BUS 301 Principles of Finance
Final Exam
Section A
(Answer all questions)
Each question in Section A has 10 points
1-a) Rapid corporate growth in sales and profits can cause financing problems. Elaborateon this statement.
1-b) Discuss the advantage and disadvantage of level production schedules in firms withcyclical sales.
2). Describe in detail the three theories for describing the shape of the term structure ofinterest rates (the yield curve)?
3) Describe in detail 5 Cs of credit that are sometimes used by bankers and others todetermine whether a potential loan will be repaid?
4-a) Commercial paper may show up on corporate balance sheets as eithera current asset or a current liability. Explain this statement.
4-b)What are the advantages and disadvantages of commercial paper in comparison withbank borrowing at the prime rate?
5) Describe in detail the three factors that influence the required rate of return byinvestors?
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Section B
1). (20 points)
The Harmon Company manufactures skates. The companys income statement for 2008 is as follows:
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HARMON COMPANY
Income Statement For the Year Ended December 31, 2008
Sales (30,000 skates @ $25) …………………………………………………
$750,000
Less: Variable costs (30,000 skates at $7) ……………………………
210,000
Fixed costs …………………………………………………………………….
270,000
Earnings before interest and taxes (EBIT) ………………………………
270,000
Interest expense …………………………………………………………………..
170,000
Earnings before taxes (EBT) …………………………………………………
100,000
Income tax expense (35%) ……………………………………………………
35,000
Earnings after taxes (EAT)……………………………………………………
$ 65,000
Given this income statement, compute the following:
a.
Degree of operating leverage.
b.
Degree of financial leverage.
c.
Degree of combined leverage.
d.
Break-even point in units.
2) ( 15 points)
X-treme Vitamin Company is considering two investments, both of which cost $10,000. The cash flows are as follows:
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Year
Project A
Project B
1 ………………..
$12,000
$10,000
2 ………………..
8,000
6,000
3 ………………..
6,000
16,000
a.
Which of the two projects should be chosen based on the payback method?
b.
Which of the two projects should be chosen based on the net present value
method? Assume a cost of capital of 10 percent.
c.
Should a firm normally have more confidence in answer a or answer b
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3) (15 points)
Using Table 10-2 on page 292 (Chapter 10):
a.Assume the interest rate in the market (yield to maturity) goes down to
8 percent for the 10 percent bonds. Using column 2, indicate what the bond price will be with a 5-year, a 15-year, and a 30-year time period.
b. Assume the interest rate in the market (yield to maturity) goes up to 12 percentfor the 10 percent bonds. Using column 3, indicate what the bond price will be with a 5-year, a 10-year, and a 30-year period.
c. Based on the information in part a, if you think interest rates in the market aregoing down, which bond would you choose to own?
d. Based on information in part b, if you think interest rates in the market aregoing up, which bond would you choose to own?
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