# FI515 Financial Management: Week 8 Final Study Guide (Version 4)

FI515 Financial Management

Week 8 Final Study Guide

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

The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends.

The corporate valuation model discounts free cash flows by the required return on equity.

The corporate valuation model can be used to find the value of a division.

An important step in applying the corporate valuation model is forecasting the firm's pro forma financial statements.

Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or terminal, value.

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

If a project with normal cash flows has an IRR greater than the WACC, the project must also have a positive NPV.

If Project A's IRR exceeds Project B’s, then A must have the higher NPV.

A project’s MIRR can never exceed its IRR.

If a project with normal cash flows has an IRR less than the WACC, the project must have a positive NPV.

If the NPV is negative, the IRR must also be negative.

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? (Points : 20)

a. $26.77

b. $27.89

c. $29.05

d. $30.21

e. $31.42

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? (Points : 20)

a. $24,057

b. $26,730

c. $29,700

d. $33,000

e. $36,300

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. $102.8

b. $108.2

c. $113.9

d. $119.9

e. $125.9 (Points : 30)

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 = $45,000

Annual cost of goods sold = $31,500

Inventory = $4,000

Accounts receivable = $2,000

Accounts payable = $2,400

a. 25 days

b. 28 days

c. 31 days

d. 35 days

e. 38 days (Points : 30)

2. (TCO C) Your company has been offered credit terms of 4/30, net 90 days. What will be the nominal annual percentage cost of its nonfree trade credit if it pays 120 days after the purchase? (Assume a 365-day year.) (Points : 30)

a. 16.05%

b. 16.90%

c. 17.74%

d. 18.63%

e. 19.56%

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)

a. 7.16%

b. 7.54%

c. 7.93%

d. 8.35%

e. 8.79%

4. (TCO B) Zhdanov Inc. forecasts that its free cash flow in the coming year, that is, at t = 1, will be -$10 million, but its FCF at t = 2 will be $20 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 14%, what is the firm's value of operations, in millions? (Points : 35)

a. $158

b. $167

c. $175

d. $184

e. $193

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 short-term investments that are unrelated to operations. The balance sheet also shows $90 million in accounts payable, $120 million in notes payable, $300 million in long-term 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? (Points : 35)

a. $24.90

b. $27.67

c. $30.43

d. $33.48

e. $36.82

Week 8 Final Study Guide

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

The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends.

The corporate valuation model discounts free cash flows by the required return on equity.

The corporate valuation model can be used to find the value of a division.

An important step in applying the corporate valuation model is forecasting the firm's pro forma financial statements.

Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or terminal, value.

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

If a project with normal cash flows has an IRR greater than the WACC, the project must also have a positive NPV.

If Project A's IRR exceeds Project B’s, then A must have the higher NPV.

A project’s MIRR can never exceed its IRR.

If a project with normal cash flows has an IRR less than the WACC, the project must have a positive NPV.

If the NPV is negative, the IRR must also be negative.

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? (Points : 20)

a. $26.77

b. $27.89

c. $29.05

d. $30.21

e. $31.42

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? (Points : 20)

a. $24,057

b. $26,730

c. $29,700

d. $33,000

e. $36,300

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. $102.8

b. $108.2

c. $113.9

d. $119.9

e. $125.9 (Points : 30)

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 = $45,000

Annual cost of goods sold = $31,500

Inventory = $4,000

Accounts receivable = $2,000

Accounts payable = $2,400

a. 25 days

b. 28 days

c. 31 days

d. 35 days

e. 38 days (Points : 30)

2. (TCO C) Your company has been offered credit terms of 4/30, net 90 days. What will be the nominal annual percentage cost of its nonfree trade credit if it pays 120 days after the purchase? (Assume a 365-day year.) (Points : 30)

a. 16.05%

b. 16.90%

c. 17.74%

d. 18.63%

e. 19.56%

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)

a. 7.16%

b. 7.54%

c. 7.93%

d. 8.35%

e. 8.79%

4. (TCO B) Zhdanov Inc. forecasts that its free cash flow in the coming year, that is, at t = 1, will be -$10 million, but its FCF at t = 2 will be $20 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 14%, what is the firm's value of operations, in millions? (Points : 35)

a. $158

b. $167

c. $175

d. $184

e. $193

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 short-term investments that are unrelated to operations. The balance sheet also shows $90 million in accounts payable, $120 million in notes payable, $300 million in long-term 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? (Points : 35)

a. $24.90

b. $27.67

c. $30.43

d. $33.48

e. $36.82

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