# FI515 Financial Management: Week 8 Final Study Guide (Version 3)

FI515 Financial Management

Week 8 Final (Version 3)

1. (TCO A) Which of the following is NOT normally regarded as being a barrier to hostile takeovers? (Points : 5)

Abnormally high executive compensation

Targeted share repurchases

Shareholder rights provisions

Restricted voting rights

Poison pills

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) The Ackert Company's last dividend was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (rs) is 12.0%. What is the best estimate of the current stock price? (Points : 20)

a. $37.05

b. $38.16

c. $39.30

d. $40.48

e. $41.70

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)

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) The Dewey Corporation has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion cycle? (Points : 30)

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

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) Sapp Trucking's balance sheet shows a total of noncallable $45 million long-term debt with a coupon rate of 7.00% and a yield to maturity of 6.00%. This debt currently has a market value of $50 million. The balance sheet also shows that the company has 10 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is $65 million. The current stock price is $22.50 per share; stockholders' required return, rs, is 14.00%; and the firm's tax rate is 40%. The CFO thinks the WACC should be based on market value weights, but the president thinks book weights are more appropriate. What is the difference between these two WACCs?

a. 1.55%

b. 1.72%

c. 1.91%

d. 2.13%

e. 2.36%

(Points : 30)

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 $900 million. Its balance sheet shows $70 million in accounts receivable, $50 million in inventory, $30 million in short-term investments that are unrelated to operations, $20 million in accounts payable, $110 million in notes payable, $90 million in long-term 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? (Points : 35)

a. $23.00

b. $25.56

c. $28.40

d. $31.24

e. $34.36

Week 8 Final (Version 3)

1. (TCO A) Which of the following is NOT normally regarded as being a barrier to hostile takeovers? (Points : 5)

Abnormally high executive compensation

Targeted share repurchases

Shareholder rights provisions

Restricted voting rights

Poison pills

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) The Ackert Company's last dividend was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (rs) is 12.0%. What is the best estimate of the current stock price? (Points : 20)

a. $37.05

b. $38.16

c. $39.30

d. $40.48

e. $41.70

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)

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) The Dewey Corporation has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion cycle? (Points : 30)

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

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) Sapp Trucking's balance sheet shows a total of noncallable $45 million long-term debt with a coupon rate of 7.00% and a yield to maturity of 6.00%. This debt currently has a market value of $50 million. The balance sheet also shows that the company has 10 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is $65 million. The current stock price is $22.50 per share; stockholders' required return, rs, is 14.00%; and the firm's tax rate is 40%. The CFO thinks the WACC should be based on market value weights, but the president thinks book weights are more appropriate. What is the difference between these two WACCs?

a. 1.55%

b. 1.72%

c. 1.91%

d. 2.13%

e. 2.36%

(Points : 30)

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 $900 million. Its balance sheet shows $70 million in accounts receivable, $50 million in inventory, $30 million in short-term investments that are unrelated to operations, $20 million in accounts payable, $110 million in notes payable, $90 million in long-term 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? (Points : 35)

a. $23.00

b. $25.56

c. $28.40

d. $31.24

e. $34.36

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