FINC 3630: Advanced Business Finance Additional Practice Problems

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "FINC 3630: Advanced Business Finance Additional Practice Problems"

Transcription

1 FINC 3630: Advanced Business Finance Additional Practice Problems Accounting For Financial Management 1. Calculate free cash flow for Home Depot for the fiscal year-ended February 1, 2015 (the 2014 fiscal year). 2. Calculate MVA and EVA for Home Depot. Use the information given in class for market value data. Financial Statement Analysis 1. Use the DuPont equation to calculate return on equity for Home Depot for the fiscal years-end February 1, 2015 and February 2, Did it increase or decrease? Was the change in return on equity driven by changes in profitability, changes in how efficiently the firm used its assets, or changes in the extent to which the firm uses debt financing? Cost of Capital 1. Your boss has assigned you and your assistant the task of estimating the cost of common equity for your firm. Your assistant has gathered the following information. The company has $1,000 face value bonds outstanding with 9 years to maturity, a 7 percent coupon rate, paid semiannually, and currently selling for $ Analysts have estimated a 10 percent growth rate for your firm for the foreseeable future. The company s common stock currently has a dividend yield of 2 percent. Your assistant has estimated the beta of the stock to be 1.5. Using reasonable estimates for the risk-free rate and market risk premium, if necessary, what do you recommend as a reasonable estimate of the cost of common equity? Be sure to be able to justify your answer to your boss and the board of directors. 2. In addition to the information in the above problem, you know your company has 1,000 bonds outstanding, 20,000 shares of common stock, currently trading at $60, and a 40% marginal tax rate. You also know the firm has 12,000 shares of preferred stock, currently selling for $85 and paying a $8.50 annual dividend. What is your estimate of the firm s cost of capital? 3. Assume all of the same information from the previous 2 problems, except now your boss tells you that your firm has a target debt-equity ratio of 1, where equity is equally divided between common and preferred stock. What is your estimate of the firm s cost of capital now? 1

2 Corporate Value 1. Your firm, GOP Enterprises, is evaluating Obama, Inc. for a possible acquisition. You believe free cash flows will grow at 8 percent for the foreseeable future. Obama, Inc. has $100 million in marketable securities that you believe is not necessary for the firm s operations. The current book value of Obama, Inc. s common equity is $360 million. For the fiscal year that just ended, Obama, Inc. had total operating capital of $500 million, which is $91.5 million more than total operating capital at the end of the previous fiscal yearend. From the firm s income statement, Obama, Inc. had $200 million in earnings before interest and taxes. Both Obama, Inc. and Clinton Enterprises are in the 40% tax bracket. Obama s stock currently has a beta of 1.75, the firm s bonds yield 9 percent, and the dividend yield on preferred stock is 11 percent. The firm has 24 million shares of common stock outstanding, currently selling for $25, 300,000 bonds outstanding, currently selling at par, and 1 million shares of preferred stock outstanding, currently selling for $100. Based on this information and reasonable estimates of any other inputs, what is the most GOP Enterprises would be willing to pay per share of common stock for Obama, Inc.? What is EVA and MVA for Obama, Inc.? 2. Common shares of Yostmeister, Inc. are currently selling for $65. The firm had free cash flow for the fiscal year that just ended of $125 million and has a weighted average cost of capital of 10 percent. The firm also has $2.5 billion in debt and 75 million shares outstanding. You expect free cash flows to increase by 14 percent per year for the next two years and 8 percent per year thereafter. Based on this information, do you recommend your clients to buy, sell, or hold Yostmeister, Inc. stock? 2

3 SOLUTIONS Accounting For Financial Management 1. Information given in class for tax rate (from note 6 on pg. 46 of Annual Report/10-K) = 36.4% To calculate free cash flow, we need EBIT, the tax rate, and the net change in operating capital. To get the change in operating capital, we need total operating capital in each year fiscal year: Net operating working capital = operating current assets operating current liabilities *Note: Assume that Other Current Assets are necessary for the firm s operations. For current liabilities, the interest-bearing ones need to be eliminated (Short-Term Debt and Current Installments of Long-Term Debt). Net operating working capital = ($15,302 $0) ($11,269 $290 - $38) = $15,302 $10,941 = $4,361 Operating long-term assets: *Note: Assume that Other Assets are necessary for the firms operations. We want the amount of fixed assets net of depreciation. Operating long-term assets = $22,720 + $1,353 + $571 = $24,644 Total Operating Capital = $4,361 + $24,644 = $29, fiscal year: Net operating working capital = ($15,279 $0) ($10,749 $33) = $15,279 $10,716 = $4,563 Operating long-term assets = $23,348 + $1,289 + $602 = $25,239 Total Operating Capital = $4,563 + $25,239 = $29,802 Net change in total operating capital = $29,005 $29,802 = -$797 negative number Free cash flow = $10,469 ( ) (-$797) = $7, million 3

4 2. Information given in class for market value data: Number of shares on 2/1/15 = billion Price per share on 1/30/15 = $ Tax rate from note 6 on pg. 46 of Annual Report/10-K) = 36.4% WACC = 7.12% MVA = (1.307 billion x $104.42) $9,322 million = $ billion EVA = $10,469 ( ) $29,005 (0.0712) = $4, million Financial Statement Analysis 1. ROE = Profit Margin TATO Equity Multiplier Net Income Net Income Sales Assets = Equity Sales Assets Equity ,343 = 6,343 83,176 39,946 9,322 83,176 39,946 9, ,385 = 5,385 78,812 40,518 12,522 78,812 40,518 12, Return on equity increased from 2013 to 2014 and it was driven by all three factors: increased profitability (profit margin), increased asset use efficiency (total asset turnover), and increased leverage (equity multiplier). 4

5 Cost of Capital 1. There are three ways to estimate the cost of equity: CAPM: r = (0.06) = 0.11 using 2% for risk-free rate and 6% for market risk premium as reasonable estimates Bond Yield Plus Risk Premium: Need to calculate YTM: N = 18; PV = ; PMT = 35; FV = 1000 I/Y = 4 YTM = 8% r = = 0.12 Dividend Yield Plus Growth Rate: using 4% as risk premium (3% - 5% is reasonable, so 11% - 13% is reasonable range for r) r = = 0.12 Conclusion: 12% is a consistent estimate of the cost of common equity, and 11% to 13% is a reasonable range. 2. First, one needs the cost of preferred stock (the rest of the information is in #1). Cost of Preferred = $8.50 / $85 = 10% WACC = (1.2 M / M) x (0.12) + (1.02 M / M) x (0.10) + ( M / M) x (0.08) x (1-0.4) = % 3. If the target debt-equity ratio is 1, that means 50% of the firm is financed with debt and 50% with equity (25% from common stock and 25% from preferred stock). WACC = (0.5 / 2) x (0.12) + (0.5 / 2) x (0.10) + (1 / 2) x (0.08) x (1-0.4) = 7.9% 5

6 Corporate Value 1. To get price per share, we need to get value of equity, value of the firm, and therefore the value of the operating assets. In order to get the value of operations, we need to know free cash flow and the cost of capital. Cost of Capital: Cost of Common Equity = (0.06) = using 4% for risk-free rate and 6% for market risk premium as reasonable estimates WACC = (600 M / 1 B) x (0.145) + (100 M / 1 B) x (0.11) + (300 M / 1 B) x (0.09) x (1-0.4) = 11.42% Free Cash Flow (for fiscal year that just ended): = $200 million (1 0.40) - $91.5 million = $28.5 million Value of Operating Assets: = ($28.5 million x 1.08) / ( ) = $900 million Value of the Firm = $900 million + $100 million in non-operating assets = $1 billion Value of the firm s common equity = $1 billion $100 million (preferred stock) $300 million (debt) $600 million Value per share = $600 million / 24 million shares = $25 per share. *Note: The value we estimate per share is equal to the current market price. Based on this, we would not be willing to pay more than the current market price of $25 per share. EVA = $200 million (1 0.40) - $500 million (0.1142) = $62.9 million MVA = $600 million - $360 million = $240 million 6

7 2. To get price per share, we need to get value of equity, value of the firm, and therefore the value of the operating assets. Value of Operating Assets: (1) Draw a timeline and (2) deal with the right-hand side PV1 = CF2 / (r-g) = $ million / ( ) = $8, million *Note: You could calculate PV2 (3) Bring it all back to today PV0 = ($142.5 million + $8, million) / (1.10) 1 = $7, million Value of the Firm = $7, million because there are no non-operating assets Value of the firm s common equity = $7, million $2,500 million (debt) $5, million Value per share = $5, million / 75 million shares = $66.85 per share. Recommend they buy. They are currently selling for $65, but you believe they are worth $

Finance 3130 Corporate Finiance Sample Final Exam Spring 2012

Finance 3130 Corporate Finiance Sample Final Exam Spring 2012 Finance 3130 Corporate Finiance Sample Final Exam Spring 2012 True/False Indicate whether the statement is true or falsewith A for true and B for false. 1. Interest paid by a corporation is a tax deduction

More information

Sample Problems Chapter 10

Sample Problems Chapter 10 Sample Problems Chapter 10 Title: Cost of Debt 1. Costly Corporation plans a new issue of bonds with a par value of $1,000, a maturity of 28 years, and an annual coupon rate of 16.0%. Flotation costs associated

More information

NIKE Case Study. Professor Corwin. An overview of the individual questions and their relation to the lecture topics is provided below.

NIKE Case Study. Professor Corwin. An overview of the individual questions and their relation to the lecture topics is provided below. NIKE Case Study Professor Corwin This case study includes several problems related to the valuation of Nike. We will work through these problems throughout the course to demonstrate some of the most important

More information

BUSINESS FINANCE (FIN 312) Spring 2008

BUSINESS FINANCE (FIN 312) Spring 2008 BUSINESS FINANCE (FIN 312) Spring 2008 Assignment 3 Instructions: please read carefully You can either do the assignment by yourself or work in a group of no more than two. You should show your work how

More information

CHAPTER 14 COST OF CAPITAL

CHAPTER 14 COST OF CAPITAL CHAPTER 14 COST OF CAPITAL Answers to Concepts Review and Critical Thinking Questions 1. It is the minimum rate of return the firm must earn overall on its existing assets. If it earns more than this,

More information

Chapter 13, ROIC and WACC

Chapter 13, ROIC and WACC Chapter 13, ROIC and WACC Lakehead University Winter 2005 Role of the CFO The Chief Financial Officer (CFO) is involved in the following decisions: Management Decisions Financing Decisions Investment Decisions

More information

SAMPLE FACT EXAM (You must score 70% to successfully clear FACT)

SAMPLE FACT EXAM (You must score 70% to successfully clear FACT) SAMPLE FACT EXAM (You must score 70% to successfully clear FACT) 1. What is the present value (PV) of $100,000 received five years from now, assuming the interest rate is 8% per year? a. $600,000.00 b.

More information

Practice Questions for Midterm II

Practice Questions for Midterm II Finance 333 Investments Practice Questions for Midterm II Winter 2004 Professor Yan 1. The market portfolio has a beta of a. 0. *b. 1. c. -1. d. 0.5. By definition, the beta of the market portfolio is

More information

Chapter 11 Calculating the Cost of Capital

Chapter 11 Calculating the Cost of Capital Chapter 11 Calculating the Cost of Capital (def) - Cost of obtaining money to fund asset purchase - use as estimate of r (discount rate) If we can earn more than the cost of capital (r) from a project

More information

SOLUTIONS. Practice questions. Multiple Choice

SOLUTIONS. Practice questions. Multiple Choice Practice questions Multiple Choice 1. XYZ has $25,000 of debt outstanding and a book value of equity of $25,000. The company has 10,000 shares outstanding and a stock price of $10. If the unlevered beta

More information

Bond Valuation. What is a bond?

Bond Valuation. What is a bond? Lecture: III 1 What is a bond? Bond Valuation When a corporation wishes to borrow money from the public on a long-term basis, it usually does so by issuing or selling debt securities called bonds. A bond

More information

BF 6701 : Financial Management Comprehensive Examination Guideline

BF 6701 : Financial Management Comprehensive Examination Guideline BF 6701 : Financial Management Comprehensive Examination Guideline 1) There will be 5 essay questions and 5 calculation questions to be completed in 1-hour exam. 2) The topics included in those essay and

More information

CHAPTER 12 RISK, COST OF CAPITAL, AND CAPITAL BUDGETING

CHAPTER 12 RISK, COST OF CAPITAL, AND CAPITAL BUDGETING CHAPTER 12 RISK, COST OF CAPITAL, AND CAPITAL BUDGETING Answers to Concepts Review and Critical Thinking Questions 1. No. The cost of capital depends on the risk of the project, not the source of the money.

More information

The Cost of Capital. Chapter 10. Cost of Debt (r d ) The Cost of Capital. Calculating the cost of obtaining funds for a project

The Cost of Capital. Chapter 10. Cost of Debt (r d ) The Cost of Capital. Calculating the cost of obtaining funds for a project The Cost of Capital Chapter 10 (def) - Cost of obtaining money to fund asset purchase - use as estimate of r (discount rate) If we can earn more than the cost of capital (r) from a project than company

More information

MBA (3rd Sem) 2013-14 MBA/29/FM-302/T/ODD/13-14

MBA (3rd Sem) 2013-14 MBA/29/FM-302/T/ODD/13-14 Full Marks : 70 MBA/29/FM-302/T/ODD/13-14 2013-14 MBA (3rd Sem) Paper Name : Corporate Finance Paper Code : FM-302 Time : 3 Hours The figures in the right-hand margin indicate marks. Candidates are required

More information

Equity Analysis and Capital Structure. A New Venture s Perspective

Equity Analysis and Capital Structure. A New Venture s Perspective Equity Analysis and Capital Structure A New Venture s Perspective 1 Venture s Capital Structure ASSETS Short- term Assets Cash A/R Inventories Long- term Assets Plant and Equipment Intellectual Property

More information

NIKE Case Study Solutions

NIKE Case Study Solutions NIKE Case Study Solutions Professor Corwin This case study includes several problems related to the valuation of Nike. We will work through these problems throughout the course to demonstrate some of the

More information

Financial Formulas. 5/2000 Chapter 3 Financial Formulas i

Financial Formulas. 5/2000 Chapter 3 Financial Formulas i Financial Formulas 3 Financial Formulas i In this chapter 1 Formulas Used in Financial Calculations 1 Statements of Changes in Financial Position (Total $) 1 Cash Flow ($ millions) 1 Statements of Changes

More information

CHAPTER 3 LONG-TERM FINANCIAL PLANNING AND GROWTH

CHAPTER 3 LONG-TERM FINANCIAL PLANNING AND GROWTH CHAPTER 3 LONG-TERM FINANCIAL PLANNING AND GROWTH Answers to Concepts Review and Critical Thinking Questions 5. The sustainable growth rate is greater than 20 percent, because at a 20 percent growth rate

More information

Chapter 14 Capital Structure in a Perfect Market

Chapter 14 Capital Structure in a Perfect Market Chapter 14 Capital Structure in a Perfect Market 14-1. Consider a project with free cash flows in one year of $130,000 or $180,000, with each outcome being equally likely. The initial investment required

More information

Chapter 17: Financial Statement Analysis

Chapter 17: Financial Statement Analysis FIN 301 Class Notes Chapter 17: Financial Statement Analysis INTRODUCTION Financial ratio: is a relationship between different accounting items that tells something about the firm s activities. Purpose

More information

PRACTICE EXAM QUESTIONS ON WACC

PRACTICE EXAM QUESTIONS ON WACC Dr. Sudhakar Raju Financial Statements Analysis (FN 6450) PRACTICE EXAM QUESTIONS ON WACC 1. The return shareholders require on their investment in a firm is called the: a. dividend yield. B. cost of equity.

More information

Risk (beta), Return & Capital Budgeting Chpt. 12: problems 2,6,9,13,15. I. Applications of CAPM. 1) risk premium

Risk (beta), Return & Capital Budgeting Chpt. 12: problems 2,6,9,13,15. I. Applications of CAPM. 1) risk premium Risk (beta), Return & Capital Budgeting Chpt. 12: problems 2,6,9,13,15 I. Applications of CAPM 1) risk premium estimate from historical data (Ibbotson) 2) risk free rate Tbill vs. Tbond, consistent with

More information

CHAPTER 8 STOCK VALUATION

CHAPTER 8 STOCK VALUATION CHAPTER 8 STOCK VALUATION Answers to Concepts Review and Critical Thinking Questions 5. The common stock probably has a higher price because the dividend can grow, whereas it is fixed on the preferred.

More information

Finance 3130 Sample Exam 1B Spring 2012

Finance 3130 Sample Exam 1B Spring 2012 Finance 3130 Sample Exam 1B Spring 2012 True/False Indicate whether the statement is true or false. 1. A firm s income statement provides information as of a point in time, and represents how management

More information

Finance Master. Winter 2015/16. Jprof. Narly Dwarkasing University of Bonn, IFS

Finance Master. Winter 2015/16. Jprof. Narly Dwarkasing University of Bonn, IFS Finance Master Winter 2015/16 Jprof. Narly Dwarkasing University of Bonn, IFS Chapter 2 Outline 2.1 Firms Disclosure of Financial Information 2.2 The Balance Sheet 2.3 The Income Statement 2.4 The Statement

More information

Current Ratio: Current Assets / Current Liabilities. Measure of whether company has enough cash to cover immediate expenses

Current Ratio: Current Assets / Current Liabilities. Measure of whether company has enough cash to cover immediate expenses 1 Beta: a measure of a stock s volatility relative to the overall market (typically the S&P500 index is used as a proxy for the overall market ). The higher the beta, the more volatile the stock price.

More information

Liquidity analysis: Length of cash cycle

Liquidity analysis: Length of cash cycle 2. Liquidity analysis: Length of cash cycle Operating cycle of a merchandising firm: number of days it takes to sell inventory + number of days until the resulting receivables are converted to cash Acquisition

More information

Computing Liquidity Ratios Current Ratio = CA / CL 708 / 540 = 1.31 times Quick Ratio = (CA Inventory) / CL (708 422) / 540 =.53 times Cash Ratio =

Computing Liquidity Ratios Current Ratio = CA / CL 708 / 540 = 1.31 times Quick Ratio = (CA Inventory) / CL (708 422) / 540 =.53 times Cash Ratio = 1 Computing Liquidity Ratios Current Ratio = CA / CL 708 / 540 = 1.31 times Quick Ratio = (CA Inventory) / CL (708 422) / 540 =.53 times Cash Ratio = Cash / CL 98 / 540 =.18 times 2 Computing Leverage

More information

KEY EQUATIONS APPENDIX CHAPTER 2 CHAPTER 3

KEY EQUATIONS APPENDIX CHAPTER 2 CHAPTER 3 KEY EQUATIONS B CHAPTER 2 1. The balance sheet identity or equation: Assets Liabilities Shareholders equity [2.1] 2. The income statement equation: Revenues Expenses Income [2.2] 3.The cash flow identity:

More information

Exam 1 Morning Session

Exam 1 Morning Session 91. A high yield bond fund states that through active management, the fund s return has outperformed an index of Treasury securities by 4% on average over the past five years. As a performance benchmark

More information

Homework Solutions - Lecture 2

Homework Solutions - Lecture 2 Homework Solutions - Lecture 2 1. The value of the S&P 500 index is 1286.12 and the treasury rate is 3.43%. In a typical year, stock repurchases increase the average payout ratio on S&P 500 stocks to over

More information

FSA Note: Summary of Financial Ratio Calculations

FSA Note: Summary of Financial Ratio Calculations FSA Note: Summary of Financial Ratio Calculations This note contains a summary of the more common financial statement ratios. A few points should be noted: Calculations vary in practice; consistency and

More information

Review for Exam 3. Instructions: Please read carefully

Review for Exam 3. Instructions: Please read carefully Review for Exam 3 Instructions: Please read carefully The exam will have 25 multiple choice questions and 5 work problems. You are not responsible for any topics that are not covered in the lecture note

More information

IFRS Financial Ratios.

IFRS Financial Ratios. 100 IFRS Financial Ratios Author s preface Dear readers, in order to make solid investments, investors compare companies within their peer group. For this purpose, key ratios such as EBIT, working capital

More information

VALUATION JC PENNEY (NYSE:JCP)

VALUATION JC PENNEY (NYSE:JCP) VALUATION JC PENNEY (NYSE:JCP) Prepared for Dr. K.C. Chen California State University, Fresno Prepared by Sicilia Sendjaja Finance 129-Student Investment Funds December 15 th, 2009 California State University,

More information

Solutions to Chapter 4. Measuring Corporate Performance

Solutions to Chapter 4. Measuring Corporate Performance Solutions to Chapter 4 Measuring Corporate Performance 1. a. 7,018 Long-term debt ratio 0. 42 7,018 9,724 b. 4,794 7,018 6,178 Total debt ratio 0. 65 27,714 c. 2,566 Times interest earned 3. 75 685 d.

More information

Economics 173B - Corporate Finance Fall 2016 Prof. Garey Ramey. Study Problems II

Economics 173B - Corporate Finance Fall 2016 Prof. Garey Ramey. Study Problems II Economics 173B - Corporate Finance Fall 2016 Prof. Garey Ramey Study Problems II Problem 4.1. Consider an outstanding bond issue having a coupon rate of 5% and a time to maturity of two years, with interest

More information

Unit 01. 1. Return computation with cash purchase vs. margin purchase

Unit 01. 1. Return computation with cash purchase vs. margin purchase FCS 5510 Formula Sheet *Note: The formulas I expect you to know are colored in Red. They are either more conceptually based, or are more commonly used than the others. You need to have a passing familiarity

More information

Total shares at the end of ten years is 100*(1+5%) 10 =162.9.

Total shares at the end of ten years is 100*(1+5%) 10 =162.9. FCS5510 Sample Homework Problems Unit04 CHAPTER 8 STOCK PROBLEMS 1. An investor buys 100 shares if a $40 stock that pays a annual cash dividend of $2 a share (a 5% dividend yield) and signs up for the

More information

Chapters 3-4 Financial Statements, Cash Flow, and Analysis of Financial Statements. Balance Sheet. Total Liabilities and Shareholder s Equity

Chapters 3-4 Financial Statements, Cash Flow, and Analysis of Financial Statements. Balance Sheet. Total Liabilities and Shareholder s Equity Chapters 3-4 Financial Statements, Cash Flow, and Analysis of Financial Statements Balance Sheet Assets Cash Inventory Accounts Receivable Property Plant Equipment Liabilities and Shareholder s Equity

More information

DUKE UNIVERSITY Fuqua School of Business. FINANCE 351 - CORPORATE FINANCE Problem Set #4 Prof. Simon Gervais Fall 2011 Term 2.

DUKE UNIVERSITY Fuqua School of Business. FINANCE 351 - CORPORATE FINANCE Problem Set #4 Prof. Simon Gervais Fall 2011 Term 2. DUK UNIRSITY Fuqua School of Business FINANC 351 - CORPORAT FINANC Problem Set #4 Prof. Simon Gervais Fall 2011 Term 2 Questions 1. Suppose the corporate tax rate is 40%. Consider a firm that earns $1,000

More information

CIS September 2012 Exam Diet. Examination Paper 2.2: Corporate Finance Equity Valuation and Analysis Fixed Income Valuation and Analysis

CIS September 2012 Exam Diet. Examination Paper 2.2: Corporate Finance Equity Valuation and Analysis Fixed Income Valuation and Analysis CIS September 2012 Exam Diet Examination Paper 2.2: Corporate Finance Equity Valuation and Analysis Fixed Income Valuation and Analysis Corporate Finance (1 13) 1. Assume a firm issues N1 billion in debt

More information

STUDENT CAN HAVE ONE LETTER SIZE FORMULA SHEET PREPARED BY STUDENT HIM/HERSELF. FINANCIAL CALCULATOR/TI-83 OR THEIR EQUIVALENCES ARE ALLOWED.

STUDENT CAN HAVE ONE LETTER SIZE FORMULA SHEET PREPARED BY STUDENT HIM/HERSELF. FINANCIAL CALCULATOR/TI-83 OR THEIR EQUIVALENCES ARE ALLOWED. Test III-FINN3120-090 Fall 2009 (2.5 PTS PER QUESTION. MAX 100 PTS) Type A Name ID PRINT YOUR NAME AND ID ON THE TEST, ANSWER SHEET AND FORMULA SHEET. TURN IN THE TEST, OPSCAN ANSWER SHEET AND FORMULA

More information

You just paid $350,000 for a policy that will pay you and your heirs $12,000 a year forever. What rate of return are you earning on this policy?

You just paid $350,000 for a policy that will pay you and your heirs $12,000 a year forever. What rate of return are you earning on this policy? 1 You estimate that you will have $24,500 in student loans by the time you graduate. The interest rate is 6.5%. If you want to have this debt paid in full within five years, how much must you pay each

More information

Chapter 9 The Cost of Capital ANSWERS TO SELEECTED END-OF-CHAPTER QUESTIONS

Chapter 9 The Cost of Capital ANSWERS TO SELEECTED END-OF-CHAPTER QUESTIONS Chapter 9 The Cost of Capital ANSWERS TO SELEECTED END-OF-CHAPTER QUESTIONS 9-1 a. The weighted average cost of capital, WACC, is the weighted average of the after-tax component costs of capital -debt,

More information

Suggested solutions to 3-mark and 4-mark problems contained in the Sample Paper - Exam 3 - Investment Planning (IP)

Suggested solutions to 3-mark and 4-mark problems contained in the Sample Paper - Exam 3 - Investment Planning (IP) Suggested solutions to 3-mark and 4-mark problems contained in the Sample Paper - Exam 3 - Investment Planning (IP) Setion II Question 6 A buisnessman wants to achieve the goal of marriage of his daughter

More information

Review for Exam 3. Instructions: Please read carefully

Review for Exam 3. Instructions: Please read carefully Review for Exam 3 Instructions: Please read carefully The exam will have 25 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation

More information

Problem 1 Problem 2 Problem 3

Problem 1 Problem 2 Problem 3 Problem 1 (1) Book Value Debt/Equity Ratio = 2500/2500 = 100% Market Value of Equity = 50 million * $ 80 = $4,000 Market Value of Debt =.80 * 2500 = $2,000 Debt/Equity Ratio in market value terms = 2000/4000

More information

] (3.3) ] (1 + r)t (3.4)

] (3.3) ] (1 + r)t (3.4) Present value = future value after t periods (3.1) (1 + r) t PV of perpetuity = C = cash payment (3.2) r interest rate Present value of t-year annuity = C [ 1 1 ] (3.3) r r(1 + r) t Future value of annuity

More information

Module 1: Corporate Finance and the Role of Venture Capital Financing TABLE OF CONTENTS

Module 1: Corporate Finance and the Role of Venture Capital Financing TABLE OF CONTENTS 1.0 ALTERNATIVE SOURCES OF FINANCE Module 1: Corporate Finance and the Role of Venture Capital Financing Alternative Sources of Finance TABLE OF CONTENTS 1.1 Short-Term Debt (Short-Term Loans, Line of

More information

Chapter 10 Risk and Capital Budgeting

Chapter 10 Risk and Capital Budgeting Chapter 10 Risk and Capital Budgeting MULTIPLE CHOICE 1. Operating leverage describes the relationship between... a. EBIT and sales b. taxes and sales c. debt and equity d. fixed costs and variable costs

More information

Things to Absorb, Read, and Do

Things to Absorb, Read, and Do Things to Absorb, Read, and Do Things to absorb - Everything, plus remember some material from previous chapters. This chapter applies Chapter s 6, 7, and 12, Risk and Return concepts to the market value

More information

Financial Analysis Project. Apple Inc.

Financial Analysis Project. Apple Inc. MBA 606, Managerial Finance Spring 2008 Pfeiffer/Triangle Financial Analysis Project Apple Inc. Prepared by: Radoslav Petrov Course Instructor: Dr. Rosemary E. Minyard Submission Date: 5 May 2008 Petrov,

More information

Trade Date The date of the previous trading day. Recent Price is the closing price taken from this day.

Trade Date The date of the previous trading day. Recent Price is the closing price taken from this day. Definition of Terms Price & Volume Share Related Institutional Holding Ratios Definitions for items in the Price & Volume section Recent Price The closing price on the previous trading day. Trade Date

More information

Income Measurement and Profitability Analysis

Income Measurement and Profitability Analysis PROFITABILITY ANALYSIS The following financial statements for Spencer Company will be used to demonstrate the calculation of the various ratios in profitability analysis. Spencer Company Comparative Balance

More information

Topics in Chapter. Key features of bonds Bond valuation Measuring yield Assessing risk

Topics in Chapter. Key features of bonds Bond valuation Measuring yield Assessing risk Bond Valuation 1 Topics in Chapter Key features of bonds Bond valuation Measuring yield Assessing risk 2 Determinants of Intrinsic Value: The Cost of Debt Net operating profit after taxes Free cash flow

More information

( ) ( )( ) ( ) 2 ( ) 3. n n = 100 000 1+ 0.10 = 100 000 1.331 = 133100

( ) ( )( ) ( ) 2 ( ) 3. n n = 100 000 1+ 0.10 = 100 000 1.331 = 133100 Mariusz Próchniak Chair of Economics II Warsaw School of Economics CAPITAL BUDGETING Managerial Economics 1 2 1 Future value (FV) r annual interest rate B the amount of money held today Interest is compounded

More information

Certified Financial Management Professional VS-1201

Certified Financial Management Professional VS-1201 Certified Financial Management Professional VS-1201 Certified Financial Management Professional Certified Financial Management Professional Certification Code VS-1201 Vskills certification for Financial

More information

CHAPTER 5 HOW TO VALUE STOCKS AND BONDS

CHAPTER 5 HOW TO VALUE STOCKS AND BONDS CHAPTER 5 HOW TO VALUE STOCKS AND BONDS Answers to Concepts Review and Critical Thinking Questions 1. Bond issuers look at outstanding bonds of similar maturity and risk. The yields on such bonds are used

More information

9. Himal Trading has EBIT of Rs 80,000, interest expense of Rs 12,000, and preferred

9. Himal Trading has EBIT of Rs 80,000, interest expense of Rs 12,000, and preferred Set A Fundamentals of Financial Management Model Questions 2072 Program: BBS Time: 3 Hours Part: III F.M.: 100 Code: MGT 215 P.M.: 35 The objective of the model questions is to give an overview of the

More information

Financial ratios can be classified according to the information they provide. The following types of ratios frequently are used:

Financial ratios can be classified according to the information they provide. The following types of ratios frequently are used: Financial Ratios Financial ratios are useful indicators of a firm's performance and financial situation. Most ratios can be calculated from information provided by the financial statements. Financial ratios

More information

CHAPTER II LITERATURE REVIEW

CHAPTER II LITERATURE REVIEW CHAPTER II LITERATURE REVIEW 2.1 Financial Ratios Analysis Financial ratios are important to analysts due to conquer the little meaning of typically numbers. Thus, ratios are intended to provide meaningful

More information

Chapters 3 and 13 Financial Statement and Cash Flow Analysis

Chapters 3 and 13 Financial Statement and Cash Flow Analysis Chapters 3 and 13 Financial Statement and Cash Flow Analysis Balance Sheet Assets Cash Inventory Accounts Receivable Property Plant Equipment Total Assets Liabilities and Shareholder s Equity Accounts

More information

Introduction to Bonds

Introduction to Bonds Bonds are a debt instrument, where the bond holder pays the issuer an initial sum of money known as the purchase price. In turn, the issuer pays the holder coupon payments (annuity), and a final sum (face

More information

Chapter 3 Financial Statements, Cash Flow, and Taxes

Chapter 3 Financial Statements, Cash Flow, and Taxes Chapter 3 Financial Statements, Cash Flow, and Taxes ANSWERS TO END-OF-CHAPTER QUESTIONS 3-1 a. The annual report is a report issued annually by a corporation to its stockholders. It contains basic financial

More information

Topics CHAPTER 9. What types of long-term capital do firms use? Capital Components. Before-tax vs. After-tax Capital Costs

Topics CHAPTER 9. What types of long-term capital do firms use? Capital Components. Before-tax vs. After-tax Capital Costs Topics CHAPTER 9 The Cost of Capital Cost of Capital Components Debt Preferred Common Equity WACC 1 2 What types of long-term capital do firms use? Long-term debt Preferred stock Common equity Capital

More information

LECTURE- 4. Valuing stocks Berk, De Marzo Chapter 9

LECTURE- 4. Valuing stocks Berk, De Marzo Chapter 9 1 LECTURE- 4 Valuing stocks Berk, De Marzo Chapter 9 2 The Dividend Discount Model A One-Year Investor Potential Cash Flows Dividend Sale of Stock Timeline for One-Year Investor Since the cash flows are

More information

What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated?

What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated? What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? HOCK international - 2004 1 HOCK international - 2004 2 How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated? HOCK

More information

Corporate Finance, Fall 03 Exam #2 review questions (full solutions at end of document)

Corporate Finance, Fall 03 Exam #2 review questions (full solutions at end of document) Corporate Finance, Fall 03 Exam #2 review questions (full solutions at end of document) 1. Portfolio risk & return. Idaho Slopes (IS) and Dakota Steppes (DS) are both seasonal businesses. IS is a downhill

More information

Appendix D: Answers to Self-Test Problems

Appendix D: Answers to Self-Test Problems Appendix D: Answers to Self-Test Problems Chapter 2 Financial Statement and Cash Flow Analysis ST2-1 Use the financial statements below to answer the questions about S&M Manufacturing s financial position

More information

TYPES OF FINANCIAL RATIOS

TYPES OF FINANCIAL RATIOS TYPES OF FINANCIAL RATIOS In the previous articles we discussed how to invest in the stock market and unit trusts. When investing in the stock market an investor should have a clear understanding about

More information

comment on the following by ( ) or ( ) 1. The financial staff s task is to obtain and use funds so as to maximize the market share of the firm. 2.

comment on the following by ( ) or ( ) 1. The financial staff s task is to obtain and use funds so as to maximize the market share of the firm. 2. comment on the following by ( ) or ( ) 1. The financial staff s task is to obtain and use funds so as to maximize the market share of the firm. 2. Two key limitations of the proprietorship for of business

More information

NWC = current assets - current liabilities = 2,100

NWC = current assets - current liabilities = 2,100 Questions and Problems Chapters 2,3 pp45-47 1. Building a balance sheet. Penguin Pucks, Inc., has current assets of $3,000, net fixed assets $6,000, current liabilities of $900, and long-term debt of $5,000.

More information

FIN350 In Class Work No. 2. The following list of equations will be reprinted on quiz 2.

FIN350 In Class Work No. 2. The following list of equations will be reprinted on quiz 2. FIN350 In Class Work No. 2 The following list of equations will be reprinted on quiz 2. For bond: YTM = Current yield + Capital gains yield EVA = After-tax After-tax Operating Income Capital costs = NOPAT

More information

MGT201 Financial Management Formulas Lecture 1 to 22

MGT201 Financial Management Formulas Lecture 1 to 22 MGT201 Financial Management Formulas Lecture 1 to 22 http://vustudents.ning.com 1. Fundamental Accounting Equation and Double Entry Principle. Assets +Expense = Liabilities + Shareholders Equity + Revenue

More information

Chapter 5: Valuing Bonds

Chapter 5: Valuing Bonds FIN 302 Class Notes Chapter 5: Valuing Bonds What is a bond? A long-term debt instrument A contract where a borrower agrees to make interest and principal payments on specific dates Corporate Bond Quotations

More information

MBA Financial Management and Markets Spring 2011 Dr. A. Frank Thompson Due: February 28, 2011 Competency Exam 1 Directions: Please answer the

MBA Financial Management and Markets Spring 2011 Dr. A. Frank Thompson Due: February 28, 2011 Competency Exam 1 Directions: Please answer the MBA Financial Management and Markets Spring 2011 Dr. A. Frank Thompson Due: February 28, 2011 Competency Exam 1 Directions: Please answer the following 33 questions designed to test your knowledge of the

More information

6. Financial Planning. Break-even. Operating and Financial Leverage.

6. Financial Planning. Break-even. Operating and Financial Leverage. 6. Financial Planning. Break-even. Operating and Financial Leverage. Financial planning primarily involves anticipating the impact of operating, investment and financial decisions on the firm s future

More information

Chapter 4. Financial Analysis: Sizing up Firm Performance. Chapter Contents. Learning Objectives

Chapter 4. Financial Analysis: Sizing up Firm Performance. Chapter Contents. Learning Objectives Chapter 4 Financial Analysis: Sizing up Firm Performance Learning Objectives Chapter Contents Principles Used in this Chapter 1.Why Financial Statements are Analyzed 2.Common Size Statements Standardizing

More information

VALUATION OF DEBT CONTRACTS AND THEIR PRICE VOLATILITY CHARACTERISTICS QUESTIONS See answers below

VALUATION OF DEBT CONTRACTS AND THEIR PRICE VOLATILITY CHARACTERISTICS QUESTIONS See answers below VALUATION OF DEBT CONTRACTS AND THEIR PRICE VOLATILITY CHARACTERISTICS QUESTIONS See answers below 1. Determine the value of the following risk-free debt instrument, which promises to make the respective

More information

Financial Statement and Cash Flow Analysis

Financial Statement and Cash Flow Analysis Chapter 2 Financial Statement and Cash Flow Analysis Answers to Concept Review Questions 1. What role do the FASB and SEC play with regard to GAAP? The FASB is a nongovernmental, professional standards

More information

BUSINESS FINANCE (FIN 312) Spring 2009

BUSINESS FINANCE (FIN 312) Spring 2009 BUSINESS FINANCE (FIN 31) Spring 009 Assignment Instructions: please read carefully You can either do the assignment by yourself or work in a group of no more than two. You should show your work how to

More information

Chapter 17 Does Debt Policy Matter?

Chapter 17 Does Debt Policy Matter? Chapter 17 Does Debt Policy Matter? Multiple Choice Questions 1. When a firm has no debt, then such a firm is known as: (I) an unlevered firm (II) a levered firm (III) an all-equity firm D) I and III only

More information

AN OVERVIEW OF FINANCIAL MANAGEMENT

AN OVERVIEW OF FINANCIAL MANAGEMENT CHAPTER 1 Review Questions AN OVERVIEW OF FINANCIAL MANAGEMENT 1. Management s basic, overriding goal is to create for 2. The same actions that maximize also benefits society 3. If businesses are successful

More information

MBA 8230 Corporation Finance (Part II) Practice Final Exam #2

MBA 8230 Corporation Finance (Part II) Practice Final Exam #2 MBA 8230 Corporation Finance (Part II) Practice Final Exam #2 1. Which of the following input factors, if increased, would result in a decrease in the value of a call option? a. the volatility of the company's

More information

Spring 2012. True/False Indicate whether the statement is true or false.

Spring 2012. True/False Indicate whether the statement is true or false. Corporation Finance Spring 2012 Sample Exam 2B True/False Indicate whether the statement is true or false. 1. The total return on a share of stock refers to the dividend yield less any commissions paid

More information

Expected default frequency

Expected default frequency KM Model Expected default frequency Expected default frequency (EDF) is a forward-looking measure of actual probability of default. EDF is firm specific. KM model is based on the structural approach to

More information

ISS Governance Services Proxy Research. Company Financials Compustat Data Definitions

ISS Governance Services Proxy Research. Company Financials Compustat Data Definitions ISS Governance Services Proxy Research Company Financials Compustat Data Definitions June, 2008 TABLE OF CONTENTS Data Page Overview 3 Stock Snapshot 1. Closing Price 3 2. Common Shares Outstanding 3 3.

More information

2-8. Identify whether each of the following items increases or decreases cash flow:

2-8. Identify whether each of the following items increases or decreases cash flow: Problems 2-8. Identify whether each of the following items increases or decreases cash flow: Increase in accounts receivable Increase in notes payable Depreciation expense Increase in investments Decrease

More information

MGT201 Solved MCQs(500) By

MGT201 Solved MCQs(500) By MGT201 Solved MCQs(500) By http://www.vustudents.net Why companies invest in projects with negative NPV? Because there is hidden value in each project Because there may be chance of rapid growth Because

More information

Learning Objective: Compare the financial implications of the different forms of business organizations. Learning Objective: Compare the

Learning Objective: Compare the financial implications of the different forms of business organizations. Learning Objective: Compare the 1. award: MC Qu. 6 Todd and Cathy created a firm that is... Todd and Cathy created a firm that is a separate legal entity and will share ownership of that firm on a 50 50 basis. Which type of entity did

More information

Key Concepts and Skills. Standardized Financial. Chapter Outline. Ratio Analysis. Categories of Financial Ratios 1-1. Chapter 3

Key Concepts and Skills. Standardized Financial. Chapter Outline. Ratio Analysis. Categories of Financial Ratios 1-1. Chapter 3 Key Concepts and Skills Chapter 3 Working With Financial Statements Know how to standardize financial statements for comparison purposes Know how to compute and interpret important financial ratios Know

More information

If you ignore taxes in this problem and there is no debt outstanding: EPS = EBIT/shares outstanding = $14,000/2,500 = $5.60

If you ignore taxes in this problem and there is no debt outstanding: EPS = EBIT/shares outstanding = $14,000/2,500 = $5.60 Problems Relating to Capital Structure and Leverage 1. EBIT and Leverage Money Inc., has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes [EBIT] are projected

More information

MBA 8130 FOUNDATIONS OF CORPORATION FINANCE FINAL EXAM VERSION A

MBA 8130 FOUNDATIONS OF CORPORATION FINANCE FINAL EXAM VERSION A MBA 8130 FOUNDATIONS OF CORPORATION FINANCE FINAL EXAM VERSION A Fall Semester 2004 Name: Class: Day/Time/Instructor:. Read the following directions very carefully. Failure to follow these directions will

More information

Discounted Cash Flow Valuation

Discounted Cash Flow Valuation 6 Formulas Discounted Cash Flow Valuation McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Outline Future and Present Values of Multiple Cash Flows Valuing

More information

Fundamentals Level Skills Module, Paper F9

Fundamentals Level Skills Module, Paper F9 Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2008 Answers 1 (a) Calculation of weighted average cost of capital (WACC) Cost of equity Cost of equity using capital asset

More information

Forecasting and Valuation of Enterprise Cash Flows 1. Dan Gode and James Ohlson

Forecasting and Valuation of Enterprise Cash Flows 1. Dan Gode and James Ohlson Forecasting and Valuation of Enterprise Cash Flows 1 1. Overview FORECASTING AND VALUATION OF ENTERPRISE CASH FLOWS Dan Gode and James Ohlson A decision to invest in a stock proceeds in two major steps

More information

Corporate Finance. Slide 1 咨询热线 : 学习平台 : lms.finance365.com

Corporate Finance. Slide 1 咨询热线 : 学习平台 : lms.finance365.com Corporate Finance Capital Budgeting Cost of Capital Measures of Leverage Dividends and Share Repurchases Working capital management Corporate Governance of Listed Companies Slide 1 Capital Budgeting Slide

More information

Corporate Finance: Final Exam

Corporate Finance: Final Exam Corporate Finance: Final Exam Answer all questions and show necessary work. Please be brief. This is an open books, open notes exam. For partial credit, when discounting, please show the discount rate

More information