FIN 515 EXAM QUESTIONS (COMPLETE GUIDE} WITH 100% CORRECT AND VERIFIED ANSWERS. GUARANTEED A+ SCORE

1. TCO A) In the United States, which of the following types of organization has the greatest revenue in total? (Points : 5) Sole proprietorship C corporation S corporation Limited partnership 2. TCO A) A sole proprietorship is owned by (Points : 5) one person. one or two people, but if there are two owners, they must be married to each other. up to 100 owners. up to 64 owners. 3. TCO B) Which of the following would cause the present value of an annuity to increase? (Points : 5) Reducing the number of payments. Increasing the interest rate. Decreasing the interest rate. Decreasing the liquidity of the payments. 4. TCO B) Which of the following is an annuity due? (Points : 5) A typical car loan. A typical mortgage. A typical apartment rental agreement. A credit card balance. 5. TCO G) If you were a manager of a company, which of the three right side components of the DuPont Identity would you want to increase and which would you want to decrease, other things being equal? Give a specific example for how to do that for each of the three. (Points : 20) The DuPont Identity measures the company’s ROE in terms of its profitability, asset efficiency, and leverage. The model helps investors compare similar companies like these with similar ratios. Investors can then apply perceived risks with each company's business model. Based on these three performances measures i.e. Profit Margin, Total Asset Turnover and Financial Leverage, the model concludes that a company can raise its ROE by maintaining a high profit margin, increasing asset turnover, or leveraging assets more effectively. In details, net profit margin can be used to margin a company's overall profitability. Besides, the firm’s asset turnover is used to identify how efficiently the firm is utilizing its assets to generate sales. The term equity multiplier indicates the value of assets held per dollar of shareholder equity. The right side components of the DuPont Identity that can be increased are Net Income and Sales. The inventory and account receivable can be reduced which can help the current assets position and in turn reduces total assets, which then improves total asset turnover. Hence, decreasing the inefficiencies in asset utilization and inventory holding will improve the ROE. The management can use this formula to pinpoint the problem area whether it is a lower profit margin, asset turnover, or poor financial leveraging if investors are unsatisfied with a low ROE. 6. TCO D) A stock has just paid a dividend and will pay a dividend of $3.00 in a year. The dividend will stay constant for the rest of time. The return on equity for similar stocks is 14%. What is P0? (Points : 20) A stock has just paid a dividend and will pay a dividend of $3.00 in a year, so Dividend for Year 0 and coming years will be $3 => D0 = 3 => D1 = 3 The dividend will stay constant for the rest of time => Rate of Dividend growth = 0 => g = 0 r = 14% P0 = D1 / (r - g) = 3 /(14% - 0) = 21.43 7. TCO D) A stock has just paid a dividend and has declared an annual dividend of $2.00 to be paid one year from today. The dividend is expected to grow at a 5% annual rate. The return on equity for similar stocks is 12%. What is P0? (Points : 20) Constant Dividend Growth Model: P0 = Stock Price = 2.0 / (0.12 -0.05) = 2.0 /(0.07) = 200/7 = $28.57 8. (TCO D) A particular bond has 8 years to maturity. It has a face value of $1,000. It has a YTM of 7% and the coupons are paid semiannually at a 10% annual rate. What does the bond currently sell for? (Points : 10) Face value (FV) = $1,000 Coupon rate = 10%, YTM = 7% and has 8 years to maturity. The compounding is semi-annual: => Semi-annual coupon payment = $1,000 * (10% / 2) = $50 Semi-annual YTM = 7% / 2 = 3.5% Semi-annual years = 8 * 2 = 16 Using the excel to calculate current price of the bond: PV = (Rate, Nper, PMT, FV) = (3.5%, 16, -50, -1000) = $1,181.41 9. (TCO D) A bond currently sells for $1,000 and has a par of $1,000. It was issued two years ago and had a maturity of 10 years. The coupon rate is 7% and the interest payments are made semiannually. What is its YTM? (Points : 10) Yield to Maturity of Coupon Bond: P = CPN x (1/y)(1-[1/(1+y)^n] + (FV / [1+y]^n) => 1000 = 35 * 1/y * (1 - 1/(1 + y)^16) + 1000 /(1+y)^16 Using Excel to compute the yield to maturity: = Rate(16,-35,1000,-1000) = 3.5% 10. (TCO D) What is β and why is it important to investors and issuers of stock? Describe the behavior of stocks with βs of greater than one, less than one, and less than zero. (Points : 30) The sensitivity of a stock to market movements is called Beta. It represents the most widely accepted measure of the extent to which the return on a stock fluctuates with the return on the market portfoilio. Beta is the measure of volatility, more particularly known as systematic risk. Investors uses beta to analyze the volatility of the stock in comparison of market and hence decides their required return. Issuers of the stock uses it to decide the cost of equity. - A stock with beta of greater than one experiences greater fluctuations than the market portfolio. - A stock with beta of less than one has lesser return fluctuations that the market portfolio and a stock with Beta 1 has the same fluctuation in return as that of the market portfolio. - Zero beta means the stock is not correlated with market and it does not move any direction following the market movement. 11. TCO E) A company has 100 million shares outstanding trading for $8 per share. It also has $900 million in outstanding debt. If its equity cost of capital is 15%, and its debt cost of capital is 12%, and its effective corporate tax rate is 40%, what is its weighted average cost of capital? (Points : 30) Weighted Average Cost of capital: = [Equity / (Debt + Equity)]*Equity cost of capital + [ Debt / (Debt + equity)]*Debt Cost of capital*(1 - tax rate) =[($100 / $1000) * 0.15] +[ ($900/$1000) * 0.12 *(1-0.40) = 0.015 + 0.0648 = 0.0798 = 7.98% 12. TCO A) What is the difference between capital structure and capital budgeting? Explain and give an example of a capital structure decision and an example of a capital budgeting decision. (Points : 25) Capital structure refers to the composition of the "Shareholder Equity and Liabilities" section of a corporation's balance sheet. Capital structure decisions related to capital structure of the company, which includes debt and equity. Besides, bank loans, preferred stock, retained earnings and working capital might also be part of the company's capital structure. On the other hand, capital budgeting refers to the process of evaluating and managing a firm's long-term investments. Capital budgeting decision involves three steps: recording the investment's cost, projecting the investment's cash flows and comparing the projected earnings with inflation rates and the time value of the investment. Capital structure and capital budgeting must be aligned to ensure that the business has sufficient cash to undertake the investments necessary. For example: Capital structure decision: How should we pay for our assets? Should we use debt or equity? Capital budgeting decision: What long-term investments or projects should the business take on? 13. TCO H) What is the difference between the cash cycle and the operating cycle? Under what condition would they be the same? (Points : 30) Cash conversion cycle is the number of days required for a company to convert resources to cash flows while an operating cycle is the average time period between the acquisition of inventory and the receipt of cash from the inventory's sale. They would be the same as there is only inventory in the working capital of the company. 14. (TCO F) A company has the opportunity to do any of the projects for which the net cash flows per year are shown below. The company has a cost of capital of 12%. Which should the company do and why? You must use at least two capital budgeting methods. Show your work Year A B C 0 - 1 100 -50 100 2 100 100 100 3 100 100 100 4 100 100 100 5 100 100 100 6 100 100 100 7 -100 -200 0 (Points : 40) NPV Method: NPV = PV of cash inflow – PV of cash outflow Profitable Index Method: PI= PV of Cash Inflow / PV of Cash Outflow Company A: PV of Cash Inflow = 100/1.12 + 100/1.12^2 + 100/1.12^3 + 100/1.12^4 + 100/1.12^5 + 100/1.12^6 = 411.14 PV of Cash Outflow = 300 + 100/1.12^7 = 345.23 NPV Method: NPV = PV of Cash Inflow - PV of Cash Outflow = 411.14 - 345.23 = 65.91 Profitable Index Method: PI = PV of Cash Inflow / PV of Cash Outflow = 411.14 / 345.23 = 1.19 Company B: PV of Cash Inflow = 100/1.12^2 + 100/1.12^3 + 100/1.12^4 + 100/1.12^5 + 100/1.12^6 = 321.86 PV of Cash Outflow = 100 + 50/1.12 + 200/1.12^7 = 235.11 NPV Method: NPV = PV of Cash Inflow - PV of Cash Outflow = 321.86 - 235.11 = 86.75 Profitable Index Method: PI = PV of Cash Inflow / PV of Cash Outflow = 321.86 / 235.11 = 1.3690 Company C: PV of Cash Inflow = 100/1.12 + 100/1.12^2 + 100/1.12^3 + 100/1.12^4 + 100/1.12^5 + 100/1.12^6 = 411.14 PV of Cash Outflow = 300 NPV Method: NPV = PV of Cash Inflow - PV of Cash Outflow = 411.14 - 300 = 111.14 Profitable Index Method: PI = PV of Cash Inflow / PV of Cash Outflow = 411.14 / 300 = 1.3705 Regarding to NPV Method and Profitable Index Method, the best choice is project C as its NPV is higher and also PI is higher though all of the three companies have Positive NPV and PI is greater than 1.