Fin 486 Final Exam Essay

1064 Words Oct 6th, 2012 5 Pages
Finance 486 Final Exam

1. Income Statement Preparation - 25 points a. Prepare an income statement for Cathy Chen, CPA, for the year ended December 31, 2009 Cathy Chen, CPA
Income Statement for the Year Ended December 31, 2009 | Sales revenue | | $360,000 | Less: Operating expenses | | | Salaries | 180,000 | | Employment taxes and benefits | 34,600 | | Supplies | 10,400 | | Travel & entertainment | 17,000 | | Lease payment | 32,400 | | Depreciation expense | 15,600 | | Total operating expense | | 290,000 | Operating profits | | $ 70,000 | Less: Interest expense | | 15,000 | Net profits before taxes | | $ 55,000 | Less: Taxes (30%) | | 16,500 | Net
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5. WACC – Book weights – 15 points
Ridge Tool has on its books the amounts and specific (after-tax) costs shown in the following table for each source of capital. a. Calculate the firm’s weighted average cost of capital using book value weights. Source of Capital | Book Value | Specific Cost | Weighted Cost | Long Term Debt | $700,000 | 5.3% | 2.65% | Preferred Stock | 50,000 | 12.0% | 0.43% | Common Stock | 650,000 | 16.0% | 7.43% | Total | $1,400,000 | | 10.51% |

Total WACC is 10.51%.

b. Explain how the firm can use this cost in the investment decision-making process.

Companies can compare the WACC and IRR when making investment decision. The IRR needs to be higher the WACC of the investment in order for an investment to be successful.

6. Cash conversion cycle – 10 points
American Products is concerned about managing cash efficiently. On the average, the inventories have an age of 90 days, and accounts receivable are collected in 60 days. Accounts payable are paid approximately 30 days after they arise. The firm has annual sales of about $30 million. Assume there is no difference in the investment per dollar of sales in inventory, receivables, and payables; and a 365- day year. a. Calculate the firm’s operating cycle.
Operating Cycle = Age of Receivables + Inventory Age
OC = 60

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