SPRING 2021
MID-TERM EXAM
FIN 300
Problem 1 (20 Points)
Consider the following data:
Free Cash Flow 1 = $27 million;
Free Cash Flow 2 = $43 million;
Free Cash Flow 3 = $48 million.
Free Cash Flow 4= $62 million.
Assume that free cash flow grows at a rate of 6 percent for year 5 and beyond. If the weighted average cost of capital is 12 percent, calculate the value of the firm.
Problem 2 (20 Points)
An Electronics shop provides specialty-manufacturing service. The initial outlay is $30 million and, management estimates that the firm might generate cash flows for years one through five equal to $5,000,000; $7,500,000; $10,500,000; $20,000,000; and $20,000,000.
The company uses a 20% discount rate for projects of this type.
Is this a good investment opportunity? Explain your answe
Problem 3 (20 Points)
The graph below represents the IRR of one of the project your company is considering.
1. Explain why this project has two IRRs and not only one?
2. How can you make investing decision based on the above graph? Explain in details your answer.
3. If the cost of capital is 15%, are you going to accept investing in this project? Why.
4. What will be your decision if the cost of capital is 90%?
Problem 4 (40)
Consider the following extract of the financial statements of two competing companies:
Company A
Company B
Cu
ent Asset
Cash
10,000
200,000
Account receivables
90,000
150,000
Inventory
300,000
50,000
Total
400,000
400,000
Cu
ent liabilities
Accounts payable
150,000
50,000
Notes payable
50,000
250,000
Total
200,000
300,000
The quick ratio is 2 and 1.33 for company A and B, respectively.
1. Do you think that company A has a better financial condition than company B? Explain your answer in details.
The commercial (sales) of both firms is as follows:
Company A
Company B
Sales
4,000,000
4,000,000
Cost of goods sold
2,000,000
1,200,000
Gross profit
2,000,000
2,800,000
Average inventory
200,000
300,000
Inventory turnove
10
4
2. The company B has the lowest inventory turnover but it is more efficient in generating higher gross profit. Explain how this can happen.
3. Poor decision-making can have bad consequences on the financial activity of companies. Discuss this in details and give concrete examples.
XXXXXXXXXXSPRING 2021
MID TERM EXAM
FIN 200
Problem 1 (15 Points)
You have the following bond maturing in 4 years:
Face Value = 1.000$;
Semiannual dividends = 30$;
Annual Interest rate= 4%
1. Compute the PV of the cash flows?
1. What will happen to the bond price if the interest rate increases to 6%?
Problem 2 (20 Points)
ONCF has issued a 4% bond maturing in 5 years.
The bond pays semi-annual coupon.
1. If the required rate of return is 2.5%, compute the PV of the bonds.
2. What will happen to the price of the bond:
A. Interest rate increases to 4%?
B. Interest rate decreases to 1.5%?
Explain in details all your answers.
Problem 3 (15 Points)
You are interested by the growth opportunities that offer a company listed in Casablanca stock market.
You are expecting this company to pay a Dividend of 15 MAD next year and its price is expected to be 250 MAD.
1. If the expected return is 10%, compute P0 (price of the bond today).
2. If the cu
ent price is less than the price computed in part 1, what you will do as an investor?
Problem 4 (50 Points)
The financial statement of CIH, a Moroccan bank, of the years 2015 and 2016 are given below.
You are required to compute and analyze the trend of the main ratios:
· Liquidity: 4 ratios
· Leverage (financial) ratios: 3 ratios
· Profitability ratios: 3 ratios
In total, you have to compute and interpret 10 ratios for both 2015 and 2016.
All the figures are in MAD Thousands