FIN 515 Final Exam, 03 sets

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

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

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?

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?

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?

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.)

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?

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?

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?

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.

FIN 515 Final Exam 2
Page 1
1.
(TCO A) Which of the following does NOT always increase a company’s market
value? (Points : 5)

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

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?

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.

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?

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.)

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? (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?

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?

FIN 515Final Exam 3

Page
1

1. (TCO A) Which of the following
statements is NOT correct? (Points:5)

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

3. (TCO D) The Ackert Company’s last dividend was $1.55. The dividend
growth rate is expected to be constant at 1.5% for 2 years, after which
dividends are expected to grow at a rate of 8.0% forever. The firm’s required
return (rs) is 12.0%. What is the best estimate of the current stock price?

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) 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.

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 = $31,500
Annual cost of goods sold = $4,000
Inventory = $
2,000
Accounts receivable = $ 2,400
Accounts payable = $45,000

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?

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

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?