If a firm uses external financing as a plug item, has a new capital budget of $1 million, a net income of $750,000, and a plowback ratio of 40%. how much should be raised in external funds?
Answer(s): D
Mumping the 40% plowback ratio times the $750,000 of income produces $300,000 of funds for arrestment. Subtracting the $300,000 from the $1 million needed results in $700,000 to be obtained from external sources.
What happens to the NPV of a 1-year project if fixed costs are increased from $200 to $300, the firm is profitable, has a 35% tax rate and employs a 12% cost of capital?
The $100 increase in costs is tax deductible. Therefore, the after-tax effect is only $65. Discounting the $65 decline at 12% (PV factor = .893) results in a decline in NPV of $58.05.
An annual payment in perpetuity of $1,000 per year beginning immediate is said to offer a 12% interest rate. What is its present value?
Answer(s): B
At 12%. the factor for the present value of an annuity approaches 8.33333. That assumes the first payment is one year away, Since the first payment is today, 1.00 must be added to the above (actor, resulting in 9.33333. Multiplying 933333 times $1,000 results in a present value of $9,333 33.
What is the rate of return for an investor who pays $1,054.47 for a three-year bond with a 7% coupon and sells the bond 1 year later for $1 .037.19?
Answer(s): A
The investor would have a loss of $17.28 on the sale ($1,054.47-- $1 .037.19). The $17.28 loss would partial offset the $70 of interest income, reusing in a net return of $52.72 ($70-- $17.28). Dividing the $52.72 by the $1,054.47 original investment results in a 5% return.
In calculating the total value of a bond, how much does the $1,000 to be received upon a bond's maturity in 4 years add to the bond's price if the discount rate is 6%?
The 6% present value factor for four years is .792. Multiplying that times $1,000 results value of $792.00.
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