FIN 402 Final Exam with precise detailed solutions

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FIN 402 Final Exam with precise detailed solutions
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3 Key Questions in Corporate Finance: - ✔✔1. How much money does the firm need?
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(NWC)



2. How does a firm acquire money? (capital structure)
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3. What long-term investment(s) should the firm undertake? (capital budgeting)
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Constant Growth Model assumes: || || ||




Also what is the formula? - ✔✔Common stock dividends will grow at a constant rate into
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the future.|| ||




Vcs = D1 / Kcs - g
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Capital Budgeting is important because... - ✔✔-Determining BS Evolution
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-Large Expenses ||




-Limited access to capital || || ||




-Effect on firm liquidity / profitability
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-ST & LT strategic implications
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3 components of ideal capital budgeting analysis - ✔✔1. Size of ALL relevant CF's
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2. TVM (when will CF occur?)
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3. Risk (what RRR will incorporate appropriate risk level?)
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Primary Concerns of Capital Budgeting: - ✔✔1. Size, risk, timing of CF's
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2. Replacement Issues
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3. Income Issues
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Two major mistakes in capital budgeting: - ✔✔1. Reject a good project
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2. Accept a bad project
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How to evaluate projects to avoid: - ✔✔1. Size of CF's (throughout whole life)
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2. TVM (when are they occurring?)
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3. Risk (what RRR will incorporate appropriate risk level?)
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7 Methods to Evaluate Decision-Making: - ✔✔1. *Payback Period
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2. Discounted Payback Period
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3. *NPV
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4. *Profitability Index
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5. Average Accounting Return
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6. *Internal Rate of Return
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7. Modified IRR (MIRR)
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*signifies the methods we will cover in class
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Drawbacks of Payback Period Method: - ✔✔1. Subjective cutoffs & doesn't guarantee a
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single answer ||

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2. Ignores TVM
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3. Ignores IRR
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4. Ignores some CF's (creates bias against LT projects / new projects)
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Benefits of Payback Period Method: - ✔✔*Minor decisions - efficient / fast
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1. Simple in concept
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2. Bias toward ST projects (liquidity bias)
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3. Later CF's more uncertain - adjusts for riskiness of later CFs by ignoring them
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Qualitative factors of NPV: - ✔✔1. Urgency: || || || || || ||




-tech. changes, partial investment recovery, employee safety / morale, etc.
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2. Company culture:
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-automation vs. expansion (communication info flow, team relationships & dynamics)
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3. Product / service quality
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4. Strategy / industry trends:
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-product building, market potential & share maintenance, future capacity, international
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competition, etc. || ||




5. Environmental / Ethical:
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gov't trends, cost efficiency vs. public animosity, local air quality
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IRR is where NPV = - ✔✔0
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