Devry FIN 515 Week 8 Final Exam Questions And Answers. Final Exam Page 1
3. (TCO D) Church Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product. Management expects earnings and dividends to grow at a rate of 25% for the next 4 years, after which competition will probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0. The company’s last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the riskfree rate is 3.00%. What is the current price of the common stock? a. $26.77 (Points : 20)

Final Exam Page 2
1. (TCO H) Zervos Inc. had the following data for 2008 (in millions). The new CFO believes (a) that an improved inventory management system could lower the average inventory by $4,000, (b) that improvements in the credit department could reduce receivables by $2,000, and (c) that the purchasing department could negotiate better credit terms and thereby increase accounts payable by $2,000. Furthermore, she thinks that these changes would not affect either sales or the costs of goods sold. If these changes were made, by how many days would the cash conversion cycle be lowered?
a. 34.0
The formula for calculating the Cash conversion cycle is CCC = DIO + DSO – DPO Where DIO represents Days inventory Outstanding DSO represents Days Sales Outstanding DPO represents Days Payable outstanding Cash conversion cycle impact by inventory reduction DIO = (Average inventory / Cost of goods sold) * 365 Original DIO = ($20,000/$80,000) *365 =91.25 days Revised DIO= ($16,000/$80,000 *365) = 73 days Cash conversion cycle impact by reduced accounts receivable DPO = (Accounts payable / Cost of goods sold) * 365 Original DPO =($10,000/$80,000)*365 = 45.625 days Revised DPO = ($12,000/$80,000) *365 = 54.75 days Cash conversion cycle impact by increased a/c payable DSO = (Total receivables / Total credit sales) * 365 Original DSO = ($16,000/$110,000 *365) = 53.09 days Revised DSO = ($14,000/$110,000 *365) = 46.45 days CCC = DIO + DSO – DPO Original CCC = 91.25 + 53.09 – 45.63 = 98.71 days Revised CCC = 73 + 46.45 – 54.75 = 64.7 days Total impact = original CCC – Revised CCC = 98.71 – 64.7 = 34.01 days So, cash conversion cycle will be lowered by 34.0 days

2. (TCO C) Bumpas Enterprises purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15, net 50. If the firm chooses to pay on time but does not take the discount, what is the effective annual percentage cost of its nonfree trade credit? (Assume a 365day year.)
a. 20.11% (Points : 30)
EAR = (1 + 2/98)^{365/35} – 1 = 1.2345 – 1 = 0.2345 = 23.45%. 
3. (TCO E) You were hired as a consultant to the Quigley Company, whose target capital structure is 35% debt, 10% preferred, and 55% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of common from retained earnings is 11.25%, and the tax rate is 40%. The firm will not be issuing any new common stock. What is Quigley’s WACC?
a. 8.15% (Points : 30) 
4. (TCO B) A company forecasts the free cash flows (in millions) shown below. The weighted average cost of capital is 13%, and the FCFs are expected to continue growing at a 5% rate after Year 3. Assuming that the ROIC is expected to remain constant in Year 3 and beyond, what is the Year 0 value of operations, in millions? Year: 1 2 3 Free cash flow: $15 $10 $40 a. $315 (Points : 35)
We need to discount the future cash flows at 13% with the growth of 5%
= 15X(1+13%)^1 + 10X(1+13%)^2 + 40X(1+13%)^3 + 42/(13%5%)X(1+13%)^3
= 13.27 + 7.83 + 27.72 + 363.85
= $ 386.13 is the worth of the business 
5. (TCO G) Based on the corporate valuation model, Hunsader’s value of operations is $300 million. The balance sheet shows $20 million of shortterm investments that are unrelated to operations, $50 million of accounts payable, $90 million of notes payable, $30 million of longterm debt, $40 million of preferred stock, and $100 million of common equity. The company has 10 million shares of stock outstanding. What is the best estimate of the stock’s price per share?
a. $13.72 (Points : 35) 
Assuming that book values of debt are close to market values of debt, the total market value of the company is:
= $300 + $20 = $320 million.
Market value of equity = Total market value – Value of debt
= $320 – (Notes payable + Longterm debt + Preferred stock)
= $320 – ($90 + $30 + $40) = $160 million.
Price per share = Market value of equity / Number of shares
= $160 / 10 = $16
6. TCO G) Clayton Industries is planning its operations for next year, and Ronnie Clayton, the CEO, wants you to forecast the firm’s additional funds needed (AFN). The firm is operating at full capacity. Data for use in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year? Dollars are in millions.
Last year’s sales = S_{0}  $350  Last year’s accounts payable  $40  
Sales growth rate = g  30%  Last year’s notes payable  $50  
Last year’s total assets = A_{0}*  $500  Last year’s accruals  $30  
Last year’s profit margin = PM  5%  Target payout ratio  60% 
a. $102.8
b. $108.2
c. $113.9
d. $119.9
e. $125.9 (Points : 30)
Page 1
Page 2

Total market value = Value of operations non – operating assets
= $900 + $30 = $930 million.
Market value of equity = Total market value – (Value of debt Value of Preferred stock)
= $930 – (Longterm debt Preferred stock)
= $320 – ($90 $20 $110)
= $710 million.
Price per share = Market value of equity / Number of shares
= $710 / 25 = $28.4.
Week 8 : Final Week – Final Exam Page 1

Bottom of Form
Week 8 : Final Week – Final Exam Page 2

Bottom of Form