QUESTION 5 5 points 1. Your uncle has $1,025,000 and wants

| June 12, 2016

Question
1.
Your uncle has $1,025,000 and wants to retire. He expects to live for another 25
years, and he also expects to earn 7.5% on his invested funds. How much could he
withdraw at the beginning of each of the next 25 years and end up with zero in the
account?
$85,538.08
$65,864.32
$88,104.22
$103,501.08
$73,562.75
5 points

QUESTION 7

5 points

1.
Last year Blease Inc had a total assets turnover of 1.33 and an equity multiplier of
1.75. Its sales were $320,000 and its net income was $10,600. The CFO believes that the
company could have operated more efficiently, lowered its costs, and increased its net
income by $10,250 without changing its sales, assets, or capital structure. Had it cut costs
and increased its net income by this amount, how much would the ROE have changed?
5.82%
9.10%
7.31%
8.87%
7.46%
QUESTION 8

5 points

1.
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
QUESTION 9

5 points

1.
Your child’s orthodontist offers you two alternative payment plans. The first plan
requires a $4,000 immediate up­front payment. The second plan requires you to make

monthly payments of $137.41, payable at the end of each month for 3 years. What
nominal annual interest rate is built into the monthly payment plan?
17.81%
12.06%
14.36%
17.52%
15.08%
Q U E S T I O N 10

5 points

1.
You inherited an oil well that will pay you $30,000 per year for 25 years, with the
first payment being made today. If you think a fair return on the well is 7.5%, how much
should you ask for it if you decide to sell it?
$269,616.75
$294,780.98
$348,704.3
3
$359,489.0
0
$399,032.7
9
5 points
5 points

QUESTION 13

5 points

1.
Your uncle is about to retire, and he wants to buy an annuity that will provide him
with $73,000 of income a year for 20 years, with the first payment coming immediately.
The going rate on such annuities is 5.25%. How much would it cost him to buy the
annuity today?
$1,059,405.81
$712,520.72
$937,527.27
$918,776.72
$975,028.36
Q U E S T I O N 14

5 points

1.
Edwards Electronics recently reported $11,250 of sales, $5,500 of operating costs
other than depreciation, and $1,250 of depreciation. The company had no amortization
charges, it had $3,500 of bonds that carry a 6.25% interest rate, and its federal­plus­state
income tax rate was 35%. How much was its net cash flow?
$3,284.75

$3,457.63
$3,639.61
$3,831.17
$4,032.81
QUESTION 15

5 points

1.
Your father is about to retire, and he wants to buy an annuity that will provide
him with $91,000 of income a year for 25 years, with the first payment coming
immediately. The going rate on such annuities is 5.15%. How much would it cost him to
buy the annuity today?
$1,248,843.27
$1,408,270.07
$1,474,697.91
$1,328,556.67
$1,169,129.87
Q U E S T I O N 16

5 points

1.
Pace Corp.’s assets are $625,000, and its total debt outstanding is $185,000. The
new CFO wants to employ a debt ratio of 55%. How much debt must the company add or
subtract to achieve the target debt ratio?
$158,750
$166,688
$175,022
$183,773
$192,962
Q U E S T I O N 17

5 points

1.
Last year Jandik Corp. had $250,000 of assets, $18,750 of net income, and a debt­
to­totalassets ratio of 37%. Now suppose the new CFO convinces the president to
increase the debt ratio to 48%. Sales and total assets will not be affected, but interest
expenses would increase. However, the CFO believes that better cost controls would be
sufficient to offset the higher interest expense and thus keep net income unchanged. By
how much would the change in the capital structure improve the ROE?
2.09%
2.19%
2.14%
2.52%
2.37%

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