FIN 534 Final Exam 1

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FIN 534 Final Exam 1

  1. Which of the following will cause an increase in net working capital, other things held constant?
  2. Howes Inc. 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 costof its non-free trade credit?
  3. Data on Nathan Enterprises for the most recent year are shown below, along with the days sales outstanding of the firms against which it benchmarks. The firm’s new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks’ average. If this were done, by how much would receivables decline? Use a 365-day year.
  4. BLW Corporation is considering the terms to be set on the options it plans to issue to its executives. Which of the following actions would decrease the value of the options, other things held constant?
  5. An analyst wants to use the Black-Scholes model to value call options on the stock of Heath Corporation based on the following data:
  6. Other things held constant, the value of an option depends on the stock’s price, the risk-free rate, and the fin 534 final exam
  7. McLeod Inc. is considering an investment that has an expected return of 15% and a standard deviation of 10%. What is the investment’s coefficient of variation?
  8. Century Roofing is thinking of opening a new warehouse, and the key data are shown below. The company owns the building that would be used, and it could sell it for $100,000 after taxes if it decides not to open the new warehouse. The equipment for the project would be depreciated by the straight-line method over the project’s 3-year life, after which it would be worth nothing and thus it would have a zero salvage value. No new working capital would be required, and revenues and other operating costs would be constant over the project’s 3-year life. What is the project’s NPV? (Hint: Cash flows are constant in Years 1-3.)
  9. Whitestone Products is considering a new project whose data are shown below. The required equipment has a 3-year tax life, and the accelerated rates for such property are 33.33%, 44.45%, 14.81%, and 7.41% for Years 1 through 4. Revenues and other operating costs are expected to be constant over the project’s 10-year expected operating life. What is the project’s Year 4 cash flow?
  10. Tashakori Trucking, a U.S.-based company, is considering expanding its operations into a foreign country. The required investment at Time = 0 is $10 million. The firm forecasts total cash inflows of $4 million per year for 2 years, $6 million for the next 2 years, and then a possible terminal value of $8 million. In addition, due to political risk factors, Tashakori believes that there is a 50% chance that the gross terminal value will be only $2 million and a 50% chance that it will be $8 million. However, the government of the host country will block 20% of all cash flows. Thus, cash flows that can be repatriated are 80% of those projected. Tashakori’s cost of capital is 15%, but it adds one percentage point to all foreign projects to account for exchange rate risk. Under these conditions, what is the project’s NPV?
  11. Suppose a carton of hockey pucks sell in Canada for 105 Canadian dollars, and 1 Canadian dollar equals 0.71 U.S. dollars. If purchasing power parity (PPP) holds, what is the price of hockey pucks in the United States?
  12. A box of chocolate candy costs 28.80 Swiss francs in Switzerland and $20 in the United States. Assuming that purchasing power parity (PPP) holds, what is the current exchange rate fin 534 final exam ?
  13. Suppose Stackpool Inc. had inventory in Britain valued at 240,000 pounds one year ago. The exchange rate for dollars to pounds was 1£ = 2 U.S. dollars. This year the exchange rate is 1£ = 1.82 U.S. dollars. The inventory in Britain is still valued at 240,000 pounds. What is the gain or loss in inventory value in U.S. dollars as a result of the change in exchange rates fin 534 final exam ?
  14. Burnham Brothers Inc. has no retained earnings since it has always paid out all of its earnings as dividends. This same situation is …..to persist in the future. The company uses the CAPM to calculate its cost of equity, and its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would REDUCE its WACC?
  15. Which of the following statements is CORRECT?
  16. Collins Group: The Collins Group, a leading producer of custom automobile accessories, has hired you to estimate the firm’s weighted average cost of capital. The balance sheet and some other information are provided below.
  17. A company expects sales to increase during the coming year, and it is using the AFN equation to forecast the additional capital that it must raise. Which of the following conditions would cause the AFN to increase?
  18. Which of the following is NOT one of the steps …..in the financial planning process?
  19. Judd Enterprises:These are the simplified financial statements for Judd Enterprises fin 534 final exam
  20. Projects A and B are mutually exclusive and have normal cash flows. Project A has an IRR of 15% and B’s IRR is 20%. The company’s cost of capital is 12%, and at that rate Project A has the higher NPV. Which of the following statements is CORRECT?
  21. Dickson Co. is considering a project that has the following cash flow and cost of capital (r) data. What is the project’s NPV? Note that a project’s expected NPV can be negative, in which case it will be rejected fin 534 final exam
  22. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.
  23. Which of the following is NOT normally ……as being a barrier to hostile takeovers?
  24. Best Bagels, Inc. (BB) Best Bagels, Inc. (BB) currently has zero debt. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero growth company. BB’s current cost of equity is 13%, and its tax rate is 40%. The firm has 20,000 shares of common stock outstanding selling at a price per share of $23.08.
  25. Other things held constant, which of the following events is most likely to encourage a firm to increase the amount of debt in its capital structure?
  26. Eccles Inc., a zero growth firm, has an expected EBIT of $100,000 and a corporate tax rate of 30%. Eccles uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%.
  27. The Anson Jackson Court Company (AJC) currently has $200,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6%. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero growth company. AJC’s current cost of equity is 8.8%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $60.00
  28. McCann Publishing has a target capital structure of 35% debt and 65% equity. This year’s capital budget is $850,000 and it wants to pay a dividend of $400,000. If the company follows a residual dividend policy, how much net income must it earn to meet its capital budgeting requirements and pay the dividend, all while keeping its capital structure in balance?
  29. The capital budget of Creative Ventures Inc. is $1,000,000. The company wants to maintain a target capital structure that is 30% debt and 70% equity. The company forecasts that its net income this year will be $800,000. If the company follows a residual dividend policy, what will be its total dividend payment?
  30. Which of the following actions will best enable a company to raise additional equity capital?

fin 534 final exam