Financial Management Final Exam Practice Problems and Solutions

This document provides a comprehensive set of solutions to a financial management homework assignment. The solutions cover a wide range of topics, including the cash flow identity, time value of money, stock and bond valuation, and capital budgeting techniques. The assignment includes detailed calculations for various financial scenarios, such as calculating the cost of equity using the CAPM model, determining the present value of investments, analyzing the net present value of projects, calculating beta, and determining the weighted average cost of capital (WACC). Furthermore, the document also analyzes capital budgeting decisions, including incremental cash flow analysis for new versus old machine scenarios and calculating the fair value of different investment schemes. The solutions are presented in a clear and organized manner, making them a valuable resource for students studying financial management. Finally, the solutions includes the balance sheet information.

Running head: FINANCIAL MANAGEMENT
Financial Management
Name of the Student:
Name of the University:
Authors Note:

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FINANCIAL MANAGEMENT

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FINANCIAL MANAGEMENT
Contents
Part 1:...............................................................................................................................................3
Answer 1:.........................................................................................................................................3
Answer 2:.........................................................................................................................................3
Answer 3:.........................................................................................................................................6
Answer 4:.........................................................................................................................................7
Answer 5:.......................................................................................................................................11
Answer 6:.......................................................................................................................................14
Answer 7:.......................................................................................................................................15
Answer 8:.......................................................................................................................................18
Answer 9:.......................................................................................................................................22
Answer 10:.....................................................................................................................................23
Part 2:.............................................................................................................................................24
References:....................................................................................................................................29

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Part 1:
Answer 1:
Items Operating
cash flow
Net
working
capital
Net capital
spending
Cash flow
from assets
Cash flow
to creditors
Cash flow
to share
holders
1 Increase in
$2.3
million
No effect No effect No effect No effect
2 No effect No effect No effect No effect No effect No effect
3 Decrease
in cash
flow by
$77,000
Net effect
$0
No effect No effect No effect No effect
Answer 2:
We know that the price of the share is (D / Ke - g)
Where,
D = dividend at the end of t (i.e. in year 4 in this case).
Ke = Cost of equity.

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g = Growth rate.
Since there is no cost of equity given in this case the same has to be calculated by using capital
asset pricing model (CAPM) (Adler, 2018). As per CAPM the cost of equity is calculated by
using following formula,
Re = Rf + B x (Rm – Rf)
Where,
Re = cost of equity.
Re = Risk free rate of return.
B = beta.
Rm = Market rate of return
(Rm – Rf) = Market risk premium.
Accordingly, the cost of equity in this case is calculated below.
Re = Rf + B x (Rm – Rf)
As per capital asset pricing model (CAPM)
Risk free rate 2.20%
Market risk premium 6%
Beta 1.25

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Cost of equity 0.097
Cost of equity 9.7%
Using the above information let us calculate the value of a share at present to determine the price
at which the stock should be sold today (Danazimi Jibril, Toyin J and ., 2018).
Dividend expected at the end of year 4 is calculated below:
Year 1 2 3 4
Expected
dividend
3.25 3.4775 3.720925 3.98139
The price of the share is to be calculated by using the following formula,
(D1 / Ke - g)
Where,
D = dividend at the end of t (i.e. in year 4 in this case).
Ke = Cost of equity.
g = Growth rate.
Expected dividend at the end of year 4 would be as shown in the calculation is $3.98 (Hamer,
Keppel and Zedeck, 2016).

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Accordingly, the share should be sold at following price:
(D1 / Ke - g)
Dividend at the end of year 4 3.98
Ke 9.70%
g 3%
Price $59.40
Hence, the shares should be sold today at a price of $59.40 each on the basis of dividend growth
model (Hand, 2017).
Answer 3:
Part (a):
Calculation of expected net present value of the project based on the available information is
calculated below:
Cash flows: Success Failure Net cash flow PV factor @16%
Year 0.55 0.45
8 600 300 465 141.84
9 700 350 542.5 142.65
10 800 400 620 140.54

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Present value of total cash flow 425.03
Less: Initial investment at t = 0 400.00
Expected net present value 25.03
Expected net present value of the project as can be seen is $25.03 thus, with current scenario the
organization should proceed with the project.
Part (b):
The value of abandonment option:
At t = 7 the sale proceeds from abandonment is $870. Considering the discounting rate of 16%
per annum the present value factor at the end of year 7 is 0.35383 thus, the present value of the
sale proceed is (870 x 0.35383) = $307.83. Thus, value of the abandonment option is (307.83 –
400) = ($92.17) (Kim, 2018).
Answer 4:
Part (i):
The beta is calculated by using the following formula:

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Date S&P500 AAPL
20150131 -0.035583 -0.129542
20150228 0.043117 0.089452
20150331 0.006932 0.039214
20150430 0.006201 0.130733
20150530 0.021030 -0.038963
20150630 0.019058 -0.023180
20150731 -0.015080 -0.136575
20150829 0.037655 0.033437
20150930 -0.015514 -0.095043
20151031 0.023201 0.153093
20151128 0.024534 0.071966
20151231 -0.004189 -0.011459

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20160130 -0.031041 -0.053745
20160227 0.054893 0.140328
20160331 -0.017396 -0.039744
20160430 0.008521 -0.003995
20160529 0.010491 -0.026862
20160630 -0.021012 -0.054837
20160731 0.019742 -0.028427
20160831 -0.062581 -0.027815
20160930 -0.026443 -0.041360
20161030 0.082983 -0.030095
20161130 0.000505 0.014127
20161231 -0.017530 0.032146
20170129 -0.050735 -0.072753
20170229 -0.004128 0.104544
20170331 0.065991 0.224556
20170429 0.002699 -0.081005
20170531 0.015329 -0.027073

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20170630 0.000906 -0.027914
20170729 0.035610 0.199836
20170831 -0.001219 -0.004938
20170930 -0.001234 -0.001466
20171031 -0.019426 -0.023077
20171130 0.034174 0.040600
20171230 0.018201 0.021623
20180131 0.017884 0.021248
20180228 0.037198 0.044191
20180331 -0.000389 -0.000462
20180428 0.009091 0.010800
20180531 0.011576 -0.028521
20180630 0.004814 0.040759
20180731 0.019349 0.005198
20180831 0.000546 -0.012218
20180929 0.019303 0.062110
20181031 0.022188 -0.049998

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20181130 0.028083 0.046685
20181229 0.009832 -0.002526
Covariance = 0.001173
Variance = 0.0054818
Accordingly beta is (0.001173 / 0.0054818) = 0.2139855 or 0.21
Beta measures of AAPL is 0.21 is indicative of significantly low risk that investors have to
undertake in case they decide to invest in AAPL (Lindley and Edwards, 2017).
Part (ii):
The beta measures have been calculated by using the returns data of S&P and AAPL thus, as
long as the data of these two parameters are correctly given there is significant confidence on the
above calculation.
Answer 5:
Mondo Group Division:
Cost of equity:
As per CAPM the cost of equity is calculated by using following formula,
Re = Rf + B x (Rm – Rf)
Where,