ÇANKAYA UNIVERSITY
MAN 305 BUSINESS FINANCE
MIDTERM EXAM I
19 November 2012
NAME:
SURNAME:
ID:
Question 1 (15 p)
You are in the process of purchasing a new automobile that will cost you $25,000. The dealership is offering you either a
$1,000 rebate (applied toward the purchase price) or 3.9% financing for 60 months (with payments made at the end of the
month). You have been pre-approved for an auto loan through your local credit union at an interest rate of 7.5% for 60
months. Should you take the $2000 rebate and finance through your credit union or forgo the rebate and finance through
the dealership at the lower 3.9% (annual)?
Credit Union:
First we need the monthly interest rate = APR / k = .075 / 12 = .00625 or .625%.
Now:
PV = 24000 (rebate 25,000 - 1,000)
I = .625
FV = 0
N = 60
Compute PMT = $480.91
Dealership:
First we need the monthly interest rate = APR / k = .039 / 12 = .00325 or .325%.
Now:
PV = 25000 (no rebate)
I = .325
FV = 0
N = 60
Compute PMT = $459.29
Since 459.29 < 480.91, go with the dealership and forgo the rebate.
Question 2 (15 p)
Consider the following two projects:
Year 0
Year 1
Year 2
Year 3
Year 4
Discount
Project Cash Flow Cash Flow Cash Flow Cash Flow Cash Flow
Rate
A
-100
40
50
60
N/A
.15
B
-73
30
30
30
30
.10
Which Project would you invest in these two projects, if you consider:
i.
ii.
iii.
iv.
Payback period method
Added value of the project
Profitability ratio
Internal Rate of Return of the projects?
Question 8 (10 p)
You are offered an investment opportunity that costs you $28,000,has an NPV of $2278, lasts for three years and produces
the following cash flows:
Today
-$28,000
1st year
$10,000
2nd year
?
3rd year
$15,000
The present value of the first payment is $9,091. Then what is the amount of the second payment?
NPV = PV benefits - PV of costs
2278 = 10000 / (1.10)1 + X / (1.10)2 + 15000 / (1.10)3 - 28000
30278 = 10000 / (1.10)1 + X / (1.10)2 + 15000 / (1.10)3
30278 = 9091 + X / (1.10)2 + 11270
9917 = X / (1.10)2
X = 11,999.57
Question 4 (15 p)
Tom Carrige is 35 years old. His salary is $50,000 per annum. Assuming the salary to be steady for the following years.
He dreams to be retired at the age of 65 and live in Bodrum for the remaining part of his life time.
a) If the discount rate is 8%, what would be the PV value of the salary payments?
b) If he spends 5% of his salary each year, what will be the amount accumulated at the age of his retirement?
c) He will probably live 20 more years in Bodrum after his retirement, what is the amount of money that he can
spend each month so that he is not out of money?
Question 5 (15 p)
You invest in a six year treasury bond with a par value of $1000 with a coupon rate of 5% and a yield 3%. After two
years, you sell the coupon. The yield is still 3%. What is the rate of return with this bond?
Question 6 (10 p)
Angel Motor Company sells its common bonds for $500. The dividend to be paid is $15. Analysts state that, they expect
a growth rate of 5% each year as a perpetuity for the Angel.
a. What rate of return would you expect for the stock?
b. Angel has earned 15% on equity and paid out 60% as dividend, what would the stock price be ?
Question 7 (2 p each)
Which of the following statements regarding annuities is false?
a) PV of an annuity = C ×
1
1
1 

r  (1  r ) N




b) The difference between an annuity and a perpetuity is that a perpetuity ends after some fixed number of
payments.
c) An annuity is a stream of N equal cash flows paid at regular intervals.
d) Most car loans, mortgages, and some bonds are annuities.
Which of the following statements regarding growing perpetuities is false
a) We assume that r < g for a growing perpetuity.
C
b) PV of a growing perpetuity =
rg
c) To find the value of a growing perpetuity one cash flow at a time would take forever.
d) A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a constant rate forever.
Which of the following statements is false?
a) About 75% of firms surveyed used the NPV rule for making investment decisions.
b) If you are unsure of your cost of capital estimate, it is important to determine how sensitive
your analysis is to errors in this estimate.
c) To decide whether to invest using the NPV rule, we need to know the cost of capital.
d) NPV is positive only for discount rates greater than the internal rate of return.
Which of the following balance sheet equations is incorrect?
a) Assets - Liabilities = Shareholders' Equity
b) Assets = Liabilities + Shareholders' Equity
c) Assets - Current Liabilities = Long Term Liabilities
d) Assets - Current Liabilities = Long Term Liabilities + Shareholders' Equity
Cash is a
a) Long-term asset
b) Current Asset.
c) Current Liability.
d) Long-term liability
Which of the following statements regarding the balance sheet is incorrect?
a) The balance sheet provides a snapshots of the firm's financial position at a given point in time.
b) The balance sheet lists the firm's assets and liabilities.
c) The balance sheet reports stockholders' equity on the right hand side.
d) The balance sheet reports liabilities on the left hand side.
Which of the following is not an operating expense?
a) Interest expense
b) Depreciation and amortization
c) Selling, general and administrative expense
d) Research and development
Which of the following statements is false?
a) The payback investment rule is based on the notion that an opportunity that pays back its
initial investments quickly is a good idea.
b) An IRR will always exist for an investment opportunity.
c) A NPV will always exist for an investment opportunity.
d) In general, there can be as many IRRs as the number of times the project's cash flows change
sign over time.
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.
Which of the following statements is false?
a) The payback rule is useful in cases where the cost of making an incorrect decision might not
be large enough to justify the time required for calculating the NPV.
b) The payback rule is reliable because it considers the time value of money and depends on the
cost of capital
c) For most investment opportunities expenses occur initially and cash is received late
d) Fifty percent of firms surveyed reported using the payback rule for making decisions