FIN 405 Takehome Exam

QUESTION 1

For the next fiscal year, you forecast net income of $50,000 and ending assets of $500,000. Your firm’s payout ratio is 20%. Your beginning stockholders’ equity is $300,000, beginning debt is $100,000 and your beginning total liabilities are $120,000. Your non-debt liabilities such as accounts payable are forecasted to increase by $10,000.  What is your net new financing needed for next year?

QUESTION 2

For the next fiscal year, you forecast net income of $50,000 and ending assets of $500,000. Your firm’s payout ratio is 20%. Your beginning stockholders’ equity is $300,000, beginning debt is $100,000 and your beginning total liabilities are $120,000. Your non-debt liabilities such as accounts payable are forecasted to increase by $10,000.

What amount of new equity would you need to issue to cover the net new financing need in order to keep your debt-equity ratio constant?

QUESTION 3

Eagle Sports, Inc. had net income of $600,000 in 2018. The firm paid a dividend of $120,000.  Initial total assets were $10,000,000, of which $6,000,000 was financed by equity. What is Eagle’s sustainable growth rate?

QUESTION 4

Eagle Sports Company (ESC) had net income of $6 million on sales of $50 million last year.  The firm paid a dividend of $1.2 million.  Total assets were $120 million, of which $40 million was financed by debt.  ESC has no spare capacity.  The firm’s financial planners forecast that total sales next year will increase by 10% from this year’s level.  If ESC chooses not to issue new shares of stocks and maintains a 1/2 debt-to-equity ratio, how much new debt will be issued?

QUESTION 5

During the year the following changes were observed.

• • Inventory period increased by 10 days.
  • Receivables period decreased by 5 days.
  • Accounts payable period increased by 7 days.

What is the net change in cash conversion cycle?

QUESTION 6

A firm offers its customers 3/5 net 25. What is the cost of trade credit to a customer who chooses to pay on day 25?

QUESTION 7

The quarterly working capital levels for Hasbeen Toys are presented in the following table (in $ thousands):

Quarter                                  1               2           3             4

Cash                                     $ 800        800       800          800

Accounts Receivable         1,400        800       700       3,700

Inventory                            1,100     3,100     5,100        550

Accounts Payable                  600        600       600          600

What are Hasbeen Toy’s temporary working capital requirements in the third quarter?

QUESTION 8

Sun Prairie Traders borrowed $100,000 at an APR of 4.5 percent for 3 months.  The loan called for a compensating balance of 10 percent.  What is the effective interest rate (EAR) on the loan?

QUESTION 9

Gibbs, Inc., has just set up a formal line of credit of $1 million with First National Bank. The line of credit is good for up to five years. The bank will be charging them an interest rate of 6 percent on the loan, and in addition the firm will pay an annual fee of 40 basis points on the unused balance. The firm borrowed $800,000 on the first day the credit line became available. What is the firm’s effective interest rate on this line of credit?

QUESTION 10

Sun Prairie Traders borrowed $300,000 at an APR of 1.7 percent for 3 months.  The loan called for a compensating balance of 15 percent.  What is the effective interest rate (EAR) on the loan?

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