FIN 614 Week 10 Final Exam | Assignment Help | Kogod School Of Business American University
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- 13 May 2020
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Final
Exam
FIN 614– Financial Management
Fall Semester 2019
Pledge: I, the
undersigned, pledge that I have not committed any academic offense under the
KSB/AU Academic Integrity Code while preparing for or taking this exam.
Signature:_________ ________________________________
Print name here: ___ _________________________
INSTRUCTIONS:
1. The exam is worth a total of 100 points.
2. You may use a calculator and/or excel, and
the exam is open book and open note.
3. You can use class notes and book, you are
not allowed to use internet sites to get answers.
4. Please submit your exam as a Word
document.
5. If you use Excel to prepare problem calculations,
please paste the work in Excel to the Word document that will be submitted.
6. Upload your completed exam, by 11:59 PM EST
on Saturday, December 7, 2019, to LMS and email the completed exam to the professor.
7. Good luck.
True/False, Multiple Choice, & Short Answer Questions (100 points)
Choose
the best answer for each of the following questions.
1.
Which of the following statements is CORRECT?
|
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a. |
|
The NPV method assumes that cash flows will be reinvested at the
risk-free rate, while the IRR method assumes reinvestment at the IRR. |
|
|
b. |
|
The NPV method assumes that cash flows will be reinvested at the
cost of capital, while the IRR method assumes reinvestment at the risk-free
rate. |
|
|
c. |
|
The NPV method does not consider all relevant cash flows,
particularly cash flows beyond the payback period. |
|
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d. |
|
The IRR method does not consider all relevant cash flows,
particularly cash flows beyond the payback period. |
|
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e. |
|
The NPV method assumes that cash flows will be reinvested at the
cost of capital, while the IRR method assumes reinvestment at the IRR. |
2.
Which of the following statements is CORRECT? Assume that the
project being considered has normal cash flows, with one outflow followed by a
series of inflows.
|
|
a. |
The higher the cost of capital used to calculate the NPV, the
lower the calculated NPV will be. |
|
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b. |
If a project's NPV is greater than zero, then its IRR must be
less than the cost of capital. |
|
|
c. |
If a project's NPV is greater than zero, then its IRR must be less
than zero. |
|
|
d. |
The NPVs of relatively risky projects should be found using
relatively low costs of capital. |
|
|
e. |
A project's NPV is generally found by compounding the cash
inflows at the cost of capital to find the terminal value (TV), then discounting
the TV at the IRR to find its PV. |
3. To increase productive
capacity, a company is considering a proposed new plant. Which of the following
statements is CORRECT?
|
|
a. |
Since depreciation is
a non-cash expense, the firm does not need to deal with depreciation when
calculating the operating cash flows. |
|
|
b. |
When estimating the
project's operating cash flows, it is important to include both opportunity
costs and sunk costs, but the firm should ignore the cash flow effects of
externalities since they are accounted for in the discounting process. |
|
|
c. |
Capital budgeting
decisions should be based on before-tax cash flows. |
|
|
d. |
The cost of capital
used to discount cash flows in a capital budgeting analysis should be
calculated on a before-tax basis. |
|
|
e. |
In calculating the
project's operating cash flows, the firm should not deduct financing
costs such as interest expense, because financing costs are accounted for by
discounting at the cost of capital. If interest were deducted when estimating
cash flows, this would, in effect, "double count" it. |
4.
Garden-Grow Products is considering a new investment whose data
are shown below. The equipment would be depreciated on a straight-line basis
over the project's 3-year life, would have a zero salvage value, and would require
some additional working capital that would be recovered at the end of the
project's life. Revenues and other operating costs are expected to be constant
over the project's life. What is the project's NPV? (Hint: Cash flows are
constant in Years 1 to 3.)
|
Project cost of capital (r) |
10.0% |
|
Net investment in fixed
assets (basis) |
$75,000 |
|
Required new working capital |
$15,000 |
|
Straight-line deprec. rate |
33.333% |
|
Sales revenues, each year |
$75,000 |
|
Operating costs (excl.
deprec.), each year |
$25,000 |
|
Tax rate |
35.0% |
|
|
a. |
$23,852 |
|
|
b. |
$25,045 |
|
|
c. |
$26,297 |
|
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d. |
$27,612 |
|
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e. |
$28,993 |
5.
You have been asked to forecast the additional funds needed (AFN)
for Houston, Hargrove, & Worthington (HHW), which is planning its operation
for the coming year. 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 and higher level? All dollars are in millions.
|
Last year's sales = S0 |
$300.0 |
Last year's accounts payable |
$50.0 |
|
Sales growth rate = g |
40% |
Last year's notes payable |
$15.0 |
|
Last year's total assets = A0* |
$500.0 |
Last year's accruals |
$20.0 |
|
Last year's profit margin =
PM |
20.0% |
Initial payout ratio |
10.0% |
|
|
a. |
$31.9 |
|
|
b. |
$33.6 |
|
|
c. |
$35.3 |
|
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d. |
$37.0 |
|
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e. |
$38.9 |
|
|
a. |
Targeted share repurchases. |
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|
b. |
Shareholder rights provisions. |
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c. |
Restricted voting rights. |
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d. |
Poison pills. |
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e. |
Abnormally high executive compensation. |
7.
You have been hired by McKinsey &
Company to design a five-year compensation program for your divisional vice presidents.
Because you know that principal-agent conflicts have had a history at this
firm, please pen a memo detailing your compensation system design that addresses
this problem. Be as specific as needed.
8.
You have been retained by Hayek &
Company to recommend a distribution system template for projected free cash
flow of +79.0, -38.8, +188.7, -5.4, and 6.7 over the 2016–20 time period. What
10 questions do you need to pose to the C-Suite and the board to make a free
cash flow distribution decision that is satisfactory to all involved? Be as
specific as needed.
9.
Business risk has brought myriad
questions from three new independent board members. Discuss operating and
financial risk in the context of your projected (i.e., 2015–2020) economic, market,
and business cycle for this brewer of high-end craft beers. What factors weigh
in on the optimal capital structure if annual growth is projected to exceed 18%,
free cash flow is negative, and the debt/equity ratio is 100%? Be as specific
as needed.
|
Year |
ICP |
ACP |
PDP |
CCC |
AVE |
|
2015 |
48 |
34 |
42 |
40 |
59 |
|
2014 |
51 |
39 |
30 |
60 |
58 |
|
2013 |
41 |
31 |
53 |
19 |
53 |
|
2012 |
38 |
25 |
58 |
5 |
62 |
|
2011 |
31 |
21 |
56 |
-4 |
51 |
USA 
India
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