could you assist me in completing this pass paper please

MGMT2023 Financial Management 1- Final Exam of Semester 2, 2014 Study Guide Exam format & instructions 1) The Final Exam will be 2 hours and covers Ratio analysis to the end of the course. 2) Answer all questions in SECTION A (30 marks). 3) Choose any TWO questions from SECTION B (25 marks each). 4) The paper is worth 60% of the final grade. 5) Be sure to state ALL formulae being used and work all questions thoroughly outlining each step. 6) Please use Standard English in your answers. 7) Carry your own non-programmable calculator to the exam. 8) Arrive 30 minutes before the start time of the exam- this is very important! 9) Do not gamble by studying selective topics as some questions are mixed from two or more topics. 10) Two of the following topics will be used in testing the compulsory question a. Ratio analysis b. Time value of money c. Risk & return. N.B. Remember all concepts are equally important. You can never say you have studied well if you did not: I. Review thoroughly the detailed lecture notes- with emphasis on concepts. II. Review in-class examples and additional insights given III. Work ALL problem papers thoroughly. IV. Attempt end of chapter questions and past papers V. Simulate an exam scenario by timing yourself and completing exam type questions. Mona School of Business & Management UWI MGMT2023 Financial Management 1- Final Exam of Semester 2, 2014 Study Guide Here are a few questions to practice: Question 1. (20 marks) (a) A 5-year corporate bond with a 6.8% coupon rate is trading at $952.63 (the face value is $1000). Assuming semi-annual coupon payments: (i) Estimate the yield to maturity on this bond. (5 marks) (ii) Now assume that the rating of the corporation that issued the bond declines from AA to BBB and that the default spread increases from 0.5% (which is what it is now) to 0.8%. Estimate the effect on the bond price. (5 marks) (b) You are valuing First Bank, a large commercial bank. The bank reported earnings per share of $4.00 last year, and paid out dividends of $2.40 per share. The earnings are expected to grow 4% a year in perpetuity, and the firm is expected to maintain its existing payout ratio. The firm's equity beta is 1.25, the risk-free rate is 5% and the return on the market portfolio is 8.2%. (i) Estimate the value of equity per share. (5 marks) (ii) If the stock is trading at $42 per share, estimate the implied growth rate (the growth rate that the market is assuming for this stock). (5 marks) Question 2. (20 marks) (a) Your subscription to Jogger's World Monthly is about to run out and you have the choice of renewing it by sending in the $10 a year regular rate or of getting a lifetime subscription to the magazine by paying $100. Your cost of capital is 7 percent. How many years would you have to live to make the lifetime subscription the better buy? Payments for the regular subscription are made at the beginning of each year. (Round up if necessary to obtain a whole number of years.) (5 marks) (b) Today is your 25th birthday. Your parents just gave you $5,000 that you plan to use to open a stock brokerage account. Your plan is to add $500 to the account each year on your birthday. Your first $500 contribution will come one year from now on your 26th birthday. Your 40th and final $500 contribution will occur on your 65th birthday. You plan to withdraw $5,000 from the account five years from now on your 30th birthday to take a trip to Europe. You also anticipate that you will need to withdraw $10,000 from the account 10 years from now on your 35th birthday to take a trip to Asia. You expect that the account will have an average annual return of 12 percent. (i) In present value terms (t=0), what is the total cost of the vacations you plan to take on your 30th and 35th birthdays? (6 marks) (ii) How much money do you anticipate that you will have in the account on your 65th birthday, following your final contribution? (9 marks) Mona School of Business & Management UWI MGMT2023 Financial Management 1- Final Exam of Semester 2, 2014 Study Guide Question 3. (20 marks) (a) Complete the balance sheet and sales information in the table that follows for HI Ltd. using the following financial data (all sales are on credit): (15 marks) Debt Ratio: 50% Total assets turnover: 1.5x Gross profit margin on sales: 25% Current Ratio: 1.8x Accounts receivable turnover: 10x Inventory turnover ratio: 5x BALANCE SHEET Cash Accounts Payable Accounts Receivable Long-Term Debt Inventories Common Stock Fixed Assets Retained Earnings Total Assets $300,000 Sales (b) 60,000 97,500 Total Liabilities & Equity Cost of Goods Sold S.M. Ltd. had sales of $400,000 in 2011 (70% of its sales are credit). The company's gross profit margin is 10%, its ending inventory is $80,000, and its accounts receivable is $25,000. What amount of funds can be generated by the company if it increases its inventory turnover ratio to 10 and its accounts receivable turnover ratio to 18? (5 marks) Question 4. (20 marks) Brick's Brewery Inc. manufactures and distributes fruit juice products. Brick is considering the development of a new prune juice product. Bricks' CFO has collected the following information regarding the proposed project. The project can be operated at the company's Dayton plant, which is currently vacant. The project will require that the company spend $1 million today (t = 0) to purchase a new machine. For tax purposes, the equipment will be depreciated on a straight-line basis. The company plans to use the machine for all 3 years of the project. At t = 3, the equipment is expected to have no salvage value. The project will require a $200,000 increase in net operating working capital at t = 0. The cost of the net operating working capital will be fully recovered at t = 3. The project is expected to produce incremental sales of $1 million a year for three years (t = 1, 2, and 3). The annual operating costs (excluding depreciation) are expected to be 60 percent of sales. The company's tax rate is 40 percent and it has a WACC equal to 10 percent The company is extremely profitable, so any losses incurred from the prune juice project can be used to partially offset taxes paid on the company's other projects. (a) Determine the project's NPV and MIRR? Mona School of Business & Management UWI (18 marks) MGMT2023 Financial Management 1- Final Exam of Semester 2, 2014 Study Guide (b) Should the company undertake this project? Explain your response. (2 marks) Question 5. (20 marks) (a) John Brown is 20 years old and has recently started his first job. Since he knows you are studying financial management he has come to you for some advice. After a brief discussion you discovered the following information about John. - He would like to purchase a car 2 years from now. He anticipates that the vehicle will cost $2,500,000.00. His bank has indicated that they will require a 20% deposit and will finance the remainder at 12% per annum interest with equal monthly installments for 5 years. - On his 30th birthday he will have access to $1,000,000.00 from a savings plan started by his parents. He intends to use this to open a retirement savings account that will mature in 35 years on his 65th birthday. This account will provide a return of 7% per annum and will require that John makes additional deposits of $60,000 at the end of each year in the account. (i) (ii) (iii) (iv) (b) (i) (ii) (iii) How much would John need to save at the end of each month to be able to afford the deposit on the car, assuming his savings could earn interest at 4% per annum? (2 marks) What will be the principal balance on the vehicle loan after 3 years of payments? (4 marks) How much interest would John have paid after 3 years of payments? (2 marks) What will be the balance on the retirement account on John's 65th birthday? (3 marks) Differentiate between the nominal and the effective interest rates? (3 marks) Define perpetuity and give two examples of such investments. (3 marks) Why is the concept of the time value of money so important to financial managers?(3 marks) Question 6. (20 marks) (a) (i) (ii) (iii) What is an efficient portfolio? List 5 types of events that influence systematic (non-diversifiable) risk. How can standard deviation be used in investment analysis? (b) (i) Richtex Brick has a current dividend of $1.70 and the market value of its common stock is $28. The expected market return is 13 percent and the risk-free rate is 9 percent. If Richtex stock is half as volatile as the market (that is, the stock price moves on average at half the rate of the movement in the market index), and the market is in equilibrium, what rate of growth is expected for Richtex's dividends assuming a constant growth valuation model? (5 marks) (ii) The beta of Sanafil is 1.2. Sanafil is evaluating a merger with Matra, a firm that has a beta of 0.95. Sanafil's stock sells for $40 per share and there are 10 million shares outstanding. Matra's stock sells for $60, but there are only 2 million shares outstanding. Mona School of Business & Management UWI (2 marks) (3 marks) (2 marks) MGMT2023 Financial Management 1- Final Exam of Semester 2, 2014 Study Guide If these two firms merge, what will be the merged firm's beta? (iii) (2 marks) Lotte Group is planing on diversifying into the transportation industry. As a result, Lotte's beta would rise to 1.3 from 1.1 and the expected long-term growth rate in the firm's earnings would increase from 11% to 14%. Currently the risk-free rate is 5.0% and the market risk premium is 8.6%. If Lotte's current dividend is $1.30, should Lotte diversify into the transportation industry? (6 marks) Question 7. (20 marks) (a) (b) (i) What are the advantages and disadvantages of long-term debt financing? (4 marks) (ii) According to the fundamental principle of intrinsic value, how does a firm value an asset? (4 marks) (iii) Suppose you buy a 9.75 percent coupon, 30-year bond when the bond is first issued. If interest rates suddenly fall to 8.25 percent, what happens to the value of your bond? Why? Suppose your bond is convertible. Does your answer change? (Note: You are not required to perform any mathematical calculations. Discuss the relationships only.)(4 marks) (i) What is the market value of a zero coupon bond with 5 years to maturity? The bond was originally sold with a yield to maturity equal to 11 percent, but the market rate today is 9 percent. (2 marks) (ii) Determine the value of a LASKA 6.25% cumulative preferred stock, series D, par value $75 to an investor who requires a 9.5% rate of return on a security with this risk.(3 marks) (iii) WPI has a bond issue outstanding that has a coupon rate of 10%, and a current yield of 11%. The yield to maturity on this bond is 12%. What is the market price, to the nearest dollar, of the WPI bond if it pays interest semi-annually and has 10 years to mature?(3 marks) Question 8. (20 Marks) (a) Two mutually exclusive projects are being evaluated. Each project has an initial outlay of $50,000 and a required return of 15%. The after-tax cashflows for the two projects are: Year 1 2 3 4 (b) Project A $5,000 18,000 25,000 32,000 (i) Compute each project's Payback Period, NPV and MIRR? (ii) Using the information calculated, which project should be selected? (i) What are the principles that should be applied when estimating cash flows for capital budgeting purposes? (3 marks) Mona School of Business & Management UWI Project B $20,000 20,000 20,000 20,000 (13 marks) (1 marks) MGMT2023 Financial Management 1- Final Exam of Semester 2, 2014 Study Guide (ii) Explain why the internal rate of return method is more popular than the net present value method. What are some potential problems with relying on the IRR method?(3 marks) Question 9. (20 marks) You have finally saved $10,000 and are ready to make your first investment. You have the three following alternatives for investing that money: Capital Cities ABC, Inc. bonds with a par value of $1,000, a coupon interest rate of 8.75 percent, are selling for $1,314 and mature in 12 years. Southwest Bancorp preferred stock paying a dividend of $2.50 and selling for $25.50. Emerson Electric common stock selling for $36.75. The stock recently paid a $1.32 dividend and the firm's earnings per share has increased from $1.79 to $3.06 in the past five years. The firm expects to grow at the same rate for the foreseeable future. Your required rates of return for these investments are 6 percent for the bond, 7 percent for the preferred stock, and 15 percent for the common stock. Required: (a) Calculate the value of each investment based on your respective required rates of return. (11 marks) (b) Which investment would you select? Why? (c) Assume Emerson Electric's managers expect an earnings downturn and, as a result, lower their growth forecast by 3 percent. Would this change your decision in (b) above? (2 marks) (d) What economic factors determine the yield to maturity for a bond? (2 marks) (5 marks) Question 10. (20 marks) You recently graduated with a major in finance and have just landed a job as a financial planner with RNJ Investments Limited. Your first assignment is to invest $100,000 for a client. You have been restricted to the following investment alternatives - Alta Industries, an electronics firm; Repo Men Ltd., a debt collection agency; Jamaican Foam, manufacturers of mattresses and other foam products; and your company's \"index fund\