# FI515 Financial Management: Week 8 Final Study Guide (Version 2)

FI515 Financial Management

Week 8 Final Study Guide (Version 2)

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 projectâ€™s WACC.

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? (Points: 20)

a. $41.58

b. $42.64

c. $43.71

d. $44.80

e. $45.92

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. (Points: 20)

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?

5. (TCO G) Chua Chang & Wu Inc. is planning its operations for next 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 your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year? (Points: 30)

Last year's sales = S0 $200.000 Last year's accounts payable $50,000

Sales growth rate = g 40% Last year's notes payable $15,000

Last year's total assets = A0* $135,000 Last year's accruals $20,000

Last year's profit margin = PM 20% Target payout ratio 25%

a. -$14,440

b. -$15,200

c. -$16,000

d. -$16,800

e. -$17,640

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? (Points: 30)

Average inventory = $75,000

Annual sales = $600,000

Annual cost of goods sold = $360,000

Average accounts receivable = $160,000

Average accounts payable = $25,000

a. 120.6 days

b. 126.9 days

c. 133.6 days

d. 140.6 days

e. 148.0 days

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) 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? (Points: 30)

a. 8.15%

b. 8.48%

c. 8.82%

d. 9.17%

e. 9.54%

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). (Points: 35)

Year: 1 2

Free cash flow: -$50 $100

a. $1,456

b. $1,529

c. $1,606

d. $1,686

e. $1,770

5. (TCO G) Based on the corporate valuation model, Bernile Inc.'s value of operations is $750 million. Its balance sheet shows $50 million of short-term investments that are unrelated to operations, $100 million of accounts payable, $100 million of notes payable, $200 million of long-term debt, $40 million of common stock (par plus paid-in-capital), and $160 million of retained earnings. What is the best estimate for the firm's value of equity, in millions? (Points: 35)

a. $429

b. $451

c. $475

d. $500

e. $525

Week 8 Final Study Guide (Version 2)

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 projectâ€™s WACC.

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? (Points: 20)

a. $41.58

b. $42.64

c. $43.71

d. $44.80

e. $45.92

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. (Points: 20)

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?

5. (TCO G) Chua Chang & Wu Inc. is planning its operations for next 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 your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year? (Points: 30)

Last year's sales = S0 $200.000 Last year's accounts payable $50,000

Sales growth rate = g 40% Last year's notes payable $15,000

Last year's total assets = A0* $135,000 Last year's accruals $20,000

Last year's profit margin = PM 20% Target payout ratio 25%

a. -$14,440

b. -$15,200

c. -$16,000

d. -$16,800

e. -$17,640

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? (Points: 30)

Average inventory = $75,000

Annual sales = $600,000

Annual cost of goods sold = $360,000

Average accounts receivable = $160,000

Average accounts payable = $25,000

a. 120.6 days

b. 126.9 days

c. 133.6 days

d. 140.6 days

e. 148.0 days

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) 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? (Points: 30)

a. 8.15%

b. 8.48%

c. 8.82%

d. 9.17%

e. 9.54%

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). (Points: 35)

Year: 1 2

Free cash flow: -$50 $100

a. $1,456

b. $1,529

c. $1,606

d. $1,686

e. $1,770

5. (TCO G) Based on the corporate valuation model, Bernile Inc.'s value of operations is $750 million. Its balance sheet shows $50 million of short-term investments that are unrelated to operations, $100 million of accounts payable, $100 million of notes payable, $200 million of long-term debt, $40 million of common stock (par plus paid-in-capital), and $160 million of retained earnings. What is the best estimate for the firm's value of equity, in millions? (Points: 35)

a. $429

b. $451

c. $475

d. $500

e. $525

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