NOTICE − FINAL EXAM

DATE: Tuesday, August 15th from 7–10 pm

LOCATION: HENRY ANGUS 492

We will have a Question/Answer/Review session on SATURDAY morning from

11:30 to 2 in our normal classroom (HA 343). I will get DAP to book our normal
room; however, if it is a different room, I will email you. Please bring your
notes/assignments/review questions/textbook to the session.

I WILL BE AVAILABLE FOR ADDITIONAL OFFICE HOURS ON Tuesday, August

15th from 3:30-6:30 pm IN MY OFFICE (HA 351). Feel free to e-mail me as needed;
however, include your phone number in the e-mail (in case, I need to talk to you).

Please note that CELL PHONES ARE NOT ALLOWED ON THE DESKS DURING
EXAMS. THUS, MAKE SURE YOU HAVE A WATCH TO KEEP TRACK OF TIME
(in case the computer malfunctions). Please turn your cell phones OFF and
PUT THEM AWAY in your jacket/pants/bag/purse/“murse”. Thanks.

Finally, make sure and bring your student identification card with you and
place it in front of you before the exam starts.

1. The exam is 3 hours in length and 95 marks.

2. The final exam covers everything beginning with Chapter 14 until the end of
the term (chapters 14, 3 (tax stuff re: capital budgeting), 13, 18 & 19, 20 and 4).
Thus, only post-midterm materials will be examined.

2. The final exam can be worth up to 60% of your grade.

3. There will be 15 marks for multiple choice questions (1 mark each). There will be
12 marks for short answer questions [1-2 marks each] (based on the class notes).

4. There will be six computational questions− the biggest questions being

Capital Budgeting (20 marks) and WACC (20 marks). Other questions will
relate to the following topics: Chapter 13, Chapter 13 (Topic 13.3), Chapter 14
(Topic 14.5), and Chapter 4 (Pro-forma financial statements).

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NOTE:
No complete final exam has been provided. Capital Budgeting and WACC will be
the two biggest problems on the final exam. Accordingly, old exam problems
relating to these two areas are provided below. TWO ADDITIONAL WACC
QUESTIONS ARE INCLUDED which will be done during the review session.
With respect to the other problems on the final, as long as you can do (and
understand) the in-class examples and problems, the supplementary textbook
problems and the assignment problems, you should be properly prepared.

The instructions on the cover page will be exactly as follows: see next page also.

BUSI 370 − FINANCE

FINAL EXAM − SUMMER 2017
Time: 180 minutes Total Marks: 95
Name (Last, First): _______________________________ Student # ___________
Signature: _________________________________
1. Please be careful to budget your time carefully so that you can attempt all
the questions.
2. Please do not ask any questions concerning the INTERPRETATION of the
questions. If you believe there is missing or incorrect information, state your
assumption and proceed.
3. Read the whole question before you start answering. Read carefully.
4. Unless indicated otherwise, take (intermediate) calculations to FOUR
decimal places- i.e., 0.0123 or 1.2345%. For calculation of dollar amounts,
take calculations to the closest dollar (no cents needed). You must show
all keys punched in (including −, BEG, if applicable).
5. Formula Sheets are provided separately. Put your name on the formula
sheet and return it with your exam (ON TOP OF THE EXAM).
6. You MUST show your work to get the marks.
7. If you write on the back of a page, please indicate so (on the FRONT of the page).
8. PLEASE TURN YOUR CELL PHONE OFF AND PUT IT AWAY. THANKS.
CELL PHONES ARE NOT PERMITTED ON THE TABLE.
9. Do NOT tear any pages out (unstaple and restaple, if you have to).
10. Where applicable, the tax rate is 40%.

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 BUSI 370 − Finance
(Section: 971) | Final Exam
Exam Date: August 15th (HA 492) Exam Time: 7 to 10 pm

Students – please review and complete #1-4 below (please print clearly):

1 Student Name (Last Name, First Name):

2 Student Number:
3 Read and Observe the UBC and DAP Exam Rules:
1. Each examination candidate is required to produce photo ID for identification and verification by the invigilator (UBCCard
preferred, if not available, government-issued photo ID required).
2. Examination candidates are not permitted to ask questions of the examiners or invigilators, except in cases of supposed
errors or ambiguities in examination questions, illegible or missing material, or the like.
3. No examination candidate shall be permitted to enter the examination room after the expiration of one-half hour from the
scheduled starting time, or to leave during the first half hour of the examination. Should the examination run forty-five (45)
minutes or less, no examination candidate shall be permitted to enter the examination room once the examination has
begun.
4. Examination candidates must conduct themselves honestly and in accordance with established rules for a given examination,
which will be articulated by the examiner or invigilator prior to the examination commencing. Should dishonest behaviour be
observed by the examiner(s) or invigilator(s), pleas of accident or forgetfulness shall not be received.
5. Examination candidates suspected of any of the following, or any other similar practices, may be immediately dismissed from
the examination by the examiner/invigilator, and may be subject to disciplinary action:
a. speaking or communicating with other examination candidates, unless otherwise authorized;
b. purposely exposing written papers to the view of other examination candidates or imaging devices;
c. purposely viewing the written papers of other examination candidates;
d. using or having visible at the place of writing any books, papers or other memory aid devices other than those
authorized by the examiner(s); and,
e. using or operating electronic devices including but not limited to telephones, calculators, computers, or similar
devices other than those authorized by the examiner(s)—(electronic devices other than those authorized by the
examiner(s) must be completely powered down if present at the place of writing).
6. Examination candidates must not retain, destroy or damage any examination material, must hand in all examination materials
and must not take any examination material from the examination room without permission of the examiner or invigilator.
7. Notwithstanding the above, for any mode of examination that does not fall into the traditional, paper-based method,
examination candidates shall adhere to any special rules for conduct as established and articulated by the examiner
8. Examination candidates must follow any additional examination rules or directions communicated by the examiner(s) or
invigilator(s).
4 Read and Complete the Student Declaration:
By providing my signature below, I agree to all UBC and Diploma in Accounting Program (DAP) exam rules and policies
governing student conduct during examinations, as outlined above. I understand that violation of these rules, whether intentional or
otherwise, is considered academic misconduct and as stipulated in the UBC Calendar, disciplinary action will be pursued.

Student Signature:

All materials distributed for this exam remain the property of the Diploma in Accounting Program, University of
British Columbia.

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NAME (Last, First): ________________________
FORMULA SHEET − BUSI 370 FINAL
Future value of a cash flow
FV = PV(1 + i)n

Present value of a cash flow

PV = FV÷(1 + i)n

FVANNUITY DUE = FVREG ANNUITY × (1 + i)

Present value of a perpetuity

PV = A1 ÷ i

PVANNUITY DUE = PVREG ANNUITY × (1 + i)

Nominal Interest Rate [Fisher Formula]

(1 + nominal) = (1 + real) (1 + expected inflation)

Dividend Discount Model

P0 = Σ Dt÷(1 + k)t

DDM – No Growth-Rate
P0 = D1÷k

DDM – Constant-Growth-Rate
D1 D
P0  kc  1  g
kc  g P0

Pn = Dn+1
kc − g

Dividend Payout
Dividend Payout = Dividend per Common Share = Dividends
Earnings per Common Share (EPS) Net Income

Sustainable Growth Rate

g = ROE x (1 – Payout ratio)

Total Return
TR = [CF1 + (P1 – P0)] ÷ P0 OR [DIV1 + (P1 − P0)] ÷ P0

Required Rate of Return [CAPM]

r  r f   (rm  r f )

4
PV of CCA Tax Shield [Half Year Rule]
[(CdT)÷(k + d)][(1+ k÷2)÷(1 + k)]

PV (on day sold) of Lost CCA Tax Shield

[(SndT)÷(k + d)]

UCC Of An Asset At The End Of A Year [Half Year Rule]

UCCn = C(1 – d÷2)(1 – d)n−1

Taxable Capital Gain

(Proceeds – Cost)(½)(Tax Rate)

Profitability Index
PI = PVCIFs
PVCOFs

Other Formulas
Int b (1  T ) Dp Dp
kb = rb (1 – T) kb  rp  kp 
NPb Pp NPp

D1 D1 Pe
re  g ke  g ke =  re
Pe NPe NPe

Chapter 4:
Return on assets net income ÷ total assets
Net profit margin net income ÷ sales
(Asset) turnover sales ÷ total assets
Return on equity net income ÷ shareholders’ equity
Debt ratio total liabilities ÷ total assets
Leverage (or equity multiplier) total assets ÷ shareholders’ equity
Price-earnings (P/E) price per share ÷ earnings per share

Dupont system ROE = net income x sales x total assets

sales total assets shareholders’ equity

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WACC QUESTION (18 marks; suggested time 33 minutes)

You have been asked by Porky Pig Ltd. (PPL), a manufacturer of skateboards to
estimate its weighted-average cost of capital (WACC).

PPL currently has $200 million face value of bonds outstanding. The bonds have
6 years remaining until maturity and carry a 12% coupon rate with semi-annual
payments. The bonds are trading at 107.70.

PPL also has 10 million preferred shares outstanding. These shares pay a dividend
of $1.50 and are trading at $18.75.

Finally, PPL has 15 million common shares outstanding, which are trading at $21.
PPL just paid a dividend of $1.25 per share and investment analysts have projected
these dividends to grow at an average annual rate of 3% for the foreseeable future.
The shares have a beta of 0.75, the risk-free rate of return is 5% and the return on
the market portfolio is 12%.

PPL has been advised by its underwriters that flotation costs would be 4% after-tax
on new bonds and preferred shares, and 6% before-tax on common shares. PPL’s
tax rate is 40%.

Calculate PPL's weighted-average cost of capital, assuming it must issue

common shares.

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SOLUTION − WACC QUESTION
COST OF DEBT:
STEP 1:
−1,077 PV [1,000 x 1.077 (107.7% of face value)]
1,000 FV
60 PMT
12 N
I/YR = 5.1251% (paid every 6-months)
STEP 2:
−960 PV [1,000(1 – .04)]
1,000 FV
30.75 PMT [(1,000)(.051251)(1–.40)]
12 N
I/YR = 3.4887%
STEP 3:
EAR = (1.034887)2 – 1 = 7.10%

COST OF PREFERRED SHARES:

r = 1.50 = 8% k= 8% = 8.33%
18.75 (1 – .04)

COST OF COMMON SHARES:

Dividend Growth Model: ATFC = 6% x .6 = 3.6%
k= (1.25)(1.03) + .03 = 1.2875 + .03 = 9.36%
21(1 – .036) 20.24

CAPM:
r = 5% + .75(12% − 5%) = 10.25%

k= 10.25 ÷ (1 – .036) = 10.63% OR 21(10.25%) = 10.63%

20.24

Average = 9.36% + 10.63% = 10.00%

2
WACC:
MV of Bonds = (200,000)($1,000 x 1.077) = $215,400,000
MV of Preferred Shares = (10,000,000)($18.75) = $187,500,000
MV of Common Shares = (15,000,000)($21) = $315,000,000
Total MV $717,900,000
WACC = ($215.4M÷$717.9M)(7.10%)+($187.5M÷$717.9M)(8.33%)
+ ($315M÷$717.9M)(10.00%)
= 8.69%
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CAPITAL BUDGETING QUESTION − 20 Marks [suggested time 36 minutes]
You have been asked to help a manufacturing firm decide whether it should invest in a new 4-year
project that it believes will improve the company’s operations. The project will require an
investment of $2 million for a new building and $1.5 million for new equipment. The company
recently purchased a block of land at a cost of $400,000 to build on if it decides to go ahead with
the project. An independent appraiser has indicated that the value of the land should be
approximately $500,000 in 4 years, based on current real estate trends. If they invest in the project,
select current assets/liabilities will be affected as follows: receivables will increase $400,000;
inventory will increase $200,000; and accounts payable will increase $100,000.

The equipment is estimated to have a 4-year useful life, at the end of which it is expected to
have zero salvage value. The building is estimated to have a 25-year useful life, at the end of
which its salvage value is expected to be equal to 40% of its original cost. At the end of year 4,
the building is expected to be worth 75% of its original cost. However, the company believes
that it will have other uses for the building at the end of the project and intends to retain it.
Both the building and equipment will be amortized on a straight-line basis.

To help with your analysis, the firm has provided you with the following projected income
statements for the project:

(In $000s) Year 1 Year 2 Year 3 Year 4

Revenues $ 8,000 $ 8,500 $ 9,000 $ 9,500
Cost of goods sold 6,000 6,300 6,500 6,800
Amortization 423 423 423 423
Interest expense 200 200 200 200
Tax expense 550.80 630.80 750.80 830.80
Net income $ 826.20 $ 946.20 $ 1,126.20 $ 1,246.20

The company’s cost of capital is 14% and the CCA rate is 20%.

Required
Should the project be undertaken?

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CAPITAL BUDGETING − SOLUTION

Land ($ 400,000)
Building (2,000,000)
Equipment (1,500,000)
CCA TAX SHIELD: 772,962
Building & Equipment
(3,500,000)(0.20)(.40)÷(0.14+0.20)x(1.07÷1.14)
AFTER-TAX NOI: 0 CF0
(8,000−6,000) = 2,000,000 CF1
(8,500−6,300) = 2,200,000 CF2
(9,000−6,500) = 2,500,000 CF3 4,039,956
(9,500−6,800) = 2,700,000 CF4
14 I/YR 2ndF NPV = 6,733,260 x .6
Investment in NWC $400,000 + $200,000 − $100,000 (500,000)
Recovery of NWC 500,000÷(1.14)4 296,040
SALVAGE VALUE: 296,040
Land 500,000÷(1.14)4
Capital gains tax (500,000 – 400,000)(1/2)(0.40)÷(1.14)4 (11,842)
Building (0.75)(2,000,000)÷(1.14)4 888,120
CCATS LOST (888,120)(0.20)(.40)÷(0.14+0.20) (208,969)
NPV $1,672,307

The project should be undertaken because it has a positive NPV.

NOTE:
1. Even though the company doesn’t intend to sell the land/building, we MUST consider the
salvage values at the end of the project’s 4-year life. We are analyzing the project over its
4-year life; we are NOT analyzing the company.

2. Amortization should be ignored (see pages 14-7 and 14-9 of notes). Interest should be
ignored (see pages 14-5 and 14-14 of notes).

3. Since land is “purchased recently”, cost = FMV (see page 14-5 of notes).

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Question 4 [for bonds, see pages 7 and 8]
Gumball Corporation has the following capital structure based on market values that it wishes
to maintain in the future:
Long-Term Debt (Bonds) 25%
Preferred shares 20%
Common stock 55%
The company has 20-year, 7 percent annual coupon, bonds outstanding that are trading at 98
(______% of ________________________). Issuing and underwriting costs on bonds would be
3% after-tax. New preferred shares with a dividend of $2.10 per share would net the company
$28 per share (after ATFC). Common shares could be sold to the public at $8 per share with
8 percent issuing costs. The firm has a beta of 0.6, the yield on government T-bills is 6 percent,
and the yield on the market portfolio is 11 percent. The firm’s tax rate is 40 percent.
Compute Gumball’s WACC assuming it will not have to issue common shares (use ______).
What would Gumball’s WACC be if it had to issue common shares (use ______)?
[Answers = Kb = 4.55%; Kp = 7.50%; Re = 9%; Ke = 9.45%; WACC = 7.59%; WACC = 7.84%]

BONDS: We are GIVEN the _______; thus, we need to CALCULATE the ____________________.

PREFERRED SHARES:

COMMON SHARES:

WACC (NOT issuing…) =

WACC (issuing…) =

10
Question 5
A firm wishes to determine the appropriate discount rate for a project it is considering undertaking.
The project is similar to the existing business of the firm. [Thus, we need to determine the
company’s __________.] The project would require a total initial investment of $20 million and
the money will be raised by issuing bonds [______________________________________ (use ___)].
The firm has 1 million common shares outstanding trading at $65. You have determined that the beta
of the firm’s common stock is 1.3, the risk-free rate of interest is 6 percent and the expected return on
the stock market as a whole is 13 percent. The firm also has 400,000 preferred shares outstanding
each having a par value of $100 and a 2% dividend. The market price of the preferred shares is $18.
The firm’s debt is in the form of bonds with an 8 percent annual coupon and 7 years left until maturity.
The bonds are trading at 102 (_______% of __________________________). The firm’s bonds
have a face value of $50 million. The firm is subject to a tax rate of 40 percent. Assume that
issuing costs for all new securities are 5%. What is the required return for the project?
[Kb = 5.09%; Kp = 11.45%; Re = 15.10%; WACC = 10.74%]

BONDS: We are GIVEN the _______; thus, we need to CALCULATE the ____________________.

PREFERRED SHARES:

COMMON SHARES:

TOTAL MV = = 123.2M

WACC =

11