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Question 1: (Cost of Capital) 8 points

Pine Tree Farms Corporation (PTFC) has a target capital structure of 20% debt, 10% preferred stock, and 70% common equity. Currently PTFC has a capital structure of 70% debt, 10% preferred stock, and 20% common stock. The after tax cost of debt is 4.5%. The preferred stock has a par value of $100 per share, a $5 per share dividend, and a market price of $70 per share. The common stock of PTFC trades at $97 per share and has a projected dividend (D1) of $2.60. The stock price and dividend are expected to continue to grow at 7% per year for the foreseeable future.

What is PTFC?s weighted average cost of capital (WACC)?

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FINC 5000, Summer 2015 Final Exam, Part B Question 1: (Cost of Capital) 8 points Pine Tree Farms Corporation (PTFC) has a target capital structure of 20% debt, 10% preferred stock, and 70% common equity. Currently PTFC has a capital structure of 70% debt, 10% preferred stock, and 20% common stock. The after tax cost of debt is 4.5%. The preferred stock has a par value of $100 per share, a $5 per share dividend, and a market price of $70 per share. The common stock of PTFC trades at $97 per share and has a projected dividend (D1) of $2.60. The stock price and dividend are expected to continue to grow at 7% per year for the foreseeable future. What is PTFC's weighted average cost of capital (WACC)? Question 2: (Capital Budgeting) 4 points Consider Projects A and B, with net cash flows as follows: ---- Net Cash Flows ---Project A Project B Initial Cost at T-0 (Now) cash inflow at the end of year 1 cash inflow at the end of year 2 cash inflow at the end of year 3 ($30,000) 10,000 8,000 5,000 ($50,000) 6,000 16,000 25,000 a. Construct NPV Profiles for these two projects. b. If the two projects were mutually exclusive, which would you accept if your firm's cost of capital were 4%? Which would you accept if your firm's cost of capital were 8%? Question 3: (Capital Budgeting) 2 points Calculate the IRR of the following project: Year 0 1 2 3 Cash Flow ($55,000) $21,000 $23,000 $25,000 Question 4: (Capital Budgeting) 2 points Calculate the Modified Internal Rate of Return (MIRR) of the project in Question 3, assuming your firm's cost of capital is 7%. Page 1 FINC 5000, Summer 2015 Final Exam, Part B Question 5: (Capital Structure) 4 points Firms R and S are similar firms in the same industry. Firms R and S have the same profit margin and total asset turnover when compared. However, Firm R's capital structure is 70% debt, 30% equity, and Firm S's capital structure is 30% debt, 70% equity. Given the above conditions, which firm will experience the highest return on equity (ROE)? Why? Question 6: (Capital Structure) 4 points A consultant has collected the following information regarding Hobbit Manufacturing: Operating income (EBIT) $600 million, Debt $0, Interest expense $0, Tax rate 35%, Cost of equity 7%, WACC 7% . The company has no growth opportunities (g = 0), so the company pays out all of its earnings as dividends . Hobbit can borrow money at a pre-tax rate of 5%. The consultant believes that if the company moves to a capital structure consisting of 30% debt and 70% equity (based on market values), which would require taking on debt in the amount of $1,779.47 million, that the cost of equity will increase to 8% and the pre-tax cost of debt will remain at 5%, but the value of the firm will rise. Is the consultant correct? If the company makes this change, what will be the increase in total market value for the firm? Question 7: (Forecasting) 8 points Jolly Joe's Novelties, Inc. had the financial data shown below last year. Jolly Joe's has just invented a new toy which they expect will cause sales to increase from $100,000 to $180,000, increasing net income to $12,000. From experience the company knows that when sales changes, all current assets plus accounts payable and accrued expenses change at the same percentage rate, and the company feels they can handle the increase without adding any fixed assets. a. Will Jolly Joe's need any new outside funding if they pay no dividends? b. If so, how much will be needed? Page 2 FINC 5000, Summer 2015 Final Exam, Part B Question 8: (Working Capital Management) 4 points Suppose it takes Jolly Joe's Novelties, Inc. 5 days to build and sell toys (on average). Also suppose it takes the firm's customers 35 days, on average, to pay for the toys after they have purchased them on credit. Finally, suppose the firm is able to delay paying for the materials it uses in the manufacturing process for 30 days. Given these conditions, how long is Jolly Joe's cash conversion cycle? Question 9: (Working Capital Management) 4 points If Jolly Joe's buys $100 worth of supplies on credit with terms 3/10 n30 and pays the bill on the 28th day after the purchase: a. What is the approximate, or \"nominal,\" cost of trade credit as an annual rate? b. What is the exact cost of trade credit as an annual rate? Question 10. Define the following terms: a. Current assets b. Current liabilities c. Working capital d. Net working capital 11. Working capital management is said to be a \"trade-off\" between two goals. Explain this statement. 12. Explain what is meant by the term \"cash conversion cycle.\" 13. Suppose it takes a computer manufacturer 10 days to build and sell computers. Also suppose it takes the firm's customers 30 days, on average, to pay for the computers after they have purchased them on credit. Finally, suppose the firm is able to delay paying for the computer parts it uses in the manufacturing process for 20 days. Given these conditions, how long is the firm's cash conversion cycle? 14. Given that cash accounts generally don't pay any interest, why should firm's hold any cash at all? Page 3 FINC 5000, Summer 2015 Final Exam, Part B 15. Given that accounts receivable represents a delay in the receipt of cash that could be put to good use, why do firms allow credit purchases at all? 16. What are the three categories of inventory costs? 17. What is \"trade credit?\" 18. Suppose your firm buys $1,000 worth of supplies on credit with terms 3/15 n60. a. What does \"3/15 n60\" mean? b. If you pay the bill on the 14th day after the purchase, what is the cost of the trade credit you have used for the 14-day period? c. If you pay the bill on the 50th day after the purchase, what is the cost of the trade credit you have used for the 35-day period after the discount period ended? 19. If your firm buys $1,000 worth of supplies on credit with terms 3/15 n60 and pays the bill on the 60th day after the purchase: a. What is the approximate, or \"nominal,\" cost of trade credit as an annual rate? b. What is the exact cost of trade credit as an annual rate? End of assignment questions (see answers to numerical problems below) Answers to numerical problems: Question 13: 20 days Question 18b: 0.00% Question 18c: 3.09% Question 19a: 25.1% Question 19b: 28.0% ** End of Exam ** Page 4