NATIONAL ECONOMICS UNIVERSITY, HANOI INSTITUTE OF SOCIAL STUDIES, THE HAGUE VIETNAM - NETHERLANDS MASTER’S PROGRAMME IN DEVELOPMENT ECONOMICS

----&---FINAL EXAMS CORPORATE FINANCE Time allowance:90’ ( The students are requested to do answers on the exam papers) Name of the student : Nguyen Phuong Anh Student Code Number: I. Choose the correct answer: (Total: 45 marks, three marks are given for each correct answer)

(The chosen answer is highlighted ) 1. Which ratio is best used for measuring how well management did in managing the funds provided by shareholders? a) b) c) d) Profit margin Debt to equity Return on Equity Inventory turnover

2. If sales are $ 600.000 and assets are $ 400 000 then asset turnover is a) .67 b) 1.50 c) 2.00 d) 3.50

3. An extremely high current ratio implies: a) b) c) d) Management is not investing idle assets productively Currents assets have been depleted and the company is insolvent Total assets are earning a very low rate of return Current liabilities are higher than current assets.

4. If we have a cash of $ 1,500, accounts receivables of $ 25,500 and current liabilities of $ 30,000, our quick or acid test ratio would be: a) 1.88 b) 1.33 c) 1.11 d) .90

5. The number of times we convert receivables into cash during the year is measured by a) Capital Turnover b) Asset turnover c) Accounts receivable turnover d) Return on assets 6. In order for budgeting to really work, we must link the budgeting process with: a) b) c) d) Financial statements Accounting transactions Strategic Planning Operating reports

7. The first forecast we will prepare for budgeting will be the: a) b) c) d) Budgeted income statement Sales forecast Cash budget Budgeted balance sheet

8. Taylor Manufacturing has compiled the following production for manufacturing Jug of beverages Planned production 6,000 Jugs Required material per jug 10 pounds of powder Desire ending material for materials 4,000 pounds Beginning material for materials 3,000 pounds Purchased cost for materials USD 2.00 per pound Based on the above information, what is the total cost for planned material purchased? a) 110,000 c) 122,000 b) 120,000 d) 128,000

9. Which of the following budget will help us prepare the budgeted income statements? a) b) c) d) Direct labor budget Cash budget Budgeted balance sheet Year end balance sheet

10. If account payable have historically been 20% of sales and we have estimated sales of $ 200,000, then estimated A/C payable must be: a) 10,000 b) 20,000 c) 30,000 d) 40,000

11.

Capital budgeting consists of 3 different stages, the 1st stage is: a) Discounted cash flows b) Simulation c) Decision analysis d) Net present value

12. The ability to postpone, delay, alter or abandon a project adds value to the project. This value is referred to as: a) b) c) d) Relevant cash flows Attributable value, Net present value Option pricing

13. The time value of money is important for 3 reasons as follows: a) b) c) d) Inflation, uncertainty and opportunity costs Relevancy, stability and consistency Project returns, costs and timing Projects options, positions and variables.

14. Which of the following is relevant in determining the cash flows of a project? a) Sunk cost c) Pay back period b) Depreciation d) Net present value

15. You are about to invest $ 15000 into a project that’ll generate $ 5 500 of cash flow each year for the next 3 years. If your cost of capital is 11% then the present value of future cash flows is a) $23,118 c) $ 11,612 b) $13,442 D) $ 10,898

PROBLEMS Questions 1 (40 Points) The main characteristic of the capital expenditures in fixed assets ( CAPEX) for the business of a large hotel in Hanoi are described in the following table: Capital expenditures Nature Land Basic Building with 100 (one hundred) rooms Equipment for basic building with 100 Rooms Optional Cost Swimming Pool Optional Cost Swimming pool Additional building with 75 rooms Equipment for additional building

Cost 750 000 US$ 2 000 000 US$ 1 000 000 US$ 500 000 US$ 600 000 US$ 1 000 000 US$ 800 000 US$

Depreciation Period No Depreciation 30 Years 15 Years 15 Years 15 Years 30 Years 15 Years

Year to invest Year 1 Year 1 Year 2 If done in Year 2 If done after year 2 Year 1 or anytime after Year 2 or anytime after

The hotel will be ready to open on day 1 of year 3 1. You can decide either to build the optional swimming pool (immediately or later) or not. If you do so the unit per room will be increased by 10% as of the year after the investment is made. 2. You can also decide either to build the additional building (immediately or later) or not. If you do so it will need 2 years: one year for the building and one year for the equipment. The new building will be in operation on day 1 of the year after the year the equipment is installed.

The main characteristics of the operations of the business are described in the following table: Incomes Nature Room Base for income Day-customer Condition Occupancy rate =60% Occupancy rate =65% Occupancy rate =70% Occupancy rate =75% Occupancy rate =80% Rate 85 US$/day 80 US$/day 76 US$/day 72 US$/day 68 US$/day 15 US$/day

Catering

Day-customer

You can make the choice of the unit rate and, consequently, change the occupancy rate. Operating Expenses Nature Fixed cost base building Fixed cost pool Fixed cost Additional Building Consumption cost room Personnel Cost Room Variable cost catering

Base for Expense Year Year Year Day – customer Day – customer Percentage of income 55%

Level 600 000 US$/year 115 000US$/year 300 000US$/year 15 US$/day 15 US$/day

Answer: There are many methods of calculation to answer the question should we build the optional swimming pool and should we build the additional building. The method of comparision rate of return is chosen hereunder. With this method, we will calculate the rates of return with these assumption: - If we choose to build the optional swimming pool, it will be done in year 2. - If we choose to build the additional building, it will be built in year 1. - The unit rate chosen is 85 USD per day. Therefore, the occupancy rate is 60%. - The compared year is the year 3. We have three scenarios described hereunder:

Scenario 1: basic bulding only (without swimming pool) Annual revenue: Room: 365 days x 100 rooms x 60% x 85 USD/day = Catering: 365 x 100 x 0.6 x 15 = Total revenue: Annual Cost: 1. Depreciation: Land: Basic bulding: 2,000,000/30 = Equipment for basic building: 1,000,000/15 = 2. Fixed cost base building: 3. Consumption cost: 365 x 100 x 0.6 x 15 = 4. Personel cost room: 365 x 100 x 0.6 x 15 = 5. Variable cost catering: 0.55 x 328,500 = Total cost:  profit(1) = 2,190,000 – 1,571,009 = 618,991 USD Total investment: 750,000 + 2,000,000 + 1,000,000 = 3,750,000 USD  rate of return(1): 618,991 / 3,750,000 = 16.51% Scenario 2: Basic bulding with swimming pool done in year 2 Additional revenue: 1,861,500 USD x 10% = Additional cost: Depreciation for swimming pool: 500,000/15 = Fixed cost pool  profit(2): 618,991 + 186,150 – 148,333 = 656,808 USD Total investment: 3,750,000 + 500,000 = 4,250,000 USD  rate of return(2): 656,808 /4,250,000 = 15.45% rate of return (2) < rate of return (1) Conclusion: The swimming pool should not be done. Scenario 3: additional bulding Additonal Annual Revenue Room: 365 x 75 x 0.6 x 85 = Catering: 365 x 75 x 0.6 x 15 = Total additional annual revenue Additional Annual Cost: 1. Depreciation: Additional bulding: 1,000,000/30 = Equipment for additional building: 800,000/15 = 2. Fixed cost base building: 3. Consumption cost: 365 x 75 x 0.6 x 15 = 4. Personel cost room: 365 x 75 x 0.6 x 15 = 5. Variable cost catering: 0.55 x 246,375 =

1,861,500 USD 328,500 USD 2,190,000 USD 0 USD 66,667 USD 66,667 USD 600,000 USD 328,500 USD 328,500 USD 180,675 USD 1,571,009 USD

186,150 USD 148,333 USD 33,333 USD 115,000 USD

1,396,125 USD 246,375 USD 1,642,500 USD 33,333 USD 53,333 USD 300,000 USD 246,375 USD 246,375 USD 135,506.25 USD

Total additional cost: Profit(3): 618,991 + 1,642,500 - 1,014,922.25 = Total investment: 3,750,000 + 1,000,000 + 800,000 =  rate of return(3): 1,246,568.75 / 5,550,000 = 22.46% rate of return (3) > rate of return (1) Conclusion: The additional building should be done.

1,014,922.25 USD 1,246,568.75 USD 5,550,000 USD

Questions 2 ( 15 points) You have now the possibility to choose between 3 different capital structures. Which one do you choose? Why?

Equity in year 1 1 500 000 US$ 2 000 000 US$ 3 000 000 US$

Cost of equity 15% 18% 12%

Interest Rate for Debt 8% 9% 6%

Answer Assume that with the debt of 5,000,000 USD, we have the comparision of 3 options: D A B C 5,000,000 5,000,000 5,000,000 E 1,500,000 2,000,000 3,000,000 V 6,500,000 7,000,000 8,000,000 D/V 0.77 0.71 0.63 E/V 0.23 0.29 0.38 Re 15% 18% 12% Rd 10% 9% 6% WACC 11.15% 11.57% 8.25%

The option C gives the lowest WACC. Therefore, we chose the capital structure C. Assume that with the total capital of 10,000,000 USD, the comparision hereunder: D A B C 8,500,000 8,000,000 7,000,000 E 1,500,000 2,000,000 3,000,000 V 10,000,000 10,000,000 10,000,000 D/V 0.85 0.80 0.70 E/V 0.15 0.20 0.30 Re 15% 18% 12% Rd 10% 9% 6% WACC 10.75% 10.80% 7.80%

The option C still have the lowest WACC. Conclusion: Option C is the best choice in term of cost of capital.

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