2012 Solutions to Review Questions for Final Exam Solutions to...Corporate Finance Review Questions A worldwide cosmetics company can upgrade the quality of one of its products by

June 2012

Solutions to

Final Exam Review Questions

Corporate Finance Review Questions 1. Maple Ltd. currently has 10 million common shares outstanding. Maple has just paid a

dividend of $0.25 per share and investment analysts have informed you that the dividends are expected to grow by 7% annually for the foreseeable future. The analysts have also informed you that the shares are expected to be selling at a price of $4.50 in 1 year’s time, the beta on the Maple shares is 1.10, the market price of risk is 6%, and the risk-free rate of return is 4%. Hint - The $4.50 does not include the dividend that will be paid in one year’s time. The sum of these amounts must be brought back to time now. What is the current market price for a Maple common share?

a) $4.07 b) $4.29 c) $4.31 d) $4.47 e) None of the above

2. At the most recent Treasury bill auction, 182-day Treasury bills (T-bills) with a face value of

$100 were selling for $95.60. At this price, what is the yield offered by the T-bills? a) 2.3% b) 4.6% c) 9.4% d) 19.7% e) None of the above

3. Ferny Inc. currently has 60 million common shares outstanding with a current market price

of $13 per share. The shares just paid a dividend of $1.50 per share and investment analysts expect the dividends to grow at an average annual rate of 2% for the foreseeable future. What is the cost of Ferny’s common shares if flotation costs on new common shares are expected to be 3% after-tax, Ferny’s tax rate is 30%, and Ferny intends to finance its growth from retained earnings?

a) 11.77% b) 13.54% c) 13.77% d) 14.13% e) None of the above

Commentthat will be$.25 x 1.07market valtime will gi The discoucan be obtr = 0.04 + 1 4.7675 FV1 n 0 pmt 10.6 I CPT PV =

Comment182/365 n‐95.60 PV 100 FV 0 Pmt Cpt i

CommentNote that in

k rre e

You are uscosts for inke = 1.50 (1that is, 13.7

Corporate Finance Review Questions 4. Your company currently purchases its inventory on credit with trade terms of 3/15, net 60.

What is the cost of the missed discount if the company decides to delay payment until day 60?

a) 3.00% b) 3.09% c) 20.36% d) 28.03% e) None of the above

5. Trail Inc. currently has 5 million preferred shares outstanding. The shares have a par value

of $22.50 per share and their current price is $25 per share. Trail’s tax rate is 40% and flotation costs on a new issue of preferred shares are 5% before tax. What per-share dividend are the preferred shares paying if the component cost of the preferred shares in a weighted average cost of capital calculation is 8.25%? Hint – The after tax costs of flotation must be subtracted from the share price to obtain the net proceeds.

a) $1.80 b) $1.96 c) $2.00 d) $2.06 e) None of the above

Comment60 – 15 = 445/365 n -97 PV 100 FV 0 pmt Cpt i

Comment

Comment

Corporate Finance Review Questions


Corporate Finance Review Questions A worldwide cosmetics company can upgrade the quality of one of its products by purchasing new equipment at a cost of $155,000. The new equipment would replace old equipment that has a current market value of $23,000. The old equipment originally cost $180,000 and was three quarters amortized. If the old equipment was used for an additional 12 years, its salvage value at that time would be $5,000. The new equipment has an expected life of 12 years. Its salvage value is estimated at $30,000. By upgrading the quality of this product, the company would be able to increase the sale price. As a result, the operating income before tax will increase by $20,000 per year for the first 3 years, and by $25,000 per year during the last 9 years. The company’s tax rate is 40% and its cost of capital after tax is 15%. The capital cost allowance for the new equipment is 20%. Required Compute the net present value (NPV) for the investment and state whether the company should proceed with the investment.

Comment

Comment


Bad Debt Review Questions

The trial balance before adjustment of Rosen Company reports the following balances: Dr. Cr. Accounts receivable $105,000 Allowance for doubtful accounts $ 2,500 Sales (all on credit) 650,000 Sales returns and allowances 40,000 Included in accounts receivable is $5,000 in accounts that must be written off Instructions (a) Calculate the amount of bad debt expense that would be recorded based on the ageing

method using seven percent of gross accounts receivable. (b) Calculate the net recoverable amount on the balance sheet based on bad debt expense

being calculated based on 2% of net credit sales

Comment

Comment AR after w100,000; A12,200 cr =

Bad Debt Review Questions

Depreciation Review Questions On March 1, 2012, Sundemon Company purchased snow-making equipment for $840,000 having an estimated useful life of six years with an estimated residual value of $60,000. Amortization is taken for the portion of the year the asset is used. The asset is a Class 8 asset with a maximum CCA rate of 20%. The company has a December 31 year end. Required For each of the following independent assumptions, calculate the depreciation. If you are using a financial calculator show your keystroke for requirement 1 to earn part marks.

1. Straight line - 2012 2. Sum of the years digits – 2014 3. Declining balance - 2014 4. Double declining balance – 2014 5. Capital cost allowance - 2014

Depreciation Review Questions

Bond Review Questions Vaggio Corporation issued $400,000 of 8% bonds on October 1, 2009, due on October 1, 2014. The interest is to be paid four times a year on January 1, April 1, July 1, and October 1. The bonds were sold to yield 12% effective annual interest. Vaggio Corporation closes its books annually on March 31. Required

1. Calculate the amount that Vaggio received from the issue of the bond 2. Calculate the interest expense that would be shown on the income statement for the

year ended March 31, 2010. 3. Calculate the interest expense that would be shown on the income statement for the

year ended March 31, 2011.

If you are using a financial calculator show your keystrokes in order to earn part marks

Comment

Bond Review Questions

Foreign Exchange Review Questions

This information pertains to the following questions.

FRC Ltd. is a foreign company and is a subsidiary of a Canadian company. At the end of the first fiscal year (December 31), the following balances appeared on FRC Ltd.’s financial statements denominated in the host country’s foreign currency (FC):

Accounts receivable (A/R) 85,000 FC Inventory (FIFO basis) 55,000 FC Capital assets 500,000 FC Bonds payable 250,000 FC Sales 960,000 FC Purchases 625,000 FC Amortization expense 45,000 FC

Other Information:

Accounts receivable (A/R) relates to sales that occurred evenly over the 4th quarter.

The goods in inventory at year end were purchased evenly over the 4th quarter. Capital assets were purchased and bonds were issued on January 1. Sales, purchases and expenses occurred evenly throughout the year. Exchange rates were as follows:

1 FC = $ CDN

January 1 0.85

December 31 0.70

Average for the year 0.82

Average for the 4th quarter 0.73

1. (+) If FRC Ltd. is financially and operationally dependent on its Canadian parent, the amounts that should appear on the translated year-end financial statements of FRC Ltd. (in Canadian dollars) are a) inventory $40,150, capital assets $425,000, sales $787,200. b) inventory $38,500, capital assets $350,000, sales $672,000. c) inventory $45,100, capital assets $410,000, sales $787,200. d) inventory $40,150, capital assets $350,000, sales $700,800. e) inventory $38,500, capital assets $425,000, sales $672,000.

Comment


2. (+) If FRC Ltd. is financially and operationally independent of its Canadian parent, the amounts that should appear on the current year’s translated financial statements of FRC Ltd. (in Canadian dollars) are a) A/R $59,500, cost of goods sold $472,350, amortization expense $38,250. b) A/R $69,700, cost of goods sold $467,400, amortization expense $36,900. c) A/R $62,050, cost of goods sold $416,100, amortization expense $32,850. d) A/R $59,500, cost of goods sold $467,400, amortization expense $36,900. e) A/R $59,500, cost of goods sold $399,000, amortization expense $31,500.

Comment



This information pertains to the following questions.

Another World Inc. (AWI) is a foreign subsidiary of a Canadian company in its second year of operation. The following December 31 year-end balances, denominated in the host country’s foreign currency (FC), appeared in the records of AWI:

Year 1 Year 2 Cash 30,000 FC 150,000 FC Accounts receivable 45,000 FC 90,000 FC Inventory (FIFO basis) 40,000 FC 75,000 FC Capital assets 190,000 FC 180,000 FC Accounts payable 55,000 FC 25,000 FC Capital stock 10,000 FC 10,000 FC Retained earnings, January 1 0 FC 240,000 FC Sales 550,000 FC 600,000 FC Cost of sales 200,000 FC 250,000 FC Amortization expense 10,000 FC 10,000 FC Other operating expenses 100,000 FC 120,000 FC

Other Information:

The inventory was purchased evenly over the fourth quarter of each respective year. Capital assets were purchased on January 1, Year 1. Capital stock was issued on January 1, Year 1. Sales, purchases and expenses occurred evenly throughout each year. Exchange rates were as follows:

1 FC = CDN$ Year 1 Year 2 January 1 0.36 0.30 December 31 0.30 0.34 Average for the year 0.33 0.32 Average for the fourth quarter 0.31 0.35


3. If AWI is financially and operationally independent of its Canadian parent, the amounts that should appear on the Year 2 translated year-end financial statements of AWI (in Canadian dollars) are a) inventory $24,000, sales $192,000, amortization expense $3,200 b) inventory $25,500, sales $204,000, amortization expense $3,400 c) inventory $25,500, sales $192,000, amortization expense $3,200 d) inventory $26,250, sales $192,000, amortization expense $3,400 e) inventory $26,250, sales $204,000, amortization expense $3,200

4. If AWI is financially and operationally dependent of its Canadian parent, the amounts that should appear on the Year 2 translated year-end financial statements of AWI (in Canadian dollars) are a) inventory $24,000, sales $192,000, amortization expense $3,200 b) inventory $25,500, sales $204,000, amortization expense $3,400 c) inventory $26,250, sales $192,000, amortization expense $3,200 d) inventory $26,250, sales $192,000, amortization expense $3,400 e) inventory $26,250, sales $192,000, amortization expense $3,600

Commentfinancially aof its Canadforeign opeshould be tmethod. Unassets and lusing the Drate of 0.34should be taverage ratFC x .34 = $= $192,000;= $3,200. Choice a) –of .32 for alChoice b) –.34 for all.Choice d) –average forYear 2, rateamortizatioChoice e) –average ratYear 2 average raamortizatio

Commentfinancially aits Canadianforeign opeshould be tmethod. Unmonetary, nliabilities shhistorical exstatement ihistorical raassets Inventory =Sales = 600,Amort relat


Ratio Analysis Review Questions The following partial information has been extracted from the financial statements of Toss Away Ltd., a recycling plant: 2010 2009 Current assets $800,000 $750,000 Current liabilities $450,000 $430,000 Cash and temporary investments $400,000 $380,000 Net accounts receivable $250,000 $175,000 Net income $300,000 $220,000 Sales $2,200,000 $1,895,000 Cost of goods sold $1,350,000 $1,130,000 Interest expense $100,000 $105,000 Amortization expense $150,000 $145,000 Income tax rate 40% 40% Share price $15.00 $14.50 Preferred dividends declared and paid $50,000 $50,000 Common dividends declared and paid $100,000 $100,000 Common shares outstanding throughout the year 25,000

25,000

Preferred shares outstanding throughout the year 10,000

10,000

The following industry averages have been obtained: Average collection period 70 days Gross margin 34% Times interest earned 10 times Price earnings ratio 2.15

1. The current ratio for Toss Away Ltd. at December 31, 2010 was:

a. 1.44 b. 1.78 c. 2.00 d. 3.22 e. None of the above

Comment

Ratio Analysis Review Questions 2. The quick ratio for Toss Away Ltd. at December 31, 2010 was:

a. .89 b. 1.44 c. 1.78 d. 2.00 e. None of the above

3. The accounts receivable turnover for Toss Away Ltd. at December 31, 2010 was:

a. 8.80 times b. 9.64 times c. 10.35 times d. 12.57 times e. None of the above

4. The gross margin for Toss Away Ltd. at December 31, 2010 was (rounded)

a. 39% b. 40% c. 61% d. 63% e. None of the above

5. Times interest earned for Toss Away for the year ended December 31, 2010 was

a. 5 times b. 5.2 times c. 6 times d. 6.2 times e. None of the above

6. The price earnings ratio for Toss Away for the year ended December 31, 2010 was

a. 1.25 b. 1.50 c. 2.10 d. 2.50 e. None of the above

Ratio Analysis Review Questions

Ratio Analysis Review Questions

Review Questions from The Kieso Text

Current & Deferred Tax Expense P 18-3 Earnings per Share P 17-5 Post Retirement (Pension) Expense P 19-12 Leases P 20-3 Errors P 21-8 (a) Cash Flow Statements P 22-10








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NPVCost Trade In PV

Net Initial Investment (155,000.00) 23,000.00 (132,000.00)

PV of CCA Tax ShieldCost 132,000.00 Cdt 2+K 28,203.73

CCA 20% d+k 2(1+k)Tax 40%RRR 15.0000%

Cash SavingsFirst 3 years 20,000.00 Last nine years - 25,000.00

20,000.00 25,000.00 Tax 40% 40%

After tax 12,000.00 15,000.00

C01 / C02 12,000.00 15,000.00 74,460.00F01 / F02 3.00 9.00

PV of salvage value net of opportunity costSalvage Value 30,000.00 Opportunity Cost (5,000.00)

25,000.00 4,672.68

PV of Lost Tax Shield Sn dt

(1+k) n̂ d+k

4,672.68 0.23 (1,068.04)

Net Present Value (25,731.64)

Cost SVStraight line - 2009 840,000.00 60,000.00 780,000.00 130,000.00 per full year

6.00 108,333.33

2nd Depr2nd set Toggle to SL

Down arrowLif 6.00 enter Down arrowM01 3.00 enter Down arrowCst 840,000.00 enter Down arrowSal 60,000.00 enter Down arrowYR 1.00 enter Down arrowDep = 108,333.33

Cost SV 4/21, 3/21 ProrateSum of the Years Digits - 2012 840,000.00 60,000.00 780,000.00 0.19 1/6

780,000.00 0.14 5/6

2nd Depr2nd set Toggle to SYD

Down arrowLif 6.00 enter Down arrowM01 3.00 enter Down arrowCst 840,000.00 enter Down arrowSal 60,000.00 enter Down arrowYR 4.00 enter Down arrowDep = 117,619.05

NBV Rate ProrateDeclining Balance - 2012 840,000.00 1/6 140,000.00 5/6 116,666.67

723,333.33 1/6 120,555.56 602,777.78 1/6 100,462.96 502,314.81 1/6 83,719.14

2nd Depr2nd set Toggle to DBDB = 100.00 enter Down arrowLif 6.00 enter Down arrowM01 3.00 enter Down arrowCst 840,000.00 enter Down arrowSal 60,000.00 enter Down arrowYR 4.00 enter Down arrowDep = 83,719.14

NBV Rate ProrateDouble Declining Balance - 2012 840,000.00 1/3 280,000.00 5/6 233,333.33

606,666.67 1/3 202,222.22 404,444.44 1/3 134,814.81 269,629.63 1/3 89,876.54

Documents

2012 Solutions to Review Questions for Final Exam Solutions to...Corporate Finance Review Questions A worldwide cosmetics company can upgrade the quality of one of its products by