You must show your work for
all questions. If you include only answers, you will not earn any points for
the problems even if your answers are correct.
1. Indicate whether each of the following actions would
increase or decrease a firm’s WACC. (3 points)
a. The corporate tax rate for the firm is
decreased. _________________________________
b. The Federal Reserve raises interest rates. _________________________________
c. The firm uses more debt and less equity in
its capital structure to expand operations. _____________________
2. Vandelay Industries Inc. has a target capital
structure of 60% common equity and 40% debt and is looking to fund $5 billion
in capital projects for the next year. Vandelay Industries has a target WACC of
13%, bonds that sell at par with a coupon rate of 9% and a tax rate of 35%. The
company hopes their retained earnings will be adequate to fund the equity
portion of Vandelay’s capital budget. Vandelay expects to pay a year-end
dividend of $3.50 and their common stock currently sells for $32. (5 points)
a. What
is Vandelay’s growth rate?
b. Vandelay
expects net income for the year to be approximately $525 million and they
anticipate paying out 45% of those
earnings in dividends. What is Vandelay’s breakpoint in retained earnings?
3. Whatley Inc. has a target capital structure
consisting of 35% debt, 10% preferred stock, and 55% common equity. The firm
has 20-year, 10% semiannual coupon bonds that sell for $958.50. Whatley also
has preferred stock that pays an 8.25% annual dividend (with a par value of
$100) and sells for $75. Finally, Whatley plans to pay an annual dividend of
$1.95 on its common stock that currently sells for $22.50 a share. Whatley’s
stock is a constant growth stock with a growth rate of 5%. Flotation costs on
new common stock are 10%, and the firm’s marginal tax rate is 40%. (7 points)
a. What
is Whatley’s after-tax component cost of debt?
b. What
is Whatley’s component cost of preferred stock?
c. What
is Whatley’s component cost of external equity (cost of equity issuing new
stock)?
d. Assume that Whatley does have to issue new
common stock to fund the equity portion of its capital budget, what is their WACC?
4. Rank order the following
capital project types according to level of risk, from lowest risk to highest
risk.(2 points)
Expansion
New
Venture
Replacement
5. Find the NPV, IRR,
MIRR and Payback for the following projects; use a WACC of 10%. (7 points)
|
Year |
Project A |
Project B |
|
0 |
-$1,000 |
-$1,000 |
|
1 |
$200 |
$1,000 |
|
2 |
$300 |
$100 |
|
3 |
$500 |
$100 |
|
4 |
$700 |
$100 |
|
|
Project A |
Project B |
|
NPV |
||
|
IRR |
||
|
MIRR |
||
|
Payback Period |
If projects A & B are mutually
exclusive, which would you recommend be accepted? ___________________
6. Bania Inc. has annual sales of $16.5
million, inventory levels of $2.6 million, receivables of $3 million, and
payables of $1.25 million. The firms cost of goods sold is 75% of sales. (5
points)
a. What
is Bania’s CCC?
b. If Bania’s terms of sale are Net 45, how
efficient/effective is their receivables (credit) department?
_______________________________________________________________________________________
7. Kruger Industrial Smoothing Inc. sells on
terms of 2/15, net 40. Total annual sales are $9,700,000. 20% of the customers pay on the 15th day and take
discounts, 40% pay in 40 days, 30% pay in 50 days and the remaining 10% of their customers pay, on average, 60
days after their purchases. (5 points)
a. What is Kruger’s accounts receivable balance?
Round to the nearest dollar.
b. The
credit manager of Kruger is implementing
stricter credit and collections policies and is striving for the following
scenario: 40% of customers paying in 15 days taking discounts, 45% paying in 40
days and the remaining paying in 50 days. How
much cash will be freed up if Kruger’s CFO can make this happen? Round to the nearest dollar.
c. Why
is freeing up cash like this important to any given company?
__________________________________________________________________________________________
