Practice Final Exam Questions

Problem 1 (only set up equations/formulae; no need for numerical solutions)

a. Facebook is considering an investment project
for online dating. The project requires $1M
investment each year from year 1 to year T. Then starting in year T+1, the project will
generate a profit of $700k each year, forever. Assume all cash flows occur at the end of
the year. Write a formula for the present value of this project with a discount rate of i.

b. Due to the financial crisis in the Euro region, Citi Bank wishes to sell a 10-year Italian
bond that has a face value of $100M. Four years ago, Citi bought the bond for $95M, and
the bears an interest rate of 5%, paid annually (4 annual payments has been received so
far). Citi investment arm expects at least 8% annual return on investment. What must be
the minimum selling price of the bond today in order to meet the expected return on the
investment?

Page 2 of 8

Name: ___________________________________

Problem 2
The data in Table below are available for two companies, A and B, all stated in millions.
Calculate each companys return on equity (ROE) and return on total assets (ROA).

Page 3 of 8

Name: ___________________________________

Problem 3
You go for an oil change. Your mechanic offers to use premium oil (then the oil change would
cost $50 instead of $30 for regular oil), which would mean youd only need to come back in 12
months instead of 6 months. Suppose the effective interest rate is 0.5% per month. Determine
whether it is more advantageous to use premium oil or regular oil. Assume an infinite horizon
and repetition. [hint: use the interest factors in the attached tables]

Page 4 of 8
Problem 4

Name: ___________________________________

Page 5 of 8

Name: ___________________________________

Problem 5
Boeing is trying to decide whether to keep a plane-assembly equipment for another year. Three
years ago, the equipment was purchased at $125,000. Boeing is using 200% Declining Balance
for book purposes, and this is the fourth year of ownership of the equipment. The useful life of
the equipment (asset) is 8 years. What was the depreciation in year 3?

Page 6 of 8

Name: ___________________________________

Problem 6
Consider the 2010 annual reports of Pepsico [PEP] and Coca Cola [KO]. By the time the reports
were issued, the stocks of Pepsico and Coca Cola were priced at $66.39 and $62.92, respectively.
You want to make some investment in KO by rationalizing your decision with the financial ratio
analysis. Answer if the following analyses are true or false.
_____ 9.1. KO had a lower debt ratio than PEP
_____ 9.2. KO was more liquid than PEP

Page 7 of 8

Name: ___________________________________

Page 8 of 8

Name: ___________________________________