BA 3425: Managerial Finance FINAL EXAM

Question
1
NAME: … … … … … STUDENT ID # … … … … …
University of New Brunswick, Saint John
Faculty of Business
BA 3425: Managerial Finance
FINAL EXAM
Total Points: 100 Duration: 2 Hours and 30 Minutes
Instructions
• It’s a CLOSED book test.
• Formula CHEAT SHEET will be provided.
• NO electronic devices, other than your calculator.
• If you are using calculator, write down your INPUT VARIABLES, otherwise I won’t be able to
check your answers.
Part I: True/False with Explanation [10*3 = 30 points]

1. You hold a winning ticket from your provincial lottery. It entitles the bearer to receive payments of
   $50,000 at the end of each of the next 20 years. Given what you know about the time value of
   money, you should be able to sell this ticket for no less than $1 million in the open market.
2. Beatrice has a credit card that applies interest every month to her account balance. In this case,
   Beatrice is paying an interest rate that is greater than the APR shown on her billing statement.
3. If one uses the constant growth model to value stock, one assumes that P1 = P0 (1 + g), P2 = P0 (1 +
   g), etc.
4. You are attempting to value the shares of a new, high-technology firm in a developing industry. You
   would MOST likely use constant dividend growth model.
   2
5. If the cost of capital is greater than the IRR, the project should be accepted.
6. All else the same, shortening the firm’s cash cycle will likely increase the firm’s profitability.
7. The primary objective of short-term financial management is to minimize the investment in net
   working capital.
8. If the yield curve is upward sloping, then short-term debt will be expensive than long-term debt.
9. Disbursement float arises when you basically receive a check from your customer.
10. The basic factors to be evaluated in the credit evaluation process, the five Cs of credit, are Capital,
    collateral, control, character, and capacity.
    3
    Part II: Quantitative Problems [70 points]
11. Douglass Inc. wants to establish an employee reward program whereby they can pay five employees
    $1,000 a year each for twenty years. The first payment is to begin one year from today. The company
    expects to earn 3.25% on the funds in this program. How much does the company have to deposit today
    to totally fund this reward program? [10 points]
12. Westover Ridge offers a 9 percent coupon bond with semiannual payments and a yield to maturity of
    11.68 percent. The bonds mature in 16 years. What is the market price per bond if the face value is
    $1,000? [10 points]
    4
13. Huang Company’s last dividend was $1.25. The dividend growth rate is expected to be constant at 15%
    for 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm’s required
    return (rs) is 11%, what is its current stock price? [10 points]
    5
14. Your division is considering two investment projects, each of which requires an upfront expenditure of
    $25 million. You estimate that the cost of capital is 10% and that the investments will produce the
    following after-tax cash flows (in millions of dollars): [5*4 = 20 points]
    Year Project A Project B
    1 5 20
    2 10 10
    3 15 8
    4 20 6
    a. Calculate the payback period for each of the projects.
    b. Calculate the discounted payback period for each of the projects.
    c. If the two projects are independent and the cost of capital is 10%, which project or projects
    should the firm undertake?
    d. If the two projects are mutually exclusive and the cost of capital is 5%, which project should the
    firm undertake?
    e. Calculate the internal rate of return of each project? Which project should the firm choose and
    why? Consider the two projects are mutually exclusive.
    6
15. Dewey Corporation has the following data, in thousands. Assuming a 365-day year, what is the firm’s
    cash conversion cycle? [10 points]
    Annual sales $45,000
    Annual cost of goods sold $31,500
    Inventory $4,000
    Accounts receivable $2,000
    Accounts payable $2,400
16. Karloff Medical Supply maintains an average inventory of 2,000 human skulls for sale to medical
    schools and filmmakers. The carrying cost per skull per year is estimated to be $5. Boris places an order
    for 10,000 skulls on the first of each month and the order cost is $75. Calculate the economic order
    quantity (EOQ. [10 points]

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