Fall-2012 FINAL EXAM AGEC 424
(246 total points)
Name___________________________ Date___________
You must show logically correct work, including calculator inputs and outputs for all problems to
receive credit. Show signs on calculator inputs. Differentiate calculator outputs from inputs.
Ratio
Profit margin (PM = ROS)
Total Asset Turnover
Debt ratio (TL/TA)
DSO (also called ACP)
ITO (COGS/inventory)
Accounts payable deferral
Industry median
AgBiz Inc.
5%
2x
50%
25 days
10 x
20 days
2.5%
4x
75%
10 days
15 x
20 days
Use the above data for questions 1-4.
1. (3 points) How does the ROA for AgBiz and the industry compare (you have to first determine both ROAs to
compare them)? Explain very briefly.
2. (12 points) Construct the extended Du Pont equation for both AgBiz Inc. and for the industry. Then analyze
each of the three components of the company's ROE in a side-by-side comparison to the industry (say
something about each component).
3. (8 points) Show a side by side comparison of the cash conversion cycle for AgBiz Inc. with the industry. Use
the CCC to analyze working capital management for AgBiz Inc. in comparison to the industry (say something
about each component).
4. (2 points) Based on the data and information on this page point out any red flags or major successes that you
see for AgBiz Inc.
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5. Critically evaluate the following statements made over the years by groups during AGEC 424 term project
presentations. Explain in one or two sentences.
a. (2 points) My company has a debt ratio (TL/TA) of 1.08.
b. (2 points) The industry has an equity multiplier of 0.73.
c. (2 points) My company has poor earnings from interest because TIE is only 2 compared to the industry median
of 8.
d. (2 points) I need to present both ITO and inventory conversion period because they show different information.
6. The risk free rate and MRP were given to you as 2% and 5%, respectively, for the term project.
a. (4 points) What are the required rates of returns for equity investors in company A with a beta of 0.5 and
company B with a beta of 1.5? Show work
b. (2 points) Based on the data given, implicitly what is KM, the expected return on the market? Show work
c. (2 points) What is the economic factor making the required returns for companies A & B different than the
market?
7. (6 points) The Paragon Company has sales of $2,000 with a cost ratio of 60%, current ratio of 1.5, inventory
turnover ratio (based on cost) of 3.0, and average collection period (ACP) of 45 days. Complete the following
current section of the firm's balance sheet. Clearly show/label the calculation of each component.
Cash
Accts Rec
Inventory
Current Assets
$
$
Accts Payable $
Accruals
Current Liabs
60
$ 750
2
8. a. (7 points) What is the monthly payment on a 5-year car loan of $30,000 at 3.5% interest compounded
monthly? Show work
b. (13 points) Construct an amortization table below for the first 2 months of the loan. Show work for the
interest calculation
Month Beg. Bal.
Payment
Interest
Prin. Reduction
End. Bal.
9.
(6 points) Smith Blarney is trying to sell my grandmother a semiannual, 10% coupon, $1000 face value bond
with 12 years to maturity. Currently the market requires a 8% rate of return on bonds of this risk. What is this
bond worth? Show work
10. Thompson Tires Inc. has an outstanding semiannual, 12% coupon, $1000 face value bond that is selling for
$1185 and has 10 years to maturity.
a. (6 points) What is the yield to maturity of this bond? Show work
b. (3 points) What is the current yield of this bond? Show work
11. (6 points) Assume the Thompson Tires bond above is callable in 5 years with a $70 call premium. What is the
YTC? Show work
12. (6 points) Smith Blarney is back trying to sell Grandma a 10 year, callable, semiannual, $1000 face value, 12%
coupon bond. It is callable in 1 year with a $80 call premium. If comparable bonds of this risk yield 5% and
you expect this bond to be called, what is its value? Show work
13. (6 points) Frazier Manufacturing paid a dividend last year of $2, which is expected to grow at a constant rate
of 5%. Frazier has a beta of 1.3. If the market is returning 11% and the risk-free rate is 4%, calculate the value
of Frazier’s stock. Show work
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14. (15 points) Forecast AFN with a 50 % sales increase; at 80% of capacity last year; any additional funds will
come from Notes payable, or a surplus will reduce notes payable. The interest rate is 10%. Round to the
nearest whole dollar. Show capacity calculation here:
Last
Sales
-VC
-FC
EBIT
-interest
EBT
-Taxes (40%)
NI
-Div (45%)
Add. RE
Cash
AR
Inv
CA
NFA
TA
AP
Accr.
Notes
CL
Bonds
Stock
RE
TL+E
Factor
1st Pass
Feedback
2nd Pass
36,000
-17,440
-15,000
3,560
-560
3,000
-1,200
1,800
-810
990
1,080
6,480
9,000
16,560
12,600
29,160
4,320
2,880
2,100
9,300
3,500
3,500
12,860
29,160
Show clearly your interest calculations and the AFN for each pass and total AFN after two passes:
4
15. (4 points) Nu-Mode Fashions Inc. manufactures quality women’s wear, and needs to borrow money to get
through a brief cash shortage. Unfortunately, sales are down, and lenders consider the firm risky. The CFO
has asked you to estimate the interest rate Nu-Mode should expect to pay on a one year loan. She’s told you
to assume a 3% default risk premium even though the loan is relatively short, and to assume the liquidity and
maturity risk premiums are each ½%. Inflation is expected to be 4% over the next twelve months. Economists
believe the pure interest rate is currently about 3½%.
16. (15 points) Long Life Insurance Inc. just paid a dividend of $1.50, and projects supernormal growth at of 12%
for the next three years. After that growth is expected to slow down to a normal 4% and go on at that rate for
the foreseeable future. Stocks of similar risk are earning a return of 10%. How much would you pay for a share
of Long Live today?
17. (2 points) What is the market price per share of Whopie, Inc. if the firm had net income of $200,000, earnings
per share of $2.70, total equity of $800,000, and a market to book value ratio of 1.5? Show work
a.
$16.20
c.
$7.20
b.
$10.80
d.
None of the above
18. (2 points) Which of the following is not a short-term debt instrument?
a.
Commercial paper
c.
Money market securities
b.
Common stock
d.
Treasury bills
19. (2 points) Which of the following is a characteristic(s) of initial public offerings (IPOs)?
a.
Very stable
b.
General public can get involved right
away
c.
Institutions are the largest investors in
IPOs
d.
Secondary market transaction
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20. (2 points) The term “red herring” relates to the:
a.
SEC’s approval of a stock offering from a company whose future is questionable.
b.
circulation of the company’s prospectus prior to approval by the SEC.
c.
document distributed to potential investors that is stamped “incomplete information.”
d.
SEC’s conditional approval of the prospectus.
21. (2 points) Interest rates are set by:
a.
the forces of supply and demand in the market for debt.
b.
the Federal Reserve, the nation’s central bank which regulates the banking industry.
c.
senior banking executives on the basis of the funds banks have available to lend.
d.
the president and his council of economic advisors.
22. (2 points) An effective program of working capital management requires that:
a.
the firm run with the absolute minimum in each current asset account.
b.
a series of cost/benefit tradeoffs be considered because running a business is easier with more working capital
than with less, but holding working capital costs money.
c.
large inventories be maintained to adequately service customers.
d.
credit can be easily granted to customers to encourage higher sales.
23. (2 points) Large, strong companies frequently resort to commercial paper as a source of short-term funds because:
a.
commercial paper dealers and lenders are flexible about repayment terms.
b.
commercial paper is normally cheaper than other sources of short-term credit.
c.
interest rates on commercial paper are very stable.
d.
all of the above
24.
a.
b.
c.
d.
(2 points) What is the effective rate on an 8% loan subject to a 10% minimum compensating balance? Show work.
10.0%
8.0%
8.89%
none of the above
25. (2 points) If a vendor’s invoice states terms of sale of 2/10 net 60, the implied annual cost of interest from foregoing
the discount would be: Show work.
a. 13.2%
b. 14.6%
c. 2.0%
d. 13.7%
26. (2 points) You plan to place an order with a new supplier. You have been offered terms of 2/10, net 50 from the date
your supplies are shipped. The cost of borrowing from the bank is 15 percent on an annual basis. What is the best
course of action in paying the supplier, assuming the firm will need to borrow if it takes the discount? Show work.
a. Pay as soon as supplies are received.
b. Pay on the 10th day.
c. Pay on the 50th day.
d. Pay on the 51st day.
27. (2 points) The yield curve is:
a.
inverted when short-term rates are higher than long-term rates.
b.
normal when it slopes upward to the right
c.
a plot of interest rates versus term, also called the term structure of interest rates.
d.
all of the above
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28. (3 points) A firm has EBIT of $3.6M and debt of $15M on which it pays 8% interest. What is its Degree of Financial
Leverage (DFL)? Show work
a.
1.0
b.
1.4
c.
1.5
d.
1.6
29. (6 points) ) Mr. Moore is 35 years old today and is beginning to plan for his retirement. He wants to set aside an
equal amount at the end of each of the next 25 years so that he can retire at age 60. He expects to live to about 80,
and wants to be able to withdraw $25,000 per year from the account on his 61st through 80th birthdays. The account
is expected to earn 10 percent per annum for the entire period of time. Determine the size of the annual deposits that
must be made by Mr. Moore. Include a timeline in your answer. Show work
30.
a.
b.
c.
d.
(3 points) How much must be invested today to have $1,000 in two years if the interest rate is 5%? Show work
$909.09
$900.00
$907.00
$950.00
31. (3 points) Find the present value of $100 to be received at the end of two years if the discount rate is 12% compounded
monthly. Show work.
a. $66.50
b. $78.76
c. $68.80
d. $91.80
e. $79.75
32. (3 points) What is the rate of return on an investment if you lend $1,000 and are repaid $1,254.70 two years later? Show
work
a. 12%
b. 25%
c. 6%
d. 18%
e. 4%
33. (4 points) Designs Now is opening a showcase office to display and sell its computer designed poster art. Designs
expects cash flows to be $120,000 in the first year, $180,000 in the second year, $240,000 in the third year. If Designs
uses 11 percent as its discount rate, what is the present value of the cash flows? Show work
a.
b.
c.
d.
$429,720
$457,620
$456,000
$424,820
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34. (6 points) Assume the following facts about a firm that sells just one product:
Selling price per unit = $24.00
Variable costs per unit = $18.00
a.
417 units
Total monthly fixed costs
= $2,500
b.
1,250 units
What is the firm’s monthly breakeven volume in units?
c.
5,000 units
Show work
d.
1,667 units
35. (2 points) Kermit’s Hardware’s (KH) fixed operating costs are $20.8 million and its variable cost ratio is 0.30. The firm
has $10 million in bonds outstanding with a coupon interest rate of 9%. KH has 200,000 shares of common stock
outstanding. The firm has revenues of $32.2 million and its marginal tax rate is 40%. Compute KH’s degree of total
leverage. Show work
a.
26.8
b.
5.5
c.
29.1
d.
4.7
36. (2 points) A firm’s degree of financial leverage is 2 and the degree of operating leverage is 2.5. What is their degree of
total leverage? Show work
a.
6.0
b.
4.5
c.
5.0
d.
none of the above
37. (2 points) Stocks that have high financial rewards are generally accompanied by:
a.
high dividend payments.
b.
low dividend payments because of internally generated growth.
c.
high risk.
d.
all of the above
38. (2 points) The underlying principles of portfolio theory include:
a.
diversifying business-specific risk away.
b.
basing decisions on stocks’ risk/return characteristics in a portfolio context rather than on a stand-alone basis.
c.
getting the highest available return for the amount of risk the investor is comfortable with.
d.
all of the above
39. (2 points) Market risk:
a.
is the degree to which a stock’s return moves with the market’s return.
b.
is caused by things that affect specific companies or industries.
c.
can be diversified away.
d.
is the chance of losing money in the stock market.
40. (2 points) Which of the following statements is false?
a.
Beta is meaningful only if an investor holds a well-diversified portfolio.
b.
You can completely eliminate risk if you hold a well diversified portfolio.
c.
A portfolio composed of only one stock will not be well diversified.
d.
A wise investor diversifies to capture the high average return of stocks while avoiding as much risk as possible.
e.
All of the above statements are correct.
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41. (10 points) Projected cash flows for two mutually exclusive projects are as follows (again, identify all calculator
inputs and outputs – don’t assume they are already identified):
Year
Project A
Project B
0 ($150,000)
($200,000)
1 80,000
40,000
2 60,000
50,000
3 50,000
50,000
4
60,000
5
50,000
6
53,000
If the firm’s cost of capital is 10% and the equivalent annual annuity method is used to eliminate the disparity
between the projects’ lives, which project should be undertaken? Why?
42. (40 points) Replacement Problem: Atlantic Control Company purchased a machine two years ago at a cost of $70,000.
At that time, the machine’s expected economic life was six years and its salvage value at the end of its life was
thought to be $10,000. It is being depreciated using the straight line method so that its book value at the end of six
years is $10,000. The old machine can be sold today for $20,000. In three years, however, the old machine will have
a market value of only $9000.
A new machine can be purchased for $100,000, including shipping and installation costs.
The new machine has an
economic life estimated to be three years, at which time it would be sold for $20,000. Three-year MACRS
depreciation will be used (with percentages 33, 45, 15 and 7). During its three-year life, the new machine will reduce
cash operating expenses by $40,000 per year. Sales are not expected to change. But the new machine will require
net working capital to be increased by $4,000.
The firm’s marginal tax rate is 40 percent. The appropriate required rate of return is 10 percent.
On the attached form identify the relevant cash flows for this project, NPV, IRR, Payback, and should the company
make this replacement investment (state why)?
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Worksheet for the capital budgeting question
Initial Outlay
Depreciation [initial basis =
]
Work space
Operating Cash flow
minus
deprec.
EBT
less taxes
EAT
Dep. addback
OCF
Terminal CF
Calculator inputs/outputs and investment decision
TCF workspace
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