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RMIT Classification: Trusted Question 1. XYZ stock has the following information about its future returns: Stock A Stock B Retur n Probabilit y Retur n Probabilit y -10% 10% -12% 10% 15% 20% 14% 20% 14% 70% 12% 70% You invest 30% in stock A and 70% in stock B a. What is the expected return and standard deviation for each stock? b. What is the correlation? c. Calculate the expected return of the portfolio? d. Calculate the standard deviation of the portfolio? Question 2. The historical returns of ABC for the past 3 years are: 15%, 12%, 14%. The historical returns of DEF for the past 3 years are: 8%, 12%, 9%. A. What are the expected returns and standard deviations of returns for ABC and DEF? B. What is the correlation coefficient? C. A portfolio consists of 30% ABC stocks. The rest is DEF stocks. What are the expected return and standard deviation of this portfolio? Question 3. A. JKL stock is quite cyclical. In a boom, the stock is expected to return 35% in comparison to 15% in normal time and negative 18% in a recession. The probability of recession is 20%. There is a 18% chance of a boom. What is the standard deviation of the returns of this stock? B. A stock had returns of 10%, 8%, 15%, -2% annually for the past 4 years. What is the mean and standard deviation of these returns? Question 4. Stock A has the following historical returns: 16%, -10%, 14% and 10%; while stock B’s historical returns are: -5%, 10%, 15% and 8%. a. Calculate the average return of Stock A, B. b. Calculate the standard deviation of each stock c. Which stock do you prefer? d. Calculate the correlation coefficient. e. Interpret the meaning of that correlation coefficient. Question 5. A. A company has 35% of its assets financed by risk-free debt. The risk-free interest rate is 5%, the expected market risk premium is 9%, and the beta of the company’s stock is 1.2. What is the company cost of capital? What is the after-tax WACC, assuming that the tax rate is 40%? B. A firm has a beta of 1.1 and a debt-to-equity ratio 0.25. The market rate of return is 11%, the tax rate is 20% and the risk-free rate is 3%. The pretax cost of debt is 7%. What is the firm’s WACC? Question 6. EJS is 35% financed by risk-free debt and 65% equity. The treasury bill rate is 3%, the expected market return is 15% and the beta of stock is 1.6. The tax rate is 30%. The firm is considering a project that is equally as risky as the overall firm. The project has an initial cash outflow of $1.5 million and annual cash inflows of $500 000 at the end of each year for 5 years. What is the NPV of the project? Question 7. ABC has a target capital structure of 40% debt and 60% equity. The pretax cost of debt is 6%, the tax rate is 30%, the cost of equity is 12%. The firm is considering a project that is equally as risky as the overall firm. The project has an initial cash outflow of $1.5 million and annual cash inflows of $500 000 at the end of each year for 5 years. What is the NPV of the project? Question 8. DEF has a target capital structure of 50% debt and 50% equity. The after-tax cost of debt is 5%, the tax rate is 30%, the cost of equity is 13%. The firm is considering a project that is equally as risky as the overall firm. The project has an initial cash outflow of $1.2 million and annual cash inflows of $400 000 at the end of each year for 4 years. What is the NPV of the project? Question 9.
RMIT Classification: Trusted A. Given the following data: Current assets = 800, Current liabilities = 300; Inventory = 200; Account receivables = 150. Calculate the quick ratio. B. Given the following data: Long-term debt = 100, Value of leases = 15; Book value of equity = 70; Market value of equity = 120, calculate the debt-equity ratio. C. Given the following data: Sales = 3000, Cost of goods sold = 1500, Average receivables = 150, calculate the average collection period. D. HTG has sales of $1000000 and cost of goods sold of 800000. The firm had a beginning inventory of 60000 and an ending inventory of $70000. What is the length of the inventory period? E. A firm has accounts receivables of $30000, inventory of $50000, sales of $370000 and cost of goods sold of $190000. How long does it take the firm to sell its inventory and collect payment on the sale? F. For its most recent year a company had Sales = $800000 and Cost of goods sold = $500000. At the beginning of the year, its Account receivables = $70000 and Account Payables = $120000 and Inventory = 90000 At the beginning of the year, its Account receivables = $80000 and Account Payables = $110000 and Inventory = 100000 Calculate the cash cycle. Question 10. Balance Sheet Assets 2019 2018 Current Assets Income Statement 2019 Cash and marketable securities 600 500 Net sales 48000 Accounts receivable 160 240 Cost of goods sold 32000 Inventories 8200 6500 Selling, general and administrative expenses 12000 Other current assets 210 280 Depreciation 1600 Total current assets 9170 7520 Earnings before interest and taxes (EBIT) ? Interest expenses 300 Fixed Assets Earnings before taxes (EBT) ? Tangible fixed assets Tax (20%) ? Property, plant and equipment 32000 29000 Net Income ? Less accumulated depreciation 8500 7600 Dividend (20%) ? Net tangible fixed assets 23500 21400 Addition to retained earning (80%) ? Long term investment 240 500 Other long-term assets 450 300 Total assets 33360 29720 Liabilities and Shareholders’ Equity 2019 2018 Current liabilities Debt due for repayment 1000 1200 Accounts payable 4400 4000 Other current liabilities 2300 2400 Total current liabilities 7700 7600 Long-term debt 4900 5400 Deffered income taxes 600 700 Other long-term liabilities 800 700 Total liabilities 14000 14400 Common stock and other paid-in-capital 800 900 Retained earnings and capital surplus 18560 14420 Total shareholders’ equity 19360 15320 Total liabilities and shareholders’ equity 33360 29720 a. Fill in the blank (?) of the Income statement. b. Calculate the following financial ratios of year 2019: ROA, ROE, current ratio, quick ratio, Cash cycle (Average days in inventory, Average collection period, Average payment period) c. There are some operational changes that AR period increases by 12 days, inventory period increases by 5 days. The account payable period decreases by 15 days. What should be the new cash conversion cycle? Question 11. A. The supplier offers a credit term 2/15, net 45. What is the cost of forgoing the discount on a $220000 purchase? Question 12.
RMIT Classification: Trusted A local office supply store expects to sell 2000 printers next year. Annual carrying cost is $40 per printer, and ordering cost is $50. The company operates 360 days a year. a. What is the EOQ? b. How many times per year does the store reorder? c. What is the total annual cost if the EOQ quantity is ordered? d. What is the length of an order cycle? Question 13. ABC uses 1,000,000 tons of stone per year. The carrying costs are 70 USD/ton. The cost per order is 460. Calculate the economic order quantity per order, the optimal number of orders per year, the optimal annual order costs, the optimal carrying costs and the total costs of the optimal inventory. Question 14. Sources of fund The amount of each source of fund Figures Long-term debt from bank $1200000 The bank charges 12% interest rate Bond $1600000 Consider to issue 12% coupon bond with a face value of $1000, price is $1200, 7 years to maturity Stock $2500000 The risk-free rate is 5%, expected market rate of return is 10%, beta of stock is 1.2 Estimate WACC, the tax rate is 20%. Question 15. The default rate of HTS’s new customers has been running at 10%. The average sale for each new customer amounts to $700, generating a profit of $80 and a 35% chance of a repeated order next year. The default rate on repeated order is only 1.5%. If the interest rate is 8%, what is the expected profit from each new customer? Question 16. A firm has 2000 bonds outstanding with a 1000 USD face value, and 9% coupon rate, 8 years to maturity, annual interest payments, and sells at 92% of face value. The firm also has 40000 shares of common stocks outstanding at a market price of 59USD a share and beta of 0.7. The risk-free rate is 5%, the market return is 11% and tax rate is 35%. What is WACC? Question 17. Expected sales 700, 560, 800 and 680 for the months of January through April, respectively. The firm collects 50% of sales in the month of sale, 28% in the month following, 20% two months later. The remaining 2% is never collected. How much money does the firm expect to collect in the month of April? Question 18. Sources of funds The amount of each source Figures Long term debt from bank 1200000 USD Bank lending interest rate 11% Bond 1600000 USD 10% coupon bond face value 1000 USD, price = 1100 USD and 9 years to maturity Stock 2200000 USD Risk-free rate is 5%, the expected market rate of return = 12%, and beta is 1.5 What is WACC, tax rate = 20% Question 19. Sales in next 3 months: Jan = 95, Feb = 25, March = 35. 65% of sales are collected in the month they occur, 35% in the next month. Receivables at the end of Dec is 20. a. What are collections on account receivables in March? b. What are receivables at the end of March? Question 20. A firm pretax cost of debt is 7%, and cost of preferred stock is 8%. 20 000 shares of common stock outstanding at a market price = 40 USD per share. 10000 shares of preferred stock outstanding at the market price = 45 USD per share. The bond has face value of 500 000 USD and sells at 95% face value. The tax rate is 30%. What is WACC?
RMIT Classification: Trusted Question 21. Sales forecasted for 2022 for a firm are as follows: 2022 Q1 2022 Q2 2022 Q3 2022 Q4 Receivables at the start of period ($ million) 180 Sales ($ millions) 600 700 550 200 We assume that sales in 2021 Q4 were $220 million. 2022 Q1 2022 Q2 2022 Q3 2022 Q4 Cash at start of the period ($ million) 40 Sales become accounts receivable before they become cash. Cash flow comes from collections on account receivables. Suppose 60% of sales are cashed in in the immediate quarter and 40% cashed in the following quarter. Use of cash table 2022 Q12022 Q22022 Q32022 Q4 Payments on account payables200190350250 Increase in inventory140140160160 Labor and other expenses120120120120 Capital expenditures60402010 Taxes, interest payment and dividends40404040 Total uses560530690580 a. Calculate receivables at the end period of 2022 b. Construct table showing the cumulative financing requirements in 2022. We assume that the minimum operating cash balance is $20 million. Question 22. ABC is currently experiencing a bad debt ratio of 5%. ABC believes that a tighter credit control can reduce this ratio to 2%. However, sales can drop 10% because of this policy. The cost of goods sol is 75% of the selling price. Per $100 of current sales, what is Tom’s expected profit under the proposed credit standards? Question 23. On April 1 st , a firm had a beginning cash balance of $180. March sales were $400 and April sales were $500. During April, the firm had cash expenses of $140 and payments on account payables of $200. The account receivables period is 30 days. What is the firm’s beginning cash balance on May 1 st ? Question 24. Complete the sources and the uses of cash on February and March February March 1. Total sales 80 90 2. Purchases of materials Cash 30 30 Credit 20 30 3. Other expenses 20 20 4. Taxes, interest,.. 10 10 5. Capital investment 10 0 Sales Purchases Cash: 65% Jan (credit): 20 Credit: 35% Credit duration: 1 month January sales: 80 Minimum cash: 40 Cash at start of February: 50 Question 25. Complete the uses of cash and cumulative financing requirements on February and March February March 1.Purchases of materials Cash 30 30 Credit 20 30 2. Other expenses 10 10 3. Taxes, interest … 10 10 4. Capital investment 10 0