Finance 455 Fall 2017 Final Exam Name________________________________ Page 1

Instructions: Put your name on the Bubble Form and on your exam sheeta. Select the best
answer for each question and record that answer on your Scantron form. When finished, sign
the honor pledge, slip the Bubble form inside this exam, and turn in both the form and the
exam. Bubble forms without a printed exam will not be graded. You may use your financial
calculator and your notes sheet for reference. You must put away any phones, tablets, or
computers. You may use space on this exam for scratch paper but note that I will not grade any
of your scratch work. There will be no partial credit. Each question is worth the same amount.

I pledge that I have neither given nor received unauthorized help on this exam. Furthermore, I
realize that giving or receiving unauthorized help on this exam could result in failure of this
course or dismissal from the University.

Signed _________________________________ Date: ________________________

1. You are trying to determine how much you need in order to retire comfortably. You would
like a monthly retirement income of $20,000 and anticipate living for 30 years in retirement.
The first retirement check will come at the end of your first month of retirement. You have
already saved $40,000. You expect to earn 6% on your investments. You have 40 years until you
retire. How much must you save at the end of each month between now and the day you retire,
with your first savings deposit in one month, in order to fund your retirement?
a. $1,212.46
b. $1,454.96
c. $4,437.30
d. $1,745.95
e. $3,395.30

2. You have just taken out a loan of $500,000 to buy a house. The terms of the loan are 30 years
with monthly payments at a nominal annual rate of 6%. How much interest will you pay over
the life of the loan?
a. $402,216
b. $482,659
c. $579,191
d. $695,029
e. $900,000

3. You want to purchase a really nice car. It costs $80,000. You will put $20,000 down and
finance the balance at a nominal annual rate of 6% with monthly payments for 5 years with a
balloon payment of $25,000 at the end of the loan. What will be your monthly payment?
a. $728.77
b. $801.65
c. $881.81
d. $969.99
e. $1,066.99
Finance 455 Fall 2017 Final Exam Name________________________________ Page 2

4. Butch, Inc. bonds have a par value of $1,000, a coupon rate of 8% with semi-annual
payments, maturity of 20 years, and are callable in 5 years at $1070. They currently trade for
$965. Calculate the yield to call.
a. 7.53%
b. 8.28%
c. 9.11%
d. 10.02%
e. 11.02%

5. Suppose that at the end of year 5, when the bonds above become callable (and how have 15
years to maturity), the yield to maturity is 6.5%. Which ONE of the following statements is
TRUE?
a. The company is unlikely to call the bonds because interest rates have declined.
b. The company will not call the bonds because the bond price is below the call price.
c. The company will call the bonds because the bond price is above the call price.
d. The company will call the bonds because the bond price is above the par value.
e. The company is likely to call the bonds because interest rates have increased.

6. Selected information for Jones, Inc. is shown below:

Short-term investments $20 million
Total Assets: $200 million
Short-term debt: $10 million
Long-term debt: $100 million
Shareholder's equity: $50 million
Shares outstanding: 1 million.

Free cash flows are expected to be the following: $15 million in Year 1, $10 million in Year 2
and $5 million in Year 3.
Growth rate after year 3 is expected to be 5%.
The required return on equity is 11%, the WACC is 8%, and the unlevered cost of equity is 9%.
Use the CORPORATE VALUATION model to find the intrinsic value of Jones' per share stock
price.
a. $68.50
b. $75.35
c. $82.89
d. $91.18
e. $100.29

7. Selected information for Kiffen, Inc. is shown below:

Short-term investments $20 million
Total Assets: $200 million
Short-term debt: $10 million
Long-term debt: $100 million
Shareholder's equity: $50 million
Finance 455 Fall 2017 Final Exam Name________________________________ Page 3

Shares outstanding: 1 million.

Dividends per share are expected to be the following:

$1.50 in Year 1, $1.00 in Year 2 and $0.50 in Year 3.
Growth rate after year 3 is expected to be 5%.
The required return on equity is 11%, the WACC is 8%, and the unlevered cost of equity is 9%.
Use the DIVIDEND GROWTH model to find the intrinsic value of Kiffen's per-share stock price.
a. $8.11
b. $8.93
c. $9.82
d. $10.80
e. $11.88

8. Which ONE of the following statements is FALSE?

a. In the dividend growth model, an increase in the market risk premium will cause the
predicted stock price to decline.
b. In the corporate valuation model, a permanent decrease in the fixed assets will cause
the predicted stock price to incrrease.
c. If a firm increases its payout ratio, the dividend growth model would predict an increase
in the stock price.
d. If a firm increases its payout ratio, the corporate valuation model would predict an
increase in the stock price.
e. A decrease in the corporate tax rate would lead to a higher WACC and and a higher
hurdle rate of return for new projects.

Use this information for the next 2 questions: Consider the following information for Butch
Jones, Inc. (in millions, except for per share items)
Financial Statement Information:
Sales $1,000
Net Income $50
Total Assets $2,000
Shareholder equity $750
Tax rate 40%
Bond Issue: 1,500,000 of $1,000 par value 20-year 5% coupon bonds with semiannual payments
with a yield to maturity of 7%.
100 million shares of stock outstanding
Market price per share $20
10 million shares of $7 per share dividend preferred stock with 5% flotation cost
Market price per share of preferred stock $ 120
HSB's stock's beta 1.20
Risk free rate 3%
Market risk premium 6.5%
Recent dividend on common stock $2 per share
Finance 455 Fall 2017 Final Exam Name________________________________ Page 4

Expected growth rate in common stock dividends 6%

9. Calculate the percentage of debt in Jones's market value capital structure

a. 26.9%
b. 29.6%
c. 32.6%
d. 35.9%
e. 39.4%

10. Calculate the WACC. Use the CAPM for the stock's required return.
a. 7.75%
b. 8.13%
c. 8.54%
d. 8.97%
e. 9.41%

11. Which ONE of the following statements is TRUE?

a. If the firm's tax rate declines, then its WACC will increase because its after tax cost of
debt increases.
b. If the firm's tax rate declines, its higher net profit will cause its WACC to increase.
c. If a firm's tax rate declines, then the YTM on its debt will decrease.
d. If a firm's tax rate declines, then the after-tax value of its dividends will increase,
increasing the firm's value.
e. If a firm's tax rate declines, then its preferred stock will become more valuable relative
to its common stock, driving down the firm's percentage of equity in its capital structure.
Finance 455 Fall 2017 Final Exam Name________________________________ Page 5

12. Referring to the NPV profile graph above, if the cost of capital is 12% and the projects are
mutually exclusive, then which project or projects should be accepted?
a. Can't tell from the available information
b. Project A
c. Project B
d. Neither Project A nor B
e. Projects A and B

13. The cost of capital is 10%. Consider the following pair of projects A and B:
Year: 0 1 2 3
CFA -1000 900 400 100
CFB - 500 500 200 100
Which ONE of the following statements is FALSE?
a. If Projects A and B are independent, you would accept only Project A.
b. The NPV of Project A is greater than the NPV of Project B.
c. The IRR of Project B is greater than the IRR of Project A.
d. If Projects A and B are mutually exclusive, you would accept only Project B.
e. Project A adds the most value to the company.

14. Jones, Inc. is doing a capital budgeting analysis for a new food truck. Revenues are expected
to be $85,000 per year, food and labor costs will be $60,000. Jones spent $15,000 last year on
marketing to determine of the project was worthwhile. The new food truck will cost $120,000
and it will be depreciated according to a 7-year depreciation schedule, shown below. VOLS will
have to borrow the money for the project and interest on the debt will be $10,000. Jones's tax
rate is 40%. Calculate the cash flow for capital budgeting purposes for Year 1.
MACRS Depreciation 1 2 3 4 5 6 7 8
Finance 455 Fall 2017 Final Exam Name________________________________ Page 6

Rate 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46%

a. 4,711
b. 7,852
c. 12,859
d. 15,859
e. 21,859

15. Which ONE of the following statements is TRUE?

a. The after-tax salvage value is the gain on the sale less the taxes due on the gain.
b. Required investment in inventory is an example of a sunk cost.
c. Only the after-tax portion of interest expense is deducted when calculating the cash
flows for capital budgeting purposes.
d. If the company doesn't have to increase the amount of debt it has to finance the
project, the unlevered cost of equity should be used to discount the project's cash flows.
e. None of the above are true.

16. Acme Industries' call options have a strike (exercise) price of $40 per share and 6 months to
maturity. Acme stock is trading at $35 and will either increase to $41 or decrease to $30 over
the next 6 months. The nominal risk free rate is 6% per year. Using the binomial option pricing
model, calculate the payoff at the option's expiration of the hedge portfolio consisting of
writing one call option and purchasing the hedge ratio's number of shares of stock. Note: I am
NOT asking you to calculate the option price.
a. $2.73
b. $2.86
c. $3.01
d. $3.16
e. $3.32

17. Which ONE of the following statements is TRUE?

a. European options are traded in Europe while American options are traded in the U.S.
b. The time value of an option increases as it gets closer to expiration.
c. The value of an in the money option increases as it gets closer to expiration.
d. The exercise value of an option will be equal to its strike price when the option expires.
e. The exercise value of an option will be equal to its price when the option expires.

18. Fat Chance Investments is considering purchasing a license from The University of
Tennessee to use its iconic trademark on a line of yoga mats. A 3-year license costs $60,000. If
the yoga mats are well-received, then FCI will receive $100,000 per year for 3 years. The
probability of this is 40%. If the yoga mats aren't well-received, then FCI will receive $15,000
per year for 3 years. The probability of this is 60%. However, if the mats are well-received, then
FCI can renew the license at the end of 3 years for another payment of $60,000 and receive the
same cash flows that it received in the previous 3 years for another 3 years. The cost of capital
Finance 455 Fall 2017 Final Exam Name________________________________ Page 7

is 10%. For simplicity, assume all cash flows are discounted at the cost of capital. Using a
decision tree, calculate the expected NPV of the project.
a. $97,984
b. $107,782
c. $118,561
d. $130,417
e. $143,458

19. The data here is the same for Fat Chance Investments as in the previous problem. You want
to use the Black and Scholes Option Pricing Model to price this growth option. What is the value
for P, the value of the underlying asset, that you should use when applying the model? Note: I
am not asking you to find the value of this project or the value of the option! Just P!
a. 78,735
b. 86,059
c. 86,974
d. 89,721
e. 91,552

20. Which ONE of the following statements is TRUE?

a. A firm can use retained earnings without paying a flotation cost. Therefore, while the
cost of retained earnings is not zero, its cost is generally lower than the after-tax cost of debt.
b. The capital structure that minimizes the firm's weighted average cost of capital is also
the capital structure that maximizes its earnings per share.
c. If a firm finds that the cost of debt is less than the cost of equity, increasing its debt ratio
must reduce its WACC.
d. Other things held constant, if corporate tax rates declined, then the Modigliani-Miller
tax-adjusted tradeoff theory would suggest that firms should increase their use of debt.
e. The capital structure that minimizes a firm's weighted average cost of capital is also the
capital structure that maximizes its stock price.

21. Which ONE of the following statements is TRUE?

a. The capital structure that maximizes the stock price is generally the capital structure
that also maximizes earnings per share.
b. All else equal, an increase in the corporate tax rate would tend to encourage a company
to increase its debt ratio.
c. Since debt financing raises the firm's financial risk, increasing a company's debt ratio will
always increase its WACC.
d. Since debt is cheaper than equity, increasing a company's debt ratio will always reduce
its WACC.
e. When a company increases its debt ratio, the costs of equity and debt both increase.
Therefore, the WACC must also increase.

22. Daylight Solutions is considering a recapitalization that would increase its debt ratio and
increase its interest expense. The company would issue new bonds and use the proceeds to buy
Finance 455 Fall 2017 Final Exam Name________________________________ Page 8

back shares of its common stock. The company's CFO thinks the plan will not change total
assets or operating income, but that it will increase earnings per share (EPS). Assuming the
CFO's estimates are correct, which ONE of the following statements is CORRECT?
a. If the plan reduces the WACC, the stock price is also likely to decline.
b. Since the plan is expected to increase EPS, this implies that net income is also expected
to increase.
c. Since the proposed plan increases Daylight's financial risk, the company's stock price still
might fall even if EPS increases.
d. If the plan does increase the EPS, the stock price will automatically increase at the same
rate.
e. Under the plan there will be more bonds outstanding, and that will increase their
liquidity and thus lower the interest rate on the currently outstanding bonds.

23. F. Marston, Inc. has developed a forecasting model to estimate its AFN for the upcoming
year. All else being equal, which of the following factors is most likely to lead to an increase of
the additional funds needed (AFN)?
a. A switch to a just-in-time inventory system and outsourcing production.
b. The company reduces its dividend payout ratio.
c. The company switches its materials purchases to a supplier that sells on terms of 1/5,
net 90, from a supplier whose terms are 3/15, net 35.
d. A sharp increase in its forecasted sales.
e. The company discovers that it has excess capacity in its fixed assets.

24. Spontaneous funds are generally defined as follows:

a. A forecasting approach in which the forecasted percentage of sales for each item is held
constant.
b. Funds that a firm must raise externally through short-term or long-term borrowing
and/or by selling new common or preferred stock.
c. Assets required per dollar of sales.
d. Funds that arise out of normal business operations from its suppliers, employees, and
the government, and they include immediate increases in accounts payable, accrued wages,
and accrued taxes.
e. The amount of cash raised in a given year minus the amount of cash needed to finance
the additional capital expenditures and working capital needed to support the firm's growth.

25. Consider the following information for Curry Corporation ($ millions except per-share data).
Use the APV model to find the intrinsic value of the firm's equity in $millions.
Historical Projected year 1 Projected year 2
Short-term investments 20 22 25
Total Assets 1,000 1,100 1,200
All debt 300 330 350
Total liabilities 500 550 575
Shareholder's equity 500 550 625
Interest expense 15 17 18
Finance 455 Fall 2017 Final Exam Name________________________________ Page 9

Free cash flow 25 35 40

Interest rate on debt = 5%
rL (levered cost of equity) = 9%
WACC =7%
rU (unlevered cost of equity) = 8%
Tax rate = 40%
Long-term growth rate = 3%
a. $620
b. $633
c. $652
d. $677
e. $709

26. Flying K Corporation currently has a capital structure consisting of 70% debt and 30% equity.
It's beta is 1.9 and its cost of debt is 9%. That is too much debt for the CFO's taste and Flying K
is considering significantly reducing the amount of debt by issuing equity and paying down the
debt. Its target is 20% debt and 80% equity and if it does so, its cost of debt will decline to 5%.
The risk free rate is 3% and the market risk premium is 6%. What will be its new required rate of
return if it recapitalizes in this way? Use the APV model's levering and unlevering formulas, NOT
Hamada.
a. 10.9%
b. 11.5%
c. 12.0%
d. 12.6%
e. 13.3%

27. The direct spot rate for Hogwarts' Galleons is GAL/USD = $2.45. A 6-month forward contract
on Galleons is F = $2.30. If the nominal annual U.S. risk-free rate is 4%, then what is the nominal
annual risk-free rate at Hogwarts?
a. 14.3%
b. 15.7%
c. 17.3% correct answer
d. 19.0%
e. 20.9%

28. Curry, Inc. is considering a 2-year investment in a project based on the island nation of West
Finchley. The cash flows will be in the local currency, the Finch and the current direct exchange
rate is FIN/USD = S = $6.20. West Finchley is experiencing quite a bit of inflation and its central
bank's risk free bonds have a nominal annual yield of 35% compared to the U.S. risk free rate of
4%. The project cash flows (in Finches) are expected to be:
Year 0 1 2
-1000 800 700
Convert these cash flows to dollars using the appropriate forward rates and calculate the dollar
NPV of the project if your dollar-denominated cost of capital is 10%.
Finance 455 Fall 2017 Final Exam Name________________________________ Page 10

a. -$408
b. -$449
c. -$494
d. -$543
e. -$598

29. Which ONE of the following statements concerning common stock and the investment
banking process is FALSE?
a. If a firm sells 1,000,000 new shares of Class B stock, the transaction occurs in the
primary market.
b. Listing a large firm's stock is often considered to be beneficial to stockholders because
the increases in liquidity and reputation probably outweigh the additional costs to the firm.
c. The preemptive right gives each existing common stockholder the right to purchase his
or her proportionate share of a new stock issue.
d. Stockholders have the right to elect the firm's directors, who in turn select the officers
who manage the business. If stockholders are dissatisfied with management's performance, an
outside group may ask the stockholders to vote for it in an effort to take control of the
business. This action is called a tender offer.
e. The announcement of a large issue of new stock could cause the stock price to fall. This
loss is called "market pressure," and it is treated as a flotation cost because it is a cost to
stockholders that is associated with the new issue.

30. Which ONE of the following statements is FALSE?

a. Publicly owned companies have sold shares to investors who are not associated with
management, and they must register with and report to a regulatory agency such as the SEC.
b. When stock in a closely held corporation is offered to the public for the first time, the
transaction is called "going public," and the market for such stock is called the new issue
market.
c. It is possible for a firm to go public and yet not raise any additional new capital.
d. When a corporation's shares are owned by a few individuals who own most of the stock
or are part of the firm's management, we say that the firm is "closely, or privately, held."
e. Going public establishes a firm's true intrinsic value and ensures that a liquid market will
always exist for the firm's shares.

If you have a job starting when you graduate, would you please put the company and what job

it is here? ________________________________________________