FINANCE DEPARTMENT

Program: 3rd Year

FIN310 – FINANCIAL MANAGEMENT

Mid-term Exam – March 17th, 2022, XXXX – XXXX

Course manager: Johan WIENBELT

Semester 6 - Year 2021-2022

General Instructions:

See on Moodle.

Exam Instructions:

1. Please put your name/surname on your exam sheet.

2. You have 60 minutes to complete the exam.
3. There is only one correct answer and no penalty.
4. Each question = 5 points (20 questions x 5 = 100 points).

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 Multiple Choice Questions

Financial statements and Cash-flows

Question 1.
The WACC measures?

Answer
A. The firm’s Cost of Debt
B. The firm’s Cost of Equity
C. The Cost of Capital for a firm
D. The economic return on a firm’s Net Working Capital.

Question 2.
What is the Capital Employed of MyDreamCompany in 2020 and 2019 respectively?

Balance sheet (in million €) 2020 2019

Net Fixed Assets 1,000 800
Inventories 300 275
Receivables 100 65
Cash 120 160
= Total Assets 1,520 1,300
2020 2019
Payables 55 85
Financial Debt 640 585
Total Shareholders' Equity 825 630
= Total Liabilities & Shareholders' Equity 1,520 1,300

Answer
A. €1,465 million and €1,215 million respectively
B. €725 million and €1,405 million respectively
C. €1,345 million and €1,055 million respectively
D. €1,575 million and €1,385 million respectively

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 Question 3.
Using the Balance Sheet and Income Statement hereunder, what is the RoCE of MyDreamCompany
in 2020?

Balance sheet (in million €) 2020 2019

Net Fixed Assets 1,000 800
Inventories 300 275
Receivables 100 65
Cash 120 160
= Total Assets 1,520 1,300
2020 2019
Payables 55 85
Financial Debt 640 585
Total Shareholders' Equity 825 630
= Total Liabilities & Shareholders' Equity 1,520 1,300

Income Statement 2020

Sales 600
- Cost of sales 280
- Administrative & General costs 100
= EBIT 220
- Interest / Financial expenses 20
= Net Earnings 200
- Dividends 60
= Retained Earnings 140
Tax rate 30.00%

Answer
A. 16.92%
B. 18.67%
C. 11.45%
D. 14.60%

Question 4.
You notice that MyDream’s Total Shareholders’ Equity has increased. Which are the sources for
that increase?
Answer
A. The company received cash from clients
B. The company sold an old machine
C. The company received subsidies from the local government, to create jobs
D. The company made profits which it retained

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 Question 5.
The risk-free rate on the market is 2.0%. The return of the market is 7.5% and the firm’s Beta is 1.6.
The firm’s Cost of Debt is 2.75% and the corporate tax rate is 25%.

In addition, you have the following information:

The firm’s market capitalisation is €825 million, the market value of its Debt is €640 million, and its
cash position is €120 million.

What is the firm’s WACC?

Answer
A. 6.31%
B. 11.04%
C. 10.98%
D. 7.42%

Question 6.
You noticed in Question 5 that the firm’s beta is higher than 1. This makes investing in the firm’s
share more or less risky than market average?

Answer
A. Less risky
B. More risky

Question 7.
The following data are taken from the records of ABC Corp. Its corporate tax rate is 30%.
EBIT: €34,600
Depreciation: €11,500
Change in Accounts Payables: - €6,000
Change in Accounts Receivables: €2,000
Change in inventories: €12,000

What is the right amount of ABC’s Free Cash-flow (FCF)? If ABC Corp. would have bought a new
machine for €10,000, would that make its FCF higher, lower or would it remain unchanged?

Answer
A. CF = €26,100 and unchanged
B. CF = €15,720 and lower
C. CF = €26,100 and lower
D. CF = €15,720 and unchanged

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 Discounted cash-flow valuation

Question 8.
Your favourite pizza restaurant has a special offer:
Offer 1 - You pay today €20 for a nice Quattro Stagioni, or
Offer 2 - You can pay it €23 on 17 March 2024.

Your discount rate is 7%. Which offer do you prefer.

Answer
A. I take Offer 1, because the Present Value of Offer 2 is lower
B. I take Offer 1, because its Future Value is lower than Offer 2
C. I take Offer 2, because its Present Value is lower than Offer 1
D. I take Offer 2, because it is lower than Offer1’s Future Value

Question 9.
Suppose your brother can invest in a project that provides him with a 6-year annuity with annual
payments of $750 at the end of each year, at a 4% discount rate. You offer him an alternative:
$4,000 today and you receive the proceeds from the project. Who is the smarter investor?

Choose the best answer

A. Me of course, my brother is null in Finance
B. I am because the Present Value of the Annuity is higher than my $4,000
C. My brother is because the Present Value of the Annuity is lower than my $4,000
D. I am because the Present Value of the Annuity is lower than my $4,000

Question 10.
The value of a warehouse today is €4,500,000 and its expected value in 5 years is €6,000,000. What
is the annual percentage return on this investment over the five-year period?
Answer
A. 6.31%
B. 6.04%
C. 6.98%
D. 5.92%

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 Risk and return & Cost of capital calculation
Question 11.
Professional investors put 15-20 stocks and bonds in their portfolio and not just 1 or 2. What is the
objective of diversification?

Answer
A. With 15-20 stocks, the portfolio has a higher return
B. Risk reduction through not perfectly correlated investments
C. It is cheaper to buy 15-20 stocks
D. The covariance is higher for 15-20 stocks

Question 12.
You have calculated the Cost of Equity for ABC Company at 7.70%. XYZ Company’s Cost of Equity is
5.22%.
2 sub-questions: What does Cost of Equity represent? Comparing the Cost of Equity, which
company is riskier, ABC or XYZ?

Answer
A. The annual dividend payment and ABC is riskier
B. The average interest rate on bank loans and XYZ is riskier
C. The minimum return shareholders require and XYZ is riskier
D. The minimum return shareholders require, and ABC is riskier

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 Net Present Value calculation

Question 13.
Use the following data:
An investor has to make a choice between the following two “mutually exclusive” projects:

Project 1: Buying a warehouse for $800,000 of initial investment. Clients will come to the
warehouse to collect their orders. He needs recover the initial cash outlay within 5 years given the
following cash flows per year for five years (in thousands):

Period 0 1 2 3 4 5
Cash Flow -800 -30 140 200 250 430

Project 2: Starting a transporting company with an initial investment for 3 trucks of $170,000 and
deliver the orders at the client’s home. This project will generate the following annual cash flows
for five years (in thousands):
Period 0 1 2 3 4 5
Cash Flow -170 -10 25 80 150 -20

With a 5% WACC, which project would you recommend to the investor?

Answer
A. Neither
B. Both projects deliver value to the investor
C. Project 2
D. Project 1

Question 14.
Consider 2 projects A and B that generate the following cash-flows (in million €):

Period 0 1 2 3 4 5
Project A -200 45 45 45 45 45
Project B -110 25 25 25 25 25

Assuming a 10.5% WACC, which project should you accept?

Choose the best answer

A. You should accept both projects
B. Project A
C. Project B
D. Neither

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 Question 15.
You consider investing in project A. The Net Present Value of project A is €12,000. The initial
investment of project A is €50,000.
You can also invest in project B. You know that project B’s Profitability Index (PI) is 1.3. You are
subject to capital rationing.

Should you invest in project A or B?

Choose the correct answer

A. PI of project A = PI of project B, so you can invest in A or B
B. PI of project A and PI of project B are both > 1, so you can invest in A and B
C. PI of project A > 1 and > than PI of project B, so you should invest in A
D. PI of project A < than PI of project B, so you should invest in B

Question 16.
The Internal Rate of Return of an investment represents what exactly?

Answer
A. The rate of return on the initial investment. This return needs to be lower than the cost of
financing the investment
B. The rate of return on the initial investment. This return needs to be higher than the cost of
financing the investment
C. The time it takes before the accumulated cash-flows from the project equal the initial
investment amount
D. The return a debt holder requires for investing in the project

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 Alternative investment rules

Question 17.
Assume a project in which you initially invest $800. Its cash-flows are:

Year1 Year2 Year3 Year4

A. $500 $400 $300 $200
B. $200 $300 $400 $600
C. $350 $350 $350 $350

The company has cash problems and can only execute projects with a Payback Period shorter than
30 months. Which project(s) should the company execute?

Choose the best answer

A. Projects A and B
B. Projects A and C
C. Projects B and C
D. Neither project

Question 18.
Using the same data as in Question 17, using the NPV decision rule, which project creates the
highest value for the company?

Year1 Year2 Year3 Year4

A. $500 $400 $300 $200
B. $200 $300 $400 $600
C. $350 $350 $350 $350

Use a WACC of 5%.

Choose the best answer

A. Project A
B. Project B
C. Project C
D. Neither project

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 Question 19.
A company has consulted its banker and can use credit facilities up to €140,000.
Consider the following investments A and B, each with an initial investment of €50,000.

Investment Investment
Year A B
1 25,000 5,000
2 25,000 5,000
3 25,000 65,000

Initial investment - 50,000 - 50,000

WACC 5.50%

In which project(s) will you invest using the Profitability Index?

Answer
A. You should accept A and reject B
B. You should accept B and reject A
C. You should accept both projects
D. None of them

Question 20.
Consider the following investments A and B, each with an initial investment of €50,000.

Investment Investment
Year A B
1 25,000 5,000
2 25,000 5,000
3 25,000 65,000

Initial investment - 50,000 - 50,000

Bad news! Your banker is calling: the bank is reducing its loan amount to the company! Your credit
facilities have now fallen to €90,000. But the new bank loan is less expensive and your WACC is
decreasing to 4.5%. In which project will you invest, using the Profitability Index?

A. You should accept project A and reject project B

B. You should accept project B and reject project A
C. You should accept both projects
D. You reject both

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