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 riskfree 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 365day 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 shortterm investments that are unrelated to operations, $50 million of accounts payable, $90 million of notes payable, $30 million of longterm 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 + Longterm debt + Preferred stock)
= $320 – ($90 + $30 + $40) = $160 million.
Price per share = Market value of equity / Number of shares
= $160 / 10 = $16
 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 = S_{0} 
$350 

Last year’s accounts payable 
$40 
Sales growth rate = g 
30% 

Last year’s notes payable 
$50 
Last year’s total assets = A_{0}* 
$500 

Last year’s accruals 
$30 
Last year’s profit margin = PM 
5% 

Target payout ratio 
60% 

$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 (r_{s}) 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% disc ____
Receipts 3952
Less
payments
purchases 2000
other 500
____
Total 2500
Cash +1452
____________________________________________


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 = S_{0} 
$300 

Last year’s accounts payable 
$50 
Sales growth rate = g 
40% 

Last year’s notes payable 
$15 
Last year’s total assets = A_{0}* 
$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)
AFN = projected increase in assets – spontaneous increase in liabilities – increase in retained earnings
The company is at full capacity, so assets must grow at the same rate as projected sales: $500*1.4=$700, projected increase in assets = $700 – $500 = $200
Total sales = $300 *1.4 = $420
spontaneous increase in liabilities = X, 20/500 = X/700 => X = 28
For payout ratio = 10%:
Increase in Retained earnings = Net Income = 420 X 20% = 84, Dividend = 10% = 84X10%=8.4.
Increase in retained earnings = 848.4 = 75.6
AFN = $200 – $28 – $75.6 = $96.4 million
For payout ratio = 50%:
Increase in Retained earnings = Net Income = $420 * 20% = $84, Dividend = 50% = $84 * 50%=$42.
Increase in retained earnings = $84 – $42 = $42
AFN = $200 – $28 – $42 = $130 million
AFN change = $130 – $96.4 = $33.6

Page 2
1. (TCO H) Your consulting firm was recently hired to improve the performance of ShinSoenen 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 365day 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 365day 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) 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 riskfree 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%
rd=YTM =7.51% rs=rRf+(rmrRf)*beta=4.5+5.5*1.2=11.1%
WACC=Wd*rd*(1T)+Wc*rs=0.35*7.51*(10.40)+0.65*11.1=8.79%
Key: E
(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
Verified in 2 places as well.
First, find the horizon, or terminal, value:
HV4 = FCF3(1 g)/(WACC – g) = $40(1.05)/(0.13 – 0.05) = $525
Then find the PV of the free cash flows and the horizon value:
Value of operations = $15/(1.13) $10/(1.13)2 ($40 $525)/(1.13)3 = $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 shortterm investments that are unrelated to operations, $20 million in accounts payable, $110 million in notes payable, $90 million in longterm 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)


Total market value = Value of operations non – operating assets
= $900 + $30 = $930 million.
Market value of equity = Total market value – (Value of debt Value of Preferred stock)
= $930 – (Longterm debt Preferred stock)
= $320 – ($90 $20 $110)
= $710 million.
Price per share = Market value of equity / Number of shares
= $710 / 25 = $28.4.
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 riskfree 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)
They will have a net cash surplus of $1452.
___________________________________________
Cash Budget
___________________________________________
+Sales Collection
60% for prior month 2400
40% from current month 1552
3% disc ____
Receipts 3952
Less
payments
purchases 2000
other 500
____
Total 2500
Cash +1452
____________________________________________ 

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 = S_{0} 
$300 

Last year’s accounts payable 
$50 
Sales growth rate = g 
40% 

Last year’s notes payable 
$15 
Last year’s total assets = A_{0}* 
$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 365day 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 365day 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 halfyear 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 shortterm investments that are unrelated to operations. The balance sheet also shows $90 million in accounts payable, $120 million in notes payable, $300 million in longterm 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) 

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