Fin 515 week 6 problems solutions

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This archive file of FIN 515 Week 6 Problems Solutions
contains:
Prob 16-1
Prob 16-2
Prob 16-3
Prob 16-4
Prob 16-5
Business - General Business
1. (TCO A) Which of the following does NOT always increase a
company's market value? (Points : 5)
Increasing the expected growth rate of sales
Increasing the expected operating profitability (NOPAT/Sales)
Decreasing the capital requirements (Capital/Sales)
Decreasing the weighted average cost of capital
Increasing the expected rate of return on invested capital
2. (TCO F) Which of the following statements is correct?
(Points : 5)
The NPV, IRR, MIRR, and discounted payback (using a
payback requirement of 3 years or less) methods always lead
to the same accept/reject decisions for independent projects.
For mutually exclusive projects with normal cash flows, the
NPV and MIRR methods can never conflict, but their results
could conflict with the discounted payback and the regular
IRR methods.

2. Multiple IRRs can exist, but not multiple MIRRs. This is one
reason some people favor the MIRR over the regular IRR.
If a firm uses the discounted payback method with a required
payback of 4 years, then it will accept more projects than if it
used a regular payback of 4 years.
The percentage difference between the MIRR and the IRR is
equal to the project’s WACC.
3. (TCO D) 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, i.e., g = 0. The company's last dividend,
D 0, was $1.25, its beta is 1.20, the market risk premium is
5.50%, and the risk-free rate is 3.00%. What is the current
price of the common stock?
a. $26.77
b. $27.89
c. $29.05
d. $30.21
e. $31.42
4. (TCO G) Singal Inc. is preparing its cash budget. It 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?
a. $24,057
b. $26,730
c. $29,700
d. $33,000

3. e. $36,300
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 C) Bumpas Enterprises purchases $4,562,500 in
goods per year from its sole supplier on terms of 2/15, net
50. If the firm chooses to pay on time but does not take the
discount, what is the effective annual percentage cost of its
nonfree trade credit? (Assume a 365-day year.)
a. 20.11%
b. 21.17%
c. 22.28%
d. 23.45%
e. 24.63%
3. (TCO E) You were hired as a consultant to the Quigley
Company, whose target capital structure is 35% debt, 10%
preferred, and 55% common equity. The interest rate on new
debt is 6.50%, the yield on the preferred is 6.00%, the cost of
common from retained earnings is 11.25%, and the tax rate is
40%. The firm will not be issuing any new common stock.
What is Quigley's WACC?
a. 8.15%
b. 8.48%

4. c. 8.82%
d. 9.17%
e. 9.54%
4. (TCO B) A company forecasts the free cash flows (in
millions) shown below. The weighted average cost of capital
is 13%, and the FCFs are expected to continue growing at a
5% rate after Year 3. Assuming that the ROIC is expected to
remain constant in Year 3 and beyond, what is the Year 0
value of operations, in millions?
Year: 1 2 3
Free cash flow: -$15 $10 $40
a. $315
b. $331
c. $348
d. $367
e. $386
5. (TCO G) Based on the corporate valuation model,
Hunsader's value of operations is $300 million. The balance
sheet shows $20 million of short-term investments that are
unrelated to operations, $50 million of accounts payable, $90
million of notes payable, $30 million of long-term debt, $40
million of preferred stock, and $100 million of common
equity. The company has 10 million shares of stock
outstanding. What is the best estimate of the stock's price
per share?
a. $13.72
b. $14.44
c. $15.20
d. $16.00
e. $16.80
6. TCO G) Clayton Industries is planning its operations for

5. next year, and Ronnie Clayton, the CEO, wants you to
forecast the firm's additional funds needed (AFN). The firm is
operating at full capacity. Data for use in your forecast are
shown below. Based on the AFN equation, what is the AFN
for the coming year? Dollars are in millions.
Last year's sales = S 0
$350
Last year's accounts payable
$40
Sales growth rate = g
30%
Last year's notes payable
$50
Last year's total assets = A 0*
$500
Last year's accruals
$30
Last year's profit margin = PM
5%
Target payout ratio
60%
a. $102.8
b. $108.2
c. $113.9
d. $119.9
e. $125.9
1. (TCO A) Which of the following does NOT always increase
a company's market value? (Points : 5)
Increasing the expected growth rate of sales
Increasing the expected operating profitability
(NOPAT/Sales)

6. Decreasing the capital requirements (Capital/Sales)
Decreasing the weighted average cost of capital
Increasing the expected rate of return on invested capital
2. (TCO F) Which of the following statements is
correct? (Points : 5)
The MIRR and NPV decision criteria can never conflict.
The IRR method can never be subject to the multiple IRR
problem, while the MIRR method can be.
One reason some people prefer the MIRR to the regular IRR
is that the MIRR is based on a generally more reasonable
reinvestment rate assumption.
The higher the WACC, the shorter the discounted payback
period.
The MIRR method assumes that cash flows are reinvested at
the crossover rate.
3. (TCO D) The Ramirez Company's last dividend was $1.75.
Its dividend growth rate is expected to be constant at 25% for
2 years, after which dividends are expected to grow at a rate
of 6% forever. Its required return ( r s) is 12%. What is the
best estimate of the current stock price?
a. $41.58
b. $42.64
c. $43.71
d. $44.80
e. $45.92
4. (TCO G) The ABC Corporation's budgeted monthly sales
are $4,000. In the first month, 40% of its customers pay and
take the 3% discount.
The remaining 60% pay in the month following the sale and
don't receive a discount.

7. ABC's bad debts are very small and are excluded from this
analysis.
Purchases for next month's sales are constant each month at
$2,000. Other payments for wages, rent, and taxes are
constant at $500 per mon...
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