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Practice Questions 308

This document contains 6 practice questions related to corporate finance topics like required rate of return on equity, net present value calculations, cash flows, and working capital changes. The questions cover a range of difficulties and include numerical calculations, short answers, and multiple choice responses. The document provides the necessary information to work through and answer each question in the sections labeled "Question 1" through "Question 6".

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Nidale Chehade
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77 views9 pages

Practice Questions 308

This document contains 6 practice questions related to corporate finance topics like required rate of return on equity, net present value calculations, cash flows, and working capital changes. The questions cover a range of difficulties and include numerical calculations, short answers, and multiple choice responses. The document provides the necessary information to work through and answer each question in the sections labeled "Question 1" through "Question 6".

Uploaded by

Nidale Chehade
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Practice Questions

Prof. Dr. Denis Schweizer, CFP, FRM


Professor of Finance
John Molson School of Business, Concordia University
Mailing address: 1455 de Maisonneuve Boulevard West,
Montreal, Quebec H3G 1M8
Office: MB 11.305
Phone: +1(514)-848-2424, ext. 2926
Fax: +1(514)-848-4500
E-Mail: [email protected]
Agenda

I. Midterm Topics

II. Post Midterm Topics

Page 2
Question 1

Suppose a firm has 3 billion shares outstanding and just reported a


net income of $1.5 billion. The firm expects to maintain a dividend
payout ratio of 40 percent on its earnings. If the firm’s price-earnings
ratio is 20, its leverage ratio is 4 and its return on equity is 7 percent,
what is its required rate of return on equity

Page 3
Question 2

Professor Jane Lamoure just won a big jackpot at the Montreal casino. She has been offered
two options:

Option 1: Receive $95,000 at the beginning of each year of the next 25 years
Option 2: Receive a lump sum at the beginning of next year (t = 1)

How much should the lump sum (Option 2) be, so that Jane would be indifferent between
the two Options 1 and 2? The interest rate is 4% compounded semi-annually. Round your
answer to the nearest dollar.

Page 5
Question 3

What is the maximum dollar amount that you would be willing to pay for an investment that
pays $8,000 every other year forever, if the first payment occurs 6 years from today and the
interest rate is 5 % compounded quarterly? Round your answer to the nearest dollar.

Page 7
Agenda

I. Midterm Topics

II. Post Midterm Topics

Page 9
Question 4

Rus Inc. will produce 70,000 widgets next year. Variable costs will equal 27.63% of sales
while fixed costs will total $125,534. The production will require a machine which cost
$50,000, has a usual live of 5 years and a salvage value of $10,000.

a. At what price must each widget be sold for the company to achieve a taxable income of
$137,816 if the firm has a tax rate of 20%?
b. What is the resulting Operational Cash Flow?

Page 10
Question 5

 An investment has a four-year life and costs $200,000 initially. It has an annual taxable
income (EBIT) of $75,000 in the first year. Operating income is expected to increase at a
rate of 6% over the life of the investment. The depreciation is $10,000 each year. The asset
class remains open after the project. The project requires net working capital of $15,000
initially which can be recovered at the end of the project. The corporate tax rate is 33%
and the appropriate discount rate is 9%. The NPV of this investment is?

Page 14
Question 6

You are considering adding a microbrewery onto one of your firm's existing
restaurants. This will entail an increase in inventory of $8,000, an increase in
accounts payable of $2,500, and an increase in property, plant, and equipment of
$40,000. All other accounts will remain unchanged. The change in net working
capital resulting from the addition of the microbrewery is:

Page 16

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