1.

You have determined the profitability of a planned project by finding the present
value of all the cash flows from that project. Which of the following would cause
the project to look more appealing in terms of the present value of those cash
flows?
1 point

a. The discount rate decreases.

b. The cash flows are extended over a longer period of time, but the total amount of the cash
flows remains the same.
c. The discount rate increases.
d. Statements b and c are correct.
e. Statements a and b are correct.

2. Which of the following bank accounts has the highest effective annual return?
1 point

a. An account that pays 10 percent nominal interest with monthly com-pounding.

b. An account that pays 10 percent nominal interest with daily com-pounding.
c. An account that pays 10 percent nominal interest with annual com-pounding.
d. An account that pays 9 percent nominal interest with daily com-pounding.
e. All of the investments above have the same effective annual return.

3. Suppose someone offered you the choice of two equally risky annuities, each
paying $10,000 per year for five years. One is an ordinary (or deferred) annuity,
the other is an annuity due. Which of the following statements is most correct?

1 point

a. The present value of the ordinary annuity must exceed the present value of the annuity due,
but the future value of an ordinary annuity may be less than the future value of the annuity due.
b. The present value of the annuity due exceeds the present value of the ordinary annuity, while
the future value of the annuity due is less than the future value of the ordinary annuity.
c. The present value of the annuity due exceeds the present value of the ordinary annuity, and
the future value of the annuity due also exceeds the future value of the ordinary annuity.
d. If interest rates increase, the difference between the present value of the ordinary annuity and
the present value of the annuity due remains the same.
e. Statements a and d are correct.

4. Kramer Corporation recently announced that its net income was lower than last
year. However, analysts estimate that the company's net cash flow increased.
What factors could explain this discrepancy?
1 point

a. The company's depreciation and amortization expenses increased.

b. The company's interest expense declined.
c. The company had an increase in its noncash revenues.
d. Statements a and b are correct.
e. Statements b and c are correct.

5. Armstrong Inc. is a profitable corporation with a 40 percent corporate tax rate.

The company is deciding between depreciating the equipment it purchased this
year on a straight-line basis over five years or over three years. Changing the
depreciation schedule will have no impact on the equipment's economic value.
If Armstrong chooses to depreciate the equipment over three years, which of
the following will occur next year, relative to what would have happened if it had
depreciated the equipment over five years?

1 point

a. The company will have a lower net income.

b. The company will pay less in taxes.
c. The company will have a lower net cash flow.
d. Statements a and b are correct.
e. All of the statements above are correct.

6. Analysts who follow Cascade Technology recently noted that, relative to the
previous year, the company's operating income (EBIT) and net income had
declined but its operating cash flow had increased. What could explain these
changes?

1 point

a. The company's depreciation and amortization expenses increased.

b. The company's interest expense decreased.
c. The company's tax rate increased.
d. Statements a and b are correct.
e. All of the statements above are correct.

7. Linda needs a new car and she is deciding whether it makes sense to buy or
lease the car. She estimates that if she buys the car it will cost her $17,000
today (t = 0) and that she would sell the car four years from now for $7,000 (at t
= 4). If she were to lease the car she would make a fixed lease payment at the
end of each of the next 48 months (4 years). Assume that the operating costs
are the same regardless of whether she buys or leases the car. Assume that if
she leases, there are no up-front costs and that there is no option to buy the car
after four years. Linda estimates that she should use a 6 percent nominal
 interest rate to discount the cash flows. What is the breakeven lease payment?
(That is, at what monthly lease payment would she be indifferent between
buying and leasing the car?)
1 point

a. $269.85
b. $271.59
c. $275.60
d. $277.39
e. $279.83

8. Hillary is trying to determine the cost of health care to college students and
parents' ability to cover those costs. She assumes that the cost of one year of
health care for a college student is $1,000 today, that the average student is 18
when he or she enters college, that inflation in health care cost is rising at the
rate of 10 percent per year, and that parents can save $100 per year to help
cover their children's costs. All payments occur at the end of the relevant
period, and the $100/year savings will stop the day the child enters college
(hence 18 payments will be made). Savings can be invested at a nominal rate
of 6 percent, annual compounding. Hillary wants a health care plan that covers
the fully inflated cost of health care for a student for 4 years, during Years 19
through 22 (with payments made at the end of Years 19 through 22). How much
would the government have to set aside now (when a child is born), to
supplement the average parent's share of a child's college health care cost?
The lump sum the government sets aside will also be invested at 6 percent,
annual compounding.
1 point

a. $1,082.76
b. $3,997.81
c. $5,674.23
d. $7,472.08
e. $8,554.84

9. Cartwright's average daily sales are $10 million (assume 360 days). Currently,
Cartwright's days sales outstanding (DSO) is well above the industry average of
15. Cartwright is implementing a plan that is designed to reduce its DSO to 15
without reducing its sales. If successful the plan will free up cash, half of which
will be used to reduce notes payable and the other half will be used to reduce
 accounts payable. What will be the current ratio if Cartwright fully succeeds in
implementing this plan?
1 point

a. 1
b. 0.63
c. 1.3
d. 1.25
e. 1.5

10.The company's current assets consist of cash, inventories, and accounts

receivable. How much cash does Taft have on its balance sheet?
1 point

a. -$ 8,333
b. $ 68,493
c. $125,000
d. $200,000
e. $316,667

11.Cochrane, Inc. had $75,000 in cash on the balance sheet at the end of 2001. At
year-end 2002, the company had $155,000 in cash. We know cash flow from
operating activities totaled $1,250,000 and cash flow from long-term investing
activities totaled -$1,000,000. Furthermore, Cochrane issued $250,000 in long-
term debt last year to fund new projects, increase liquidity, and to buy back
some common stock. If dividends paid to common stockholders equaled
 $25,000, how much common stock did Cochrane repurchase last year?
(Assume that the only financing activities in which Cochrane engaged involved
long-term debt, payment of common dividends, and common stock.)
1 point

a. $ 55,000
b. $105,000
c. $205,000
d. $255,000
e. $395,000

12.McGwire Aerospace expects to have net cash flow of $12 million. The company
forecasts that its operating costs excluding depreciation and amortization will
equal 75 percent of the company's sales. Depreciation and amortization
expenses are expected to be $5 million and the company has no interest
expense. All of McGwire's sales will be collected in cash, costs other than
depreciation and amortization will be paid in cash during the year, and the
company's tax rate is 40 percent. What is the company’s expected sale?
1 point

a. $ 68.00 million
b. $ 66.67 million
c. $ 46.67 million
d. $133.33 million
e. $ 26.67 million