1) How much are you willing to pay for one share of stock if the company just paid an $.80 annual
dividend, the dividends increase by 4% annually and you require an 8% rate of return?
What is the expected return on this portfolio?
3) Your bank offers you a $100,000 line of credit with an interest rate of 2.5% per quarter. The loan agreement also requires that 4% of the
unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance. Your short-term investments are
paying 1.25% per quarter. What is your effective annual interest rate if you borrow the whole $100,000 for the entire year? Assume that both the
funds you borrow and the funds you invest use compound interest.
4) Your firm has a net cash inflow for the quarter of -$30 (negative). The beginning cash balance is $15. Company policy is to maintain a minimum
cash balance of $5 and borrow only the amount that is necessary to maintain that balance. How much does your firm need to borrow to have a
zero cumulative surplus?
5) You are considering two projects with the following cash flows:
Which of the following statements are true concerning these two projects?
I. Both projects have the same future value at the end of year 4, given a positive rate of return.
II. Both projects have the same future value given a zero rate of return.
III. Both projects have the same future value at any point in time, given a positive rate of return.
IV. Project A has a higher future value than project B, given a positive rate of return.
I and III only
II and IV only
I, II, and III only
6) You own some equipment which you purchased three years ago at a cost of $135,000. The equipment is 5-year property for
MACRS. You are considering selling the equipment today for $82,500. Which one of the following statements is correct if your tax
rate is 34%?
The book value today is $8,478.
The tax due on the sale is $14,830.80.
The taxable amount on the sale is $38,880.
You will receive a tax refund of $13,219.20 as a result of this sale.
The book value today is $64,320.
7) Frank’s Formals rents apparel throughout the year. They have experienced non-payment by about 15% of their
customers with an average loss of $400. Frank’s wants to stem their losses by using an instant electronic credit check on
the customer. These checks will cost them $15 on each of the 1,000 customers. The opportunity cost is 2.0% for the
credit period. Should they pursue the credit check?
No, because the $15,000 cost is too high.
No, because a $400 loss is minor.
Yes, because the net gain is $30,000.
Yes, because the net gain is $45,000.
Yes, because the net gain is $60,000.
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