Sp-2016 FINAL EXAM AGEC 424
(233 total points)
Name______
You must show logically correct work, including calculator inputs and outputs for all problems to receive credit. Show signs on calculator inputs. Differentiate calculator outputs from inputs.
Ratio / Industry median / AgBiz Inc.Profit margin(PM = ROS) / 4% / 5%
Total Asset Turnover / 3 x / 1.5 x
Debt ratio (TL/TA) / 50% / 80%
DSO (also called ACP) / 25 days / 40 days
ITO (COGS/inventory) / 10 x / 5 x
ROE / 24% / 37.5%
Accounts payable deferral / 20 days / 20 days
Use the above data for questions 1-3.
1. (10 points) Construct the extended Du Pont equation for both AgBiz Inc. and for the industry. Then analyze each of the three components of the company's ROE in a side-by-side comparison to the industry (explain ROE, say something about each component).
2. (10 points) Show a side by side comparison of the cash conversion cycle for AgBiz Inc. with the industry. Use the CCC to analyze working capital management for AgBiz Inc. in comparison to the industry (say something about each component).
3. (3 points) Based on questions 1 and 2 point out any red flags or successes that you see for AgBiz Inc.
4. (10 points) Jill's Wigs Inc. had the following balance sheet last year:
Last Factor Next Last Factor Next
Cash $ 800 Accounts payable $ 350
Accounts rec. 450 Accrued wages 150
Inventory 950 Notes payable 2,000
Net fixed A. 34,000 Mortgage 26,500
Common stock 3,200
Retained earnings 4,000
Total liabilities
Total assets $36,200 and equity $36,200
Jill has just invented a non-slip wig for men which she expects will cause sales to double, increasing after-tax net income to $1,000. She operated at 80% of capacity last year. (1) Will Jill need any outside capital if she pays out 40% of net income as dividends? (2) If so, how much? Show calculations beyond those shown above in the space below.
5. (6 points) Inflation is expected to be 5% next year and a steady 7% each year thereafter. Maturity risk premiums are zero for one year debt but have an increasing value for longer debt. One-year government debt yields 9% whereas two-year debt yields 11%.
a. What is the real risk-free rate and the maturity risk premium for two-year debt?
b. Forecast the nominal yield on one- and two-year government debt issued at the beginning of the second year.
6a. (7 points) What is the monthly mortgage payment on a 3-year car loan for $30,000 at 8% (get it right to the penny)?
b. (13 points) Construct an amortization table for the first 2 months of the loan.
Month Beg Bal PMT INT Prin. Reduction End Bal
Show interest calculations:
7. (8 points) Mr. Moore is 35 years old today and is beginning to plan for his retirement. He wants to set aside an equal amount at the end of each of the next 25 years so that he can retire at age 60. He expects to live to about 80, and wants to be able to withdraw $25,000 per year from the account on his 61st through 80th birthdays. The account is expected to earn 10 percent per annum for the entire period of time. Determine the size of the annual deposits that must be made by Mr. Moore. Give at least some indication of what you are doing.
8. (9 points)
a. The Wintergreens are planning ahead for their son's education. He's eight now and will start college in 10 years. How much will they have to set aside each year to have $65,000 when he starts if the interest rate is 7%?
b. What interest rate would you need to get to have an annuity of $7,500 per year accumulate to $279,600 in 15 years?
c. How many years will it take for $850 per year to amount to $20,000 if the interest rate is 8%?
9. (20 points) Additional Funds needed with financial feedback
It is 2005 and you have been given the attached information on the Crum Company. Crum expects sales to grow by 50% in 2006, and variable costs should increase the same percentage. Fixed costs will increase proportionately with fixed assets. Fixed assets were being operated at 90% of capacity in 2005. Current assets and spontaneous liabilities should increase at the same rate as sales during 2006. The company plans to finance any external funds needed as 50% notes payable and 50% common stock. After taking financing feedbacks into account, and after the second pass, what are Crum’s additional notes payable and common stock needed?
The blank worksheet for the projected balance sheet method follows.
Sales Factor:______Capacity factor ______
2006 2006
2005 Factor 1st pass Feedback 2nd pass
Sales $1,000.00
Variable costs 400.00
Fixed Costs ___400.00 ______
EBIT $ 200.00
Interest 16.00 ______
EBT $ 184.00
Taxes (40%) 73.60
______
Net Income $ 110.40
Dividends (60%) 66.24 ______
Add'n to R.E. $ 44.16
Current Assets $ 700.00
Net fixed Assets 300.00
______
Total assets $1,000.00
A/P and Accruals $ 150.00
N/P 8.00% 200.00
Common stock 150.00
Retained earnings 500.00
______
Total Liab & Equity $1,000.00
Additional Funds needed each pass: ______
Accumulative AFN ___NA______
First pass AFN breakdown: Notes ______% $______Interest______
Stock ______% $______
Show calculations including interest:
10. (8 points) Jen and Barry Inc. has a $1000 face value, 10 year remaining life,semi-annual, 9% coupon bond outstanding. Investors require a 12% rate of return on bonds of this risk. What is the intrinsic value of the bond?
11. (8 points) Joe Kool Inc. has a $1000 face value, 12 year remaining life,semi-annual, 9% coupon bond outstanding. It is selling for $955. What is the yield to maturity for this bond?
12.(4 points) What are the current and expected capital gains yields on the bond in number 11?
13.(8 points) Blue Inc. has a $1000 face value,4 years to call,semi-annual, 15% coupon bond outstanding. Investors require an 8% rate of return on bonds of this risk. The call premium on this bond is $100. What is the value of the bond assuming it will be called?
14.(8 points) Black and GoldInc. has a $1000 face value,6 years to call,semi-annual, 15% coupon bond outstanding. The bond has a call premium of one year's worth of interest at the coupon rate. It is currently selling for $1300. What is the yield to call?
15. (15 points) Long Life Insurance Inc just paid a dividend of $1.50, and projects supernormal growth at of 12% for the next three years. After that growth is expected to slow down to a normal 4% and go on at that rate for the foreseeable future. Similar stocks are earning a return of 10%. How much would you pay for a share of Long Live today?
16.(4 points) Assume a firm’s bonds are currently yielding new investors 6%. The combined federal and state tax rate is 40%. What is the firm’s after-tax cost of debt is?
a. / 3.6%b. / 4.0%
c. / 4.8%
d. / 6.0%
17. (4 points) Allegheny Valley Power Company common stock has a beta of 0.80. If the current risk-free rate is 6.5% and the expected return on the stock market as a whole is 16%, determine the cost of retained earnings for the firm (using the SML from the CAPM).
a. / 14.1%b. / 7.6%
c. / 6.5%
18. (4 points) Northeast Airlines has a current dividend of $1.80. Dividends are expected to grow at 7% into the foreseeable future. What is the firm’s cost of equity from new stock if its shares can be sold to net the company $46 after administrative expenses (flotation costs)?
a. / 10.9%b. / 11.2%
c. / 7.2%
d. / none of the above
19. (4 points) Hatter Inc. has the following capital components and costs. Calculate Hatter’s WACC.
Component / Value / CostDebt / 15,500 / 10%
Preferred Stock / 7,500 / 12%
Common Equity / 10,000 / 14%
a. / 11.67%
b. / 12.41%
c. / 13.73%
d. / 14.55%
20. (4 points) Zylon Inc. plans net income of $10 million next year and typically pays 40% of its earnings in dividends. Its capital structure is one third equity and two thirds debt with no preferred stock. Zylon’s MCC curve will break at:
a. / $ 4,000,000b. / $ 6,000,000
c. / $12,000,000
d. / $18,000,00
21. (4 points) Illinois Tool Company’s (ITC) fixed operating costs are $1,260,000 and its variable cost ratio (i.e., variable costs as a fraction of sales) is 0.70. The firm’s debt consists of a $6,000,000 bond issue (par value), which pays a coupon rate of 9%. Sales are $9 million per year. What is ITC’s degree of financial leverage?
a. / 1.20b. / 1.875
c. / 3.0
d. / 1.60
22. (4 points) Last year Avator’s operating income (EBIT) increased by 22 percent while its dollar sales increased by 15%. What is Avator’s degree of operating leverage (DOL)?
a. / . 68b. / 2.0
c. / 1.47
d. / . 32
23. (6 points) Assume the following facts about a firm that sells just one product:
Selling price per unit / = $24.00Variable costs per unit / = $18.00
Total monthly fixed costs / = $2,500
What is the firm’s annual breakeven volume in units?
24. (12 points) A project has the following cash flows
C0 C1 C2 C3
($700) $200 $500 $244
a. What is the project’s payback period?
b. Calculate the projects NPV at 12% and Calculate the project’s IRR.
c. Calculate the EAA of the project.
25. (40 points) The Ewert Company is evaluating the proposed acquisition of a new milling machine. The machine’s base price is $108,000, and it would cost another $12,500 to modify it for special use by the firm. The machine falls into the MACRS three-year class, and it would be sold after three years for $65,000. (Use the MACRS depreciation percentages that we have been using: 33%, 45%, 15% and 7%.) The machine would require an increase in net working capital (inventory) of $5,500. The milling machine would have no effect on revenues, but it is expected to save the firm $44,000 per year in before-tax operating costs, mainly labor. Ewert’s marginal tax rate is 34 percent and cost of capital is 10%.
Determine the cash flows, NPV, IRR, and payback on the attached sheet. Recommend either acceptance or rejection and say why.
26. (4 points extra credit) Conestoga Ltd. has the following estimated probability distribution of returns.
Return Probability
4% .20
12% .50
14% .30
Calculate Conestoga’s expected return, the variance, standard deviation of return and the return’s coefficient of variation.
Question 25
Operating Cash flow
minus
deprec.
EBT
less taxes
EAT
Dep. Add
back
OCF
Terminal CF / Timeline, calculator inputs/outputs and investment decision
9