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Exam Financial Management

The document is a 5 question, 3 hour exam on financial management. It covers topics such as investment evaluation techniques like net present value (NPV) and internal rate of return (IRR), capital budgeting, cost of capital calculation, dividend valuation, and key financial concepts. The student is provided information on 5 questions and is instructed to show all calculations and assumptions. Good luck is wished for the exam.

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Shrief Mohi
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357 views10 pages

Exam Financial Management

The document is a 5 question, 3 hour exam on financial management. It covers topics such as investment evaluation techniques like net present value (NPV) and internal rate of return (IRR), capital budgeting, cost of capital calculation, dividend valuation, and key financial concepts. The student is provided information on 5 questions and is instructed to show all calculations and assumptions. Good luck is wished for the exam.

Uploaded by

Shrief Mohi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Exam of Financial Management

Prof. Luc Keuleneer

• Please check the number of pages: you should find 5 questions.

• The exam will take 3 hours. .

• You are allowed to use a calculator.

• If you think any data is missing, you can make the necessary assumptions.

• Please write down all your calculations, you are not only marked on the final
solution.

Good luck!!

Name: …………………………………………………………

Student number: ……………………………………………...

1
QUESTION I.(10%)
True or false? Explain why !

I.1. Pay back method is the best method for investment decisions.

I.2. A negative net working capital can be an indication of liquidity problems.

2
I.3. Depreciations do not have any impact on the cash flow of a company.

3
QUESTION II.(30%)
The company ‘Venturani’ is considering going into a new product, which is typical
for the firm. A machine required for the project costs $ 2 million. The marketing
department predicts that sales will be $ 1,2 million per year for the next 5 years, after
which the market will cease to exist. The tool, a five-year class machine, will be
depreciated down to zero using the straight-line method. Cost of goods sold and
operating costs are predicted to be 25 percent of sales. To be clear: depreciation is
NOT included in this 25% . After 5 years the machine is sold for $ 150 000.
Venturani also needs to add net working capital of $ 100 000 at the moment of the
investment in the machine. This additional working capital will be received back at
acquisition cost at the end of the project life. The tax rate for Venturani is 40 percent.
The required rate of return (=WACC) is 16 percent. Everything is paid immediately.

II.1. Value this project using the NPV.

4
II.2. Write down the formula if you had to evaluate this project using the IRR. (no
calculations)

5
QUESTION III.(30%)

Your sister is celebrating her 29th birthday today and wants to start saving for her
anticipated retirement at age 59. She wants to be able to withdraw 15 000 Euro from
her savings account on each birthday for 10 years following her retirement. The first
withdrawal will be on her 60th birthday. She intends to invest her money in savings
and bonds. The annual effective interest rate amounts 10%. She wants to make equal
annual payments on each birthday.

III.1. If she starts making her deposits on her 30th birthday and continues to make
deposits until she is 59, what amount must she deposit annually to be able to
make the desired withdrawals on retirement?

6
III.2. Suppose your sister has just won a large sum of money. Rather than making
equal payments she has decided to make one lump-sum payment on her 40th
birthday to cover her retirement needs. What amount should she deposit?

7
QUESTION IV.(20%)
IV.1. Given the following information, what is JEM Inc.'s weighted average cost of
capital? Market value of equity = $50 million; market value of debt = $30
million; cost of equity = 16%; cost of debt before tax = 8%; equity beta =
1.25; tax rate = 34%.

IV.2. Rattle me Bones, Inc.'s common stock is currently selling for $66.25 per share.
You expect the next dividend to be $5.30 per share. If the firm has a dividend
growth rate of 4% that is expected to remain constant indefinitely, what is the
firm's cost of equity?

8
IV.3. Explain extensively: CAPM

9
QUESTION V.(10%)
What is the definition/meaning of the following financial concepts ?

V.1. Value based management ?

V.2. Net working capital ?

V.3. The agency problem ?

10

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