FINC 322

PRACTICE PROBLEMS FO REXAMS

PRACTICE PROBLEMS for EXAMS

PROBLEMS

FINC 322

Exam 1: 8 questions
Exam 2: 21 questions
Exam 3: 11 questions
Exam 4: 9 questions

† Try to solve these problems without looking at the solutions although it takes a
long time. That would be the only way to enhance your real understanding and problem-
solving ability. Learning by reading solutions will immensely limit your learning
opportunity and ability to solve tweaked problems.

Solutions to these problems are found in files:

▪ PracticeProblemsForExams_Solutions_FINC322.pdf
▪ PracticeProblemsForExams_Solutions_FINC322_Excel.xlsx

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EXAM 1 PRACTICE PROBLEMS

1. A firm has a total debt ratio of 0.33. What is the debt to equity ratio?

2. Reliable Cars has sales of $807,200, total assets of $1,105,100, and a profit margin of
9.68 percent. The firm has a debt to equity ratio of 100 percent. What is the return on
equity?

3. Big Guy Subs has net income of $150,980, a price-earnings ratio of 12.8, and a price of
10. How many shares of stock are outstanding?

4. A firm has a debt to equity ratio of 100 percent and a return on assets of 13 percent.
What is the return on equity?

5. The Dockside Inn has net income for the most recent year of $8,450. The tax rate was 38
percent. The firm paid $1,300 in taxes expense and $1,900 in interest expense. What
was the Times Interest Earned for the year?

6. A firm has a total debt ratio of 50%, debt of $300,000, and net income of $90,000. What
is the return on equity?

7. A firm has a debt to asset ratio of 75%, $240,000 in debt, and net income of $48,000.
Calculate return on assets.

8. A firm has total assets of $2,000,000. It has $900,000 in long-term debt. The
stockholders’ equity is $900,000. What is the total debt ratio?

Answers on the next page

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Answers:

1 𝟎. 𝟒𝟗𝟐𝟓
2 𝟎. 𝟏𝟒𝟏𝟒 (𝟏𝟒. 𝟏𝟒%)
3 𝟏𝟗𝟑, 𝟐𝟓𝟒. 𝟒𝟎
4 𝟎. 𝟐𝟔 (𝟐𝟔%)
5 𝟔. 𝟏𝟑𝟏𝟔
6 𝟎. 𝟑
7 𝟎. 𝟏𝟓 (𝟏𝟓%)
8 𝟎. 𝟓𝟓 (𝟓𝟓%)

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EXAM 2 PRACTICE PROBLEMS

† Excel calculations of the questions below are shown in
“PracticeProblemsForExams_Solutions_FINC322_Excel.xlsx”

1. If you wish to accumulate $140,000 in 13 years, how much must you deposit today in an
account that pays an annual interest rate of 14%?

2. What will $247,000 grow to be in 9 years if it is invested today in an account with an

annual interest rate of 11%?

3. How many years will it take for $136,000 to grow to be $468,000 if it is invested in an
account with an annual interest rate of 8%?

4. At what annual interest rate must $137,000 be invested so that it will grow to be
$475,000 in 14 years?

5. If you wish to accumulate $197,000 in 5 years, how much must you deposit today in an
account that pays a quoted annual interest rate of 13% with semi-annual compounding
of interest?

6. What will $153,000 grow to be in 13 years if it is invested today in an account with a

quoted annual interest rate of 10% with monthly compounding of interest?

7. How many years will it take for $197,000 to grow to be $554,000 if it is invested in an
account with a quoted annual interest rate of 8% with monthly compounding of interest?

8. At what quoted annual interest rate must $134,000 be invested so that it will grow to be
$459,000 in 15 years if interest is compounded weekly?

9. You are offered an investment with a quoted annual interest rate of 13% with quarterly
compounding of interest. What is your effective annual interest rate?

10. You are offered an annuity that will pay $24,000 per year for 11 years (the first
payment will occur one year from today). If you feel that the appropriate discount rate is
13%, what is the annuity worth to you today?

11. If you deposit $16,000 per year for 12 years (each deposit is made at the end of each
year) in an account that pays an annual interest rate of 14%, what will your account be
worth at the end of 12 years?

12. You plan to borrow $389,000 now and repay it in 25 equal annual installments
(payments will be made at the end of each year). If the annual interest rate is 14%, how
much will your annual payments be?

13. You are told that if you invest $11,000 per year for 23 years (all payments made at the
end of each year) you will have accumulated $366,000 at the end of the period. What
annual rate of return is the investment offering?

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14. You are offered an annuity that will pay $17,000 per year for 7 years (the first payment
will be made today). If you feel that the appropriate discount rate is 11%, what is the
annuity worth to you today?

15. If you deposit $15,000 per year for 9 years (each deposit is made at the beginning of
each year) in an account that pays an annual interest rate of 8%, what will your account
be worth at the end of 9 years?

16. You plan to accumulate $450,000 over a period of 12 years by making equal annual
deposits in an account that pays an annual interest rate of 9% (assume all payments
will occur at the beginning of each year). What amount must you deposit each year to
reach your goal?

17. You are told that if you invest $11,100 per year for 9 years (all payments made at the
beginning of each year) you will have accumulated $375,000 at the end of the period.
What annual rate of return is the investment offering?
18. You plan to buy a car that has a total "drive-out" cost of $25,700. You will make a down
payment of $3,598. The remainder of the car’s cost will be financed over a period of 5
years. You will repay the loan by making equal monthly payments. Your quoted annual
interest rate is 8% with monthly compounding of interest. (The first payment will be
due one month after the purchase date.) What will your monthly payment be?
19. You are valuing an investment that will pay you $12,000 the first year, $14,000 the
second year, $17,000 the third year, $19,000 the fourth year, $23,000 the fifth year, and
$29,000 the sixth year (all payments are at the end of each year). What it the value of
the investment to you now is the appropriate annual discount rate is 11%?

20. You are valuing an investment that will pay you $27,000 per year for the first ten years,
$35,000 per year for the next ten years, and $48,000 per year the following ten years (all
payments are at the end of each year). If the appropriate annual discount rate is 9.00%,
what is the value of the investment to you today?

21. You have just won the Michigan Lottery with a jackpot of $40,000,000. Your winnings
will be paid to you in 26 equal annual installments with the first payment made
immediately. If you feel the appropriate annual discount rate is 8%, what is the present
value of the stream of payments you will receive?

Answers on the next page

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Answers:

1 𝟐𝟓, 𝟒𝟖𝟗. 𝟕𝟏𝟒𝟑

2 631,835.1203
3 16.0576 years
4 𝟗. 𝟐𝟖𝟕𝟑%
5 𝟏𝟎𝟒, 𝟗𝟒𝟕. 𝟎𝟐𝟗𝟎
6 $558,386.38
7 155.61 months |12.97 years
8 0.1580% | 8.21%
9 EAR = 13.65%
10 $136,486.5871
11 $436,331.98
12 $56,598.8807
13 3.2086%
14 $88,919.1435
15 $202,298.44
16 $20,497.9783
17 𝟐𝟓. 𝟗𝟎𝟔𝟗%
18 𝟒𝟒𝟖. 𝟏𝟒𝟖𝟗
19 𝟕𝟔, 𝟐𝟕𝟑. 𝟔𝟑
20 𝟑𝟐𝟑, 𝟏𝟐𝟑. 𝟎𝟑
21 𝟏𝟕, 𝟗𝟔𝟏, 𝟏𝟗𝟒. 𝟏𝟑𝟔𝟑

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EXAM 3 PRACTICE PROBLEMS

1. A 15-year bond pays 11% on a face value of $1,000. If similar bonds are currently
yielding 8%, what is the market value of the bond? Use semi-annual analysis.

2. A ten-year bond pays 11% interest on a $1000 face value semi-annually. If it currently
sells for $1,195, what is its yield to maturity?
3. A 10-year bond has a face value of $1,000. If similar bonds are currently yielding 10%
and this bond sells for $925, what is the annual coupon rate (ACR) on this bond? Use
semi-annual analysis.

4. Wine and Roses, Inc., offers a bond with a coupon of 5.5 percent with semiannual
payments and a yield to maturity of 6.32 percent. The bonds mature in 11 years. What
is the market price of a $1,000 face value bond?

5. An issue of preferred stock is paying an annual dividend of $5. The growth rate for the
firm's common stock is 14%. What is the preferred stock price if the required rate of
return is 11%?

6. An issue of common stock has just paid a dividend of $3.75. Its growth rate is 8%.
What is its price if the market's rate of return is 16%?

7. An issue of common stock is selling for $57.20. The year-end dividend is expected to be
$2.32 assuming a constant growth rate of 6%. What is the required rate of return?

8. An issue of common stock is expected to pay a dividend of $4.80 at the end of the year.
Its growth rate is equal to 8%. If the required rate of return is 13%, what is its current
price?

9. An issue of common stock just paid a dividend of $4.0 at the end of the year. Its growth
rate is equal to 3%, and the current share price is $40. What is the required rate of
return on the stock?

10. The preferred stock of Gapers Inc. pays an annual dividend of $6.50. What is the price
of the preferred stock if the required return is 10%?

11. The preferred stock of Lewis-Schultz Enterprises pays an annual dividend of $6.00.
What is the required return if the market value of the preferred stock is $70?

Answers on the next page

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Answers:

1 𝟏𝟐𝟓𝟗. 𝟑𝟖𝟎𝟓
2 𝟖. 𝟏𝟏𝟎𝟓%
3 𝟖. 𝟕𝟗𝟔𝟒%
4 𝟗𝟑𝟓. 𝟔𝟗𝟑𝟖
5 Over $1,200
6 Less than $900
7 $45.45
8 𝟗𝟔
9 𝟏𝟑. 𝟑%
10 𝟔𝟓
11 𝟖. 𝟓𝟕%

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EXAM 4 PRACTICE PROBLEMS

1. Find the IRR of the following project:

Year Project A
0 –240,000
1 20,000
2 50,000
3 100,000
4 150,000

2. Find the NPV at 7% of the following project:

Year Project A
0 –240,000
1 20,000
2 50,000
3 100,000
4 150,000

3. Find the crossover rate of the following two projects:

Year Project A Project B

0 –240,000 –225,000
1 20,000 145,000
2 50,000 60,000
3 100,000 40,000
4 150,000 30,000

4. A project that provides annual cash flows of $28,500 for 9 years costs $138,000 today. Is
this a good project if the required return is 8%? At what discount rate would you be
indifferent between accepting the project and rejecting it?

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5. You are considering two mutually exclusive projects with the following cash flows.
Which project(s) should you accept if the discount rate is 8.5 percent? What if the
discount rate is 13 percent?

A. accept project A as it always has the higher NPV

B. accept project B as it always has the higher NPV
C. accept A at 8.5 percent and B at 13 percent
D. accept B at 8.5 percent and A at 13 percent
E. accept B at 8.5 percent and neither at 13 percent

6. Consider the following two mutually exclusive projects:

The required return is 15 percent for both projects. Which one of the following
statements related to these projects is correct?
A. Because both the IRR and the PI imply accepting Project B, that project should be
accepted.
B. The profitability rule implies accepting Project A.
C. The IRR decision rule should be used as the basis for selecting the project in this
situation.
D. Only NPV implies accepting Project A.
E. NPV, IRR, and PI all imply accepting Project A.

7. The Blue Dog Company has common stock outstanding that has a current price of $20
per share and just paid a $0.5 dividend. Blue Dog’s dividends are expected to grow at a
rate of 3% per year, forever. The expected risk-free rate of interest is 2.5%, whereas the
expected market premium is 5%. The beta on Blue Dog’s stock is 1.2.

a. What is the cost of equity for Blue Dog using the dividend valuation model?

b. What is the cost of equity for Blue Dog using the capital asset pricing model?

8. The Mountaineer Airline Company has consulted with its investment bankers and
determined that they could issue new debt with a YTM of 8%. If Mountaineer ' marginal
tax rate is 39%, what is the after-tax cost of debt to Mountaineer?

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9. Given the following information for Titleist Co, find the WACC. Assume the company’s
tax rate is 35%.

Debt: 8,500 7.2% coupon bonds outstanding, $1,000 par value, 25 years to
maturity, selling for 118% of par; the bonds make semiannual
payments.

Common Stock: 225,000 shares outstanding, selling for $87 per share; the beta is
1.15.

Preferred Stock: 15,000 shares of 4.8% preferred stock outstanding, currently sells for
$98 per share.

Market: 7% market risk premium and 3.1% risk-free rate.

Answers on the next page

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Answers:

1 𝟗. 𝟓𝟔𝟖𝟓%
2 𝟏𝟖, 𝟒𝟐𝟕. 𝟓𝟗𝟒𝟕
3 𝟔. 𝟗𝟗𝟏𝟏%
4 𝟏𝟒. 𝟓𝟖𝟗𝟓%
5 E
6 D
7 a. 𝟓. 𝟓𝟖%; b. 𝟖. 𝟓%
8 𝟒. 𝟖𝟖%
9 𝟖. 𝟒𝟕𝟕𝟑%

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