June 2012 Solutions to Final Exam Review Questions Corporate Finance Review Questions 1. Maple Ltd. currently has 10 million common shares outstanding. Maple has just paid a
dividend of $0.25 per share and investment analysts have informed you that the dividends
are expected to grow by 7% annually for the foreseeable future. The analysts have also
informed you that the shares are expected to be selling at a price of $4.50 in 1 year’s time,
the beta on the Maple shares is 1.10, the market price of risk is 6%, and the risk-free rate of
return is 4%.
Hint - The $4.50 does not include the dividend that will be paid in one year’s time. The
sum of these amounts must be brought back to time now.
What is the current market price for a Maple common share?
a) $4.07
b) $4.29
c) $4.31
d) $4.47
e) None of the above
2. At the most recent Treasury bill auction, 182-day Treasury bills (T-bills) with a face value of
$100 were selling for $95.60. At this price, what is the yield offered by the T-bills?
a) 2.3%
b) 4.6%
c) 9.4%
d) 19.7%
e) None of the above
3. Ferny Inc. currently has 60 million common shares outstanding with a current market price
of $13 per share. The shares just paid a dividend of $1.50 per share and investment
analysts expect the dividends to grow at an average annual rate of 2% for the foreseeable
future. What is the cost of Ferny’s common shares if flotation costs on new common shares
are expected to be 3% after-tax, Ferny’s tax rate is 30%, and Ferny intends to finance its
growth from retained earnings?
a) 11.77%
b) 13.54%
c) 13.77%
d) 14.13%
e) None of the above
Comment
that will be
$.25 x 1.07
market val
time will gi
The discou
can be obt
r = 0.04 + 1
4.7675 FV
1n
0 pmt
10.6 I
CPT PV =
Comment
182/365 n
‐95.60 PV 100 FV 0 Pmt Cpt i Comment
Note that in
kre  re 
You are us
costs for in
ke = 1.50 (1
that is, 13.7
Corporate Finance Review Questions 4. Your company currently purchases its inventory on credit with trade terms of 3/15, net 60.
What is the cost of the missed discount if the company decides to delay payment until day
60?
a) 3.00%
b) 3.09%
c) 20.36%
d) 28.03%
e) None of the above
5. Trail Inc. currently has 5 million preferred shares outstanding. The shares have a par value
of $22.50 per share and their current price is $25 per share. Trail’s tax rate is 40% and
flotation costs on a new issue of preferred shares are 5% before tax. What per-share
dividend are the preferred shares paying if the component cost of the preferred shares in a
weighted average cost of capital calculation is 8.25%?
Hint – The after tax costs of flotation must be subtracted from the share price to
obtain the net proceeds.
a) $1.80
b) $1.96
c) $2.00
d) $2.06
e) None of the above
Comment
60 – 15 = 4
45/365 n
-97 PV
100 FV
0 pmt
Cpt i
Comment
Comment
Corporate Finance Review Questions Corporate Finance Review Questions Corporate Finance Review Questions A worldwide cosmetics company can upgrade the quality of one of its products by purchasing
new equipment at a cost of $155,000. The new equipment would replace old equipment that
has a current market value of $23,000. The old equipment originally cost $180,000 and was
three quarters amortized. If the old equipment was used for an additional 12 years, its salvage
value at that time would be $5,000. The new equipment has an expected life of 12 years. Its
salvage value is estimated at $30,000.
By upgrading the quality of this product, the company would be able to increase the sale price.
As a result, the operating income before tax will increase by $20,000 per year for the first 3
years, and by $25,000 per year during the last 9 years.
The company’s tax rate is 40% and its cost of capital after tax is 15%. The capital cost
allowance for the new equipment is 20%.
Required
Compute the net present value (NPV) for the investment and state whether the company should
proceed with the investment.
Comment
Comment
Corporate Finance Review Questions Bad Debt Review Questions The trial balance before adjustment of Rosen Company reports the following balances:
Dr.
Cr.
Accounts receivable
$105,000
Allowance for doubtful accounts
$ 2,500
Sales (all on credit)
650,000
Sales returns and allowances
40,000
Included in accounts receivable is $5,000 in accounts that must be written off
Instructions
(a) Calculate the amount of bad debt expense that would be recorded based on the ageing
method using seven percent of gross accounts receivable.
(b) Calculate the net recoverable amount on the balance sheet based on bad debt expense
being calculated based on 2% of net credit sales
Comment
Comment
AR after w
100,000; A
12,200 cr =
Bad Debt Review Questions Depreciation Review Questions On March 1, 2012, Sundemon Company purchased snow-making equipment for $840,000
having an estimated useful life of six years with an estimated residual value of $60,000.
Amortization is taken for the portion of the year the asset is used. The asset is a Class 8 asset
with a maximum CCA rate of 20%. The company has a December 31 year end.
Required
For each of the following independent assumptions, calculate the depreciation. If you are using
a financial calculator show your keystroke for requirement 1 to earn part marks.
1.
2.
3.
4.
5.
Straight line - 2012
Sum of the years digits – 2014
Declining balance - 2014
Double declining balance – 2014
Capital cost allowance - 2014
Depreciation Review Questions Bond Review Questions Vaggio Corporation issued $400,000 of 8% bonds on October 1, 2009, due on October 1, 2014.
The interest is to be paid four times a year on January 1, April 1, July 1, and October 1. The
bonds were sold to yield 12% effective annual interest. Vaggio Corporation closes its books
annually on March 31.
Required
1. Calculate the amount that Vaggio received from the issue of the bond
2. Calculate the interest expense that would be shown on the income statement for the
year ended March 31, 2010.
3. Calculate the interest expense that would be shown on the income statement for the
year ended March 31, 2011.
If you are using a financial calculator show your keystrokes in order to earn part marks
Comment
Bond Review Questions Foreign Exchange Review Questions This information pertains to the following questions.
FRC Ltd. is a foreign company and is a subsidiary of a Canadian company. At the end of the
first fiscal year (December 31), the following balances appeared on FRC Ltd.’s financial
statements denominated in the host country’s foreign currency (FC):
Accounts receivable (A/R)
Inventory (FIFO basis)
Capital assets
Bonds payable
Sales
Purchases
Amortization expense
85,000 FC
55,000 FC
500,000 FC
250,000 FC
960,000 FC
625,000 FC
45,000 FC
Other Information:





Accounts receivable (A/R) relates to sales that occurred evenly over the 4th
quarter.
The goods in inventory at year end were purchased evenly over the 4th quarter.
Capital assets were purchased and bonds were issued on January 1.
Sales, purchases and expenses occurred evenly throughout the year.
Exchange rates were as follows:
1 FC
=
$ CDN
January 1
0.85
December 31
0.70
Average for the year
0.82
Average for the 4th quarter
0.73
1. (+) If FRC Ltd. is financially and operationally dependent on its Canadian parent, the
amounts that should appear on the translated year-end financial statements of FRC Ltd.
(in Canadian dollars) are
a) inventory $40,150, capital assets $425,000, sales $787,200.
b) inventory $38,500, capital assets $350,000, sales $672,000.
c) inventory $45,100, capital assets $410,000, sales $787,200.
d) inventory $40,150, capital assets $350,000, sales $700,800.
e) inventory $38,500, capital assets $425,000, sales $672,000.
Comment
Foreign Exchange Review Questions 2. (+) If FRC Ltd. is financially and operationally independent of its Canadian parent, the
amounts that should appear on the current year’s translated financial statements of FRC
Ltd. (in Canadian dollars) are
a) A/R $59,500, cost of goods sold $472,350, amortization expense $38,250.
b) A/R $69,700, cost of goods sold $467,400, amortization expense $36,900.
c) A/R $62,050, cost of goods sold $416,100, amortization expense $32,850.
d) A/R $59,500, cost of goods sold $467,400, amortization expense $36,900.
e) A/R $59,500, cost of goods sold $399,000, amortization expense $31,500.
Comment
Foreign Exchange Review Questions Foreign Exchange Review Questions This information pertains to the following questions.
Another World Inc. (AWI) is a foreign subsidiary of a Canadian company in its second year of
operation. The following December 31 year-end balances, denominated in the host country’s
foreign currency (FC), appeared in the records of AWI:
Cash
Accounts receivable
Inventory (FIFO basis)
Capital assets
Accounts payable
Capital stock
Retained earnings, January 1
Sales
Cost of sales
Amortization expense
Other operating expenses
Year 1
30,000 FC
45,000 FC
40,000 FC
190,000 FC
55,000 FC
10,000 FC
0 FC
550,000 FC
200,000 FC
10,000 FC
100,000 FC
Year 2
150,000 FC
90,000 FC
75,000 FC
180,000 FC
25,000 FC
10,000 FC
240,000 FC
600,000 FC
250,000 FC
10,000 FC
120,000 FC
Other Information:





The inventory was purchased evenly over the fourth quarter of each respective year.
Capital assets were purchased on January 1, Year 1.
Capital stock was issued on January 1, Year 1.
Sales, purchases and expenses occurred evenly throughout each year.
Exchange rates were as follows:
1 FC = CDN$
Year 1
January 1
December 31
Average for the year
Average for the fourth quarter
Year 2
0.36
0.30
0.33
0.31
0.30
0.34
0.32
0.35
Foreign Exchange Review Questions 3. If AWI is financially and operationally independent of its Canadian parent, the amounts
that should appear on the Year 2 translated year-end financial statements of AWI (in
Canadian dollars) are
a) inventory $24,000, sales $192,000, amortization expense $3,200
b) inventory $25,500, sales $204,000, amortization expense $3,400
c) inventory $25,500, sales $192,000, amortization expense $3,200
d) inventory $26,250, sales $192,000, amortization expense $3,400
e) inventory $26,250, sales $204,000, amortization expense $3,200
4. If AWI is financially and operationally dependent of its Canadian parent, the amounts that
should appear on the Year 2 translated year-end financial statements of AWI (in Canadian
dollars) are
a) inventory $24,000, sales $192,000, amortization expense $3,200
b) inventory $25,500, sales $204,000, amortization expense $3,400
c) inventory $26,250, sales $192,000, amortization expense $3,200
d) inventory $26,250, sales $192,000, amortization expense $3,400
e) inventory $26,250, sales $192,000, amortization expense $3,600
Comment
financially a
of its Canad
foreign ope
should be t
method. Un
assets and l
using the D
rate of 0.34
should be t
average rat
FC x .34 = $
= $192,000;
= $3,200. Choice a) –
of .32 for al
Choice b) –
.34 for all.
Choice d) –
average for
Year 2, rate
amortizatio
Choice e) –
average rat
Year 2 average ra
amortizatio
Comment
financially a
its Canadian
foreign ope
should be t
method. Un
monetary, n
liabilities sh
historical ex
statement i
historical ra
assets Inventory =
Sales = 600,
Amort relat
Foreign Exchange Review Questions Ratio Analysis Review Questions The following partial information has been extracted from the financial statements of Toss Away
Ltd., a recycling plant:
Current assets
Current liabilities
Cash and temporary investments
Net accounts receivable
Net income
Sales
Cost of goods sold
Interest expense
Amortization expense
Income tax rate
Share price
Preferred dividends declared and paid
Common dividends declared and paid
Common shares outstanding
throughout the year
Preferred shares outstanding
throughout the year
2010
$800,000
$450,000
$400,000
$250,000
$300,000
$2,200,000
$1,350,000
$100,000
$150,000
40%
$15.00
$50,000
$100,000
2009
$750,000
$430,000
$380,000
$175,000
$220,000
$1,895,000
$1,130,000
$105,000
$145,000
40%
$14.50
$50,000
$100,000
25,000
25,000
10,000
10,000
The following industry averages have been obtained:
Average collection period
Gross margin
Times interest earned
Price earnings ratio
70 days
34%
10 times
2.15
1. The current ratio for Toss Away Ltd. at December 31, 2010 was:
a. 1.44
b. 1.78
c. 2.00
d. 3.22
e. None of the above
Comment
Ratio Analysis Review Questions 2. The quick ratio for Toss Away Ltd. at December 31, 2010 was:
a.
b.
c.
d.
e.
.89
1.44
1.78
2.00
None of the above
3. The accounts receivable turnover for Toss Away Ltd. at December 31, 2010 was:
a.
b.
c.
d.
e.
8.80 times
9.64 times
10.35 times
12.57 times
None of the above
4. The gross margin for Toss Away Ltd. at December 31, 2010 was (rounded)
a.
b.
c.
d.
e.
39%
40%
61%
63%
None of the above
5. Times interest earned for Toss Away for the year ended December 31, 2010 was
a.
b.
c.
d.
e.
5 times
5.2 times
6 times
6.2 times
None of the above
6. The price earnings ratio for Toss Away for the year ended December 31, 2010 was
a.
b.
c.
d.
e.
1.25
1.50
2.10
2.50
None of the above
Ratio Analysis Review Questions Ratio Analysis Review Questions Review Questions from The Kieso Text Current & Deferred Tax Expense
Earnings per Share
Post Retirement (Pension) Expense
Leases
Errors
Cash Flow Statements
P 18-3
P 17-5
P 19-12
P 20-3
P 21-8 (a)
P 22-10
Review Questions from The Kieso Text Review Questions from The Kieso Text Review Questions from The Kieso Text Review Questions from The Kieso Text Review Questions from The Kieso Text Review Questions from The Kieso Text Review Questions from The Kieso Text Page 6: [1] Comment [GLBMC7]
Gary L Biggs, MBA, CA
11/11/2010 8:55:00 AM
NPV
Cost
Trade In
PV
(155,000.00) 23,000.00
(132,000.00)
Net Initial Investment
PV of CCA Tax Shield
Cost
CCA
Tax
RRR
132,000.00
Cdt
2+K
20%
40%
15.0000%
d+k
2(1+k)
Cash Savings
First 3 years
Last nine years
20,000.00
-
25,000.00
Tax
20,000.00
40%
25,000.00
40%
After tax
12,000.00
15,000.00
C01 / C02
F01 / F02
12,000.00
3.00
15,000.00
9.00
28,203.73
74,460.00
PV of salvage value net of opportunity cost
Salvage Value
30,000.00
Opportunity Cost
(5,000.00)
25,000.00
PV of Lost Tax Shield
4,672.68
Sn
dt
(1+k)^n
d+k
4,672.68
0.23
Net Present Value
Page 10: [2] Comment [GLBMC11]
(1,068.04)
(25,731.64)
Gary L Biggs MBA CA
11/11/2010 8:56:00 AM
Straight line - 2009
Cost
840,000.00
SV
60,000.00
780,000.00
130,000.00
per full year
6.00
108,333.33
2nd Depr
2nd set
Toggle to
Lif
M01
Cst
Sal
YR
Dep =
Sum of the Years Digits - 2012
Cost
840,000.00
2nd Depr
2nd set
Lif
M01
Cst
Sal
YR
Dep =
Declining Balance - 2012
NBV
840,000.00
723,333.33
602,777.78
502,314.81
2nd Depr
2nd set
DB =
Lif
M01
Cst
Sal
YR
Dep =
Double Declining Balance - 2012
NBV
840,000.00
606,666.67
404,444.44
269,629.63
SL
6.00
3.00
840,000.00
60,000.00
1.00
108,333.33
enter
enter
enter
enter
enter
SV
60,000.00
Toggle to
780,000.00
780,000.00
Down
Down
Down
Down
Down
Down
arrow
arrow
arrow
arrow
arrow
arrow
4/21, 3/21 Prorate
0.19
1/6
0.14
5/6
SYD
6.00
3.00
840,000.00
60,000.00
4.00
117,619.05
enter
enter
enter
enter
enter
Rate
Down
Down
Down
Down
Down
Down
arrow
arrow
arrow
arrow
arrow
arrow
Prorate
1/6
1/6
1/6
1/6
Toggle to
100.00
6.00
3.00
840,000.00
60,000.00
4.00
83,719.14
140,000.00
120,555.56
100,462.96
83,719.14
DB
enter
enter
enter
enter
enter
enter
Rate
5/6
Down
Down
Down
Down
Down
Down
116,666.67
arrow
arrow
arrow
arrow
arrow
arrow
Prorate
1/3
1/3
1/3
1/3
280,000.00
202,222.22
134,814.81
89,876.54
5/6
233,333.33