FIN 610 – Final Exam

 

1. The risk-free rate of return is 4% and the market risk premium is 8%. What is the expected rate of return on a stock with a beta of 1.28?

 A. 9.12%

 B. 10.24%

C. 13.12%

 D. 14.24% 

E. 15.36%

 

Solution:  Calculation of Expected rate of return of Common equity (Using CAPM)

 

Formula 

r = Rf + β (Rm- Rf)

Where as

Rf = 0.04 

Rm – Rf =0.08

β = 1.28

r = 0.04+ 1.28 (0.08)

r = 0.1424

Hence the Expected rate of return is 14.24%

2. The stock of Big Joe’s has a beta of 1.14 and an expected return of 11.6%. The risk-free rate of return is 4%. What is the expected return on the market? 

A. 7.60% 

B. 8.04%

C. 9.33%

D. 10.67%

E. 12.16%

 

Solution:  Calculation of expected return on the market (Using CAPM)

 

Formula 

r = Rf + β (Rm- Rf)

Where as

Rf = 0.04 

Rm =

β = 1.14

r = 0.116

0.116 = 0.04+ 1.14 (Rm-0.04)

0.116 = 0.04+ 1.14Rm-0.0456

0.1216 = 1.14Rm

Rm = 0.1216/1.14 

Rm = 0.10667

Hence the expected return on the market is 0.10667 or 10.67%

3. You have a $1,000 portfolio, which is invested in stocks A and B plus a risk-free asset. $400 is invested in stock A. Stock A has a beta of 1.3 and stock B has a beta of .7. How much needs to be invested in stock B if you want a portfolio beta of .90? 

A. $0

B. $268 

C. $482 

D. $543 

E. $600

 

Solution: – Computation of the Beta of B stock

Given information 

Total investment = $1000

Stock A = $400

Beta A = 1.3

Beta B = 0.7

Port folio Beta = 0.90

Port folio Beta = (400/1000)*1.30 + (x/1000)*0.7

0.90 = (400/1000)*1.30 + (x/1000)*0.7

0.90 = (0.40)*1.30 + (x/1000)*0.7

0.90 = 0.52 + (x/1000)*0.7

0.542857 = (x/1000)

 

x = 0.542857*1000

 

x = 543

 

Hence B Stock total investment is $543

 

Starr Knight Corporation’s Balance Sheet and Income Statement as shown below:

 

 

4. StarrKnight Corporation’s accounts payable turnover for 2008 is (use average payables)

______. 

A. 7.75

 B. 7.96 

C. 8.94 

D. 9.02 

E. 10.39

 

Solution: Computation of the Account payable turnover for 2008

Account payable RatioCost of Goods Sold

Avg Account Payable

Where as

Cost of Goods Sold $                     75,586 

Avg Account Payable $                       8,383 

 

Account payable Ratio $                     75,586 

$                       8,383 

 

Account payable Ratio                             9.02 

 

Hence the Account payable turnover for 2008

 

5. StarrKnight Corporation’s accounts receivable turnover ratio for 2008 is (use average accounts receivable) _______. 

A. 2.88 

B. 15.43

C. 21.35 

D. 29.53 

E. 34.58

 

Solution: Computation of the Account Receivable turnover for 2008

 

Account Receivable RatioSales

Avg Account Receivable

Where as

Sales $                  113,260 

Avg Account Receivable $                       5,306 

 

Account Receivable Ratio $                  113,260 

$                       5,306 

 

Account Receivable Ratio                          21.35 

 

 

Hence the Account Receivable turnover for 2008

 

6. The inventory turnover for the Lambkin Company was 8 times and its days’ sales in receivables were 55. The average payables deferral period (or turnover) was 7.5. What is the cash cycle for Lambkin given a 365-day year?

A. 51.96 days 

B. 58.04 days 

C. 115.00 days 

D. 149.29 days 

E. 164.37 days

 

Solution: Computation of the Cash Cycle

 

Formula as:

 

Cash Conversion Cycle = Days inventory outstanding + Days Sales outstanding – Days Payable outstanding

 

Cash Conversion Cycle = 365/8+ 55- 365/7.5

 

Cash Conversion Cycle = 45.625+ 55- 48.66667

Cash Conversion Cycle = 51.96

Hence the Cash Conversion Cycle is 51.96 Days

 

7. In a typical month, the Jeremy Corporation receives 80 checks totaling $156,000. There are delayed four days on average. What is the average daily float?

A. $22,286 

B. $20,800

 C. $18,000 

D. $20,129 

E. 19,899

 

Solution: Computation of the Average Daily Float

 

If total collection for a month is 156000, then it will be 156000/30*4 =20800

 

 

 

 

 

 

 

8. As of the beginning of the quarter, you have a cash balance of $250. During the quarter, you

pay your suppliers $310. Your accounts receivable collections are $420. You also pay an interest payment of $30 and a tax bill of $180. In addition, you borrow $75. What is your cash balance at the end of the quarter? 

A. $225

B. $245 

C. $255 

D. $275 

E. $285

 

Solution: Computation of the Cash balance 

 

ParticularsAmount

Cash balance $        250 

Add: Cash collections $        420 

Total Receipts $        670 

Less: Payments 

Paid Supplies $        310 

Interest paid $          30 

tax paid $        180 

Cash net changes $        150 

Add; Borrowings $          75 

Cash Balance at the end $        225 

 

 

Hence the Cash balance is $225

 

9. Your firm has an average receipt size of $108. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically receive 8,500 checks per day. The daily interest is .016 percent. If the bank charges a fee of $225 per day, should the lockbox project be accepted? What would be the net annual savings be if the service were adopted?

A. $25,842.59 

B. $18,200.21 

C. $19,250.45 

D. $24,915.15 

E. $24,519.51

 

a. The average daily collections are the number of checks received times the average value of a check, so: 

 

Average daily collections = 108(8,500) 

Average daily collections = 918,000 

 

The present value of the lockbox service is the average daily receipts times the number of days the collection is reduced, so: 

 

PV = (2 day reduction)(918,000) 

PV = 1,836,000 

 

The daily cost is a perpetuity. The present value of the cost is the daily cost divided by the daily interest rate. So: 

PV of cost = 225/0.00016 

PV of cost = 1,406,250 

 

The NPV of lockbox is 1,836,000-1,406,250 = 429,750 

 

The firm should take the lockbox service. 

 

The net annual savings excluding the cost would be the future value of the savings minus the savings, so: 

Annual savings = 1,836,000(1.00016) ^ 365 – 1,836,000 

Annual savings = 110,406 

 

And the annual cost would be the future value of the daily cost, which is an annuity, so: 

Annual cost = 225(FVIFA365,.016%) 

Annual cost = $84,576.99 

So, the annual net savings would be: 

Annual net savings = 110,406- $84,576.99 

Annual net savings = $25,829 Approx

10. No More Pencils, Inc., disburses checks every two weeks that average $93,000 and take seven days to clear. How much interest can the company earn annually if it delays transfer of funds from an interest-bearing account that pays .015 percent per day for those seven days? Ignore the effects of compounding interest.

A. $3,315.25 

B. $2,958.58 

C. $2,538.90 

D. $2,852.12 

E. $2,583.09

 

Solution:

0.015% can be written as .00015. Therefore, .00015*7*93000*26 shows the interest rate over 7 days times the principal times the number of times this can happen annually. This comes to: $2538.90

 

11. Cow Chips, Inc., a large fertilizer distributor based in California, is planning to use a lockbox system to speed up collections from its customers located on the East Coast. A Philadelphia-area bank will provide this service for an annual fee of $20,000 plus 10 percent per transaction. The estimated reduction in collection and processing time is one day. If the average customer payment in this region is $5,300, how many customers are needed, on average, each day to make the system profitable for Cow Chips? Treasury bills are currently yielding 5 percent per year.

A. 87.87 

B. 91.15

 C. 83.25 

D. 81.98

 

Solution:

 

NPV =0 =(5300*1*n)-(0.10*n)/0.000134-20000/0.05

 

N = 87.87

 

 

12. If 25% of the customers pay on day 10 and 75% pay on day 30, the average collection period is: 

A. 15 days. 

B. 20 days.

C. 25 days.

 D. 30 days.

 E. 40 days.

 

Solution: Average collection period assuming no of customers are 10 = 2.5*10+7.5*30 

     =25+225 = 250/10 = 25 Days

 

13. Collegiate Tuxedo rents apparel throughout the year. They have experienced non-payment by about 15% of their customers with an average loss of $200. Collegiate wants to stem their losses by using an instant electronic credit check on the customer. These checks will cost them $7 on each of the 1,000 customers. The opportunity cost is 1.5% for the credit period. Should they pursue the credit check?

A. No, because the $7000 cost is too high. 

B. No, because a $200 loss is minor.

 C. Yes, because the net gain is $30,000. 

D. Yes, because the net gain is $23,000. 

E. Yes, because the net gain is $193,000.

 

Solution:

Expected loss from non-payment = 1000*15%*200 = $30000

 

Cost of Credit Check = 1000*7 = $7000

 

Opportunity cost = $7000*1.5% =$105

 

Hence Net Gain = 30000 -7000 -105 = $22895

 

 

14. If 20% of the customers pay on day 10 and 80% pay on day 30, the average collection period is: 

A. 10 days. 

B. 15 days.

C. 22.5 days.

 D. 24 days.

 E. 26 days.

Solution: Average collection period assuming no of customers are 10 = 2*10+8*30 

     =20+240 = 260/10 = 26 Days

 

 

15. On September 1, a firm grants credit with terms of 2/10 net 45. The creditor:

A. must pay a penalty of 2% when payment is made later than September 1st. 

B. must pay a penalty of 10% when payment is made later than 2 days after September 1st. 

C. receives a discount of 2% when payment is made at least 10 days before September 1st. 

D. receives a discount of 2% when payment is made before September 1st and pays a penalty of 10% if payment is made after September 1st. 

E. receives a discount of 2% when payment is made within 10 days after the effective invoice date of September 1st.

 

 

16. The Tate Corporation has annual sales of $47 million. The average collection period is 36days. What is the average investment in accounts receivables as shown on the balance sheet?

A. $4,730,520

B. $4,635,616 

C. $4,835,400 

D. $4,563,116 

E. $4,653,616

 

Solution: Computation of the average investment in accounts receivables

 

Collection period -365

A/R Turn over

 

A/R Turn over365

36

 

A/R Turn over10.13888889

 

Account Receivable RatioSales

Avg Account Receivable

Where as

Sales $                         47,000,000 

Avg Account Receivable

Account Receivable Ratio10.13888889

 

 

Avg Account Receivable $                         47,000,000 

10.13888889

 

Avg Account Receivable                        4,635,616.44 

 

17. Lipman, Inc., has an average collection period of 39 days. Its average daily investment in receivables is $47,500. What are annual credit sales? What is receivable turnover?

A. $444,555; 9.4

B. $446,551; 8.8

C. $444,940; 5.5

D. $444,551; 9.4

 E. $444,515; 8.8

Solution: Computation of the Annual Credit Sales and Account Receivable Turn over

Collection period -365

A/R Turn over

 

A/R Turn over365

39

 

A/R Turn over9.358974359

 

Account Receivable RatioSales

Avg Account Receivable

Where as

Sales

Avg Account Receivable $                                 47,500 

Account Receivable Ratio9.358974359

 

 

Sales $                               444,551 

 

 

 

 

18. Suppose the current exchange rate for the Polish zloty is Z 4.27. The expected exchange rate in three years is Z 4.51. What is the difference in the annual inflation rates for the United States and Poland over this period? Assume the anticipated rate is constant for both countries. What relationship are you relying on in answering this question?

A. 1.51 

B. 1.84 

C. 1.48 

D. 1.15 

E. 1.86

 

Solution:

Time value of money Calculator: PV is 4.27, FV is -4.51, n is 3, payment is 0, end of period, solve for interest rate and get 1.84.

 

 

19. An efficient capital market is one in which:

A. brokerage commissions are zero. 

B. taxes are irrelevant. 

C. securities always offer a positive rate of return to investors. 

D. security prices are guaranteed by the U.S. Securities and Exchange Commission to be fair. 

E. security prices reflect available information.

 

20. In an efficient market when a firm makes an announcement of a new product or product enhancement with superior technology providing positive NPV, the price of the stock will: 

A. rise gradually over the next few days. 

B. decline gradually over the next few days.

C. rise on the same day to the new price. 

D. stay at the same price, with no net effect. 

E. drop on the same day to the new price.

 

21. Financial managers can create value through financing decisions that: 

A. reduce costs or increase subsidies. 

B. increase the product prices.

 C. create a new security.

D. Both A and B. 

E. Both A and C.

 

22. Remitting cash flows is a term used to describe:

 A. cash flows earned in a foreign country.

 B. moving cash flows from the foreign subsidiary to the parent firm. 

C. forecasting the value of foreign currency one-year hence. 

D. forecasting the value of U.S. currency one-year hence. 

E. None of the above.

 

23. The price of one country’s currency expressed in terms of another country’s currency is: 

A. by definition, one unit of currency.

B. the cross inflation rate. 

C. the depository rate.

D. the exchange rate. 

E. the foreign interest rate.

 

24. The cross rate is the: 

A. exchange rate between the U.S. dollar and another currency. 

B. exchange rate between two currencies, neither of which is generally the U.S. dollar.

 C. rate converting the direct rate into the indirect rate. 

D. estimated based on the weighted average cost of capital by the agent at the exchange kiosk. 

E. None of the above.

 

25. You are planning a trip to Australia. Your hotel will cost you A$150 per night for five nights. You expect to spend another A$2,000 for meals, tours, souvenirs, and so forth. How much will this trip cost you in U.S. dollars given the following exchange rates?

Country: Australia, U.S $ equivalent: .7004, currency per U.S. $ 1.4278

A. $1,926 

B. $2,007 

C. $2,782 

D. $2,856 

E. $3,926

 

Used international currency exchange rate calculator to solve this one