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FIN 515
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FIN 515 MIDTERM EXAM
FIN 515 MIDTERM EXAM FIN 515 MIDTERM EXAM Question 1. Question : (TCO G) The firm's equity multiplier measures Student Answer: the value of ass... [Show More] ets held per dollar of shareholder equity. the return the firm has earned on its past investments. the firm's ability to sell a product for more than the cost of producing it. how efficiently the firm is utilizing its assets to generate sales. Instructor Explanation: Chapter 2 Points Received: 10 of 10 Comments: Question 2. Question : (TCO G) The DuPont Identity expresses the firm's ROE in terms of Student Answer: profitability, asset efficiency, and leverage. valuation, leverage, and interest coverage. profitability, margins, and valuation. equity, assets, and liabilities. Instructor Explanation: Chapter 2 Points Received: 10 of 10 Comments: Question 3. Question : (TCO B) You plan on retiring in 20 years. You currently have $275,000 and think you will need $1,000,000 to retire. Assuming you don’t deposit any additional money into the account, what annual return will you need to earn to meet this goal? Student Answer: N = 20 PV = $275,000 FV = $1,000,000 CPT for i/y i/y = 6.67% If; I planned to retire in 20 and I dont deposit any additional money into the account my annual return would need to be 6.67% in order to meet my foal of $1,000,000. Instructor Explanation: Week 2 Lecture and Chapter 4 PV 275000 FV 1000000 N 20 I answer 6.66% PMT 0 Either PV or FV must be negative Points Received: (not graded) Comments: Question 4. Question : (TCO B) You start saving $100 per month in an account that pays 5% interest, compounded monthly. You make the payment at the beginning of each month and interest is applied at the end of each month. How much money will you have in the account in 5 years? Show your work. Student Answer: N = 5 (5 x 12) = 60 i/y = 5% (.05 / 2) = 2.50% PV = $100 PMT/CF = $100 FV = $6,497.35 If; I deposit $100 into an account that pays 5% compounded month and make a $100 monthly payment in five years I would have $6,497.35 Instructor Explanation: Week 2 Lecture and Chapter 4 PV 0 FV answer $6800.61 N 5*12=60 I .05/12=.0041667 PMT 100 Points Received: (not graded) Comments: Question 5. Question : (TCO B) A grandfather sets up a trust for his only grandchild. The trust consists of an annuity that will pay $5,000 monthly to the grandchild for 18 years. The annuity pays an annual return of 5% and makes the payments monthly at the end of the month. Return on the annuity is 5% annually. The payments to the grandchild are paid at the beginning of the month. The annuity will have a value of $0 at the end of the 18 years. How much needs to be deposited to set up the annuity? Show your work. Student Answer: Instructor Explanation: Week 2 Lecture and Chapter 4 PV answer 711,201 FV 0 N 216 I .05/12=.0041667 PMT 5000 Points Received: (not graded) Comments: Question 6. Question : (TCO B) You have a two children, A and B. Child A is not going to college but is working in a business to learn the ropes. Child A plans on opening a business someday. Child B is attending college. You put a certain amount of money into an account. From this account, Child B will receive $2,000 per month for the next four years. Whatever is left at that time will go to Child A to help start the business. You want Child A to receive $96,000 at that time. The account pays 7% annually, compounded monthly. How much money do you need to start the account? Show your work. Student Answer: Child B Receiving = $2,000 x 48 = $96,000 in four years Child A receives $96,000 at that time Account pays 7% annually compounded monthly FV = -$96,000 N = 48 i/y = 7% (.07 / 12) = .00583 PMT = -2000 PV = $156,152 What is needed to start the account is $156,152 Instructor Explanation: Week 2 Lecture and Chapter 4 PV answer 156,152 FV -96000 N 48 I .07/12=.00583 PMT -2000 Points Received: (not graded) Comments: Question 7. Question : (TCO F) A project requires an initial cash outlay of $95,000 and has expected cash inflows of $20,000 annually for 9 years. The cost of capital is 10%. What is the project’s NPV? Show your work. Student Answer: N = 9 i/y = 10% PMT = $20,000 NPV = $115,180 - $95,000 = $20,180 The project's NPV is $20,180 Instructor Explanation: Week 3 Lecture and Chapters 7 and 8 PV 115,180 (calculated) FV N 9 I .10 PMT 20000 NPV= 115,180-95,000=20,180 Points Received: (not graded) Comments: Question 8. Question : (TCO F) 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. Student Answer: Year Original CF Discounted CF CF 0 -40000 -40000 40000 1 12000 10909.09 29090.91 2 12000 9917.36 19173.55 3 4 5 Discounted payback period = 4.25 years Instructor Explanation: Week 3 Lecture and Chapters 7 and 8 40,000/12,000=3.33 years Points Received: (not graded) Comments: Question 9. Question : (TCO F) 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. Student Answer: Instructor Explanation: Week 3 Lecture and Chapters 7 and 8 Using Excel, 19% Points Received: (not graded) Comments: Question 10. Question : (TCO F) A project requires an initial cash outlay of $95,000 and has expected cash inflows of $20,000 annually for 9 years. The cost of capital is 10%. What is the project’s discounted payback period? Show your work. Student Answer: Instructor Explanation: Week 3 Lecture and Chapters 7 and 8 The discounted payback is about 6.75 years. Year Original CF Discounted CF CF0-∑CFi 0 -95000 -95000 95000 1 20000 $18,181.82 $76,818.18 2 20000 $16,528.93 $60,289.26 3 20000 $15,026.30 $45,262.96 4 20000 $13,660.27 $31,602.69 5 20000 $12,418.43 $19,184.26 6 20000 $11,289.48 $7,894.79 7 20000 $10,263.16 ($2,368.38) Points Received: (not graded) Comments: Question 11. Question : (TCO F) 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. Projects A and B can be done together. Projects B and C can be done together. But Projects A and C are mutually exclusive. The company has a cost of capital of 12%. Which should the company do and why? You must use at least two capital budgeting methods. Show your work. A B C 0 -500 -500 -600 1 200 -200 100 2 200 200 100 3 200 200 100 4 200 200 100 5 200 200 100 6 200 200 100 7 -300 -300 100 Student Answer: Instructor Explanation: Week 3 Lecture and Chapters 7 and 8 Student answers will vary. But only Project A should be undertaken. The others have negative NPV or IRR below the hurdle rate. Project A B C Discounted Payback 3.6 NA NA Payback 2.4 5.5 6 NPV 105 -234 -219 IRR 28% 0 4.01% Points Received: (not graded) Comments: [Show Less]
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FIN 515 MIDTERM EXAM
FIN 515 MIDTERM EXAM FIN 515 MIDTERM EXAM Question 1. Question : (TCO G) The firm's equity multiplier measures Student Answer: the value of ass... [Show More] ets held per dollar of shareholder equity. the return the firm has earned on its past investments. the firm's ability to sell a product for more than the cost of producing it. how efficiently the firm is utilizing its assets to generate sales. Instructor Explanation: Chapter 2 Points Received: 10 of 10 Comments: Question 2. Question : (TCO G) The DuPont Identity expresses the firm's ROE in terms of Student Answer: profitability, asset efficiency, and leverage. valuation, leverage, and interest coverage. profitability, margins, and valuation. equity, assets, and liabilities. Instructor Explanation: Chapter 2 Points Received: 10 of 10 Comments: Question 3. Question : (TCO B) You plan on retiring in 20 years. You currently have $275,000 and think you will need $1,000,000 to retire. Assuming you don’t deposit any additional money into the account, what annual return will you need to earn to meet this goal? Student Answer: N = 20 PV = $275,000 FV = $1,000,000 CPT for i/y i/y = 6.67% If; I planned to retire in 20 and I dont deposit any additional money into the account my annual return would need to be 6.67% in order to meet my foal of $1,000,000. Instructor Explanation: Week 2 Lecture and Chapter 4 PV 275000 FV 1000000 N 20 I answer 6.66% PMT 0 Either PV or FV must be negative Points Received: (not graded) Comments: Question 4. Question : (TCO B) You start saving $100 per month in an account that pays 5% interest, compounded monthly. You make the payment at the beginning of each month and interest is applied at the end of each month. How much money will you have in the account in 5 years? Show your work. Student Answer: N = 5 (5 x 12) = 60 i/y = 5% (.05 / 2) = 2.50% PV = $100 PMT/CF = $100 FV = $6,497.35 If; I deposit $100 into an account that pays 5% compounded month and make a $100 monthly payment in five years I would have $6,497.35 Instructor Explanation: Week 2 Lecture and Chapter 4 PV 0 FV answer $6800.61 N 5*12=60 I .05/12=.0041667 PMT 100 Points Received: (not graded) Comments: Question 5. Question : (TCO B) A grandfather sets up a trust for his only grandchild. The trust consists of an annuity that will pay $5,000 monthly to the grandchild for 18 years. The annuity pays an annual return of 5% and makes the payments monthly at the end of the month. Return on the annuity is 5% annually. The payments to the grandchild are paid at the beginning of the month. The annuity will have a value of $0 at the end of the 18 years. How much needs to be deposited to set up the annuity? Show your work. Student Answer: Instructor Explanation: Week 2 Lecture and Chapter 4 PV answer 711,201 FV 0 N 216 I .05/12=.0041667 PMT 5000 Points Received: (not graded) Comments: Question 6. Question : (TCO B) You have a two children, A and B. Child A is not going to college but is working in a business to learn the ropes. Child A plans on opening a business someday. Child B is attending college. You put a certain amount of money into an account. From this account, Child B will receive $2,000 per month for the next four years. Whatever is left at that time will go to Child A to help start the business. You want Child A to receive $96,000 at that time. The account pays 7% annually, compounded monthly. How much money do you need to start the account? Show your work. Student Answer: Child B Receiving = $2,000 x 48 = $96,000 in four years Child A receives $96,000 at that time Account pays 7% annually compounded monthly FV = -$96,000 N = 48 i/y = 7% (.07 / 12) = .00583 PMT = -2000 PV = $156,152 What is needed to start the account is $156,152 Instructor Explanation: Week 2 Lecture and Chapter 4 PV answer 156,152 FV -96000 N 48 I .07/12=.00583 PMT -2000 Points Received: (not graded) Comments: Question 7. Question : (TCO F) A project requires an initial cash outlay of $95,000 and has expected cash inflows of $20,000 annually for 9 years. The cost of capital is 10%. What is the project’s NPV? Show your work. Student Answer: N = 9 i/y = 10% PMT = $20,000 NPV = $115,180 - $95,000 = $20,180 The project's NPV is $20,180 Instructor Explanation: Week 3 Lecture and Chapters 7 and 8 PV 115,180 (calculated) FV N 9 I .10 PMT 20000 NPV= 115,180-95,000=20,180 Points Received: (not graded) Comments: Question 8. Question : (TCO F) 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. Student Answer: Year Original CF Discounted CF CF 0 -40000 -40000 40000 1 12000 10909.09 29090.91 2 12000 9917.36 19173.55 3 4 5 Discounted payback period = 4.25 years Instructor Explanation: Week 3 Lecture and Chapters 7 and 8 40,000/12,000=3.33 years Points Received: (not graded) Comments: Question 9. Question : (TCO F) 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. Student Answer: Instructor Explanation: Week 3 Lecture and Chapters 7 and 8 Using Excel, 19% Points Received: (not graded) Comments: Question 10. Question : (TCO F) A project requires an initial cash outlay of $95,000 and has expected cash inflows of $20,000 annually for 9 years. The cost of capital is 10%. What is the project’s discounted payback period? Show your work. Student Answer: Instructor Explanation: Week 3 Lecture and Chapters 7 and 8 The discounted payback is about 6.75 years. Year Original CF Discounted CF CF0-∑CFi 0 -95000 -95000 95000 1 20000 $18,181.82 $76,818.18 2 20000 $16,528.93 $60,289.26 3 20000 $15,026.30 $45,262.96 4 20000 $13,660.27 $31,602.69 5 20000 $12,418.43 $19,184.26 6 20000 $11,289.48 $7,894.79 7 20000 $10,263.16 ($2,368.38) Points Received: (not graded) Comments: Question 11. Question : (TCO F) 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. Projects A and B can be done together. Projects B and C can be done together. But Projects A and C are mutually exclusive. The company has a cost of capital of 12%. Which should the company do and why? You must use at least two capital budgeting methods. Show your work. A B C 0 -500 -500 -600 1 200 -200 100 2 200 200 100 3 200 200 100 4 200 200 100 5 200 200 100 6 200 200 100 7 -300 -300 100 Student Answer: Instructor Explanation: Week 3 Lecture and Chapters 7 and 8 Student answers will vary. But only Project A should be undertaken. The others have negative NPV or IRR below the hurdle rate. Project A B C Discounted Payback 3.6 NA NA Payback 2.4 5.5 6 NPV 105 -234 -219 IRR 28% 0 4.01% Points Received: (not graded) Comments: [Show Less]
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FIN 515 FINAL EXAM
FIN 515 FINAL EXAM 1. (TCO A) In the United States, which of the following types of organization has the greatest revenue in total? a. Sole prop... [Show More] rietorship b. C corporation c. S corporation d. Limited partnership Question 2. (TCO A) Which of the following statements is NOT correct? (Points : 5) The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends. The corporate valuation model discounts free cash flows by the required return on equity. The corporate valuation model can be used to find the value of a division. An important step in applying the corporate valuation model is forecasting the firm's pro forma financial statements. Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or terminal, value. Question 3. (TCO A) Sole proprietorships have all of the following advantages except ? a. easy to set up. b. single taxation of income. c. limited liability. d. ownership and control are not separated. Question 4. (TCO B) Which of the following would cause the present value of an annuity to decrease? a. Reducing the number of payments. b. Increasing the number of payments. c. Decreasing the interest rate. d. Decreasing the liquidity of the payments. Question 5. (TCO B) In a TVM calculation, if incoming cash flows are positive, outgoing cash flows must be a. positive. b. negative. c. either positive or negative. It really doesn’t matter. d. stated in time units that are different from the time units in which the interest rates are stated. Question 6. Which of the following statements is correct? (Points : 5) One advantage of the NPV over the IRR is that NPV takes account of cash flows over a project’s full life, whereas IRR does not. One advantage of the NPV over the IRR is that NPV assumes that cash flows will be reinvested at the WACC, whereas IRR assumes that cash flows are reinvested at the IRR. The NPV assumption is generally more appropriate. One advantage of the NPV over the MIRR method is that NPV takes account of cash flows over a project’s full life, whereas MIRR does not. One advantage of the NPV over the MIRR method is that NPV discounts cash flows, whereas the MIRR is based on undiscounted cash flows. Since cash flows under the IRR and MIRR are both discounted at the same rate (the WACC), these two methods always rank mutually exclusive projects in the same order. Question 7. (TCO G) The Chadmark Corporation's budgeted monthly sales are $3,000. In the first month, 40% of its customers pay and take the 2% discount. The remaining 60% pay in the month following the sale and don't receive a discount. Chadmark's bad debts are very small and are excluded from this analysis. Purchases for next month's sales are constant each month at $1,500. Other payments for wages, rent, and taxes are constant at $700 per month. Construct a single month's cash budget with the information given. What is the average cash gain or (loss) during a typical month for the Chadmark Corporation? Answer: Single Month's Cash Budget for the Chadmark Corporation Current month sales collected: 3000 x 40% x (100%-2%) = $1176 + Prior month sales collected: 3000 x 60% = $1800 - purchases $1500 - other expenses $700 = $ 776 Average cash gain during a typical month = $ 776 8. If you were a manager of a company, which of the three right side components of the DuPont Identity would you want to increase and which would you want to decrease, other things being equal? Give a specific example for how to do that for each of the three. Ans: The DuPont Identity measures the company’s ROE in terms of its profitability, asset efficiency, and leverage. The model helps investors compare similar companies like these with similar ratios. Investors can then apply perceived risks with each company's business model. Based on these three performances measures i.e. Profit Margin, Total Asset Turnover and Financial Leverage, the model concludes that a company can raise its ROE by maintaining a high profit margin, increasing asset turnover, or leveraging assets more effectively. The first term in the DuPont Identity is the firm’s net profit margin, which measures its overall profitability. The second term is the firm’s asset turnover, which measures how efficiently the firm is utilizing its assets to generate sales. Together, these terms determine the firm’s return on assets. The third term is the equity multiplier which indicates the value of assets held per dollar of shareholder equity. The right side components of the DuPont Identity that can be increased are Net Income and sales. The inventory and account receivable can be reduced which can help the current assets position and in turn reduces total assets, which then improves total asset turnover. I would like to decrease the inefficiencies in asset utilization and inventory holding to improve the ROE. If investors are unsatisfied with a low ROE, the management can use this formula to pinpoint the problem area whether it is a lower profit margin, asset turnover, or poor financial leveraging. References: http://www.myaccountingcourse.com/financial-ratios/dupont-analysis 9. (TCO B) Leak Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 11% and FCF is expected to grow at a rate of 5% after Year 2, what is the Year 0 value of operations, in millions? Assume that the ROIC is expected to remain constant in Year 2 and beyond (and do not make any half-year adjustments). Year: 1 2 Free cash flow: -$50 $100 Answer: Value of Operations=Present value of the expected free cash flows Horizon value at year 2= (CF in year 3)/(WACC-G) Horizon value at year 2 = 100(1.05)/(.11-.05) = 1,750.00 Year Yearly earnings Present value 1 (50.00) (45.05) 2 100.00 81.16 Horizon Value 1,750.00 1,420.34 at Year 2 Net Present value = 1,456.46 10. A stock pays an annual dividend of $2.50 and that dividend is not expected to change. Similar stocks pay a return of 10%. What is P0? As per the Constant Dividend Growth Model P0 = Stock Price = Div 1 /( Required Rate of Return – Dividend Growth Rate) = 2.5 /(0.1 -0) = $ 25 11. A stock has just paid a dividend and has declared an annual dividend of $2.00 to be paid one year from today. The dividend is expected to grow at a 5% annual rate. The return on equity for similar stocks is 12%. What is P0? Constant Dividend Growth Model P0 = Stock Price = 2.0 /(0.12 -0.05) = 2.0 /(0.07) = 200/7 = $ 28.57 12. A bond has 5 years to maturity and has a YTM of 8%. Its par value is $1,000. Its semiannual coupons are $50. What is the bonds current market price? Bonds current market price would be calculated as Present value of the Face Value = = 1000 * [ 1/ 1.04 ^10] = $ 675.564 Present value of the coupon payments = 50 * [1 - (1/1.04^10)] / 0.04 = $405.54 Bonds current market price = $ 675.564 + $405.54 = $1081.104 13. A bond currently sells for $1,000 and has a par of $1,000. It was issued two years ago and had a maturity of 10 years. The coupon rate is 7% and the interest payments are made semiannually. What is its YTM? 1000 = 35 * 1/y * ( 1- 1/(1 + y)^16) + 1000 /( 1+y)^16 Using Excel Formula To compute the yield to maturity using excel , we can use the function =Rate(16,-35,1000,-1000) = 3.5 % 14. A company has 10 million shares outstanding trading for $7 per share. It also has $300 million in outstanding debt. If its equity cost of capital is 15%, and its debt cost of capital is 9%, and its effective corporate tax rate is 40%, what is its weighted average cost of capital? Fraction of the Company’s value financed by Equity = 70/370 = 0.189 Fraction of the Company’s value financed by Debt = 300 /370 = 0.81 Company weighted average cost of capital = 0.189 * 0.15 + 0.81*0.09 * (1- 0.4) = 0.189 * 0.15 + 0.81* 0.054 = 0.07209 = 7.209 % 15. Name and describe the three functions of managerial finance. For each, give an example other than those used in the text and lecture. Managerial finance is concerned with the duties of the financial manager in the business firm. The financial manager actively manages the financial affairs of any type of business, whether private or public, large or small, profit-seeking or not-for-profit. They are also more involved in developing corporate strategy and improving the firm’s competitive position. Managerial finance is concerned with the duties of the financial manager working in a business. Three functions of the managerial finance are listed as below. Financial Decision - Financial decision is one of the most important functions of the managerial finance. They have to make sound decision about the debt and equity financing for the company. Funds can be acquired through various ways and means. There is an optimal mix of debt and equity for every company and the financing manager has to ensure that a correct ratio of an equity and debt is maintained. This mix of equity capital and debt is known as a firm’s capital structure. The use of debt affects the risk and return of a shareholder. It is more risky though it may increase the return on equity funds. A good capital structure for a company would maximize shareholders return. Dividend Decision - Earning positive return is a common goal of all the businesses. But the key function a financial manger performs is to decide whether to distribute all the profits to the shareholder or retain all the profits or distribute part of the profits to the shareholder and retain the other half in the business. It’s the financial manager’s responsibility to decide a optimum dividend policy which maximizes the market value of the firm. Hence an optimum dividend payout ratio is calculated. It is a common practice to pay regular dividends in case of profitability. Another way is to issue bonus shares to existing shareholders. Liquidity Decision - It is very important to maintain a liquidity position of a firm to avoid insolvency. Firm’s profitability, liquidity and risk all are associated with the investment in current assets. In order to maintain a tradeoff between profitability and liquidity it is important to invest sufficient funds in current assets. Investment in current assets affects firm's profitability and liquidity. More current assets enhance liquidity which helps the firms to meet short-term obligation of the firm. But it also affects the profitability negatively as the current assets earn much less than their cost of capital. Financial manager needs to carry out a trade-off between liquidity and profitability while balancing investment in current assets. References: http://www.managementstudyguide.com/finance-functions.htm 16. Explain thoroughly how stock portfolios affect the risk to an investor. Ans: A portfolio consists of a number of different securities or other assets selected for investment gains. However, a portfolio also has investment risks. The primary objective of portfolio theory or management is to maximize gains while reducing diversifiable risk. Portfolios can consist of any number of assets with differing proportions of each asset, there is a wide range of risk-return ratios. By selecting the right assets in the right proportions, it may be possible to reduce diversifiable risk to near zero, but the portfolio would still have systematic risk, which also affects the general market. Portfolios, like stocks, have betas which measure the systematic risk of the portfolio compared to that of the market. Most investors try to reduce the risk associated with an individual stock by diversification. Investors want to minimize the risk associated with a given firm's expected return. Diversification can play a role by minimizing firm-specific risks. Fluctuations of a stock’s return that are due to firm-specific news are independent risks. This type of risk is also referred to as firm-specific risk. Fluctuations of a stock’s return that are due to market-wide news represent common risk. This type of risk is also called systematic, undiversifiable, or market risk. When we combine many stocks in a large portfolio, the firm-specific risks for each stock will average out and be diversified. Good news will affect some stocks, and bad news will affect others, but the amount of good or bad news overall will be relatively constant. When firms carry both types of risk, only the firm-specific risk will be diversified when we combine many firms’ stocks into a portfolio. The volatility will therefore decline until only the systematic risk. When we are adding new assets to the portfolio, we are actually lowering the variability of returns. Through careful selection of assets in the portfolio, we can eliminate most firm-specific risk. By owning a portfolio of stocks, it's possible to lower the overall risk of the entire investment portfolio. References: http://thismatter.com/money/investments/modern-portfolio-theory.htm Berk, Jonathan B., Peter DeMarzo. 1962. Corporate finance. 3rd ed. Peterson Publishing. 17. What is the Cash Conversion Cycle (CCC)? Name the components of the CCC and explain why the CCC is important to business. Answer: The cash conversion cycle measures the number of days the firm's operating cycle requires costly financing to support it. You can think of the operating cycle as the number of days sales invested in inventories and receivables. Cash conversion cycle (CCC) has been considered a useful measure of firm’s effective working capital management and especially the cash management. The CCC days are calculated by taking into account the 1. Debtors turnover period, 2. Payables turnover period, and 3. Inventory turnover period. The CCC length in days can be simply calculated as follows: CCC days = inventory turnover days + debtors turnover days – payables turnover days The reduction in cash conversion cycle (CCC) can help the firms to increase its working capital and improve its cash position. If a company wants to shorten their CCC, there are three steps they can take. They can decrease their Inventory Conversion Period, which is shortening the time it takes to convert inventories into accounts receivable such as by implementing a just in time inventory management system, Another way is to reduce the Average Collection Period, which is the amount of time the company's customers take to pay for the goods. This is usually accomplished by instituting a small discount for payments made promptly. The third way is to increase the Payables Deferral Period, which is to extend the time it takes for the company to pay its suppliers. Firm can use their relationship with suppliers to create faster turnaround on cash flow cycle. Also firm can do this by getting their suppliers to accept a longer debt repayment period than what is normal in accounts receivable relationships. Rather than having a 30 or 60 days repayment period, getting the creditors to extend the repayment period beyond that will allow to have more cash on hand without having to pay creditors as often. Existing relationship can be used with customers to eliminate the time between cash flow cycles. 18. A company has the opportunity to do any of the projects for which the net cash flows per year are shown below. The company has a cost of capital of 12%. Which should the company do and why? You must use at least two capital budgeting methods. Show your work. Year A B C 0 -300 -100 -300 1 100 -50 100 2 100 100 100 3 100 100 100 4 100 100 100 5 100 100 100 6 100 100 100 7 -100 -200 0 (Points : 40) Ans: 1st Capital Budgeting Method ( NPV Calculation) Project ‘A’ NPV - Year Net Cash Flow Discount Rate Discounted Amount 0 -300 -300 1 100 1.12 89.28 2 100 1.2544 79.72 3 100 1.404928 71.18 4 100 1.573519 63.55 5 100 1.762342 56.74 6 100 1.973823 50.66 7 -100 2.210681 -45.23 NPV 65.91 Project ‘B’ NPV - Year Net Cash Flow Discount Rate Discounted Amount 0 -100 -100 1 -50 1.12 -44.64 2 100 1.2544 79.72 3 100 1.404928 71.18 4 100 1.57351936 63.55 5 100 1.762341683 56.74 6 100 1.973822685 50.66 7 -200 2.210681407 -90.47 NPV 86.74 Project ‘C ‘ NPV Year Net Cash Flow Discount Rate Discounted Amount 0 -300 -300 1 100 1.12 89.28 2 100 1.2544 79.72 3 100 1.404928 71.18 4 100 1.57351936 63.55 5 100 1.762341683 56.74 6 100 1.973822685 50.66 7 0 2.210681407 0 PV 111.14 The company should do the project ‘C’ as the Net present value of the discounted cash flow is the highest which is $ 111.14. 2nd Capital Budgeting Method ( Cash Payback Period) Project 'A' Year Net Cash Flow Cumulative Cash Flow 0 -300 -300 1 100 -200 2 100 -100 3 100 0 4 100 100 5 100 200 6 100 300 7 -100 200 Cash payback period 3 Years Project 'B' Year Net Cash Flow Cumulative Cash Flow 0 -100 -100 1 -50 -150 2 100 -50 3 100 50 4 100 150 5 100 250 6 100 350 7 -200 150 Cash payback period 2.5 Years Project 'C' Year Net Cash Flow Cumulative Cash Flow 0 -300 -300 1 100 -200 2 100 -100 3 100 0 4 100 100 5 100 200 6 100 300 7 0 300 Cash payback period 3 Years As per the Cash Payback period technique, this is better for the firm to carry out the Project ‘B’ as the cash be recovered faster and company can recover the initial investment much sooner. 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FIN 515 MIDTERM EXAM
Grading Summary FIN 515 MIDTERM EXAM Grade Details - All Questions Question 1. Question : (TCO G) The firm's equity multiplier measures The va... [Show More] lue of assets held per dollar of shareholder equity. The return the firm has earned on its past investments. The firm's ability to sell a product for more than the cost of producing it. How efficiently the firm is utilizing its assets to generate sales. Instructor Explanation: Chapter 2 Question 2. Question : (TCO G) Suppose Novak Company experienced a reduction in its ROE over the last year. This fall could be attributed to a decrease in asset turnover. an increase in leverage. a decrease in equity. Instructor Explanation: Chapter 2 Question 3. Question : (TCO B) 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. Student Answer: FV = 10000 NPER = 20 Rate = 8% PV = (8%,20,0,10000,0) = $2145 Instructor Explanation: Week 2 Lecture & Chapter 4 PV answer 2145 FV 10000 N 20 I .08 PMT 0 Points Received: 20 of 20 Comments: Question 4. Question : (TCO B) You start saving $100 per month in an account that pays 5% interest, compounded monthly. You make the payment at the beginning of each month & interest is applied at the end of each month. How much money will you have in the account in 5 years? Show your work. mt = 12 * 5 = 60 i = 0.05 / 12 = 0.004 F = P [(1 + i / m) ^t - 1) / (i / m) F = 100 * ((1 + 0.05 / 12) ^60 − 1) / (0.05 / 12) F = 100 * (0.28) / (0.004) = $7,000 There will be $7,000 in the account 5 years from now. Instructor Explanation: Week 2 Lecture & Chapter 4 PV 0 FV answer $6800.61 N 5*12=60 I .05/12=.0041667 PMT 100 Question 5. Question : (TCO B) You currently have $10,000 in your retirement account. If you deposit $500 per month & the account pays 5% interest, how much will be in the account in 10 years? Show your work. FV = C * 1/r *((1+r)^n - 1) Future Value of money after 20 months = 500 * 12/ 0.05 * ((1.0041666) ^20 - 1) Future Value of money after 20 months = $ 10405.91 The money that will be there in the account in 10 years = 10405.91 * (1.0041666)^100 The money that will be there in the account in 10 years = $ 15770.92 Instructor Explanation: Week 2 Lecture & Chapter 4 PV 10000 FV answer 94,111 N 120 I .05/12=.0041667 PMT 500 Points Received: 10 of 20 Comments: Week 2 Lecture & Chapter 4 PV 10000 FV answer 94,111 N 120 I .05/12=.0041667 PMT 500 Question 6. Question : (TCO B) A homebuyer is taking out a mortgage with a balloon payment. The loan amount is $100,000 & the annual interest rate is 5%. The homebuyer will make equal monthly payments for 5 years except the last payment will include an additional payment of $20,000. How much will the equal monthly payments be? Show your work. (Monthly payment * 12 / 0.05) * [1 – 1 / (1.00041666)^60] + 20000 / (1.00041666)^60 = 100,000 100,000 = (Monthly payment * 12 / 0.05) * (1 – 0.7792054) + 20000 * 0.7792054 84415.8922 = (Monthly payment * 12 / 0.05) * 0.2207946 Monthly payment = $1593.03 Instructor Explanation: Week 2 Lecture & Chapter 4 PV 100000 FV 20000 N 60 I .05/12=.0041667 PMT 1593.03 Points Received: 20 of 20 Comments: Week 2 Lecture & Chapter 4 PV 100000 FV 20000 N 60 I .05/12=.0041667 PMT 1593.03 Question 7. Question : (TCO F) A project requires an initial cash outlay of $60,000 & has expected cash inflows of $15,000 annuall for 8 years. The cost of capital is 10%. What is the project’s NPV Show your work. Student Answer: Cost of Capital: 10% = 15000 / (1.10^1 = 13,636.36 15000 / (1.10^2) = 12,396.69 15000 / (1.10^3) = 11,269.72 15000 / (1.10^4) = 10,245.20 15000 / (1.10^5)= 9,313.82 15000 / (1.10^6) = 8,467.11 15000 / (1.10^7) 7,697.37 15000 / (1.10^8) = 6,997.61 =================== 80,023.88 80023.88 - 60000 = 20,023.88 NPV = $20,023.88 Instructor Explanation: Week 3 Lecture & Chapters 7 & 8PV 80,023 (calculated) FV N 8 I .10 PMT -15000 80,023-60,000=20,023=NPV Question 8. Question : (TCO F) A project reuires an initial cash outlay of $60,000 & has expected cash inflow of $15,000 annually for 8 years. The cost of capital is 10%. What s the project’s payback period? Show your work. Question 9. Question : (TCO F) A project requires an initial cash outlay of $40,000 & has expected cash inflows of $12,000 annually for 7 years. The cost of capital is 10%. What is the project’s IRR? Show your work. Student Answer: Cost of Capital: 12000 / (1.10^1) = 10909.09 12000 / (1.10^2) = 9917.36 12000 / (1.10^3) = 9015.78 12000 / (1.10^4) = 8196.16 12000 / (1.10^5) = 7451.06 12000 / (1.10^6) = 6773.69 12000 / (1.10^7) = 6157.90 12000 / (1.10^8) = 5598.09 ==================== 64,019.13 64019.13 - 40000 = 24,019.13 NPV = $24,019.13 (40000 / 24019) + 0.10 = 1.67 + 0.10 = 1.77 IRR = 17.7% Instructor Explanation: Week 3 Lecture & Chapters 7 & 8 Using Excel, 23% Points Received: 20 of 20 Comments: Week 3 Lecture & Chapters 7 & 8 Using Excel, 23% Question 10. Question : (TCO F) A project requires an initial cash outlay of $95,000 & has expected cash inflows of $20,000 annually for 9 years. The cost of capital is 10%. What is the project’s discounted payback period? Show your work. Student Answer: Discounted Csh Inflow = Actual Cash Inflow / (1 + i)n Year CF PV CFxPV CCF 0 95000) 1 (95000) 95000 1 20000 0.91 18181.82 76818.18 2 20000 0.83 16528.93 60289.26 3 20000 0.75 15026.30 45262.96 4 20000 0.68 13660.27 31602.69 5 20000 0.62 12418.43 19184.26 6 20000 0.56 11289.48 7894.79 7 20000 0.51 10263.16 (2368.38) Discounted Payback Period = 6.77 years Instructor Explanation: Week 3 Lecture & Chapters 7 & 8 The discounted payback is about 6.75 years. Year Original CF Discounted CF CF0-∑CFi 0 -95000 -95000 95000 1 20000 $18,181.82 $76,818.18 2 20000 $16,528.93 $60,289.26 3 20000 $15,026.30 $45,262.96 4 20000 $13,660.27 $31,602.69 5 20000 $12,418.43 $19,184.26 6 20000 $11,289.48 $7,894.79 7 20000 $10,263.16 ($2,368.38) Points Received: 20 of 20 Comments: Question 11. Question : (TCO F) 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. Projects A & B can be done together. Projects B & C can be done together. But Projects A & C are mutually exclusive. The company has a cost of capital of 12%. Which should the company do & why? You must use at least two capital budgeting methods. Show your work. A B C 0 -500 -500 -600 1 200 -200 100 2 200 200 100 3 200 200 100 4 200 200 100 5 200 200 100 6 200 200 100 7 -300 -300 100 Student Answer: Project A B C Discounted Payback 3.6 NA NA Payback 2.4 5.5 6 NPV 187 -234 -219 IRR 28% 0 4.01% The only project with a positive NPV is A. Also the IRR is the highest with project A. Instructor Explanation: Week 3 Lecture & Chapters 7 & 8 Student answers will vary. But only Project A should be undertaken. The others have negative NPV or IRR below the hurdle rate. Project A B C Discounted Payback 3.3 NA NA Payback 2.4 5.5 6 NPV 187 -171 -144 IRR 28% 0 4.01% 0 -500 -500 -500 -500 -600 -600 1 200 $178.57 -200 ($178.57) 100 $89.29 2 200 $159.44 200 $159.44 100 $79.72 3 200 $142.36 200 $142.36 100 $71.18 4 200 $127.10 200 $127.10 100 $63.55 5 200 $113.49 200 $113.49 100 $56.74 6 200 $101.33 200 $101.33 100 $50.66 7 -300 ($135.70) -300 ($135.70) 100 $45.23 8 $0.00 $0.00 0 9 $0.00 $0.00 0 10 $0.00 $0.00 0 $186.58 -170.566 -143.624 Points Received: 40 of 40 Comments: Week 3 Lecture & Chapters 7 & 8 Student answers will vary. But only Project A should be undertaken. The others have negative NPV or IRR below the hurdle rate. Project A B C Discounted Payback 3.3 NA NA Payback 2.4 5.5 6 NPV 187 -171 -144 IRR 28% 0 4.01% 0 -500 -500 -500 -500 -600 -600 1 200 $178.57 -200 ($178.57) 100 $89.29 2 200 $159.44 200 $159.44 100 $79.72 3 200 $142.36 200 $142.36 100 $71.18 4 200 $127.10 200 $127.10 100 $63.55 5 200 $113.49 200 $113.49 100 $56.74 6 200 $101.33 200 $101.33 100 $50.66 7 -300 ($135.70) -300 ($135.70) 100 $45.23 8 $0.00 $0.00 0 9 $0.00 $0.00 0 10 $0.00 $0.00 0 $186.58 -170.566 -143.624 [Show Less]
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FIN 515 WEEK 8 FINAL EXAM
FIN 515 WEEK 8 FINAL EXAM 1. TCO A) In the United States, which of the following types of organization has the greatest revenue in total? (Points : 5) ... [Show More] Sole proprietorship Corporation S corporation Limited partnership 2. TCO A) A sole proprietorship is owned by (Points : 5) one person. one or two people, but if there are two owners, they must be married to each other. up to 100 owners. up to 64 owners. 3. TCO B) Which of the following would cause the present value of an annuity to increase? (Points : 5) Reducing the number of payments. Increasing the interest rate. Decreasing the interest rate. Decreasing the liquidity of the payments. 4. TCO B) Which of the following is an annuity due? (Points : 5) A typical car loan. A typical mortgage. A typical apartment rental agreement. A credit card balance. 5. TCO G) If you were a manager of a company, which of the three right side components of the DuPont Identity would you want to increase & which would you want to decrease, other things being equal? Give a specific example for how to do that for each of the three. (Points : 20) The DuPont Identity measures the company’s ROE in terms of its profitability, asset efficiency, & leverage. The model helps investors compare similar companies like these with similar ratios. Investors can then apply perceived risks with each company's business model. Based on these three performances measures i.e. Profit Margin, Total Asset Turnover & Financial Leverage, the model concludes that a company can raise its ROE by maintaining a high profit margin, increasing asset turnover, or leveraging assets more effectively. In details, net profit margin can be used to margin a company's overall profitability. Besides, the firm’s asset turnover is used to identify how efficiently the firm is utilizing its assets to generate sales. The term equity multiplier indicates the value of assets held per dollar of shareholder equity. The right side components of the DuPont Identity that can be increased are Net Income & Sales. The inventory & account receivable can be reduced which can help the current assets position & in turn reduces total assets, which then improves total asset turnover. Hence, decreasing the inefficiencies in asset utilization & inventory holding will improve the ROE. The management can use this formula to pinpoint the problem area whether it is a lower profit margin, asset turnover, or poor financial leveraging if investors are unsatisfied with a low ROE. Source: http://www.myaccountingcourse.com/financial-ratios/dupont-analysis 6. TCO D) A stock has just paid a dividend & will pay a dividend of $3.00 in a year. The dividend will stay constant for the rest of time. The return on equity for similar stocks is 14%. What is P0? (Points : 20) A stock has just paid a dividend & will pay a dividend of $3.00 in a year, so Dividend for Year 0 & coming years will be $3 => D0 = 3 => D1 = 3 The dividend will stay constant for the rest of time => Rate of Dividend growth = 0 => g = 0 r = 14% P0 = D1 / (r - g) = 3 /(14% - 0) = 21.43 7. TCO D) A stock has just paid a dividend & has declared an annual dividend of $2.00 to be paid one year from today. The dividend is expected to grow at a 5% annual rate. The return on equity for similar stocks is 12%. What is P0? (Points : 20) Constant Dividend Growth Model: P0 = Stock Price = 2.0 / (0.12 -0.05) = 2.0 /(0.07) = 200/7 = $28.57 8. (TCO D) A particular bond has 8 years to maturity. It has a face value of $1,000. It has a YTM of 7% & the coupons are paid semiannually at a 10% annual rate. What does the bond currently sell for? (Points : 10) Face value (FV) = $1,000 Coupon rate = 10%, YTM = 7% & has 8 years to maturity. The compounding is semi-annual: => Semi-annual coupon payment = $1,000 * (10% / 2) = $50 Semi-annual YTM = 7% / 2 = 3.5% Semi-annual years = 8 * 2 = 16 Using the excel to calculate current price of the bond: PV = (Rate, Nper, PMT, FV) = (3.5%, 16, -50, -1000) = $1,181.41 9. (TCO D) A bond currently sells for $1,000 & has a par of $1,000. It was issued two years ago & had a maturity of 10 years. The coupon rate is 7% & the interest payments are made semiannually. What is its YTM? (Points : 10) Yield to Maturity of Coupon Bond: P = CPN x (1/y)(1-[1/(1+y)^n] + (FV / [1+y]^n) => 1000 = 35 * 1/y * (1 - 1/(1 + y)^16) + 1000 /(1+y)^16 Using Excel to compute the yield to maturity: = Rate(16,-35,1000,-1000) = 3.5% 10. (TCO D) What is β & why is it important to investors & issuers of stock? Describe the behavior of stocks with βs of greater than one, less than one, & less than zero. (Points : 30) The sensitivity of a stock to market movements is called Beta. It represents the most widely accepted masure of the extent to which the return on a stock fluctuates with the return on themarket portfoilio. Beta is the measure of volatility, more particularly known as sysematic risk. Investors uses beta to analyze the volatility of the stock in comparison of mrket & hence decides their required return. Issuers of the stock uses it to decide the cost of equity. - A stock with beta ofgreater than one experiences greater fluctuations than the market portfolio. - A stock with beta of less than one has lesser return fluctuations that the market portflio & a stock with Beta 1 has the same fluctuation in return as that of the market portflio. - Zero beta mens the stock is not correlated with market & it does not move any direction followig the market movement. 11. TCO E) A company has 100 million shares outstanding trading for $8 per share. It also has $900 million in outstanding debt. If its equity cost f capital is 15%, & its debt cost of capital is 12%, & its effective corporat tax rate is 40%, what is its weighted average cost of capital? (Points : 30) Weighted Average Cost of capital: = [Equity / (Debt + Equity)]*Equity cost of capital + [ Debt / (Debt + equity)]*Debt Cost of capital*(1 - tax rate) =[($100 / $1000) * 0.15] +[ ($900/$1000) * 0.12 *(1-0.40) = 0.015 + 0.0648 = 0.0798 = 7.98% 12. TCO A) What is the difference between capital structure & capital budgeting? Explain & give an example of a capital structure decision & an example of a capital budgeting decision. (Points : 25) Capital structure refers to the composition of the "Shareholder Equity & Liabilities" section of a corporation's balance sheet. Capital structure decisions related to capital structure of the company, which includes debt & equity. Besides, bank loans, preferred stock, retained earnings & working capital might also be part of the company's capital structure. On the other hand, capital budgeting refers to the process of evaluating & managing a firm's long-tem investments. Capital budgeting decision involves three steps: recording th investment's cost, projecting the investment's cash flows & comparing the rojected earnings with inflation rates & the time value of the investment. Capital structure & capital budgeting must be aligned to ensure that the usiness has sufficient cash to undertake the investments necessary. For example: Capital structure decision: How should we pay for our assets? Should we use debt orequity? Capital bdgeting decision: What long-term investments or projects should the busines take on? 13. TCO H) What is the difference between the cash cycle & the perating cycle? Under what condition would they be the same? (Points : 0) Cash conversion cycle is the number of days required for a ompany to convert resources to cash flows while an operating cycle is the average time period between the acquisition of inventory & the receipt of cash from the inventory's sale. They would be the same as there is only inventory in the working capital of the company. 14. (TCO F) A company has the opportunity to do any of the projects for which the net cash flows per year are shown below. The company has a cost of capital of 12%. Which should the company do & why? You must use at least two capital budgeting methods. Show your work Year A B C 0 -300 -100 -300 1 100 -50 100 2 100 100 100 3 100 100 100 4 100 100 100 5 100 100 100 6 100 100 100 7 -100 -200 0 (Points : 40) NPV Method: NPV = PV of cash inflow – PV of cash outflow Profitable Index Method: PI= PV of Cash Inflow / PV of Cash Outflow Company A: PV of Cash Inflow = 100/1.12 + 100/1.12^2 + 100/1.12^3 + 100/1.12^4 + 100/1.12^5 + 100/1.12^6 = 411.14 PV of Cash Outflow = 300 + 100/1.12^7 = 345.23 NPV Method: NPV = PV of Cash Inflow - PV of Cash Outflow = 411.14 - 345.23 = 65.91 Profitable Index Method: PI = PV of Cash Inflow / PV of Cash Outflow = 411.14 / 345.23 = 1.19 Company B: PV of Cash Inflow = 100/1.12^2 + 100/1.12^3 + 100/1.12^4 + 100/1.12^5 + 100/1.12^6 = 321.86 PV of Cash Outflow = 100 + 50/1.12 + 200/1.12^7 = 235.11 NPV Method: NPV = PV of Cash Inflow - PV of Cash Outflow = 321.86 - 235.11 = 86.75 Profitable Index Method: PI = PV of Cash Inflow / PV of Cash Outflow = 321.86 / 235.11 = 1.3690 Company C: PV of Cash Inflow = 100/1.12 + 100/1.12^2 + 100/1.12^3 + 100/1.12^4 + 100/1.12^5 + 100/1.12^6 = 411.14 PV of Cash Outflow = 300 NPV Method: NPV = PV of Cash Inflow - PV of Cash Outflow = 411.14 - 300 = 111.14 Profitable Index Method: PI = PV of Cash Inflow / PV of Cash Outflow = 411.14 / 300 = 1.3705 Regarding to NPV Method & Profitable Index Method, the best choice is project C as its NPV is higher & also PI is higher though all of the three companies have Positive NPV and PI is greater than 1. In my business office, management is deciding whether to move or staff to a larger office or to remodel & add more cubicles to fit our growing staff. So in order to expand our space in the existing office I’m sure they are making capital budgeting decisions. In reading our lecture it is beneficial for companies to use more than one method to ensure the best decisions are made. The commonly used methods are: 1. Payback Period 2. Net Present Value 3. Internal Rate of Return 4. Discounted Payback Period 5. Accounting Rate of Return 6. Profitability Index In my managements case they need to decide which project would be most cost effective & better for the company in the long run (which has long-term value). The costs for both projects will have to be estimated. They also need to determine the opportunity costs. The goal & objective should be to limit expenses while creating an efficient work space; while growing our internal operation. The Payback Period Method seems good for this type of project because it would help to monitor & control outflow costs. The other method is the Accounting Rate of Return. Very true Professor. This is an easy way to determine calculations in small projects. It sometimes used as an start in determining the value of a project. The Payback rule can be used to weed out bad investments.Then they can use other methods like calculation of the NPV & IRR. However there are both advantages & disadvantages to using this method. They are: Advantages: 1. Payback is easy to calculate 2. It can be used to measure inherent risk of project 3. When companies are faced with liquidity problems, it can provide a good ranking of projects that would return money early Personally I would like to open a group home for unwanted children. I would need to purchase a home, with beds, & individual furniture like drawers & desks. Hypothetically I would need around 200,00 for a home in California, as well as another 50,000 to buy furniture & all other necessities that would allow me to be approved to open a home of that capacity. I would enjoy to run the home, until I'm unable to participate. I would say 30 years. [Show Less]
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FIN 515 Final Exam
FIN 515 Final Exam Page 1 1. (TCO A) Which of the following does NOT always increase a company's market value? (Points : 5) Increasing the expect... [Show More] ed growth rate of sales Increasing the expected operating profitability (NOPAT/Sales) Decreasing the capital requirements (Capital/Sales) Decreasing the weighted average cost of capital Increasing the expected rate of return on invested capital 2. (TCO F) Which of the following statements is correct? (Points : 5) The NPV, IRR, MIRR, & discounted payback (using a payback requirement of 3 years or less) methods always lead to the same accept/reject decisions for independent projects. For mutually exclusive projects with normal cash flows, the NPV & MIRR methods can never conflict, but their results could conflict with the discounted payback & the regular IRR methods. Multiple IRRs can exist, but not multiple MIRRs. This is one reason some people favor the MIRR over the regular IRR. If a firm uses the discounted payback method with a required payback of 4 years, then it will accept more projects than if it used a regular payback of 4 years. The percentage difference between the MIRR & the IRR is equal to the project’s WACC. 3. (TCO D) Church Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product. Management expects earnings & dividends to grow at a rate of 25% for the next 4 years, after which competition will probably reduce the growth rate in earnings & dividends to zero, i.e., g = 0. The company's last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, & the risk-free rate is 3.00%. What is the current price of the common stock? a. $26.77 . $27.89 . $29.05 . $30.21 . $31.42 Points : 20) 4. (TCO G) Singal Inc. is preparing its cash budget. It expects to have sales of $30,000 in January, 35,000 in February, & $35,000 in March. If 20% of sales are for cash, 40% are credit sales paid in the month after the sale, & another 40% are credit sales paid 2 months after the sale, what are the expecte cash receipts for March? a. $24,057 b. $26,730c. $29,700 d. $33,000 e. $36,300 (Points : 2) Page 2 1. (TCO H) ervos Inc. had the following data for 2008 (in millions). The new CFO believes (a) that an improved inventory management system could lower the average inventory by $4,000, (b) that improvements in the credit department could reduce receivables by $2,000, & (c) that the purchasing department could negotiate better credit terms & thereby increase accounts payable by $2,000. Furthermore, she thinks that these changes would not affect either sales or the costs of goods sold. If these changes were made, by how many days would the cash conversion cycle be lowered? Original Revised Annual sales: unchanged Cost of goods sold: unchanged Average inventory: lowered by $4,000 Average receivables: lowered by $2,000 Average payables: increased by $2,000 Days in year $110,000 $80,000 $20,000 $16,000 $10,000 365 $110,000 $80,000 $16,000 $14,000 $12,000 365 a. 34.0 b. 37.4 c. 41.2 d. 45.3 e. 49.8 (Points : 30) The formula for calculating the Cash conversion cycle is CCC = DIO + DSO - DPO Where DIO reresents Days inventory Outstanding DSO represens Days Sales Outstanding DPO represens Days Payable outstanding Cash conversion cycle impact by inventory reduction DIO = (Averageinventory / Cost of goods sold) * 365 Original DIO = (20,000/$80,000) *365 =91.25 days Revised DIO= (16,000/$80,000 *365) = 73 days Cash conversio cycle impact by reduced accounts receivable DPO = (Accouns payable / Cost of goods sold) * 365 Original DPO =($10,000/$80,000)*365 = 45.625 days Revised DPO = $12,000/$80,000) *365 = 54.75 days Cash conversio cycle impact by increased a/c payable DSO = (Total reeivables / Total credit sales) * 365 Original DSO = ($16,000/$110,000 *365) = 53.09 days Revised DSO = ($14,000/$110,000 *365) = 46.45 days CCC = DIO + DS – DPO Original CCC = 1.25 + 53.09 – 45.63 = 98.71 days Revised CCC = 3 + 46.45 – 54.75 = 64.7 days Total impact = riginal CCC – Revised CCC = 98.71 – 64.7 = 34.01 days So, cash conversion cycle will be lowered by 34.0 days 2. (TCO C) Bumpas Enterprises purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15, net 50. If the firm chooses to pay on time but does not take the discount, what is the effective annual percentage cost of its nonfree trade credit? (Assume a 365-day year.) a. 20.11% b. 21.17%c. 22.28% d. 23.45% e. 24.63% (Points : 3) EAR = (1 +2/98)365/35 - 1 = 1.2345 - 1 = 0.2345 = 23.45%. 3. (TCO E) You were hired as a consultant to the Quigley Company, whose target capital structure is 35% ebt, 10% preferred, & 55% common equity. The interest rate on new debt is 6.50%, the yield on the referred is 6.00%, the cost of common from retained earnings is 11.25%, & the tax rate is 40%. The firm will not be issuing any new common stock. What is Quigley's WACC? . 8.15% . 8.48% . 8.82% . 9.17% . 9.54% Points : 30) . (TCO B) A company forecasts the free cash flows (in millions) shown below. The weighted average cost f capital is 13%, & the FCFs are expected to continue growing at a 5% rate after Year 3. Assuming that the ROIC is expected to remain constant in Year 3 & beyond, what is the Year 0 value of operations, in millions? ear: 1 2 3 ree cash flow: -$15 $10 $40 . $315 . $331 . $348 $367 . $386 Points : 35) e need to discount the future cash flows at 13% with the growth of 5% = -15X(1+13%)^-1 + 10X(1+13%)^-2 + 40X(1+13%)^-3 + 42/(13%-5%)X(1+13%)^-3 = -13.27 + 7.83 + 27.72 + 363.85 = $ 386.13 is the worth of the business 5. (TCO G) Based on the corporate valuation model, Hunsader's value of operations is $300 million. The balance sheet shows $20 million of short-term investments that are unrelated to operations, $50 million of accounts payable, $90 million of notes payable, $30 million of long-term debt, $40 million of preferred stock, & $100 million of common equity. The company has 10 million shares of stock outstanding. What is the best estimate of the stock's price per share? a. $13.72b. $14.44 c. $15.20 d. $16.00 e. $16.80(Points : 35) Assuming that book values of debt are close to market values of debt, the total market value of the ompany is: = $300 + $20 = $320 million. Market value of equity = Total market value - Value of debt $320 - (Notes payable + Long-term debt + Preferred stock) $320 - ($90 + $30 + $40) = $160 million. Price per share = Market value of equity / Number of shares = $160 / 10 = $16 6. TCO G) Clayton Industries is planning its operations for next year, & Ronnie Clayton, the CEO, wants ou to forecast the firm's additional funds needed (AFN). The firm is operating at full capacity. Data for se in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year? Dollars are in millions. Last year's sales = S0 $350 Last year's accounts payable $40 Sales growth rate = g 30% Last year's notes payable $50 Last year's total assets = A0* $500 Last year's accruals $30 Last year's profit margin = PM 5% Target payout ratio 60% a. $102.8 . $108.2 . $113.9 . $119.9 . $125.9 (Points : 30) I used H&R Block, Inc. (HRB) as my company. I decided to use the formula in chapter 9 for the valuation using the Price-Earnings Ratio (EPS). HRB has earnings per share of $2.33. If there average P/E of comparable company stocks is 31.73 as shown on the Yahoo Finance site, I estimated a value for HRB using the P/E as a valuation multiple. This was accomplished by multiplying the EPS by the P/E of comparable companies. So Po=$2.33x31.73=$73.93. So, this estimate assumes the company can expect comparable future risk, payout rates, & growth rates to like firms in the industry (Berk, p.289). Berk, Jonathan, Peter DeMarzo. Corporate Finance, 3rd Edition. Pearson Learning Solutions, 02/2013. VitalBook file. Good example Michael. I found that the dividend discount model is used to price stock by the amount of its future value or cash flow. This is then discounted by the set rate of return that is based on the investor’s risk of having the stock. The price of the dividend discount model is also known as the intrinsic value of the stock. The sales price of the ordinary cash flow in the future is this amount if no dividends are paid out. These are the three models used in the DDM: 1. Zero growth – assumes all dividends paid by a stock will remain the same 2. Constant growth model – assumes the dividend will grow by a specific percent each year 3. Variable growth model – this is where the growth is separated into three phases a. A fast initial phase b. A slower transition phase c. This will end with a lower rate that is sustainable over a period of time [Show Less]
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