Final Exam (Questions, Solutions, & Formulas) - FINANCIAL MANAGEMENT 1 PDF

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Final Exam (Questions, Solutions, & Formulas) for the course Business Finance - Financial Management 1...

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Financial Management 1 - Fall 2017 FINAL EXAM PRACTICE QUESTIONS Chap.12 1. If a stock consistently goes down (up) by 1.6% when the market portfolio goes down (up) by 1.2% then its Beta: A. Equals 1.40 B. Equals 1.24 C. Equals 1.33 D. Equals 1.41 2. What is the Beta of a three-stock portfolio including 25% of Stock A with a Beta of .90, 40% Stock B with a Beta of 1.05, and 35% Stock C with a Beta of 1.73? A. 1.05 B. 1.17 C. 1.22 D. 1.25 3. Calculate the risk premium on Stock C given the following information: risk-free rate = 5%, market return = 13%, Stock C = 1.3 Beta. A. 8.0% B. 10.4% C. 15.4% D. 16.9%

4. If a two-stock portfolio is equally invested in stocks with Betas of 1.4 and 0.7, then the portfolio Beta is: A. 0.70 B. 1.05 C. 1.40 D. 2.10

5. An investor divides her portfolio into thirds, with one part in Treasury bills, one part in a market index, and one part in a diversified portfolio with Beta of 1.50. What is the Beta of the investor's overall portfolio? A. 0.833 B. 1.000 C. 1.167 D. 1.250

6. Calculate the Sharpe ratios of the following stocks assuming that the risk free rate is 4%. Which stock offers the least desirable risk adjusted return?

Stock

Expected return

Std Dev of returns

Yahoo

14%

6%

Google

16%

7%

Sharpe Ratio

Chap.13 7. What appears to be the targeted debt ratio of a firm that issues $15 million in bonds and $35 million in equity to finance its new capital projects? A. 15.00% B. 30.00% C. 35.00% D. 60.00% 8. What is the WACC for a firm with 50% debt and 50% equity that pays 12% on its debt, 20% on its equity, and has a 40% tax rate? A. 9.6% B. 12.0% C. 13.6% D. 16.0% 9. What is the WACC for a firm using 55% equity with a required return of 15%, 35% debt with a required return of 8%, 10% preferred stock with a required return of 10%, and a tax rate of 35%? A. 10.72% B. 11.07% C. 11.70% D. 12.05% 10. What dividend is paid on preferred stock if investors require a 9% rate of return and the stock has a market value of $54.00 per share and a book value of $50.00 per share? A. $2.92 B. $4.50 C. $4.68 D. $4.86 11. Calculate a firm's WACC given that the total value of the firm is $2,000,000, $600,000 of which is debt, the costs of debt and equity are 10% and 15% respectively, and the firm pays no taxes: A. 9.0% B. 11.5% C. 13.5% D. 14.4% 12. What return on equity do investors seem to expect for a firm with a $55 share price, an expected dividend of $5.50, a beta of .9 and a constant growth rate of 5.5%? A. 9.00% B. 10.00% C. 13.95% D. 15.50% 13. What is a firm's weighted-average cost of capital if the stock has a beta of 1.45, Treasury bills yield 5%, and the market portfolio offers an expected return of 14%? In addition to equity, the firm finances 30% of its assets with debt that has a yield to maturity of 9%. The firm is in the 35% marginal tax bracket.

Chap.20 14. What is the inventory period for a firm with an annual cost of goods sold of $8 million, $1.5 million in average inventory, and a cash conversion cycle of 75 days? A. 6.56 days B. 18.75 days C. 53.33 days D. 68.44 days 15. Your accountant suspects a mistake in the computation of the payables period, which has been reported at 54.75 days. Calculate the correct payables period, given the following: annual sales = $1,200,000, annual cost of goods sold = $700,000, average accounts payable = $105,000. A. 31.94 days B. 54.75 days C. 179.58 days D. 212.92 days 16. What will be the change in net working capital as a result of the following changes in current assets and current liabilities? (I.) Current assets decrease by $125,000. (II.) Current liabilities increase by $55,000. A. Increase by $70,000 B. Increase by $180,000 C. Decrease by $70,000 D. Decrease by $180,000 17. Create a statement of sources and uses of cash from the following entries: Income Statement & Balance Sheet Changes Depreciation 40 Repaid operating line of credit 30 Bought marketable securities 50 16 Net income 0 Inventory decrease 10 Increased Accounts Receivables 60 11 Fixed asset investment 0 Long Term Debt increase 80 Paid dividends 10 Payables increase 70

Chap.21 18. What is the benefit for a firm with daily sales of $30,000 to be able to speed up collections by three days, assuming an 8 percent annual opportunity cost of funds? A. $7,200 daily benefit B. $7,200 annual benefit C. $30,000 annual benefit D. $90,000 annual benefit

19. What is the total carrying cost for an inventory of 200 widgets if the per-widget carrying cost is $4, the cost per order is $14, and there are 5 orders per year? A. $400 B. $470 C. $800 D. $870 20. Your firm's ledger shows a balance of $1 million which reflects today's $75,000 deposit and a cheque for $50,000 that went out in yesterday's mail. What is the bank's ledger balance for your account? A. $875,000 B. $975,000 C. $1,025,000 D. $1,125,000 21. How much money can be saved annually by setting up a lock-box system that will process 500 cheques per day at a cost of $0.20 per cheque if each cheque averages $220, collection float is reduced by three days, and the annual interest rate is 8 percent? A. ($27,700) B. ($10,100) C. $10,000 D. $16,400 22. Average daily collection of cheques for a firm is $50,000. The firm also writes on the average $35,000 of cheques daily. If the collection period for cheques is 5 days, calculate the net float. A. -$75,000 B. $75,000 C. ($425,000) D. $425,000

Chap.22 23. How much does a firm lose on a $5,000 sale that has a 40% profit margin if the 30% probability of default occurs? A. $600 B. $2,000 C. $900 D. $3,000

24. You are buying goods worth $75,000 from a firm that offers the credit terms of 2/10, net 30. What will be the actual payment if you paid within 10 days? A. $73,500 B. $74,250 C. $75,000 D. $76,500

25. ABC Corp has the opportunity to make a one-time sale of $250,000 to a customer. The cost of goods sold for this sale is $190,000. If the probability of the customer paying is 85%, what is the expected profit from this transaction? A. Zero B. $22,500 C. +$8,000 D. +$10,000

SOLUTIONS

1.

C

Beta = change in stock’s return / change in market return = 1.6%/1.2% = 1.33

2. D

Portfolio Beta = (.25 x 0.9) + (.4 x 1.05) + (.35 x 1.73) = .225 + .42 + .606 = 1.25

3. B

Stock C Risk Premium = Beta x (market risk premium) = 1.3 x (13% - 5%) = 10.4%

4. B

Portfolio Beta = (W1 x B1) + (W2 x B2) = (.5 x 1.4) + (.5 x .70) = 1.05

5. A

Beta of portfolio = 1/3 x Beta of T-Bills + 1/3 of market Beta + 1/3 of Beta of diversified investments = 1.3 (0) + 1/3 (1) + 1/3 (1.5) = .8333

6.

Sharpe Ratio = Expected return – Risk free rate Standard Deviation of returns Yahoo Sharpe ratio = (.14 - .04) / .06 = 1.67 Google Sharpe ratio = (.16 - .04) / .07 = 1.71 Yahoo stock has the lower sharpe ratio and therefore provides the poorer risk adjusted return.

7. B 8. C

WACC = (.5 x (.12 x .6)) + (.5 x .2) = 3.6% + 10% = 13.60%

9. B

WACC = (.35 x (1 - .35).08) + (.1 x .1) + (.55 x .15) = 1.82% + 1.0% + 8.25% = 11.07%

10. D

9% = Dividend/Price 9% = Dividend/54.00 9% x $54 = Dividend = $4.86

11. C

WACC = .10(600,000/2,000,0000) + .15(1,400,000/2,000,000) = .10(.3) + .15(.7) = 13.5%

12. D

requity = = $5.50/$55.0 + 5.5% = 10% + 5.5% = 15.5%

13.

re = 5% + 1.45 (14% - 5%) = 5% + 13.05 = 18.05%

rd = 9% (1 - .35) = 5.85% WACC = (.3  5.85%) + (.7  18.05%) = 1.755% + 12.635% = 14.39%

14. D

inventory period =

= = 68.44 days

15. B

payable period =

= = 54.75 days 16. D

Change in net working capital = (change in current assets - change in current liabilities) = -125,000 - (55,000) = -$180,000

17.

Sources of Cash Net income Depreciation Inventory decrease Payables increase Long Term Debt increase

16 0 40 10 70 80 36 0

Uses of Cash Repaid operating line of credit

Fixed asset investment Bought marketable securities Increased Accounts Receivables Paid dividends

Net Change in Cash

-30 11 0 -50 -60 -10 26 0 10 0

18. B

Annual Benefit = Daily sales x 3 days x .08 = $30,000 x 3 x .08 = $7,200

19. A

Total carrying costs = carrying cost per widget x average widget inventory = $4 x 200/2 = $400

20. B

Available balance = company's balance - availability float + payment float = $1,000,000 - $75,000 + $50,000 = $975,000

21. B

Reduced collection float: = 500 cheques daily x $220 per cheque x 3 days = $330,000 daily return = $330,000 x .08/365 = $72.33 daily bank charges = 500 x $0.20 = $100,000 Therefore, the firm loses 427.67 daily, or $10,100 annually.

22. A

Payment float = 35,000 x 5 = 175,000 Availability float = 50,000 x 5 = 250,000 Net float = Payment Float – Availabiliy Float = -75,000

23. D

Loss = Sales revenue - profit margin = $5,000 - (.4 x $5,000) = $3,000

24. A

Cash discount = 75,000 x .02 = $1,500 Actual payment = 75,000 - 1,500 = $73,500

25. B

Expected profit = Prob of getting paid x resulting profit - prob of not getting paid x cost of goods lost =0.85(250,000 - 190,000) - (.15)(190,000) = 51,000 - 28,500 = $22,500

Financial Management 1 FORMULA SHEET Final Exam

WACC = D x (1- tax rate) x Rdebt V

+

P x Rpreferred V

Rdebt = current market Yield to maturity

Rpfd =

Div1 price of the preferred

Requity = Rf + B(Rm – Rf)

CAPM

+

E x Requity V

Requity = Div1 + g P0

Dividend Discount Model

Valuing a business:

Horizon value =

FCF H+1 r* – g

(*r = WACC)

Net Float = Payment Float – Availability Float

Effective annual rate for Accounts Receivables 365/extra days credit discount -1 = (1+ discounted price ) The break-even probability of being paid = PV (Cost) PV (Rev)...