financial management 196

(12 pts) 1. Explain the relationship that exists among the following: capital budgeting, weighted average cost of capital and the overall objective of the firm.

(12 pts) 2. Explain the importance of conducting an environmental scan. Also include a discussion of the forces of an environmental scan.

(12 pts) 3. Explain the significance of a required rate of return.

(8 pts) 4. Explain the relationship between the life cycle concept and dividend policy.

(16 pts) 5. Maple Media is considering a proposal to enter a new line of business. In reviewing the proposal, the company’s CFO is considering the following facts:

  • The new business will require the company to purchase additional fixed assets that will cost $600,000. These costs will be depreciated on a straight line basis over three years.
  • At the end of three years, the company will get out of the business and will sell the fixed assets at a salvage value of $100,000.
  • The project will require a $50,000 increase in net operating working capital, which will be recovered at the project’s conclusion.
  • The company’s marginal tax rate is 30%.
  • The new business is expected to generate $2 million in sales each year. The operating costs excluding depreciation are expected to be $1.4 million per year.
  • The project’s cost of capital is 12%.

What is the project’s net present value (NPV)? Should the project be undertaken?

(8 pts) 6. Calculate the price of a 20 year 6 percent coupon bond with 15 years left to maturity and a market interest rate of 8 percent. Assume that the interest payments are semiannual and the par value of the bond is $1,000.

(16 pts) 7. The balance sheet and income statement shown below are for Byrd Inc.

BALANCE SHEET

Cash $ 140.0 Accounts payable $800.0

Accts. Receivable 880.0 Notes payable ` 600.0

Inventories 1,320.0 Accruals 400.0

Total current assets 2,340.0 Total current liabilities 1,800.0 Long-term bonds 1,000.0

Total debt 2,800.0

Common stock 200.0

(50,000 shares)

Retained earnings 1,000.0

Net plant & equip 1,660.0 Total common equity 1,200.0

Total assets $4,000.0 Total liabilities & equity $4,000.0

INCOME STATEMENT

Net sales $6,000.0

Operating costs 5,599.8

Depreciation 100.2

EBIT $ 300.0

Less: Interest 96.0

EBT $ 204.0

Less: Taxes 81.6

Net income $ 122.4

Account balances in financial statements are in thousands.

Required:

  • a)Construct the DuPont Identity and explain its significance.
  • b)Calculate the earnings per share and explain its significance.
  • c)Calculate the current ratio and explain its significance.
  • d)Calculate the inventory holding period and explain its significance.

(16 pts) 8. Firms A and B are identical except for their level of debt and the interest rates they pay on debt. Each has $2 million in assets, $400,000 of EBIT, and has a 40% tax rate. However, firm A has a debt-to-assets ratio of 50% and pays 12% interest on its debt. While Firm B has a 30% debt ratio and pays only 10% interest on its debt.

Required:

  • a)Determine the return on equity for each firm.
  • b)Explain why Firm B pays lower interest.

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