1. Solution

2. Pre-Midterm Exercise

3. Question 1: 3 mins
List 5 principles of finance. Give one example of each with relevant explanation.
Answer
Principle 1:
Principle 2:
Principle 3:
Principle 4:
Principle 5:

4. Question 2: 3 mins
Foods Corporation's bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 4.75%, based on semiannual compounding. What is the bond’s price?
Answer : N = 20, I = 2.38%, PMT = 31.25, FV = 1,000
CPT PV? = 1,118.31

5. Question 3: 4 mins
You sold a house and accepted a note with the following cash flow stream as your payment. What was the effective price you received for the house assuming an interest rate of 6.0%?
Years:
CFs: $0 $1,000 $2,000 $2,000 $2,000
Answer:

6. Question 4 and 5: 5 mins
Southwest Cools had a profit margin of 5.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm's ROE?
The company's sales last year were $52,000, and its total assets were $22,000. What was its total assets turnover ratio (TATO)?
Answer
4. TATO = 1.5, EM = 1.8 , NPM = 5.25%
ROE = 1.5x1.8x5.25% = 14.18%
5. TATO = Sales/TATO = 52,000/22000 = 2.36

7. Question 6: 3 mins
Delphi Corp. has $410,000 of assets, and it uses no debt--it is financed only with common equity. The new CFO wants to employ enough debt to bring the debt/assets ratio to 40%, using the proceeds from the borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio?
Answer
Total asset x Debt ratio = Debt
410,000 x 40% = 164,000

8. Question 7: 15 mins