Quigley Inc. is considering two financial plans for the coming year. Management expects sales to be $300,000, operating costs to be $265,000, assets to be $200,000, and its tax rate to be 35%. Under Plan A it would use 25% debt and 75% common equity. The interest rate on the debt would be 8.8%, but under a contract with existing bondholders the TIE ratio would have to be maintained at or above 3.2. Under Plan B, the maximum debt that met the TIE constraint would be employed. Assuming that sales, operating costs, assets, the interest rate, and the tax rate would all remain constant, by how much would the ROE change in response to the change in the capital structure?, , ,7.10%, ,7.40%, ,8.21%, ,8.73%, ,7.25%,8. ,Suppose you just won the state lottery, and you have a choice between receiving $2,075,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes., , ,11.10%, ,10.38%, ,12.14%, ,9.44%, ,11.83%,9. ,What’s the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $2,950 at the end of Year 4 if the interest rate is 5%?, , ,$11,133.74, ,$8,740.50, ,$10,405.36, ,$8,532.40, ,$12,590.49,10. ,Your grandmother just died and left you $132,500 in a trust fund that pays 6.5% interest. You must spend the money on your college education, and you must withdraw the money in 4 equal installments, beginning immediately. How much could you withdraw today and at the beginning of each of the next 3 years and end up with zero in the account?, , ,$37,769.20, ,$39,221.86, ,$37,406.03, ,$33,774.38, ,$36,316.54,11. ,A new firm is developing its business plan. It will require $635,000 of assets, and it projects $450,000 of sales and $355,000 of operating costs for the first year. Management is reasonably sure of these numbers because of contracts with its customers and suppliers. It can borrow at a rate of 7.5%, but the bank requires it to have a TIE of at least 4.0, and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt. What is the maximum debt ratio the firm can use? (Hint: Find the maximum dollars of interest, then the debt that produces that interest, and then the related debt ratio.), , ,50.87%, ,59.34%, ,49.87%, ,62.34%, ,42.89%,12. ,Sam was injured in an accident, and the insurance company has offered him the choice of $49,000 per year for 15 years, with the first payment being made today, or a lump sum. If a fair return is 7.5%, how large must the lump sum be to leave him as well off financially as with the annuity?, , ,$437,070.42, ,$576,560.98, ,$506,815.70, ,$427,771.05, ,$464,968.53,13. ,Last year Harrington Inc. had sales of $325,000 and a net income of $19,000, and its year-end assets were $250,000. The firm’s total-debt-to-total-assets ratio was 37.5%. Based on the DuPont equation, what was the ROE?, , ,14.71%, ,12.16%, ,11.92%, ,11.43%, ,13.74%,14. ,What’s the present value of $1,675 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly?, , ,$1,440.49, ,$1,241.80, ,$1,179.71, ,$1,266.63, ,$1,279.05,15. ,Last year Hamdi Corp. had sales of $500,000, operating costs of $450,000, and year-end assets of $350,000. The debt-to-total-assets ratio was 17%, the interest rate on the debt was 7.5%, and the firm’s tax rate was 35%. The new CFO wants to see how the ROE would have been affected if the firm had used a 50% debt ratio. Assume that sales, operating costs, total assets, and the tax rate would not be affected, but the interest rate would rise to 8.0%. By how much would the ROE change in response to the change in the capital structure?, , ,3.79%, ,3.69%, ,3.18%, ,3.53%, ,2.48%,16. ,Your aunt has $640,000 invested at 5.5%, and she now wants to retire. She wants to withdraw $45,000 at the beginning of each year, beginning immediately. She also wants to have $50,000 left to give you when she ceases to withdraw funds from the account. For how many years can she make the $45,000 withdrawals and still have $50,000 left in the end?, , ,26.32, ,27.37, ,22.63, ,19.74, ,29.21,17. ,Garcia Industries has sales of $167,500 and accounts receivable of $18,500, and it gives its customers 25 days to pay. The industry average DSO is 27 days, based on a 365-day year. If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average, and if it earns 8.0% on any cash freed-up by this change, how would that affect its net income, assuming other things are held constant?, , ,$508.32, ,$405.68, ,$488.77, ,$386.13, ,$518.09,18. ,Quigley Inc. is considering two financial plans for the coming year. Management expects sales to be $300,000, operating costs to be $265,000, assets to be $200,000, and its tax rate to be 35%. Under Plan A it would use 25% debt and 75% common equity. The interest rate on the debt would be 8.8%, but under a contract with existing bondholders the TIE ratio would have to be maintained at or above 4.5. Under Plan B, the maximum debt that met the TIE constraint would be employed. Assuming that sales, operating costs, assets, the interest rate, and the tax rate would all remain constant, by how much would the ROE change in response to the change in the capital structure?, , ,2.72%, ,2.59%, ,2.96%, ,3.22%, ,3.14%,19. ,Your aunt has $350,000 invested at 5.5%, and she now wants to retire. She wants to withdraw $45,000 at the beginning of each year, beginning immediately. She also wants to have $50,000 left to give you when she ceases to withdraw funds from the account. For how many years can she make the $45,000 withdrawals and still have $50,000 left in the end?, , ,9.47, ,10.76, ,13.35, ,11.41, ,12.38

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