BUS ADM 350: Exam 1 (ATTEMPT 2)

Section 3 Summer 2017

For the Exam 1 take home exam, please use the

Exam 1 Drop Box Form /Spreadsheet Available on D2L (-5% if you forget)
Do not use your in class exam booklet to do the take-home exam

Use the time series graphs below to answer Problem 1.

SP500, or the benchmark, represents the S&P 500, a US large cap index
Industry represents the construction materials industry
VMC, or Vulcan Materials, is a specific company in the construction materials industry

Graph 1: Operating Margin (%)

Graph 2: Price to Sales Ratio

1. Which of the following statements is FALSE:

A. The time series demonstrates that the construction materials industry is a cyclical industry
B. The time series demonstrates that Vulcan Materials, or VMC, is a cyclical company
C. As of March 2017, the construction materials industry is more expensive than the S&P 500
D. As of March 2017, VMC is more expensive than the construction materials industry
E. As of March 2017, VMCs operating margin may justify why VMC is less expensive than the S&P 500
Use the income statement and balance sheet data for Company X below for Problems 2-8.
All income statement and balance sheet data (including shares outstanding) is in millions except where
expressed as a percentage.

Dec-15 Dec-16
Sales $ 500 $ 525
Operating Margin 40.0% 40.0%
Effective Tax Rate 25.0% 25.0%
Interest Expense $ 40 $ 50
Dividends $ 20 $ 30
Shares Issued (Repurchased) ($)
$ - $ (40)
Shares Outstanding (#) $ 20 $ 18
Price Per Share $ 120 $ 125
Current Portion of LT Debt $ 30 $ 50
Long Term Debt $ 200 $ 250
Gross PPE $ 700 $ 900
Net PPE $ 400 $ 515
Cash $ 85 $ 105
Marketable Securities $ 200 $ 165
Accounts Receivable $ 80 $ 70
Inventory $ 35 $ 45
Accounts Payable $ 25 $ 40
Other Short Term Liabilities $ 45 $ 10

5-Stage Dupont ROE Dec-15 Dec-16

Tax Burden 0.7500 ?
Interest Burden 0.8000 ?
Operating Margin 0.4000 ?
Asset Turnover 0.6250 ?
Leverage Ratio 1.6000 ?
Return on Equity 0.2400 ?

2. Which of the following statements is TRUE:

A. The company was a better value in 2016 vs. 2015 based on both P/E and P/B
B. The company was a better value in 2016 vs. 2015 based on P/E but not P/B
B. The company was a better value in 2016 vs. 2015 based on P/B but not P/E
D. The company was more expensive in 2016 vs. 2015 based on P/B but not P/E
E. The company was more expensive in 2016 vs. 2015 based on P/E but not P/B

3. Using 5-Stage Dupont ROE, which of the following statements is TRUE:

A. ROE was lower in 2016 vs. 2015, partially because of a higher tax burden
B. ROE was lower in 2016 vs. 2015, partially because of a higher interest burden
C. ROE was lower in 2016 vs. 2015, partially because of fewer dollars of sales per dollar of assets
D. ROE was higher in 2016 vs. 2015, partially because the company had a higher ratio of debt to equity
E. ROE was higher in 2016 vs. 2015, partially because the company had a lower ratio of debt to equity
4. In 2016, the companys net income was:

A. $50.0 M
B. $100.0 M
C. $120.0 M
D. $150.0 M
E. $200.0 M

5. In 2016, Company Xs working capital __________.

A. decreased by $15.0M
B. decreased by $5.0M
C. increased by $5.0M
D. increased by $20.0M
E. increased by $40.0M

6. Ignore your answers to Problems 4&5. In 2016, assume the company had a net income of $140M
and the YOY change in working capital was 200. Company Xs Cash Flow from Operations was:

A. ($60.0M)
B. $25.0M
C. $55.0M
D. $95.0M
E. $455.0M

7. Ignore your answers to Problems 6. In 2016, assume the company had a Cash Flow from
Operations of $300.0M, making Company Xs Free Cash Flows to Equity:

A. $138M
B. $163M
C. $170M
D. $183M
E. $255M

8. Company Xs management indicates they plan to change Company Xs depreciation method from a
straight-line method to a new method that will depreciate long-term assets less in the earlier years
and more in the later years of the long-term assets 10-year useful life. Which of the following
statements is (are) TRUE?

I. If you were to add the next 10 years of FCFF together, the sum would be the same as if you
added the next 10 years of FCFE together
II. Under the new method, CFO would be higher in the early years and lower in the later years of
the assets useful life
III. Under the new method, FCFF would be lower in the early years and higher in the later years of
the assets useful life

A. I
B. II
C. I & II
D. III
E. I, II, & III
9. Management is trying to evaluate Project X vs. Project Y. If management pursues Project X, it cannot
project Y. Project X involves a cash outlay today and five positive after tax future cash flows. Project
Y involves a cash outlay today, followed by nine positive future after tax cash flows and finally a
large negative cash flow ten periods from now. Which of the following statements are FALSE:

I. IRR should not be used because Project X has an investment horizon of five years while Project Y
has an investment horizon of ten years
II. IRR should not be used for Project Y, because Project Ys cash flows are unconventional
III. The Profitability Index should not be used because the projects are mutually exclusive

A. I
B. II
C. I & III
D. II & III
E. I, II, & III

10. Which of the following statements about a project (with an initial cash outlay and five future positive
after tax cash flows) is (are) always TRUE:

I. Decreasing the discount rate will always cause the projects IRR to increase
II. Increasing the discount rate while decreasing the growth rate of after-tax cash flows will always
cause the projects IRR to decrease
II. Increasing the discount rate while increasing the growth rate of after-tax cash flows will always
cause the projects NPV to increase

A. I
B. II
C. III
D. I & II
E. I & III

Use the following information for Problems 11-13. A project will cost $1000 today (T=0) and will generate
$225 in after-tax cash flows at the end of each of the next six years with an appropriate discount rate of
15.0%. The first five discount factors have been provided below for convenience.
TIME 0 1 2 3 4 5 6
DISCOUNT FACTOR 1.000000 0.869565 0.756144 0.657516 0.571753 0.497177 ?

11. If management uses the payback period method with a cut off of 4.5 years, management
__________ invest in the project. If management uses the discounted payback period method with a
cut off of 6.0 years, management __________ invest in the project.
A. will ; will
B. will not ; will
C. will ; will not
D. will not ; will not
E. impossible to tell without more information

12. Using the discount factors, if the $225 after-tax cash flow in year six (T=6) was instead received
today (T=0) __________.

A. It would be worth 43.2% more because of the time value of money

B. It would be worth 56.8% more because of the time value of money
C. It would be worth $97.27 more because of the time value of money
D. It would be worth $127.73 more because of the time value of money
E. impossible to tell without more information
13. The projects internal rate of return (IRR) is closest to:

A. 8.3%
B. 9.3%
C. 10.3%
D. 11.3%
E. 12.3%

14. You have $250,000 in debt today (T=0) with an APR of 5.0%. You make no monthly payments for
twelve consecutive months. If your credit score was 50 points lower, your APR would change by
1.5%. If your credit score was lower, __________. HINT: Be sure to interpret the direction (+/-) of the
change in APR and calculate the EAR.

A. you would pay $4,040 less in interest over the course of one year
B. you would pay $3,900 less in interest over the course of one year
C. you would pay $3,750 less in interest over the course of one year
D. you would pay $3,750 more in interest over the course of one year
E. you would pay $3,900 more in interest over the course of one year

Use the following information for Problems 15-16. You are evaluating two different loans with the
amortization tables below:

Loan #1: 350K Initial Balance; 3 EOP Payments, 4.5% Annual Fixed Rate
Payment # BOP Balance Payment Principle Interest EOP Balance
1 $ 350,000.00 $ 127,320.68 $ 111,570.68 $ 15,750.00 $ 238,429.32
2 $ 238,429.32 $ 127,320.68 $ 116,591.36 $ 10,729.32 $ 121,837.97
3 $ 121,837.97 $ 127,320.68 $ 121,837.97 $ 5,482.71 $ -
Loan #2: 350K Initial Balance; 15 EOP Payments, 3.5% Annual Fixed Rate
Payment # BOP Balance Payment Principle Interest EOP Balance
1
2
3
4
5

15

15. When the 10th payment is made on Loan #2, the EOP Balance on the loan will be closest to:

A. $116,666
B. $137,207
C. $143,069
D. $151,944
E. $168,612

16. Over the course of the next three payments, you would pay __________.

A. you would have paid $2861 more in cumulative interest on Loan #1 than on Loan #2
B. you would have paid $2861 more in cumulative interest on Loan #2 than on Loan #1
C. you would have paid $10,500 more in cumulative interest on Loan #2 than on Loan #1
D. you would have paid $10,500 more in cumulative interest on Loan #1 than on Loan #2
E. you would have paid $5,483 more in cumulative interest on Loan #1 than on Loan #2
17. You have $1000 in a savings account today (T=0). Approximately how much longer would it take
for your investment to double (i.e. to become worth $2000) if you earned 10.0% on your savings as
opposed to 15.0% at the end of every calendar year?

A. 1.0 years
B. 2.0 years
C. 2.4 years
D. 3.4 years
E. 5.0 years

18. You just received an after tax cash flow of $120.00. These cash flows will grow at 12.0% for each
of the next 3 years, and 4.0% every year thereafter. The appropriate discount rate is 10.0% per year.
What is the present value of all future cash flows?

A. $2369
B. $2569
C. $2618
D. $2738
E. $2858

19. In exactly six years (T=6), you will start to receive $1100 per period from a trust your parents set up.
You will receive this $100 payment indefinitely. The appropriate discount rate is 5.0%. What is the
value of the trust today (T=0)?

A. $16,417
B. $17,238
C. $19,900
D. $20,952
E. $22,000

20. During lecture, we demonstrated how credit utilization is calculated as a percentage of a high water
mark. Ignore any interest calculations (i.e. APR = 0.0%). Assume you are given a $10,000 credit
line. Over the first year you make one $3500 purchase followed by one $1000 payment. Next year,
your credit card company increases your credit limit to $14,000 and you make another $1000
payment. At the end of year two, your credit utilization would be calculated as:

A. 11%
B. 15%
C. 18%
D 25%
E. 43%