Course Work
Directions: You may complete the exam in Excel or in Word.
Question 1:
Avery Corporation’s target capital structure is 35% debt, 10% preferred, and 55% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of common from reinvested earnings is 11.25%, and the tax rate is 40%. The firm will not be issuing any new common stock. What is Avery’s WACC?
Question 2:
Clifford Company is choosing between two projects. The larger project has an initial cost of $100,000, annual cash flows of $30,000 for 5 years. The smaller project has an initial cost of $50,000, annual cash flows of $16,000 for 5 years. The projects are equally risky with a cost of capital of 10%. If the projects are independent, and you have been advised to prioritize the IRR method, which project or projects would you pick?
Question 3:
Current Design Co. is considering two mutually exclusive, equally risky, and not repeatable projects, S and L. Their cash flows are shown below. The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, value will be forgone, i.e., what’s the chosen NPV versus the maximum possible NPV? The required rate of return is 7.5%.
| Year | 0 | 1 | 2 | 3 | 4 |
| CFS | −$1,100 | $550 | $600 | $100 | $100 |
| CFL | −$2,700 | $650 | $725 | $800 | $1,400 |
Question 4:
Worthington Inc. is considering a project that has the following cash flow data. What is the project’s payback period?
| Year | 0 | 1 | 2 | 3 |
| Cash flows | −$500 | $150 | $200 | $300 |
Question 5:
Firms HD and LD are identical except for their level of debt and the interest rates they pay on debt. HD has more debt and pays a higher interest rate on that debt. Based on the data given below, what is the difference between the two firms’ ROEs?
| Applicable to Both Firms | Firm HD’s Data | Firm LD’s Data | |||
| Assets | $200 | Debt ratio | 50% | Debt ratio | 30% |
| EBIT | $40 | Interest rate | 12% | Interest rate | 10% |
| Tax rate | 35% | ||||
Question 6: 5 Points
In your internship with Lewis, Lee, & Taylor Inc. you have been asked to forecast the firm’s additional funds needed (AFN) for next year. The firm is operating at full capacity. Data for use in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year?
| Last year’s sales = S0 | $200,000 | Last year’s accounts payable | $50,000 |
| Sales growth rate = g | 40% | Last year’s notes payable | $15,000 |
| Last year’s total assets = A0* | $135,000 | Last year’s accruals | $20,000 |
| Last year’s profit margin = PM | 20.0% | Target payout ratio | 25.0% |
Question 7:
Brothers Breads has the following data. What is the firm’s cash conversion cycle?
| Inventory conversion period = | 50 days |
| Average collection period = | 17 days |
| Payables deferral period = | 25 days |
Question 8:
Thornton Universal Sales’ cost of goods sold (COGS) average $2,000,000 per month, and it keeps inventory equal to 50% of its monthly COGS on hand at all times. Using a 365-day year, what is its inventory conversion period?
