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
