Devry FIN 515 Week 8 Final Exam Questions And Answers 138568

Final Exam Page 1

1. (TCO A) Which of the following does NOT always increase a company’s market value? (Points : 5)

[removed]Increasing the expected growth rate of sales

[removed]Increasing the expected operating profitability (NOPAT/Sales)

[removed]Decreasing the capital requirements (Capital/Sales)

[removed]Decreasing the weighted average cost of capital

[removed]Increasing the expected rate of return on invested capital

 

2. (TCO F) Which of the following statements is correct? (Points : 5)

[removed]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.

[removed]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.

[removed]Multiple IRRs can exist, but not multiple MIRRs. This is one reason some people favor the MIRR over the regular IRR.

[removed]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.

[removed]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

1. (TCO H) Zervos 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, and (c) that the purchasing department could negotiate better credit terms and 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 represents Days inventory Outstanding

DSO represents Days Sales Outstanding

DPO represents Days Payable outstanding

Cash conversion cycle impact by inventory reduction

DIO = (Average inventory / 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 conversion cycle impact by reduced accounts receivable

DPO = (Accounts 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 conversion cycle impact by increased a/c payable

DSO = (Total receivables / 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 + DSO – DPO

Original CCC = 91.25 + 53.09 – 45.63 = 98.71 days

Revised CCC = 73 + 46.45 – 54.75 = 64.7 days

Total impact = original 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 : 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)

 

We 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, 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)

 

Assuming that book values of debt are close to market values of debt, the total market value of the company 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, 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)

[removed] Increasing the expected growth rate of sales

[removed] Increasing the expected operating profitability (NOPAT/Sales)

[removed] Decreasing the capital requirements (Capital/Sales)

[removed] Decreasing the weighted average cost of capital

[removed] Increasing the expected rate of return on invested capital

 

2. (TCO F) Which of the following statements is correct? (Points : 5)

[removed] The MIRR and NPV decision criteria can never conflict.

[removed] The IRR method can never be subject to the multiple IRR problem, while the MIRR method can be.

[removed] 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.

[removed] The higher the WACC, the shorter the discounted payback period.

[removed] 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)

 

Cash flows are:

Year 1 1.75 * 1.25 = 2.1875

Year 2 2.1875 *1.25 = 2.734

Stock price at end of year 2 2.734 *(1.06)/(.12-.06)= 48.30 Gordon Growth model

Discount cash flows back to present at .12 (rate of return)

2.1875/1.12 + 2.734/(1.12)^2 + 48.30/1.12^2

$42.64 (b)

 

 

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)

 

They will have a net cash surplus of $1452.

___________________________________________

Cash Budget

___________________________________________

+Sales Collection

60% for prior month               2400

40% from current month      1552

3%…
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