ADM 2350 Final Exam Winter 2007 Version 1 Solns Revised For Booth
ADM 2350 Final Exam Winter 2007 Version 1 Solns Revised For Booth
ADM 2350 Final Exam Winter 2007 Version 1 Solns Revised For Booth
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a. $120
b. $49
c. $58
d. $32
e. $41
f. $90
g. None of the above.
Approximation Formula and Tabular Approach:
To the nearest whole percentage point, the YTM = 12%. Now find the coupon interest on a 5-year
bond with a YTM of 12% that sells for $775.92.
$775.92 = (I x PVIFA 12%,5)+ ($1,000 x PVIF 12%,5) = (I x 3.605) + ($1,000 x 0.567)
I = ($775.92 - $567)/3.605 = $208.92/3.605 = $57.95 or $58 to nearest dollar
Financial Calculator:
Set P/Y = C/Y = 1, N = 20, PV = - $775.92, PMT = $90, FV = $1,000 and CPT I/Y = 12.00%.
Set P/Y = C/Y = 1, N = 5, I/Y = 12%, PV = - $775.92, FV = $1,000 and CPT PMT = $57.84.
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ADM 2350 Name: ________________________________
April 20, 2007 Student ID#: ___________________________
126. The Dwindling Oil Company (DOC) expects to pay a $20 per share dividend for fiscal 2007 and fiscal
2008. Thereafter, dividends are expected to DECLINE by 5% per year. If investors require a 10% rate of
return, what is a fair market price per share to the nearest dollar for DOCs stock at the BEGINNING of
fiscal 2007.
a. $380
b. $320
c. $139
d. $350
e. $200
f. $400
g. None of the above.
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ADM 2350 Name: ________________________________
April 20, 2007 Student ID#: ___________________________
127. M&M, Inc., is considering the purchase of a new machine that will REDUCE manufacturing costs by
$20,000 annually BEFORE taxes. The new machine will be in CCA Class 8 with a CCA rate of 20%. The
firm expects to sell the machine immediately after the end of its 2-year life for $20,000. No new equipment
in the same CCA will be bought at that time. The firm must INCREASE net working capital by $15,000
when the machine is installed. However, this net working capital will be freed up at the end of the
machines economic life. The firm's marginal tax rate is 40% and it uses a 10% cost of capital to evaluate
projects of this nature. If the machine costs $40,000 what is the NPV of the project to the nearest hundred
dollars?
1a. $13,600 CCA Formula Method:
b. $12,000 Step 1: $20,000 x (1 - .4) x PVIFA
10%,2
= $20,826
c. $52,200 Step 2: [1.05/1.10][(0.4)(0.2)($40,000)/(0.1+0.2)] = $10,182
d. $51,100 Step 3: $20,000/1.1
2
= $16,529
e. $1,000 Step 4: - [1/1.1
2
][(0.4)(0.2)($20,000)/(0.1+0.2)] = - $4,408
f. $500 Step 5: $15,000/1.1
2
= $12,397
g. None of the above. Step 6: - $40,000 - $15,000 = - $55,000
NPV = $526
Note: Steps 2 and 4 above correspond to Steps 2A and 2B in the Ch. 14 PowerPoints used for the current Booth
text. Hence, Steps 5 and 6 above correspond to Steps 4 and 5 of the current text
Cash Flow Analysis Method:
Intermediate
Outputs
Net installed cost $40,000
Salvage, t=n $20,000
Year 0 1 2
Starting UCC $0 $40,000 $36,000
CCA $0 $4,000 $7,200
Ending UCC $0 $36,000 $28,800
Revenues $0 $0 $0
Operating costs $0 -$20,000 -$20,000
Net revenues $0 $20,000 $20,000
Cash-Flow
Outputs
Year 0 1 2
Net installed cost $40,000 $0 $0
A-T net revenues $0 $12,000 $12,000
CCA tax shield tn $0 $1,600 $2,880
NWC $15,000 $0 -$15,000
Salvage, t=n $0 $0 $20,000
PV tax shield t>n $0 $0 $2,347
Net cash flow -$55,000 $13,600 $52,227
Net present value $526
Approx. IRR 10.59%
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ADM 2350 Name: ________________________________
April 20, 2007 Student ID#: ___________________________
128. Consider the following information developed from Beta Inc.s financial statements for the year 2006.
Average inventory = $20 million
Average accounts receivable = $21 million
Average accounts payable = $20 million
Annual credit sales = $273.75 million
Cost of sales = $182.5 million
What were the companys operating and cash conversion cycles in 2006?
a. 68 days, 28 days
b. 68 days, 40 days
c. 40 days, 28 days
d. 28 days, 40 days
e. 28 days, 68 days
f. 40 days, 68 days
g. None of the above.
Inventory conversion period = (Average inventory/Cost of goods sold) x 365 days =
($20M/$182.5M) x 365 days = 40 days
Receivables conversion period = (Average accounts receivable/Annual credit sales) x 365 days =
($21M/$273.75M) x 365 days = 28 days
Operating cycle = Inventory conversion period + Receivables conversion period = 40 days + 28 days = 68 days
Payables deferral period = (Average accounts payable/Cost of goods sold) x 365 days =
($20M/$182.5M) x 365 days = 40 days
Cash conversion cycle = Operating cycle Payables deferral period = 68 days 40 days = 28 days
14
ADM 2350 Name: ________________________________
April 20, 2007 Student ID#: ___________________________
129. A firm's payments policy is to stretch payments to its supplier who sells on terms of 2/10, net 30.
Payment is made in 60 days and the cash saved is invested in a money market mutual fund paying 12%
interest. This policy is because the firm has a net to the nearest whole percentage point.
HINT: Use the APR formula below to find the approximate cost of trade credit:
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