NATIONAL ECONOMICS UNIVERSITY, HANOI

INSTITUTE OF SOCIAL STUDIES, THE HAGUE

VIETNAM - NETHERLANDS MASTER’S PROGRAMME

IN DEVELOPMENT ECONOMICS
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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) Profit margin
b) Debt to equity
c) Return on Equity
d) 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) Management is not investing idle assets productively

b) Currents assets have been depleted and the company is insolvent
c) Total assets are earning a very low rate of return
d) 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) Financial statements
b) Accounting transactions
c) Strategic Planning
d) Operating reports

7. The first forecast we will prepare for budgeting will be the:

a) Budgeted income statement

b) Sales forecast
c) Cash budget
d) 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 b) 120,000
c) 122,000 d) 128,000

9. Which of the following budget will help us prepare the budgeted income
statements?

a) Direct labor budget

b) Cash budget
c) Budgeted balance sheet
d) 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) Relevant cash flows

b) Attributable value,
c) Net present value
d) Option pricing

13. The time value of money is important for 3 reasons as follows:

a) Inflation, uncertainty and opportunity costs

b) Relevancy, stability and consistency
c) Project returns, costs and timing
d) Projects options, positions and variables.

14. Which of the following is relevant in determining the cash flows of a project?

a) Sunk cost b) Depreciation

c) Pay back period 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 b) $13,442
c) $ 11,612 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 Cost Depreciation Year to invest
Period
Land 750 000 US$ No Depreciation Year 1
Basic Building with 2 000 000 US$ 30 Years Year 1
100 (one hundred)
rooms
Equipment for basic 1 000 000 US$ 15 Years Year 2
building with 100
Rooms
Optional Cost 500 000 US$ 15 Years If done in Year 2
Swimming Pool
Optional Cost 600 000 US$ 15 Years If done after year 2
Swimming pool
Additional building 1 000 000 US$ 30 Years Year 1 or anytime
with 75 rooms after
Equipment for 800 000 US$ 15 Years Year 2 or anytime
additional building 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 Base for income Condition Rate
Room Day-customer Occupancy rate =60% 85 US$/day
Occupancy rate =65% 80 US$/day
Occupancy rate =70% 76 US$/day
Occupancy rate =75% 72 US$/day
Occupancy rate =80% 68 US$/day
Catering Day-customer 15 US$/day

You can make the choice of the unit rate and, consequently, change the occupancy rate.

Operating
Expenses
Nature Base for Expense Level
Fixed cost base Year 600 000 US$/year
building
Fixed cost pool Year 115 000US$/year
Fixed cost Year 300 000US$/year
Additional Building
Consumption cost Day – customer 15 US$/day
room
Personnel Cost Day – customer 15 US$/day
Room
Variable cost Percentage of 55%
catering income

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 = 1,861,500 USD
Catering: 365 x 100 x 0.6 x 15 = 328,500 USD
Total revenue: 2,190,000 USD
Annual Cost:
1. Depreciation:
Land: 0 USD
Basic bulding: 2,000,000/30 = 66,667 USD
Equipment for basic building: 1,000,000/15 = 66,667 USD
2. Fixed cost base building: 600,000 USD
3. Consumption cost: 365 x 100 x 0.6 x 15 = 328,500 USD
4. Personel cost room: 365 x 100 x 0.6 x 15 = 328,500 USD
5. Variable cost catering: 0.55 x 328,500 = 180,675 USD
Total cost: 1,571,009 USD
 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% = 186,150 USD

Additional cost: 148,333 USD
Depreciation for swimming pool: 500,000/15 = 33,333 USD
Fixed cost pool 115,000 USD

 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 = 1,396,125 USD
Catering: 365 x 75 x 0.6 x 15 = 246,375 USD
Total additional annual revenue 1,642,500 USD
Additional Annual Cost:
1. Depreciation:
Additional bulding: 1,000,000/30 = 33,333 USD
Equipment for additional building: 800,000/15 = 53,333 USD
2. Fixed cost base building: 300,000 USD
3. Consumption cost: 365 x 75 x 0.6 x 15 = 246,375 USD
4. Personel cost room: 365 x 75 x 0.6 x 15 = 246,375 USD
5. Variable cost catering: 0.55 x 246,375 = 135,506.25 USD
 Total additional cost: 1,014,922.25 USD

Profit(3): 618,991 + 1,642,500 - 1,014,922.25 = 1,246,568.75 USD

Total investment: 3,750,000 + 1,000,000 + 800,000 = 5,550,000 USD

 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.

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 Cost of equity Interest Rate for

Debt
1 500 000 US$ 15% 8%
2 000 000 US$ 18% 9%
3 000 000 US$ 12% 6%

Answer
Assume that with the debt of 5,000,000 USD, we have the comparision of 3 options:

D E V D/V E/V Re Rd WACC

A
5,000,000 1,500,000 6,500,000 0.77 0.23 15% 10% 11.15%
B
5,000,000 2,000,000 7,000,000 0.71 0.29 18% 9% 11.57%
C
5,000,000 3,000,000 8,000,000 0.63 0.38 12% 6% 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 E V D/V E/V Re Rd WACC

A 8,500,000 1,500,000 10,000,000 0.85 0.15 15% 10% 10.75%
B 8,000,000 2,000,000 10,000,000 0.80 0.20 18% 9% 10.80%
C 7,000,000 3,000,000 10,000,000 0.70 0.30 12% 6% 7.80%
The option C still have the lowest WACC.

Conclusion: Option C is the best choice in term of cost of capital.