Finance 411 final exam questions from bb
Downie Foods recently completed a 4-for-1 stock split. Prior to the split, its stock sold for $120 per share. If the firm's total market value increased by 5% as a result of increased liquidity caused by the split, what was the stock price following the split?
$120 / (4/1) = $30 $30 X 0.05 = $1.50 $30 + $1.50 = $31.50
Suppose that you're planning a vacation and borrow $2,000 from a bank for one year at a stated annual interest rate of 14 percent, with interest prepaid (a discounted loan). Also, assume that the bank requires you to maintain a compensating balance equal to 20 percent of the initial loan value. What effective annual interest rate are you being charged?
-Face amount of loan: =2000/(1-0.14-0.2) -interest= face amt *.14 -compensating balance= face amt *.2 - 2 columns, 0 and 1 -in zero column, =face amt =-interest =-comp. balance =sum( all) in 1 column, =-face amt =+ comp. balance No interest =sum( all) ear==RATE(1,,0 sum, 1 sum) =21.21%
Arnold Inc. purchases merchandise on terms of 2/10 net 30, and it always pays on the 30th day. The CFO calculates that the average amount of costly trade credit carried is $375,000. What is the firm's average accounts payable balance? (Assume a 365-day year.)
-costly trade credit=purchases per day x (days credit is outstanding-discount period) -375000=purchases per day x (30-10) -purchases per day = 375000/20 -free trade credit=10* purchases per day -total trade credit=free trade credit +375000 =562500
Andrews Corporation 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 non-free trade credit? (Use a 365-day year.)
-nominal rate ==0.02/0.98 -mult by (365/(58-8))=7.3 -.98*7.3=14.9%(not sure why needed) -ear =(1+nominal)^mult by-1 =15.89%
Campbell Computing Inc. currently has sales of $1,000,000, and its days sales outstanding is 30 days. The financial manager estimates that offering longer credit terms would (1) increase the days sales outstanding to 50 days and (2) increase sales to $1,200,000. However, bad debt losses, which were 2 percent on the old sales, would amount to 5 percent on the incremental sales only (bad debts on the old sales would stay at 2 percent). Variable costs are 80 percent of sales, and Campbell has a 15 percent receivables financing cost. What would the annual incremental pre-tax profit be if Bass extended its credit period?
1. cost of carrying receivables= DSO x Sales per day x variable cost ratio x cost of receivables financing -=30*(1000000/365)*0.8*0.15 2. But what about after we make the policy change? -=50*(1200000/365)*0.8*0.15 3. what about the bad debt? - current bad debt ==0.02*1000000 -bad debt after policy change =(0.02*1000000)+(200000*0.05) 4. 2 columns titled current, after policy change, rows are as follows: -Sales C: = sales, APC:=increased sales -Cost, = sales*.8 for both -Profit before bad debt and receivables financing =sales -cost for both -bad debt (both neg) C: = current bad debt, APC: = bad debt after policy change -receivables financing(both neg), C: cost of carrying receivables, APC, APC cost of carrying receivables -NET both = sum(profit before bad debt and receivables financing, bad debt, receivables financing) -Difference =APC NET- C NET= ANSWER = $20,136.99
Bailey and Sons has a levered beta of 1.10, its capital structure consists of 40% debt and 60% equity, and its tax rate is 40%. What would Bailey's beta be if it used no debt, i.e., what is its unlevered beta?
=1.1/(1+(1-0.4)*(0.4/0.6))
Maxwell Gardens requires a $100,000 annual loan in order to pay laborers to tend and harvest its organic vegetable crop. Maxwell borrows on a discount interest basis at a nominal annual rate of 11 percent. If Maxwell must actually receive $100,000 net proceeds to finance its crop, then what must be the face value of the note?
=100000/(1-0.11) = $112,359.55
Brothers Breads has the following data. What is the firm's cash conversion cycle? Inventory conversion period = 50 days Average collection period = 17 days Payables deferral period = 25 days
CCC=ICP+ACP-PDP -=50+17-25 =42 days
Grandin Inc. is evaluating its dividend policy. It has a capital budget of $625,000, and it wants to maintain a target capital structure of 60% debt and 40% equity. The company forecasts a net income of $475,000. If it follows the residual dividend policy, what is its forecasted dividend payout ratio?
Capital Budget = $625,000 40% of this comes from equity to maintain the capital structure. 40% of this capital budget = 40% * $625,000 = $250,000 Residual dividend = Net Income - Amount required for capital budget Residual dividend = $475,000 - $250,000 = $225,000 Dividend payout ratio = $225,000/$475,000 = 47.37%
Weston Clothing Company is considering manufacturing a new style of shirt, whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero salvage value, and no new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other Weston's products and would reduce their pre-tax annual cash flows. What is the project's NPV? (Hint: Cash flows are constant in Years 1-3.) WACC 10.0% Pre-tax cash flow reduction for other products (cannibalization) $5,000 Investment cost (depreciable basis) $80,000 Straight-line deprec. rate 33.333% Sales revenues, each year for 3 years $67,500 Annual operating costs (excl. deprec.) $25,000 Tax rate 35.0%
Depreciation per year = 80000/3 = 26,666.67 Income before tax = sales - operating cost - depreciation = 67500-25000-26666.67 = 15,833.33 Net income = 15,833.33*(1-35%) = 10,291.67 Cashflow from operations in year 1-3 = 10,291.67 + depreciation = 10,291.67+26,666.67 = 36,958.33 Post tax impact of cannibalization = 5000*(1-35%) = 3250 So net cashflow in each year = 36,958.33 - 3250 = 33,708.33 NPV = -80000+33,708.33/1.1+33,708.33/1.1^2+33,708.33/1.1^3 = $3827.64
David Rose Inc. forecasts a capital budget of $500,000 next year with forecasted net income of $400,000. The company wants to maintain a target capital structure of 30% debt and 70% equity. If the company follows the residual dividend policy, how much in dividends, if any, will it pay?
Dividends= NI-Equity requirement Equity requirement= % Equity*capital budget =70%*500,000=$350,000 Dividends=400,000-350,000 =$50,000
Exhibit 16.1 Pennewell Publishing Inc. (PP) is a zero growth company. It currently has zero debt and its earnings before interest and taxes (EBIT) are $80,000. PP's current cost of equity is 10%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $48.00. Refer to Exhibit 16.1. PP is considering changing its capital structure to one with 30% debt and 70% equity, based on market values. The debt would have an interest rate of 8%. The new funds would be used to repurchase stock. It is estimated that the increase in risk resulting from the added leverage would cause the required rate of return on equity to rise to 12%. If this plan were carried out, what would be PP's new value of operations?
FCF/WACC= value of ops for perpetuity -WACC=wdrd(1-T)+wcrs =(0.3*0.08*(1-0.4))+(0.7*0.12) -EBIT=80000 -EBIT (1-T)=EBIT*(1-.4) -Value of ops on the perp=EBIT(1-T)/WACC = $487,804.88
Data on Liu Inc. for the most recent year are shown below, along with the inventory conversion period (ICP) of the firms against which it benchmarks. The firm's new CFO believes that the company could reduce its inventory enough to reduce its ICP to the benchmarks' average. If this were done, by how much would inventories decline? Use a 365-day year. Cost of goods sold = $85,000 Inventory = $20,000 Inventory conversion period (ICP) = 85.88 Benchmark inventory conversion period (ICP) = 38.00t i
ICP=INV/Cogs per day -=38=INV/(85000/365) target inventory=38*(85000/365) current inventory=20000 drop in inv = target - current inv. = $(11,150.68)
Baltimore Baking is preparing its cash budget and 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?
Jan=30000 FEB=35000 Mar=35000 -3 columns, jan feb mar jan column: =.2*jan feb column:(2 calculations) =.4*jan =.2*feb mar column: (3 calcs) =.4*jan =.4*feb =.2*mar -find sum of march column =33,000
You have been asked to forecast the additional funds needed (AFN) for Houston, Hargrove, & Worthington (HHW), which is planning its operation for the coming year. The firm is operating at full capacity. Data for use in the forecast are shown below. However, the CEO is concerned about the impact of a change in the payout ratio from the 10% that was used in the past to 50%, which the firm's investment bankers have recommended. Based on the AFN equation, by how much would the AFN for the coming year change if HHW increased the payout from 10% to the new and higher level? All dollars are in millions. Last year's sales = S0 $300.0 Last year's accounts payable $50.0 Sales growth rate = g 40% Last year's notes payable $15.0 Last year's total assets = A0* $500.0 Last year's accruals $20.0 Last year's profit margin = PM 20.0% Initial payout ratio 10.0%
Last year's sales = 300 Sales growth rate = 40% Forecasted sales = 300*1.4 = 420 change in sales = 420-300 = 120 Last year's total assets = 500 Forecasted total assets = 500*1.4 = 700 Last year's accounts payable = 50 Last year's notes payable = 15 Last year's accruals = 20 Payables + accruals = 50 +20 = 70 Profit margin = 20% Target payout ratio = 10% Retention ratio = (1 - Payout) = 90% AFN = (Last year assets/Last year sales*Change in sales) - ((Payables+accruals)/Last year sales*Change in sales) - (Profit Margin*Retention Ratio*Forecasted sales) = (500/300*120) - (70/300*120) - (0.2*0.9*420) = 96.4 If payout = 50% AFN = (500/300*120) - (70/300*120) - (0.2*0.5*420) = 130 So, Net increase in AFN = 130-96.4 = 33.6
Hernandez Corporation expects to have the following data during the coming year. What is Hernandez's expected ROE? Assets $200,000 Interest rate 8% D/A 65% Tax rate 40% EBIT $25,000
NOT THE SAME PROBLEM ANSWER IS 12.51%
Weber Interstate Paving Co. had $450 million of sales and $225 million of fixed assets last year, so its FA/Sales ratio was 50%. However, its fixed assets were used at only 65% of capacity. If the company had been able to sell off enough of its fixed assets at book value so that it was operating at full capacity, with sales held constant at $450 million, how much cash (in millions) would it have generated?
Sales $450 Fixed assets $225 % of capacity utilized 65% If FA Capacity Used = full capacity = Actual sales/% of capacity used =450/65% =$692.31 Target FA/Sales ratio = Full capacity FA/Sales = FA/Capacity sales =65/2 = 32.50% Optimum FA = Sales × Target FA/Sales ratio = $146.25 Cash generated = Actual Fixed Asset − Optimum Fixed Asset =$78.75
Gladys Turner borrowed $12,000 from the bank using a 10.19 percent "add-on", one-year installment loan, payable in four equal quarterly payments. What is the effective annual rate of interest?
add on interest= 12000*.1019 amount to be repaid= 12000 + add on interest payments, quarterly = amt to be repaid/4 periodic rate=RATE(4, pmt quarterly,12000) nominal rate=periodic rate*4 effective rate= EFFECT(nominal rate,4) =16.98%
Brinkley Resources stock has increased significantly over the last five years, selling now for $175 per share. Management feels this price is too high for the average investor and wants to get the price down to a more typical level, which it thinks is $25 per share. What stock split would be required to get to this price, assuming the transaction has no effect on the total market value? Put another way, how many new shares should be given per one old share?
old price per share=175 new price/share=25 stock split rate=175/25 =7
Cartwright Communications is considering making a change to its capital structure to reduce its cost of capital and increase firm value. Right now, Cartwright has a capital structure that consists of 20% debt and 80% equity, based on market values. (Its D/S ratio is 0.25.) The risk-free rate is 6% and the market risk premium, rM − rRF, is 5%. Currently the company's cost of equity, which is based on the CAPM, is 12% and its tax rate is 40%. What would be Cartwright's estimated cost of equity if it were to change its capital structure to 50% debt and 50% equity?
rs=rrf+RPm(b) -.12=.06+.05b -beta=(0.12-0.06)/0.05 -unlevered beta=1.2/(1+(1-0.4)*0.25) -relevered beta =C16*(1+(1-0.4)*(0.5/0.5)) CAPM for rs=0.06+0.05*C18 =14.35%
Below are the simplified current and projected financial statements for Decker Enterprises. All of Decker's assets are operating assets. All of Decker's current liabilities are operating liabilities. Income statement Current Projected Sales na . 1,500 Costs na 1,050 Profit before tax na . 450 Taxes na 135 Net income na . 315 Dividends na . 95 Balance sheets . Current Projected Current assets 100 . 115 Net fixed assets 1,200 . 1,440 Current Projected Current liabilities 70 81 Long-term debt 300 . 360 Common stock 500 . 500 Retained earnings 430 . 650 Based on the projections, Decker will have
total funds available = 81 + 360 + 500 + 650 = 1591 Total funds spending = 115 + 1440 = 1555 Finanacing surplus = 1591 - 1555 = 36 surplus
