FINC 3630: Advanced Business Finance Additional Practice Problems


 Miles Phelps
 4 years ago
 Views:
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 yearended 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 yearsend 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 riskfree 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 debtequity 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/10K) = 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 interestbearing ones need to be eliminated (ShortTerm Debt and Current Installments of LongTerm Debt). Net operating working capital = ($15,302 $0) ($11,269 $290  $38) = $15,302 $10,941 = $4,361 Operating longterm assets: *Note: Assume that Other Assets are necessary for the firms operations. We want the amount of fixed assets net of depreciation. Operating longterm 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 longterm 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/10K) = 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 riskfree 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 (10.4) = % 3. If the target debtequity 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 (10.4) = 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 riskfree 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 (10.4) = 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 nonoperating 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 righthand side PV1 = CF2 / (rg) = $ 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 nonoperating 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 $
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 informationFinance 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 informationBUSINESS 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 informationPractice 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 informationCHAPTER 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 informationCHAPTER 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 informationNIKE 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 informationChapter 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 informationChapter 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 informationBond 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 longterm basis, it usually does so by issuing or selling debt securities called bonds. A bond
More informationHomework 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 informationMBA (3rd Sem) 201314 MBA/29/FM302/T/ODD/1314
Full Marks : 70 MBA/29/FM302/T/ODD/1314 201314 MBA (3rd Sem) Paper Name : Corporate Finance Paper Code : FM302 Time : 3 Hours The figures in the righthand margin indicate marks. Candidates are required
More informationSAMPLE 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 informationChapter 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 informationThe 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 informationPRACTICE 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 informationExam 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 informationEquity 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 informationFinancial 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 informationSOLUTIONS. 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 informationComputing 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 informationKEY 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 informationFinance 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 informationDUKE 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 informationSolutions to Chapter 4. Measuring Corporate Performance
Solutions to Chapter 4 Measuring Corporate Performance 1. a. 7,018 Longterm 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 informationBF 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 1hour exam. 2) The topics included in those essay and
More informationCorporate 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 informationThings 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 informationChapter 14 Capital Structure in a Perfect Market
Chapter 14 Capital Structure in a Perfect Market 141. 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 informationLiquidity 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 informationUnit 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 informationCIS 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 informationReview 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 informationTopics 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 informationChapter 5: Valuing Bonds
FIN 302 Class Notes Chapter 5: Valuing Bonds What is a bond? A longterm debt instrument A contract where a borrower agrees to make interest and principal payments on specific dates Corporate Bond Quotations
More informationChapter 9 The Cost of Capital ANSWERS TO SELEECTED ENDOFCHAPTER QUESTIONS
Chapter 9 The Cost of Capital ANSWERS TO SELEECTED ENDOFCHAPTER QUESTIONS 91 a. The weighted average cost of capital, WACC, is the weighted average of the aftertax component costs of capital debt,
More informationVALUATION JC PENNEY (NYSE:JCP)
VALUATION JC PENNEY (NYSE:JCP) Prepared for Dr. K.C. Chen California State University, Fresno Prepared by Sicilia Sendjaja Finance 129Student Investment Funds December 15 th, 2009 California State University,
More informationFSA 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 informationCHAPTER 3 LONGTERM FINANCIAL PLANNING AND GROWTH
CHAPTER 3 LONGTERM 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 informationFinance 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 informationProblem 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 informationExpected default frequency
KM Model Expected default frequency Expected default frequency (EDF) is a forwardlooking measure of actual probability of default. EDF is firm specific. KM model is based on the structural approach to
More informationBonds. Describe Bonds. Define Key Words. Created 2007 By Michael Worthington Elizabeth City State University
Bonds OBJECTIVES Describe bonds Define key words Explain why bond prices fluctuate Compute interest payments Calculate the price of bonds Created 2007 By Michael Worthington Elizabeth City State University
More informationChapter 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 informationModule 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 ShortTerm Debt (ShortTerm Loans, Line of
More informationFinancial 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 informationCHAPTER 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 informationCertified Financial Management Professional VS1201
Certified Financial Management Professional VS1201 Certified Financial Management Professional Certified Financial Management Professional Certification Code VS1201 Vskills certification for Financial
More informationSTUDENT CAN HAVE ONE LETTER SIZE FORMULA SHEET PREPARED BY STUDENT HIM/HERSELF. FINANCIAL CALCULATOR/TI83 OR THEIR EQUIVALENCES ARE ALLOWED.
Test IIIFINN3120090 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 informationReview 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 informationFinance Homework Julian Vu May 28, 2008
Finance Homework Julian Vu May 28, 2008 Assignment: p. 2829 Problems 11 and 12 p. 145147 Questions 42, 43, and 44, and Problems 41, 42, 43, and 413 P11 A Treasury Bond that matures in 10 years
More informationWhat Do ShortTerm Liquidity Ratios Measure? What Is Working Capital? How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated?
What Do ShortTerm 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 informationLeverage. FINANCE 350 Global Financial Management. Professor Alon Brav Fuqua School of Business Duke University. Overview
Leverage FINANCE 35 Global Financial Management Professor Alon Brav Fuqua School of Business Duke University Overview Capital Structure does not matter! Modigliani & Miller propositions Implications for
More information] (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 tyear annuity = C [ 1 1 ] (3.3) r r(1 + r) t Future value of annuity
More informationChapter 3 Financial Statements, Cash Flow, and Taxes
Chapter 3 Financial Statements, Cash Flow, and Taxes ANSWERS TO ENDOFCHAPTER QUESTIONS 31 a. The annual report is a report issued annually by a corporation to its stockholders. It contains basic financial
More informationCHAPTER 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 information6. Financial Planning. Breakeven. Operating and Financial Leverage.
6. Financial Planning. Breakeven. Operating and Financial Leverage. Financial planning primarily involves anticipating the impact of operating, investment and financial decisions on the firm s future
More informationUnderstanding Financial Management: A Practical Guide Guideline Answers to the Concept Check Questions
Understanding Financial Management: A Practical Guide Guideline Answers to the Concept Check Questions Chapter 3 Interpreting Financial Ratios Concept Check 3.1 1. What are the different motivations that
More informationIf 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 informationBonds, Preferred Stock, and Common Stock
Bonds, Preferred Stock, and Common Stock I. Bonds 1. An investor has a required rate of return of 4% on a 1year discount bond with a $100 face value. What is the most the investor would pay for 2. An
More informationYou 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 informationChapters 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 informationTotal 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 informationTYPES 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( ) ( )( ) ( ) 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 informationFinancial 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 informationVALUATION 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 riskfree debt instrument, which promises to make the respective
More informationThe cost of capital. A reading prepared by Pamela Peterson Drake. 1. Introduction
The cost of capital A reading prepared by Pamela Peterson Drake O U T L I N E 1. Introduction... 1 2. Determining the proportions of each source of capital that will be raised... 3 3. Estimating the marginal
More informationValue of Equity and Per Share Value when there are options and warrants outstanding. Aswath Damodaran
Value of Equity and Per Share Value when there are options and warrants outstanding Aswath Damodaran 1 Equity Value and Per Share Value: A Test Assume that you have done an equity valuation of Microsoft.
More informationPractice Set #2 and Solutions.
FIN672 Securities Analysis & Portfolio Management Professor Michel A. Robe Practice Set #2 and Solutions. What to do with this practice set? To help MBA students prepare for the assignment and the exams,
More informationFinancial ratio analysis
Financial ratio analysis A reading prepared by Pamela Peterson Drake O U T L I N E 1. Introduction 2. Liquidity ratios 3. Profitability ratios and activity ratios 4. Financial leverage ratios 5. Shareholder
More informationPractice Exam (Solutions)
Practice Exam (Solutions) June 6, 2008 Course: Finance for AEO Length: 2 hours Lecturer: Paul Sengmüller Students are expected to conduct themselves properly during examinations and to obey any instructions
More informationTrade 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 informationDiscounted Cash Flow Valuation
6 Formulas Discounted Cash Flow Valuation McGrawHill/Irwin Copyright 2008 by The McGrawHill Companies, Inc. All rights reserved. Chapter Outline Future and Present Values of Multiple Cash Flows Valuing
More informationANSWERS TO STUDY QUESTIONS
ANSWERS TO STUDY QUESTIONS Chapter 17 17.1. The details are described in section 17.1.1. 17.3. Because of its declining payment pattern, a CAM would be most useful in an economy with persistent deflation
More informationSpring 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 informationa) The Dividend Growth Model Approach: Recall the constant dividend growth model for the price of a rm s stock:
Cost of Capital Chapter 14 A) The Cost of Capital: Some Preliminaries: The Security market line (SML) and capital asset pricing model (CAPM) describe the relationship between systematic risk and expected
More informationFinancial 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 informationISS 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 informationBH Chapter 9 The Cost of Capital
1 Capital Budgeting Overview Capital Budgeting is the set of valuation techniques for real asset investment decisions. Capital Budgeting Steps estimating expected future cash flows for the proposed real
More informationKey Concepts and Skills. Standardized Financial. Chapter Outline. Ratio Analysis. Categories of Financial Ratios 11. 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 informationMBA 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 informationChapter 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 allequity firm D) I and III only
More informationAN 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 informationFundamentals 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 informationEstimating Cost of Capital. 2. The cost of capital is an opportunity cost it depends on where the money goes, not where it comes from
Estimating Cost of Capal 1. Vocabulary the following all mean the same thing: a. Required return b. Appropriate discount rate c. Cost of capal (or cost of money) 2. The cost of capal is an opportuny cost
More informationIncome 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 informationMGT201 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 informationMath Workshop Algebra (Time Value of Money; TVM)
Math Workshop Algebra (Time Value of Money; TVM) FV 1 = PV+INT 1 = PV+PV*I = PV(1+I) = $100(1+10%) = $110.00 FV 2 = FV 1 (1+I) = PV(1+I)(1+I) = PV(1+I) 2 =$100(1.10) 2 = $121.00 FV 3 = FV 2 (1+I) = PV(1
More informationChapter 11 The Cost of Capital ANSWERS TO SELECTED ENDOFCHAPTER QUESTIONS
Chapter 11 The Cost of Capital ANSWERS TO SELECTED ENDOFCHAPTER QUESTIONS 111 a. The weighted average cost of capital, WACC, is the weighted average of the aftertax component costs of capital debt,
More informationFixed Income: Practice Problems with Solutions
Fixed Income: Practice Problems with Solutions Directions: Unless otherwise stated, assume semiannual payment on bonds.. A 6.0 percent bond matures in exactly 8 years and has a par value of 000 dollars.
More informationCHAPTER 20. Hybrid Financing: Preferred Stock, Warrants, and Convertibles
CHAPTER 20 Hybrid Financing: Preferred Stock, Warrants, and Convertibles 1 Topics in Chapter Types of hybrid securities Preferred stock Warrants Convertibles Features and risk Cost of capital to issuers
More informationCHAPTER 8 INTEREST RATES AND BOND VALUATION
CHAPTER 8 INTEREST RATES AND BOND VALUATION Solutions to Questions and Problems 1. The price of a pure discount (zero coupon) bond is the present value of the par value. Remember, even though there are
More informationReturn on Equity has three ratio components. The three ratios that make up Return on Equity are:
Evaluating Financial Performance Chapter 1 Return on Equity Why Use Ratios? It has been said that you must measure what you expect to manage and accomplish. Without measurement, you have no reference to
More informationInterest Rates and Bond Valuation
Interest Rates and Bond Valuation Chapter 6 Key Concepts and Skills Know the important bond features and bond types Understand bond values and why they fluctuate Understand bond ratings and what they mean
More informationCHAPTER 8. Problems and Questions
CHAPTER 8 Problems and Questions 1. Plastico, a manufacturer of consumer plastic products, is evaluating its capital structure. The balance sheet of the company is as follows (in millions): Assets Liabilities
More informationAnswers to Review Questions
Answers to Review Questions 1. The real rate of interest is the rate that creates an equilibrium between the supply of savings and demand for investment funds. The nominal rate of interest is the actual
More informationCHAPTER 15 Capital Structure: Basic Concepts
Multiple Choice Questions: CHAPTER 15 Capital Structure: Basic Concepts I. DEFINITIONS HOMEMADE LEVERAGE a 1. The use of personal borrowing to change the overall amount of financial leverage to which an
More informationEconomic Value Added (EVA) Valuation Tutorial
Economic Value Added (EVA) Valuation Tutorial Index 1. Introduction to valuation: valuation of bond 2. Company valuation Determing the cost of capital Calculating EVA 3. Detailed examples of EVAvaluation
More informationFNCE 3010 (Durham). HW2 (Financial ratios)
FNCE 3010 (Durham). HW2 (Financial ratios) 1. What effect would the following actions have on a firms net working capital and current ratio (assume NWC is positive and current ratio is initially greater
More information