TEST NUMBER: ________________

FI 3300 – CORPORATION FINANCEFINAL EXAM

Summer 2008

NAME _____________________________________________

STUDENT NUMBER _________________________________

CLASS DAYS/TIME _______________ INSTRUCTOR _________________________

READ THE FOLLOWING DIRECTIONS VERY CAREFULLY. FAILURE TO FOLLOW THESE INSTRUCTIONS WILL ALMOST CERTAINLY RESULT IN YOUR EXAM BEING MISGRADED WHICH WILL ADVERSELY AFFECT YOUR GRADE. IF THERE IS ANYTHING ABOUT THE DIRECTIONS THAT YOU DO NOT UNDERSTAND, ASK YOUR INSTRUCTOR IMMEDIATELY.

1. Fill in your name, student number, and the days and time of the class for which you are registered (for example, T/TH at 5:00pm) on the Answer Sheet as well as on the lines above.

2. In the box on the Answer sheet titled “TEST NUMBER” record the number that appears in the upper right hand corner of this sheet on the line “TEST NUMBER” – since there are multiple versions of the exam, failure to do so may result in your exam being graded with the wrong answer key!!! DO NOT COPY FROM SOMEONE ELSE’S EXAM – YOUR NEIGHBOR MAY HAVE A DIFFERENT VERSION OF THE EXAM!!!

3. Read each question very carefully. Consider all of the answer choices and then select the best correct answer – there is only one best answer per question. Circle the letter answer on the exam and record your answers on the Answer Sheet.

NOTE WELL: ONLY THE ANSWER KEY WILL BE GRADED!!!

4. You may use a financial calculator. No notes, formula sheets, scratch paper (use back pages of exam if necessary), or stored formulae allowed.

The exam consists of 25 questions each worth 4.0 points. Choose the BEST ANSWER for each question. Your score will be computed as:

[100 – (number missed x 4.0)].You will have 120 minutes to complete the exam. Do not leave any answers blank – an unanswered question will be graded as a wrong answer. Good luck.

1. The primary goal of a publicly-owned firm interested in serving its stockholders should be to:

A. Maximize expected total corporate profit.B. Maximize expected EPS.C. Minimize the chances of losses.D. Maximize the stock price per share.E. Maximize expected net income.

2. Venuava, Inc. reported net income of $4,211,600 for the fiscal year ending December 31, 2006 and Venuava paid total dividends of $3,218,400 in 2006. If Venuava reported Retained earnings of $43,886,600 on its December 31, 2005 balance sheet, what did Venuava report as Retained earnings on its December 31, 2006 balance sheet?

A. $42,893,400B. $46,379,100C. $44,879,800D. $44,215,100E. None of the above are within $1,000 of the correct answer

3. The financial ratio measured as total assets minus total equity, divided by total assets, is the:

A. Total debt ratio B. Equity multiplier C. Debt-equity ratio D. Current ratio E. Times interest earned ratio

4. You are given the following information for a certain company:

Return on Equity 40%Return on Assets 30%Net Profit Margin 8%

Determine the company’s Debt Ratio.

A. 0%B. 25%C. 50%D. 75%E. None of the above.

Use the following information about the Iraga Company to answer question 5:

Iraga CompanyBalance Sheets

For the Year Ending December 31, 2004 and 2005

2004 2005 Cash 1,800 900Accounts receivable 3,000 2,100Inventories 7,200 8,900 Total current assets 12,000 11,900Net fixed assets 65,000 75,100 Total assets 77,000 87,000

Notes payable 300 900Accounts payable 3,200 4,700Accrued expenses 500 200 Total current liabilities 4,000 5,800Long-term debt 39,300 44,000Common stock ($0.20 par value) 13,700 11,700Retained earnings 20,000 25,500 Total liab. & equity 77,000 87,000

Additional Data from 2005 Income Statement (in thousands):Depreciation $ 6,600Net income $ 11,000Net sales $290,000

5. Net cash flow from operating activities for 2005

A. $17,200B. $19,500C. $7,000D. $18,300E. $18,000

6. Suppose there is a financial security that promises to give you $5,000 eight years from today. All else constant, for a given nominal interest rate, a change from monthly compounding to annual compounding will cause the current price of this security to ___________________ .

A. Increase.B. Decrease.C. Remain the same.D. Either increase or decrease depending on the number of years until the money is to be

received.E. None of the above.

7. The Adam Smith family just purchased a $350,000 house with an $110,000 down payment and a 30-year mortgage loan at 6.50% per annum with monthly compounding. Payments are made monthly. What is the remaining balance on the mortgage after 15 years?

A. 236,619.21B. 174,141.94C. 217,677.42D. 172,807.76E. 216,009.70

8. Assume that the stated interest rate is 7.5% compounded continuously. What is the effective rate?

A. 7.50%B. 7.79%C. 7.82%D. 0.075%E. 0.079%

9. Kerri deposits $8,000 in a bank account today. She makes another deposit of $14,000 into the account at the end of year one and she makes a third deposit of $10,000 at the end of year two. If the bank pays interest at 8 percent compounded annually, how much will she have in her account at the end of three years?

A. $37,207.30B. $40,183.88C. $34,451.20D. $28,591.20E. None of the above is within $100 of the correct answer.

10. Harriet wishes to save money to provide for her retirement. Beginning one year from now she will begin depositing the same fixed amount each year for the next 20 years into a retirement savings account. In exactly seven years from now she will withdraw $10,000. Starting one year after making her final deposit, she will withdraw $135,000 annually for each of the following 15 years (i.e. he will make 15 withdrawals in all). Assume that the interest rate is 9% p.a. over both the depositing period and the withdrawal period. In order for Lydia to have sufficient funds in her account to fund her retirement, how much should she deposit annually (rounded to the nearest dollar)?

A. $97,368B. $20,064C. $21,870D. $23,838E. $31,020

11. Consider three investment alternatives: a perpetuity, an ordinary annuity and an annuity due. All three have the SAME payment amount. The annuity due and the ordinary annuity have the same number of payments (e.g., 6 payments). The interest rate is positive and the same for all three investments. Given this information, which of the following statements is correct?

A. The present value of the ordinary annuity is greater than the present value of the annuity due.

B. The perpetuity and the annuity due have the same present value.C. The future value of the ordinary annuity is less than future value of the annuity due.D. The present value of the ordinary annuity is greater than the present value of the

perpetuity.E. None of the above is the correct answer.

12. Peachtree State Bank is offering a savings deposit account with a stated nominal interest rate of 5.4% per annum. Interest is paid quarterly. Morris Moneybaggs plans to deposit $10,000 into the account today and wants to accumulate $30,000 in the account. How many years will it take to accumulate $30,000 in the account? State your answer to 2 decimal places.

A. 20.89 yearsB. 20.48 yearsC. 17.06 yearsD. 13.18 years E. 12.92 years

13. You plan to deposit money in a saving account earning a stated interest rate of 8.5% p.a. with quarterly compounding. From t=1 to t=7 (t=1 and t=7 included) you will make 7 equal annual deposits of $19,750 (first payment made at t=1). Find the sum you have accumulated at the end of 11 years.

A. $180,458.24B. $178,944.82C. $247,992.23D. $252,632.85E. $218,205.68

14. This morning, Mary bought a ten-year bond that pays a 6.5% semiannual coupon. She paid $994 for the $1,000 face value bond. If the market interest rate on this type of bond increases to 7% tonight, how much will Mary receive for her first interest payment?

A. $32.50 B. $35.00C. $65.00 D. $69.58E. $70.00

15. Duke Corporation's bonds have a face value of $1,000 and a 5% coupon paid semiannually; the bonds mature in 9 years. If the yield to maturity is 3%, what is the price of the bond? A. $1000.00B. $1068.74C. $1120.94D. $1156.73E. $1378.07

16. Suppose you purchase Consolidated Corporation’s bond for $180. The bond is a zero coupon bond with a face value of $1,000, and a 25-year maturity. If the yield to maturity on the bond remains unchanged, what will be the price of the bond one year before maturity? A. $180.00B. $820.00C. $933.71D. $967.20 E. $1000.00

17. The stock of Acme, Inc. currently sells for $90 per share. The firm just paid a dividend of $5.09 and the dividend is expected to grow at a constant rate in perpetuity. If the required rate of return is 12%, what is the dividend growth rate?A. 0%B. 3.91%C. 6.00%D. 10.89% E. 25.31%

18. MQA, Inc. just paid a dividend of $1.50. The firm is expected to pay a dividend of $1.75, $2.00 and $2.50 at the end of the next three years, respectively. Dividends are expected to grow at 6% per year thereafter. Given a required return of 14%, what would you pay for the stock today? A. $13.42 B. $27.12C. $28.98D. $30.48 E. $31.25

19. The Seattle Corporation has been presented with an investment opportunity that will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm's cost of capital is 10 percent. Assume cash flows occur evenly during the year, 1/365th each day. What is the regular payback period (not the discounted payback) for this investment?A. 5.23 yearsB. 4.86 yearsC. 4.00 yearsD. 6.12 yearsE. 4.35 years

20. You are attempting to reconstruct a project analysis of a co-worker who was fired for flunking FI 3300. You have found the following information:

The IRR is 14%. The project life is 6 years. The initial cost is $16,000. In years 1, 2, 3 and 4 you will receive cash inflows of $3,000. You know the cash flows in years 5 and 6 are equivalent, but the amount is not on file. The appropriate discount rate is 10%.

What is the NPV of the project?

A. $2,335.25B. $5,750.35C. ($1,250)D. $2,000E. None of the above

21. Consider the following projects, for a firm using a discount rate of 10%:

Project NPV IRR PI A $200,000 10.2% 1.04 B $(200,001) 11% .81 C $1 10% 1.01 D $(235,000) 9% .95

If the projects are independent, which, if any, project(s) should the firm accept?

A. AB. BC. DD. B and DE. A and C

22. Which of the following statements is most correct concerning a project with normal cash flows (i.e., a cash outflow in Year 0 followed by cash inflows in all subsequent years)?

A. If the NPV of a project is positive then the discounted payback period rule will always accept the project.

B. If the NPV of a project is negative, then the profitability index of the project will always be greater than one.

C. If the profitability index of a project is greater than one, then the IRR will always be less than the project’s cost of capital.

D. If the NPV of a project is zero, then the IRR of the project will be equal to the discount rate for the project.

E. If the discount rate of a project is zero, then the project will always be accepted.Use the following information to answer questions 23 to 25.

Record your final numerical answer to each of the following questions on the answer sheet. Show your work on the answer sheet in the boxes provided for possible partial credit

PolyGlem Inc. is a software manufacturer specializing in small business operations. The company is considering introducing new alternative software. The company’s chief financial officer has collected the following information about the proposed product:

The project has an anticipated economic life of 8 years. To date the company has spent $22 million in R&D to develop the new software product. The company will have to purchase new computer equipment to produce the new

product. The new equipment will cost the company $48 million to purchase and install. The equipment will be depreciated on a straight-line basis to a $12 million salvage value over its 8-year project life. It is anticipated that the equipment will in fact be sold for $12 million in year 8.

If the company goes ahead with the new product, it will have an effect on the company’s net working capital. At the outset (i.e. at t=0), inventory will increase by $1.5 million and accounts payable will increase by $500,000. At t=8, the net working capital will be recovered after the project is completed.

The new software is expected to generate sales revenue of $110 million per year for each of the next 8 years. Operating costs, excluding management salaries, are expected to be $40 million per year. New software experts will be hired and it is estimated that these experts will be paid salaries totaling $5 million per year.

Because the new software is similar to some of PolyGlem’s existing software products, sales in the existing products will decrease by $10 million per year and company operating costs (related to these lost sales) will decline by $4 million, once the new product gets to the market.

The company’s interest expense each year will be $3 million. The company’s tax rate is 40 percent.

Show your work completely.

23. Compute the initial outlay (at t=0) for PolyGlem Inc. ___-49______________

24. Calculate PolyGlem’s operating cash flow in year 2. __37.2_______________

25. Find the non-operating cash flow in the final year of the project. _____13____

TEST NUMBER: ____________

FI 3300 - CORPORATION FINANCEANSWER SHEET Final Exam – Summer 2008

NAME ________________________________________________________

STUDENT NUMBER ____________________________________________

CLASS DAYS/TIME ____________________ INSTRUCTOR_________________________DIRECTIONS: For questions 1 – 22, record your answers from the exam on this Answer Sheet (write your letter choices as capitals - A, B, C, D or E). For questions 23, 24, and 25 record your final numerical answer on the Answer Sheet and show your work on the back of the Answer Sheet for possible partial credit. NOTE WELL: ONLY THIS ANSWER SHEET WILL BE GRADED!!! All questions are equally weighted and worth 4 points each. You have 120 minutes to complete the exam.

1. _____D_____ 11. _____C_____ 21. ____E______

2. _____C_____ 12. ______B____ 22. _____D_____

3. _____A_____ 13. ______D____ 23. _____49M____

4. _____B_____ 14. ______A____ 24. ___37.2M____

5. _____E_____ 15. ______D____ 25. ______13M____

6. _____A_____ 16. ______C____

7. _____B_____ 17. ______C____

8. _____B_____ 18. ______B____

9. _____A_____ 19. ______B____

10. _____C_____ 20. ______A____