Finance

FISV2000 – Finance Name_________________________
Take Home Practice Exam 2

For numbers 1-6, please match the situation with the following conditions:
A. Company with a high degree of Financial Leverage
B. Company with a low degree of Financial Leverage
C. Company with a high degree of Operating Leverage
D. Company with a low degree of Operating Leverage

1. This company tends to have more Fixed Assets _____

2. This company tends to have less Interest Expense _____

3. This company tends to have higher Wage Expense _____

4. This company tends to have much higher ROE in profitable years _____

5. This company doesn’t crash as badly in slow sales years _____ & _____

6. This company does really great in strong sales years _____ & _____

7. A company with a Degree of Operating Leverage (DOL) of 2.5 has an increase in sales of 10%. By how much will their Profits increase?
a. 10% c. 2.5%
b. 25% d. 4.0%

8. A company with a Degree of Financial Leverage (DFL) of 3.6 has an increase in sales of 10%. By how much will their Profits increase?
a. 10% c. 2.78%
b. 3.6% d. 36%

9. A company has a DOL of 2.5 and a DFL of 3.6. What is their Degree of Combined Leverage?
a. 2.5 c. 3.6
b. 6.1 d. 9.0

For numbers 10-14, tell me what you would do with each of the projects if your WACC is 12%:
A. Approve the project
B. Reject the project

10. An Opportunity Investment with an IRR of 12% _____

11. A Compulsory Investment with an IRR of 12% _____

12. A new product line offering an ROI of 10% _____

13. A new plant with a useful life of 20 years and an NPV of ($12,000) _____

14. A new plant with a cost of $1 million and a PI of 1.4 _____
“Maturity Matching” and Sources of Financing:
For questions 15-30 , use the following answer choices assuming standard maturity matching principles and typical loan terms.
a. Short-term Financing (less than 2 years) c. Long-term Financing (over 6 years)
b. Intermediate Financing (2-6 years) d. No financing – pay as you go

15. All things equal, this has a higher rate

16. I should use this to finance my inventory

17. This tends to make my day-to-day cash flows better

18. This causes cash flow and interest rate uncertainty

19. I should use this to finance my trips to my favorite restaurant

20. I should use this to finance my vehicles

21. I should use this to finance my home

22. I should use this if rates are projected to rise going forward

23. I should use this to finance my Safety stock of Cash and Inventory

24. Bonds are typically this

25. Stocks are considered this

26. Factoring is this

27. A Line of Credit is considered this

28. Trade Credit is considered this

29. I should use this to pay for Wages

30. I should use this to pay my cable bill

For questions 31-38, use the follow answer choices:
a. Common Stock d. All of the above
b. Preferred Stock e. None of the above
c. Bonds

31. Will get money first if the company goes bankrupt
32. Is likely to have a “Cumulative” feature
33. Are not considered part of Owner’s Equity
34. Comes with a promise to pay money regularly
35. Is the first to get dividends
36. Gets to vote and, thus, owns and controls the company and its earnings
37. Is the riskiest for the company
38. Is the riskiest for the investor
Questions 39-50 intentionally skipped.

Use the following info to compute this company’s WACC. All costs are before tax and the tax rate is 40%. Based on your work, answer Questions 51-60.

Source Amount Cost
Preferred Stock $50,000 8%
Mortgage $200,000 6%
Cash on Hand $40,000 12%
Common Stock $150,000 12%
Bank Loan $60,000 8%

51. What is the companies after-tax cost of Preferred Stock?
a. 8.0% c. 13.3%
b. 3.2% d. 4.8%

52. What is the companies after-tax cost of Mortgage?
a. 6.0% c. 10.0%
b. 2.4% d. 3.6%

53. What is the companies after-tax cost of Cash of Hand?
a. 12.0% c. 20.0%
b. 7.2% d. 4.8%

54. What is the companies after-tax cost of Bank Loan?
a. 8.0% c. 13.3%
b. 3.2% d. 4.8%

55. What is the weight of the Preferred Stock?
a. 10.0% c. 8.0%
b. 5.0% d. 50.0%

56. What is the weight of the Cash on Hand?
a. 40.0% c. 12.5%
b. 8.0% d. 12.0%

57. What is the weight of the Common Stock?
a. 3.0% c. 30.0%
b. 3.3% d. 12.0%

58. What is the weighted cost for Preferred?
a. 8.0% c. 10.0%
b. 0.8% d. 0.48%

59. What is the weighted cost for Common?
a. 3.60% c. 36.0%
b. 30.0% d. 2.16%
60. What is the WACC for this company?
a. 7.4% c. 8.7%
b. 5.2% d. 9.2%
Questions #61-65 are based on the following info. Your company in planning a major $3 million expansion so it initiates 2 stock issues: a Preferred Stock issue for $500,000 involving $20 shares with a $2.50 dividend and floatation costs of $5,000 and a Common Stock issue for $2,000,000 involving $40 shares with a $3 dividend and floatation costs of $100,000. Your company plans to get the remaining money from cash on hand. Your company’s recent growth rate has been 5% and your tax rate is 30%. Please solve on this paper and show your work so I can grant partial credit.

61. How many shares of Preferred were issued?
a. 500,000 c. 5,000
b. 25,000 d. 10,000,000

62. What is the cost of the Preferred Stock?
a. 17.6% c. 2.5%
b. 5.0% d. 12.6%

63. How many shares of Common were issued?
a. 50,000 c. 80,000,000
b. 2,000,000 d. 100,000

64. What is the cost of the Common Stock?
a. 7.9% c. 12.9%
b. 7.5% d. 12.5%

65. What is the cost of the Retained Earnings?
a. 7.9% c. 12.9%
b. 7.5% d. 12.5%

Short Answer:
What is Working Capital? Why is it important to manage WC well? Give me 3 tools or strategies I can use to obtain effective Working Capital Management.