(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 companyâ€™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 projectâ€™s conclusion.
- The companyâ€™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 projectâ€™s cost of capital is 12%.
What is the projectâ€™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.
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
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
Net sales $6,000.0
Operating costs 5,599.8
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.
- 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.
- a)Determine the return on equity for each firm.
- b)Explain why Firm B pays lower interest.