FIN 515 Final Exam
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1. (TCO A) Which of the following does NOT always increase a company's market value? (Points : 5)
Increasing the
... [Show More] expected 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)
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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]