FIN 5080

Midterm Review

Instructor: Dr. Palkar

Table of Contents
Preparation Guidelines for Mid-term Exam ....................................................................... 2
Instructions.......................................................................................................................... 2
Chapter 2: Financial Statements, Cash Flow, and Taxes .................................................... 3
Study Guide .................................................................................................................... 3
Assigned Problems from End-of-Chapter 2.................................................................... 3
Additional problems for practice .................................................................................... 3
Chapter 3: Analysis of Financial Statements ...................................................................... 8
Study Guide .................................................................................................................... 8
Assigned Problems from End-of-Chapter 3.................................................................... 8
Additional problems for practice .................................................................................... 8
Chapter 4: Time Value of Money ..................................................................................... 10
Study Guide .................................................................................................................. 10
Assigned Problems from End-of-Chapter 4.................................................................. 10
Additional problems for practice .................................................................................. 10
Chapter 10: The Basics of Capital Budgeting................................................................... 15
Study Guide .................................................................................................................. 15
Assigned Problems from End-of-Chapter 10................................................................ 15
Additional problems for practice .................................................................................. 15

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FIN 5080
Midterm Review

Instructor: Dr. Palkar

Preparation Guidelines for Mid-term Exam

Attached below is the Study Guide for each Chapter.

Please note that just solving the additional practice problems below is NOT
enough to be successful in the exam. In order to be successful, you must
o Follow the study guide below for each chapter read the material carefully
and solve all the assigned problems from end-of-chapter and additional
practice problems.
Do not hesitate to call, email or meet me in office if you have any queries.

Instructions

Mid-term will be as per syllabus in Week 5.

The material covered for the exam is Chapters 2, 3, 4, and 10 (material covered in
Weeks 1-5)
The exam will be a TIMED exam. Tentatively, the exam will have 25-35
questions for around 3 hours.
If you extend the time limit in the exam, you will get a grade of ZERO. So, make
sure you submit your exam before the time limit.
The exam will be open from 6:00 PM on Friday, November 1st to 11:00 PM on
Sunday, November 3rd. You can take the timed exam anytime during this period.
If you take the timed exam outside this period, you will get a grade of zero.

If you have any questions, email me directly at dp788@nova.edu

Good Luck! J

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FIN 5080
Midterm Review

Instructor: Dr. Palkar

Chapter 2: Financial Statements, Cash Flow, and Taxes

Study Guide
A. Read Chapter 2 Handout and related material from Blackboard
B. Watch the Tegrity videos uploaded on Blackboard
C. Read Chapter 2 from the Textbook
D. Solve Quiz 1 and Discussion 1

Assigned Problems from End-of-Chapter 2

Solve all problems at end of Chapter 2. Solve the Mini-case

Additional problems for practice

Note that the additional problems below do not include practice problems on
NCF, NOWC, NOPAT, FCFs, MVA, EVA since the end-of-chapter does a good job of
including similar problems
Corporate tax liability and Corporate after-tax yield since the end-of-chapter does a good
job of including similar problems
1. The dividend payments are tax-deductible.
a. True
b. False
2. The interest payments on corporate bonds are tax-deductible.
a. True
b. False
3. Use the tax table to solve this problem: Bleckall Industries earned $287,420 in taxable
income for the year. How much tax does the company owe on this income?
a. $112,094
b. $90,644
c. $107,094
d. $116,656
e. $95,344

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FIN 5080
Midterm Review

Instructor: Dr. Palkar

4. ABC has net income of $10,000; dividends of $5,000; ending retained earnings of $20,000.
Compute beginning retained earnings.
a. $10,000
b. $25,000
c. $15,000
d. $5,000
e. $20,000
5. ABC has dividends of $5,000; beginning retained earnings of $15,000; ending retained
earnings of $20,000. Compute net income.
a. $10,000
b. $25,000
c. $15,000
d. $5,000
e. $20,000
6. ABC has net income of $10,000; beginning retained earnings of $15,000; ending retained
earnings of $20,000. Compute dividends.
a. $10,000
b. $25,000
c. $15,000
d. $5,000
e. $20,000
7. Winslow Enterprises has total assets of $11,700, net working capital of $1,400, owner's
equity of $5,000 and long-term debt of $3,500. What is the value of the current assets?
a. $4,600
b. $4,800
c. $2,100
d. $7,200
e. $1,800
8. Theresa's Boutique, Inc., has taxable income of $82,348. How much does Theresa's owe in
taxes?
a. $20,587
b. $13,750
c. $16,248
d. $14,689
e. $27,998
9. What is sales revenue, minus cost of goods sold and operating expenses, known as for
income statement purposes?

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FIN 5080
Midterm Review
a.
b.
c.
d.

Instructor: Dr. Palkar

Net profit
Retained earnings
Net income available to preferred shareholders
EBIT

10. Fixed assets includes which of the below?

a. Inventory
b. Patents
c. Land
d. Copyrights
11. You are about to determine your corporations taxable income. Which of the below would
not be included as a tax-deductible expense?
a. Marketing expenses
b. Depreciation expense
c. Cost of goods sold
d. Dividend expense
12. Your firm has the following income statement items: sales of $50,250,000; income tax of
$1,744,000; operating expenses of $10,115,000; cost of goods sold of $35,025,000; and
interest expense of $750,000. What is the amount of the firms EBIT?
a. $15,552,000
b. $58,000,000
c. $5,110,000
d. $4,630,000
13. Your firm has the following income statement items: sales of $50,250,000; income tax of
$1,744,000; operating expenses of $10,115,000; cost of goods sold of $35,025,000; and
interest expense of $750,000. What is the amount of the firms gross profit?
a. $18,000,000
b. $15,225,000
c. $5,000,110
d. $6,632,000
14. Your firm has the following income statement items: sales of $50,250,000; income tax of
$1,744,000; operating expenses of $10,115,000; cost of goods sold of $35,025,000; and
interest expense of $750,000. What is the amount of the firms income before tax?
a. $4,360,000
b. $750,000
c. $10,865,000
d. $25,115,000
15. Your firm has the following balance sheet statement items: total current liabilities of
$805,000; total assets of $2,655,000; fixed and other assets of $1,770,000; and long-term
debt of $200,000. What is the amount of the firms total current assets?
a. $885,000

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FIN 5080
Midterm Review

Instructor: Dr. Palkar

b. $1,550,000
c. $600,000
d. $325,000
16. Your firm has the following balance sheet statement items: total current liabilities of
$805,000; total assets of $2,655,000; fixed and other assets of $1,770,000; and long-term
debt of $200,000. What is the current ratio?
17. Your firm has the following balance sheet statement items: total current liabilities of
$805,000; total assets of $2,655,000; fixed and other assets of $1,770,000; and long-term
debt of $200,000. What is the amount of the firms net working capital?
a. $885,000
b. $1,550,000
c. $600,000
d. $325,000
e. $80,000
18. Your firm has the following balance sheet statement items: total liabilities of $1,005,000;
total assets of $2,655,000; fixed and other assets of $1,770,000; and long-term debt of
$200,000. What is the amount of the firms total stockholders equity?
a. $3,650,885
b. $550,000
c. $1,650,000
d. $833,000
19. Use the following information to answer the questions below. In 2004, A & K, Inc. expects
operating income (earnings before interest and taxes) of $18,000,000. In addition, the
corporation has $20,000,000 of debt outstanding with a 10 percent interest rate and will pay
$1,000,000 in dividends to its common stockholders. Assume that A & K will receive no
other sources of income during 2004. A & Ks taxable income for 2004 will be:
a. $18,000,000.
b. $17,000,000.
c. $16,000,000.
d. $15,000,000.
20. A & Ks total tax liability for 2004 will be:
a. $5,488,250.
b. $5,530,000.
c. $5,600,000.
d. $6,080,000.
21. Use the following information to answer the questions below. In 2004, A & K, Inc. expects
operating income (earnings before interest and taxes) of $18,000,000. In addition, the
corporation has $30,000,000 of debt outstanding with a 10 percent interest rate and will pay
$1,000,000 in dividends to its common stockholders. Assume that A & K will receive no
other sources of income during 2004. A & Ks taxable income for 2004 will be:

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FIN 5080
Midterm Review

Instructor: Dr. Palkar

a. $18,000,000.
b. $17,000,000.
c. $16,000,000.
d. $15,000,000.
22. Which of the following is NOT included in operating income?
a. Cost of goods sold
b. Sales
c. Taxes
d. Operating expenses
23. Which of the following is NOT considered a fixed asset?
a. Land
b. Equipment
c. Patents
d. Building
24. Using the information provided, calculate net income for 2002. Assume a tax rate of 40
percent.
Year
2002
Inventory
$5,000
Sales
200,000
Depreciation expense
5,000
Cost of goods sold
100,000
Interest expense
10,000
Operating expenses
30,000
a. $33,000
b. $44,000
c. $55,000
d. $66,000
25. Culligan, Inc., has current assets of $5,000, net fixed assets of $23,000, current liabilities of
$4,300, and long-term debt of $13,000. What is the value of the shareholders equity account
for this firm? How much in net working capital?
26. Ragsdale, Inc., has sales of $527,000, costs of $280,000, depreciation expense of $38,000,
interest expense of $15,000, and a tax rate of 35 percent. What is the net income for the firm?
Suppose the company paid out $48,000 in cash dividends. What is the addition to retained
earnings?
27. The Herrara Co., had $273,000 in taxable income. Compute the companys income taxes.
What is the marginal tax rate? What is the average tax rate?

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FIN 5080
Midterm Review

Instructor: Dr. Palkar

Chapter 3: Analysis of Financial Statements

Study Guide
A. Read Chapter 3 Handout and related material from Blackboard
B. Read Chapter 3 from the Textbook
C. Watch the Tegrity videos uploaded on Blackboard
D. Solve Quiz 2 and Discussion 2.

Assigned Problems from End-of-Chapter 3

Solve all problems at end of Chapter 3. Solve the Minicase

Additional problems for practice

1.

If Roten, Inc., has a equity multiplier of 1.75, total asset turnover of 1.30, and profit
margin of 8.5 percent, what is the return on equity (ROE)?

2.

Thomsen Company has a debt-equity ratio of 1.40. Return on assets is 8.7 percent
and total equity is $520,000.
a. What is the equity multiplier?
b. What is the return on equity?
c. What is the net income?

3.

Wexford Hotels has sales of $289,600, depreciation of $21,400, interest of $1,300,

net income of $14,500, and a tax rate of 34 percent. What is the times interest
earned ratio?

4.

Toast and Butter, Inc., has total assets of $712,000 and an equity multiplier of 1.6.
What is the debt-equity ratio?

5.

Smith Corporation has current assets of $11,400, inventories of $4,000, and a

current ratio of 2.6. What is Smiths acid test ratio? Assume pre-paid expenses are
zero.

6.

A firm has total equity of $70,312.50, a profit margin of 8 percent, an equity

multiplier of 1.6, and a total asset turnover of 1.3. What is the amount of the firms
sales?

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FIN 5080
Midterm Review

Instructor: Dr. Palkar

7.

ABC Corporation has the following ratios:

Total Asset Turnover= 1.6
Total debt to total assets= 0.5
Current Ratio= 1.7
Current Liabilities= $2,000,000
Sales = $16,000,000
What is the amount of current assets?

8.

The Bakers Dozen has current liabilities of $5,600, net working capital of $2,100,
inventory of $3,900, and sales of $13,500. What is the quick ratio? Assume prepaid
expenses are zero.

9.

A firm has total assets of $682,000 and total equity of $424,000. What is the debt-equity
ratio?

10.

The Jamestown Group has equity of $421,000, sales of $792,000, and a profit margin of 6
percent. What is the return on equity?

11.

A firm has sales of $350,000, a profit margin of 6 percent, a total asset turnover rate of
1.25, and an equity multiplier of 1.4. What is the return on equity?

12.

The ability of the firm to pay off short-term obligations as they come due is indicated by:

a.
b.
c.
d.

My Grade Point Average

Turnover Ratios
Liquidity Ratios
Profitability Ratios

13.

If the debt ratio is 0.20, the Equity Multiplier is:

14.

If the debt ratio is 0.80, the Equity Multiplier is:

15.

If the debt ratio is 0.80, the debt-equity ratio is:

16.

If the debt ratio is 0.60, the debt-equity ratio is:

17.

If the Debt/Equity Ratio is 0.60. What is the Debt Ratio?

18.

If the Debt/Equity Ratio is 0.80. What is the Debt Ratio?

19.

A firm has net working capital of $1,100 and current liabilities of $2,800. What is the
current ratio?

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FIN 5080
Midterm Review

Instructor: Dr. Palkar

Chapter 4: Time Value of Money

Study Guide
A. Read Chapter 4 Handout and related material from Blackboard
B. Watch the Tegrity videos uploaded on Blackboard
C. Read Chapter 4 from the Textbook
D. Solve Quiz 3 and Discussion 3.

Assigned Problems from End-of-Chapter 4

Solve all problems including the Minicase

Additional problems for practice

1. At 8% compounded annually, how long will it take $750 to double?
2. You wish to borrow $2,000 to be repaid in 12 monthly installments of $189.12. The
annual interest rate is:
3. A friend plans to buy a big-screen TV/entertainment system and can afford to set
aside $1,320 toward the purchase today. If your friend can earn 5.0%, how much can
your friend spend in four years on the purchase?
The following three questions refer to the following statement:
A Max, Inc. deposited $2,000 in a bank account that pays 12% interest annually.
4. What will the dollar amount be in four years?
5. What will the dollar amount be if the interest is compounded semiannually for those
four years?
6. How many periods would it take for the deposit to grow to $6,798 if the interest is
compounded semiannually?

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FIN 5080
Midterm Review

Instructor: Dr. Palkar

7. Today, you are investing $25,000 at 6 percent, compounded monthly, for 10 years. How
much additional income could you earn if you could have invested this amount at 7 percent,
compounded monthly?
8. You are planning a large wedding 4 years from today when your fianc finishes medical
school. You have estimated that you will need $45,000 for this affair. You can earn 3.5
percent compounded annually on your savings. How much would you have to deposit today
in one lump sum to pay for the entire wedding?
9. You have $1,000 today and want to double your money in 8 years. What interest rate must
you earn?
10. Ten years ago, Frederico deposited $2,500 into an account. Five years ago, he added an
additional $2,500 to his account. He earned 8 percent, compounded quarterly, for the first 5
years and 12 percent, compounded annually, for the last 5 years. How much money does
Frederico have in his account today?
11. Your grandfather spent $2,000 to buy 200 shares of stock in a new company 60 years ago.
The stock has appreciated 9 percent per year on average. What is the current value of these
200 shares?
12. If you place $50 in a savings account with an interest rate of 7% compounded weekly, what
will the investment be worth at the end of five years (round to the nearest dollar)?
13. What is the future value of $121,900 invested at 10 percent, compounded semi-annually for
25 years?
14. If you put $700 in a savings account with a 10% nominal rate of interest compounded
monthly, what will the investment be worth in 21 months (round to the nearest dollar)?
15. What is the value of $750 invested at 7.5% compounded quarterly for 4.5 years (round to the
nearest $1)?
16. Shorty Jones wants to buy a one-way bus ticket to Mule-Snort, Pennsylvania. The ticket costs
$142, but Mr. Jones has only $80. If Shorty puts the money in an account that pays 9%
interest compounded monthly, how many months must Shorty wait until he has $142 (round
to the nearest month)?

17. How much do you need to invest today in order to have $1,000 at the end of 5 years if
you are sure to earn an interest at the rate of 3%?
18. If you can double your money in 10 years, what is the implied rate of interest?
19. If you can triple your money in 23 years, what is the implied rate of interest?
20. How many years it will take you to triple your money if you can earn 10% each year?
21. How many years it will take you to quadruple (means 4 times) your money if you can
earn 10.20% each year? Note: Do not write "years" in your answer. Simply write the
number in the answer box.
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FIN 5080
Midterm Review

Instructor: Dr. Palkar

22. What is the future value of $100 invested for 10 years at 10% if interest is
compounded quarterly?
23. What is the future value of $3079 invested for 26 years at 18% if interest is
compounded semi-annually?
24. How much do you need to invest today in order to have $1,000 at the end of 5 years if
you are sure to earn an interest at the rate of 3%, if interest is compounded twice a
year?
25. How much do you need to invest today in order to have $3005 at the end of 15 years
if you are sure to earn an interest at the rate of 13%, if interest is compounded
monthly?
26. How much do you need to invest today in order to have $9131 at the end of 25 years
if you are sure to earn an interest at the rate of 9%, if interest is compounded
quarterly?
27. If you can double your money in 10 years, what is the implied annual rate of interest,
given that compounded in quarterly?
28. How many years it will take you to triple your money if you can earn 8% each year,
given that compounding is monthly?
29. How many years it will take you to double your money if you can earn 13% each
year, given that compounding is quarterly?
30. How many months it will take to grow your money from $4074 to $6702 if you can
earn an interest of 8% compounded monthly?
31. Say, you deposit $15,000 in a bank for 10 years. What is the amount you will have in
the bank at the end of 10 years if interest of 4% is compounded monthly for first five
years and interest of 3% is compounded quarterly for the remaining years?
32. Say, you deposit $1523 in a bank for 20 years. What is the amount you will have in
the bank at the end of 20 years if interest of 5 % compounded monthly for first 5
years and interest of 7 % compounded quarterly for the remaining years?
33. What is the implied annual rate if you deposit $750 and receive $2,000 in 8 years,
assuming interest is compounded quarterly?
34. How many months it will take to grow your money from $10,250 to $25,000 if you
can earn an interest of 8% compounded monthly? How many years will it take?
35. How many years it will take to grow your money from $3308 to $9537 if you can
earn an interest of 15% compounded quarterly?
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FIN 5080
Midterm Review

Instructor: Dr. Palkar

36. The difference between an ordinary annuity and an annuity due is the:
a. timing of the annuity payments.
b. interest rate applied to the annuity payments.
c. number of annuity payments.
d. amount of each annuity payment.
37. Which one of the following is an annuity due?
a. $225 paid at the end of each monthly period for an infinite period of time
b. $100 paid at the end of each monthly period for one year
c. $225 paid forever
d. $600 paid at the beginning of every quarter for five years, starting today
38. What is the present value of $150 received at the beginning of each year for 16 years?
The first payment is received today. Use a discount rate of 9%.
39. What is the present value of $250 received at the beginning of each year for 21 years?
Assume that the first payment is received today. Use a discount rate of 12%
40. What is the future value of semi-annual payments of $6,500 for eight years at 12
percent?
41. You are considering an investment which would entail $5,000 payments each year for
20 years. The investment will pay 7 percent interest. How much will this investment
be worth at the end of the 20 years?
42. Kelly starting setting aside funds six years ago to buy some new equipment for her
firm. She has saved $2,000 each quarter and earned an average rate of return of 7.5
percent. How much money does she currently have saved for this purpose?
43. Today, you are purchasing a $85,000 20-year car loan at 6 percent. You will pay
annually at the end of each year. What is the amount of each payment?
44. You just won a lottery that will pay you $2,500 a year for twenty years. You will
receive your first payment today. If you can earn 8 percent on your money, what are
your winnings worth to you today? (Note that since you will receive your first
payment today, it is an annuity due problem).
45. The Perpetual Life Insurance Co is trying to sell you an investment policy that will
pay you and your heirs $15,000 per year forever.
a. If the required return on this investment is 8%, how much will you pay for
the policy?
b. Suppose the Perpetual Life Insurance Co. told you the policy costs
$195,000. At what interest rate would this be a fair deal?

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FIN 5080
Midterm Review

Instructor: Dr. Palkar

46. Compute the Effective Rate in each of the following cases:

APR
11%
7
9
17

Compounding Effective
Periods
Rate
in a year
Quarterly
Monthly
Daily
Semi-annually

47. Compute the Nominal Rate in each of the following cases:

APR
(Nominal
Rate)

Compounding
Periods
in a year (m)
Semi-annually
Monthly
Weekly
Daily (365)

Effective
Rate (EAR)
8.1%
7.6%
16.8%
26.2%

48. Assume interest rate of 5.5%. A company receives cash flows of 100,000 at the end
of years 4, 5, 6, 7, and 8, and cash flows of $250,000 at the end of year 10.
a. Compute the present value
b. Compute the future value
49. In order to buy a house, you take a loan of 100,000 at 7.5% for a period of 13 years.
a. Compute the balance remaining at the end of 5 years
b. Interest paid for the first five years
50. Consider a 10-year loan with monthly payments at 10%. If the loan amount is
$250,000, compute
c. Interest paid during the 6th year
d. Principal repaid during the last 3 years
e. Balance remaining at the end of the 8th year

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FIN 5080
Midterm Review

Instructor: Dr. Palkar

Chapter 10: The Basics of Capital Budgeting

Study Guide
A. Read Chapter 10 Handout
B. Read Chapter 10 from the Textbook
C. Solve Discussion 3 and Week 5 Discussion Problems

Assigned Problems from End-of-Chapter 10

Solve problems from end of the chapter. Solve the mini-case

Additional problems for practice

1. The Modern Medicine Company is considering a new project which will require an
initial cash investment of $425,000. The project will produce no cash flows for the
first 2 years. The projected cash flows for years 3 through 6 are $31,000, $56,000,
$250,000, and $429,000, respectively. How long will it take the firm to recover its
initial investment in this project (i.e. compute payback period)? Also compute
NPV, IRR, PI, MIRR if the interest rate is 10%. Determine whether you will accept
or reject the project based on each capital budgeting technique. Assume that the
cut-off period is 3 years.
2. The Blueberry Company is considering a project which will cost $500,000 initially.
The project will not produce any cash flows for the first 3 years. Starting in year 4,
the project will produce cash inflows of $500,000 a year for 3 years. This project is
risky, so the firm has assigned it a discount rate of 22 percent. What is the NPV, PI,
IRR, MIRR?
3. What is the payback period for a project with the following cash flows?

Year
0
1
2
3
4

CF
-12500
2250
5800
3400
4100

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FIN 5080
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Instructor: Dr. Palkar

4. Given the following cash flow data. What is the project's payback?
Year:

Cash flows:

0
-$1,000

1
$300

2
$310

3
$320

4
$330

5
$340

5. A project has the following cash flows. What is the payback period? Year Cash Flows 0 Year
CF
0
-5000
1
2700
2
3300
3
1400
4
330
5
340
6. What is NPV, IRR, PI, MIRR of a project with the following cash flows if the discount rate is
14 percent?

Year
0
1
2
3
4

CF
-18000
5000
7500
8400
2100

7. You have been asked to analyze a capital investment proposal. The project s cost is
$2,775,000. Cash inflows are projected to be $925,000 in Year 1; $1,000,000 in Year 2;
$1,000,000 in Year 3; $1,000,000 in Year 4; and $1,225,000 in Year 5. Assume that your
firm discounts capital projects at 15.5%. What is the project s payback period?

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