Hello I am requesting an expert to do an online exam for me at 8:30am-11:00am PDT. Here is the exam review sheet. The exam is said to be 2 hours and 30 minutes.
BUSI125 Final Exam Review Solution Scenario Analysis (Chap 11) Miller Mfg. is analyzing a proposed project. The company expects to sell 8,000 units. The expected variable cost per unit is $11 and the expected fixed costs are $290,000. The depreciation expense is $68,000. The tax rate is 32 percent. The sales price is estimated at $64 a unit. The estimates on FC, VC, P, and Q are within +/- 4 percent. What is the operating cash flow under the best case scenario? A. What is the operating cash flow under the best case scenario? Solution: OCFbest case = [(64 × 1.04 - 11 × 0.96) × (8,000 × 1.04) – (290,000 × 0.96)] (1 - 0.32) + (68,000 × 0.32) = $149,274 B. How sensitive is OCF to sales volume at the best case? Solution: Since OCF is a linear function of Q, the sensitivity is just the coefficient. (P-VC)(1-T) = (64× 1.04 - 11 × 0.96)(1-32%) = 38.08 The sensitivity analysis shows that when sales volume increases 1 unit, OCF increases $38.08. Degree of Operating Leverage (Chap 11) Steele Insulators is analyzing a new type of insulation for interior walls. Management has compiled the following information to determine whether or not this new insulation should be manufactured. The insulation project has an initial fixed asset requirement of $1.3 million, which would be depreciated straight-line to zero over the 12-year life of the project. Projected fixed costs are $769,000 and the anticipated annual operating cash flow is $241,000. What is the degree of operating leverage for this project? Solution: DOL = 1 + FC/ OCF = 1 + (769,000/241,000) = 4.19 Break-Even Analysis (Chap 11) The Country Road Industries is evaluating a new product line that has a twelve-year life. The initial capital expenditure is $52,311,900. At the end of the 12th year, the company expects that it can sell the product line to an emerging market firm a price of $1 million. Assume that depreciation is straight-line to zero over the life of the project. The initial net working capital investment will be $2 million, which will be recouped at the end of the project. Price per unit is $41, variable cost per unit is $20, and fixed costs are $71,870,800 per year. The Country Road Industries’ after-tax value-weighted cost of capital is 3.02%. Because the new product line is considered to have lower risk than the overall firm, the management decides to apply for a -0.5% adjustment factor to WACC as its required rate of return. 1. 2. 2.1. How much sales volume (in integral units) can make the project financial break-even (ignore tax)? Solution: Discount rate for the project’s cash flow: 3.02%-0.5% = 2.52% After-tax salvage value = 1,000,000 - 1,000,000(0%) = $1,000,000 PV of CAPEX = 52,311,900 -1,000,000 / (1+2.52%)^12 = $51,570,083.01 PV of ΔNWC = 2,000,000 – 2,000,000 / (1+2.52%)^12 = $516,365.84 At the financial break-even, NPV = 0. PV of OCF = PV of CAPEX + PV of ΔNWC = 51, 570,083.01 + 516,365.84 = $52,086,448.85 PV = -52,086,448.85, N = 12, I/Y = 2.52%, CPT PMT = $5,083,909.20 Q(Fin BE) = (FC + OCF(NPV = 0))/(P – V) = (71,870,800 + 5,083,909.20)/(41-20) = 3,664,509.96 ~ 3,664,510 (units) When sales volume reaches 3,664,510 units, the project can achieve financial break-even. WACC (Chap 14) Consider the following information for Evenflow Power Co., · Debt: 5,500 7.5 percent coupon bonds outstanding, $1,000 par value, 21 years to maturity, selling for 105 percent of par; the bonds make semiannual payments. · Common stock: 110,000 shares outstanding, selling for $58 per share; the beta is 1.07. · Preferred stock: 19,000 shares of 6 percent preferred stock outstanding, currently selling for $106 per share. · Market: 9 percent market risk premium and 6 percent risk-free rate. Assume the company's tax rate is 34 percent. What is its cost of capital? Solution: MVD = 5,500(1,000)(1.05) = $5,775,000 MVE = 110,000(58) = $6,380,000 MVP = 19,000(106) = $2,014,000 V = 5,775,000 + 6,380,000 + 2,014,000 = $14,169,000 WD = MVD/ V = 5,775,000 / 14,169,000 = 40.76% WE = MVE/ V = 6,380,000 / 14,169,000 = 45.03% WP = MVP/ V = 2,014,000 / 14,169,000 = 14.21% To calculate the cost of each type of capital, we have RE = 0.06 + 1.07(0.09) = 15.63% For debt, we have FV = 1,000; PV = -1,050; PMT = 37.5; N = 42; CPT I/Y = 3.52 RD = YTM = 3.52% × 2 = 7.04% For preferred stock, we have RP = 6/106 = 5.66% WACC = WD×RD×(1-T) + WE×RE + WP×RP = 40.76%(7.04%)(1-34%) + 45.03%(15.63%) + 14.21%(5.66%) = 1.89% + 7.04% + 0.80% = 9.73% WACC (Chap 16) Bruce & Co. expects its EBIT to be $100,000 every year forever. The firm can borrow at 11 percent. Bruce currently has no debt, and its cost of equity is 18 percent. The tax rate is 31 percent. Bruce will borrow $61,000 and use the proceeds to repurchase shares. What will the WACC be after recapitalization? Solution: VU = $100,000(1 - 0.31)/0.18 = $383,333.33 VL = $383,333.33 + 0.31($61,000) = $402,243.33 RE = 0.18 + (0.18 - 0.11)($61,000/($402,243.33 - $61,000))(1 - 0.31) = 0.1886 WACC = 0.1886(402,243.33 - 61,000)/402,243.33 + 0.11(61,000/402,243.33) (1 - 0.31) = 17.15% Break-Even EBIT (Chap 16) Kelso Electric is debating between a leveraged and an unleveraged capital structure. The all equity capital structure would consist of 40,000 shares of stock. The debt and equity option would consist of 25,000 shares of stock plus $280,000 of debt with an interest rate of 7 percent. What is the break-even level of earnings before interest and taxes between these two options? Ignore taxes. Solution: EBIT/40,000 = [EBIT - ($280,000 × 0.07)]/25,000 EBIT = $52,267 Large Stock Dividend (Chap 17) The Tanning Bed has 10,000 shares of stock outstanding with a par value of $1 per share and a market value of $8 per share. The balance sheet shows $10,000 in the common stock account, $60,000 in the capital in excess of par account, and $94,300 in the retained earnings account. The firm just announced a 100 percent stock dividend. How the equity accounts will change after the stock dividend? Solution: Common Stock account increases. CS = 10,000 + 10,000*1 = $20,000 Paid-in-surplus account does not change. PIS = $60,000 Retained Earnings account decreases. RE = 94,300 – 10,000*1 = $84,300 Total Equity account does not change. TE = 10,000+60,000+94,300 = $164,300 Small Stock Dividend (Chap 17) Southern Fried Chicken has 8,000 shares of stock outstanding with a par value of $1 per share and a market value of $34 per share. The balance sheet shows $45,000 in the capital in excess of par account, $8,000 in the common stock account, and $152,000 in the retained earnings account. The firm just announced a 5 percent stock dividend. How the equity accounts will change after the stock dividend? Solution: Common Stock account increases. CS = 8,000(1) + 8,000(5%)(1) = $8,400 Paid-in-surplus account increases. PIS = 45,000 + 8,000(5%)(34-1) = $58,200 Retained Earnings account decreases. RE = 152,000 – 8,000(5%)(34) = $138,400 Total Equity account does not change. TE = 8,000 + 45,000 + 152,000 = $205,000 Long-term Financial Planning (Chap 4) The most recent financial statements for Dockett, Inc., are shown here (assuming no income taxes): Assets and costs are proportional to sales. Current liability of $4,000 also changes with sales. The rest of Debt and equity do not. $819 dividends were just paid. Next year’s sales are projected to be $8,449. A. What is the EFN if the company keeps the current dividend payout ratio? Solution: ΔSales% = 8,449/7,100 – 1 = 19% ΔTA = 21,900(19%) = $4,161 ΔCL = 4,000(19%) = $760 ΔRE = 2,730(1+19%)(1-819/2,730) = $2,274 EFN = ΔTA - ΔCL – ΔRE = 4,161 – 760 – 2,274 = $1,127 B. If the firm is open to change dividend policy, is it possible to support sales growth without EFN? Solution: Using the same formula as the last question, EFN = ΔTA - ΔCL – ΔRE = 0 ΔRE = ΔTA – ΔCL = 4,161 – 760 = $3,401 ΔRE = 2,730(1+19%)(1-Div%) So, Div% = -4.69%, which means that it is impossible to support sales growth without EFN. C. If the fixed assets ($18,000) are running at 90% capacity, how much is the dividend payout ratio if the company keeps the current capital structure? Suppose the firm does not raise new equity. Solution: Maximum sales growth rate supported by existing FA = 1/90% - 1 = 11% < 19% therefore, the firm needs to invest in new fa. pro forma fa = 18,000(1+19%)/(1+11%) = $19,297.30 pro forma ta = pro forma ca + pro forma fa = (21,900-18,000)(1+19%) + 19,297.30 = $23,938.30 d/e = 9,400 / 12,500 = 0.752 pro forma te = (1/1.752)*23,938.30 = $13,663.41 δte = 13,663.41 – 12,500 = $1,163.41 since δte = 2,730(1+19%)(1-div%) div% = 1 – 1,163.41/[2,730(1+19%)] = 64.19%. cash budget (chap 18) here are some important figures from the budget of nashville nougats, inc., for the second quarter of 2013: the company predicts that 3 percent of its credit sales will never be collected, 36 percent of its sales will be collected in the month of sale, and the remaining 61 percent will be collected in the following month. credit purchases will be paid in the month following the purchase. in march 2013, credit sales were $302,400, and credit purchases were $224,640. the april 1 cash balance was $403,200. what is the cash balance at the end of may? solution: in apr: cash inflow from sales = (0.61)302 19%="" therefore,="" the="" firm="" needs="" to="" invest="" in="" new="" fa.="" pro="" forma="" fa="18,000(1+19%)/(1+11%)" =="" $19,297.30="" pro="" forma="" ta="pro" forma="" ca="" +="" pro="" forma="" fa="(21,900-18,000)(1+19%)" +="" 19,297.30="$23,938.30" d/e="9,400" 12,500="0.752" pro="" forma="" te="(1/1.752)*23,938.30" =="" $13,663.41="" δte="13,663.41" –="" 12,500="$1,163.41" since="" δte="2,730(1+19%)(1-Div%)" div%="1" –="" 1,163.41/[2,730(1+19%)]="64.19%." cash="" budget="" (chap="" 18)="" here="" are="" some="" important="" figures="" from="" the="" budget="" of="" nashville="" nougats,="" inc.,="" for="" the="" second="" quarter="" of="" 2013:="" the="" company="" predicts="" that="" 3="" percent="" of="" its="" credit="" sales="" will="" never="" be="" collected,="" 36="" percent="" of="" its="" sales="" will="" be="" collected="" in="" the="" month="" of="" sale,="" and="" the="" remaining="" 61="" percent="" will="" be="" collected="" in="" the="" following="" month.="" credit="" purchases="" will="" be="" paid="" in="" the="" month="" following="" the="" purchase.="" in="" march="" 2013,="" credit="" sales="" were="" $302,400,="" and="" credit="" purchases="" were="" $224,640.="" the="" april="" 1="" cash="" balance="" was="" $403,200.="" what="" is="" the="" cash="" balance="" at="" the="" end="" of="" may?="" solution:="" in="" apr:="" cash="" inflow="" from="" sales="">