Financial Decision Making Exam
Instructions – please note this:
The test will include 8 questions related everything we have covered in this course.
The exam has (1) a variety of multiple choice questions (a,b,c,d) with only ONE correct answers and (2) questions where your answer should be written in the designated space.
Please make sure you write your calculations in the space given for the numeric questions, at least the relevant ones if this will help me understand how you reached the solution given. USE A MAXIMUM OF TWO DECIMALS in your final answer in all exercises. This means that you will have to round the final number accordingly (use excel for this as well). Only ONE answer per question is correct.
Overall the exam is worth 100 marks. Questions have different weights based on their difficulty level. You will have two hours to complete it once you open it. It will appear all in one page. Please don’t trust the timer on campus and control your own time.
Question 1 Which one of the following statements is TRUE?
a. The levered Beta takes into consideration the firm business and financial risk.
b. The unlevered Beta is useful when a firm has no debt.
c. The debt to equity ratio is needed to calculate the levered Beta of a firm
d. All of the above
Question 2 As the CFO of a medium enterprise, you need to advise the CEO on the acquisition of a manufacturing plant in the United Kingdom. Your decision will exclusively be based on the financials of the project without any strategic consideration, being this assessed by the CEO later on.
The plan requires an initial investment of £90,000 (year 0) and is expected to generate constant profits after depreciation and before tax of £22,000. Annual depreciation is equivalent to £1250 and the company plant to invest heavily in NWC an amount of £ 1800 per year. No additional CAPEX investments will be made during the life of the project, which is 10 years. The tax rate is 35%. Note that the FCF is constant over the life of the project. The project is entirely financed with equity and is considered to be low risk given the nature of the investment, having a cost of equity (Ke) of 4%.
a.Indicate what the FCF is for year 1 [5 marks].
b.Calculate the NPV [5 marks].
c.Calculate the IRR [4 marks].
d.Would you invest or reject the project? [1 mark].
Question 3 Given the following data please calculate Amazon cost of Equity. Note that Amazon trades at NASDAQ and its Beta is 1.47. Please use TWO decimals in this answer if applicable, round your final number using excel if possible.
•Moodys Seasoned AAA Corporate bond average yield = 2%.
•S&P500 BBB Investment Grade Corporate Bond Index = 3.34%.
•Average NASDAQ return past 10 years = 8.8%.
Question 4 Given the following information, please obtain the TOTAL ASSETS VARIATION for the month of October (from September 30th until October 31st, 2016). Make sure your answer has a maximum of TWO decimals rounding as necessary. Please include the calculation (or relevant parts of it) and the final number in the box provided.
Question 5 Why was it relevant to obtain the Funds Flow Statement in the Butler Lumber case?
a. To reduce long-term debt
b. To obtain information about the financing sources and uses of the firm
c. To see how much money Mr Butler spent in inventories
d. To obtain the company net profit
Question 6 You are the CFO of “Collector vehicles Ltd” . Your supervisor has asked you to advise on how to finance a new investment in an established but small tire company, issuing equity or debt. You have been given the following information:
Information (in millions)
•New total investment = $16 million. .
•Exiting debt before the investment=$60m.
•Interest payment due on existing debt is $3m.
•Principal payments of existing debt is 10% equivalent to $6m.
•Old and new debt interest rate: 5% per annum.
•Next year principal payment of new debt=10% of new amount.
•Shareholders equity book value = 50m.
•Common shares outstanding= 50m.
•Book value per share=$1.00.
•Market price per share=$4.
•Common Dividends=60c per share.
•New financing needed= $16m.
•Next year net profit (before new financing)= $25m.
•Company tax rate: 30%.
Please use a maximum of TWO decimals in this calculation, round all numbers as necessary using excel if possible.
Please calculate next year ratios if the company financed the $16 million with debt OR equity.
a.TIE (Times interest earned) [5 marks].
b.Times-burden-covered ratio [4 marks].
c.Times-common-covered ratio [4 marks].
d.EPS [5 marks].
e.Make a decision [2 marks].
Question 7 Which one of the following statements is FALSE?
a. Any increase in income implies a cash inflow.
b. A decrease in assets implies a cash inflow.
c. Any increase in expenses implies a cash inflow.
d. Any increase in liabilities implies a cash inflow.
Question 8 Which one of the following statements is TRUE?
a. Only the price of existing bonds is affected when interest rates change
b. Only the price of new bonds is affected when interest rates change
c. The price of an existing bond increases when interest rates increase
d. The price of an existing bond falls when interest rates increase