Download Corporate Finance Theory - Final Exam | FINA 4200 and more Exams Finance in PDF only on Docsity! FINA4200 Exam 1- Fall 2008
Form A
Instructions
1. You have 90 minutes to complete this examination.
2. You are allowed to consult the provided formula sheet only.
3. You can only use your calculator. Laptops are not permitted.
4. Please answer the questions in the space provided. Write your full name /egibly at the bottom of this page.
5. Please show ail work to ensure full credit. Partial credit is extensive and a function of the work shown. When you use
your financial calculator, please show exactly the manner in which the numbers were entered on your calculator.
6. Please stop writing when time is called. Failure to stop writing when time is called will result in an immediate loss
of 20 points. Do not make us enforce this rule.
Good Luck!
Your Name:
Please PRINT legibly _-- [a
‘Student ID: i. xaMe: SE Form: A
Formulas:
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(i+r)" r (+ry r-g (+r)
Section I: Multiple Choices (5 points each, Circle the right answer).
1, Projects A and B have the same expected lives and initial cash outflows. However, one project's cash flows are
larger in the early years, while the other project has larger cash flows in the later years. The two NPV profiles are
given below:
-1 oO - 100 °
NPV Sood O°
299 259
A a 600
Q
$1. -2190 -26i 1s
WS
/ No -2od 368 xu
VY Which of the following statements is most correct? 1S % Go Blo Lo ay 4
a. Project A has the smaller cash flows in the later years.
@ePoect? cA has the larger cash flows
c. We require ire information on the cost of capital in order to determine which project has larger early cash flows,
—d--The NPV profile graph is inconsistent with the statement made in the problem.
e. None of the statements above is correct.
2. Brooks & Son Inc. is thinking about expanding their business by opening another shop on property they
purchased 10 years ago. Which of the following items should be included in the analysis of this endeavor?
~a:—Fhre-property was cleared of trees and brush 5 years ago at a cost of $5,000.
b. The new shop is expected to affect the profitability of the existing shop since some current customers will
transfer their business to the new shop. Brooks and Son estimate that profits at the existing shop will decrease
by 10 percent.
Brooks & Son can lease the entire property to another company (that wants to grow flowers on the lot) for
Both statements b
analysis.
3. Your company is considering two mutually exclusive projects, X and Y, whose costs and cash flows are shown
below: royZ% 9 \ ‘Z -t
Project X Project Y P09 20u © 0v OV BO
Year Cash Flow Cash Flow x2 2
0 -$2,000 _-$2,000 xine xe xh oi ¢
1 200 2,000 , i — 7 VS2.l0 a
2 600 200 Z3ou
3 800 100 7
4 1,400 15 . AATT b3
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* Section I: Problem Workout (show work for partial credit) 200,009
1. Parker Products manufactures a variety of household products. The company is considering introducing a new
detergent. The company’s CFO has collected the following information about the proposed product. (Note: You
may or may not need to use all of this information. ly the information that is relevant.)
© The project has an anticipated economic life
« The (0) 32 mo purchase a new machine to produce the detergent. The machine has an up-front
cost (t = 0) 6£§2 million) The machine will be depreciated on a straightsline basis over 4 years. The company
sales anticipates that the machine will last for four years, and that after four years, its salvage value will equal,
Ceek © If the company goes ahead with the proposed product, it will have an effect on the company’s net operating
eet working capital. At the outset, t= 0, inventory will increase by $140,000 and accounts payable will increase
e' by $40,000. Att = 4, the net operating working capital ‘will be recovered after the project is completed.
4 © The detergent is expected to generate sales revenue of $1 million the first year (t= 1), $2 million the second
eet year (t = 2), $2 million the third year (t = 3), and $1 million the final year (t= 4). Each year the operating
E costs (not including depreciation) are expected to equal 50 percent of sales revenue.
Ta. © The company’s interest expense each year will be $100,000.
4.° The new detergent is expected to reduce the after-tax cash flows of the company’s existing products by
PeCAT- — $950,000a year (t= 1,2, 3, and 4).
ng * The project’s discount rate is estimated to be 12 percent. The company’s tax rate is 40 percent.
‘What is the net present value of the proposed project? (20 points)
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nev = -$24.4
2. Company X announced today that it will begin paying annual dividends. The first dividend will be paid next year in
the amount of $.25 a share. The following dividends will be $.40; $.60, and $.75 a share annually for the
following three years, respectively. After that, dividends are projected to increase by 3.5% per year. How much
are you willing to pay to buy one share of this stock if your desired rate of return is 12%? (7 points)
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ug ae r-4 oe (.1% 035) (1.12) 3
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3. Blackwell., Inc. is analyzing two machines to determine which one it should purchase. The company requires a_14%
rate of return and uses straight-line depreciation to a zero book value. Machine A has a cost of $290,000,
annual operating costs of $8,000, and a 3-year life. Machine B costs $180,000, has annual operating costs of
$12,000, and has a 2-year life. Whichever machine is purchased will be replaced at the end of its useful life.
Which machine should Blackwell purchase and why? Use EAC method only. (10 points)
cay g, 500 ~ F000
resh ~ 49/89" M - $500 by talala-‘2)
er qe eeeeT Aeros
wi Ep rre
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ia B =
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— ¢-2 a4 Wt, $133
LAC 4 ‘ , ,
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a rar = 12,000 “12,909 epuse it bas a lower
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