MBA 8130 – FOUNDATIONS OF CORPORATION FINANCE

TAKE HOME PROBLEM SET-HODGES Spring 2006

Directions: This take-home problem set (THPS) is due at the beginning of the regular class in session 7, February 23, 2006. You may turn in the assignment in any of three ways; 1. The preferred choice is to fax to either 770-832-8309 (Home fax) or 678-839-5041 (Office fax), 2. The second choice is to scan your answer sheets, convert to .pdf using Adobe Acrobat, and email me at mba8622@hotmail.com. Please do not send .jpg files as these are often difficult to correctly size and print, 3. The third choice is to snail-mail me, Charles Hodges, 465 Bethesda Church Road, Carrollton, GA 30117. Though you may use your book, notes, internet, etc., all work on this THPS is to be yours alone - any discussion of either the questions on the assignment or your answers with anyone other than the instructor will be considered as cheating and, thus, as a violation of the GSU honor code. You are allowed to ask questions in chat sessions. The assignment consists of 15 multiple choice questions, for which you have to record the letter of the correct multiple choice answer directly on the answer sheet on the last page (do not show any intermediate steps, there will be no partial credit assigned). The questions were chosen as they were representative of exam level questions from previous Final Exams. The grade on any assignment turned in after the beginning of class on February 23 will be reduced at a daily compounded rate of 10% per day (begin mode). I will release the answers as soon as I receive everyone’s Problem Set, but in any case before February 27. 1. The RRR Company has a target current ratio of 3.2. Presently, the current ratio is 4.1 based on current assets of $12,956,000. If RRR expands its fixed assets using short-term liabilities (maturities less than one year), how much additional funding can it obtain before its target current ratio is reached? (Round your answer to the nearest dollar.)

a. $1,453,413 b. $1,292,727 c. $1,059,632 d. $1,361,242 e. $888,750

2. Dorr Corp. had an ROA of 8%. Dorr's net profit margin was 4% on sales of $250. What were total assets?

a. $ 30 b. $125 c. $220 d. $500 e. None of the above.

MBA 8130 page - 2 - Hodges THPS Spring 2006 3. DEF Inc. has the following balance sheet:

Current assets $ 7,000 A/P & Accruals $ 1,000 Fixed assets 3,000 S-T Loans 2,000 Total Assets $10,000 Common Stock 2,000

Retained Earnings 5,000 Total Claims $10,000

DEF's after-tax profit margin is 10%, and the company pays out 60 percent of its earnings as dividends. Its sales last year were $10,000; its assets were used to full capacity; no economies of scale exist in the use of assets; the profit margin, the payout ratio, and the ratio of A/P & Accruals to sales are expected to remain constant. The company uses the percent-of-sales method to estimate funds requirements, and it plans to raise any required external capital as short-term bank loans. The company forecasts that sales grow by 50 percent next year. After it has raised the necessary expansion funds, DEF’s current ratio will be closest to?

a. 120% b. 140% c. 160% d. 180% e. 200% 4. Suppose that RAF Corp. is operating at full capacity and plans to increase its sales by 10% next year. If the firm currently has $15,000,000 in assets, $4,000,000 in spontaneous liabilities (i.e., those liabilities that scale with sales, and are not arbitrarily chosen by management), expects to earn $800,000 next year, and maintains a payout ratio of 30%, the forecasted External/Additional Funds Needed according to the percentage-of-sales method is closest to

a. $1,400,000 b. $1,200,000 c. $1,000,000 d. $800,000 e. $600,000

5. Your company has the following balance sheet (in millions of dollars): Current assets $ 8.0 Accounts payable $ 1.6 Net fixed assets 8.0 Notes payable 2.0

Accrued wages & taxes 0.4 Total current liabilities $ 4.0 Long-term debt 3.0 Common equity 3.0 Retained earnings 6.0

Total assets $16.0 Total liabilities and equity $16.0 You have determined the following facts: (1) last year's sales were $20 million; (2) the company will pay out 40 percent of earnings as dividends; (3) a profit margin of 3 percent is projected; (4) fixed assets were used to full capacity; and (5) all assets as well as spontaneous liabilities (only accounts payable are considered spontaneous liabilities) as shown on the balance sheet are expected to grow proportionally with sales. Further, your boss estimates she will need to raise $4 million externally by issuing new debt or common stock next year. If the above assumptions hold, the sales growth (in %) your boss is expecting is closest to

a. 15% b. 20% c. 25% d. 30% e. 35%

MBA 8130 page - 3 - Hodges THPS Spring 2006 6. QUAR corp. has created the firm’s pro forma balance sheet for the next fiscal year. Sales are projected to grow at 20% to the level of $600 million. Current assets, fixed assets, short-term debt, and long-term debt are 25%, 125%, 30% and 50% of the total sales, respectively. QUAR pays out 40% of net income as dividends. The value of common stock is constant at $100 million. The profit margin on sales is 10%. Based on these numbers, the amount of external funds the company needs is closest to:

a. $0 b. $20 c. $40 d. $60 e. $80 7. Which one of the following would have the greatest net present value, assuming an appropriate interest rate of 10 percent?

a. $1,000 today plus $100 a month for 2 years b. $1,000 today plus $200 a month for a year c. $1,000 today plus $400 a month for six months d. $2,200 today plus $200 a month for six months e. $2,200 today plus $100 a month for a year

8. ORP Inc. has a project that has the following cash flows:

Year Cash Flow 0 -$300.00 1 100.00 2 125.43 3 90.12 4 ?

What cash flow will the project have to generate in the fourth year in order for the project to have a 15 percent rate of return?

a. $ 15.55 b. $ 58.95 c. $100.25 d. $103.10 e. $150.75 9. Which of the following values is closest to the amount that should be paid for a stock that will pay a dividend of $10 in one year and $11 in two years? The stock will be sold in 2 years for an estimated price of $120. The appropriate discount rate is 9%.

a. $114 b. $119 c. $124 d. $129 e. $138 10. Bond A and Bond B both have a face value of $1000 and have 20 years to maturity. Bond A pays a $45 yearly coupon and is priced at $1,098.96. Bond B pays a yearly coupon of $35. Both bonds have the same level of risk. What is the price of Bond B?

a. $854.75 b. $1,098.96 c. $1,000.00 d. $959.62 e. $960.44 11. Panther Enterprises has outstanding zero coupon bonds that have a face value of $1000 and mature in exactly 18 years. The market price of the bonds is $179.86. What will be the percentage change in the market price of the bonds if the yield to maturity falls by half?

a. The answer can not determined from the information given b. 133.56% c. 100.00% d. 131.02% e. 128.60%

MBA 8130 page - 4 - Hodges THPS Spring 2006 12. You plan to retire 40 years from now. You expect that you will live 20 years after retiring. You want to have enough money upon reaching retirement age to withdraw $150,000 from the account at the beginning of each year you expect to live, and yet still have $2,700,000 left in the account at the time of your expected death (60 years from now). You plan to accumulate the retirement fund by making equal annual deposits at the end of each year for the next 40 years. You expect that you will be able to earn 12% per year on your deposits. However, you only expect to earn 9% per year on your investment after you retire since you will choose to place the money in less risky investments. What equal annual deposits must you make each year to reach your retirement goal?

a. $2,906.61 b. $2,297.97 c. $1,945.68 d. $1,737.22 e. $2,573.72

13. You took out a 30-year mortgage for $150,000 exactly 5 years ago. The loan had an APR of 6% with monthly payments. You have just received a financial windfall and wish to pay off the outstanding loan balance today. How much will you need to pay?

a. $139.735.89 b. $139,581.54 c. $125,000.00 d. $139,304.54 e. $105,000.00

14. Shares of Fairlie-Poplar, Inc. are currently priced at $23.64 a share and produce a total return of 14.80%. The annual dividends of Fairlie-Poplar have been increasing at a rate of 2.4% and are expected to continue at this rate. What is the expected amount of the next dividend?

a. $1.37 b. $1.91 c. $2.41 d. $2.87 e. $2.93 15. The Carnation Chemical Company is investing in an incinerator to dispose of waste. The incinerator costs $2.5 million and will generate end-of-year cash of $1 million for the next 3 years. The internal rate of return for this project is

a. 6.4%. b. 8.6%. c. 9.7%. d. 10.4%. e. 12.0%.

MBA 8130 page - 5 - Hodges THPS Spring 2006 MBA 8130–FOUNDATIONS OF CORPORATION FINANCE

Spring 2006

Take Home Problem Set

ANSWER SHEET

Name: …………………………………………………………….. Student Number: ……………………………………………………………..

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