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FIN 401 (71)

# practice questions and solutions

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School
Ryerson University
Department
Finance
Course
FIN 401
Professor
Alan Kaplan
Semester
Fall

Description
Miscellaneous Problems (stuff about Ethics, and stuff that just doesnt 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 Stewarts EVA? a) \$1,875,000 b) \$2,500,000 c) -\$2,500,000 d) \$15,000,000 e) None of the above www.notesolution.comUse 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. Its 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 hasnt 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 firms annual revenues? a) \$160,000 b) \$800,000 c) \$1,600,000 www.notesolution.com
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