FIN 515 FINAL EXAM

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FIN 515 Final Exam (New).docx Question 1. 1. (TCO A) In the United States, which of the following types of organization has the greatest revenue in total? (Points : 5) Sole proprietorship C corporatio ... n S corporation Limited partnership Question 2. 2. (TCO A) A sole proprietorship is owned by ( Points : 5) one person. one or two people, but if there are two owners, they must be married to each other. up to 100 owners. up to 64 owners. Question 3. 3. (TCO B) Which of the following would cause the present value of an annuity to increase? (Points : 5) Reducing the number of payments. Increasing the interest rate. Decreasing the interest rate. Decreasing the liquidity of the payments. Question 4. 4. (TCO B) Which of the following is an annuity due? (Points : 5) A typical car loan. A typical mortgage. A typical apartment rental agreement. A credit card balance. Question 5. 5. (TCO G) If net income, total assets, and book value of equity stayed the same, what would be the effect on the DuPont Identity of an increase in sales? (Points : 20) Dupont equation calculates return on equity by following formula ROE (Return on Equity) = (Net Income/Sales) * (Sales/Assets) * (Assets/Equity) If sales increase while net income, total assets, and book value of equity stayed the same then return on rquity will remain the same as the decrease in profit margin (Net Income/Sales) will be compensated by increase in asset turnover ratio (Sales/Assets). Question 6. 6. (TCO D) A stock has just paid a dividend and will pay a dividend of $3.00 in a year. The dividend will stay constant for the rest of time. The return on equity for similar stocks is 14%. What is P0? (Points : 20) P0 = 3/14% = $21.43 Question 7. 7. (TCO D) A stock has just declared an annual dividend of $2.25 to be paid one year from today. The dividend is expected to grow at a 7% annual rate. The return on equity for similar stocks is 12%. What is P0? (Points : 20) P0 = 2.25/(12% -7%)= $45 Question 8. 8. (TCO D) A bond has 5 years to maturity and has a YTM of 8%. Its par value is $1,000. Its semiannual coupons are $50. What is the bonds current market price? (Points : 10) Price = 1081.11 Solution: NPER 10 ← Number of Period 5 x 2 = 10 PMT 50 ← Payment per Period FV 1000 ← Par Value Rate 4,00% ← Semi-Annual Rate 8%/2 = 4% Current Price $1 081,11 Question 9. 9. (TCO D) A bond currently sells for $1,030 even though it has a par of $1,000. It was issued two years ago and had a maturity of 10 years. The coupon rate is 7% and the interest payments are made semiannually. What is its YTM? (Points : 10) YTM = 6.51% Solution: NPER 16 ← Number of Period 8 x 2 = 16 PMT 35 ← Payment per Period PV 1030 ← Present Value FV 1000 ← Par Value YTM 6,51% Question 10. 10. (TCO D) Explain thoroughly how stock portfolios affect the risk to an investor. (Points : 30) The stock is generally more risker than other class of asset such as debts, money market instrument, treasuries etcetera. If a investor just held on stock then his return and risk are tied to one company but a investor hold multiple securities in his portfolio which a not closely correlated then it will help him to reduce the risk of overall portfolio while maintain the return. The stock portfolio helps the investor to reduce due to the benefit of diversification. Diversification can be achieved by investing in different asset classes such as financial instruments, real estate, and commodities etcetera. Also in each asset class investment should be made in different categories for example in asset class financial instruments investment can be made in stocks, debt, option and futures. Different asset classes even different asset among the same asset class behave differently to different situation. So one should diversify because it reduces the risk while maximizing the return for the given level of risk taken thus helping in achieving the overall financial goals. Question 11. 11. (TCO E) A company has 30 million shares outstanding trading for $8 per share. It also has $90 million in outstanding debt. If its equity cost of capital is 15%, and its debt cost of capital is 9%, and its effective corporate tax rate is 40%, what is its weighted average cost of capital? (Points : 30) WACC = 9%*(1-.4)*(90/330) 15%*(240/330) = 12.38% Question 12. 12. (TCO A) Name and describe the three functions of managerial finance. For each, give an example other than those used in the text and lecture. (Points : 25) The managerial finance functions are as follow 1. Investment Decision – Where to invest, example whether to invest in new machinery or business. 2. Financing Decision – how to finance, example whether to borrow money or raise equity capital. 3. Dividend Decision – Distribution of profit, example whether to declare dividend or reinvest in business. 4. Working Capital Decision – Management of working capital, example level of current asset or current liabilities to keep. Please check if these are as per your text. Question 13. 13. (TCO H) What is the difference between the cash cycle and the operating cycle? Under what condition would they be the same? (Points : 30) Cash conversion cycle is the length of time a company takes to converts its recourse inputs (from the time it purchases inventory) into cash (receipt of cash from account receivable or sales) and reduced by time it take to payout to creditors. Cash Conversion Cycle = DIO DSO – DPO Where DIO= Days inventory outstanding DSO = Days sales outstanding DPO = Days payable outstanding Operating cycle is the number of days a company takes in converting its inventories in cash. Operating Cycle = DIO DSO So Cash Conversion Cycle will equal Operating Cycle if DPO is zero that is the company purchase its input in cash. Question 14. 14. (TCO F) A company has the opportunity to do any of the projects for which the net cash flows per year are shown below. The company has a cost of capital of 12%. Which should the company do and why? You must use at least two capital budgeting methods. Show your work. Year A B C 0 -300 -100 -300 1 100 -50 100 2 100 100 100 3 100 100 100 4 100 100 100 5 100 100 100 6 100 100 100 7 -100 -200 0 (Points : 40) Year A B C 0 -300 -100 -300 1 100 -50 100 2 100 100 100 3 100 100 100 4 100 100 100 5 100 100 100 6 100 100 100 7 -100 -200 0 NPV $65,91 $86,74 $111,14 ← Select Cell to See NPV Formula IRR 24,29% 43,16% 24,29% ← Select Cell to See IRR Formula If the projects are mutually exclusive we should select project C as it has maximum NPV and its IRR is greater than cost of capital. If the project are not mutually exclusive we should select all project all project have positive NPV and IRR is greater than cost of capital. [Show More]

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