Homework answers / question archive / Final Exam: Spring 2021 Finance 436 Problem 1 The Widget Company’s most recent financial data are as follows: Price Per Widget = $30 Fixed Cost = $30M Variable Cost Per Widget = $15 EBIT = $30M A) How many widgets did Widget Company produce and sell in the most recent period? B) What is the firm’s break-even production rate? C) Due to a downturn in the demand for widgets, Widget Company is considering reducing the scale of its manufacturing operations as well as reducing the price per widget, with the following projected results: Price per widget = $25 Fixed Cost = $20M Variable Cost Per Widget = $10 Will these changes increase or decrease the Company’s break-even point? 1 Final Exam: Spring 2021 Finance 436 Problem 2 The Flim-Flam Corporation has attracted a loyal clientele of investors

Final Exam: Spring 2021 Finance 436 Problem 1 The Widget Company’s most recent financial data are as follows: Price Per Widget = $30 Fixed Cost = $30M Variable Cost Per Widget = $15 EBIT = $30M A) How many widgets did Widget Company produce and sell in the most recent period? B) What is the firm’s break-even production rate? C) Due to a downturn in the demand for widgets, Widget Company is considering reducing the scale of its manufacturing operations as well as reducing the price per widget, with the following projected results: Price per widget = $25 Fixed Cost = $20M Variable Cost Per Widget = $10 Will these changes increase or decrease the Company’s break-even point? 1 Final Exam: Spring 2021 Finance 436 Problem 2 The Flim-Flam Corporation has attracted a loyal clientele of investors

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Final Exam: Spring 2021 Finance 436 Problem 1 The Widget Company’s most recent financial data are as follows: Price Per Widget = $30 Fixed Cost = $30M Variable Cost Per Widget = $15 EBIT = $30M A) How many widgets did Widget Company produce and sell in the most recent period? B) What is the firm’s break-even production rate? C) Due to a downturn in the demand for widgets, Widget Company is considering reducing the scale of its manufacturing operations as well as reducing the price per widget, with the following projected results: Price per widget = $25 Fixed Cost = $20M Variable Cost Per Widget = $10 Will these changes increase or decrease the Company’s break-even point? 1 Final Exam: Spring 2021 Finance 436 Problem 2 The Flim-Flam Corporation has attracted a loyal clientele of investors. These investors particularly appreciate the firm’s commitment to a minimum dividend payout ratio of 25%. Next year, the firm expects the following results: Net Income = $20M Proposed Capital Projects: Project A: Hurdle Rate: 10%; IRR = 20%; Cost $20M Project B: Hurdle Rate: 15%; IRR = 12%; Cost = $8M Project C: Hurdle Rate: 14%; IRR = 10%; Cost = $7M The corporation is committed to maintain its capital structure of 50% equity and 50% debt. A) Will Flim-Flam accomplish its dual objectives of maintaining its targeted capital structure and its targeted minimum dividend payout ratio? B) If so, will Flim-Flam be able to pay dividends in excess of 25%, if it chooses to do so? What would be the resultant dividend payout ratio? C) Assume that the firm identifies an additional capital project, with a cost of $30 million. Assume that the IRR of the project exceeds its hurdle rate. If the firm wishes to maintain its dividend payout ratio of 25%, how will the firm finance the incremental $30 million capital commitment? 2 Final Exam: Spring 2021 Finance 436 Problem 3 The Fromage Corporation is a levered firm. Its financial position is as follows: Value of Levered Firm = $100M Value of Debt = $50M Cost of Debt = 5% Tax Rate = 20% A) What is the implied value of the unlevered firm? B) What is the intrinsic value of the equity of the levered firm? C) Assume that cost of equity for the levered firm has been estimated to be 14%. What is the WACC for the levered firm? D) What is the cost of equity of the unlevered firm, assuming that Hamada’s precepts and equations are applicable? E) What is the WACC for the unlevered firm? 3 Final Exam: Spring 2021 Finance 436 Problem 4 The Wham-O Company is assessing its short-term cash requirements. Wham-O Co envisions spending heavily on capital investments over the next two years, and believes that the mix of capital expenditures will result in the following MACRS depreciation rates. Year 1 2 3 4 5 Depreciation Expense (% of Capital Expenditure) 20 30 25 15 10 Assume that, in year 1, the firm invests $20M. Assume that, in year 2, the firm invests $10M more. A) Complete the following table, for the two year cap expenditure program: Year 1 2 3 4 5 6 Depreciation Expense ($ millions) - B) What will be the incremental after-tax cash impact of these depreciation expenses? Complete the following table, for the firm, assuming a tax rate of 40%: Year 1 2 3 4 5 6 After-Tax Cash Impact of Depreciation Expense ($ millions) 4 Final Exam: Spring 2021 Finance 436 Problem 5 The BoCo is considering entering a new business. Because of its unfamiliarity with the new business, BoCo wants to ensure that it has adequate inventory, on hand, prior to the next selling year. The firm forecasts the following net product sales. Year 1 2 3 4 5 Revenue ($ millions) 50 100 180 260 320 A) Assume that COGS are projected to be 20%. Please compute the projected balance sheet amounts of required inventory, assuming that BoCo requires 9 months of on-hand inventory, at the commencement of the next year. (360 day year) Year 0 1 2 3 4 Inventory ($ millions) - B) Using the results from the prior question, please compute the year over year free cash flow requirements for inventory for the following periods. Year 0 1 2 3 4 Inventory ($ millions) - 5 Final Exam: Spring 2021 Finance 436 Problem 6 Hamada Inc. an established firm, has over many years added successive levels of debt. The firm feels that it is now excessively levered. As such, it has determined to use the cash on its balance sheet to expunge all of its debt. Its current financial position is as follows: Beta of Currently Levered Firm = 2.0 Market Value Equity = $10M Market Value Debt = $10M Cost of Debt = 10% Tax Rate = 40% Marketplace inputs include: Risk-Free Rate = 2% Market Risk Premium = 8% A) What is the firm’s current cost of equity? B) What is the firm’s current WACC? C) Based on the current circumstances, what is the implied beta of the unlevered firm? D) Given the foregoing result, what would be the cost of equity in the unlevered firm? 6 Final Exam: Spring 2021 Finance 436 Problem 7 The Ponzi Corporation has decided to acquire a new computing platform. PoCo can either lease the equipment, or borrow from a bank to purchase the equipment. The quote to lease the equipment is summarized as follows: • • • • Annual lease payment of $4M, paid at the beginning of the calendar year. Lease term of three calendar years. Lease is considered an operating lease. Tax rate of 40%. A) Please construct a spread sheet, to evaluate the net present cost of this option. The last line, or row, should be the annual after-tax cash flow of this option. Identify the line item in each row. Fill in each cell with a number, where appropriate. Year Row After-Tax Cash Flow 0 1 2 3 Note: You do not need to compute the overall net present cost of this option B) • • • The quote that PoCo has received from the Madoff Bank for a loan is as follows: Loan of $10M, collateralized by the computing equipment Interest rate of 10% Loan repaid at the end of three years, as a lump sum Additionally, PoCo has determined that tax depreciation would be as follows: Year 1 2 3 Percentage 30 40 30 The equipment is estimated to have a residual value of $2M at the end of three year period. 7 Final Exam: Spring 2021 Finance 436 Please construct a spread sheet, to evaluate the net present cost of the ‘purchase’ option. The last line, or row, to your spreadsheet should reflect the after-tax cash flow of this option. Identify the line item in each row. Fill in each cell with a number, where appropriate. Row After-Tax Cash Flow 0 1 Year 2 3 4 Note: As with the prior question, you do not need to compute the overall net present cost of this option. 8 Final Exam: Spring 2021 Finance 436 Problem 8 Mr. Skitters asks his assistant Luigi to create ‘baseline’ performance data for his specialty chemical business. He tasks Luigi with developing metrics for the business’ cash conversion cycle. Luigi obtains the following information for the business’ most recently completed fiscal year: Revenue = $720M Cost of Goods Sold = $120M From the most recent balance sheet, Luigi obtains the following data: Inventory = $240M Accounts Receivable = $180M Accounts Payable = $20M Mr. Skitters instructs Luigi to compute the following performance metrics, assuming a 360 calendar day year: A) What is the inventory conversion period for the business? B) What is the receivables collection period? C) What is the accounts payable deferral period? D) What is the overall duration of the overall cash conversion cycle? 9