Re: Another Sample Final exam -- Advanced Corporate Finance

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Date Posted: 15:55:42 12/08/07 Sat
Author: aanda ada
Subject: Re: Another Sample Final exam
In reply to: Charles Hodges 's message, "Another Sample Final exam" on 13:04:58 04/19/01 Thu

>Exam 3 FI4300 Spring 2000 Your Name
>___________________________
>
>Instructions:
>* True/False questions are worth 2 points. Multiple
>choice questions are worth 3 points. Short answer
>questions usually take less than three sentences and
>are worth 4 points. Problems are worth the number of
>points listed in the question. Other questions are
>valued as listed. Underline denotes a wording change
>from a previous quiz or exam.
>
>TF1. According to the text, the primary goal for a
>firm's financial managers is to maximize shareholder's
>wealth.
> a. True b. False
>
>TF2. The optimal dividend policy is the long-run
>residual policy.
>a. True b. False
>
>TF3. In perfect capital markets, the way a firm
>finances its assets is irrelevant.
>a. True b. False
>
>TF4. When a low P/E firm acquires a high P/E firm, we
>generally expect the low P/E firm's earning per share
>to decrease.
>a. True b. False
>
>TF5. Financial Leverage is more controllable than
>Operating Leverage.
>a. True b. False
>
>SA1 . (2 points each)Real Options - fill in the
>blanks. If you need to describe the option more
>fully, write your description near the question. For
>the record, the type of option is either call or put.
>The underlying asset refers to the item, which upon a
>change in value, will impact the decision to exercise
>or not exercise the option.
>
>a. Common stock where all stock is owned by an
>owner/manager.
>
>Type of option ______ Who is long _________ Who is
>short ___________ Underlying Asset _________
>
>b. Decision on Test marketing a product prior to a
>national ad campaign and product roll out.
>
>Type of option ______ Who is long _________ Who is
>short ___________ Underlying Asset _________
>
>c. Use of an efficient specialized machines with no
>salvage value versus a less-efficient general machine
>with large salvage value.
>
>Type of option ______ Who is long _________ Who is
>short ___________ Underlying Asset _________
>
>MC1. Two investment opportunities have the same
>total cash flows. This means that with a discount
>rate of 0%, their cash flows have the same sum.
>Choose the combination from the following three
>aspects of capital budgeting that will give the
>highest Internal Rate of Return (hint, change each of
>the aspects one at a time, assume the projects are
>identical except for this change). CHOOSE THE BEST
>ANSWER.
>
>Payback Period Depreciation (to 0 salvage value)
>Cost of Financing
>1. shortest 4. straight line 7. high cost
>2. longest 5. MACRS 8. low cost
>3. doesn't matter 6. doesn't matter 9. doesn't
>matter
>
>a. 3, 6, 9. b. 1, 5, 8. c. 1, 5, 9.
>d. 2, 4, 7. e. 3, 4, 7. f. 2, 6, 8.
>
>MC2. For a normal, above-average risk (by any measure)
>capital budgeting project, the Net Present Value
>criteria assumes that expected future cash flows are
>reinvested at ___________, and the Payback Period
>criteria assumes that expected future cash flows are
>reinvested at ___________.
>(a) A rate above the firm's weighted average cost of
>capital, no discount rate is used.
>(b) A rate above the firm?s weighted average cost of
>capital, the accounting rate of return.
>(c) The internal rate of return, the a rate below the
>firm's weighted average cost of capital.
>(d) The firm's weighted average cost of capital, The
>accounting rate of return,.
>(e) The accounting rate of return, the accounting rate
>of return.
>(e) Neither criteria assumes reinvestment of future
>cash flows.
>
>MC3.. Which of the following is considered the most
>important responsibility of the financial managers of
>a corporation?
> a. liquidity management b. operations management
>c. capital budgeting
> d. capital structure e. dividend policy
>
>SA2. Briefly describe the set-of-contracts model of
>the corporation?
>
>
>
>
>
>
>SA3. What is meant by the term "moral hazard"?
>
>
>
>
>
>MC4. For an all equity firm, investments with NPV=$0:
> a. typically have postive accounting profits.
> b. are generally high risk.
> c. will generally have low discount rates.
> d. all of the above.
> e. none of the above.
>
>MC5. ___________ markets deal in securities with
>maturities of one year or more; ___________ markets
>deal with markets in which most new securities have
>fixed maturities.
> a. money, primary b. capital, equity
> c. spot, derivative d. futures, debt
> e. none of the above.
>
>MC6. For a long-term capital budgeting project,
>expensing an item rather than capitalizing an item
>will most likely not affect the project's total net
>income over the life of the project. However,
>expensing the item will reduce the project's
>calculated Payback Period and Internal Rate of Return.
>a. True B. False
>
>MC7. For a typical firm with a given capital
>structure, which of the following is correct? (Note:
>All rates are after taxes.)
>a. kd > ks > WACC. b. ks > kd > WACC.
>c. WACC > ks > kd. d. ks > WACC > kd.
>e. None of the statements above is correct.
>
>
> SA4. (6 points) An all-equity firm with 10,000
>shares is currently selling for $20 per share. The
>firm has $30,000 available to pay dividends or
>repurchase stock. This is a no-tax world and no
>information is revealed by the dividend payment
>method. Fill in the blanks below.
>
>Before the cash is distributed
>Assets = _______ Debt= _______ Equity=________ Price
>per share=________
>
>After paying $30,000 in dividends
>Assets = ________ Debt= _________ Equity=_________
>Price per share=________
>
>After $30,000 in share repurchases
>Assets = ________ Debt= _________ Equity=_________
>Price per share=________
>
>
>SA5. What is the optimal capital structure? Why?
>
>
>
>
>
>TF6. In the real world, the expected value of
>bankruptcy costs is negatively related to the degree
>of specialization of the firm's assets.
>A. True B. False
>
>TF7. For most companies, dividends are less stable
>than earnings.
>A. True B. False
>
>SA 6. (2 points) Match the term with the date:
>Record Date _________ May 12, 1999
>Payment Date __________ May 15, 1999
>Ex-Dividend Date __________ May 30, 1999
>Declaration Date _________ May 5, 1999
>
> PROBLEM INSTRUCTIONS
>
>* Show all work.
>* Be sure to label each section of the answer.
>* Use the back of the test if you need more room.
>* Set your calculator to four decimal places.
>
>1. (8 points) Rollins Corporation is constructing its
>MCC schedule. The firm is at its target capital
>structure. Its bonds have a 9 percent coupon, paid
>semiannually, a current maturity of 17 years, and sell
>for $1,210. Rollins' beta is 1.1, the risk-free rate
>is 6 percent, and the expected return on the market is
>12 percent. Rollins is a constant growth firm, which
>just paid a dividend of $1.5, sells for $25.00 per
>share, and has a growth rate of 12 percent.
>The firm's book value balance sheet is as follows:
> Asset $15,650 Long Term Debt $15,000
> Equity ($.25 par) $600
> Retained Earnings $50
>
>
>What is the firm's leverage ratio?
>
>
>
>What is Rollins' cost of debt%?
>
>
>
>What is Rollins' cost of retained earnings using the
>Discounted Cash Flow approach?
>
>
>
>Using your DCF estimate of the cost of retained
>earnings, what is Rollins' WACC?
>
>
>
>2. (7 points) Two firms plan to merge. There are no
>synergies, acquisition expenses and no premium is
>being paid. Prior to the merger, the acquirer has
>earnings per share of $2 and a price earnings ratio of
>25. The acquiree has earnings per share of $6 a price
>earnings ratio of 10. The acquiror has 10 million
>shares of stock and the acquiree has 7 million shares
>of stock. What is the acquirer's market value,
>earnings per share, and Price-earnings ratio after the
>acquisition?
>
>
>
>
>
>
>
> 4. (2 points) Your required rate of return is 10%. If
>you invest $150 today you will receive the following
>cash flows:
> At the end of year 1 $90
> At the end of year 2 $35
> At the end of year 3 $40
>What is the Profitability Index of the project?
>
>
>
>
>
>
>5. (10 points) Parker Products manufactures a variety
>of household products. The company is considering
>introducing a new detergent. The company's CFO has
>collected the following information about the proposed
>product. (Note: You may or may not need to use all of
>this information, use only the information that is
>relevant.)
>
>a. The project has an anticipated economic life of 4
>years. To assess the demand for the new product, last
>year the company conducted a marketing survey that
>cost $60,000.
>b. The company will have to purchase a new machine to
>produce the detergent. The machine has an up-front
>cost (t = 0) of $2 million. The machine will be
>depreciated on a straight-line basis over 4 years
>(that is, the company's depreciation expense will be
>$500,000 in each of the first four years (t = 1, 2, 3,
>and 4).) The company anticipates that the machine will
>last for four years, and that after four years, its
>salvage value will equal $0.
>c. If the company goes ahead with the proposed
>product, it will have an effect on the company's net
>working capital. At the outset, t = 0, inventory will
>decrease by $150,000 and accounts payable will
>increase by $80,000. At t = 4, the net working capital
>will be recovered after the project is completed.
>d. The detergent is expected to generate sales revenue
>of $2 million in each year. Each year the operating
>costs (not including depreciation) are expected to
>equal 50 percent of sales revenue.
>e. If the project is accepted, the company's interest
>expense each year will be $100,000, however dividends
>will be reduced by $50,000.
>f. The new detergent is expected to reduce the
>before-tax cash flows of the company's existing
>products by $250,000 a year (t = 1, 2, 3, and 4).
>g. The proposed project is riskier than the average
>project for Parker; the project's Cost of Capital is
>estimated to be 12 percent.
>h. The company's tax rate is 40 percent.
>
>What is the net present value of the proposed project?
>
>
>
>
>
>
> Exam 3 FI4300 Spring 2000 Your Name
>___________________________
>Open Book, Open Notes. Point Values are as shown.
>
>5. (7.5 points) Deliman Chicken has the the following
>balance sheet; Assets 4000 = Debt 1000 plus Equity
>3000. The firm is, zero-growth firm with 50 shares
>selling for $60 each. The firm pays no taxes and pays
>out all earnings as dividends. The firm's debt is
>selling at par and has a coupon rate of 8%. Last year
>the firm's EBIT was $425.
>
>a. Under the current capital structure, what is the
>WACC?
>
>
>
>b. What is the current market value of the firm?
>
>
>
>Now assume the firm issues $1000 of equity to
>repurcahse all of the outsstanding debt.
>
>c. What is the firm's new WACC?
>
>
>
>d. What is the firm's new Dividends per share?
>
>
>
>e. What is the firm's new cost of common equity(%)?
>
>
>
>1. (4.5 points) In 1998, the Lissa Company, a low
>growth firm, paid dividends of $2,000,000 on after-tax
>income (cash flow) of $26,000,000. Capital budget
>projects totaled $4,000,000 in 1998. 1998 was a
>normal year for earnings, dividends, and capital
>budgets. For the past 8 years, earning have grown at
>a constant rate of 5%. However, in 1999, earnings are
>expected to fall to $22,000,000 and the firm expects
>to have profitable investment opportunities will grow
>to 8,000,000. It is predicted that Lissa will not
>maintain the 1998 level of earnings growth, and the
>company will return to it previous 5% growth rate.
>Lissa's target debt ratio is 20%.
>
>a. Calculate Lissa's total dividends for 1998 if its
>dividend payment is set to force dividends to grow at
>the long-run growth rate in earnings.
>
>
>
>b. Calculate Lissa's total dividends for 1998 if it
>continues its 1997 dividend payout ratio.
>
>
>
>c. Calculate Lissa's total dividends for 1998 if it
>uses a pure residual dividend.
>
> 3. Now consider a COMPANY in a world that of perfect
>capital markets, with one change, CORPORATE TAXES DO
>EXIST. This world has no personal taxes, all
>investors have homogeneous expectations, no bankruptcy
>costs, and M&M's with corporate taxes theory of
>capital structure is true. Company Y is financed has
>the following market value balance sheet:
>
> Assets = $ 185 Liabilities = $90
> Equity = $95
>
>The firm had $30 in EBIT last year. The firm has 19
>shares outstanding. The firm expects the same
>return/profits for the foreseeable future. The firm a
>is a zero growth firm, that pays out all excess
>earnings as dividends. Any time the firm changes its
>capital structure, it changes only the debt/equity mix
>and does not change its total assets. Liabilities
>consist only of the firm's debt. The debt is
>riskless, perpetual, selling at par, and has a 7%
>pre-tax yield. If the firm were to change its capital
>structure, new debt would still have a 7% pre-tax
>yield. The firm's tax rate is 35%. Given this
>information, answer the following questions:
>
>a. (2 points) What is the value of the firm's tax
>shield due to the use of perpetual debt?
>
>
>
>b. (2 points) What is the current expected return on
>the firm's equity?
>
>
>
>c. (2 points) Now suppose that two things happen.
>Assume that the pre-tax yield on debt increases to 9%,
>and suppose the firm decides to issue an additional
>$20 in debt. What is the value of the tax shield
>associated with this new debt?

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Re: Another Sample Final exam -- Esther Wong, 18:19:48 01/19/14 Sun