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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 c ash 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) 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) | 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 con stant 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. 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. b. $108. 2 c. $113. 9 d. $119. 9 e. $125. 9 (Points : 30) | | Final Exam Page 2 1. (TCO H) Desai Inc. has the following data, in thousands. Assuming a 365-day year, what is the firm's cash con version cycle? Annual sales = Annual cost of goods sold = Inventory = Accounts receivable = Accounts payable =| $45,000 $30,000 $4,500 $1,800 $2,500| a. 28 days b. 32 days c. 35 days d. 39 days e. 43 days (Points : 30) | 2. (TCO C) A firm buys on terms of 2/8, net 45 days, it does not take discounts, and it actually pays after 58 days. What is the effective annual percentage cost of its nonfree trade credit? Use a 365-day year. ) a. 14. 34% b. 15. 10% c. 15. 89% d. 16. 69% e. 17. 52%(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 equi ty.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) 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, 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) | |