FIN515 week 8 final exam

Final Exam Page 1

1. (TCO A) Which of the following does NOT always increase a
company’s market value? (Points : 5)
Increasing the
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,
and 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 and MIRR methods can never
conflict, but their results could conflict with the discounted payback and 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 and 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 and dividends to grow at a rate of 25% for the next 4 years, after
which competition will probably reduce the growth rate in earnings and
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%, and the risk-free rate is
3.00%. What is the current price of the common stock?
a. $26.77
b. $27.89
c. $29.05
d. $30.21
e. $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, and $35,000
in March. If 20% of sales are for cash, 40% are credit sales paid in the month
after the sale, and another 40% are credit sales paid 2 months after the sale,
what are the expected cash receipts for March?
a. $24,057
b. $26,730
c. $29,700
d. $33,000
e. $36,300
(Points : 20)

Final Exam Page 2
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 : 30)

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% debt, 10% preferred, and 55%
common equity. The interest rate on new debt is 6.50%, the yield on the
preferred is 6.00%, the cost of common from retained earnings is 11.25%, and
the tax rate is 40%. The firm will not be issuing any new common stock. What is
Quigley’s WACC?
a. 8.15%
b. 8.48%
c. 8.82%
d. 9.17%
e. 9.54%
(Points : 30)

4. (TCO B) A company forecasts the free cash flows (in
millions) shown below. The weighted average cost of capital is 13%, and 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 and beyond, what is the Year
0 value of operations, in millions?
Year: 1 2 3
Free cash flow: -$15 $10 $40
a. $315
b. $331
c. $348
d. $367
e. $386
(Points : 35)

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, and $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. $13.72
b. $14.44
c. $15.20
d. $16.00
e. $16.80
(Points : 35)

6. TCO G) Clayton Industries is planning its operations for
next year, and Ronnie Clayton, the CEO, wants you to forecast the firm’s
additional funds needed (AFN). The firm is operating at full capacity. Data for
use 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
b. $108.2
c. $113.9
d. $119.9
e. $125.9 (Points : 30)

Page 1

1. (TCO A) Which of the following does NOT always increase a
company’s market value? (Points : 5)
Increasing the
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 MIRR and
NPV decision criteria can never conflict.
The IRR method
can never be subject to the multiple IRR problem, while the MIRR method can be.
One reason
some people prefer the MIRR to the regular IRR is that the MIRR is based on a
generally more reasonable reinvestment rate assumption.
The higher the
WACC, the shorter the discounted payback period.
The MIRR
method assumes that cash flows are reinvested at the crossover rate.

3. (TCO D) The Ramirez Company’s last dividend was $1.75.
Its dividend growth rate is expected to be constant at 25% for 2 years, after
which dividends are expected to grow at a rate of 6% forever. Its required
return (rs) is 12%. What is the best estimate of the current stock price?
a. $41.58
b. $42.64
c. $43.71
d. $44.80
e. $45.92
(Points : 20)

5. (TCO G) Howton & Howton Worldwide (HHW) is planning
its operations for the coming year, and the CEO wants you to forecast the
firm’s additional funds needed (AFN). The firm is operating at full capacity.
Data for use in the forecast are shown below. However, the CEO is concerned
about the impact of a change in the payout ratio from the 10% that was used in
the past to 50%, which the firm’s investment bankers have recommended. Based on
the AFN equation, by how much would the AFN for the coming year change if HHW
increased the payout from 10% to the new and higher level? All dollars are in
millions.
Last year’s sales = S0 $300
Last year’s accounts
payable $50
Sales growth rate = g 40% Last
year’s notes payable $15
Last year’s total assets = A0* $500 Last year’s accruals $20
Last year’s profit margin = PM 20% Initial payout ratio 10%

a. $31.9
b. $33.6
c. $35.3
d. $37.0
e. $38.9 (Points : 30)

Page 2

1. (TCO H) Your consulting firm was recently hired to
improve the performance of Shin-Soenen Inc, which is highly profitable but has
been experiencing cash shortages due to its high growth rate. As one part of
your analysis, you want to determine the firm’s cash conversion cycle. Using
the following information and a 365-day year, what is the firm’s present cash
conversion cycle?
Average inventory =
Annual sales =
Annual cost of goods sold =
Average accounts receivable =
Average accounts payable = $75,000

$600,000
$360,000
$160,000
$25,000

a. 120.6 days
b. 126.9 days
c. 133.6 days
d. 140.6 days
e. 148.0 days (Points : 30)

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 : 30)

3. (TCO E) Daves Inc. recently hired you as a consultant to
estimate the company’s WACC. You have obtained the following information. (1)
The firm’s noncallable bonds mature in 20 years, have an 8.00% annual coupon, a
par value of $1,000, and a market price of $1,050.00. (2) The company’s tax
rate is 40%. (3) The risk-free rate is 4.50%, the market risk premium is 5.50%,
and the stock’s beta is 1.20. (4) The target capital structure consists of 35%
debt and the balance is common equity. The firm uses the CAPM to estimate the
cost of common stock, and it does not expect to issue any new shares. What is
its WACC?
a. 7.16%
b. 7.54%
c. 7.93%
d. 8.35%
e. 8.79%

(Points : 30)

4. (TCO B) A company forecasts the free cash flows (in
millions) shown below. The weighted average cost of capital is 13%, and 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 and beyond, what is the Year
0 value of operations, in millions?
Year:
1 2 3
Free cash flow:
-$15 $10 $40
a. $315
b. $331
c. $348
d. $367
e. $386

(Points : 35)

5. (TCO G) Based on the corporate valuation model, the value
of a company’s operations is $900 million. Its balance sheet shows $70 million
in accounts receivable, $50 million in inventory, $30 million in short-term
investments that are unrelated to operations, $20 million in accounts payable, $110
million in notes payable, $90 million in long-term debt, $20 million in
preferred stock, $140 million in retained earnings, and $280 million in total
common equity. If the company has 25 million shares of stock outstanding, what
is the best estimate of the stocks price per share?
a. $23.00
b. $25.56
c. $28.40
d. $31.24
e. $34.36
verified 2 places, pretty sure.
(Points : 35)

Week 8 : Final Week – Final Exam Page 1

1. (TCO A) Which of the following does NOT always increase a
company’s market value? (Points : 5)
Increasing the
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)
For a project
with normal cash flows, any change in the WACC will change both the NPV and the
IRR.
To find the
MIRR, we first compound cash flows at the regular IRR to find the TV, and then
we discount the TV at the WACC to find the PV.
The NPV and
IRR methods both assume that cash flows can be reinvested at the WACC. However,
the MIRR method assumes reinvestment at the MIRR itself.
If two
projects have the same cost, and if their NPV profiles cross in the upper right
quadrant, then the project with the higher IRR probably has more of its cash
flows coming in the later years.
If two
projects have the same cost, and if their NPV profiles cross in the upper right
quadrant, then the project with the lower IRR probably has more of its cash
flows coming in the later years.

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 and dividends to grow at a rate of 25% for the next 4 years, after
which competition will probably reduce the growth rate in earnings and
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%, and the risk-free rate is
3.00%. What is the current price of the common stock?
a. $26.77
b. $27.89
c. $29.05
d. $30.21
e. $31.42
(Points : 20)

4. (TCO G) The ABC Corporation’s budgeted monthly sales are
$4,000. In the first month, 40% of its customers pay and take the 3% discount.
The remaining 60% pay in the month following the sale and
don’t receive a discount.
ABC’s bad debts are very small and are excluded from this
analysis.
Purchases for next month’s sales are constant each month at
$2,000. Other payments for wages, rent, and taxes are constant at $500 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
ABC Corporation? (Points : 20)

5. (TCO G) Howton & Howton Worldwide (HHW) is planning
its operations for the coming year, and the CEO wants you to forecast the
firm’s additional funds needed (AFN). The firm is operating at full capacity.
Data for use in the forecast are shown below. However, the CEO is concerned
about the impact of a change in the payout ratio from the 10% that was used in
the past to 50%, which the firm’s investment bankers have recommended. Based on
the AFN equation, by how much would the AFN for the coming year change if HHW
increased the payout from 10% to the new and higher level? All dollars are in
millions.
Last year’s sales = S0 $300
Last year’s accounts
payable $50
Sales growth rate = g 40% Last
year’s notes payable $15
Last year’s total assets = A0* $500 Last year’s accruals $20
Last year’s profit margin = PM 20% Initial payout ratio 10%

a. $31.9
b. $33.6
c. $35.3
d. $37.0
e. $38.9 (Points : 30)

Week 8 : Final Week – Final Exam Page 2

1. (TCO H) The Dewey Corporation has the following data, in
thousands. Assuming a 365-day year, what is the firm’s cash conversion cycle?
Annual sales =
Annual cost of goods sold =
Inventory =
Accounts receivable =
Accounts payable = $45,000

$31,500
$4,000
$2,000
$2,400

a. 25 days
b. 28 days
c. 31 days
d. 35 days
e. 38 days (Points : 30)

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 : 30)

3. (TCO E) You were hired as a consultant to the Quigley
Company, whose target capital structure is 35% debt, 10% preferred, and 55%
common equity. The interest rate on new debt is 6.50%, the yield on the
preferred is 6.00%, the cost of common from retained earnings is 11.25%, and
the tax rate is 40%. The firm will not be issuing any new common stock. What is
Quigley’s WACC?
a. 8.15%
b. 8.48%
c. 8.82%
d. 9.17%
e. 9.54%
(Points : 30)

4. (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
a. $1,456
b. $1,529
c. $1,606
d. $1,686
e. $1,770
(Points : 35)

5. (TCO G) Based on the corporate valuation model, the value
of a company’s operations is $1,200 million. The company’s balance sheet shows
$80 million in accounts receivable, $60 million in inventory, and $100 million
in short-term investments that are unrelated to operations. The balance sheet
also shows $90 million in accounts payable, $120 million in notes payable, $300
million in long-term debt, $50 million in preferred stock, $180 million in
retained earnings, and $800 million in total common equity. If the company has
30 million shares of stock outstanding, what is the best estimate of the
stock’s price per share?
a. $24.90
b. $27.67
c. $30.43
d. $33.48
e. $36.82
(Points : 35)