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1. FIN 515 Final Exam Set 1
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1. (TCO A) In the United States, which of the following types of organization has the
greatest revenue in total? (Points : 5)
a. Sole proprietorship
b. C corporation
c. S corporation
d. Limited partnership
1.1) Which of the following is not a step in the WACC valuation method?
A) Compute the value of the investment, including the tax benefit of leverage, by
discounting the free cash flow of the investment using the WACC.
B) Compute the weighted average cost of capital.
C) Determine the free cash flow of the investment.
D) Adjust the WACC for the firm's current debt/equity ratio.
1. (TCO H) Zervos Inc. had the following data for 2008 (in millions). The new CFO
believes (a) that an improved inventory management system could lower the average
inventory by $4,000, (b) that improvements in the credit department could reduce
receivables by $2,000, and (c) that the purchasing department could negotiate better
credit terms and thereby increase accounts payable by $2,000. Furthermore, she thinks
that these changes would not affect either sales or the costs of goods sold. If these
changes were made, by how many days would the cash conversion cycle be lowered?
2. (TCO A) Sole proprietorships have all of the following advantages except (Points :
5)
a. easy to set up.
b. single taxation of income.
c. limited liability.
d. ownership and control are not separated.

2. 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.)
Question 2. 2. (TCO A) A sole proprietorship is owned by (Points : 5)
a. one person.
b. one or two people, but if there are two owners, they must be married to each other.
c. up to 100 owners.
d. up to 64 owners.
3. (TCO B) Which of the following would cause the present value of an annuity to
decrease? (Points : 5)
a. Reducing the number of payments.
b. Increasing the number of payments.
c. Decreasing the interest rate.
d. Decreasing the liquidity of the payments.
3. Church Inc. is presently enjoying relatively high growth because of a surge in the
demand for its new product. Management expects earnings and dividends to grow at a
rate of 25% for the next 4 years, after which competition will probably reduce the
growth rate in earnings and dividends to zero. The company’s last dividend, D0, was $
1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is
3.00%. Which is the current price of the common stock?
3. (TCO E) Your firm is planning to invest in a new power generation system. Galt
Industries is an all-equity firm that specializes in this business. Suppose Galt’s equity
beta is 0.75, the risk-free rate is 3%, and the market risk premium is 6%. If your firm’s
project is all equity financed, then which is your estimate of your cost of capital
closest to?
4. (TCO B) In a TVM calculation, if incoming cash flows are positive, outgoing cash
flows must be (Points : 5)
a. positive.
b. negative.
c. either positive or negative. It really doesn’t matter.
d. stated in time units that are different from the time units in which the interest rates
are stated.
4. (TCO B)
You expect CCM Corporation to generate the following free cash flows over the next
5 years.
Year
1

3. 2
3
4
5
FCF ($ millions)
25
28
32
37
40
Following Year 5, you estimate that CCM’s free cash flows will grow at 5% per year
and that CCM’s weighted average cost of capital is 13%.
Which is the enterprise value of CCM Corporation closest to?
4. (TCO B)
You expect CCM Corporation to generate the following free cash flows over the next
5 years.
Year 1 2 3 4 5
FCF ($ millions) 25 28 32 37 40
If CCM has $200 million of debt and 8 million shares of stock outstanding, then
which is the share price for CCM closest to?
Question 4. 4. (TCO B) Which of the following is an annuity due? (Points : 5)
a. A typical car loan.
b. A typical mortgage.
c. A typical apartment rental agreement.
d. A credit card balance.
5. If you were a manager of a company, which of the three right side components of
the DuPont Identity would you want to increase and which would you want to
decrease, other things being equal? Give a specific example for how to do that for
each of the three. (Points : 20)
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)
5. (TCO G)
Consider the information for the following four firms.
Firm
Cash

4. Debt
Equity
rD
rE
τc
Eenie
0
150
150
5%
10%
40%
Meenie
0
250
750
6%
12%
35%
Minie
25
175
325
6%
11%
35%
Moe
50
350
150
7.50%
15%
30%
Which is the weighted average cost of capital for Meenie closest to?
5. (TCO D)

5. Which is the standard deviation of the returns on Stock A from 2000 to 2009 closest
to?
Year End
Stock A Realized Return
(R – R)
(R – R)2
2000
46.3%
29.85%
0.0891023
2001
26.7%
10.25%
0.0105063
2002
86.9%
70.45%
0.4963203
2003
23.1%
6.65%
0.0044223
2004
0.2%
-16.25%
0.0264063
2005
-3.2%
-19.65%
0.0386123
2006
-27.0%
-43.45%
0.1887903
2007

6. 27.9%
11.45%
0.0131103
2008
-5.1%
-21.55%
0.0464403
2009
-11.3%
-27.75%
0.0770063
6. A stock pays an annual dividend of $2.50 and that dividend is not expected to
change. Similar stocks pay a return of 10%. What is P0? (Points : 20)
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)
7. A stock has just paid a dividend and has declared an annual dividend of $2.00 to be
paid one year from today. The dividend is expected to grow at a 5% annual rate. The
return on equity for similar stocks is 12%. What is P0? (Points : 20)
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)
8. 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)
9. A bond currently sells for $1,000 and 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)
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)
10. A company has 10 million shares outstanding trading for $7 per share. It also has
$300 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)
Question 10. 10. (TCO D) Explain thoroughly how stock portfolios affect the risk to
an investor. (Points : 30)
11. 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)

7. 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)
12. Explain thoroughly how stock portfolios affect the risk to an investor. (Points : 30)
13. What is the Cash Conversion Cycle (CCC)? Name the components of the CCC
and explain why the CCC is important to business.
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)
14. 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)