# Chapter 7. component of the convertible can be estimated as =

Save this PDF as:

Size: px
Start display at page:

Download "Chapter 7. component of the convertible can be estimated as ="

## Transcription

1 Chapter Income bonds do share some characteristics with preferred stock. The primary difference is that interest paid on income bonds is tax deductible while preferred dividends are not. Income bondholders also have prior claims on the assets, if the firm goes bankrupt. In calculating cost of capital, the primary difference again will be that the cost of income bonds will be lower, because of the tax savings. 7-2 Commodity bonds are different from straight bonds because the interest payments on these bonds are not fixed but vary with the price of the commodity to which they are linked. There is more risk, therefore, to the holder of these bonds. It is different from equity since the cash flows are constrained. Even if the commodity's price does go up, the payments on the commodity bond will go up only by the defined amount, whereas equity investors have no upside limit. Commodity bondholders also have prior claims on the assets of the firm if the firm goes bankrupt. I would treat commodity bonds as debt, but recognize that it is also debt that creates less bankruptcy risk if the firm gets into trouble due to commodity price movements. 7-3 The first characteristic - a fixed dividend and a fixed life - is a characteristic of debt, as is the last one - no voting rights. The other two - no tax deductions and secondary claims on the assets - make it more like equity. In fact, this security looks a lot like preferred stock, and I would treat it as such. 7-4 Value of Straight Preferred Stock portion of Convertible = 6/.09 = \$66.67! Perpetual Life Value of Conversion Portion = \$105 - \$66.67 = \$ The convertible bond is a 10-year bond with a face value of \$1000 and a coupon rate of 5%. If it yielded the same rate as the straight bond, i.e. 8%, its price would be equal to (! ) + = , assuming semi-annual coupons. Hence, the equity component of the convertible can be estimated as = The total equity component of the firm s asset value = 50(1 m.) (20000) = \$56.077m. The debt component = \$25m (20000) = m. Hence, the debt ratio = /( ) = 42.19% 7-6 Value of Equity = 50,000 * \$ ,000 * \$90 = \$14,000,000 Value of Debt = \$5 million

2 Debt Ratio = 5/(5+14) = 26.32% Since the debt was taken on recently, it is assumed that the book value of debt is equal to market value. 7-7 a. The cost of internal equity = (6) = 14.3% b. The cost of external equity = (100/95)(14.3) = % 7-8 a. If the current owners give up 30% of the firm, they will be left with (0.7)(120) = \$84m. Otherwise, they have \$80m. Hence, they are better off taking the venture capital, assuming that they cannot do better. b. The breakeven percentage would be x, where x solves 120x = 80, or x = 2/3; i.e. the owners should be willing to give up no more than 33% of the firm. 7-9 We assume that Office Helpers is choosing to go public instead of using venture capital. Furthermore, we assume that the market valuation of \$120 will hold even with the IPO. Finally, let us assume that \$20 million need to be raised. Now, if the target price is \$10, which represents an underpricing of 20%, the true value of the shares would be 10/.8 = \$12.5 per share. At this price, the firm would have to issue 20/10 or 2 million shares. Since the 2 million shares will represent a value of \$25 million, the total number of shares outstanding would be 2(120/25) = 9.6 million shares. Of this, the existing shareholders would get 7.6 million shares, representing a value of (7.6/9.6)120 = \$95m.; the public shareholders would get (2/9.6)120 = \$25m. for which they would have paid 2(10) = \$20m., or an undervaluation of 5/25 or 20% a. The exit value will be 50(15) = \$750m. b. The discounted terminal value is 750/ = \$225.80m. c. You would ask for at least 75/ or 33% of the firm a. The expected return using the CAPM is (6) = 13.1% b. Venture capitalists typically have to invest a large portion of their portfolio in a single firm; hence there is a lot of diversifiable risk that they would have to hold. Furthermore, firms requiring venture capital would normally be riskier than other firms in the industry The loss to the existing shareholders is 50(\$18) = \$900m. The main people gaining from the underpricing are the investors that are able to buy the stock at the issue price I am in qualified agreement with this statement. It is true that IPOs are more difficult to value, partially because they tend to be younger firms and partially because you don t have an anchor of a market assessed value. I would test it empirically by looking at the

3 extent of underpricing for firms at different stages in the life cycle. If this statement is true, I would expect the underpricing to be greatest in younger, more difficult to value firms a. Since you are a small firm, you should consider the reputation of the investment banker. A more reputable investment banker may be able to attract wary investors into the offering. If you are a high technology or biotechnology firm, where technical knowledge may be essential in the valuation process, you should pick an investment banker with some experience with similar issues. b. If the issue is fairly priced, 40% of the firm (20/50). c. If the investment banker underprices the issue, you will have to sell Value of Securities Sold = \$20/.9 = \$22.22 As % of Overall Firm Value = 22.22/50 = 44.44% d. You would have to sell roughly 2 million shares: (\$50 million/2 million = \$25) 7-15 a. Number of shares you would need to sell in rights offering = \$100 mil/\$25 = 4 million Number of shares outstanding = 10 million You would need 5 rights to buy two shares. b. Ex-rights price = (50*10+25*4)/14 = \$42.86 c. Value per right = Pre-rights price - Ex-rights price = \$50 - \$42.86 = \$7.14 d. If the price of the right were higher than \$7.14, I would sell my rights at the higher price and keep the difference as excess return. The stock price after the rights issue and the cash will yield me more than what I paid for the stock which was \$ a. Expected Stock Price = (1 million * \$ ,000 * \$10)/1.5 million = \$13.33 b. Price per Right = \$15 - \$13.33 = \$1.67 c. No, because I will own more shares after the issue a. The current capital is \$15(1 million shares) = \$15million. Additional capital to be raised is \$10(0.5 million shares) = \$5 million. Hence, net income after the issue will be \$1 million(20/15) = \$1.33 million. Hence EPS would be 1.33/1.5 = cents per share. b. Earnings per share under this alternate scenario would be 1.33/1.33 = \$1 per share

4 c. No, if I have availed myself of the rights issue; in this case, I would have the same proportional ownership of the firm. Even if I had sold the right, I would have been compensated for the lost value a. Annual tax savings from debt = \$ 40 million *.09 *.35 = \$1.26 b. PV of Savings assuming savings are permanent = \$40 million *.35 = \$14.00 c. PV of Savings assuming savings occur for 10 years = \$1.26 (PVA,9%,10) = \$8.09 d. PV of Savings will increase If savings are permanent = 1.26/.07 = \$18.00 If savings are for 10 years = \$1.26 (PVA,7%,10) = \$ a. After-tax interest rate = 10% (1-.45) = 5.50% b. If only half the interest is allowed = 10% (1-.225) = 7.75% c. Yes. The tax savings will be much lower since the tax savings will not occur until three years from now. The after-tax interest rate will therefore be the same as the pre-tax rate (10%) for the first three years a. Ignoring the net operating loss, PV of Tax Savings = \$5 billion (.36) = \$1.8 billion b. Yes. The net operating loss will mean that this tax savings will not occur for a while. For instance, if it will be 5 years before Westinghouse will have enough taxable income to claim the interest deduction, this \$ 1.8 billion should be discounted back 5 years to arrive at the present value a. False. There may be non-discretionary capital expenditures/working capital needs that drain cash flows. b. False. Capital expenditures may be discretionary. c. Partially true. The commitment to pay dividends is a much weaker one than the one to pay interest expenses. d. True. e. False. This is true only if management is not concerned about wealth maximization. 7-22

5 While there may be other motives behind acquisitions, the firm that would look most promising on the free cash flow hypothesis would be the firm with low growth, poor projects, low leverage and good earnings. It is in this firm that the discipline of borrowing money will have the greatest impact in terms of inducing managers to pick better investments a. Cost of Equity = 9% + 6% = 15% Since it is an all-equity financed firm, the cost of capital is equal to the cost of equity. b. Marginal Marginal Value of Debt Increase in Debt Tax Benefits Exp. Bankruptcy Cost 2500,000 2,500,000 1,000, ,000 2,500,000 1,000, , ,000 2,500,000 1,000,000 1,000, , , , , , , ,000 1,200,000 10,000, , , ,000 12,500,000 2,500,000 1,000,000 1,400,000 Every marginal increment past \$7.5 million has expected cost > expected tax benefits! Optimal debt is between \$ 5 million and \$ 7.5 million. c. Value of Firm at Optimal Capital Structure = Current Firm Value + Sum of Marginal Tax Benefits - Sum of marginal bankruptcy costs = \$13,360, a. In the Miller-Modigliani world with no taxes, the value of the firm will be \$ 100 million no matter what the debt ratio. b. The cost of capital will always be 11%. c. With taxes, the value of the firm will increase as the debt is increased (because of the tax benefits of debt) and the cost of capital will go down (due to the interest tax savings again) Of \$1 paid to bondholders from corporate before-tax income, the bondholder gets (1-0.4) = 60 cents. Of the same dollar paid to equityholders, the equity holder gets (1-0.3)(1-0.2) = 56 cents. Hence debt does have a tax advantage. If a firm with no debt and a market value of \$100 million borrowed \$50 million in this world, it would obtain a benefit of /0.6 = 1/16 of the amount issued, or 50/16 = \$3.33 million. Hence the firm value would be = \$153million The tax rate on equity would have to be t, where t solves (1-0.3)(1-t) = 1-0.4, i.e. 1-t = (1-

6 0.4)/(1-0.3) = t = % 7-27 a. The past policy of not using debt can be justified by noting that returns on projects were high (increasing the need for flexibility) and that earnings in the future were likely to be volatile (because of the growth). b. Given that returns on projects are declining, I would argue for a greater use for debt a. Financial flexibility is higher with low leverage in several ways: one, the firm can use retained earnings for whatever purposes it chooses: it is not forced to pay out funds as debt service. Also, with low leverage and high debt capacity, the firm can tap into this debt capacity if funds are urgently needed. Finally, there are likely to be fewer covenants to restrict the firm. b. The tradeoff is flexibility versus the tax advantages of debt and the discipline enforced by debt on wayward managers a. An electric utility is regulated (reducing agency costs), has stable and predictable cash flows (reducing bankruptcy needs), and knows its future investment needs with some precision (reducing the need for flexibility). All of these factors will increase its capacity to carry debt. b. Yes. Both the regulation and the monopoly characteristics reduce the agency costs and bankruptcy costs, increasing debt capacity.

### Chapter 7. . 1. component of the convertible can be estimated as 1100-796.15 = 303.85.

Chapter 7 7-1 Income bonds do share some characteristics with preferred stock. The primary difference is that interest paid on income bonds is tax deductible while preferred dividends are not. Income bondholders

### Chapter 7: Capital Structure: An Overview of the Financing Decision

Chapter 7: Capital Structure: An Overview of the Financing Decision 1. Income bonds are similar to preferred stock in several ways. Payment of interest on income bonds depends on the availability of sufficient

### Finding the Right Financing Mix: The Capital Structure Decision. Aswath Damodaran 1

Finding the Right Financing Mix: The Capital Structure Decision Aswath Damodaran 1 First Principles Invest in projects that yield a return greater than the minimum acceptable hurdle rate. The hurdle rate

### 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

### 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

Chapter 17 Valuation and Capital Budgeting for the Levered Firm 17A-1 Appendix 17A The Adjusted Present Value Approach to Valuing Leveraged Buyouts 1 Introduction A leveraged buyout (LBO) is the acquisition

### The Adjusted Present Value Approach to Valuing Leveraged Buyouts 1 Introduction

Chapter 18 Valuation and Capital Budgeting for the Levered Firm 18A-1 Appendix 18A The Adjusted Present Value Approach to Valuing Leveraged Buyouts 1 Introduction A leveraged buyout (LBO) is the acquisition

### BUS303. Study guide 2. Chapter 14

BUS303 Study guide 2 Chapter 14 1. An efficient capital market is one in which: A. all securities that investors want are offered. B. all transactions are closed within 2 days. C. current prices reflect

### t = 1 2 3 1. Calculate the implied interest rates and graph the term structure of interest rates. t = 1 2 3 X t = 100 100 100 t = 1 2 3

MØA 155 PROBLEM SET: Summarizing Exercise 1. Present Value [3] You are given the following prices P t today for receiving risk free payments t periods from now. t = 1 2 3 P t = 0.95 0.9 0.85 1. Calculate

The consequence of failing to adjust the discount rate for the risk implicit in projects is that the firm will accept high-risk projects, which usually have higher IRR due to their high-risk nature, and

### COST OF CAPITAL Compute the cost of debt. Compute the cost of preferred stock.

OBJECTIVE 1 Compute the cost of debt. The method of computing the yield to maturity for bonds will be used how to compute the cost of debt. Because interest payments are tax deductible, only after-tax

### 1 (a) Net present value of investment in new machinery Year 1 2 3 4 5 \$000 \$000 \$000 \$000 \$000 Sales income 6,084 6,327 6,580 6,844

Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2013 Answers 1 (a) Net present value of investment in new machinery Year 1 2 3 4 5 \$000 \$000 \$000 \$000 \$000 Sales income 6,084

### Finance 2 for IBA (30J201) F.Feriozzi Resit exam June 14 th, 2011. Part One: Multiple-Choice Questions (45 points)

Question 1 Finance 2 for IBA (30J201) F.Feriozzi Resit exam June 14 th, 2011 Part One: Multiple-Choice Questions (45 points) Assume that financial markets are perfect and that the market value of a levered

### The 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

### 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

### Chapter 1 The Scope of Corporate Finance

Chapter 1 The Scope of Corporate Finance MULTIPLE CHOICE 1. One of the tasks for financial managers when identifying projects that increase firm value is to identify those projects where a. marginal benefits

IE Aufgabe 4 The Adjusted-Present-Value Approach to Valuing Leveraged Buyouts 1) Introduction A leveraged buyout (LBO) is the acquisition by a small group of equity investors of a public or private company

### CHAPTER 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

Business 2019 Finance I Lakehead University Midterm Exam Philippe Grégoire Fall 2002 Time allowed: 2 hours. Instructions: Calculators are permitted. One 8.5 11 inches crib sheet is allowed. Verify that

### INTERVIEWS - FINANCIAL MODELING

420 W. 118th Street, Room 420 New York, NY 10027 P: 212-854-4613 F: 212-854-6190 www.sipa.columbia.edu/ocs INTERVIEWS - FINANCIAL MODELING Basic valuation concepts are among the most popular technical

### ] (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

### AFM 372 Fall 2007 Midterm Examination Friday, October 26. This exam has 11 pages including this page. A separate formula sheet will be provided.

Student name: Student number: Instructor: Alan Huang Duration: 2 hours AFM 372 Fall 2007 Midterm Examination Friday, October 26 This exam has 11 pages including this page. A separate formula sheet will

### 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

### Investing Practice Questions

Investing Practice Questions 1) When interest is calculated only on the principal amount of the investment, it is known as: a) straight interest b) simple interest c) compound interest d) calculated interest

### DUKE UNIVERSITY Fuqua School of Business. FINANCE 351 - CORPORATE FINANCE Problem Set #7 Prof. Simon Gervais Fall 2011 Term 2.

DUKE UNIVERSITY Fuqua School of Business FINANCE 351 - CORPORATE FINANCE Problem Set #7 Prof. Simon Gervais Fall 2011 Term 2 Questions 1. Suppose the corporate tax rate is 40%, and investors pay a tax

### CHAPTER 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

### Value 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.

FIN 534 Week 4 Quiz 3 (Str) Click Here to Buy the Tutorial http://www.tutorialoutlet.com/fin-534/fin-534-week-4-quiz-3- str/ For more course tutorials visit www.tutorialoutlet.com Which of the following

### 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

### Capital Structure. Corporate Finance. Prof. Ian Giddy New York University CORPORATE FINANCE DECISONS INVESTMENT FINANCING RISK MGT MGT PORTFOLIO

Capital Structure-1 Capital Structure Prof. Ian Giddy New York University Corporate Finance CORPORATE FINANCE DECISONS INVESTMENT FINANCING RISK MGT MGT PORTFOLIO CAPITAL M&A DEBT EQUITY MEASUREMENT TOOLS

### Cash Flow Analysis Venture Business Perspective

Cash Flow Analysis Venture Business Perspective Cash Flow (CF) Analysis What is CF and how is determined? CF Free CF Managing CF Cash Conversion Cyclical CF Break-even Valuing venture businesses based

### The Debt-Equity Trade Off: The Capital Structure Decision

The Debt-Equity Trade Off: The Capital Structure Decision Aswath Damodaran Stern School of Business Aswath Damodaran 1 First Principles Invest in projects that yield a return greater than the minimum acceptable

### 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

### 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

### GESTÃO FINANCEIRA II PROBLEM SET 5 SOLUTIONS (FROM BERK AND DEMARZO S CORPORATE FINANCE ) LICENCIATURA UNDERGRADUATE COURSE

GESTÃO FINANCEIRA II PROBLEM SET 5 SOLUTIONS (FROM BERK AND DEMARZO S CORPORATE FINANCE ) LICENCIATURA UNDERGRADUATE COURSE 1 ST SEMESTER 2010-2011 Chapter 18 Capital Budgeting and Valuation with Leverage

### Contribution 787 1,368 1,813 983. Taxable cash flow 682 1,253 1,688 858 Tax liabilities (205) (376) (506) (257)

Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2012 Answers 1 (a) Calculation of net present value (NPV) As nominal after-tax cash flows are to be discounted, the nominal

### CHAPTER 20 LONG TERM FINANCE: SHARES, DEBENTURES AND TERM LOANS

CHAPTER 20 LONG TERM FINANCE: SHARES, DEBENTURES AND TERM LOANS Q.1 What is an ordinary share? How does it differ from a preference share and debenture? Explain its most important features. A.1 Ordinary

### Activity Sheet 1: What is a Stock?

Activity Sheet 1: What is a Stock? Stocks represent a share of ownership in a publicly held company. Private companies do not issue stock. As a stockholder, the investor has a claim on the assets of the

### CORPORATE FINANCE REVIEW FOR THIRD QUIZ. Aswath Damodaran

CORPORATE FINANCE REVIEW FOR THIRD QUIZ Aswath Damodaran Basic Skills Needed What is the trade off involved in the capital structure choice? Can you estimate the optimal debt ratio for a firm using the

### INVESTMENT TRANSLATED INTO HUMAN WORDS

INVESTMENT JARGON TRANSLATED INTO HUMAN WORDS Hi, The world of finance loves jargon, but it s overly confusing. Let s clear the air. Here s a concise walk-through of terms that are common, but often not

Review for Exam 1 Instructions: Please read carefully The exam will have 20 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation

### 6. Debt Valuation and the Cost of Capital

6. Debt Valuation and the Cost of Capital Introduction Firms rarely finance capital projects by equity alone. They utilise long and short term funds from a variety of sources at a variety of costs. No

### Chapter 9. Year Revenue COGS Depreciation S&A Taxable Income After-tax Operating Income 1 \$20.60 \$12.36 \$1.00 \$2.06 \$5.18 \$3.11

Chapter 9 9-1 We assume that revenues and selling & administrative expenses will increase at the rate of inflation. Year Revenue COGS Depreciation S&A Taxable Income After-tax Operating Income 1 \$20.60

### Option Pricing Applications in Valuation!

Option Pricing Applications in Valuation! Equity Value in Deeply Troubled Firms Value of Undeveloped Reserves for Natural Resource Firm Value of Patent/License 73 Option Pricing Applications in Equity

### Fundamentals Level Skills Module, Paper F9. Section A. Mean growth in earnings per share = 100 x [(35 7/30 0) 1/3 1] = 5 97% or 6%

Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2015 Answers Section A 1 A 2 D 3 D Mean growth in earnings per share = 100 x [(35 7/30 0) 1/3 1] = 5 97% or 6% 4 A 5 D 6 B 7

### Part 9. The Basics of Corporate Finance

Part 9. The Basics of Corporate Finance The essence of business is to raise money from investors to fund projects that will return more money to the investors. To do this, there are three financial questions

Review for Exam 1 Instructions: Please read carefully The exam will have 21 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation

### 3. If an individual investor buys or sells a currently owned stock through a broker, this is a primary market transaction.

Spring 2012 Finance 3130 Sample Exam 1A Questions for Review 1. The form of organization for a business is an important issue, as this decision has very significant effect on the income and wealth of the

### 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.

### 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,

### 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

1.0 FINANCING PRINCIPLES Module 1: Corporate Finance and the Role of Venture Capital Financing Financing Principles 1.01 Introduction to Financing Principles 1.02 Capitalization of a Business 1.03 Capital

### Finance 2 for IBA (30J201) F.Feriozzi Regular exam December 15 th, 2010. Part One: Multiple-Choice Questions (45 points)

Finance 2 for IBA (30J201) F.Feriozzi Regular exam December 15 th, 2010 Question 1 Part One: Multiple-hoice Questions (45 points) Which of the following statements regarding the capital structure decision

### Stock Valuation. Everything You Wanted to Know About Stocks. and Their Value. FINC 3610 Yost

Everything You Wanted to Know About Stocks and Their Value 158 Let s Review The price (value) of a bond is equal to the of the bond's cash flows. 159 Stock Valuation The price (value) of a share of stock

### Chapter 19. Web Extension: Rights Offerings and Zero Coupon Bonds. Rights Offerings

Chapter 19 Web Extension: Rights Offerings and Zero Coupon Bonds T his Web Extension discusses two additional topics in financial restructuring: rights offerings and zero coupon bonds. Rights Offerings

### 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

### 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

### Finance 2 for IBA (30J201) F. Feriozzi Re-sit exam June 18 th, 2012. Part One: Multiple-Choice Questions (45 points)

Finance 2 for IBA (30J201) F. Feriozzi Re-sit exam June 18 th, 2012 Part One: Multiple-Choice Questions (45 points) Question 1 Assume that capital markets are perfect. Which of the following statements

### Chapter 5 Valuing Stocks

Chapter 5 Valuing Stocks MULTIPLE CHOICE 1. The first public sale of company stock to outside investors is called a/an a. seasoned equity offering. b. shareholders meeting. c. initial public offering.

### INVESTMENT DICTIONARY

INVESTMENT DICTIONARY Annual Report An annual report is a document that offers information about the company s activities and operations and contains financial details, cash flow statement, profit and

### More Tutorial at Corporate Finance

Corporate Finance Question 1. The cost of capital (8 points) St. Claire Enterprises is a levered firm. The equity cost of capital for St. Claire is 7%. The debt cost of capital for St. Claire is 2%. Assume

### 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

### Chapter 15. Learning Objectives Principles Used in This Chapter 1.A Glance at Capital Structure Choices in Practice 2.Capital Structure Theory

Chapter 15 Capital Structure Policy Agenda Learning Objectives Principles Used in This Chapter 1.A Glance at Capital Structure Choices in Practice 2.Capital Structure Theory 3.Why Do Capital Structures

### Common and Preferred Stock C H A P T E R S E V E N T E E N. Financing

Common and Preferred Stock C H A P T E R S E V E N T E E N Financing Limited 2000 Figure 17-1 Time line during rights offering PPT 17-1 Limited 2000 Beforetax and aftertax yields on corporate debentures

### Chapter 15: Debt Policy

FIN 302 Class Notes Chapter 15: Debt Policy Two Cases: Case one: NO TAX All Equity Half Debt Number of shares 100,000 50,000 Price per share \$10 \$10 Equity Value \$1,000,000 \$500,000 Debt Value \$0 \$500,000

### 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,

### CHAPTER 7 CAPITAL STRUCTURE: OVERVIEW OF THE FINANCING DECISION. The Choices: Types of Financing

1 2 CHAPTER 7 flows (usually interest and principal payments), whereas an equity claim entitles the holder to any residual cash flows after meeting all other promised claims. This remains CAPITAL STRUCTURE:

### 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. 1. DayTop Inns is a publicly traded company, with 10 million shares

### FN2 Ron Muller 2007-08 MODULE 4: CAPITAL STRUCTURE QUESTION 1

MODULE 4: CAPITAL STRUCTURE QUESTION 1 Gadget Corp. manufactures gadgets. The average selling price of this finished product is \$200 per unit. The variable cost for these units is \$125. Gadget Corp. incurs

### Often stock is split to lower the price per share so it is more accessible to investors. The stock split is not taxable.

Reading: Chapter 8 Chapter 8. Stock: Introduction 1. Rights of stockholders 2. Cash dividends 3. Stock dividends 4. The stock split 5. Stock repurchases and liquidations 6. Preferred stock 7. Analysis

### Understanding a Firm s Different Financing Options. A Closer Look at Equity vs. Debt

Understanding a Firm s Different Financing Options A Closer Look at Equity vs. Debt Financing Options: A Closer Look at Equity vs. Debt Business owners who seek financing face a fundamental choice: should

### Equity Value and Per Share Value: A Test

Equity Value and Per Share Value: A Test Assume that you have done an equity valuation of Microsoft. The total value for equity is estimated to be \$ 400 billion and there are 5 billion shares outstanding.

### The Value of Synergy. Aswath Damodaran 1

The Value of Synergy 1 Valuing Synergy The key to the existence of synergy is that the target firm controls a specialized resource that becomes more valuable if combined with the bidding firm's resources.

### CHAPTER 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

Advantages and disadvantages of investing in the Stock Market There are many benefits to investing in shares and we will explore how this common form of investment can be an effective way to make money.

### The Option to Delay!

The Option to Delay! When a firm has exclusive rights to a project or product for a specific period, it can delay taking this project or product until a later date. A traditional investment analysis just

### Cash Flow Analysis Venture Business Perspective

Cash Flow Analysis Venture Business Perspective Cash Flow (CF) Analysis What is CF and how is determined? CF Operating CF Free CF Managing CF Cash Conversion Cyclical CF Break-even Valuing venture businesses

### There are two types of returns that an investor can expect to earn from an investment.

Benefits of investing in the Stock Market There are many benefits to investing in shares and we will explore how this common form of investment can be an effective way to make money. We will discuss some

### Use the table for the questions 18 and 19 below.

Use the table for the questions 18 and 19 below. The following table summarizes prices of various default-free zero-coupon bonds (expressed as a percentage of face value): Maturity (years) 1 3 4 5 Price

### 1 Pricing options using the Black Scholes formula

Lecture 9 Pricing options using the Black Scholes formula Exercise. Consider month options with exercise prices of K = 45. The variance of the underlying security is σ 2 = 0.20. The risk free interest

### 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

### Chapter 16 Debt-Equity Mix 1. Divido Corporation is an all-equity financed firm with a total market value of \$100 million.

Chapter 16 Debt-Equity Mix 1. Divido Corporation is an all-equity financed firm with a total market value of \$100 million. The company holds \$10 million in cash-equivalents and has \$90 million in other

### Chapter 12. Preferred Stocks - 1. Preferred Stocks and Convertibles

Preferred Stocks - 1 Chapter 12 Preferred Stocks and Convertibles Preferred Stocks Valuing and Investing in Preferreds Convertibles Valuing and Investing in Convertibles Preferred stocks have preference

### Primary Market - Place where the sale of new stock first occurs. Initial Public Offering (IPO) - First offering of stock to the general public.

Stock Valuation Primary Market - Place where the sale of new stock first occurs. Initial Public Offering (IPO) - First offering of stock to the general public. Seasoned Issue - Sale of new shares by a

### Cash flow before tax 1,587 1,915 1,442 2,027 Tax at 28% (444) (536) (404) (568)

Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2014 Answers 1 (a) Calculation of NPV Year 1 2 3 4 5 \$000 \$000 \$000 \$000 \$000 Sales income 5,670 6,808 5,788 6,928 Variable

### Finding the Right Financing Mix: The Capital Structure Decision

Finding the Right Financing Mix: The Capital Structure Decision Aswath Damodaran Stern School of Business Aswath Damodaran 1 First Principles Invest in projects that yield a return greater than the minimum

### 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.

### U + PV(Interest Tax Shield)

CHAPTER 15 Debt and Taxes Chapter Synopsis 15.1 The Interest Tax Deduction A C-Corporation pays taxes on proits ater interest payments are deducted, but it pays dividends rom ater-tax net income. Thus,

### RELEVANT TO ACCA QUALIFICATION PAPER F9

RELEVANT TO ACCA QUALIFICATION PAPER F9 Analysing the suitability of financing alternatives The requirement to analyse suitable financing alternatives for a company has been common in Paper F9 over the

### CHAPTER 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

### Discount rates for project appraisal

Discount rates for project appraisal We know that we have to discount cash flows in order to value projects We can identify the cash flows BUT What discount rate should we use? 1 The Discount Rate and

### TPPE17 Corporate Finance 1(5) SOLUTIONS RE-EXAMS 2014 II + III

TPPE17 Corporate Finance 1(5) SOLUTIONS RE-EXAMS 2014 II III Instructions 1. Only one problem should be treated on each sheet of paper and only one side of the sheet should be used. 2. The solutions folder

### A guide to investing in hybrid securities

A guide to investing in hybrid securities Before you make an investment decision, it is important to review your financial situation, investment objectives, risk tolerance, time horizon, diversification

### a) 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

### Practice 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

### FINANCIAL MANAGEMENT For M.Com /B.Com Part A Question & Answers INTRODUCTION TO FINANCIAL MANAGEMENT 1. What is financial management?

FINANCIAL MANAGEMENT For M.Com /B.Com Part A Question & Answers INTRODUCTION TO FINANCIAL MANAGEMENT 1. What is financial management? It is the application of planning and control functions of the finance

### CHAPTER SIX. Accrual Accounting and Valuation: Pricing Earnings

CHAPTER SIX Accrual Accounting and Valuation: Pricing Earnings Concept Questions C6.1. Analysts typically forecast eps and eps growth without consideration for how earnings are affected by payout. That