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FIN 515 Final Exam (Set 4)

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Author: Christine Farr
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1.Which of the following is not a step in the WACC valuation method?
2. Which of the following statements is correct?
3. 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. The company’s last dividend, D0, was \$ 1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. Which is the current price of the common stock?
4. (TCO G) The ABC Corporation’s budgeted monthly sales are \$4,000. In the first month, 40% of its customers pay and take the 3% discount.
The remaining 60% pay in the month following the sale and don’t receive a discount.
ABC’s bad debts are very small and are excluded from this analysis.
Purchases for next month’s sales are constant each month at \$2,000. Other payments for wages, rent, and taxes are constant at \$500 per month.
Construct a single month’s cash budget with the information given. What is the average cash gain or (loss) during a typical month for the ABC Corporation?
5. (TCO G)
Consider the information for the following four firms.
Firm
Cash

Debt

Equity

rD

rE

τc

Eenie
0

150

150

5%

10%

40%

Meenie
0

250

750

6%

12%

35%

Minie
25

175

325

6%

11%

35%

Moe
50

350

150

7.50%

15%

30%

Which is the weighted average cost of capital for Meenie closest to?
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?

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