FINANCIAL MANAGEMENT

FIN310 – Financial Management

Responsable du module : Johan WIENBELT

Semestre 5 - Année 2021-2022

Final Exam Subject – 14 December 2021, 2pm – 4pm

Exam Instructions:

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

2. You have 120 minutes to complete the exam;
3. The formulas are listed below;
4. Points are indicated per question. There is no penalty;
5. There are only open questions, 1.1 – 1.9, 2.1 – 2.3, 3.1 – 3.5, and 4.1 – 4.3;
6. Write your formulas and calculations clearly, each step. Correct formulas / calculations
with wrong answers still receive points. Answers without calculations receive less points;
7. Write compact, factual answers. Save time, no stories!
8. There are 67 points + 7 bonus points, for a total maximum of 60 points, to be
recalculated on a 20-point grade.
A compléter par l’étudiant (si les étudiants doivent répondre sur le sujet) :

Nom : ……………………………………………………………………………………..

Prénom : ...……………………………………………………………………………….

Numéro : …………………………………………
 Formulas

MAIN FORMULAS PROVIDED FOR THE FINAL EXAM

‫ܥ‬ ͳ ‫ܥ‬ ି ௡ሻ Annuity formula

ܸܲ ൌ ͳെ ൌ ሺͳ െ ͳ ൅ ܴ
ܴ ሺͳ ൅ ܴ ሻ௡ ܴ

஼
Fܸ ൌሺ ͳ ൅ ܴ ௡ െͳሻ Future value of annuity
ோ

ͳ
ܸܽ ‫ܴ ݎ‬ ൌ ܴ ଵ െܴ
തଶ ൅ ܴ ଶ െܴ
തଶ ൅ ‫ ڮ‬൅ ܴ ் െܴ ത ;
ܶ െͳ
்
ͳ Variance of returns
ܸܽ ‫ܴ ݎ‬ ൌ ෍ ሺܴ ௧െܴ
തሻ;
ܶ െͳ
௧ୀଵ

Financial Management - session 1 153

MAIN FORMULAS PROVIDED FOR THE FINAL EXAM

‫݈ܽ݁ݎ‬ ‫ ݒܥ‬ሺܴ ஺ Ǣܴ ஻ ሻ
‫ݎܥ‬ ‫݅ݐ‬ ܿ‫ݐ‬ ൌߩ ஺ǡ஻ ൌ‫ܴ ݎݎܥ‬ ஺Ǣ
ܴ ஻ ൌ
ߪ஺ ൈ ߪ஻ Correlation
and
் covariance
ͳ
‫ܴ ݒܥ‬ ஺Ǣܴ ஻ ൌߪ ஺஻ ൌ ෍ ܴ ஺೟ െܴ ஺ ൈܴ ஻೟ െܴ ஻
of returns
ܶ െͳ
௧ୀଵ

The standard deviation of a portfolio with two stocks

Var(ܴ ௉ሻ ൌܺ ஺ଶ ൈߪ ஺ଶ ൅ ܺ ଶ
஻ ൈߪ ஻ଶ ൅ ʹܺ ஺ ܺ ஻ ‫ݒܥ‬ ሺܴ ஺ Ǣܴ ஻ ሻ

ܵ ‫݅ݐ݂ݐݎ ܦ‬ ൌߪ ோು ൌ ܸܽ ‫ݎ‬ሺܴ ௉ ሻ

Financial Management - session 1 154

 MAIN FORMULAS PROVIDED FOR THE FINAL EXAM

Beta definitions.
ܿ ܿ‫ݒ‬ሺܴ ௠ Ǣܴ ௌ௧஺ ሻ
ܾ݁ ௧஺
ௌ ൌ ܸܽ
‫ݎ‬ሺܴ ௠ ሻ

ܿ ܿ‫ݒ‬ሺܴ ௠ Ǣܴ ௌ ሻ ௩ ሺோಲǢ
ோ ಳሻ
ܾ݁ ൌ ܸܽ
௧஺ ߩ ஺ǡ஻ ൌ ՞ ‫ܴ ݒܥ‬ ஺Ǣ
ܴ ஻ ൌߩ ஺ǡ஻ ൈߪ஺ ൈߪ஻
௧஺
ௌ ఙಲ ൈ
ఙಳ
‫ݎ‬ሺܴ ௠ ሻ

ߩ ோ஺ǡோ ൈߪௌ
௧ ஺ ൈߪோ ߩ ோ஺ǡோ ൈ ߪௌ
௧ ஺
ܾ݁ ൌ ൌ
௧஺
ௌ
ߪோ ൈߪோ ߪோ

Financial Management - session 1 155

Grading principles for teachers:

 For each individual open question, the whole scale from 0/20 to 20/20 should be
used.
See Grading grid on our Teams channel under Exam questions
o As a reminder: 10/20 is "barely passing, minimally acceptable level of
knowledge and skills";
o 16/20 and above is "excellent", "with only minor inadequacies";
o A 20/20 is an outstanding answer (not necessarily perfect) above what would
normally be expected from a student;
o If some elements are present without giving a satisfactory answer, 8/20 or
less can be given. "Limited knowledge and skills";
o A zero should be kept for no answer at all or for an answer where no element
can be remotely related to what is asked for.
 Don't remove points for French answers or French words – we are not here to
grade the quality of their English;
 For some questions, use the indicated full number of points;
 Other questions require your assessment. Please then mark the question on a scale
from 0/20 to 20/20;
 Then check the maximum amounts of points indicated per question;
 For example:
5 points maximum for a question;
You assess the answer by the student as “Good”, 12-13.99 on a 20-scale;
You give a 13;
The number of points for that answer then calculates as 13 * 5 max. / 100 = 0.65;
 Questions add up to 20+13+9+18 = 60 points in total. There are 7 bonus points, that
could be added;
 At the end, calculate the actual number of points per question. There are 60
maximum points for the exam, to be recalculated to a 20-scale;
 See for detailed instructions below in this answer sheet.

 How to assess answers?

 Good logic + perfectly right answer: 20/20
 Logic + slight error in answer (e.g., error in % sign, rounding error, etc.): 16/20
 Good logic + wrong answer (calculation mistake): 12-14/20
 Error or slight error in logic, calculations missing, but right answer: 12/20
 False answer, but contains something related to the question from course theory:
8/20
 No answer, or contains something related to future value, or the wrong use of the
annuity formula, etc.: 0-7/20.
 Final Exam

Questions
Part 1.
Cost of Capital, risk and return (20 points: 2 + 2 + 3 + 2 + 2 + 3 + 2 + 2 + 2)
1. Question 1.1 (2 points)
Wonder Industries has 25 million shares outstanding trading at $18 per share. In addition,
Wonder has $150 million in outstanding debt, trading in the bond markets. Suppose Wonder's
Cost of Equity is 13%, its Cost of Debt is 7%, and the corporate tax rate is 40%.

Calculate Wonder's Weighted Average Cost of Capital (WACC) in two decimals.

Answer:

rU = rE + (1 - Tc) * rD

= (13%) + (7%) * (1 - .4) = 10.80%

2. Question 1.2 (2 points)

The Cost of Equity was given in the previous question 1.1. Which are the two models that
investors commonly use to estimate the Cost of Equity?

Answer:
The Capital Asset Pricing model (CAPM) (1 point) and the Constant Dividend Growth model,
also known as Gordon-Shapiro (1 point).

3. Question 1.3 (3 points)

Stocks and bonds have different risk profiles. Why is investing in stocks generally considered
riskier? Otherwise stated, should the return for an equity investor in general be higher, lower or
equal to the required return for investing in corporate bonds?

Answer:
Bondholders have a contract with fixed payments (1 point). In case of financial trouble of the
issuer, bondholders have more rights, a higher priority in the claim on assets in most
jurisdictions (1 point). More risk means a higher required return. Therefore, in general, equity
investors require a higher rate of return than bond investors do. (1 point)
 Firm Portfolio Weight Volatility Correlation with the Market
(“écart type”)
Taggart Transcontinental 0.25 14% 0.7
Wyatt Oil 0.35 18% 0.6
Rearden Metal 0.40 15% 0.5
4. Question 1.4 (2 points)
Below are the data for a portfolio, consisting of 3 stocks, with each their portfolio weight:

The volatility “écart type” of the market is 10%, the expected return on the market is 12%, and
the risk-free rate of interest is 4%.
Calculate the beta for Taggart Transcontinental (in two decimals).

Answer: see spreadsheet

βTT = = = 0.98

5. Question 1.5 (2 points)

Imagine that Wyatt Oil’s beta is higher than the beta of Rearden Metal, what does this mean?

Answer:
Investors require a higher return on buying shares in Wyatt Oil (1 point) and consider Wyatt Oil
a riskier company/investment (1 point).

6. Question 1.6 (3 * 1 point)

What is the Cost of Equity of each company (in 2 decimals)?

Answer: See spreadsheet.

7. Question 1.7 (2 points)

Calculate the beta of the portfolio of these 3 stocks.

Answer: 0.92, see spreadsheet.

8. Question 1.8 (2 points)

What is the expected required return of the portfolio of these 3 stocks (in 2 decimals)?

Answer:
11.38%, see spreadsheet.

9. Question 1.9 (2 points)

Is investing in the portfolio riskier or less risky than investing in the market? Explain why.

Answer:
A portfolio β < 1 means that the portfolio is less volatile than the market index and investing in
the portfolio is less risky. This can also be concluded from the expected returns.
 Part 2. Bank loan financing (13 points: 7 + 3 + 3)
1. Question 2.1 (7 points)
Company ABC consults its bankers to finance a new investment with a bank loan. It receives two
different offers. ABC’s corporate tax rate is 26%.

Offer 1 for a bank loan:

- Amount of the loan: €250,000;
- Stated interest rate: 2% per year;
- Method of payment: Equal Total payment;
- Length of the loan: 4 years;
- Frequency of payments: annually;
- Bank fees: €750 (one-off, to be paid when receiving the loan at t0);
- Insurance cost: €250 per year.

Calculate the Equal Total Payment amount? (3 points)

Offer 2 for a bank loan:

- Amount of the loan: €250,000;
- Stated interest rate: 2.25% per year;
- Method of payment: Equal Principal payment;
- Length of the loan: 3 years;
- Frequency of payments: annually;
- Bank fees: €500 (one-off, to be paid when receiving the loan at t0);
- Insurance cost: €400 per year.

Calculate the amortisation table for offer 2 using template below? (4 points)

Answer:
See spreadsheet.
Offer 1: Total payment calculated with Annuity formula: 3 points.
Offer 2: Equal principal reimbursement calculated correctly as Loan / 3: 1 point.
Correct figures for Interest payment, Total payment, Ending balance = 0 for year 3: 3 points.

Template
Outstanding balance
Year Outstanding balance begin Payment Interest Reimbursement Interest after tax end
1 250,000.00
2
3
4
5 0.00
TOTAL TOTAL
 2. Question 2.2 (3 points)
ABC compares both offers according to interest paid during the length of the loan. The total
Interest paid after tax on loan 2 is €8,325. Calculate the interest paid after tax on offer 1 (2
points). Which offer should ABC choose? (1 point)

Answer: See spreadsheet. Offer 1: €9,342 after tax. Offer 2: €8,325 after tax. Choose offer 2.

3. Question 2.3 (3 points)

ABC would like to calculate the Effective Cost of Debt of each bank loan, but it does not have
access to Excel. Which formula would you use to calculate the Effective Cost of Debt?

Answer:
Bank loan minus one-off bank fees (1 point), cash-out payments Reimbursement, Interest after
tax and Insurance cost (1 point), discounting for each year (1 point).
Bank loan minus one-off bank fees = sum of [ (R + I + Insurance cost) / (1 + CoD)^year i ]
Part 3 Equity financing (9 points: 1 + 1 + 3 + 2 + 2) (+ 7 bonus points)
To finance a new project, ABC Company is evaluating two options.

 Option 1 to issue new shares at the current market price;

 Option 2 to contract a new bank loan for €250,000.

Option 1. Issue new shares for a total amount of €250,000.

 The offering price = the market price = €41.50 per share

 The total amount of the capital increase = €250,000
 The total number of shares before the capital increase = 50,000
 Your company INVEST Inc. wish to buy 100% of the new shares.

Option 2. Contract a new bank loan for €250,000.

 ABC’s current market value of debt is €1,000,000.

1. Question 3.1 (1 point)

How many new shares should be issued by ABC Company (round to the upper unit)?

Answer:
6,025, see spreadsheet.

2. Question 3.2 (1 point)

What would be the proportion of voting rights of INVEST Inc. after the capital increase (in 2
decimals)?

Answer:
10.75%, see spreadsheet. Deduct if answer not given in percentage.

3. Question 3.3 (3 * 1 point)

Compute the debt-to-equity ratio in the initial situation, before a new share issue, and before a
new bank loan (1 point).
Calculate the new debt-to-equity ratio just after the new equity issue (1 point). Also, calculate
the debt-to-equity ratio from the initial situation with the new bank loan (1 point). All 3 debt-to-
equity ratios in 2 decimals.

Answer:
Initial Option 1 Option 2
Situation (New equity issue) (New bank loan)

Debt-to-equity ratio 0.48 0.43 0.60

Deduct if Debt-to-equity ratio not given in units (for example, a percentage is wrong).
4. Question 3.4 (2 points + 3 bonus points)
What are the advantages of debt financing vs equity financing?

Answer:
Usually cheaper cost of funding (1 point), Leverage (1 bonus point), tax benefits of interest
deductibility (1 point) and increased return on equity (2 bonus points).

5. Question 3.5 (2 + 4 bonus points)

What are the disadvantages of debt financing vs equity financing?

Answer:
Interest are fixed costs (1 point), increased risk profile (2 bonus points), interest and
reimbursements are cash-out (1 point), and financial distress costs (2 bonus points).
Part 4 Financial Statements and Cash-flows (18 points: 5 + 5 + 8)
The Beloved Company is providing you with the following financial data:
Beloved Corp
Data are in millions of € 2019 2020
Income statement
Revenue 513.6 602.6
Cost of Goods sold -248.3 -295.8
Sales and marketing -104.9 -121.1
Administration -66.9 -79.8
Depreciation and Amortisation -38.3 -40.1
Interest Income (Expense) -37.0 -40.9
35% Income Tax -6.4 -8.7
Share outstanding (millions of units) 56.8 56.8

Balance Sheet
Cash 80.4 83.6
Accounts Receivable 77.4 84.2
Inventory 30.2 35.8
Net Property, Plants & Equipment 349.6 347.9
Goodwill & Intangibles 365.5 365.5
Accounts Payable 34.8 39.7
Long Term Debt 597.5 597.5
Shareholders' Equity 270.8 279.8

Complementary information
Capital Expenditures -40.0
Dividends Paid -5.6
Sale or Purchase of Stock
Debt Issuance

1. Question 4.1 (5 points)

Complete the Income Statement for 2020, by adding Gross Profit, EBIT and Net Income (3 * 1
point). You can use the Template on the next page.

Calculate Earnings per Share for 2020 (1 point).

Calculate the Dividend payout ratio (1 point).

Answer: see spreadsheet

TEMPLATE for questions 4.1 and 4.2

Beloved Corp
Data are in millions of € 2019 2020
Income statement
Revenue 513.6 602.6

Cost of Goods sold -248.3 -295.8

Sales and marketing -104.9 -121.1

Administration -66.9 -79.8

Depreciation and Amortisation -38.3 -40.1

Interest Income (Expense) -37.0 -40.9

35% Income Tax -6.4 -8.7

Share outstanding (millions of units) 56.8 56.8

Balance Sheet
Cash 80.4 83.6
Accounts Receivable 77.4 84.2

Inventory 30.2 35.8

Net Property, Plants & Equipment 349.6 347.9

Goodwill & Intangibles 365.5 365.5

Accounts Payable 34.8 39.7

Long Term Debt 597.5 597.5

Shareholders' Equity 270.8 279.8

Complementary information
Capital Expenditures -40.0
Dividends Paid -5.6
Sale or Purchase of Stock
Debt Issuance

2. Question 4.2 (5 points)

Complete the Balance Sheet for 2019 and 2020, by adding Total Current Assets, Total Non-
Current Assets, Total Assets, Total Current Liabilities, Total Liabilities and Total Liabilities &
Shareholders’ Equity (5 * 1 point).

Answer: see spreadsheet

3. Question 4.3 (8 points)
Calculate the Working Capital Requirement for 2019 and 2020 (2 * 1 point).

Calculate Capital Employed for 2019 and 2020 (2 * 1 point).

Calculate Capital Invested for 2019 and 2020 (2 * 1 point).

Calculate the RoCE for 2020 (2 points).

Answers: see spreadsheet