Economics and Finance Department

FINC 330 Business Finance

Semester: Summer 2011

Instructor: Dr. Emmanuel Anoruo

Instructions: 1. Answer only 15 questions 2. Show all work

1)

Given the financial data for New Electronic World, Inc. (NEW), compute the following measures of cash flows for the NEW for the year ended December 31, 2005

(a)Operating Cash Flow.

(b)Free Cash Flow.

For the year ended December 31,

EBIT + DEPR – TAXES

30000+3000-8000= 25000

OCF=25000

OCF-INV-FIXED ASSETS

25000-3000-2000=20,000

2)

Meese Paper Distributors, Inc. has before-tax earnings of $1,900,000. Calculate the amount of the total tax liability. 646000

113 900 + (0.34 x [1,900,000-335000])

113 900 + (0.34 x 1,565,000)

113900 + 532100 = 646000

3) Calculate the future value of $4,600 received today if it is deposited at 9 percent for three years. Rate| 9%|

Nper| 3|

Pmt| 0|

Pv| 4600|

Fv| ($5,957.13)|

Rate| 14%|

Nper| 15|

Pmt| 0|

Pv| ($12,468.59)|

Fv| $89,000.00 |

5)

Nico establishes a seven-year, 8 percent loan with a bank requiring annual end-of-year payments of $960.43. Calculate the original principal amount.

Rate| 8%|

Nper| 7|

Pmt| 960.43|

Pv| ($5,000.35)|

Fv| $0.00 |

Rate| 10%|

Nper| 4|

Pmt| 3900|

Pv| ($12,362.48)|

Fv| $0.00 |

6)

Dottie has decided to set up an account that will pay her granddaughter (Lexi) $5,000 a year indefinitely. How much should Dottie deposit in an account paying 8 percent annual interest?

PV = 5000 / 0.08 = 62500

7)

Calculate the present value of an annuity of $3,900 each year for four years, assuming an opportunity cost of 10 percent.

8) Calculate the future value of an annuity of $5,000 each year for eight years, deposited at 6 percent.

Rate| 6%|

Nper| 8|

Pmt| 5000|

Pv| $0.00 |

Fv| ($49,487.34)|

9)

Calculate the present value of a $10,000 perpetuity at a 6 percent discount rate.

PV= 10000/6% = 166666.6667

10)

Dan and Jia are newlyweds and have just purchased a condominium for $70,000. Since the condo is very small, they hope to move into a single-family house in 5 years. How much will their condo worth in 5 years if inflation is expected to be 8 percent?

Rate| 8%|

Nper| 5|

Pmt| 0|

Pv| $70,000.00 |

Fv| ($102,852.97)|

11)

During her four years at college, Hayley received the following amounts of money at the end of each year from her grandmother. She deposited her money in a saving account paying 6 percent rate of interest. How much money will Hayley have on graduation day?

100 x 1.06= 106 +200 = 306

306 x 1.06 = 324.36

324.36 + 300= 624.36

624.36 x 1.06 = 661.82

661.82+ 400= 1061.82

12)

Calculate the future value of $6,490 received today and deposited for five years in an account which pays interest of 14 percent compounded semiannually.

Rate| 7%|

Nper| 10|

Pmt| |

Pv| $6,490.00 |

Fv| ($12,766.81)|

13)

Assume you have a choice between two deposit accounts. Account X has an annual percentage rate of 12.25 percent but with interest compounded monthly. Account Y has an annual percentage rate of 12.20 percent with interest compounded continuously. Which account provides the highest effective annual return?

PV= 100

Account X

I= 12.20

N=3

100 x e^12.20 x 3= 100 x e^0.366 = 144.19

Account Y

PV=100

3 years of interest is 44.14 at 12.25%

Therefore after 3 years there would be a total sum of 144.14

so there is no difference between the two accounts.

14)

Dr. Dan is considering investment in a project with beta coefficient of 1.75. What would you recommend him to do if this investment has an 11.5 percent rate of return, risk-free rate is 5.5 percent, and the rate of return on the market portfolio of assets is 8.5 percent?

15)

You have been given the opportunity to earn $20,000...