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In quantitative problems, you are required to write your answers on physical sheets and then take pictures of them. After that, you will copy these pictures and paste them into your Microsoft Word file. In qualitative problems, you will simply write in Microsoft Word.

We will search for plagiarism in your exams. If it is found, then it will be considered as cheating. When you refer to an article or a graph, you should both give a short in-text reference (so we will know which of the sentences are from an article) and a full-information reference in the REFERENCES section at the bottom of your sheet.

1.a. Describe the percentage of sales method and briefly explain why it is used widely.

1.b. Why WACC is important? Explain briefly.

1.c. Is there a relationship between break-even point and cost of capital? Explain briefly?

1.d. Explain the stock price before- and after stock split, and show how the increasing number of stocks affects the market value of share and shareholders wealth.

2. The MB Company is considering investment in one of the following mutually exclusive projects. Cash inflows of foreseeable next 4 year are given below:

Cash inflows (\$000)

Probability Project K Project L

0.15 4,250 4,250

0.20 4,750 5,250

0.30 5,250 6,250

0.20 5,750 7,250

0.15 6,250 8,250

2.a. Calculate the expected cash inflow and standard deviation of both project.

2.b. Which project has the greater risk, in terms of variation of coefficient and what other factors should be considered for selecting one of the mutually exclusive projects?

3. Long term capital structure of company KL is given below:

Sources of capital Book value (\$ 000)

Debts 20,000

Preferred stock 5,000

Common stock 7,500

Reserves (re) 17,500

Total capital 50,000

The interest rate for debt is overall 10%, dividend for common stock is \$1.3 and \$1.5 for preferred stock per share, respectively. Preferred -and stock price is \$10 per share, growth rate is 0.06. Suppose that the average income tax ratio is 25 % and the corporate tax ratio is 20 %, calculate and interpret the WACC of the Company.

4.a. What does it mean, if companys operating cash flow is negative for a particular period and how does it impact the investment and financing activities of a company? Explain briefly.

4.b. Explain briefly, how could a companys change in NWC be negative in a given year. What about net capital spending?

4.c. Is it possible for a company to pay dividends when it has a negative net income for the year? Could this happen in the long run? Explain briefly.

5. Total sales of ABC Corp. are \$ 100 M and net income is \$ 11,5M. The manager thinks eliminating the group marginal customers that constitutes the 10% of the total sales, will increase. Distributing the incomes and expenses of the Company between the marginal customers and credible customers based on income statement, indicate whether the company should eliminate marginal customers or not.

Percentage of sales total fixed variable

Cost of sales (%) 70 – 70 Overhead cost (%) 15 8 7

Collection exp.(%) 1 – 1

Other exp. (%) 2.5 2 0.5

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