CORRECT ANSWERS: Singal Inc. is preparing its cash budget. It expects to have sales of $30,000 in January

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PART I

1. (TCO A) Which of the following statements is NOT correct? (Points : 5)        The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends.        The corporate valuation model discounts free cash flows by the required return on equity.        The corporate valuation model can be used to find the value of a division.        An important step in applying the corporate valuation model is forecasting the firm's pro forma financial statements.        Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or terminal, value. 2. (TCO F) Which of the following statements is correct? (Points : 5)        One advantage of the NPV over the IRR is that NPV takes account of cash flows over a project’s full life, whereas IRR does not.        One advantage of the NPV over the IRR is that NPV assumes that cash flows will be reinvested at the WACC, whereas IRR assumes that cash flows are reinvested at the IRR. The NPV assumption is generally more appropriate.        One advantage of the NPV over the MIRR method is that NPV takes account of cash flows over a project’s full life, whereas MIRR does not.        One advantage of the NPV over the MIRR method is that NPV discounts cash flows, whereas the MIRR is based on undiscounted cash flows.        Since cash flows under the IRR and MIRR are both discounted at the same rate (the WACC), these two methods always rank mutually exclusive projects in the same order. 3. (TCO D) The Ackert Company's last dividend was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (rs) is 11.6%. What is the best estimate of the current stock price? 4. (TCO G) Singal Inc. is preparing its cash budget. It expects to have sales of $30,000 in January, $35,000 in February, and $40,000 in March. If 20% of sales are for cash, 40% are credit sales paid in the month after the sale, and another 40% are credit sales paid 2 months after the sale, what are the expected cash receipts for March?             5. (TCO G) Howton & Howton Worldwide (HHW) is planning its operations for the coming year, and the CEO wants you to forecast the firm's additional funds needed (AFN). The firm is operating at full capacity. Data for use in the forecast are shown below. However, the CEO is concerned about the impact of a change in the payout ratio from the 10% that was used in the past to 55%, which the firm's investment bankers have recommended. Based on the AFN equation, by how much would the AFN for the coming year change if HHW increased the payout from 10% to the new and higher level? All dollars are in millions. Last year's sales = S0 $300      Last year's accounts payable $50 Sales growth rate = g 40% Last year's notes payable $15 Last year's total assets = A0* $500 Last year's accruals $20 Last year's profit margin = PM 20% Initial payout ratio 10% PART II 1. (TCO H) Desai Inc. has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion cycle? Annual sales = Annual cost of goods sold = Inventory = Accounts receivable = Accounts payable = $45,000 $30,000 $4,500 $1,800 $2,800       2. (TCO C) A firm buys on terms of 2/10, net 45 days, it does not take discounts, and it actually pays after 58 days. What is the effective annual percentage cost of its nonfree trade credit? (Use a 365-day year.)             3. (TCO E) Daves Inc. recently hired you as a consultant to estimate the company's WACC. You have obtained the following information. (1) The firm's noncallable bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000, and a market price of $1,050.00. (2) The company's tax rate is 40%. (3) The risk-free rate is 4.50%, the market risk premium is 5.00%, and the stock's beta is 1.20. (4) The target capital structure consists of 35% debt and the balance is common equity. The firm uses the CAPM to estimate the cost of common stock, and it does not expect to issue any new shares. What is its WACC?             4. (TCO B) A company forecasts the free cash flows (in millions) shown below. The weighted average cost of capital is 14%, and the FCFs are expected to continue growing at a 5% rate after Year 3. Assuming that the ROIC is expected to remain constant in Year 3 and beyond, what is the Year 0 value of operations, in millions? Year:                      1         2        3 Free cash flow:     -$15     $10     $40        5. (TCO G) Based on the corporate valuation model, the value of a company's operations is $900 million. Its balance sheet shows $70 million in accounts receivable, $50 million in inventory, $180 million in short-term investments that are unrelated to operations, $20 million in accounts payable, $110 million in notes payable, $90 million in long-term debt, $20 million in preferred stock, $140 million in retained earnings, and $280 million in total common equity. If the company has 25 million shares of stock outstanding, what is the best estimate of the stocks price per share?