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FIN 365 Business Finance

FIN 365 Business Finance. Review Exam 4 Larry Schrenk, Instructor. Questions 1-5. How should you incorporate sunk costs in evaluating a project? (5 points ) Are interest payments on debt included in the cash flows of a project? Explain briefly. (5 points )

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FIN 365 Business Finance

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  1. FIN 365 Business Finance Review Exam 4 Larry Schrenk, Instructor

  2. Questions 1-5 • How should you incorporate sunk costs in evaluating a project? (5 points) • Are interest payments on debt included in the cash flows of a project? Explain briefly. (5 points) • What is the ‘Pecking Order’ theory of raising capital? (5 points) • What do Miller and Modigliani say about dividend policy? Explain briefly. (5 points) • What would be the effect on a firm’s WACC if the corporate income tax were decreased? Explain briefly. (5 points)

  3. Questions 6-10 • What effect does financial distress have on a firm’s capital structure? (5 points) • Why does a project need working capital?(5 points) • If a firm used the discounted payback rule and set the payback period to include all the project’s cash flows, would this be an acceptable decision rule? Explain briefly. (5 points) • What problem might result in calculating IRR when the cash flows have multiple sign changes? (5 points) • If a firm used its WACC as a discount rate for projects that were less risky than the firm itself, would it… i) Correctly evaluate all projects, ii) Accept bad projects, iii) Reject good projects, or iv) Accept bad projects and reject good projects? Explain briefly. (5 points)

  4. Question 11 • Find the NPV. (10 points)

  5. Question 12 • Find the IRR. (10 points)

  6. Question 13 • Find the MIRR. (10 points)

  7. Question 14 • What is the WACC for the following firm (which has not issued preferred shares)? (10 points)

  8. Question 14

  9. Question 15 • Find the changes in working capital for a project that requires an initial working capital of $3,000 and must maintain working capital at 8% of sales. The project ends in year 3, so include the release of all working capital in the final year. (10 points)

  10. Question 16 • GHI Industries has net income of $3,700,000, and it has 1,285,000 shares of common stock outstanding. The company's stock currently trades at $40 a share. GHI is considering a plan in which it will use available cash to repurchase 10% of its shares in the open market. The repurchase is expected to have no effect on net income or the company's P/E ratio. What will be its stock price following the stock repurchase? (10 points) New Share Price = P/E Ratio x Earnings per Share = P/E Ratio x (Net Income/Shares) Note: P/E Ratio and Net Income do not change → Only shares change. P/E Ratio = Price per Share/Earnings per Share = 40/(3,700,000/1,285,000) = 40/2.88 = 13.89 Net Income = 3,700,000 New Shares = .90 x 1,285,000 = 1,156,500 New Share Price = 13.89 x (3,700,000/1,156,500) = $44.44

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