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FIN 515 FINAL EXAM 2.
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FIN 515 FINAL EXAM 2.
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FIN 515 FINAL EXAM 2Page 1
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 MIRR & 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.
4. (TCO G) The ABC Corporation's budgeted monthly sales are $4,000. In the first month, 40% of its customers pay
& take the 3% discount.
aining 60% pay in the month following the sale & don't receive a discount.
ABC's bad debts are very small & are excluded from this analysis.
Purchases for next month's sales are constant each month at $2,000. Other payments for wages, rent, & 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? (Points : 20)
They will have a net cash surplus of $1452.
___________________________________________
Cash Budget
___________________________________________
+Sales Collection
, 60% for prior month 2400
40% from current month 1552
3% disc ____
Receipts 3952
-Less
payments
purchases 2000
other 500
____
Total 2500
Cash +1452
____________________________________________
. (TCO G) Howton & Howton Worldwide (HHW) is planning its operations for the coming year, & the CEO wants
you to forecast the firm's additional funds needed (AFN). The firm is operating at full capacity. Data for use in the
forecast are shown below. However, the CEO is concerned about the impact of a change in the payout ratio from
the 10% that was used in the past to 50%, which the firm's investment bankers have recommended. Based on the
AFN equation, by how much would the AFN for the coming year change if HHW increased the payout from 10% to
the new & higher level? All dollars are in millions.
Last year's sales = S0 $300 Last year's accounts payable $50
Sales growth rate = g 40% Last year's notes payable $15
Last year's total assets = A0* $500 Last year's accruals $20
Last year's profit margin = PM 20% Initial payout ratio 10%
a. $31.9
b. $33.6
c. $35.3
d. $37.0
e. $38.9 (Points : 30)
AFN = projected increase in assets – spontaneous increase in liabilities – increase in retained earnings
The company is at full capacity, so assets must grow at the same rate as projected sales: $500*1.4=$700,
projectedse in assets = $700 - $500 = $200
Total sales = $300 *1.4 = $420
spontaneous increase in liabilities = X, 20/500 = X/700 => X = 28
For payout ratio = 10%:
Increase in Retained earnings = Net Income = 420 X 20% = 84, Dividend = 10% = 84X10%=8.4.
Increase in retained earnings = 84-8.4 = 75.6
AFN = $200 – $28 – $75.6 = $96.4 million
For payout ratio = 50%:
Increase in Retained earnings = Net Income = $420 * 20% = $84, Dividend = 50% = $84 * 50%=$42.
Increase in retained earnings = $84 - $42 = $42
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