Course Instructor: Armin J.

, MBA, CPA (Candidate)

FIN401 MANAGERIAL FINANCE II

CRASH COURSE SUMMARY OVERVIEW - WINTER 2016

FINAL CRASH SAT. APRIL 16 and SUN. APRIL 17, 2016 @ 5:00pm - 9:00pm
COURSE DESCRIPTION: The FIN401 Final Crash Course is a comprehensive course which
includes a review of NPV & Capital Budgeting. The course provides a full review of Cost of
Capital (WACC) and Leasing concepts with extensive problem-solving applications. The course
also covers the core quantitative concepts of Financial Leverage, Capital Structure and Dividend
Policy along with relevant theory. An introduction to Sources of Capital, Rights Valuation,
Underwriting and Financial Contracts with hedging techniques is also provided. The course will
introduce and heavily cover the concepts surrounding Option Contract Valuation and Derivatives
as these concepts are heavily weighted on the final exam. Finally, the course covers the
mathematical and theoretical concepts of Mergers with an emphasis Cash vs. Stock acquisitions.
CHAPTER 9 - NPV & OTHER INVESTMENT CRITERIA
Exam Practice Question:
A new investment has an initial cost of $600,000 and will generate operating cash flow of
$120,000 per year for the first four years followed by $240,000 per year for the following three
years. The tax rate is 35% and the discount rate is 12.75%. What is the IRR? ANSWER: 17.59%
CHAPTER 10 - MAKING CAPITAL INVESTMENT DECISIONS
Exam Practice Question:
A manufacturing company wants to invest in a new machine to increase its production efficiency.
The machine has an initial cost of $750,000 and will last for three years. The CCA rate on the
asset is 30% and there is no expected salvage value. An increase in net working capital of
$25,000 will be required for the machine. During its operating life, the machine will produce
10,000 units per year. The selling price will be $30.00 per unit and the variable cost will be $7.00
per unit. The fixed costs are expected to be $50,000 per year. The corporate tax rate is 40% and
the required rate of return is 12%. What is the NPV of the investment? ANSWER: ($295,000)
CHAPTER 14 - COST OF CAPITAL
Exam Practice Question:
Jolt Inc. is considering investing in a new project. The initial cost will be $70,000 and the annual
operating cash flow generated from the project will be $21,000 per year for six years. The target
D/E ratio is 0.37 and the pre-tax cost of debt is 9%. The common stock of Jolt has a beta of 1.76
and the expected return on the market is 10.70%. The risk-free rate is 5%. If the corporate tax
rate is 34%, what is the weighted average cost of capital (WACC)? ANSWER: 12.55%
CHAPTER 22 - LEASING
Exam Practice Question:
Axon Gas Inc. is deciding to lease or buy a new refinery system for oil exploration. The system
will provide $600,000 in cost savings each year for the next five years. The system has a capital
cost of $5,500,000 and the companys tax rate is 34%. The system will be in a CCA class with a
rate of 25%. It is expected that the systems salvage value at the end of the lease will be
$500,000. The lease contract calls for annual payments of $1,240,000 per year and the
companys cost of borrowing is 9%. What is the maximum lease payment which would be
acceptable to the firm? ANSWER: $1,274,397.38
CHAPTER 16 - FINANCIAL LEVERAGE AND CAPITAL STRUCTURE POLICY
Exam Practice Question:
Duke Inc. was an unlevered firm with 600,000 shares outstanding, trading at $40 per share. The
firm had considered a proposal to add financial leverage and changed its capital structure by
issuing $9 million of debt at 10%. The proceeds were used to repurchase shares. The firms EPS
after the capital restructuring is now $5.50. A prominent shareholder who owned 15,000 shares
of Duke before the capital restructuring is not satisfied. What would the shareholders total cash
flow be assuming she applies homemade leverage to reconstruct the cash flows that were
received under the firms all-equity capital structure? Ignore taxes. ANSWER: $74,062.50

CHAPTER 17 - DIVIDENDS AND DIVIDEND POLICY

Exam Practice Question:
Jolt Inc. is an all-equity firm and will pay a cash dividend of $13.08 per share next year followed
by a liquidating dividend of $118.81 per share two years from now. It is expected that the firm
will only operate for the next two years. There are currently 500,000 shares outstanding and the
total market value of the firm is $56 million. The required return on the stock is 9%. You own
1,000 shares in Jolt Inc. If you were to use homemade dividends to generate equal cash flow
over the next two years, how many shares would you need to buy or sell at the end of the first
year? ANSWER: You need to sell 464.13 shares
CHAPTER 15 - RAISING CAPITAL
Exam Practice Question:
Sauce Inc. produces and sells educational material. The management of Sauce has decided that
they want to raise $5,000,000 in new equity. They have also decided to use a rights issue
offering to raise the money and they will set a subscription price of $50 per share for the new
stock. The current share price is $70 and there are 1,480,000 shares outstanding. What will be
the share price after the rights issue has been fully subscribed to, everything else being equal?
ANSWER: $68.73
CHAPTER 24 - RISK MANAGEMENT: AN INTRODUCTION TO FINANCIAL ENGINEERING
Exam Practice Question:
Long View Milling Co. plans to produce 1,000,000 pounds of flour from October to December this
year. A bushel of wheat is needed to produce 50 pounds of flour. The current futures contract for the
September delivery of wheat has a current price of $3.08 per bushel. Each futures contract is for
1,000 bushels of wheat. If it is currently March and the firm wants to hedge the risk of changes in the
market price of wheat, what should the firm do now? ANSWER: E) Buy 20 Sept futures contracts
a)
b)
c)
d)
e)

Buy 20,000 September futures contracts

Sell 20,000 September futures contracts
Buy 200 September futures contracts
Sell 20 September futures contracts
Buy 20 September futures contracts

CHAPTER 25 - OPTIONS AND CORPORATE SECURITIES

Exam Practice Question:
There have been many rumours about a new firm called Spot Inc. This speculation is causing the
stock price to be quite volatile. Given this situation, you decided to buy a one-month put option
contract and a one-month call option contract on Spot stock with an exercise price of $15.00. You
purchased the call option at a quoted price of $0.20 and you purchased the put option at a quoted
price of $2.10. What will be your total profit or loss on these option positions if the stock price is
$4.00 on the day that both options expire? ANSWER: $870 = total profit
CHAPTER 23 - MERGERS & ACQUISITIONS
Exam Practice Question:
Bolt Ltd. wants to acquire Tri-Delta Inc. The acquisition will be done through a share exchange,
whereby Bolt will exchange two of its shares for every one share in Tri-Delta. The total synergy of
the acquisition is expected to be $260,000. We have the following additional information:
BOLT LTD.

TRI-DELTA INC.

Shares Outstanding
80,000
24,000
Share Price
$15
$25
Earnings
$100,000
$60,000
If the NPV of the merger is exactly $0, how many shares would Bolt have to give to Tri-Delta
through a share exchange in the acquisition? ANSWER: 57,333 shares
CHAPTER 1 - CORPORATE FINANCIAL MANAGEMENT
Stock Value Maximization, Agency Theory & Problems, Managerial Compensation, Financial
Ethics and Policy, Direct / Indirect Agency Costs and Corporate Governance