# practice questions and solutions

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Published on 14 May 2011
School
Ryerson University
Department
Finance
Course
FIN 401
Professor
Miscellaneous Problems (stuff about Ethics, and stuff that just doesn’t seem to fit
anywhere else…)
Multiple Choice
1. Douglas Corp. has issued a perpetual bond. The annual coupon rate is 6.2% based on a
nominal par value of the bond of \$1000. The bond is currently selling for 91% of par
value. What is the annual rate of return on the bond?
a).08578
b) .09314
c).05722
d) .06813
e)None of the above
2. Fill in the blank. In order to perform ______________ we change one of the inputs
while keeping the others constant.
a)Sensitivity analysis
b) Simulation analysis
c)Scenario analysis
d) None of the above
3. Fill in the blank. A firm has to make a decision between two projects. It cannot
choose both, even if they are both positive NPV projects, because the firm does not have
enough money to fund both. This is an example of _________.
a)Break-even Analysis
b) Monte Carlo Simulation
c)Managerial Options
d) Capital Rationing
4. Stern Stewart Corp. has \$100 million in assets, a WACC of 12.5%, and cash flows this
year of \$15 million. What is Stern Stewart’s EVA?
a)\$1,875,000
b) \$2,500,000
c)-\$2,500,000
d) \$15,000,000
e)None of the above
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Use the following information to answer the next TWO questions. Oyvey Inc. has
expected before-tax operating cash flows of \$72,000 each year for the next ten years from
a planned project. The Corporate Tax rate is 20% but it has a special deal with the
government so that it pays tax for the first four years, but then does not pay tax for the
rest of the life of the project. The appropriate discount rate is 20%.
5. What is the Present Value as of now of the AFTER-TAX operating cash flows from
the first four years of the project?
a)\$115,469
b) \$121,732
c)\$136,427
d) \$149,111
e)None of the above
6. What is the Present Value as of now of the AFTER-TAX operating cash flows from
the last six years of the project? (Hint: If a firm is does not pay tax, what is its tax rate?)
a)\$115,469
b) \$136,427
c)\$194,231
d) \$239,437
e)None of the above
Use the following information for the next 9 questions (number 7 to 15).
It is 1898 and you are in Dawson City, Yukon, Canada. You sit down beside the Yukon
River for a picnic lunch. You look at the water, and see a glitter of yellow. It’s gold; ten
tons of it. You plan to mine five tons of it per year for two years. Gold sells for \$5 per
ounce, there are 16 ounces in a pound, and 2000 pounds in a ton.
It will cost you \$1 per ounce to mine the gold, and there is a \$60,000 one time up-front
fee for equipment and permits and stuff. The equipment will be worthless after the ore is
mined.
In 1898, the Government still hasn’t gotten around to the idea of taxes on business
income. You can borrow money for 8% per year and investors will buy shares in your
new Corporation if they receive on average at least 18% per year. You think that you
will finance your firm with equal amounts of debt and equity. All variable revenues and
expenses occur at the end of each year.
7. What are your firm’s annual revenues?
a)\$160,000
b) \$800,000
c)\$1,600,000
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d) None of the Above
8. Which of the following statements is NOT true?
a)The project has a positive NPV
b) The cashflows before tax equal the cashflows after tax in this case
c)The tax benefit from the CCA deduction is positive in this case
d) Annual costs are lower than annual revenues
9. What is the WACC for the project?
a).08
b) .105
c).13
d) .155
e).18
10. Which of the following statements is most true?
f) The PV of the operating cashflows will be higher in year one than in year two
g) The PV of the operating cashflows will be lower in year one than in year two
h) The PV of the operating cashflows in year one will be equal to the PV of the
operating cashflows in year two
i)We cannot determine the relationship between the size of the operating cashflows
in year one versus those in year two without more information than is provided in
the case
j)None of the Above
11. What are the annual variable costs?
a)\$10,000
b) \$160,000
c)\$800,000
d) \$32,000
e)None of the above
12. What are the annual cash flows?
a)\$160,000
b) \$320,000
c)\$640,000
d) \$800,000
e)We cannot determine the solution to this problem without more information
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