Finance Exam Assessment Questions

Finance Exam Assessment Questions
Your answers should be in full sentences and 1-2 paragraphs each.
1.In finance, how does short-term financial planning differ from long-term or capital budgeting?
2.As a manager, how could you determine if your firm is holding too much inventory?
3.Intuitively, what is the discount rate, why do we need it, and how do we choose the appropriate number?

Given the following information about ABC corporation:

Book Value
Security Amount ($ millions)
Common Stock 10
Preferred Stock 5
Bonds 5
Retained Earnings 2
Total 22

The common stock is currently trading at $10/share and there are 1 million shares outstanding. The firm has a Beta of 1.2, the economy’s risk-free rate is 2% and the equity market premium is 4%. ABC’s preferred stock is trading at $12/share and there are also 1 million shares outstanding. The par value of the preferred stock is $5 and it has a dividend yield of 20%. A series of 50,000 bonds were issued with a face value of $1,000. These bonds are now currently selling at $960 each. The bonds have a 10-year maturity and a coupon rate of 10% paid semi-annually. The firm’s corporate tax rate is 30%. What is the firm’s WACC?
Essay (15 marks):
In finance, we discussed the importance of cash-flow management and by extension the optimal amount of inventory to hold. In a 4-6 paragraph essay response, comment on the following statement: “We have used a Just in Time (JIT) inventory system for the last decade and it has been great! Why keep money tied-up in inventory when we can invest this excess cash in the stock market? With modern computers and data analytics I know exactly when and how our customers’ demand will change. An extra dollar in inventory is an extra dollar lost, in my view.”

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