Do the math and finance related questions
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 $20,000,000. The company uses a 20% discount rate for projects of this type. Is this a good investment opportunity? Explain your answer Problem 3 (20 Points) The graph below represents the IRR of one of the project your company is considering. 1. Explain why this project has two IRRs and not only one? 2. How can you make investing decision based on the above graph? Explain in details your answer. 3. If the cost of capital is 15%, are you going to accept investing in this project? Why. 4. What will be your decision if the cost of capital is 90%? Problem 4 (40) Consider the following extract of the financial statements of two competing companies: Company A Company B Current Asset Cash 10,000 200,000 Account receivables 90,000 150,000 Inventory 300,000 50,000 Total 400,000 400,000 Current liabilities Accounts payable 150,000 50,000 Notes payable 50,000 250,000 Total 200,000 300,000 The quick ratio is 2 and 1.33 for company A and B, respectively. 1. Do you think that company A has a better financial condition than company B? Explain your answer in details. The commercial (sales) of both firms is as follows: Company A Company B Sales 4,000,000 4,000,000 Cost of goods sold 2,000,000 1,200,000 Gross profit 2,000,000 2,800,000 Average inventory 200,000 300,000 Inventory turnover 10 4 2. The company B has the lowest inventory turnover but it is more efficient in generating higher gross profit. Explain how this can happen. 3. Poor decision-making can have bad consequences on the financial activity of companies. Discuss this in details and give concrete examples. SPRING 2021 MID TERM EXAM FIN 200 Problem 1 (15 Points) You have the following bond maturing in 4 years: Face Value = 1.000$; 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 current 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