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Eton Financial Management Final Exam




The Modern Philosophy of Higher Education;Attempt any FOUR questions of the following;1) Two projects are under consideration by the same company at the same time. Project Alpha has;a NPV of $20 million and an estimated useful life of 10 years. Project Beta has a NPV of $12 million;and also an estimated useful life of 10 years.;What should the company's decision be;a) if the project's involve unrelated expansion decisions or;b) if the project's are mutually exclusive because they would have to occupy the same space?;2) You have just purchased a car from Friendly Sam. The selling price of the car is $6,500. If you pay;$500 down, then your monthly payments are $317.22. The annual interest rate is 24%.;How many payments must you make?;3) Project November requires an initial investment of $500,000. The present value of operating;cash flows is $550,000. Project December requires an initial investment of $750,000. The present;value of operating cash flows is $810,000.;a. Compute the profitability index for each project.;b. If the projects are mutually exclusive, does the profitability index rank them correctly?;4) You have borrowed $70,000 to buy a speed boat. You plan to make monthly payments over a 15-;year period. The bank has offered you a 9% interest rate, compounded monthly.;Create an amortization schedule for the first two months of the loan.;5) The ZYX Corporation is planning to request a line of credit from its bank and wants to estimate its;cash needs for the month of September. The following sales forecasts have been made for 2005;July $500,000;August $400,000;September $300,000;October $200,000;November $100,000;Collection estimates were obtained from the credit collection department as follows: 20% collected;within the month of sale, 70% collected the first month following the sale, and 10% collected the;second month following the sale. Payments for labor and raw materials are typically made in the;month in which these costs are incurred. Total labor and raw material costs each month are 50% of;sales. General administrative expenses are $30,000 per month, lease payments are $10,000 per;month, and depreciation charges are $20,000 per month. The corporation tax rate is 40%, however;no corporate taxes are paid in September.;Prepare a cash budget for September.;SectionB 60 marks;The Modern Philosophy of Higher Education;Use the following information to answer the following question(s).;1) The MAX Corporation is planning a $4 million expansion this year. The expansion can be financed;by issuing either common stock or bonds. The new common stock can be sold for $60 per share.;The bonds can be issued with a 12% coupon rate. The firm's existing shares of preferred stock pay;dividends of $2.00 per share. The company's combined state and federal corporate income tax rate;is 46%. The company's balance sheet prior to expansion is as follows;MAX Corporation;Current assets $ 2,000,000;Fixed assets 8,000,000;Total assets $10,000,000;Current liabilities $ 1,500,000;Bonds;(8%, $1,000 par value) 1,000,000;(10%, $1,000 par value) 4,000,000;Preferred stock;($100 par value) 500,000;Common stock;($2 par value) 700,000;Retained earnings 2,300,000;Total liabilities and equity $10,000,000;a. Calculate the indifference level of EBIT between the two plans.;b. If EBIT is expected to be $3 million, which plan will result in higher EPS?;2) Goodwin Enterprises had a gross profit of $2,500,000 for the year. Operating expenses and;interest expense incurred in that same year were $595,000 and $362,000, respectively. Goodwin;had 200,000 shares of common stock and 180,000 shares of preferred stock outstanding.;Management declared a $2.50 dividend per share on the common and a $1.50 dividend per share;on the preferred. Securities purchased at a cost of $37,500 in a previous year were resold at a price;of $50,500.;Compute the taxable income and the resulting tax liability for Goodwin Enterprises for the year.;Use the following tax rates;Income Tax rate;$0-$50,000 15%;$50,001-$75,000 25%;$75,001-$100,000 34%;$100,001-$335,000 39%;Over $335,001 34%;The Modern Philosophy of Higher Education;3) Bull Gator Industries is considering a new assembly line costing $6,000,000. The assembly line;will be fully depreciated by the simplified straight line method over its 5 year depreciable life.;Operating costs of the new machine are expected to be $1,100,000 per year. The existing assembly;line has 5 years remaining before it will be fully depreciated and has a book value of $3,000,000. If;sold today the company would receive $2,400,000 for the existing machine. Annual operating costs;on the existing machine are $2,100,000 per year. Bull Gator is in the 46 percent marginal tax;bracket and has a required rate of return of 12 percent.;a. Calculate the net present value of replacing the existing machine.;b. Explain the impact on NPV of the following;i. Required rate of return increases;ii. Operating costs of new machine are increased;iii. Existing machine sold for less;4) The treasurer for Brookdale Clothing must decide how much money the company needs to;borrow in July. The balance sheet for June 30, 2004 is presented below;Brookdale Clothing Balance Sheet;June 30, 2004;Cash $75,000 Accounts payable $400,000;Marketable securities 100,000 Long-term debt 300,000;Accounts receivable 300,000 Common stock 100,000;Inventory 250,000 Retained earnings 200,000;Total current assets 725,000 Total liabilities and;Fixed assets 275,000 stockholder's equity $1,000,000;Total assets $1,000,000;The company expects sales of $250,000 for July. The company has observed that 25% of its sales is;for cash and that the remaining 75% is collected in the following month. The company plans to;purchase $400,000 of new clothing. Usually 40% of purchases is for cash and the remaining 60% of;purchases is paid in the following month. Salaries are $100,000 per month, lease payments are;$50,000 per month, and depreciation charges are $20,000 per month. The company plans to;purchase a new building for $200,000 in July and sell its marketable securities for $100,000.;If the company must maintain a minimum cash balance of $50,000, how much money must the;company borrow in July?


Paper#81198 | Written in 18-Jul-2015

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