Develop sound analytical frameworks to grasp the dividends decision practice.
FINAL EXAM
BCO222 Business Finance II
Professor Julia Sokolova
Spring Term, Year 2022/2023
Student Name:
B
Exam Version
RULES & REGULATIONS
• The first 15 minutes of the exam session will be used to review the exam before commencing; a Q&A session is allowed during these 15 minutes. Students can ask their question and the professor’s response will be shared with the entire class. No disrupting the class after the first 15 minutes after the exam has been distributed.
• No student will be allowed in the exam session after 15 minutes.
• Students may only have a pen and calculator (if specified) on the desk. No extra paper, books, mobile phones, or electronic device is allowed. Any extra paper needed will be brought to you by the administration department upon request. All mobile phones should be switched off and students’ belongings on the floor at the front of the class; any person found with an unauthorized device, concealed or otherwise, will receive a zero on the exam.
• If a calculator has been authorized by the professor, then this must be a calculator. No cell phones, smart-phones or any electronic device of any sort will be permitted. In the case that a student has forgotten their calculator, they will be requested to do the calculations by hand or obtain one before the start time of the exam.
• Students may not leave the exam for any reason, should they insist of doing so they will not be allowed to return to the exam. Toilet issues should be addressed before the start of the exam; exams over 2 hours in duration, please leave your exam with the professor and ask to be escorted by an administration member to the bathroom.
• You may not leave the exam session during the last 15 minutes.
• Speaking is not allowed under any circumstances. Should a student be seen or heard communicating with another student, they will be disqualified for the session and awarded a zero for the exam.
• If a student is caught or suspected of cheating, he or she will be sent to the administration department immediately and a disciplinary file will be opened. Cheating of any kind will result in a 0 and no retake will be allowed.
• If formulas are allowed in the exam, only professors may give the necessary information to the student either by writing on the board or handing them directly to the students. Students may not use their own notes unless specified ahead of time.
By signing this document, I verify that I have read the above rules and am aware of the consequences of not abiding by them. My exam will only be valid when signed.
LEARNING OUTCOMES ASSESSED
• Develop sound analytical frameworks to grasp the dividends decision practice.
• Demonstrate understanding of financial forecasting and planning.
• Critically analyze working capital management and managing firm liquidity.
• Analyze the sources of short-term credit and its estimated cost.
INSTRUCTIONS
• Exam Structure: set of problems on units 3, 4, 5, and 6.
• Material allowed: financial or scientific calculator, formula sheet.
• Time: 2 hours 30 minutes.
GRADING
• 60% of course grade
o Problem 1 – 20%
o Problem 2 – 35%
o Problem 3 – 25%
o Problem 4 – 20%
EXAM QUESTIONS:
Problem 1 (20 points)
The owners’ equity accounts for Vanda Corporation are shown here:
Common stock (€3 par value)€900,000
Capital surplus1,200,000
Retained earnings2,800,000
Total owners’ equity4,900,000
Instructions:
1. If the company’s stock currently sells for €58 per share and a 15 percent stock dividend is declared, how many new shares will be distributed? Show how the equity accounts would change. (10 points)
2. Assume that instead of a stock dividend, the company declares a three-for-one stock split. How the equity accounts will change? How many shares are outstanding now? What is the new par value per share? (5 points)
3. Explain the similarities and differences between Stock Dividend and Stock Split. (5 points)
Problem 2 (35 points)
The most recent financial statements for Mirabella Corporation follow. Sales for year 2023 are projected to increase by 12 percent. Tax rate will be 25% in year 2023. The company maintains a constant dividend pay-out ratio. The firm is operating at full capacity.
Instructions:
2.1. Calculate internal and sustainable growth rates. Explain what they mean. (10 points)
2.2. Prepare Proforma Income Statement and Balance Sheet for year 2023. (20 points)
2.3. Calculate the amount of external financing needed in 2023. What financing options are available for the company? (5 points)
Problem 3 (25 points)
Hendrix Corporation needs to borrow €900,000 in order to take a cash discount from its supplier on credit terms 4/15, net 50. A banker will loan the money for 30 days at an interest cost of €34,000. Assume a 360-day year for your calculations.
Instructions:
3.1. What is the effective rate on the bank loan? (4 points)
3.2. How much would it cost (in percentage terms) if Hendrix did not take the cash discount, but paid the bill in 50 days instead of 15 days? (4 points)
3.3. Should Hendrix borrow the money to take the discount? Explain. (4 points)
3.4. If another banker requires a 15 percent compensating balance, how much must Hendrix borrow to end up with €900,000? (4 points)
3.5. What would be the effective interest rate in question 3.4 if the interest charge for 30 days were €27,000? Since there are no funds to count against the compensating balance requirement, should Hendrix borrow with the 15 percent compensating balance? (4 points)
Problem 4 (20 points)
Here are the relevant estimates for the budget preparation of Mirabella Corporation for the fourth quarter of 2023:
All credit purchases are paid one month after the purchase.
Instructions:
4.1. Explain the role of cash budget. (5 points)
4.2. Using the above information, complete the following cash budget. (15 points)
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