Week 7 Revision Exercise (Questions)

Ch2-Self-test 4) Free Cash Flow In 2015, McSweeney Power, Inc., earned an EBIT of $675 million, had a
tax rate of 33.48 percent, and computed its depreciation expense as $57 million. McSweeney Power’s
gross fixed assets increased by $58 million from 2014 to 2015. The firm’s current assets increased by $30
million and spontaneous current liabilities increased by $15 million ($5 million in accrued wages and
taxes and $10 million in accounts payable).
a. Calculate McSweeney Power’s operating cash flow for 2015.
b. Calculate McSweeney Power’s investment in operating capital for 2015.
c. Calculate McSweeney Power’s free cash flow for 2015.

Ch3-Self-test 1) Calculating Ratios Listed below are the balance sheet and income statement for
Marion & Carter, Inc. Use these financial statements to calculate liquidity, asset management, debt
management, profitability, and market value ratios for 2015.
Ch4-Self-test 1) Two Future Values You have entered a consulting deal with a company. You are to
complete two projects. The first project will take one year to finish. The second project will take two
years and must be started immediately following the first one. The deal includes a provision in which the
company will make a $10,000 payment to your retirement plan after the first project and $20,000 after
the second project. You have 20 years until retirement and will earn 9 percent per year on your
retirement plan money. How much money will you have for retirement from these two payments?

Ch4-Self-test 2) Present Value You have decided to leave the small advertising firm where you are a
partner. The partnership agreement among the partners states that if a partner leaves, that person’s
ownership in the firm is “cashed out” with an immediate payment consisting of 5 percent of last year’s
revenue. Last year the firm had revenue of $1 million. But your partners would rather not have to pay
out this big cash flow to you this year because they are expecting much more business soon. In fact, they
believe that they will be earning revenues of $1.5 million in just two years. So, they offer you a choice
between taking 5 percent of last year’s revenue now, or taking 4 percent of expected revenue in two
years. If you believe an appropriate discount rate is 10 percent, which cash out payment should you
accept?
Ch4-Self-test 3) Computing Rates of Return Say that you invested $1,000 and found two years later
that the investment had fallen to $600. Your hopes are that the investment will get back to even during
the next two years. What was the annual rate of return earned in the first two years? What rate would
need to be earned in the next two years to break even? Show a time line of the problem.

Ch5-Self-test 1) Future Value and Annuity Payments Chandler and Monica are trying to decide if they
will have enough money to retire early in 12 years, at age 60. Their current assets are $300,000 in
retirement plans and they have $100,000 in other investments. Together, they contribute $28,000 per
year to their retirement plans and another $6,000 to other investments. If their assets grow at 8 percent
per year, how much money will they have when they turn 60? After they retire, they will invest their
wealth more conservatively and it will earn 5 percent per year. Is this enough to fund a $100,000 per
year retirement for 40 years?

Ch5-Self-test 2) Present Value of an Annuity  Kevin and Kody are identical twins, have identical jobs,
and earn the same salary. However, Kody has been far more financially responsible. He pays his bills on
time and pays off his credit card debt quickly. Kevin has been less financially responsible. He often
forgets to pay bills and has allowed his credit card balance to balloon. If he is short on cash for the
month, he simply decides not to pay even the minimum balance. Now Kevin and Kody are each looking
to buy houses. They both decide that they can afford a $1,000 monthly mortgage payment. On Kody’s
trip to the mortgage broker, he learns that he can obtain a mortgage for a 7 percent APR. Because of
Kevin’s bad credit rating, he will be charged 10 percent. How is Kevin’s bad credit going to impact his
house search?

Ch5-Self-test 3) Compound Frequency Say that you own a small business, which you plan to expand.
Your expansion plans include borrowing $50,000 from the bank with a 3-year, amortized loan. The bank
has given you these loan choices:
Annual payments, 10 percent APR
Quarterly payments, 9.8 percent APR
Monthly payments, 9.5 percent APR
Which loan would have a lower effective annual rate?

Ch7-Self-test 1) Bond Quotes and Value Sheila’s broker has given her the following bond quote for a
bond issued by Delvin Hardware. What is the price she would pay to buy this bond? Before buying the
bond, Sheila notices that other bonds with the same time to maturity and credit rating are offering a
5.08 yield to maturity. What is the bond price at the 5.08 yield? Should Sheila buy this bond? The date is
March 2, 2014.
Ch7-Self-test 2) Yield to Maturity and Yield to Call Kaito is considering a bond issued from All Satellite
Radio. The bond has a 9.625 percent coupon and will mature on August 1, 2018. The current market
price for the bond is 101.50 and the date is February 2, 2012. Kaito wants to know the current yield and
yield to maturity that the bond is offering. In addition, the bond can be called on August 1, 2014, at a
price of 104.813. So he wants to know the yield to call as well.

Ch7-Self-test 5) Capital Gains and Losses in Bonds Microcasm, Inc., a pharmaceutical company, has
issued bonds that now have 15 years to maturity. The bonds have a coupon rate of 4.4 percent and a
recent bond quote of 102.35. The bond has a credit rating of BBB and is priced to provide a 4.187 yield
to maturity. A news announcement today discloses that Microcasm has been named in a lawsuit that
could become a serious program for the firm. As a response, Standard & Poor’s lowered its credit rating
to BB+. The bonds with this credit rating and maturity have a yield to maturity of 5.08. What is the price
change experienced by the bonds (in dollars and percentage)?

Ch8-Self-test 1) Discounting Dividends and Future Price You are checking a financial analyst’s
recommendation. The analyst projects a company’s stock price to be $72 per share in three years. The
most recent annual dividend was $1.68 per share. The analyst expects that dividend to grow at 9.8
percent annually. Given a 13.5 percent required return, the analyst claims the stock is undervalued at
the current price of $54; thus he strongly urges investors to buy it. Using these assumptions, is the stock
really undervalued?

Ch8-Self-test 2) Growth Rates, Required Return, and Value Consider that a company is about to
embark on a large high-risk project. You believe that when this news is publicly announced,
shareholders will react by requiring a higher return from the company and by expecting faster growth.
The company is expected to pay a $1.75 per share dividend next year. You think that the current price of
$70 is fair, given the expected 9 percent growth rate. However, after the announcement investors will
expect a 10 percent growth rate and increase the required return by 1.2 percent. If this occurs as you
predict, how will the stock price change because of the announcement?

Ch8-Self-test 3) Variable Growth Rates Years Young Match is an online dating firm that finds matches
for active people over 55. It has seen substantial growth in revenue and profits as the baby-boom
generation ages. The firm will pay its first-ever dividend of $0.20 per share ($0.05 per quarter) next year.
The dividend is expected to grow at 20 percent per year for the next four years. In the fifth year and
afterwards, the Years Young dividend will grow at a steady 9.5 percent per year. If the appropriate
discount rate for Years Young is 11 percent, what is the value of the stock?