FIN 515 Final Exam (Set 4)

1.Which of the following is not a step in the WACC valuation method?

2. Which of the following statements is correct?

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?

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.
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 month.
Construct a single month’s cash budget with the information given. What is the average cash gain or (loss) during a typical month for the ABC Corporation?

5. (TCO G)

Consider the information for the following four firms.

Firm	Cash	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?

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) 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.)

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)

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

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?

5. (TCO D)

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	27.9%	11.45%	0.0131103
2008	-5.1%	-21.55%	0.0464403
2009	-11.3%	-27.75%	0.0770063