Practice Final Exam_3_6_2022

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Baylor University *

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5460

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Finance

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Feb 20, 2024

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xlsx

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You invest $3,000 in a Certificate of Deposit paying an annual compound interest of 1.26% for 10 years pays 0.70% interest compounded annually. What is the final balance in your account at the end of 18 yea #1 $3,400.17 After 10 years =FV(1.26%,10, ,-3000,) $3,595.31 After 18 years =FV(0.7%,8,,-B5,) You purchase an investment property for $150,000, make $30,000 in repairs, and then refinance the loan loan at 2.5% interest on the unpaid balance. What will be the amount of each monthly principle and inter #2 $1,200.22 =PMT(2.5%/12,15*12,-180000,,) #3 Stock Beta CAPM = Rf + B*(Rm-Rf) Pfizer 0.66 =$K$20+C20*($K$19-$K$20) Merck 0.43 =$K$20+C21*($K$19-$K$20) Eli Lilly 0.27 =$K$20+C22*($K$19-$K$20) Eli Lilly bonds have an annual coupon rate of 5.55% and a par value of $1,000 and will mature in 17 yea a 5 percent return, what price would you be willing to pay for a Eli Lilly bond? #4 $1,062.01 =-PV(5%,17,55.5,1000,) bond is purchased at market price, what is the bond's yield to maturity? #5 Semi-annual rate Annualized Rate 1.1428% =RATE(8*2,36/2,-1095.6,1000,) 2.2856% =B34*2 Suppose one of the suppliers to the Baylor Scott & White Health System offers terms of 4/10, net 30. [a]. How many days does the business have to pay its bill from this supplier in order to get the discount? #6 [b]. What is the approximate cost of the costly trade credit offered by this supplier? ANSWER a. 10 days BSW must pay the bills in 10 days if it wants to take advantage of the discount of 4 percent. If it wants to take the costly trade credit (forego the discount), it must pay the bills in 30 days. b. 100 - Discount percent Days credit received - Discount period Using the CAPM, estimate the appropriate required rate of return for the three stocks listed here, given th the expected return for the market is 6% for the coming year. Pfizer bonds are selling in the market for $1095.60. These 8 year semi-annual bonds pay 3.6% on an ann Approximate % cost = Discount percent X 360

Discount percent 4% Days credit received 30 Days of free trade credit 10 Periodic cost of trade credit 4.17% =F50/(1-F50) Number of discount periods per year 18 =360/(F51-F52) Approximate % cost 75.00% =F53*F54 short term bond rate of 5%, a 9% cost of preferred stock, and an 15% cost of common stock, what is the f #7 #2 Capital Structure (in K's) Weights Individual Cost Long Term Bonds $ 3,000 22.15% 8.00% Commercial Loans $ 2,845 21.00% 12.00% Commercial Paper $ 1,500 11.07% 6.00% Short Term Bonds $ 1,200 8.86% 5.00% Preferred Stock $ 500 3.69% 9.00% Common Stock $ 4,500 33.22% 15.00% #1 $ 13,545 = 100.00% You are considering buying a new laboratory blood analysis system that will require an initial outlay of #8 life of 5 years and will generate free cash flows to the hospital as a whole of $15,000 at the end of each y the salvage value of the system is expected to be $10,000 based on current market conditions. Given a re determine the following: [a] Payback Period 4.80 4.8 years [b] NPV ($20,254.09) Negative = not g [c] IRR 1.90% IRR < WACC = [d] Should this project be accepted? No HCA dispenses 55,000 bottles of brand name pharmaceutical annually. The optimal safety stock (which initially) is 1,000 bottles. Each bottle costs the center $2, inventory carrying costs are 10%, and the cost #9 [a] What is the economic order quantity? [b] What is the maximum inventory for this medication? [c] How often must the center order (in days)? [d] How many orders of this pharmaceutical will need to be placed each year? ANSWER Ordering costs F $20 Annual usage in units S 55,000 Annual carrying costs C 10% Purchase price per bottle P $2.00 Days per year W 360 The capital structure for Capital Health is provided below. If the firm has a 8% after tax cost of long term

Safety stock SF 1,000 a. EOQ = (2FS / CP)1/2 = 3,317 =SQRT((2*F94 b. Maximum inventory = 4,317 =F102+F99 c. Average daily usage = 152.8 =F95/F98 Reorder frequency = 22 =F102/F108 d. Orders per year 17 =F95/F102 UCLA buys $275,000 of a particular item (at gross prices) from its major supplier, McKesson, which offers UCLA terms of 1/5, net 15. Currently, the hospital is paying the #10 supplier the full amount due on Day 15, but it is considering taking the discount, paying on Day 5 and replacing the trade credit with a bank loan that has a 8 percent rate. Assume 360 days per year. a. What is the amount of free trade credit that UCLA obtains from McKesson Health? b. What is the amount of costly trade credit? c. What is the approximate annual cost of the costly trade credit? d. Should UCLA replace its trade credit with the bank loan? Explain your answer. e. If the bank loan is used, how much of the trade credit should be replaced? ANSWER a. Medical supplies per year (gross) $275,000 Discount within 5 days 1.0% $2,750 Medical supplies (net) $272,250 =E128*(1-E129) Number of days per year 360 Medical supplies per day (net) $756.25 =E130/E131 Days of free trade credit 5 Amount of free trade credit $3,781.25 =E132*E133 b. Days of costly trade credit 15 Medical supplies per day (net) $756.25 =E132 Total trade credit $11,343.75 =E137*E138 Amount of free trade credit $3,781.25 =E134 Amount of costly trade credit $7,562.50 =E139-E140 c. 100 - Discount percent Days credit received - Discount period Discount percent 1.0% Days credit received 15 Approximate % cost = Discount percent X 360

Days of free trade credit 5 Periodic cost of trade credit 1.01% =F146/(1-F146) Number of discount periods per year 36 =360/(F147-F14 Approximate % cost 36.36% =F149*F150 d. If UCLA can obtain a bank loan for less than 36.36% cost, including interest cost and fees, it should replace the costly credit with a bank loan. e. As indicated in Part d, only the costly trade credit should be replaced. UCLA should always take the fr Providence Health is evaluating two different linen supply vendors systems for handling facility linen rep #11 There are no incremental revenues attached to the projects, so the decision will be made on the basis of the present value of costs. Providence's weighted average cost of capital is 6.25%. Here are the net cash f estimates in thousands of dollars: Year System X System Y 0 $ (1,800) $ (3,850) 1 $ (1,000) $ (500) 2 $ (1,000) $ (500) 3 $ (1,000) $ (500) 4 $ (1,000) $ (500) 5 $ (1,000) $ (500) [a] Assume initially that the systems both have average risk. Which one should be chosen? ANSWER b. After the appropriate risk adjustment is made, System X should be chosen. HCA is evaluating the bulk purchase of new Hill-Rom hospital beds for its Central & West Texas region #12 The purchase will cost $35,000,000 and the beds have an expected life of five years. The expected pretax salvage value after five years of use is $3,500,000. In total, the beds are expected to generate $8,000,000 in revenue in the first year of operations. Maintenance costs are expected to be $200,000 during the first year of operation, while the increase in utilities will cost another $100,000 acoss the system in Year 1. The cost for additional expendable supplies is expected to average $250,000 during the first year. All costs and revenues, except [b] Assume that System Y is judged to have high risk. The organization accounts for differential risk by adjusting itscorporate cost of capital up or down by 2 percentage points. Which system should be chosen? a. Assuming average risk, the appropriate discount rate for both systems is 6.25 percent. At this discount rate, System Y has the lower PV of costs and hence should be chosen. depreciation, are expected to increase at a 2.8% inflation rate after the first year.

The equipment falls into the MACRS five-year class for tax depreciation and hence is subject to the following depreciation allowances: Year Allowance 1 20% 2 32% 3 19% 4 12% 5 11% 6 6% -$2,100,000 The hospital's aggregae tax rate is 21.15%, and its corporate cost of capital is 8.4%. a. Estimate the project's net cash flows over its five-year estimated life. b. What are the project's NPV and IRR? (Assume that the project has average risk.) c. Based on the results of the analysis, should this project be approved? ANSWER a. Here are the project's cash flows: 0 1 2 Equipment cost -$35,000,000 Net revenues $8,000,000 $8,224,000 Less: Maintenance costs -$200,000 -$205,600 Utilities costs -$100,000 -$102,800 Supplies -$250,000 -$257,000 Depreciation -$7,000,000 -$11,200,000 Operating income $450,000 -$3,541,400 Taxes -$95,175 $749,006 Net operating income $354,825 -$2,792,394 Depreciation $7,000,000 $11,200,000 Plus: After-tax equipment salvage value* Net cash flow -$35,000,000 $7,354,825 $8,407,606 * Pretax equipment salvage value $3,500,000 MACRS equipment salvage value $2,100,000 Difference $1,400,000 =F231-F232 Taxes $296,100 =0.2115*F233 After-tax equipment salvage value $3,203,900 =F231-F234 b. Spreadsheet solution: NPV ($2,749,191) Compare to "0" IRR 5.47% Compare to WACC c. No

Recovery Centers of America needs to acquire new vehicles that will cost $2.5 million across its six state #13 It plans to use the vehicles for three years, at which time new vehicles will be acquired. The company can the vehicles or it can lease the vehicles for three years. Assume that the following facts apply to the decis - The vehicles fall into the five-year class for tax depreciation, so the MACRS allowances are 0.2, 0.32, 0 - The company's marginal tax rate is 28 percent. - Tentative lease terms call for payments of $550,000 at the end of each year. - The best estimate for the value of the vehicles after three years of wear and tear is $1,350,000. a. What is the NAL and IRR of the lease? b. Should the organization buy or lease the equipment? ANSWER Year 0 Year 1 Year 2 Cost of owning: Net purchase price -$2,500,000 Depreciation tax savings $140,000 $224,000 Residual value Tax on residual value Net cash flow -$2,500,000 $140,000 $224,000 Cost of leasing: Lease payment $0 -$550,000 -$550,000 Tax savings from lease $0 $154,000 $154,000 Net cash flow $0 -$396,000 -$396,000 Net advantage to leasing: PV cost of leasing ($1,130,705.24) =NPV(J282,F276:H276)+E276 PV cost of owning - ($936,125.39) =NPV(J282,F270:H270)+E270 a. NAL ($194,579.85) =E276-E277 When the NAL is negative, buying is the better optio Internal rate of return of the lease: Leasing cash flow $0 -$396,000 -$396,000 Owning cash flow -$2,500,000 $140,000 $224,000 Incremental cash flow $2,500,000 -$536,000 -$620,000 IRR 5.79% When the IRR is > the ATCD, b b. The organization should BUY the vehicles

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