42
d) 0.06
e) 0.28
20) The Sinbad Corporation's 2007 annual report contained the following information:
Accounts receivable
Inventory
Accounts payable
2011
£30,000
£50,000
£10,000
2010
£35,000
£40,000
£15,000
What net effect did these accounts have on the firm's 2011 free cash flow?
a)
b)
c)
d)
e)
increased cash flow by £10,000
decreased cash flow by £10,000
increased cash flow by £20,000
decreased cash flow by £20,000
none of the above
Answers
Question
1
2
3
4
5
6
7
8
9
10
Answer
E
A
D
C
D
C
C
E
B
D
Question
11
12
13
14
15
16
17
18
19
20
Answer
C
E
E
B
C
C
B
C
C
B