OM FINAL

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FIN 351 SAMPLE FINAL EXAM

NAME (Last, First)

SIGNATURE

INSTRUCTIONS:

1. Multiple Choices: Choose the best answer. There is only one best answer. You are solely responsible for the accuracy of the answers on the Scantron. Only the answers on the Scantron are graded.

2. Write your name, number and format on the Scantron. 3. Sign your exam copy. 4. TURN IN all pages of the exams BEFORE you leave the classroom.

If you take the exams out FOR ANY REASON, you will be graded ZERO automatically for the final exam.

5. Keep BOTH of your hands on the desk ALL the time. 6. 30 questions, 1 point each.

Section Number

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1. Which of the following best defines the concept of corporate governance? A. A system for monitoring managers’ activities, rewarding performance, and disciplining misbehavior. B. Corporate values and governance structures that ensure the business is conducted in an ethical, competent, fair, and professional manner. C. A system of principles, policies, and procedures used to manage and control the activities of a corporation so as to overcome conflicts of interest inherent in the corporate form. D. A system to ensure complete transparency in disclosures regarding operations, performance, risk, and financial position. E. A system of fairness and accuracy in identifying inherent conflicts of interest. 2. Which of the following best defines the objectives of an effective system of corporate governance? A. ensure that the assets of the company are used efficiently and productively. B. eliminate or mitigate conflicts of interest among stakeholders. C. A and B. D. ensure complete transparency in disclosures regarding operations, performance, risk, and financial position. E. A and D. Question 3 to 8 use the following set-up: Suppose a company has the opportunity to bring out a new product, the Vitamin-Burger. The initial cost of the assets is $90 million, and the company’s working capital would increase by $20 million during the life of the new product. The new product is estimated to have a useful life of four years, at which time the assets would be sold for $15 million. Management expects company sales to increase by $120 million the first year, $160 million the second year, $140 million the third year, and then trailing to $50 million by the fourth year because competitors have fully launched competitive products. Operating expenses are expected to be 60% of sales, and depreciation is based on an asset life of three years under MACRS (modified accelerated cost recovery system). The MACRS deprecation schedule is Year 1: 33.33%. Year 2: 44.45%. Year 3: 14.81%. Year 4: 7.41%. Assume the required rate of return on the Vitamin-Burger project is 10% and the company's tax rate is 35%. 3. What is the investment outlay? A. -100 million. B. -110 million. C. -120 million. D. -90 million. E. -70 million.

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4. What is the cash operating expense for Year 2? A. 100 million B. 106 million C. 96 million D. 92 million E. 90 million 5. What is the depreciation for Year 3? A. 30.68 million B. 24.12 million C. 20.56 million D. 13.33 million E. 12.08 million 6. What is the after-tax operating cash flow for Year 4? A. 55.60 million B. 41.07 million C. 41.70 million D. 17.33 million E. 15.33 million 7.What is the total terminal after-tax non-operating cash flows for Year 4? A. 45.08 million B. 41.70 million C. 41.07 million D.55.60 million E.15.33 million 8.What is the NPV value of the project? A. 30.51 million B. 35.51 million C. 37.51 million D. 39.45 million E. 41. 23 million 9. Suppose the Widget Company has a capital structure composed of the following, in billions: Debt $30, Common equity $60, Preferred stock $30. The debt rating is of AA. The yield on AA debt is 8%. The marginal tax rate is 30%. The preferred annual dividend is $10, current stock price is $100. If the risk-free rate is 3%, the expected market risk premium is 5%, and the company’s stock beta is 1.5. What is Widget’s weighted average cost of capital? A. 0.0725 B. 0.0830 C. 0.0915 D. 0.1018 E. 0.1013

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10. Suppose the Widget Company has a capital structure composed of the following, in billions: Debt $40, Common equity $60, Preferred stock $20. The debt rating is of AA. The yield on AA debt is 10%. The marginal tax rate is 30%. The preferred annual dividend is $10, current stock price is $120. If the risk-free rate is 3%, the expected market risk premium is 5%, and the company’s stock beta is 1.25. What is Widget’s weighted average cost of capital? A. 0.0725 B. 0.0830 C. 0.0915 D. 0.1018 E. 0.1013 Question 11 to 12 use the following set-up: Number of units produced and sold: 1,000 Sales price per unit: $300 Variable cost per unit: $150 Fixed operating cost: $50,000 Fixed financing expense: $10,000 11.What is the degree of operating leverage? A. 1.1 B. 1.2 C. 1.4 D. 1.5 E. 1.3 12. What is the degree of total leverage? A. 1.105 B. 1.125 C. 1.110 D. 1.135 E. 1.665 13. Which one of the following statements matches M& M Proposition I without taxes? A. The cost of equity capital has a positive linear relationship with a firm's capital structure. B. The dividends paid by a firm determine the firm's value. C. The cost of equity capital varies in response to changes in a firm's capital structure. D. The value of a firm is independent of the firm's capital structure. E. The value of a firm is dependent on the firm's capital structure

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14. Which one of the following states that a firm’s cost of equity capital is a positive linear function of the firm’ s capital structure? A. Financial risk of capital structure B. M& M Proposition I without taxes C. M& M Proposition II D. Operating risk of capital structure E. M& M Proposition I with taxes 15. Paying interest reduces the taxes owed by a firm. Which one of the following terms applies to this relationship? A. Theory of interest rates B. M& M Proposition I C. Financial risk D. Interest tax shield E. Financial leverage 16. Which one of the following is the date on which the board of directors agrees to pay a dividend and passes a resolution to do so? A. Date of record B. Ex-dividend date C. Payment date D. Declaration date E. Public announcement date 17. On which one of the following dates is the determination made as to which shareholders will receive a dividend payment? A. Date of record B. Ex-dividend date C. Payment date D. Declaration date E. Public announcement date 18. The clientele effect states that investors fall into various groups because of differences in their preferences for which one of the following? A. Share price levels B. Risk level C. Short-term versus long-term investments D. Rates of return E. Dividends

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19. This morning, Structural Steel purchased 3,500 of its outstanding shares in the open market. What type of transaction was this? A. Stock payout B. Stock distribution C. Stock dividend D. Stock repurchase E. Stock reversal 20. Which one of the following increases the number of shares outstanding but does not affect the dividend yield or dividend payout ratio? A. Reverse stock split B. Cash distribution C. Stock split D. Liquidation dividend E. Special dividend 21. UXZ has sales of $683,200, cost of goods sold of $512,900, and inventory of $74,315. What is the inventory turnover rate? A. 7.33 times B. 6.90 times C. 5.70 times D. 7.14 times E. 8.47 times 22. Galaxy Sales has sales of $938,300, cost of goods sold of $764,500, and inventory of $123,600. How long on average does it take the firm to sell its inventory? A. 6.40 days B. 7.23 days C. 48.68 days D. 59.01 days E. 61.10 days 23. Leisure Products has sales of $738,800, cost of goods sold of $598,200, and accounts receivable of $86,700. How long on average does it take the firm's customers to pay for their purchases? Assume a 365-day year. A. 8.65 days B. 11.28 days C. 25.01 days D. 42.83 days E. 45.33 days

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24. Fast Kars has a return on equity of 22.3 percent, a profit margin of 14.2 percent, and total equity of $467,000. What is the net income? A. $69,608 B. $113,875 C. $104,141 D. $66,314 E. $109,897 25. Health Centers, Inc., has total equity of $948,300, sales of $1.523 million, and a profit margin of 4.4 percent. What is the return on equity? A. 4.21 percent B. 6.49 percent C. 7.18 percent D. 8.68 percent E. 7.07 percent Question 26 to 30 use the following set-up: Suppose that the Big Company has made an offer for the Little Company that consists of the purchase of 1 million shares at $18 per share. The value of Little Company stock before the bid was made public was $15 per share. Big Company stock is trading at $40 per share, and there are 10 million shares outstanding. Big Company estimates that it is likely to reduce costs through economics of scale with this merge of $2 million per year, forever. The appropriate discount rate for these gains is 10%. 26. What are the synergistic gains from this merger? A. 20 million B. 18 million C. 16 million D. 14 million E. 12 million 27. What is the target shareholder’s gain? A. 4 million B. 3 million C. 2 million D. 1 million E. 5 million

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28. What is Acquirer’s gain? A. 15 million B. 16 million C. 17 million D. 19 million E. 20 million 29. What do Big shareholders get? A. 25% of the gain B. 75% of the gain C. 15% of the gain D. 85% of the gain E. 90% of the gain 30. What is the value of Big Company post-merge? A. 300 million B. 350 million C. 390 million D. 410 million E. 417 million