 # Fin 571 final exam answers all correct 100%

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Question 1

Which of the following is considered a hybrid organizational form?

sole proprietorship

partnership

corporation

limited liability partnership

Question 2

Which of the following is a principal within the agency relationship?

the board of directors

the CEO of the firm

a company engineer

a shareholder

Question 3

Teakap, Inc., has current assets of \$ 1,456,312 and total assets of \$4,812,369 for the year ending September 30, 2006. It also has current liabilities of \$1,041,012, common equity of \$1,500,000, and retained earnings of \$1,468,347. How much long-term debt does the firm have?

Solution: Teakap has

Current Assets=\$1,456,312

Total Assets =\$4,812,369

Current Liabilities= \$1,041,012

Common equity= \$1,500,000 & Retained Earnings=\$1,468,347

Long Term Debt= (\$4,812,369-\$1,041,012-\$15,00,000-\$1,468,347

=\$803,010

\$803,010

\$1,844,022

\$2,303,010

\$2,123,612

Question 4

Which of the following presents a summary of the changes in a firm’s balance sheet from the beginning of an accounting period to the end of that accounting period?

The statement of net worth.

The statement of retained earnings.

The statement of working capital.

The statement of cash flows.

Question 5

Efficiency ratio: Gateway Corp. has an inventory turnover ratio of 5.6. What is the firm’s days’s sales in inventory?

Solution:365 days /5.6

=65.2 days

61.7 days

65.2 days

57.9 days

64.3 days

Question 6

Leverage ratio: Your firm has an equity multiplier of 2.47. What is its debt-to-equity ratio?

Solution: We know, Equity Multiplier=Total assets/ stockholders equity

Also, Equity Multiplier=1/Equity Ratio

Or, 2.47/1= Equity Ratio

Equity proportion=2.47

Debt proportion=2.47-1

=1.47

1.47

0

1.74

0.60

Question 7

Which of the following is not a method of “benchmarking”?

Identify a group of firms that compete with the company being analyzed.

Evaluating a single firm’s performance over time.

Utilize the DuPont system to analyze a firm’s performance.

Conduct an industry group analysis.

Question 8

Present value: Jack Robbins is saving for a new car. He needs to have \$ 21,000 for the car in three years. How much will he have to invest today in an account paying 8 percent annually to achieve his target? (Round to nearest dollar.)

Solution: PV =\$21,000/(1.08)3

=\$16,670

\$19,444

\$16,670

\$26,454

\$22,680

Question 9

PV of multiple cash flows: Ferris, Inc., has borrowed from their bank at a rate of 8 percent and will repay the loan with interest over the next five years. Their scheduled payments, starting at the end of the year are as follows—\$450,000, \$560,000, \$750,000, \$875,000, and \$1,000,000. What is the present value of these payments? (Round to the nearest dollar.)

Solution:

Pv  =\$450,000/1.08+ \$560,000/(1.08)2+\$7,50,000/(1.08)3+\$875,000/(1.08)4+ \$1,000,000/(1.08)5

=\$(416,667+480,110+595,374+643,151+680,583

=\$2,815,885

\$2,735,200

\$2,815,885

\$2,431,224

\$2,615,432

Question 10

PV of multiple cash flows: Ajax Corp. is expecting the following cash flows—\$79,000, \$112,000, \$164,000, \$84,000, and \$242,000—over the next five years. If the company’s opportunity cost is 15 percent, what is the present value of these cash flows? (Round to the nearest dollar.)

Solution:

Pv  =\$79,000/1.15+ \$112,000/(1.15)2+\$164,000/(1.15)3+\$84,000/(1.15)4+ \$2,42,000/(1.15)5

=\$(68696+84,688+107833+48027+120316)

=\$429,560

\$477,235

\$429,560

\$480,906

\$414,322

Question 11

Future value of an annuity: Jayadev Athreya has started on his first job. He plans to start saving for retirement early. He will invest \$5,000 at the end of each year for the next 45 years in a fund that will earn a return of 10 percent. How much will Jayadev have at the end of 45 years? (Round to the nearest dollar.)

Future Value of ordinary annuity=A X[(1+.i)n-1/i]

=\$5,000x[(1.10)45-1/.10]

=\$3,594,524

\$3,594,524

\$1,745,600

\$5,233,442

\$2,667,904

Question 12

Serox stock was selling for \$20 two years ago. The stock sold for \$25 one year ago, and it is currently selling for \$28. Serox pays a \$1.10 dividend per year. What was the rate of return for owning Serox in the most recent year? (Round to the nearest percent.)

Solution: Given, 2 years ago the price was \$20.

After 1 year it was sold for \$25(P0=\$25)

& Now it is selling for \$28(p1=\$28)

Dividend (D1=1.10)

Rate of Return(R)= D1+(P1-P0)/P0x100

=[\$1.10+\$(28-25)/25]x100

=16%

16%

32%

40%

12%

Question 13

Bond price: Regatta, Inc., has six-year bonds outstanding that pay a 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. What should the company’s bonds be priced at today? Assume annual coupon payments. (Round to the nearest dollar.)

Solution: Given,n=6 years,i=8.25%,YTM=6.875%,PV of Bond =?

PV of Bond= (1000×8.25%) x[1-1/(1.06875)6/.06875]+ 1000/(1.06875)6

=(82.5×4.8)+671

=\$1,067

\$923

\$972

\$1,066

\$1,014

Question 14

PV of dividends: Next year Jenkins Traders will pay a dividend of \$3.00. It expects to increase its dividend by \$0.25 in each of the following three years. If their required rate of return is 14 percent, what is the present value of their dividends over the next four years?

Solution: Given,n=3,D1=\$3.00, G=0.25,R=14%

Present Value of dividends over the next 4 years=\$(3.00/1.14)+\$3.25/(1.14)2+\$3.50/(1.14)3+\$3.75/(1.14)4

=\$(2.63+2.50+2.36+2.22)

=\$9.72

[D2=D1(1+g)=\$3.00+.25=\$3.25

D3=D2(1+g)=\$3.25+.25=\$3.50

D4=D3(1+g)=\$3.50+.25=\$3.75]

\$9.72

\$12.50

\$11.63

\$13.50

Question 15

Capital rationing. TuleTime Comics is considering a new show that will generate annual cash flows of \$100,000 into the infinite future. If the initial outlay for such a production is \$1,500,000 and the appropriate discount rate is 6 percent for the cash flows, then what is the profitability index for the project?

Solution: Given,  annual cashflow=\$100,000

Initial outflow= \$1,500,000, i=6%

Profitability Index=Cash inflow/ Cash outflow

=\${100,000/.06}/\$1,500,000

= 1.11

0.90

1.11

1.90

0.11

Question 16

What decision criteria should managers use in selecting projects when there is not enough capital to invest in all available positive NPV projects?

The internal rate of return.

The discounted payback.

The modified internal rate of return.

The profitability index.

Question 17

How firms estimate their cost of capital: The WACC for a firm is 13.00 percent. You know that the firm’s cost of debt capital is 10 percent and the cost of equity capital is 20%. What proportion of the firm is financed with debt?

Solution:Given, WACC=13%,Kd=10%,Ke=20%

We know,     Ke=Ko+(K0-Kd)B/S

Or,.20=.13+(.13-.10)x B/S

Or,.20-.13=.03x S/E

Or,.07=.03S/E

Or,.07/.03= S/E

Or,S:E=70:30

70% of the total fund is financed  by debt.

70%

50%

30%

33%

Question 18

The cost of equity: Gangland Water Guns, Inc., is expected to pay a dividend of \$2.10 one year from today. If the firm’s growth in dividends is expected to remain at a flat 3 percent forever, then what is the cost of equity capital for Gangland if the price of its common shares is currently \$17.50?

Solution: D1=\$2.10,g=3%,P1=\$17.50

Cost of Equity = (Next Year’s dividends per share / Current market value of stock) + Growth rate of dividends

=(\$2.10/\$17.50)+0.03

=0.15 or 15%

15.36%

12.00%

14.65%

15.00%

Question 19

If a company’s weighted average cost of capital is less than the required return on equity, then the firm:

Is financed with more than 50% debt

Must have preferred stock in its capital structure

Has debt in its capital structure

Is perceived to be safe

Question 20

A firm’s capital structure is the mix of financial securities used to finance its activities and can include all of the following except

stock.

bonds.

equity options.

preferred stock.

Question 21

M&M Proposition 1: Dynamo Corp. produces annual cash flows of \$150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock.

If Dynamo wishes to change its capital structure from 75 percent to 60 percent equity and use the debt proceeds to pay a special dividend to shareholders, how much debt should they issue?

Solution: Given,  Annual cashflow=\$150, E=75%,D=25%,V=100,Ke=10%,Kd=7%,dividend=10%

WACC=(KexS/V) +(KdxB/V)

=(.10x.75)+(.07x.25)

=.0925 or  9.25%

Debt/Equity= 25/75=33%

When it changes its capital structure, reduces its equity by 15%, the debt to equity ratio=40/60=66.7%

\$321

\$225

\$375

\$600

Question 22

Multiple Analysis: Turnbull Corp. had an EBIT of \$247 million in the last fiscal year. Its depreciation and amortization expenses amounted to \$84 million. The firm has 135 million shares outstanding and a share price of \$12.80. A competing firm that is very similar to Turnbull has an enterprise value/EBITDA multiple of 5.40.

What is the enterprise value of Turnbull Corp.? Round to the nearest million dollars.

Solution: Given,

EBIT=\$247 million

Depriciation & amortization expenses= \$84 million

Number of outstanding shares=135 million, share price o\$12.80

Enterprise Value/EBITDA multiple=5.40

We know that,

Enterprise value multiple=Enterprise value/ EBITDA[EBITDA=Revenue-Expenses

Or,  5.40=Enterprise value/EBIT+ Depriciation

Or,  5.40x\$(247+84)=Enterprise Value

Or, Enterprise Value =\$1,787 million

\$453.6 million

\$1,334 million

\$1,787 million

\$1,315 million

Question 23

External financing needed: Jockey Company has total assets worth \$4,417,665. At year-end it will have net income of \$2,771,342 and pay out 60 percent as dividends. If the firm wants no external financing, what is the growth rate it can support?

Solution: Given,

Total Assets= \$4,417,665

Net income=\$2,771,342

Dividend pay out ratio=60%

Growth rate=RR xROE

=(1- Dividend payout ratio)x (\$2,771,342/\$4,417,665)

=25.1%

32.9%

25.1%

30.3%

27.3%

Question 24

Which of the following cannot be engaged in managing the business?

a limited partner

a general partner

none of these

a sole proprietor

Question 25

Which of the following does maximizing shareholder wealth not usually account for?

Government regulation.

Amount of Cash flows.

Risk.

The timing of cash flows.

Question 26

The strategic plan does NOT identify

working capital strategies.

future mergers, alliances, and divestitures.

the lines of business a firm will compete in.

major areas of investment in real assets.

Question 27

Firms that achieve higher growth rates without seeking external financing

are highly leveraged.

none of these.

have a low plowback ratio.

have less equity and/or are able to generate high net income leading to a high ROE.

Question 28

Payout and retention ratio: Drekker, Inc., has revenues of \$312,766, costs of \$220,222, interest payment of \$31,477, and a tax rate of 34 percent. It paid dividends of \$34,125 to shareholders. Find the firm’s dividend payout ratio and retention ratio.

Solution: Given, Revenues= \$312,766

Costs=\$220,222

Interest payment=\$31,477, tax rate=34%, dividends=\$34,125

Dividend payour Ratio= Dividend/ Net income

=\$34,125/\$(312,766-220,222-31,477)x(1-.34)

=\$34,125/40,304

=0.85 or 85%

Retention Ratio= 1- Dividend payout ratio

=1-0.85

=.15 or 15%

15%, 85%

85%, 15%

55%, 45%

45%, 55%

Question 29

The cash conversion cycle

begins when the firm invests cash to purchase the raw materials that would be used to produce the goods that the firm manufactures.

shows how long the firm keeps its inventory before selling it.

begins when the firm uses its cash to purchase raw materials and ends when the firm collects cash payments on its credit sales.

estimates how long it takes on average for the firm to collect its outstanding accounts receivable balance.

Question 30

You are provided the following working capital information for the Ridge Company:

Ridge Company

Account

\$

Inventory

\$12,890

Accounts receivable

12,800

Accounts payable

12,670

Net sales

\$124,589

Cost of goods sold

99,630

Cash conversion cycle: What is the cash conversion cycle for Ridge Company?

CCC=Operating cycle-Average payment period

Operating Cycle =  Average age of inventory+ Average collection Period

AAI=Cost of Inventory/Cost of Goods sold x 365

=\$12,890/\$99,630 x 365

=  47.2 days

ACP= Accounts Receivables/(Annual sales/365)

= 37.5 days

Operating cycle=(47.2+37.5)days

=84.7

Average payment period=360 days/A/P Turnover Ratio[COGS/Average A/P=\$99,630/{(12670+12890)/2}]

=360/7.795=46.18

CCC=84.7-46.18

=38.5 days

83.5 days

46.4 days

38.3 days

129.9 days

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