1.

Consider a standard mortgage (360 months) with monthly

payments and a nominal rate (monthly compounding) of
6.70%. What portion of the payments during the first 29
months goes toward principal? 14.58%
2. A perpetual bond with a par value of $1,000.00 and a
coupon rate of 8.25% (semiannual coupon) has a current
market value of $935.00. What is its nominal yield to
maturity? 8.82%
3. ZZZ-Best, Inc. recently issued $65.00 par-value preferred
stock that pays an annual dividend of $17.00. If the stock is
currently selling for $76.00, what is the expected return of
this preferred stock? 22.37%
4. You have purchased a canning machine for $7,000.00. You
expect the machine to save your company $3,775.00 each
year for the next 10 years. What is the profitability index of
the machine? Use a discount rate of 10.90%. 3.19
5. You decide to form a portfolio with the following amounts
invested in the following stocks. What is the beta of the
portfolio? 1.126
6. Your company is considering a machine that will cost $1,000
at Time 0 and can be sold after 3 years for $100. To operate
the machine, $200 must be invested at Time 0 in
inventories; these funds will be recovered when the
machine is retired at the end of Year 3. The machine will
produce sales revenues of $900 per year for 3 years and
variable operating costs (excluding depreciation) will be 50
percent of sales. The machine will have depreciation
expenses of $500, $300, and $200 in Years 1, 2, and 3,
respectively. The company has a 40 percent tax rate,
enough taxable income from other assets to enable it to get
a tax refund from this project if the project's income is
negative, and a 10 percent cost of capital. What is the
project's NPV? $7.89
7. Your firm recently paid a dividend of $4 to common
stockholders. Dividends are expected to grow at 8% per
year for the foreseeable future. The current stock price is
$54. New shares could be sold for the same price, but
flotation costs would amount to $6 per share. Also, the firm
can issue 20-year, $1,000 par bonds at a pre-tax cost of
11.4%. The firm's tax rate is 34%. What is the firm’s cost of
capital if their capital structure consists of 60% (external)
equity and 40% bonds? 13.21%

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 8. Last year, Cayman Corporation had sales of $7,000,000,
total variable costs of $3,000,000, and total fixed costs of
$1,500,000. In addition, they paid $480,000 in interest to
bondholders. Cayman has a 35% marginal tax rate. If
Cayman's sales increase 7%, what should be the increase in
earnings per share? 13.9%
9. Last year, Cayman Corporation had sales of $30,000,000,
total variable costs of $13,500,000, and total fixed costs of
$5,000,000. In addition, they paid $3,000,000 in interest to
bondholders. Cayman has a marginal tax rate of 35 percent.
If Cayman's sales increase by 15%, what should be the
increase in earnings per share? 21.1%
10. Sand Key Development Company has a capital structure
consisting of $20 million of 10% debt and $30 million of
common equity. The firm has 500,000 shares of common
stock outstanding. Sand Key is planning a major expansion
and will need to raise $15 million. The firm must decide
whether to finance the expansion with debt or equity. If
equity financing is selected, common stock will be sold at
$75 per share. If debt financing is chosen, 6% coupon bonds
will be sold. The firm's marginal tax rate is 34%. Determine
the level of operating income at which Sand Key would be
indifferent between debt financing and equity financing.
$5,150,000
11. This question is based on the other Sand Key Development
Company question! Sand Key Development Company
estimates that it will generate an EBIT of $3.25 million.
Which financing option should Sand Key use? The "equity
financing" option
12. Your firm is selling a 3-year old machine that has a 5-year
class life. The machine originally cost $580,000 and
required an investment in net working capital of $10,000 at
the time of installation, recoverable when the machine is
terminated. Your firm is selling the asset for $180,000. Your
firm's marginal tax rate is 34%. What is the cash flow effect
from selling this machine? $207,680
13. You currently own 100 shares of stock in Beverly Brothers
Inc. The stock currently trades at $120 a share. The
company is contemplating a 2-for-1 stock split. Which of the
following best describes your position after the proposed
stock split takes place? You will have 200 shares of

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 stock, and the stock will trade at or near $60 a
share.
14. What is the market cap for GE? $402.1 billion
15. Surfing Software Corporation expects to earn $957,000 after
taxes (net income) next year. Sales will be $8,000,000. The
corporation produces software that sells for $50 per unit
and has a variable cost of $35 per unit. The firm has a
marginal tax rate of 34%. Assume no interest. What are the
expected fixed costs for the corporation next year?
$950,000
16. Consider a standard mortgage (360 months) with monthly
payments and a nominal rate (monthly compounding) of
6.80%. What portion of the payments during the first 31
months goes toward principal? 14.25%
17. What is the price of a bond with a par value of $1,000.00, a
coupon rate of 9.25%, and a yield to maturity of 6.70%? The
bond has 16 years to maturity. $1,245
18. Heavy Corp. is trying to decide whether to invest in
equipment to manufacture a new product. If the investment
project is accepted, sales revenue will increase by $65,000
per year and materials costs will increase by $16,000 per
year. The equipment will cost $140,000 and is depreciable
over 10 years using simplified straight line. The firm has a
marginal tax rate of 34%. Calculate the firm's annual cash
flows resulting from the new project. $37,100
19. Your broker has recommended that you purchase stock in
ZZZ-Best, Inc. She estimates that the 1-year target price is
$70.00, and ZZZ-Best consistently pays an annual dividend
of $8.00. Based on your analysis, you estimate that the
stock has a required rate of 18.00%. What is the intrinsic
value of this stock? $66.10
20. Suppose you are considering a project that costs $300.00
and has expected annual cashflows of $110, $121, $133.10
in years 1, 2, and 3 respectively. If the discount rate is 10
percent, what is the project's NPV? 0

21. You just won the lottery, which promises you $260,000.00
per year for the next 20 years, starting today. That is, this is
an annuity due. If your discount rate is 7.00%, what is the
"present value" of your winnings? $2,947,254

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 22. A bond with a par value of $1,000.00 and an annual coupon
has a yield to maturity of 5.60% and a current price of
$975.00. If the bond has 18 years to maturity, what is its
current yield? 5.51%
23. Stock in Simons Industries is currently selling for $91.00. It
just paid its annual dividend of $1.00 after reporting an ROE
of 15%, of which 50% is paid as dividends. What is the
expected return of this stock? 8.68%
24. Given the following cash flows for two independent projects,
and a required rate of return of 12%, which of the following
statements is correct? Time/size disparity is not a
concern in this scenario. Both projects should be
accepted.
25. You decide to form a portfolio with the following amounts
invested in the following stocks. What is the beta of the
portfolio? 1.1825
26. Your company is considering a machine that will cost $1,000
at Time 0 and can be sold after 3 years for $100. To operate
the machine, $200 must be invested at Time 0 in
inventories; these funds will be recovered when the
machine is retired at the end of Year 3. The machine will
produce sales revenues of $900 per year for 3 years and
variable operating costs (excluding depreciation) will be 50
percent of sales. The machine will have depreciation
expenses of $400, $400, and $200 in Years 1, 2, and 3,
respectively. The company has a 40 percent tax rate,
enough taxable income from other assets to enable it to get
a tax refund from this project if the project's income is
negative, and a 10 percent cost of capital. What is the
project's NPV? $4.58
27. Your firm recently paid a dividend of $4 to common
stockholders. Dividends are expected to grow at 8% per
year for the foreseeable future. The current stock price is
$54. New shares could be sold for the same price, but
flotation costs would amount to $6 per share. Preferred
stock would pay a 12% dividend on a $50 par value. The
stocks would sell for par value less flotation costs of $2 per
share. Wellington has a marginal tax rate of 34 percent.
What is the firm’s cost of capital if their capital structure
consists of 60% equity and 40% preferred stock? 15.20%
28. Last year, Cayman Corporation had sales of $7,000,000,
total variable costs of $3,000,000, and total fixed costs of

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 $1,500,000. In addition, they paid $480,000 in interest to
bondholders. Cayman has a 35% marginal tax rate. If
Cayman's sales increase 7%, what should be the increase in
operating income? 11.2%
29. Last year, Cayman Corporation had sales of $30,000,000,
total variable costs of $13,500,000, and total fixed costs of
$5,000,000. In addition, they paid $3,000,000 in interest to
bondholders. Cayman has a marginal tax rate of 35 percent.
If Cayman's sales increase by 15%, what should be the
increase in operating income? 21.5%
30. This information will be used for two questions! Sand Key
Development Company has a capital structure consisting of
$20 million of 10% debt and $30 million of common equity.
The firm has 500,000 shares of common stock outstanding.
Sand Key is planning a major expansion and will need to
raise $15 million. The firm must decide whether to finance
the expansion with debt or equity. If equity financing is
selected, common stock will be sold at $75 per share. If
debt financing is chosen, 6% coupon bonds will be sold. The
firm's marginal tax rate is 34%. Determine the level of
operating income at which Sand Key would be indifferent
between debt financing and equity financing. $5,150,000
31. This question is based on the other Sand Key Development
Company question! Sand Key Development Company
estimates that it will generate an EBIT of $7.25 million.
Which financing option should Sand Key use? The "debt
financing" option
32. Pelican Cove Corporation is trying to decide whether to
invest in equipment to manufacture a new product. If the
investment project is accepted, sales revenue will increase
by $65,000 per year and materials costs will increase by
$10,000 per year. The equipment will cost $140,000 and is
depreciable over 10 years using simplified straight line. The
firm has a marginal tax rate of 34%. Calculate the firm's
annual cash flows resulting from the new project. $41,060
33. Suppose you own 5% of Coastal Corporation's 200,000
outstanding common shares. The stock was trading for
$165 per share before Coastal executives announced a 3-
for-2 stock split. After the split, you will own _____ shares
worth _____ per share. 15,000; $110
34. What is the market cap for GE? $402.1 billion

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 35. Surfing Software Corporation expects to earn $957,000 after
taxes (net income) next year. Sales will be $8,000,000. The
corporation produces software that sells for $50 per unit
and has a variable cost of $35 per unit. The firm has a
marginal tax rate of 34%. Assume no interest. What are the
expected fixed costs for the corporation next year?
$950,000
36. Consider a standard mortgage (360 months) with monthly
payments and a nominal rate (monthly compounding) of
6.80%. What portion of the payments during the first 31
months goes toward principal? 14.25%
37. What is the price of a bond with a par value of $1,000.00, a
coupon rate of 9.25%, and a yield to maturity of 6.70%? The
bond has 16 years to maturity. $1,245
38. Heavy Corp. is trying to decide whether to invest in
equipment to manufacture a new product. If the investment
project is accepted, sales revenue will increase by $65,000
per year and materials costs will increase by $16,000 per
year. The equipment will cost $140,000 and is depreciable
over 10 years using simplified straight line. The firm has a
marginal tax rate of 34%. Calculate the firm's annual cash
flows resulting from the new project. $37,100
39. Your broker has recommended that you purchase stock in
ZZZ-Best, Inc. She estimates that the 1-year target price is
$70.00, and ZZZ-Best consistently pays an annual dividend
of $8.00. Based on your analysis, you estimate that the
stock has a required rate of 18.00%. What is the intrinsic
value of this stock? $66.10
40. Suppose you are considering a project that costs $300.00
and has expected annual cashflows of $110, $121, $133.10
in years 1, 2, and 3 respectively. If the discount rate is 10
percent, what is the project's NPV? 0
41.
42.

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