Finance for AEO Exam
07 July 2009
Your Name:
_____________________________________________________
Student Number: _____________________________________________________
Signature:
_____________________________________________________
This is a closed-book exam. You are allowed to use a calculator and a dictionary. You
have 2 hours for the exam. There are 35 multiple choice questions in total, equally
weighted. There is no penalty for the wrong choice but you may circle only one
choice for each question that you think is the best.
Be kindly reminded that you should rely on your own effort; no conversation is
allowed during the exam. Please sign before you start.
When you finish, this frontpage must be removed from the questions and handed in
together with your answer page.
Good Luck!
2
Q1
Q2
Q3
Q4
3
Q5
Q6
Q7
4
Q8
Q9
Q10
5
Q11
Q12
6
Q13
Q14
Q15
Q16
7
Q17
8
Q18
Q19
The quick ratio of a firm is 0.7. Inventory of this firm is 15 and current liabilities are
30. What is the current ratio for this firm?
A.
B.
C.
D.
smaller than 0.25
between 0.25 and 0.75
between 0.75 and 1.5
none of above
Answer C. Quick ratio = (cash + debtors) / current liabilities
Current ratio = current assets / current liabilities =
(cash + debtors + inventory) / current liabilities = quick ratio +
inventory/current liabilities = 0,7 + 15/30 = 1.2
Q20
9
Q21
Q22
Q23
10
Q24
Q25
You are considering purchasing a new home. You will need to borrow $250,000 to
purchase the home. A mortgage company offers you a 15 year fixed rate mortgage
(180 months) at 9% APR (0.75% month). If you borrow the money from this
mortgage company, your monthly mortgage payment will be closest to:
A) $2,585
B) $660
C) $2,535
D) $1,390
Answer: C
Explanation: Use the formula for a constant annuity, where: PV = 250000, I = 0.75,
N = 180 and FV = 0. Compute PMT = $2535.67
Q26
Your firm needs to invest in a new delivery truck. The life expectancy of the delivery
truck is five years. You can purchase a new delivery truck for an upfront cost of
$200,000, or you can lease a truck from the manufacturer for five years for a monthly
lease payment of $4000 (paid at the end of each month). Your firm can borrow at 6%
APR with quarterly compounding.
The present value of the lease payments for the delivery truck is closest to:
A) $206,900
B) $207,050
C) $207,680
D) $198,420
Answer: B
Explanation: First we need to calculate the monthly discount rate for the lease
arrangement.
EAR = (1 + APR / k)^k - 1 = (1 + .06 / 4)^4 - 1 = .06136 or 6 .14%
Monthly rate = (1 + EAR)^(1/12) - 1= (1.06136)^(1/12) - 1 = .004975 = 0.4975%
Now we can apply the formula for the PV of a constant annuity to calculate the PV of
the lease or by calculator:
I = .4975
N = 60 (5 years × 12 months/yr)
FV = 0
PMT = $4000 (lease payment)
Compute PV = 207,051.61
11
Q27
Which of the following statements is false?
A) The IRR investment rule states you should turn down any investment opportunity
where the IRR is less than the opportunity cost of capital.
B) The IRR investment rule states that you should take any investment opportunity
where the IRR exceeds the opportunity cost of capital.
C) Since the IRR rule is based upon the rate at which the NPV equals zero, like the
NPV decision rule, the IRR decision rule will always identify the correct investment
decisions.
D) There are situations in which multiple IRRs exist.
Answer: C
Q28
Epiphany Industries is considering a new capital budgeting project that will last for
three years. Epiphany plans on using a cost of capital of 12% to evaluate this project.
Based on extensive research, it has prepared the following incremental cash flows for
this project:
Year
Sales (Revenues)
- Cost of Goods Sold (50% of Sales)
- Depreciation
= EBIT
- Taxes (35%)
= unlevered net income
+ Depreciation
+ changes to working capital
- capital expenditures
0
1
100,000
50,000
30,000
20,000
7000
13,000
30,000
-5,000
2
100,000
50,000
30,000
20,000
7000
13,000
30,000
-5,000
3 100,000 50,000 30,000 20,000 7000 13,000 30,000 10,000 -90,000
What is the NPV of the Epiphany's project?
A) 14870
B) -8448
C) 11946
D) 77937
12
Answer: C
Year
Sales (Revenues)
- Cost of Goods Sold (50% of Sales)
- Depreciation
= EBIT
- Taxes (35%)
= unlevered net income
+ Depreciation
+ changes to working capital
- capital expenditures
= Free Cash Flow
0
-90,000
-90,000
PV of FCF (FCF/(1 + I)n)
discount rate
NPV =
-90,000
0.12
11,946
1
100,000
50,000
30,000
20,000
7000
13,000
30,000
-5,000
2
100,000
50,000
30,000
20,000
7000
13,000
30,000
-5,000
3 100,000 50,000 30,000 20,000 7000 13,000 30,000 10,000 38,000
38,000
53,000 33,929
30,293
37,724 Q29
Q30
The put price is closest to :
A) $2.5
B) $1.5
C) $3.
D) $0.9
Answer : D
13
14
Q31
Suppose the option described below has only 1 share as the underlying.
Q32
Q33
Q34
15
Q35
16