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Include your calculations for Part 1 on the Excel spreadsheet that you create for Part 2, as these calculations can be worth more points. Part 2 – Short Answer – Calculations – create your own Excel file (this file may be used for showing your calculations in Part 1 as well) PART 1: Multiple choices. 20 questions; 20 points – 1 point each – Select the best answer. In some instances (i.e., a series of calculations), partial credit is possible – but you must give your instructor insight into your thought process via Excel, Word, etc. Note that you may not get the “exact” answer due to rounding. For that reason, you should round out to at least three digits, and then choose the answer that is closest. 1. Consider the following equally likely project outcomes: Profit X Y Pessimistic prediction $ 0 $500 Expected outcome $ 500 $500 Optimistic prediction $1000 $500 a. Project Y has less uncertainty than Project X. b. Project X has more variability than Project Y. c. Since Projects X and Y have the same expected outcomes of $500, investors will view them as identical in value. d. Answers (a) and (b) above are true 2. Which of the following is NOT included in the calculation of free cash flows? a. Interest expense b. Operating income c. Depreciation d. Net operating working capital 3. Hi Sky Enterprises has total assets of $3 million, a debt ratio of 30%, and an aftertax profit margin of 11.04% and sales of $2.5 million. What is Hi Sky’s return on equity? a. 15% b. 35% c. 27% d. 13% 4. 4. Edward Johnson decided to open up a Roth IRA. He will invest $1,800 per year for the next 35 years. Deposits to the Roth IRA will be made via a $150 payroll deduction at the end of each month. Assume that Edward will earn 8.75% over the life of the IRA. How much will he have at the end of 35 years? a. $125,250 b. $250,321 c. $363,000 d. $414,405 5. As the cost of capital is increased, the: a. IRR remains constant. b. payback period remains the same. c. discounted payback period increases. d. both b and c. e. all of the above. 6. SpaceTech is considering a new project with the following projections for year 2 Year 2 Projections EBIT $400,000 Interest Expense $20,000 Depreciation Expense $40,000 Tax Rate 40% Net Working Capital Needs $200,000 If the projected net working capital needs for Year 1 was $150,000, calculate the free cash flow for Year 2. a. $130,000 b. $180,000 c. $230,000 d. $280,000 7. Famous Danish Corp. is replacing an old cookie cutter with a new one. The cookie cutter is being sold for $25,000 and it has a net book value of $75,000. Assume that Famous Danish is in the 34% income tax bracket. How much will Famous Danish net from the sale? a. $61,000 b. $55,000 c. $75,000 d. $42,000 8. ABC will purchase a machine that will cost $2,575,000. Required modifications will cost $375,000. ABC will need to invest $75,000 for additional inventory. The machine has an IRS approved useful life of 7 years; it is presumed to have no salvage value. ABC plans to depreciate the machine by using the straightline method. The machine is expected to increase ABC’s sales revenues by $1,890,000 per year; operating costs excluding depreciation are estimated at $454,600 per year. Assume that the firm’s tax rate is 40%. What is the annual operating cash flow? a. $922,464 b. $1,126,287 c. $813,563 d. $1,029,811 9. Knoko Systems is considering a capital budgeting project with a life of five years that requires an outlay of $90,000. It has Free Cash Flows (FCF) each period as shown in the following distribution: P (FCF) FCF 0.10 $ 0 0.20 12,500 0.40 37,500 0.20 43,750 0.10 50,000 Assuming a riskadjusted required rate of return of 0.20 is appropriate for projects of this level of risk, the riskadjusted net present value of the project is $_________, and therefore the project ___________ [should] or [should not] be accepted. a. $ (3,469); should not be accepted b. $ (4,963); should not be accepted c. $ 4,963; should be accepted d. $ 3,469; should be accepted 10. East Man Kodiac plans to maintain its optimal capital structure of 30% debt, 20% preferred stock, and 50% common stock. Bondholders require a return on East Man’s bonds of 10%; preferred shareholders require 11%; and common stockholders require 16%. Assuming that the firm has a marginal tax rate of 40%, what aftertax rate of return must East Man Kodiac earn on its investments if the value of the firm is to remain unchanged? a. 10% b. 12% c. 14% d. 16% Use the following information to answer questions #11  #14: A friend of yours is trying to determine whether to open a sandwich stand at the local mall based on the following data. She expects total fixed costs per year of $24,000, a sale price per sandwich of $3.00, and variable costs per sandwich of $1.80.
a. 12,000. b. 16,000. c. 20,000. d. 24,000. 2. What percentage of every sales dollar will contribute to covering fixed costs?
b. 40% c. 50% d. 60% 3. The breakeven point in sales dollars is: a. $60,000. b. $54,000. c. $46,000. d. $30,000. 4. If your friend expects to sell no more than 15,000 sandwiches per year, then: a. she should not undertake the endeavor given the current cost/volume/profit expectations. b. she should undertake the endeavor given the current cost/volume/profit expectations. c. she should assess the effect of lowering the sales price of sandwiches if she wishes to pursue this endeavor. d. none of the above. 5. A firm has a degree of combined leverage of 1.25. Sale price per unit is $15 and the quantity output is equal to 200,000 units. Interest expense is $10,000 and fixed costs are $270,000. Calculate the variable cost per unit. a. $5 b. $6 c. $7 d. $8 6. As a general rule, the capital structure: a. maximizes expected EPS and also maximizes the price per share of common stock. b. minimizes the interest rate on debt and also maximizes the expected EPS. c. minimizes the required rate on equity and also maximizes the stock price. d. maximizes the price per share of common stock and also minimizes the weighted average cost of capital. 7. What is the central feature of the moderate view (theory) of capital structure?
b. A firm’s common stock price will not be affected by the amount of debt a firm uses. c. A low debt ratio will result in a maximum price for a firm’s common stock. d. Modest levels of debt have a more favorable impact on a firm’s average cost of capital and stock price than no debt. 8. An optimal capital structure is achieved: a. when a firm’s expected profits are maximized. b. when a firm’s expected EPS are maximized. c. when a firm’s expected stock price is maximized. d. when a firm’s breakeven point is achieved. 10. The Goreman Corporation has a debt ratio of 33.33% and it needs to raise $100,000 to expand. Management feels that an optimal debt ratio is 16.67%. Sales are currently $750,000, and the total assets turnover is 7.5. How should the expansion be financed so as to produce the desired debt ratio? a. Finance it all with debt. b. Finance it all with equity. c. Finance 20% with debt and 80% with equity. d. Finance 40% with debt and 60% with equity. e. Finance 50% with debt and 50% with equity. 11. The moderate position of capital structure theory indicates that: a. the tax shield on debt positively affects firm value, indicating that there is some benefit to financial leverage as opposed to an allequity capitalization. b. the higher the firm’s financial leverage, the higher the probability the firm will be unable to meet the financial obligations included in its debt contracts, which could ultimately lead to firm failure. c. there is a range of capital structures, rather than a single capital structure, that is optimal. D. all of the above. PART 2: Create an Excel spreadsheet to show your work. There are 7 problems, totaling 30 points – points assigned per problem as noted. You must give your instructor insight into your thought process via the Excel spreadsheet.
Table 4 Financial Data for Dooley Sportswear, December 31, 1996 Inventory $206,250 Longterm debt 300,000 Interest expense 5,000 Accumulated depreciation 442,500 Cash 180,000 Net sales (all credit) 1,500,000 Common stock 800,000 Accounts receivable 225,000 Operating expenses 525,000 Notes payablecurrent 187,500 Cost of goods sold 937,500 Plant and equipment 1,312,500 Accounts payable 168,750 Marketable securities 95,000 Prepaid insurance 80,000 Accrued wages 65,000 Retained earningscurrentyear ? Federal income taxes 5,750 2. Frank Zanca is considering three different investments that his broker has offered to him. The different cash flows are as follows: (4 points) End of Year A B C 1 300 400 2 300 3 300 4 300 300 600 5 300 6 300 7 300 8 300 600 Because Frank has enough savings for only one investment, his broker has proposed the third alternative to be, according to his expertise, the best in town. However, Frank questions his broker and wants to estimate the present value of each investment. Assuming a 15% discount rate, what is Frank's best alternative?
5. Bull Gator Industries is considering a new assembly line costing $6,000,000. The assembly line will be fully depreciated by the simplified straight line method over its 5 year depreciable life. Operating costs of the new machine are expected to be $1,100,000 per year. The existing assembly line has 5 years remaining before it will be fully depreciated and has a net book value of $3,000,000. If sold today the company would receive $2,400,000 for the existing machine. Annual operating costs on the existing machine are $2,100,000 per year. Bull Gator is in the 46 percent marginal tax bracket and has a required rate of return of 12 percent. (10 points) Required: Calculate the net present value of replacing the existing machine. 6. The terms of sale given by a company were 3/10 net 60. a. Their customers would get a discount if they paid within how many days? b. The discount would be __________. c. If they do not take advantage of the discount, when must the account be paid? d. What is the annualized opportunity cost of foregoing the discount? (Hint: use a 360day year in calculations.) (3 points) 7. The treasurer for Brook dale Clothing must decide how much money the company needs to borrow in July. The balance sheet for June 30, 2004 is presented below: Brook dale Clothing Balance Sheet June 30, 2004 Cash $75,000 Accounts payable $ 400,000 Marketable securities 100,000 Longterm debt 300,000 Accounts receivable 300,000 Common stock 100,000 Inventory 250,000 Retained earnings 200,000 Total current assets 725,000 Total liabilities and Fixed assets 275,000 stockholder’s equity $1,000,000 Total assets $1,000,000 The company expects sales of $250,000 for July. The company has observed that 25% of its sales is for cash and that the remaining 75% is collected in the following month. The company plans to purchase $400,000 of new clothing. Usually 40% of purchases is for cash and the remaining 60% of purchases is paid in the following month. Salaries are $100,000 per month, lease payments are $50,000 per month, and depreciation charges are $20,000 per month. The company plans to purchase a new building for $200,000 in July and sell its marketable securities for $100,000. If the company must maintain a minimum cash balance of $50,000, how much money must the company borrow in July? (5 points) 