Corporate Finance - PRACTICE EXAM
1) Paul is 30 years old. Five years ago, he started saving for his retirement by depositing
$5,000 to his savings account at the end of each year. The interest rate of 3% has been
paid by the bank on annual basis. His goal is to save $500,000 by the time he is 65 years
old.
a) How much money will Paul will be able to save by the time he reached the age of 65?
(1 Point)
Future value of annuity FVA = 377 006
b) By how much he should increase (decrease) his last five end-of-the-year deposits in
order to be able to save exactly $500,000 by the time he is 65? (2 Points)
Calculer combine il manque à 60 ans, calculer future value d’une annuité avec t=35 = 302 310
Calculer FV de 302 310 = 350K
Il manque 149K
FVA = 149539.4 / 1.03puis5 – 1/0.03
2) You are thinking of buying new software that will save your small business an estimated
$15,000 in the first year on before-tax basis. The savings will then begin to decline at a
rate of 5% per year and will continue perpetually (forever). The income tax rate is equal
to 30%. What is the maximum amount you would be willing to pay for the software if
your required rate of return (discount rate) is equal to 15% per year? (2 Point)
PVgP = P1/(r-g) = 15 + 5% = 20%
g = - 5%
r = 15%
P1/r-g( 1.03) = P1 / r-g x 0.7 = 15000 x 0.7 / 0.15 + 0.05 = 52500
3) Sametech, Inc., a company involved in the production of industrial hardware, is
considering purchasing a new generation hydraulic press for $3.5 million. The
machinery will be depreciated to zero book value over 5 years using the straight-line
depreciation method but will have a residual market value at the end of the 5 years of
$0.3 million. During the first year, the new press is expected to increase the company’s
revenues by $0.75 million and, in addition, enable the company to save $0.25 million in
employee salaries. Both numbers are expected to grow at the rate of 3% per year for the
rest of the machinery’s useful life. The income tax rate is equal to 40%; the company’s
capital is composed of 26.5% of debt and 73.5% of equity; the company’s cost of equity
is 14.7% and its cost of debt (before-tax) is equal to 9.5%.
a) What is the project’s final cash flows year by year? (3 Points)
b) What is the project’s WACC? (2 Point)
WACC = WD x KD(AT) + WE x KE
0.265x0.095x(1-0.4)+0.735x0.147 = 12.315
c) What is the project’s NPV? (1 Point)
Somme des FCF
d) What is the project’s IRR? (2 Points)
TRI Excel
4) Construct the loan amortization schedule for a 3-year $75,000 loan if the annual interest
rate is equal to 5%. (3 Points)
5) ABC, Inc. has the following capital structure: 23% debt and 77% equity. The interest
rate on its long-term loans is equal to 7.25%, while the company’s tax rate is 28%.
ABC’s CFO has calculated the company’s WACC at 9.82%. What must be the
company’s “beta” if the risk-free rate is 3.20% and expected rate of return on the
country’s stock market is equal to 9.70%? (4 Points)
Formula Sheet:
1) FV = PV x (1+r)t
2) PV = FV / (1+r)t
3) FVA = Payment x (((1+r)t - 1) / r)
4) PVA = Payment x ((1 - 1/(1+r)t ) / r)
5) PVP = P/r
6) PVgP = P1/(r-g)
7) KD(AT) = KD(BT) x (1-T)
8) KE = KRF + Beta x (KM – KRF)
9) WACC = WD x KD(AT) + WE x KE
