Eton financial management final exam

1) Two projects are under consideration by the same company at the same time. Project Alpha has a NPV of $20 million and an estimated useful life of 10 years. Project Beta has a NPV of $12 million and also an estimated useful life of 10 years. What should the company’s decision be
a) if the project’s involve unrelated expansion decisions or
b) if the project’s are mutually exclusive because they would have to occupy the same space?

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2) You have just purchased a car from Friendly Sam. The selling price of the car is $6,500. If you pay $500 down, then your monthly payments are $317.22. The annual interest rate is 24%. How many payments must you make?

3) Project November requires an initial investment of $500,000. The present value of operating cash flows is $550,000. Project December requires an initial investment of $750,000. The present value of operating cash flows is $810,000.
a. Compute the profitability index for each project.
b. If the projects are mutually exclusive, does the profitability index rank them correctly?

4) You have borrowed $70,000 to buy a speed boat. You plan to make monthly payments over a 15- year period. The bank has offered you a 9% interest rate, compounded monthly. Create an amortization schedule for the first two months of the loan.

5) The ZYX Corporation is planning to request a line of credit from its bank and wants to estimate its cash needs for the month of September. The following sales forecasts have been made for 2005:
July $500,000
August $400,000
September $300,000
October $200,000
November $100,000
Collection estimates were obtained from the credit collection department as follows: 20% collected within the month of sale; 70% collected the first month following the sale; and 10% collected the second month following the sale. Payments for labor and raw materials are typically made in the month in which these costs are incurred. Total labor and raw material costs each month are 50% of sales. General administrative expenses are $30,000 per month, lease payments are $10,000 per
month, and depreciation charges are $20,000 per month. The corporation tax rate is 40%; however, no corporate taxes are paid in September. Prepare a cash budget for September.

1) The MAX Corporation is planning a $4 million expansion this year. The expansion can be financed by issuing either common stock or bonds. The new common stock can be sold for $60 per share. The bonds can be issued with a 12% coupon rate. The firm’s existing shares of preferred stock pay dividends of $2.00 per share. The company’s combined state and federal corporate income tax rate is 46%. The company’s balance sheet prior to expansion is as follows:
MAX Corporation
Current assets
Fixed assets
Total assets
Current liabilities
(8%, $1,000 par value)
(10%, $1,000 par value)
Preferred stock:
($100 par value)
Common stock:
($2 par value)
Retained earnings
Total liabilities and equity
a. Calculate the indifference level of EBIT between the two plans.
b. If EBIT is expected to be $3 million, which plan will result in higher EPS?

2) Goodwin Enterprises had a gross profit of $2,500,000 for the year. Operating expenses and interest expense incurred in that same year were $595,000 and $362,000, respectively. Goodwin had 200,000 shares of common stock and 180,000 shares of preferred stock outstanding. Management declared a $2.50 dividend per share on the common and a $1.50 dividend per share on the preferred. Securities purchased at a cost of $37,500 in a previous year were resold at a price of $50,500.
Compute the taxable income and the resulting tax liability for Goodwin Enterprises for the year.
Use the following tax rates:
Income Tax rate
$0-$50,000 15%
$50,001-$75,000 25%
$75,001-$100,000 34%
$100,001-$335,000 39%
Over $335,001 34%

3) Bull Gator Industries is considering a new assembly line costing $6,000,000. The assembly line will be fully depreciated by the simplified straight line method over its 5 year depreciable life. Operating costs of the new machine are expected to be $1,100,000 per year. The existing assembly line has 5 years remaining before it will be fully depreciated and has a book value of $3,000,000. If sold today the company would receive $2,400,000 for the existing machine. Annual operating costs on the existing machine are $2,100,000 per year. Bull Gator is in the 46 percent marginal tax bracket and has a required rate of return of 12 percent.
a. Calculate the net present value of replacing the existing machine.
b. Explain the impact on NPV of the following:
i. Required rate of return increases
ii. Operating costs of new machine are increased
iii. Existing machine sold for less

4) The treasurer for Brookdale Clothing must decide how much money the company needs to borrow in July. The balance sheet for June 30, 2004 is presented below:
Brookdale Clothing Balance Sheet
Cash $75,000 Accounts payable $400,000
Marketable securities 100,000 Long-term debt 300,000
Accounts receivable 300,000 Common stock 100,000
Inventory 250,000 Retained earnings 200,000
Total current assets 725,000 Total liabilities and
Fixed assets 275,000 stockholder’s equity $1,000,000
Total assets $1,000,000
The company expects sales of $250,000 for July. The company has observed that 25% of its sales is for cash and that the remaining 75% is collected in the following month. The company plans to purchase $400,000 of new clothing. Usually 40% of purchases is for cash and the remaining 60% of purchases is paid in the following month. Salaries are $100,000 per month, lease payments are $50,000 per month, and depreciation charges are $20,000 per month. The company plans to purchase a new building for $200,000 in July and sell its marketable securities for $100,000. If the company must maintain a minimum cash balance of $50,000, how much money must the company borrow in July?