Question;ProblemsDirections: You may complete the exam in Excel or in Word.Reminders:In Excel, use formulas in the spreadsheet to solve the problems so your instructor can see howyou arrived at your answers. If your instructor cannot determine how an answer wascalculated, no credit will be given for that answer. If a question calls for a text answer, such asa few sentences or a short paragraph, create a text box on the spreadsheet and enter your text inthe box. In Word, be sure to show clearly how you arrived at your answers by entering thecalculations as text. If your instructor cannot determine how an answer was calculated, nocredit will be given for that answer.Be sure to complete the exam by the deadline posted for it. Late submissions without goodreason will be assessed a penalty.Be sure to put your name on the spreadsheet or in the Word document.You must complete the exam by yourself, without assistance from anyone else. Copying andpasting from another persons spreadsheet or Word document or from the Internet is notallowed. Also, you must not give assistance to anyone else. That means you may not sendyour files, or parts of your files to anyone else and you may not receive files, or parts of filesfrom anyone else.Ask your instructor if you have any questions.Exam problems begin on the next page. There are five questions worth a total of 40 points.-----------------------------Page 1FINC 5000, Fall 2, 2013Question 1: (Cost of Capital) 8 pointsYou are provided the following information on a company. The total market value is $40 million.The companys capital structure, shown here, is considered to be optimal.Market ValueBonds, $1000 par, 6% coupon, 4% YTMPreferred Stock, 3%, $100 par, 100,000 shares @ $70 per shareCommon Stock, 100,000 shares @ $230 per share$10,000,000$7,000,000$23,000,000a. What is the after-tax cost of debt? (assume the companys effective tax rate = 40%)b. Assuming a $3 dividend paid annually, what is the required return for preferred shareholders(i.e. component cost of preferred stock)? (assume floatation costs = $0.00)c. Assuming the risk-free rate is 1%, the expected return on the stock market is 7%, and thecompany's beta is 1.1, what is the required return for common stockholders (i.e., component costof common stock)?d. What is the company's weighted average cost of capital (WACC)?Question 2: (Capital Budgeting) 10 pointsIt's time to decide how to use the money your firm is expected to make this year. Twoinvestment opportunities are available, with net cash flows as follows:Year0 (Now)1234Project X($30,000)11,00010,0009,0008,000Project Y($30,000)4,0008,00012,00016,000a. Calculate each project's Net Present Value (NPV), assuming your firm's weighted average costof capital (WACC) is 6%b. Calculate each projects Internal rate of Return (IRR).c. Plot NPV profiles for both projects on a graph).d. Assuming that your firm's WACC is 6%:(1) If the projects are independent which one(s) should be accepted?(2) If the projects are mutually exclusive which one(s) should be accepted?Page 2FINC 5000, Fall 2, 2013Question 3: (Capital Structure) 8 pointsDick & Jane Childrens Books is trying to determine its optimal capital structure. The companyscapital structure consists of debt and common stock. In order to estimate the cost of debt, thecompany has produced the following table:Percent financedwith debt (Wd)10 %30%40%50%Percent financedwith equity (Ws)90%80%70%60%50%Debt to Equity(D/S).184.108.40.2061.0Bond RatingAAAAAABBBBefore-tax costof debt (BT Rd)3.0%4.0%4.5%5.0%6.0%The companys tax rate, T, is 35 percent. The company uses the CAPM to estimate its cost ofcommon equity, Rs. The risk-free rate is 1 percent and the estimated return on the stock market is6 percent. Dick & Jane estimates that if it had no debt its beta would be 0.9. (i.e., its unleveredbeta, bU, equals 0.9.)On the basis of this information, what is the companys optimal capital structure, and what is thefirms cost of capital at this optimal capital structure?Question 4: (Forecasting) 8 pointsA firm has the following balance sheet:Cash$ 200 Accounts payable$ 200Accounts receivable200 Notes payable400Inventory200 Long-term debt800Fixed assets1,800 Common stock800Retained earnings200Total assets$2,400 Total liabilities & Equity $2,400Sales for the year just ended were $5,000, and fixed assets were used at 80 percent of capacity.Current assets and accounts payable vary directly with sales. Sales are expected to grow by 20percent next year, the expected net profit margin is 5 percent, and the dividend payout ratio is 50percent.How much additional funds (AFN) will be needed next year, if any?Page 3FINC 5000, Fall 2, 2013Question 5: Working Capital Management 6 pointsThe Roosterman Corporation has an inventory conversion period of 50 days, a receivablescollection period of 40 days, and a payables deferral period of 30 days. Its annual credit sales are$5,000,000, and its annual cost of goods sold (COGS) is 60% of sales.a. What is the length of the firm's cash conversion cycle?b. What is the firm's investment in accounts receivable?c. What is the company's inventory turnover ratio?d. Identify three ways in which the company could reduce its cash conversion cycle?e. What are the possible risks of reducing the cash conversion cycle per your recommendationsin part d?
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