# Finance Questions Do Not Understand

1. If Company A and Company B are in the same industry and use the same production method, and Company A’s asset turnover is higher than that of Company B, then all else equal we can conclude

Company A is more efficient than Company B.

Company A has a lower dollar amount of assets than Company B.

Company A has higher sales than Company B.

Company A has a lower ROE than Company B.

2. The DuPont Identity expresses the firm’s ROE in terms of

profitability, asset efficiency, and leverage.

valuation, leverage, and interest coverage.

profitability, margins, and valuation.

equity, assets, and liabilities.

3. A certain investment will pay $10,000 in 20 years. If the annual return on comparable investments is 8%, what is this investment currently worth? Show your work.

4. You take out a 5 year car loan for $20,000. The loan has a 5% annual interest rate. The payments are made monthly. What are the monthly payments? Show your work. (

5. You currently have $10,000 in your retirement account. If you deposit $500 per month and the account pays 5% interest, how much will be in the account in 10 years? Show your work.

. 6. An accident victim has received a structured settlement. According to the terms of the agreement, the victim will receive $10,000 per year at the end of each year for the next 10 years. Additionally, the victim will receive $20,000 in 10 years. The victim believes they could get 7% annually on an investment they could make if they had all the money now. What would the money be worth to them if they could get it now? Show your work. (Points : 20)

7. A project requires an initial cash outlay of $60,000 and has expected cash inflows of $15,000 annually for 8 years. The cost of capital is 10%. What is the project’s NPV? Show your work. (Points : 10)

8. (A project requires an initial cash outlay of $40,000 and has expected cash inflows of $12,000 annually for 7 years. The cost of capital is 10%. What is the project’s payback period? Show your work.

9. A project requires an initial cash outlay of $60,000 and has expected cash inflows of $15,000 annually for 8 years. The cost of capital is 10%. What is the project’s IRR? Show your work.

10. A project requires an initial cash outlay of $40,000 and has expected cash inflows of $12,000 annually for 7 years. The cost of capital is 10%. What is the project’s discounted payback period? Show your work. (Points : 20)

11. Company A has the opportunity to do any, none, or all of the projects for which the net cash flows per year are shown below. The projects are not mutually exclusive. The company has a cost of capital of 15%. Which should the company do and why? You must use at least two capital budgeting methods. Show your work. Explain your answer thoroughly.

A

B

C

0

-300

-100

-300

1

100

-100

100

2

100

100

100

3

100

100

100

4

100

100

100

5

100

100

100

6

100

100

-100

7

-300

-200

0

We should accept project B because its NPV of $29.35 > 0 and the IRR > cost of capital.