FIN 306 Wilmington University Financial Management Exam Questions Hello, I am attaching a paper. Only tutors who has good knowledge in FINANCE bid this. Th

FIN 306 Wilmington University Financial Management Exam Questions Hello, I am attaching a paper. Only tutors who has good knowledge in FINANCE bid this. The paper has got around 37 Multiple Choice Questions and 7 Mathematical Problem solving Questions to solve. The paper is attached below. Name ________________________________
Questions, Matching _____/37
FIN 306 Final
Problems ______/63
April 27, 2020
Bonus _______ /3 Total ______/ 100
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1
1. Which of the following capital budgeting techniques ignores the time value of money?
a. Payback
b. Net Present Value
c. Internal rate of return
d. B & C above
2. A $60,000 outlay for a new machine with a usable life of 15 years is called
a. Capital expenditure
b. Operating expenditure
c. Replacement expenditure
d. None of the above
3. The ranking approach involves the ranking of capital expenditure projects on the basis of some
predetermined measure such as the rate of return.
a. TRUE
b. FALSE
4. Sartell Corporation has decided to replace an existing case packer (machine) with a newer one. Two years ago,
my current case packer cost $70,000 (cheap!) & was being depreciated under MACRS using a 5-year recovery
period. My current case packer can now be sold for $30,000. The new case packer will cost me $80,000 &
would also be depreciated under a 5-year recovery period. If my assumed tax rate is 40% on all ordinary
income & capital gains, what would my initial investment be on this replacement project?
a. $48,560
b. $44,360
c. $49,240
d. $27,600
5. ______ ________projects have the same function; the acceptance of one, _________ the others from
consideration.
a. Capital rationed: eliminates
b. Unequal life; does not eliminate
c. Mutually exclusive; eliminates
d. Expansion & replacement; does not eliminate
6. The Initial Investment cash flow & subsequent operating cash inflows for a project are sometimes referred
to as
a. Necessary cash flows
b. Relevant cash flows
c. Consistent cash flows
d. Ordinary cash flows
7. If a new asset is being considered as a replacement for an old asset, the relevant cash flows would be found by
adding together the expected cash flows remaining on the old asset to the expected cash flows for the new one
a. TRUE
b. FALSE
8. Recaptured depreciation is the portion of the sale price that is below book value & has not been depreciated
a. TRUE
b. FALSE
9. The cost of capital reflects the cost of funds
a. Over a short-run time period
b. At a given point in time
c. Over a long-run time period
d. At current book values
2
10. Using the Capital Asset Pricing Model (CAPM), the cost of common stock equity (Rs) is the return required
by investors as compensation for the firm’s non diversifiable risk
a. TRUE
b. FALSE
11. When making replacement decisions, the development of relevant cash flows is complicated when compared
to expansion decisions, due to the need to calculate _________ cash flows
a. conventional
b. non-conventional
c. incremental
d. initial
12. Now Sartell Corporation is considering expanding operations to meet our growing demand. With the capital
expansion, the current accounts are expected to change. Management expects cash to increase by $10,000,
accounts receivable by $20,000, & inventories by $30,000. At the same time accounts payable will increase by
$40,000, accruals by $30,000, & long-term debt by $80,000. The change in net working capital is
a. An increase of $10,000
b. A decrease of $10,000
c. A decrease of $90,000
d. An increase of $80,000
13. If a firm is subject to capital rationing, it’s able to accept all independent projects that provide an acceptable
return
a. TRUE
b. FALSE
14. The payback period of a project that costs $1,000 initially & promises after-tax cash inflows of $300 each year
for the next 3 years is 0.333 years
a. TRUE
b. FALSE
15. A firm is evaluating three capital projects. The NVP for each project are as follows
Project
NPV
1
$ 100
2
$0
3
-$ 100
The firm should
a. Accept Project 1 & 2 and reject 3
b. Accept Project 1 & 3 and reject 2
c. Accept Project 1 and reject 2 & 3
d. Reject all Projects
16. The _____________ is the discount rate that equates the present value of the cash inflows with the initial
investment
a. payback period
b. average rate of return
c. cost of capital
d. internal rate of return
3
17. My firm must choose from 6 capital budgeting proposals outlined below. My firm is subject to capital rationing
with a capital budget of $1,000,000 & our firm’s cost of capital is 15%
(Use this data for Q 17 & Q 18)
Project
Initial investment
IRR
NPV
1
$200,000
19%
$100,000
2
$400,000
17%
$20,000
3
$250,000
16%
$60,000
4
$200,000
12%
$-5,000
5
$150,000
20%
$50,000
6
$400,000
15%
$150,000
Use the IRR approach & tell me which projects my firm should accept
a. 1, 2, 3, 4, & 5
b. 1, 2, 3, & 5
c. 2, 3, 4, & 6
d. 1, 3, 4 & 6
18. Use the NPV approach & tell me which projects my firm should accept
a. 1, 2, 3, 4 & 5
b. 1, 2, 3, 5 & 6
c. 2, 3, 4 & 5
d. 1, 3, 5 & 6
19. The risk adjusted discount rate (RADR) is the rate of return that a project must earn in order to maintain or
improve the firm’s share price
a. TRUE
b. FALSE
20. Comparing NPV & IRR analysis
a. Always results in the same ranking of projects
b. Always results in the same ACCEPT/REJECT decision
c. May give different ACCEPT/REJECT decisions
d. Is only necessary on mutually exclusive projects
21. In capital budgeting, risk refers to the chance that a project has a high degree of variability in the initial investment
a. TRUE
b. FALSE
22. A firm is evaluating the riskiness of two capital budgeting projects. The following table summarizes the NPV &
associated (NPV) probabilities for various outcomes of the two projects
Net Present Values
Probability
0.25 (Optimistic)
0.50 (Most likely)
0.25 (Pessimistic)
Project A
-$5,000
$4,000
$10,000
Project B
$0
$2,000
$8,000
Using the above information, the projects can best be characterized relative to one another by the statement
a. Project A is riskier than Project B
b. Project B is riskier than Project A
c. Since Project A has a higher expected NVP, it should be chosen
d. Since Project B has a higher standard deviation, it is riskier & should not be chosen
4
23. The approximate BEFORE TAX cost of debt for a 15-year 10% coupon interest rate, $1,000 par value bond
selling on the market for $960 & then paying out $10 for flotation costs is
a. 10%
b. 15.4%
c. 12%
d. 10.6%
24. The net proceeds used in calculating the cost of long-term debt are funds actually received after paying for
flotation costs
a. TRUE
b. FALSE
25. The cost of retained earnings for Sartell Golfing Association would be 16.64% if the firm just paid a $4.00
dividend, the stock price is currently $50.00, dividends are expected to grow at 8% indefinitely & the flotation
costs are $5 per share.
a. TRUE
b. FALSE
26. An “adjustment” must be made in determining the after tax cost of _________
a. long-term debt
b. common stock
c. preferred stock
d. retained earnings
27. My firm has a beta of 1.2. The market return equals 14% & the risk-free rate of return is equal to 6%. Using
CAPM, the estimated cost of common stock equity is
a. 6%
b. 7.2%
c. 14%
d. 15.6%
28. A firm has common stock with a market price of $25 per share & an expected dividend of $2 per share at the end
of the coming year. The growth rate in dividends has been 5%. The cost of the firm’s common stock equity is
a. 5%
b. 8%
c. 10%
d. 13%
29. Thanks to FIN 306 – you have been able to make smart business decisions & now own your own company. You
have compiled the following data regarding the market value & the costs of specific capital sources
Source of Capital
After tax cost
Long term debt
8%
Common stock equity
19%
Market price per share of your common stock is $50 & there are 7200 shares outstanding
Market value of your long-term debt is $980 per bond with a total of 150 bonds that are issued
The WACC using the market value weights is:
a. 11.7%
b. 13.5%
c. 15.8%
d. 17.5%
5
30. Poor capital structure decisions can result in a high cost of capital, thereby making some unacceptable
investments acceptable
a. TRUE
b. FALSE
31. Weighting schemes for calculating the weighted average cost of capital (WACC) include all of the following
EXCEPT
a. Book value weights
b. Optimal value weights
c. Market value weights
d. Target weights
32. Sartell Golfing Inc. is considering issuing preferred stock to raise capital for a new golf ball logo machine. The
preferred stock would have a par value of $75, & a 5.5% dividend. What is the after tax cost of preferred stock
for my company if the flotation costs I will be charged are 5.5% of the par value?
a. 5.5%
b. 5.27%
c. 7.73%
d. 5.82%
33. A firm may ACCEPT a project with an NPV of $0 because
a. The project would maintain the wealth of the firm’s owners
b. The project would enhance the wealth of the firm’s owners
c. The return on the project would be positive
d. The return on the project would be zero
34. ____________ leverage is concerned with the relationship between sales revenue and earnings per share
a. Financial
b. Operating
c. Variable
d. Total
35. A firm has fixed operating costs of $10,000, the sale price per unit of its product is $25 and its variable cost per
unit is $15. The firm’s operating breakeven point in units is __________ and its breakeven point in dollars is
_____________
a. 250, $6,250
b. 400, $10,000
c. 667, $16,675
d. 1,000, $25,000
36. The cost of equity increases with increasing financial leverage in order to compensate our shareholders for the
higher degree of financial risk
a. TRUE
b. FALSE
37. If a firm’s variable costs per unit increase, the firm’s operating breakeven point will
a. Decrease
b. Increase
c. Remain unchanged
d. Change in an undetermined direction
6
TO GET FULL CREDIT YOU MUST SHOW ME YOUR WORK ON ALL
PROBLEMS – just an answer will result in 0 points!!
Problem #1 (6 points)
Let’s pretend I am back in my Kraft Food days as a “young” Engineer. (young = quite a few years ago
the project I have been asked to resolve:
!). Here is
Replace an existing palletizer that has been in operation for 6 years. We paid $550,000 for the palletizer + 20%
more to install it. It is being depreciated using a 7 year-recovery period under MACRS. The new palletizer I am
looking at is state of the art but comes at a hefty cost of $725,000 + 20% to install it. Let’s presume President Trump’s
new tax plan is not in effect yet so we are still held to a 35% tax rate. Our Net Working Capital is expected to increase
by $20,000 due to pallet inventories which will naturally need to increase. A small business owner will pay us $90,000
for our older palletizer. What is the Initial investment we would need in order to make this capital project a reality?
Problem #2 (8 points)
A friend of mine is considering replacing a manual sheet metal press with a new automated one. His current
one was purchased 4 years ago at a cost of $75,000 & is being depreciated using a 5 year-recovery period under
MACRS. Their current press still has 5 years of useful life remaining. The new automated machine being considered
costs $95,000 + another $10,000 to install it & will be depreciated also using a 5 year-recovery period under MACRS.
He can sell the old one for $60,010 & is also still liable for a 35% tax rate because the tax plan is not law just yet. The
expected revenue & expenses for both the new & the existing press for the next 5 years is as follows: (Expenses exclude
depreciation & interest)
YEAR
1
2
3
4
5
EXISTING MANUAL PRESS
REVENUE
EXPENSES
$699,000
$685,000
$701,000
$685,000
$705,000
$685,000
$703,000
$685,000
$699,000
$685,000
NEW AUTOMATED PRESS
REVENUE
EXPENSES
$795,000
$745,000
$795,000
$745,000
$795,000
$745,000
$795,000
$745,000
$795,000
$745,000
1. Calculate the Initial investment necessary to purchase the new press
2. Determine the incremental operating cash inflows realized by the replacement (consider depreciation in year 6)
7
Problem #3 (11 points)
I am considering purchasing a new golf ball manufacturing machine. The total installed cost of this lovely
piece of equipment is $2.2 million. My existing machine cost me $1 million 10 years ago, currently has no book value
($0) & a competitor will pay me $1.2 million for it before taxes but I am subject to a 40% tax rate.
Because of this new piece of equipment, my annual sales for the next 5 years are expected to be $900,000
more than what I am currently making with my current equipment. Expenses (for the new equipment) will amount to
50% of that increased revenue. I will undergo no change in net working capital & will depreciate the new equipment
using a 5 year-recovery period under MACRS. My cost of capital is 11% & there is no terminal cash flow expected.
1. Determine my initial investment for the new equipment
2. Determine my Operating cash inflows for the new equipment (consider depreciation in year 6)
3. What’s my payback period?
4. What’s the NPV?
5. What’s the IRR? (to the nearest whole number)
Problem #4 (18 points)
OK – With all of this knowledge……& your degree – you have earned a position on the Board of Directors for my
company. First of all – Congratulations – Donald Trump (now President Trump) may fire you as an apprentice – but
not me.
Here is what we are faced with:
We believe there is a smart investment decision out there to expand our manufacturing facility by making an
initial investment of $80MM (That’s right – lots of zero’s $80,000,000). Our analysis has indicated there would be
$22,500,000 in Operating cash inflows in each of the first 5 years (We could build & sell lots of new widgets if we
expanded!!!!)
I need you to apply your FIN 305 & FIN 306 knowledge & start by:
• Determining our weighted average cost of capital (WACC)
• Find the IRR (It will be a whole number)
• Then make a recommendation to me as to whether we should ACCEPT this project or NOT
o (Our company’s criteria for ACCEPTING a project is meeting or exceeding an IRR of 14%.)
Here is what I can share with you:
1. Our target capital strategy is
a. 58% Long Term Debt
b. 17% Preferred Stock
c. 25% Common Stock Equity
2. Our tax rate is 28%
3. Common stock equity:
a. Our current share price is $40
b. Last dividend paid was $2.
c. Our growth rate has been & is expected to stay steady at 5%.
d. Our company’s risk (beta) has been rated at 0.65
e. The market return (Rm) is 13%
f. The risk free rate (Rf) has held steady at 8%
(Since we deliver a dividend, please AVERAGE the two equity costs (Gordon growth rate & CAPM) to
determine the AVERAGE cost of equity for our company)
4. Preferred stock
a. We deliver a fixed dividend of $2.22
b. Our net proceeds from sale would be $28 per share
5. Long term debt
a. Our bonds are delivering (we are paying out) a yield/return of 9.5% to our bondholders
8
Problem #5 (8 points)
You are considering two mutually exclusive projects & you want to use a risk adjusted rate (RADR) to help make
your decision. Here is what we know
1. Cost of capital (call this the market return (Rm) in CAPM) is 12%
2. Risk free rate (Rf) is 7%
Cash flows for each of your two projects are as follows
Initial investment
Project Bunker
$200,000
Inflows Year 1
Year 2
Year 3
Year 4
Risk factor (b)
$100,000
$ 75,000
$ 50,000
$100,000
0.8
Project Water hazard
$300,000
$ 22,000
$ 98,000
$200,000
$195,000
1.2
1. Use a risk adjusted interest rate (RADR) to calculate the NPV of each project
2. Which project will you go forward with?
Problem #6 (6 points)
Sartell Inc manufacturers FIN 306 widgets. I have a very labor-intensive process that uses many assets that are fully
depreciated. My fixed costs are relatively low (I run a small company) at $20,000 per year and my variable costs are
$16 per unit. The sales price for my widgets is $28 per widget.
a. What is the Operating Breakeven Point in units?
b. What is our operating profit (or loss) if we manufacture & sell:
i. 1,500 units per year
ii. 3,000 units per year
Problem #7 (6 points)
With my company’s financial data given above, (fixed costs @ $20,000, variable costs @ $16/unit and sale price @
$28/unit), if I sold 3,000 units in 2019 and expect to sell 3,300 units this year (2020) under those same financial costs.
a. Calculate the % change in my operating income and compare it with my % change in sales
b. Calculate the degree of Operating leverage (DOL) for:
i. 2019
ii. 2020
9
Extra Credit – 3 points
Thanks to your FIN 306 education – you have been able to make smart business decisions & now own a company
of your own!!! Your new company has the following information available to you for capital budgeting decision
making
Source of capital
Long term debt
Preferred stock
Common stock equity
Target market weights
20%
10%
70%
100%
DEBT – The firm can sell a 12 year, $1,000 par value, 7% coupon interest rate bond for $960
A flotation cost of 2% of the face value would be required in addition to the $40 discounted bond
price ($1,000-$960)
PREFERRED STOCK – Can be issued at $75 per share par value. It will pay a $10 annual
dividend. The cost of issuing & selling this stock would be $3 per share
COMMON STOCK:
• Currently selling for $18 per share.
• Dividend expected to be paid at the end of the next year (2018) is $1.74.
• Currently 2017 & dividends have been growing at a constant rate for the last 4 years & started
at $1.50.
• In selling this stock – flotation costs would amount to $1 per share from the current selling
price.
Your company’s tax rate is 40%
1. Find the cost for issuing new common stock
2. Find the cost of preferred stock
3. Find the WACC presuming you will have to issue new shares of common stock
10

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