ADMS 3530 3.

0 FINAL EXAM, TYPE X FALL 2016

Name Section ID #

AP/ADMS 3530 3.0 Finance

Final Exam – Fall 2016

Sunday, 18 December, 2016

Type X Exam

Instructors and Sections

Kwok Ho Section A, Fridays, 11:30am - 2:30pm

Kwok Ho Section E, Wednesdays, 11:30am - 2:30pm

Orlando Lopez Section B, Tuesdays, 7pm - 10pm

Samuel Alagurajah Section C, Wednesdays, 4pm - 7pm

Samuel Alagurajah Section F, Tuesdays, 4pm - 7pm

Irvin Pestano Section D, Thursdays, 4pm - 7pm

Lois King Section G, Internet

This exam consists of 50 multiple choice questions worth 100 marks. Choose the response that
best answers each question. Circle your answers below, and fill in your answers on the bubble
sheet. Only the bubble sheet is used to determine your exam score. Please write your name and
ID # both at the top of this cover page and on the bubble sheet. Also, please write the type of your
exam (X or Y) on the bubble sheet.

Please note the following points

1) Read the questions carefully and use your time efficiently.
2) Choose the answers that are closest to yours, because of possible rounding.
3) Keep at least 4 decimal places in your calculations and at least 2 in your final answers and at least 6
for the interest rates.
4) Unless otherwise stated, interest rates are annual, and bonds pay semi-annual coupons and have
a face value (or par value) of $1,000.
5) You may use the back of the exam paper as your scrap paper.
6) Instructors and invigilators will not answer questions during the exam.

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ADMS 3530 3.0 FINAL EXAM, TYPE X FALL 2016

1. Irene plans to save and invest annually, for the next 20 years, as follows:
Years 1-5: $3,500 per year
Years 6-7: $0 because she will take leave from work to get an MBA
Years 8-20: $5,000 per year
If she can earn 6% per year, and her contributions are made at the beginning of the years, how
much money will she have at the end of 20 years?

A) $150,196
B) $163,664
C) $87,450
D) $232,759
E) $123,888

Solution: A
She will have ($3,500){FVIFAD[(6%,5)}FVIF(6%,15) + ($5,000)FVIFAD(6%, 13)
= 50,120.70 + 100,075.33 = $150,196.02

2. In 2016 you purchased a condo in Toronto for $275,000. You made a down payment of 20%
and financed the rest over 25 years at 3.5% (APR semi-annually compounded). What is your
monthly payment on the mortgage?

A) $1,024.18
B) $1,047.43
C) $1,101.37
D) $1,235.66
E) $1,098.39

Solution: E
The mortgage amount is $275,000 x 80% or $220,000 amortized over 25 years.
The monthly interest rate can be calculated as follows.
EAR = (1 + 0.035/2)² - 1= 0.03530625,
Period (monthly) Rate is (1 + 0.03530625) 1/12 = 0.00289562.
Solve for monthly payment given PV = $220,000; N = 300; I / Y = 0.289562.
PMT is $1,098.39 per month.

3. What is the coupon rate of a 15 year bond, which is currently selling for $1,618.98? The bond’s
face value is $1,000; yield to maturity is 9% and the coupon is paid semi-annually.

A) 16.6%
B) 9.3%
C) 8.3%
D) 15.1%
E) 18.3%

Solution: A
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ADMS 3530 3.0 FINAL EXAM, TYPE X FALL 2016
Using the financial calculator: PV = 1618.98; I/Y = 4.5; n = 30; FV = 1,000
Compute PMT = $83 per period. Annual coupon = $166
Coupon rate = 166/1,000 = 16.6%

4. What is the effective annual rate of return (EAR) for an investor who pays $1,100.47 for a bond
with a 6.5% coupon and sells the bond two years later for $1,227.19? Assume that coupons
are payable semiannually and reinvested at APR of 6%.

A) 23.9%
B) 11.9%
C) 14.7%
D) 14.9%
E) 11.3%

Solution: E
Rate of Return = (Income + Capital Gain) / Initial Price

Rate of Return = [($32.5)[FVIFA(3%, 4 periods)] + ($1,227.19-$1,100.47)] / $1,100.47

= [135.97 + 126.72]/1,100.47 = .238705

Annual Rate of Return (EAR) = (1.238705)^(0.5) -1 = .1129 or 11.3%

5. Paul Edith Inc. paid dividend of $1.22 per share for the year just ended. The company
dividends are expected to grow at a constant rate per year forever. The company has
maintained a dividend payout ratio of 40%, and the return on equity (ROE) on the retained
earnings is 20%. If the company is currently selling at a price of $50, what is the required rate
of return that the shareholders need?

A) 14.73%
B) 14.44%
C) 10.64%
D) 10.44%
E) 12%

Solution: A
The sustainable growth rate, g = (1-0.40)(0.20) = 0.12
The required rate of return = DIV(1)/ P(0) + g = (1.22)(1.12)/50 + 0.12 = 14.73%

6. ABN Company is expected to pay dividends per share of $1.00, $1.25, and $1.31 in the next
three years. It is expected that beginning in the 4th year, the company’s dividend will grow at
constant rate of 4% forever. If the required rate of return on the equity is 10%, what is the
current stock price?

A) 21.33
B) 23.18
C) 18.78
D) 19.22
E) 19.99
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ADMS 3530 3.0 FINAL EXAM, TYPE X FALL 2016

Solution: E

The current stock price = 1/(1.1) +1.25/(1.1)² +1.31/(1.1)3 + [(1.31)(1.04)]/[(.10-.04)(1.1)3 ] =

$19.989 = $19.99

7. What is the profitability index for a project costing $550,000 today and providing a net cash
inflow of $165,000 annually for 5 years at an opportunity cost of capital of 9% per annum?

A) 0.30
B) 1.51
C) 5.05
D) 0.659
E) 0.167

Solution: E

NPV = -550,000 + 165,000* PVIFA (9%, 5) = 91,792.45

Profitability Index = NPV/Investment $91,792.45/$550,000 = 0.167

8. As a new graduate of York University in Finance you obtained an entry level job with a salary of
$50,000. The job requires you to see clients within the GTA and you need to decide between
keeping your old car at annual maintenance cost of $9,000 per year for the next 3 years.
Alternatively, you can purchase a new Honda Civic for $20,000 plus annual maintenance of
$4,000 for the next 7 years. At a cost of capital of 8%, you should

A) Keep the old car because $9000 is more affordable than $24,000.
B) Buy the new car because the Equivalent Annual Cost is $1000 less.
C) You are indifferent between keeping the old car and buying a new car
D) Buy the new car because the Equivalent Annual Cost is $7841.41
E) Keep the old car because the Equivalent Annual Cost is lower by $1158.59

Solution: D

EAC (Equivalent Annual Cost) of Used Car is $9000

EAC (Equivalent Annual Cost) of New Car = PV of Costs/ Annuity Factor
EAC (New Car) = $20,000 + $4000*PVIFA (8%, 7)/PVIFA (8%, 7)
EAC (New Car) = $40,825.48/5.206370 = $7,841.41

9. Tata Consulting is considering a new 5 year project and the expected annual cash flows
$7,500, $8,000, $8,500, $9,000, $9,500 respective and the initial cost is $24,000. Assume the
discount rate is 9%. What is the discounted payback period?

A) 3.39
B) 2.40
C) 3.60
D) 1.49
E) 1.67
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ADMS 3530 3.0 FINAL EXAM, TYPE X FALL 2016

Solution: C

Year Cash Flow DCF Cumulative DCF

0 -$24,000 -$24,000 -$24,000
1 $7,500 $6,880.73 -$17,119.27
2 $8,000 $6,733.43 -$10,385.84
3 $8,500 $6,563.56 -$3,822.28
4 $9,000 $6,375.82 $2,553.54
5 $9,500 $6,174.35 $8,727.89

Discounted Payback = 3 + ($3,822.28/$6,375.82) = .599

Discounted Payback = 3.60

10. Projects A and B have the following expected net cash flows.

Year A B
0 -$300,000 -$450,000
1 $150,000 $200,000
2 $150,000 $200,000
3 $150,000 $200,000

Assume that both projects have a 10% cost of capital. What is the Net Present Value (NPV) of
the project that has the higher IRR?

A) $73,027.80
B) $47,370.40
C) $37,547.19
D) -50,059.16
E) $83,025.00

Solution: A

Project A: CF0 = -$300,000, CF1=$150,000, CF2=$150,000, CF3=$150,000

Solve for IRR = 23.375

Project B: CF0 = -$450,000, CF1=$200,000, CF2=$200,000, CF3=$200,000

Solve for IRR = 15.89%

Since Project A has higher IRR, the NPV of project A is:

Project A: CF0 = -$300,000, CF1=$150,000, CF2=$150,000, CF3=$150,000, I=10%
Then Solve for NPV= $73,027.80

Please use the following information to answer questions 11, 12 and 13.

Johnson & Johnson acquires a depreciable asset at a cost of $730,000 that has a useful life of
5 years and a salvage value of $100,000. The company has a tax rate of 30% and the asset
falls into a 12% CCA class. The acquisition of the asset would result in annual pre-tax savings
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ADMS 3530 3.0 FINAL EXAM, TYPE X FALL 2016
of $275,000 in each of the 5 years starting in year 1. The acquisition of the asset requires an
investment in working capital of $32,500 at t=0 which is fully recovered in year 5. The company
is required to earn a minimum rate of return of 10%.

11. What is the CCA in Year 2?

A) $186,150
B) $ 87,600
C) $ 43,800
D) $ 77,088
E) $ 82,344

Solution: E
CCA in Year 1 = $730,000 * .12 * ½ = $43,800
CCA in Year 2 = ($730,000 - $43,800) * .12 = $82,344

12. What is the Present Value of CCA Tax Shield?

A) $185,922.57
B) $14,776.74
C) $114,024.49
D) $103,864.26
E) $86,083.33

Solution: D
𝐶𝑑𝑇𝑐 1+ .5(𝑟) 𝑆𝑑𝑇𝑐 1
𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐶𝐶𝐴 𝑇𝑎𝑥 𝑆ℎ𝑖𝑒𝑙𝑑 = [ 𝑟+𝑑 ] [ 1+ 𝑟 ] − [ 𝑑+𝑟 ] [(1+𝑟)𝑡 ]

Present Value of CCA Tax Shield =

730000(.12).30 1+ .5(.10) 100000(.12).30) 1
[ .10+ .12 ] [ 1+ .10 ] − [ .12+ .10 ] [(1+.10)5 ] = $103,864.26

13. What is the asset’s Net Present Value?

A) $666,804.23
B) $823,173.32
C) $153,362.79
D) $298,327.86
E) $273,101.85

Solution: C
After tax cash flow = $275,000 * (1-.30) = $192,500
Year 0 Cash Flow = -730,000 – 32,500 = -762,500
Year 1 – 5 = $192,500
Year 5 = $32,500+ $100,000

NPV = -762,500 + 192,500 * PVIFA (10%, 5) + 132,500/1.10^5 + PV CCA Tax Shield

NPV = -762,500 + 729,726.45 + 82,272.08 + 103,864.26 = $153,362.79

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ADMS 3530 3.0 FINAL EXAM, TYPE X FALL 2016
14. Calculate the annual cash flow from operations for a project with sales of 5 million units at a
price of $2 per unit, variable cost of $0.75, annual fixed cost (excluding depreciation) of $3
million and annual depreciation of $2 million. Assume the corporate tax rate is 30%.

A) $ 3,875,000
B) $ 375,000
C) $ 875,000
D) $ 1,250,000
E) $2,875,000

Solution: E

Sales Revenue (Price * Units) $10,000,000

Variable Cost (VC * Units) -$3,750,000
Fixed Cost -$3,000,000
Depreciation -$2,000,000
Operating Income before taxes $1,250,000
Tax 30% $375,000
Operating Income after tax $875,000
Add back Depreciation $2,000,000
Cash Flow from operations $2,875,000

15. You would like to combine a risky stock with a beta of 2.5 with Treasury bills in such a way that
the risk level of the portfolio is equivalent to the risk level of the overall market. What
percentage of the portfolio should be invested in Treasury bills?

A) 25%
B) 40%
C) 50%
D) 60%
E) 75%

Solution: D

w = weight in risky stock and 1-w = weight in Treasury bills

βP = w (2.5) + 1-w (0) = 1
w = 0.40 and 1-w = 0.60

16. VMP stock is quite cyclical. In a boom economy, the stock is expected to return 30 percent in
comparison to 12 percent in a normal economy and a negative 20 percent in a recessionary
period. The probability of a recession is 15 percent. There is a 30 percent chance of a boom
economy. The remainder of the time the economy will be at normal levels. What is the
standard deviation of the returns on VMP stock?

A) 10.05%
B) 12.60%
C) 15.83%
D) 17.46%
E) 25.04%
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ADMS 3530 3.0 FINAL EXAM, TYPE X FALL 2016

Solution: C
E (r) = 0.3(30%) + 0.55(12%) + 0.15(-20%) = 12.60%
σ2 = 0.3(30 – 12.6)2 + 0.55(12 - 12.6)2 + 0.15(-20 – 12.6)2 = 250.44
σ = 250.441/2 = 15.83%

17. Which one of the following stocks is correctly priced if the risk-free rate of return is 3.5% and
the market rate of return is 10.5%?

Stock Beta Expected Return

A 0.85 9.1%
B 1.10 11.6%
C 1.60 14.7%
D 0.90 11.3%
E 1.45 12.8%

A) A
B) B
C) C
D) D
E) E

Solution: C
Stock A: Required return = 3.5 + 0.85(10.5 – 3.5) = 9.45% > 9.1%; Overpriced
Stock B: Required return = 3.5 + 1.10(10.5 – 3.5) = 11.2% < 11.6%; Underpriced
Stock C: Required return = 3.5 + 1.60(10.5 – 3.5) = 14.7% = 14.7%; Correctly priced
Stock D: Required return = 3.5 + 0.90(10.5 – 3.5) = 9.8% < 11.3%; Underpriced
Stock E: Required return = 3.5 + 1.45(10.5 – 3.5) = 13.65% > 12.8%; Overpriced

18. A portfolio has 25% of its funds invested in Security Y and 75% of its funds invested in Security
Z. Security Y has an expected return of 8% and a standard deviation of 60%. Security Z has
an expected return of 10% and a standard deviation of 100%. The securities have a
coefficient of correlation of 0.60. Which of the following values is closest to the portfolio return
and variance?

A) 9.50%; 16.75%
B) 9.50%; 72.00%
C) 10.00%; 84.85%
D) 9.00%; 81.00%
E) 9.50%; 84.85%

Solution: B
E (rP) = 0.25(8%) + 0.75(10%) = 9.50%
σ2P = 0.252(0.602) + 0.752(12) + 2(0.25) (0.75)(0.60)(1)(0.60) = 0.72 or 72%

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ADMS 3530 3.0 FINAL EXAM, TYPE X FALL 2016
19. Stock S has an expected return of 18%, and Stock T has an expected return of 8%. However,
the risk of Stock S as measured by its standard deviation is two times that of Stock T. If the
two stocks are combined equally in a portfolio, what would be the portfolio's expected return?

A) 6%
B) 8%
C) 13%
D) 18%
E) 36%

Solution: C
E (rP) = 0.5(18%) + 0.5(8%) = 13%

20. When the market portfolio return increases from 10% to 11%, Stock J return increases from
20% to 23.6%. You are also provided with the following information: The correlation of Stock J
return with the market return is 0.90; the standard deviation of Stock J return is 30% and the
standard deviation of the market return is 15%. The beta of Stock J is:

A) 0
B) 1
C) 1.6
D) 1.8
E) 3.6

Solution: D
ΒJ = 0.90(30)/20 = 1.8
or ΒJ = {(23.60 – 20)/20}/ {(11 – 10)/10} = 1.8

21. In 2017 Bald Inc. forecasts $6 million in sales revenue with variable costs of $3.9 million, fixed
costs of $1.2 million, and annual depreciation of $1 million. Bald’s owner would like to know
the minimum sales revenue it needs to generate to achieve break even in accounting terms.

A) $3,384,615
B) $6,100,000
C) $6,285,714
D) $6,557,377
E) $7,563,454

Solution: C

Variable costs = $3.9MM/$6MM = 65% of sales; therefore for each $1 sales $0.35 is
contribution margin.

Break-even sales revenue = (Fixed Costs + Depreciation) / (Contribution per $Sales)

Break-even sales revenue = ($1,200,000 + $1,000,000) / ($0.35) = $6,285,714

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ADMS 3530 3.0 FINAL EXAM, TYPE X FALL 2016
22. ABC Corporation has a 3.8 degree of operating leverage. 2015 was a bad year for ABC as its
profits declined by 13.8 percent. Therefore, its sales must have declined by __________
percent.

A) 0.28
B) 2.75
C) 3.63
D) 10.00
E) 13.36

Solution: C

Degree of Operating Leverage = % change in profits / % change in sales

Therefore % change in sales = % change in profits / DOL = 13.8 / 3.8 = 3.63%

23. What is the most you would be willing to invest in a 6 year project that has an NPV break-even
level of sales of $5 million (cash), has variable costs (cash) which are 90% of sales and fixed
costs of $300,000 (cash)? The project’s required return is 8%. Ignore the impact of tax and
depreciation.

A) $416,667
B) $924,576
C) $1,016,678
D) $2,311,450
E) $2,567,455

Solution: B
NV break-even occurs when PV on net cash flows = Investment

Annual NPV B/E cash flows = Sales – V/C – F/C = $5,000,000 – 0.9 x $5,000,000 - $300,000
= $200,000

Solve for PV Given PMT = $200,000; I/Y = 8%; N = 6 years => $924,576 which is the most you
would be willing to invest.

24. Tanga Corp. has developed a product that has a 3 year life expectancy. The project will
require an initial investment of $60,000 that will be depreciated straight line to zero over the life
of the product. The product can be sold for $20/unit with a manufacturing cost of $10/unit; any
additional costs are fixed costs in amount of $30,000 per year. If Tanga expects to sell 7,000
units per year, what is the cash flow from operations in the 3rd year, assuming a required return
of 12% and a corporate tax rate of 30%?

A) $17,000
B) $20,000
C) $34,000
D) $48,000
E) $55,000

Solution: C
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ADMS 3530 3.0 FINAL EXAM, TYPE X FALL 2016

Annual Depreciation = $60,000 / 3 = $20,000

Cash Flow from operations = = (Sales - VC - FC – Dep’n)*(1 – Tc) + Dep’n =

($140,000 – $70,000 – $30,000 – $20,000) x (1 – 0.30) + $20,000 = $34,000

25. YX Inc. has 1 million common shares outstanding that currently trade at $40 per share. They
also have 10,000 bonds with an 8% coupon rate with interest paid annually. Each bond has a
face value of $1,000 and mature in 22 years. The bonds are currently trading at $1,101.23 per
bond. The YX’s market risk (beta) is 1.3; tax rate 34%; market risk premium 8.6% and the
prevailing risk free rate is 4.5%. Based on the above, what is YX’s weighted average cost of
capital?

A) 9.90%
B) 12.19%
C) 13.30%
D) 14.00%
E) 15.46%

Solution: C

The market Value of debt is D = 10,000 x $1,101.23 = $11,012,300.

The market value of common shares is E = 1 million x $40 = $40 million.
The market value of the firm is V = D + E = $51,012,300.
Cost of equity; CAPM = Re = Rf + Beta(Rm – Rf) = 0.045 + 1.3 x 0.086 = 15.68 %,
Cost of debt Rd = 7.08% (YTM as calculated by a financial calculator)
PV=-1101.23, FV = $1000, PMT=$80, N=22, CPT I/Y = 7.08
The weights are: D/V = $11,012,300 / $51,012,300 = 0.2159, E/V = 0.7841.
WACC = (D/V) x (1 – Tc) × Rd + (E/V) x Re = 0.2159 x (1 - 0.34) x 0.0708 + 0.7841 x 0.1568
= 13.30%.

26. You are a senior manager at Mutalo Corp. and have to choose between one of two projects (X
and Y). You are assessing the risk/return trade off that each project provides by determining
where the projects plot in relation to the security market line (SML). Assume that the risk-free
rate is 6% and that the company’s market risk premium is 9%.

Project X Y
Beta 2.0 1.1
IRR 25% 15%

A) Project X plots above the SML and should be accepted; Project Y plots below the SML and
should be rejected.
B) Project X plots above the SML and should be rejected; Project Y plots below the SML and
should be accepted.
C) Project X plots below the SML and should be accepted; Project Y plots above the SML and
should be rejected.
D) Project X plots below the SML and should be rejected; Project Y plots above the SML and
should be accepted.
E) Project X & Y both plot on the SML and both should be accepted.
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ADMS 3530 3.0 FINAL EXAM, TYPE X FALL 2016

Solution: A

Project X: E(r) = 0.06 + 2 × 0.09 = 0. 24 < IRR of 0.25. Project X plots above the SML and
should be accepted. Project Y: E(r) = 0.06 + 1.1 × 0.09 = 0.159 > IRR of 0.15. Project Y plots
below the SML and should be rejected.

27. Swazi Inc. has an average tax rate of 23% and has pre-tax cost of equity of 14% and after tax
debt cost of 4%. The firm's Market Value of Debt to Equity is 0.8. Swazi is in the process of
evaluating a project that will earn cash flows of $15,000 per year (after tax) forever starting in
one year. If the project has the same degree of risk as the firm then what is the most the firm
can invest in the project today and still earn its required return?

A) $107,143
B) $156,904
C) $166,667
D) $187,500
E) $199,654

Solution: B

WACC = 0.8/1.8 x 4% + 1/1.8 x 14% = 0.0956 (9.56%)

NPV = 0 = PV of perpetuity discounted at 9.54%
$15,000 / 0.0956 = $156,904

28. The Galveston Corp. wants to achieve a weighted average cost of capital (WACC) of 10%.
The firm has an after tax cost of debt of 4% and a before tax cost of equity of 12% and a
corporate tax rate of 40%. What is the optimal debt to equity ratio to achieve its target WACC?

A) 0.19
B) 0.33
C) 0.50
D) 0.67
E) 0.75

Solution: B

We = E/V
0.10 = [We × 0.12] + [(1 - We) × 0.04) = 0.12We + 0.04 - 0.04We
0.06 = 0.08We therefore We =0.75; Wd = 1 - We = 1 - 0.75 = 0.25

Debt to equity ratio = 0.25 / 0.75 = 0.33

29. Ignoring defaults, what is the approximate effective cost of factoring if receivables are sold at a
4% discount and the average collection period is 2 months?

A) 18.54%
B) 20.05%
C) 25.02%
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ADMS 3530 3.0 FINAL EXAM, TYPE X FALL 2016
D) 27.75%
E) 32.68%

Solution: D

$4/$96 = 4.17% per two-month period

(1.0417)^6 - 1 = 27.75%

30. A firm borrows $200,000 from the bank for 6 months, but has to maintain a compensating
balance of $15,000 with the bank. The annual interest rate for the loan is 12% (APR).What is
the effective annual interest rate on the loan?

A) 11.03%
B) 12.45%
C) 13.39%
D) 14.41%
E) 16.28%

Solution: C

Interest paid for 6 months = 12% x 200,000 x 1/2 year = 12,000

Amount of loan = 185,000
Actual 6 month rate charged = 12,000/185,000 = .0649
EAR = (1.0649)^2 -1 = 13,000/185,000 = .1339 = 13.39%

31. A firm has estimated that it will need $3,000,000 net cash during the year. Current interest rate
on money market securities is 4 percent per year and the cost of buying and selling securities
cost $20 per transaction. What is the optimal transaction size of securities?

A) $40,710.
B) $54,772.
C) $65,285.
D) $92,511.
E) $108,225.

Solution: B

Optimal Cash balance = [(2 x 3,000,000 x 20)/.04]^ 1/2 = 54,772

32. Roselawn Corp. has $16.8 million of average inventory, $4.0 million of average trade
receivables, $5.2 million of average trade payables, an annual cost of sales of $26.5 million
and annual sales of $48 million. What is the cash conversion cycle of this firm? Please round
your final answer to the nearest integer.

A) 88 days
B) 125 days
C) 145 days
D) 190 days
E) 261 days
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ADMS 3530 3.0 FINAL EXAM, TYPE X FALL 2016

Solution: D

𝐶𝑎𝑠ℎ 𝐶𝑜𝑛𝑣. 𝑐𝑦𝑐𝑙𝑒 = 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑝𝑒𝑟𝑖𝑜𝑑 + 𝑡𝑟𝑎𝑑𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑝𝑒𝑟𝑖𝑜𝑑 – trade payables period
$16,800,000 $4,000,000
= $26,500,000 + $48,000,000 – 5,200,000/[(26,500,000/365)]
( ) ( )
365 365
= (231.40 + 30.42 − 71.62 ) 𝑑𝑎𝑦𝑠 = 190.20 𝑜𝑟 𝟏𝟗𝟎 𝒅𝒂𝒚𝒔.

33. Just Snowboards Inc. expects to sell 10,700 snowboards this year. The cost of placing an
order from it supplier is $250. Each unit costs $50 and carrying costs are 20% of the purchase
price. What is the average inventory on hand for the firm?

A) 180
B) 366
C) 422
D) 731
E) 844

Solution: B
2  order cost  purchases
Economic order quantity =
carrying cost

= [(2 x 250 x 10,700)/ (0.20 x50)] ^1/2 = 731.44

Average inventory = EOQ/2 = 365.7 = 366 snowboards

34. Urban Mowers Inc. currently offers terms of sale of 3/15, net 60. What is the effective interest
rate charged to its customers who take the full 60 days to pay?

A) 3.1%
B) 11.3%
C) 18.5%
D) 24.9%
E) 28.0%

Solution: E

The current terms allow a 3% discount if the customer gives up an extra 60 – 15 = 45 days of
credit. The effective annual rate is:
3/15, net 60: (1 + 3/97)365/45 – 1 = 1.2803 - 1 = 28.03%

35. The Heather Company is considering a project - building a factory on a plot of vacant land that
it owns to produce a new product. In the calculation of the project’s NPV, the following item(s)
should be excluded:
I. The decrease in sales of the firm’s existing products that are affected by the new
product.

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ADMS 3530 3.0 FINAL EXAM, TYPE X FALL 2016
II. The portion of the existing administrative overhead that the accountant allocates to the
project.
III. The market value of the land.
A) I only
B) II only
C) III only
D) I and II
E) II and III

Solution: B (note “excluded”)

36. Which of the following statements concerning CCA is false?

A) CCA is a cash flow.

B) The CCA tax shield is a cash flow.
C) The present value of the CCA tax shield increases if the discount rate decreases.
D) The company can claim CCA at a rate lower than the allowable rate.
E) Increasing CCA will decrease the company’s taxable income.

Solution: A

37. Which of the following statements concerning NPV and IRR is false?

A) When accepting or rejecting a single investment project, the NPV rule and the IRR rule will
arrive at the same decision.
B) Only the NPV should be use to rank mutually exclusive projects.
C) It is possible that a project will have more than one IRR.
D) It is possible that a project will have no IRR.
E) In a capital rationing situation, the firm maximizes its value by accepting all positive NPV
projects.

Solution: E

38. For comparing machines with different economic lives, you need to compare:

A) Their equivalent annual costs (EAC).

B) Their IRR’s.
C) Their discounted payback periods.
D) Their payback periods.
E) None of the above.

Solution: A

39. The principle of diversification states that spreading an investment over a number of assets will
eliminate:

A) All of the risk.

B) All of the market risk and part of the unique risk.
C) All of the unique risk and part of the market risk.
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ADMS 3530 3.0 FINAL EXAM, TYPE X FALL 2016
D) Most of the market risk.
E) Most of the unique risk.

Solution: E

40. A golf course/property developer buys twice as much land as is needed to build an 18-hole golf
course and housing development so that, if things go very well, a second 18-hole golf course
and housing project can be added to the project. The developer is prepared to exercise the:

A) Option to default.
B) Option to expand.
C) Option to abandon.
D) Option to wait.
E) Option to rebuild.

Solution: B

41. Which of the following statements are correct concerning the variance of the annual returns on
an investment?

I. The larger the variance, the more the actual returns tend to differ
from the average return.
II. The larger the variance, the larger the standard deviation.
III. The larger the variance, the greater the risk of the investment.
IV. The larger the variance, the higher the expected return if the stock is positively
correlated with the market portfolio.

A) I and III only

B) II, III, and IV only
C) I, III, and IV only
D) I, II, and III only
E) I, II, III, and IV

Solution: E

42. Which of the following statements regarding operating leverage is correct?

A) All else the same, firms with high operating leverage have higher total fixed
costs.
B) It is generally easier to decrease operating leverage than it is to increase it.
C) All else the same, operating leverage will rise as output increases.
D) In order to calculate the degree of operating leverage all that is needed
are variable costs and operating cash flows.
E) All else the same, the degree of operating leverage rises as the price per
unit is increased.

Solution: A

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ADMS 3530 3.0 FINAL EXAM, TYPE X FALL 2016

43. The shorter the firm's accounts payable period, the:

A) Longer the firm's cash conversion cycle

B) Shorter the firm's inventory period
C) More the delay in the accounts receivable period
D) Less the firm must invest in working capital
E) Lower the firm’s credit rating

Solution: A

44. Which statement is true about terms of trade credit of 2/10, net 30?

A) A 10% cash discount is offered for payment before 30 days

B) A 2% cash discount can be taken for payment before the 10th of the following month
C) A 10% cash discount can be taken if paid by the second day after invoicing
D) A 2% interest late charge is added if the payment is made after day 30
E) No cash discount is offered after the tenth day

Solution: E

45. McGraw Inc., a wholesaler of university textbooks, is concerned about your university
bookstore having sufficient operating cash flow to meet its credit obligations in a timely fashion.
McGraw is concerned about the bookstore's _________________.

A) Capital
B) Character
C) Capacity
D) Collateral
E) Condition

Solution: C

46. The time interval between paying for raw materials and collecting on sales of finished goods is
known as the:

A) Inventory cycle
B) Operating cycle
C) Cash conversion cycle
D) Accounts receivable cycle
E) Accounts payable cycle

Solution: C

47. Which of the following is true regarding the beta coefficient?

A) It is a measure of total risk.

B) A beta greater than one represents lower systematic risk than the market.
C) The higher the beta the higher the expected return.
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ADMS 3530 3.0 FINAL EXAM, TYPE X FALL 2016
D) A beta of one indicates that the asset is totally risk free.
E) The market portfolio has the highest possible beta.

Solution: C

48. A well-diversified portfolio has less:

A) Unique Risk
B) Market Risk
C) Systematic Risk
D) Standard Deviation
E) Beta

Solution: A

49. In the formula to calculate the weighted average cost of capital a company’s tax rate is
relevant as it:

A) Captures the after tax cash flows relating to the change in net working capital that is used in
calculating WACC.
B) Captures the after tax cost of equity that is used in calculating its WACC.
C) Captures the deductibility of interest on debt when calculating WACC.
D) A & B are correct.
E) A & C are correct.

Solution: C

50. The dividend discount model and the capital asset pricing model can both be used to calculate:

A) A firm’s cost of equity

B) A firm’s cost of debt
C) A firm’s market risk
D) A & B are correct.
E) B & C are correct.

Solution: A

END OF EXAM

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