Final Exam Page 1 1. (TCO A) Which of the following does NOT always increase a company’s market value? (Points : 5) [removed]Increasing the expected growth rate of sales [removed]Increasing the expected operating profitability (NOPAT/Sales) [removed]Decreasing the capital requirements (Capital/Sales) [removed]Decreasing the weighted average cost of capital [removed]Increasing the expected rate of return on invested capital 2. (TCO F) Which of the following statements is correct? (Points : 5) [removed]The NPV, IRR, MIRR, and discounted payback (using a payback requirement of 3 years or less) methods always lead to the same accept/reject decisions for independent projects. [removed]For mutually exclusive projects with normal cash flows, the NPV and MIRR methods can never conflict, but their results could conflict with the discounted payback and the regular IRR methods. [removed]Multiple IRRs can exist, but not multiple MIRRs. This is one reason some people favor the MIRR over the regular IRR. [removed]If a firm uses the discounted payback method with a required payback of 4 years, then it will accept more projects than if it used a regular payback of 4 years. [removed]The percentage difference between the MIRR and the IRR is equal to the projects WACC. 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, D 0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock? a. $26.77 b. $27.89 c. $29.05 d. $30.21 e. $31.42 (Points : 20) 4. (TCO G) Singal Inc. is preparing its cash budget. It expects to have sales of $30,000 in January, $35,000 in February, and $35,000 in March. If 20% of sales are for cash, 40% are credit sales paid in the month after the sale, and another 40% are credit sales paid 2 months after the sale, what are the expected cash receipts for March? a. $24,057 b. $26,730 c. $29,700 d. $33,000 e. $36,300 (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? Original Revised Annual sales: unchanged Cost of goods sold: unchanged Average inventory: lowered by $4,000 Average receivables: lowered by $2,000 Average payables: increased by $2,000 Days in year $110,000 $80,000 $20,000 $16,000 $10,000 365 $110,000 $80,000 $16,000 $14,000 $12,000 365 a. 34.0 b. 37.4 c. 41.2 d. 45.3 e. 49.8 (Points : 30) 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…
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