Table 2A-1
Taxable Income
Up to $50,000
$50,001 - $75,000
$75,001 - $100,000
$100,001 - $335,000
$335,001 - $10,000,000
$10,000,001 – $15,000,000
$15,000,001 - $18,333,333
Over $18,333,333
Marginal Tax Rate
15%
25%
34%
39%
34%
35%
38%
35%
Tax Calculation
$0 + (15% x Amount over $0)
$7,500 + (25% x Amount over $50,000)
$13,750 + (34% x Amount over $75,000)
$22,250 + (39% x Amount over $100,000)
$113,900 + ( 34% x Amount over $335,000)
$3,400,000 + (35% x Amount over $10,000,000)
$5,150,000 + (38% x Amount over $15,000,000)
35% x Taxable Income
Formulas:
(2.2)
Holding period return (%)
Ending Price Beginning Price Distributi ons
100%
Beginning Price
(3.1)
(3.2)
(3.3)
Current ratio
Quick ratio
Average Collection Period
Current Assets Current Liabilitie s
Current Assets Inventorie s Current Liabilitie s
(3.3a)
(3.4)
(3.4a)
Accounts Receivable Turnover
Inventory Turnover
Inventory Period
(3.5)
Fixed Asset Turnover
(3.6)
Total Asset Turnover
(3.7)
Debt ratio
(3.8)
Debt-to-Equity
(3.8a)
Equity Multiplier
(3.9)
Times Interest Earned Ratio
(3.10)
Fixed Charge Coverage Ratio
(3.11)
Gross Profit Margin
(3.12)
(3.13)
Net Profit Margin
Return on Investment (Assets)
(3.14)
Return on Equity
(3.15)
Price-to-Earnings Ratio
(3.16)
Market-to-Book Ratio
(3.17)
Payout Ratio
(3.18)
Dividend Yield
(4.4)
Cash Flow from Assets
Cash Flow from Assets
Operating Cash Flow
Capital Spending
Cash Flow to Creditors
Cash Flow to Shareholders
Total Financing Needed
Total Financing Needed
Accounts Receivable
Annual Credit Sales/365
Annual Credit Sales Accounts Receivable
Cost of Goods Sold Inventory
Inventory
Costs of Goods Sold/365
Total Sales Net Fixed Assets
Total Sales Total Assets
Total Debt Total Assets
Total Debt Total Equity
Total Assets Total Equity
Interest
(4.5)
(4.6)
Increase in Retained Earnings
Additional Financing Needed
Additional Financing Needed
Earnings before Interest and Taxes (EBIT)
Interest Charges
EBIT Lease payments
Lease payments Preferred dividends before tax Before tax sinking fund
Sales - Cost of Goods Sold
Sales
Earnings after taxes Sales
Earnings after taxes
Total Assets
Earnings after taxes
Stockholde rs' equity
Market price per share
Current Earnings per share
Market price per share
Book value per share
Dividend per share
Earnings per share
Expected dividend per share
Stock price
CFFA = Cash Flow to Creditors + Cash Flow to Stockholders
CFFA = Operating Cash Flow – NWC – Capital Spending
OCF = EBIT + Depreciation - Taxes
Capital Spending = Net Fixed Assets + Depreciation
CFTC = Interest paid – Net new borrowing
CFTS = Dividends paid – Net new equity sold
TFN = Forecasted Asset Increase - Forecasted Current Liability Increase
A
CL *
TFN
S
S
S
S
Inc in R/E = Forecasted Earnings after taxes - Dividends
AFN = Total Financing Needed – Increase in Retained Earnings
A
CL *
AFN
S
S
EAT D
S
S
(5.1)
=
(5.10)
(5.13)
× ×
(5.9)
=
,
= (1 + )
(5.12)
=
,
1
=
(1 + )
(5.15)
(5.16)
=
,
=
,
1
(5.20)
=
,
=
(5.23)
1
×
= 1+
(6.4)
=
(6.8)
=
)
1
(1 + )
× (1 + )
,
(5.22)
=
(5.27)
+
(1 +
)
=
+1
(6.5)
=
(6.12)
=
(7.7)
=
1
×
(1 +
=
(7.10)
=
× (1 + )
(7.12)
=
(7.13)
=
+
(8.1)
=
(8.2)
=
(8.3)
=
(8.4)
=
(8.8)
=
(8.14)
=
+
(8.17)
=
+
(8.9)
=
(8.10)
=
(8.15)
=
+
+
=(
(10.2)
=
(11.2)
)(1
+
)+
=
(10.6)
(1 + )
(1 +
)
=
(10.11)
=
=
(1 +
1 + (1
(1 + )
=
=
=
(11.3)
=
(11.4)
(11.6)
,
,
+
(9.2)
(9.4)
(10.8)
+2
+
)
(7.9)
=
(
)+
1+
)
)( / )
(11.7)
=
1
1
(1 + )
×
,
+1
(8.7)
(1 + )
= 1+
=
×
(7.2)
×
=
(5.19)
1
(1 +
=
,
1
1
(1 + )
(5.28)
(1 + )
(1 + )
, =
(5.17)
1
(1 + )
1
(5.18)
(1 + )
×
× (1 + )
× [1 + (1
)( / )]
× (1 + )
Table 9A-1: Depreciation rates for MACRS property other than real estate
Table V: Normal Distribution (Area of the Normal Distribution That Is to the Right of +z or the Left of –z Standard Deviations from
the Mean)
Finance 3110
Midterm Examination III
April 26, 2022
Name
You have the regular exam period (75 minutes) in which to complete this test. Additional time will not be provided. Cheating will not be tolerated.
You are responsible for additional information provided during the test by the instructor (written on the board or spoken aloud to the class).
Provide all answers in the spaces provided. While you may use the backs of sheets as workspace, only the work and explanations in the spaces
provided will be graded. In numerical problems, provide COMPLETE information and show the formula(s) that you are using. Be certain to answer
any and all questions that are asked. Incorrect answers without any supporting work shown will not receive any partial credit. Point values for each
question are provided in parentheses. Please be clean and neat. Cell phones and smartwatches should be turned off and stored in a backpack or
somewhere not on your person. Graphing calculators are not permitted.
Part I: Multiple-Choice: Select the best answer from the choices provided. If NONE of the provided answers are correct, please enter X as your
answer. (4 points each)
Use the following blanks to record your answers for the multiple-choice questions. The answers written here will be considered your final
answers. Answers circled at the problem that disagree with the answers written in the blanks will be disregarded.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
1.
A firm’s leveraged beta will always be _____________ its unleveraged beta.
A. less than
B. greater than
C. the same as
D. greater than or equal to
E. none of the other answers
2.
You are considering the following two mutually exclusive projects. The crossover point is _____ percent and Project _____ should be accepted
at a discount rate of 13%.
Year
Project A CF
Project B CF
0
($69,000)
($62,000)
1
$20,000
$29,000
2
$33,000
$24,000
3
$38,000
$27,000
A. 11.88%; A
B. 11.88%; B
C. 13.05%; A
D. 13.05%; B
E. None of the other answers are correct
3.
The net working capital invested in a project is generally:
A. a sunk cost.
B. an opportunity cost.
C. recovered in the first year of the project.
D. recovered at the end of the project.
E. depreciated to a zero balance over the life of the project.
4.
Which one of the following statements is correct? Assume cash flows are conventional.
A. If the IRR exceeds the required return, the profitability index will be less than 1.0.
B. The profitability index will be greater than 1.0 when the net present value is negative.
C. When the internal rate of return is greater than the required return, the net present value is positive.
D. Projects with conventional cash flows have multiple internal rates of return.
E. If two projects are mutually exclusive, you should select the project with the shortest payback period.
5.
Connect Technology will spend $480,000 on a piece of equipment that will manufacture fine wire for the electronics industries. The shipping
and installation charges will be $60,000 and net working capital will increase $30,000. The equipment will replace an existing machine that has
a salvage value of $68,000 and a book value of $52,000. If Connect’s marginal tax rate is 35%, what is the net investment?
A. $501,600
B. $503,600
C. $507,600
D. $509,600
E. $511,600
6.
A project requires an initial investment of $200,000. At the firm’s cost of capital of 10%, the project’s profitability index is 1.15. Determine the
net present value of the project.
A. ($30,000)
B. $30,000
C. $230,000
D. $430,000
E. Cannot be determined
7.
To completely eliminate all risk (i.e., a portfolio standard deviation of zero) in a two-asset portfolio, the correlation coefficient between the
securities must be ____.
A. equal to -1.0
B. less than +1.0
C. equal to 0.0
D. less than 0.0
E. the reciprocal of the sum of the standard deviations
8.
A project has the following cash flows.
A.
B.
C.
D.
E.
F.
9.
Year
0
1
Cash Flow
($14,000)
$2,100
What is the payback period?
3.0 years
3.1 years
3.3 years
3.4 years
3.5 years
2
$5,200
3
$6,000
4
$7,000
Raider Productions has to decide whether to build its new warehouse in Oakland or Las Vegas. This decision falls into the class of:
A. independent projects
B. mutually exclusive projects
C. contingent projects
D. marginal projects
E. replacement projects
10. A term meaning that the firm has limited funds and must choose only those projects that will be profitable is:
A. capital refunding
B. capital debt
C. capital rationing
D. capital choice
E. capital inversion
11. Haagen-Daaz.is considering the purchase of a new conveyor system to replace an older less automated system. The old system, which was 10
years old, was being depreciated on a straight-line basis over its 20-year life at $15,000 per year. The new system will be depreciated as a 7year asset for MACRS purposes. The more efficient machine, which costs $520,000 installed, will reduce operating costs by $80,000 per year.
Compute the net cash flows in year 3 for the new system. Assume a 25% tax rate.
A. $78,987
B. $71,424
C. $84,175
D. $78,760
E. $80,895
12. The net present value:
A. is equal to the initial investment when the internal rate of return is equal to the required return.
B. decreases as the required rate of return increases.
C. method of analysis cannot be applied to mutually exclusive projects.
D. is proportionately related to the discount rate.
E. has greater limitations than the payback period measure.
13. The stock of Boeing, Inc. has a beta of 1.47. The market risk premium is 6.2%, the risk-free rate is 3.2%, and the expected rate of inflation is
2.2%. What is the required return for this stock?
A. 0.1231
B. 0.1028
C. 0.1192
D. 0.1183
E. 0.1216
14. The discount rate used in calculating the certainty equivalent net present value is the
A. risk-adjusted discount rate
B. cost of capital
C. risk-free rate
D. cost of equity capital
E. market return
15. The ____ is an absolute measure of risk, and the ____ is a relative measure of risk.
A. systematic risk, unsystematic risk
B. correlation, covariance
C. security market line, characteristic line
D. coefficient of variation, beta
E. standard deviation, coefficient of variation
16. Given the following information on securities, Coca-Cola and Yum Brands, calculate the expected return and standard deviation of returns on a
portfolio consisting of 50% invested in Coca-Cola and 50% invested in Yum Brands.
Coca-Cola
Yum Brands
Expected Return
0.12
0.15
Standard Deviation of Returns
0.1
0.2
Correlation coefficient of returns
-0.5
A. 13.50%; 8.66%
B. 14.25%; 13.92%
C. 14.10%; 12.77%
D. 13.80%; 10.58%
E. 13.20%; 7.21%
Bonus Question: (DO NOT WORK ON UNTIL EVERYTHING ELSE IS COMPLETE)
In each of the following set of equations, each symbol represents an integer. Provide all correct solutions to the final equation. Incomplete solution
sets will not receive credit. (4 points but no partial credit)
+
x
+
x
+
+
x
= 12
=8
=9
=?
Part II. Problems: Solve each of the following problems. Provide all answers in the spaces provided. While you may use the backs of sheets as
workspace, only the work and explanations in the spaces provided will be graded. In numerical problems, provide COMPLETE information and show
the formula(s) that you are using. Be certain to answer any and all questions that are asked. Incorrect answers without any supporting work shown
will not receive any partial credit. Monetary amounts should be rounded to the nearest pennies while returns should be rounded to the nearest
hundredth of a percent. Point values for each question are provided in parentheses.
1.
Currently, you own a portfolio comprised of the following three securities. How much of the riskiest security should you sell and replace with
risk-free securities if you want your portfolio beta to equal 0.97 of the market beta? (8)
Stock
Alcoa
Biogen
Cisco
Value
$18,000
$12,000
$20,000
Beta
1.05
1.25
0.85
2.
Proctor and Gamble is considering buying an additional piece of equipment that sells for $60,000 including the cost of installation. The firm
will also need $4,000 in additional net working capital at the start of the project. The new machine will be depreciated as a 3year MACRS
asset. Annual revenues are expected to increase by $32,000 during the 3-year life of the new machine while the operating expenses will
increase by $10,000. At the end of the project, the new machine can be sold for $6,000. If the company’s tax rate is 40% and its discount rate
is 12%, should Proctor and Gamble buy and install the new machine? Explain using at least two decision criteria as evidence to support your
recommendation. (20)
0
Revenues
Op. Exp.
Depreciation
Taxable Inc.
Taxes
Net Income
Depreciation
NWC
Cap. Spend.
Net CF
1
2
3
3.
The Company Store, purveyors of luxurious towels, is considering two pieces of weaving equipment to replace an older piece that can’t keep
up anymore. The projected cash flows for the two potential machines are as follows:
Cash Flow at the end of the relevant period, CFt
0
1
2
3
4
5
CottonMaster
($42,000)
$14,000
$13,000
$11,500
$9,000
$8,000
Bamboo-zler
($30,000)
$8,500
$10,000
$11,000
$10,500
Which of these two should The Company Store choose if its required return is 7.00%? Explain why using your numerical results as supporting
evidence. Selecting a project without backing up your recommendations with tools learned in this class will earn no credit. (8)
MC
P1
P2
P3
Bonus
TOTAL
(5.1)
=
(5.10)
(5.13)
× ×
(5.9)
=
,
= (1 + )
(5.12)
=
,
1
=
(1 + )
(5.15)
(5.16)
=
,
=
,
1
(5.20)
=
,
=
(5.23)
1
×
= 1+
(6.4)
=
(6.8)
=
)
1
(1 + )
× (1 + )
,
(5.22)
=
(5.27)
+
(1 +
)
=
+1
(6.5)
=
(6.12)
=
(7.7)
=
1
×
(1 +
=
(7.10)
=
× (1 + )
(7.12)
=
(7.13)
=
+
(8.1)
=
(8.2)
=
(8.3)
=
(8.4)
=
(8.8)
=
(8.14)
=
+
(8.17)
=
+
(8.9)
=
(8.10)
=
(8.15)
=
+
+
=(
(10.2)
=
(11.2)
)(1
+
)+
=
(10.6)
(1 + )
(1 +
)
=
(10.11)
=
=
(1 +
1 + (1
(1 + )
=
=
=
(11.3)
=
(11.4)
(11.6)
,
,
+
(9.2)
(9.4)
(10.8)
+2
+
)
(7.9)
=
(
)+
1+
)
)( / )
(11.7)
=
1
1
(1 + )
×
,
+1
(8.7)
(1 + )
= 1+
=
×
(7.2)
×
=
(5.19)
1
(1 +
=
,
1
1
(1 + )
(5.28)
(1 + )
(1 + )
, =
(5.17)
1
(1 + )
1
(5.18)
(1 + )
×
× (1 + )
× [1 + (1
)( / )]
× (1 + )
Table 9A-1: Depreciation rates for MACRS property other than real estate
Table V: Normal Distribution (Area of the Normal Distribution That Is to the Right of +z or the Left of –z Standard Deviations from
the Mean)