# What is Finance 4300? Essay

Custom Student Mr. Teacher ENG 1001-04 23 April 2016

## What is Finance 4300?

Question 1
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Chua Chang & Wu Inc. is planning its operations for next year, and the CEO wants you to forecast the firm’s additional funds needed (AFN). The firm is operating at full capacity. Data for use in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year? Last year’s sales = S0\$200,000Last year’s accounts payable\$50,000 Sales growth rate = g40%Last year’s notes payable\$15,000

Last year’s total assets = A0*\$135,000Last year’s accruals\$20,000 Last year’s profit margin = PM20.0%Target payout ratio25.0%

\$16,000

•Question 2
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Which of the following statements is CORRECT?
A negative AFN indicates that retained earnings and spontaneous liabilities are far more than sufficient to finance the additional assets needed.

•Question 3
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A company forecasts the free cash flows (in millions) shown below. The weighted average cost of capital is 13%, and the FCFs are expected to continue growing at a 5% rate after Year 3. Assuming that the ROIC is expected to remain constant in Year 3 and beyond, what is the Year 0 value of operations, in millions? Year:123

Free cash flow:\$15\$10\$40

\$386

•Question 4
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Based on the corporate valuation model, Bernile Inc.’s value of operations is \$750 million. Its balance sheet shows \$50 million of short-term investments that are unrelated to operations, \$100 million of accounts payable, \$100 million of notes payable, \$200 million of long-term debt, \$40 million of common stock (par plus paid-in-capital), and \$160 million of retained earnings. What is the best estimate for the firm’s value of equity, in millions? Answer

\$500

•Question 5
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Based on the corporate valuation model, the value of a company’s operations is \$900 million. Its balance sheet shows \$70 million in accounts receivable, \$50 million in inventory, \$30 million in short-term investments that are unrelated to operations, \$20 million in accounts payable, \$110 million in notes payable, \$90 million in long-term debt, \$20 million in preferred stock, \$140 million in retained earnings, and \$280 million in total common equity. If the company has 25 million shares of stock outstanding, what is the best estimate of the stock’s price per share? Answer

\$28.40

•Question 6
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Leak Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 11% and FCF is expected to grow at a rate of 5% after Year 2, what is the Year 0 value of operations, in millions? Assume that the ROIC is expected to remain constant in Year 2 and beyond (and do not make any half-year adjustments). Year:12

Free cash flow:\$50\$100

\$1,456

•Question 7
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Suppose Leonard, Nixon, & Shull Corporation’s projected free cash flow for next year is \$100,000, and FCF is expected to grow at a constant rate of 6%. If the company’s weighted average cost of capital is 11%, what is the value of its operations? Answer

\$2,000,000

•Question 8
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Which of the following does NOT always increase a company’s market value? Answer
Increasing the expected growth rate of sales.

•Question 9
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Zhdanov Inc. forecasts that its free cash flow in the coming year, i.e., at t = 1, will be \$10 million, but its FCF at t = 2 will be \$20 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 14%, what is the firm’s value of operations, in millions? Answer

\$167

•Question 10
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The first, and most critical, step in constructing a set of forecasted financial statements is the sales forecast.
True

•Question 11
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As long as a firm does not pay out 100% of its earnings, the firm’s annual profit that is retained in the business (i.e., the addition to retained earnings) is another source of funds for a firm’s expansion.

•Question 12
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To determine the amount of additional funds needed (AFN), you may subtract the expected increase in liabilities, which represents a source of funds, from the sum of the expected increases in retained earnings and assets, both of which are uses of funds.

•Question 13
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Expected free cash flows should be discounted at the ________ to find the value of a company’s value of operations.
Weighted average cost of capital

A

• University/College: University of Chicago

• Type of paper: Thesis/Dissertation Chapter

• Date: 23 April 2016

• Words:

• Pages:

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