Financial Accounting FIle is attached

GMBA 661 Financial Management – Hauser

Spring 2020

Final Exam

ONLINE

Name___________________________________

Instructions:

1. Write your answer to each question.

2. For the short answer, your answer will be graded based on the quality of your answer not the quantity.

3. For the problems that require a numerical answer, show your work for possible partial credit. Be sure to clearly mark your final answer. Your answers should be given to two decimal places (e.g. $147.38, 18.55 or 12.67%), unless the problem specifically asks for greater accuracy.

4. The exam totals 100 points. The value of each question is shown next to the question.

5. Upload your completed exam to the dropbox on Blackboard.

Good luck!!!

(20 points) Weighted Average Cost of Capital

The target capital structure of the Tysseland Company consists of $30 million in debt and $30 million in common equity. During the year, the company plans to raise and invest $10 million in new projects.

New bonds will have a 7% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The next expected annual dividend is $1.20, and the annual growth rate in dividends of 8% is expected to continue forever. The marginal corporate tax rate is 30%.

Assuming there is sufficient cash flow such that Tysseland can maintain its target capital structure without issuing additional shares of equity, what is its

After -tax cost of debt?
Cost of equity?
WACC?
Now assume that Tysseland issues new shares and floatation costs are 10%. What is the new WACC?

(20 points) Capital Budgeting

The Campbell Company is evaluating the acquisition of a new food machine. The base price of the equipment is $108,000 and it would cost another $12,500 for shipping and installation. The Campbell Company also paid $10,000 to an engineering firm to determine the feasibility of the new food machine. The machine falls in the MACRS 3 year class and would be sold after 4 years for $25,000. The new food line would require an increase in inventory of $5,500, which would be recovered at the end of the project. The machine is expected to generate an extra $44,000 per year in revenues, but have no effect on operating costs. Campbell’s WACC is 10% and its marginal tax rate is 34%.

MACRS 3 year class Depreciation Schedule: Year 1, 33.3%; Year 2, 44.5%; Year 3, 14.8%; Year 4, 7.4%

What is the project’s initial expense (Year 0 Cash Flow)?
What is the project’s Operating Cash Flow (OCF) in Year 2?
What is the project’s Free Cash Flow (or Cash Flow from the Assets) in Year 3?
What is the project’s NPV?

(20 points) Change in Capital Structure

Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying a rate 6%, and its stock price is $40 per share with 2 million shares outstanding. BEA is a zero growth firm and pays out all of its earnings as dividends. The firm’s EBIT is $12.401 million, and it faces a 30% federal-plus-state tax rate. The market risk premium is 5%, and the risk-free rate is 4%. BEA is considering increasing its debt level to a capital structure with 50% debt, based on market values, and repurchasing shares with the extra money that it borrows. BEA will have to retire the old debt in order to issue new debt, and the rate on the new debt will be 10%. BEA has a current beta of 1.1.

What is the current WACC?
What is BEA’s unlevered beta?
What are BEA’s new beta after releveraging and cost of equity if it has 50% debt?
What is BEA’s WACC after releveraging to 50% debt?
What is the value of the firm with 50% debt, assuming zero growth?
Should BEA change its capital structure?

(20 points) Stock Repurchase

Bayani Bakery’s most recent FCF was $48 million; the FCF is expected to grow at a constant rate of 6%. The firm’s WACC is 11% and it has 15 million shares of common stock outstanding. The firm has $30 million in short-term investments, which it plans to liquidate and distribute to common shareholders via a stock repurchase; the firm has no other non-operating assets. It has $366 million in debt and $60 million in preferred stock.

What is the value of operations?
Immediately prior to the repurchase, what is the intrinsic value of equity?
Immediately prior to the repurchase, what is the intrinsic stock price?
How many shares will be repurchased, assuming the use of all short-term investments?
What is the intrinsic stock price after the repurchase?

(20 points) Working Capital Management (Trade Credit)

A very large retailer obtains merchandise from its supplier under the credit terms 1/15, Net 45, but routinely takes 365 days to pay its bills. Given that the very large retailer is an important customer, the supplier allows the firm to stretch its credit terms.

What is the effective cost of trade credit under the contract terms? (Assume the large retailer does not take the discount.)
What is the effective cost of trade credit given the actual payment date?
Does the large retailer have a relatively large or relatively small accounts payable balance if it routinely takes 365 days to pay its bills? Why?
If the large retailer routinely takes 365 days to pay its bills, what happens to the large retailer’s cash conversion cycle?