Question 1 (3 points) Question 1 UnsavedA firm has assets valued at $750M liabilities properly valued at $600M. What is the maximumpercentage drop in asset prices can the firm withstand before becoming insolvent?Question 1 options:A)80.0%B)20.0%C)44.4%D)25.0% Question 2 (3 points) Question 2 UnsavedWhich of the following is an advantage of using IRR as a capital budgeting tool?Question 2 options:A)Estimates are extremely sensitive to changes in the discount rateB)There is not a simple Excel function to calculate IRRC)IRR allows for an easy comparison against the discount rate or WACCD)It is easier to ignore sunk costs when using IRRQuestion 3 (3 points) Question 3 UnsavedWhich of the following is an important use for Weighted Average Cost of Capital (WACC)?Question 3 options:A)WACC reflects cash expenses as opposed to accounting expenses B)WACC helps evaluate if capital returns are enough to benefit shareholdersC)WACC allows you to estimate the affect capital costs have on profitD)WACC helps you estimate the book value of a company Question 4 (3 points) Question 4 UnsavedWhich of the following is an accurate description of expected return?Question 4 options:A)If you invest in a project you are guaranteed to earn its expected returnB)Expected return tells you how likely the return is to deviate from its averageC)The investment with the highest expected return is always the best optionD)If you made the same investment 1 000 times the average of your returns would approximately equalthe expected return Question 5 (3 points) Question 5 UnsavedWhich statement is correct regarding illiquidity and/or insolvency?Question 5 options:A)Higher leverage increases the risk of becoming insolventB)Illiquidity can cause a solvent company to become insolvent but insolvency can never cause a liquid firmto become illiquid C)Bankruptcy occurs when you are deemed illiquid or insolventD)The most liquid and solvent firms are always the best investmentsQuestion 6 (3 points) Question 6 UnsavedCash Conversion Cycle is influenced by how well a company does the following:Question 6options:A)Rolls over its short-term debt to stay liquidB)Gets paid in cash on its stock investmentsC)Marks up the price it charges customers from the price it pays suppliersD)Converts inventory into sales into cash Question 7 (3 points) Question 7 UnsavedWhich of the following is not a reason net income can differ from cash flows?Question 7 options:The issuance of equity does not involve a change in net income comparable to the amount ofcash received B)Selling equipment for no gain involves cash but no profitC)Earnings from bank deposits are not included in net incomeD)When companies sell products they don’t always collect cash right away Question 8 (3 points) Question 8 UnsavedWhich of the following is not a key assumption of the Sustainable Growth Rate? Question 8 options: A)The company will manage liabilities to keep their leverage rate constantB)The company must pay dividendsC)The company’s return on equity remains constantD)The percentage of net income paid out in dividends will remain constant Question 9 (3 points) Question 9 UnsavedWhich of the following cannot be found if you know a company’s most recent year’s dividend retentionrate dividend growth rate and stock price? Question 9 options:A)Dividend paid two years from nowB)Required return on the stockC)Sustainable growth rateD)Dividend yield SaveQuestion 10 (3 points) Question 10 UnsavedA company’s bond is most likely said to be trading at a premium in which scenario?Question 10 options:A)The bond’s yield to maturity is greater than its coupon rateB)The bond is undervaluedC)The bond’s yield to maturity is less than its coupon rateD)The bond is overvalued Question 11 (10 points) Question 11 UnsavedCalculate the expected return and standard deviation (square root of the variance) of the followingprobability distribution of returns: 25% Return occurs with probabilty of 10% 10% return occurs with probability of 65% -5% return occurs with probability of 20% -30% return occurs with probability of 5% Question 11 options:Spell checkSaveQuestion 12 (10 points) Question 12 Unsaved You have run a lemonade stand with enough success to build up some extra cash. There is anopportunity to open another stand and have your friend run it for a fee and this new stand will notaffect the performance of your current stand. Opening the stand requires $50 to acquire cups and theinitial ingredients. Last summer when you were considering opening a new stand (you ultimatelydecided against it) you paid $100 for a stand that you can now use in this new venture. Your friend willonly work the weekends and will be paid $200 per month to run the new stand. Your original stand willearn profits of $150 per month and your stand will generate a gross margin (revenues minus cost ofgoods sold. The only other expense your friend’s wages is not considered in gross margin) of $250 permonth. Calculate the new stand’s payback period and NPV if the monthly discount rate to be used is0.02.Question 12 options:Spell checkSaveQuestion 13 (10 points) Question 13 UnsavedCalculate the sustainable AND internal growth rate for a company with the following financialinformation. Assume all ratios are constant.2014 Company Data: Sales = $5B Net Income = $450M Dividends = $350M Average Assets = $4B Average Equity = $2B Question 13 options:Spell checkSaveQuestion 14 (10 points) Question 14 Unsaved You take out a loan to buy a brand new car. If the Effective Annual Rate (EAR) is 8.3% whencompounding monthly calculate the EAR when compounding quarterly. (Hint: use the given EAR tocompute the APR. Then use the APR to compute the quarterly compounding EAR).Question 14 options:Spell checkSaveQuestion 15 (15 points) Question 15 UnsavedYou work for a cash management consulting firm and you are in charge of creating a brief bulletin oncash conversion cycle reduction. Offer two ways to improve EACH of the three cash conversion cyclecomponents. I will give away one answer as an example (you can use this one). My example: Reduce Days Inventory Outstanding by putting poor selling items on clearance (discountpricing). Question 15 options:Spell checkSaveQuestion 16 (15 points) Question 16 UnsavedYou have performed financial analysis on two companies resulting in the following table of financialcomparisons. Using only the information in the table state which company is more likely to bedescribed in the following ways and provide a brief explanation (a sentence or two).Company A Data: Profit Margin = 9% Current Assets = $300M Current Liabilities = $280M Asset Turnover = 3.0 Equity Multiplier = 2.5 Cash Conversion Cycle = 21 Company B Data Profit Margin = 20% Current Assets = $175M Current Liabilities = $120M Asset Turnover = 1.1 Equity Multiplier = 4.0 Cash Conversion Cycle = 36 Which company likely has the better brand strength relative to its competitors? Which company is more liquid? Which company could withstand a larger percentage decrease in asset values and still remain solvent?
