umuc-fin630-midterm-exam

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This exam is open book and is to be your individual work ONLY. You are not allowed to consult with anyone in answering the questions. If you have questions about the exam, please post them in the Conference from where you downloaded it. That way, I can deal with all students as fairly as possible, especially those who might have the same question.

You must show your work in excel worksheet for full credit; showing your work will also ease getting partial credit. I have shown the available points for each problem.

PUT YOUR NAME ON YOUR EXAM (anything you submit), in the title of your files as well. Assume I will download them and that I do not want 20+ files labeled something like “FIN630midterm”. Please consolidate your excel files and try to submit only one workbook with a separate tab for each question. Also do not forget to name the tabs to identify the questions/problems.

The exam is due by 11:59 pm, October 18, 2015. Late policy specified in the syllabus will be followed for any assignment submitted after the due date.

Please submit the completed exam under Mid-Term in the Assignment Folder.

Question 1. Answer the problem #2-7 on page 49 from the TM (3rd Edition) textbook. (20 points)

Steve’s Sub Shop (Steve’s) is considering investing in toaster ovens for each of its 120 stores located in the Southwestern United States. The high capacity conveyor toaster ovens, manufactured by Lincoln, will require an initial investment of $15,000 per store plus $1,500 in installation costs for a total investment of $1,860,000. The new capital (including the costs for installation) will be depreciated over five years using straight-line depreciation toward a zero salvage value. In addition, Steve’s will also incur addtional maintenance expenses totaling $120,000 per year to maintain the ovens. At present, firm revenues for the 120 stores total $9,000,000 and the company estimates that adding the toaster feature will increase revenues by 10%.

a. If Steve’s faces a 30% tax rate, what expected project FCFs for each of the next five years will result from the investment in toaster ovens?
b. If Steve’s uses a 9% discount rate to analyze its investments in its stores, what is the project’s NPV? Should the project be accepted?

Question 2. Answer the problem #3-2 on page 82-83 from the TM (3rd Edition) textbook. (30 points)

The expected annual free cash flow for the GPS tracker investment from problem 3-1 is computed as follows

Revenue 1,250,000

Variable cost 750,000

Fixed expenses 250,000

Gross profit 250,000

Depreciation 100,000

Net operating income 150,000

Income tax expenses 51,000

NOPAT 99,000

Plus depreciation 100,000

Less CAPEX

Less working capital investments

Free cash flow 199,000

Required

· Construct a spreadsheet model to compute free cash flow that relies on the following assumptions or estimate.

· What level of annual unit sales does it take for the investment to achieve a zero NPV? Use your spreadsheet model to answer this question.(Hint use the Goal seek function in excel)

· If unit sales were 15% higher than the base case, what unit price would it take for the investment to achieve a zero NPV?

Question 3. Answer the problem #4-9 on page 141 from the TM (3rd Edition) textbook.(30 points)

Question 4.Answer the problem #5-10 on page 184-185 from the TM (3rd Edition) textbook. (20 points)

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