Eton Financial Management Final Exam-The Modern Philosophy of Higher Education

he Modern Philosophy of Higher EducationAttempt any FOUR questions of the following1) Two projects are under consideration by the same company at the same time. Project Alpha hasa NPV of $20 million and an estimated useful life of 10 years. Project Beta has a NPV of $12 millionand also an estimated useful life of 10 years.What should the company’s decision bea) if the project’s involve unrelated expansion decisions orb) if the project’s are mutually exclusive because they would have to occupy the same space?2) You have just purchased a car from Friendly Sam. The selling price of the car is $6,500. If you pay$500 down, then your monthly payments are $317.22. The annual interest rate is 24%.How many payments must you make?3) Project November requires an initial investment of $500,000. The present value of operatingcash flows is $550,000. Project December requires an initial investment of $750,000. The presentvalue of operating cash flows is $810,000.a. Compute the profitability index for each project.b. If the projects are mutually exclusive, does the profitability index rank them correctly?4) You have borrowed $70,000 to buy a speed boat. You plan to make monthly payments over a 15-year period. The bank has offered you a 9% interest rate, compounded monthly.Create an amortization schedule for the first two months of the loan.5) The ZYX Corporation is planning to request a line of credit from its bank and wants to estimate itscash needs for the month of September. The following sales forecasts have been made for 2005:July $500,000August $400,000September $300,000October $200,000November $100,000Collection estimates were obtained from the credit collection department as follows: 20% collectedwithin the month of sale; 70% collected the first month following the sale; and 10% collected thesecond month following the sale. Payments for labor and raw materials are typically made in themonth in which these costs are incurred. Total labor and raw material costs each month are 50% ofsales. General administrative expenses are $30,000 per month, lease payments are $10,000 permonth, and depreciation charges are $20,000 per month. The corporation tax rate is 40%; however,no corporate taxes are paid in September.Prepare a cash budget for September.SectionB 60 marksThe Modern Philosophy of Higher EducationUse the following information to answer the following question(s).1) The MAX Corporation is planning a $4 million expansion this year. The expansion can be financedby issuing either common stock or bonds. The new common stock can be sold for $60 per share.The bonds can be issued with a 12% coupon rate. The firm’s existing shares of preferred stock paydividends of $2.00 per share. The company’s combined state and federal corporate income tax rateis 46%. The company’s balance sheet prior to expansion is as follows:MAX CorporationCurrent assets $ 2,000,000Fixed assets 8,000,000Total assets $10,000,000Current liabilities $ 1,500,000Bonds:(8%, $1,000 par value) 1,000,000(10%, $1,000 par value) 4,000,000Preferred stock:($100 par value) 500,000Common stock:($2 par value) 700,000Retained earnings 2,300,000Total liabilities and equity $10,000,000a. Calculate the indifference level of EBIT between the two plans.b. If EBIT is expected to be $3 million, which plan will result in higher EPS?2) Goodwin Enterprises had a gross profit of $2,500,000 for the year. Operating expenses andinterest expense incurred in that same year were $595,000 and $362,000, respectively. Goodwinhad 200,000 shares of common stock and 180,000 shares of preferred stock outstanding.Management declared a $2.50 dividend per share on the common and a $1.50 dividend per shareon the preferred. Securities purchased at a cost of $37,500 in a previous year were resold at a priceof $50,500.Compute the taxable income and the resulting tax liability for Goodwin Enterprises for the year.Use the following tax rates:Income Tax rate$0-$50,000 15%$50,001-$75,000 25%$75,001-$100,000 34%$100,001-$335,000 39%Over $335,001 34%The Modern Philosophy of Higher Education3) Bull Gator Industries is considering a new assembly line costing $6,000,000. The assembly linewill be fully depreciated by the simplified straight line method over its 5 year depreciable life.Operating costs of the new machine are expected to be $1,100,000 per year. The existing assemblyline has 5 years remaining before it will be fully depreciated and has a book value of $3,000,000. Ifsold today the company would receive $2,400,000 for the existing machine. Annual operating costson the existing machine are $2,100,000 per year. Bull Gator is in the 46 percent marginal taxbracket and has a required rate of return of 12 percent.a. Calculate the net present value of replacing the existing machine.b. Explain the impact on NPV of the following:i. Required rate of return increasesii. Operating costs of new machine are increasediii. Existing machine sold for less4) The treasurer for Brookdale Clothing must decide how much money the company needs toborrow in July. The balance sheet for June 30, 2004 is presented below:Brookdale Clothing Balance SheetJune 30, 2004Cash $75,000 Accounts payable $400,000Marketable securities 100,000 Long-term debt 300,000Accounts receivable 300,000 Common stock 100,000Inventory 250,000 Retained earnings 200,000Total current assets 725,000 Total liabilities andFixed assets 275,000 stockholder’s equity $1,000,000Total assets $1,000,000The company expects sales of $250,000 for July. The company has observed that 25% of its sales isfor cash and that the remaining 75% is collected in the following month. The company plans topurchase $400,000 of new clothing. Usually 40% of purchases is for cash and the remaining 60% ofpurchases is paid in the following month. Salaries are $100,000 per month, lease payments are$50,000 per month, and depreciation charges are $20,000 per month. The company plans topurchase a new building for $200,000 in July and sell its marketable securities for $100,000.If the company must maintain a minimum cash balance of $50,000, how much money must thecompany borrow in July?

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