CORPORATE FINANCE

Assume Lavender Corporation has a market value of $4 billion of equity and a market value of $19.8 billion of debt. What are the weights in equity and debt that are used for calculating the WACC?

0.168, 0.832 equity weight is 4/(4+ 19.8) = 0.168 Debt weight is 1 - 0.168 = 0.832

Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projections: Year 0 1 2 3 Sales (Revenues) 100,000 100,000 100,000 - Cost of Goods Sold (50% of Sales) 50,000 50,000 50,000 - Depreciation 30,000 30,000 30,000 = EBIT 20,000 20,000 20,000 - Taxes (35%) 7000 7000 7000 = unlevered net income 13,000 13,000 13,000 + Depreciation 30,000 30,000 30,000 + changes to working capital -5000 -5000 10,000 - capital expenditures -90,000 The NPV for Epiphany's Project is closest to: NPV = -90,000 + 38,000/1.12 + 38,000/1.12^2 + 53,000/1.12^3 = -90,000 + 33929 + 30293 +37724 = 11946

$11,946

Luther CorporationConsolidated Income StatementYear ended December 31 (in $millions) 2016 2015 Total sales 610.1 553.6 Cost of sales -500.2 -357.1 Gross profit 109.9 196.5 Selling, general, and administrative expenses -40.5 -38.8 Research and development -24.6 -21.8 Depreciation and amortization -3.6 -3.4 Operating income 41.2 132.5 Other income -- -- Earnings before interest and taxes (EBIT) 41.2 132.5 Interest income (expense) -25.1 -15.9 Pretax income 16.1 116.6 Taxes -5.5 -40.81 Net income 10.6 75.79 Price per share $16 $15 Sharing outstanding (millions) 10.2 8.0 Stock options outstanding (millions) 0.3 0.2 Stockholders' Equity 126.6 63.6 Total Liabilities and Stockholders' Equity 533.1 386.7 Refer to the income statement above. Luther's earnings before interest, taxes, depreciation, and amortization (EBITDA) for the year ending December 31, 2015 is closest to ________.

$135.9 million

Luther CorporationConsolidated Income StatementYear ended December 31 (in $millions) 2006 2005 Total sales 610.1 553.6 Cost of sales -500.2 -357.1 Gross profit 109.9 196.5 Selling, general, and administrative expenses -40.5 -38.8 Research and development -24.6 -21.8 Depreciation and amortization -3.6 -3.4 Operating income 41.2 132.5 Other income -- -- Earnings before interest and taxes (EBIT) 41.2 132.5 Interest income (expense) -25.1 -15.9 Pretax income 16.1 116.6 Taxes -5.5 -40.81 Net income 10.6 75.79 Price per share $16 $15 Sharing outstanding (millions) 10.2 8.0 Stock options outstanding (millions) 0.3 0.2 Stockholders' Equity 126.6 63.6 Total Liabilities and Stockholders' Equity 533.1 386.7 Refer to the income statement above. Luther's earnings before interest, taxes, depreciation, and amortization (EBITDA) for the year ending December 31, 2005 is closest to ________.

$135.9 million EBITDA = 132.5 + 3.4 = EBIT + Depreciation and amortization = 135.9

A perpetuity of $3,000 per year beginning today is said to offer a 14% interest rate. What is its present value?

$24,428.57

The book value of a firm's equity is $100 million and its market value of equity is $200 million. The face value of its debt is $70 million and its market value of debt is $60 million. What is the market value of assets of the firm?

$260 million MV of Assets = MV equity + MV liabilities = 200 + 60 = 260 million

A company has a share price of $22.15 and 118 million shares outstanding. Its market-to-book ratio for equity is 4.2, its book debt-equity ratio is 3.2, and it has cash of $800 million. How much would it cost to take over this business assuming you pay its enterprise value?

$3.805 billion

The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0. The cane manufacturing machine will result in sales of 2000 canes in year 1. Sales are estimated to grow by 10% per year each year through year three. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each.Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 35% tax bracket, and has a cost of capital of 10%.The required net working capital in the first year for the Sisyphean Corporation's project is closest to:

$3600

Suppose you invested $93 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $0.53 today and then you sold it for $94. What was your dividend yield and capital gains yield on the investment?

0.57%, 1.08% Dividend yield gain = D1/P0 = 0.53/93 = 0.57% Capital gain yield = (P1-P0)/P0 = 1/93 = 1.08%

Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projections: Year 0 1 2 3 Sales (Revenues) 100,000 100,000 100,000 - Cost of Goods Sold (50% of Sales) 50,000 50,000 50,000 - Depreciation 30,000 30,000 30,000 = EBIT 20,000 20,000 20,000 - Taxes (35%) 7000 7000 7000 = unlevered net income 13,000 13,000 13,000 + Depreciation 30,000 30,000 30,000 + changes to working capital -5000 -5000 10,000 - capital expenditures -90,000 The free cash flow for Year 1 of Epiphany's project is closest to:

$38,000

Temporary Housing Services Incorporated (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost $5 million to set up and will generate $20 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $12 million during this year and depreciation expense will be another $3 million. THSI will require no working capital for this investment. THSI's marginal tax rate is 35%. Assume that THSI's cost of capital for this project is 15%. The NPV of this temporary housing project is closest to:

$435,000

Balance Sheet Assets Liabilities Current Assets Current Liabilities Cash 49 Accounts payable 38 Accounts receivable 21 Notes payable/short-term debt 5 Inventories 18 Total current assets 88 Total current liabilities 43 Long-Term Assets Long-Term Liabilities Net property, plant, and equipment 122 Long-term debt 134 Total long-term assets 122 Total long-term liabilities 134 Total Liabilities 177 Stockholders' Equity 33 Total Assets 210 Total Liabilities and Stockholders' Equity 210 The above diagram shows a balance sheet for a certain company. If the company pays back all of its current liabilities today using cash, what will its net working capital be?

$45 million

The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0. The cane manufacturing machine will result in sales of 2000 canes in year 1. Sales are estimated to grow by 10% per year each year through year three. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each.Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 6% of its annual sales in accounts payable. The firm is in the 35% tax bracket, and has a cost of capital of 10%.The incremental unlevered net income in the first year for the Sisyphean Corporation's project is closest to:

$5200

Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projections: Year 0 1 2 3 Sales (Revenues) 100,000 100,000 100,000 - Cost of Goods Sold (50% of Sales) 50,000 50,000 50,000 - Depreciation 30,000 30,000 30,000 = EBIT 20,000 20,000 20,000 - Taxes (35%) 7000 7000 7000 = unlevered net income 13,000 13,000 13,000 + Depreciation 30,000 30,000 30,000 + changes to working capital -5000 -5000 10,000 - capital expenditures -90,000 The free cash flow for the last year of Epiphany's project is closest to:

$53,000

Temporary Housing Services Incorporated (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost $5 million to set up and will generate $20 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $12 million during this year and depreciation expense will be another $3 million. THSI will require no working capital for this investment. THSI's marginal tax rate is 35%. Ignoring the original investment of $5 million, what is THSI's free cash flow for the first and only year of operation?

$6.25 million

How much can be accumulated for retirement if $2,000 is deposited annually, beginning 1 year from today, and the account earns 9% interest compounded annually for 40 years?

$675,764.89

X and Y are both pharmaceutical companies. X presently has a potential "blockbuster" drug before the Food and Drug Administration (FDA) waiting for approval. If approved, X's blockbuster drug will produce $1 billion in net income . Y has eight separate, less important drugs before the FDA waiting for approval. If approved, each of B's drugs would produce $200 million in net income. The probability of the FDA approving a drug is 50%.What is the expected payoff for Y's eight drugs?

$800 million

The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0. The cane manufacturing machine will result in sales of 2000 canes in year 1. Sales are estimated to grow by 10% per year each year through year three. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each.Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 6% of its annual sales in accounts payable. The firm is in the 35% tax bracket, and has a cost of capital of 10%. The incremental EBIT in the first year for the Sisyphean Corporation's project is closest to:

$8000

Suppose you invested $100 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $2 today and then you sold it for $100. What was your dividend yield and capital gains yield on the investment?

-2%, 0%

Luther CorporationConsolidated Balance SheetDecember 31, 2006 and 2005 (in $ millions) Assets 2006 2005 Liabilities and Stockholders' Equity 2006 2005 Current Assets Current Liabilities Cash 65.7 58.5 Accounts payable 87.7 73.5 Accounts receivable 54.4 39.6 Notes payable / short-term debt 9.6 9.6 Inventories 46.1 42.9 Current maturities of long-term debt 39.9 36.9 Other current assets 5.1 3.0 Other current liabilities 6.0 12.0 Total current assets 171.3 144.0 Total current liabilities 143.2 132.0 Long-Term Assets Long-Term Liabilities Land 66.6 62.1 Long-term debt 237.7 168.9 Buildings 106.2 91.5 Capital lease obligations Equipment 119.3 99.6 Less accumulated depreciation (56.6) (52.5) Deferred taxes 22.8 22.2 Net property, plant, and equipment 235.5 200.7 Other long-term liabilities --- --- Goodwill 60.0 -- Total long-term liabilities 260.5 191.1 Other long-term assets 63.0 42.0 Total liabilities 403.7 323.1 Total long-term assets 358.5 242.7 Stockholders' Equity 126.1 63.6 Total Assets 529.8 386.7 Total liabilities and Stockholders' Equity 529.8 386.7 Refer to the balance sheet above. Luther's quick ratio for 2006 is closest to ________.

0.84 Quick ratio = (cash + Marketable securities + A/R)/ total current liabilities = (65.7 + 0+54.4)/142.3 = 0.84

Taggart Transcontinental is considering adding a trucking division to expand the coverage of its existing rail lines. The trucking division will cost $1,000,000 and is expected to generate free cash flows of $100,000 for each of the next five years. Taggart Transcontinental forecasts that future free cash flows after year 5 will grow at 2% per year, forever. Taggart Transcontinental's cost of capital is 10%.The continuation value, or the terminal value for the trucking division in year five is closest to:

1,275,000 Continuation value (year 5) = PMTx(1 + g)/(r - g) = 100,000 x (1.02)/(.10 - .02) = 1,275,000

Luther CorporationConsolidated Balance SheetDecember 31, 2006 and 2005 (in $ millions) Assets 2006 2005 Liabilities and Stockholders' Equity 2006 2005 Current Assets Current Liabilities Cash 53.6 58.5 Accounts payable 89.2 73.5 Accounts receivable 55.8 39.6 Notes payable / short-term debt 10.3 9.6 Inventories 45.5 42.9 Current maturities of long-term debt 38.6 36.9 Other current assets 5.4 3.0 Other current liabilities 6.0 12.0 Total current assets 160.3 144.0 Total current liabilities 144.1 132.0 Long-Term Assets Long-Term Liabilities Land 66.2 62.1 Long-term debt 228.7 168.9 Buildings 107.7 91.5 Capital lease obligations Equipment 120.6 99.6 Less accumulated depreciation (57.1) (52.5) Deferred taxes 22.8 22.2 Net property, plant, and equipment 237.4 200.7 Other long-term liabilities --- --- Goodwill 60.0 -- Total long-term liabilities 251.5 191.1 Other long-term assets 63.0 42.0 Total liabilities 395.6 323.1 Total long-term assets 360.4 242.7 Stockholders' Equity 125.1 63.6 Total Assets 520.7 386.7 Total liabilities and Stockholders' Equity 520.7 386.7 Refer to the balance sheet above. Luther's current ratio for 2006 is closest to ________.

1.11 Current ratio = current assets / current liabilities = 160.3/144.1 = 1.11

Treasury bill returns are 4%, 3%, 2%, and 5% over four years. The standard deviation of returns of Treasury bills is ________.

1.29% =sqrt{ ( (0.04-0.035)^2 + (0.03- 0.035)^2 + (0.02 - 0.035)^2 + (0.05-0.035)^2)/3} = 0.0129

Income Statement for CharmCorp: 2018 2017 Total sales 600 540 Cost of sales -532 -488 Gross Profit 68 52 Selling, general, and administrative expenses -36 -21 Research and development -4 -5 Depreciation and amortization -5 -5 Operating Income 23 21 Other income 1 5 Earnings before interest and taxes (EBIT) 24 26 Interest income (expense) -7 -7 Pretax income 14 19 Taxes -4 5 Net Income 10 14 Consider the above Income Statement for CharmCorp. All values are in millions of dollars. If CharmCorp. has 4 million shares outstanding, and its managers and employees have stock options for 2 million shares, what is its diluted EPS in 2018?

1.67

Luther CorporationConsolidated Balance SheetDecember 31, 2006 and 2005 (in $ millions) Assets 2006 2005 Liabilities andStockholders' Equity 2006 2005 Current Assets Current Liabilities Cash 57.6 58.5 Accounts payable 86.0 73.5 Accounts receivable 55.2 39.6 Notes payable / short-term debt 10.5 9.6 Inventories 45.6 42.9 Current maturities of long-term debt 39.6 36.9 Other current assets 5.6 3.0 Other current liabilities 6.0 12.0 Total current assets 164.0 144.0 Total current liabilities 142.1 132.0 Long-Term Assets Long-Term Liabilities Land 66.4 62.1 Long-term debt 231.3 168.9 Buildings108.3 91.5 Capital lease obligations Equipment 114.3 99.6 Less accumulated depreciation (54.4) (52.5) Deferred taxes 22.8 22.2 Net property, plant, and equipment 234.6 200.7 Other long-term liabilities --- --- Goodwill 60.0 -- Total long-term liabilities 254.1 191.1 Other long-term assets 63.0 42.0 Total liabilities 396.2 323.1 Total long-term assets 357.6 242.7 Stockholders' Equity 125.4 63.6 Total Assets 521.6 386.7 Total liabilities and Stockholders' Equity 521.6 386.7 Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share,

1.72 The market value of equity is 16x 10.2 = 163.2 MillionDebt value = short-term debt + current portion of long-term debt + long-term debt = 10.5 + 39.6 + 231.3 =$281.4 MillionD/E ratio = 281.4/163.2 app = 1.72

The weighted-average cost of capital, after tax, for a firm with a 65/35 debt/equity split, 8% cost of debt, 15% cost of equity, and a 35% tax rate would be:

8.63%.

Luther CorporationConsolidated Income StatementYear ended December 31 (in $millions) 2006 2005 Total sales 610.1 569.6 Cost of sales -500.2 -389.2 Gross profit 109.9 180.4 Selling, general, and administrative expenses -40.5 -39.6 Research and development -24.6 -21.6 Depreciation and amortization -3.6 -3.3 Operating income 41.2 115.9 Other income -- -- Earnings before interest and taxes (EBIT) 41.2 115.9 Interest income (expense) -25.1 -14.2 Pretax income 16.1 101.7 Taxes -5.5 -35.595 Net income 10.6 66.105 Price per share $16 $15 Sharing outstanding (millions) 10.2 8.0 Stock options outstanding (millions) 0.3 0.2 Stockholders' Equity 126.6 63.6 Total Liabilities and Stockholders' Equity 533.1 386.7 Refer to the income statement above. Luther's net profit margin for the year ending December 31, 2005 is closest to ________.

11.61% Net profit margin = Net income / total sales = 66.105/569.6 = 0.1161 or 11.61%

Below is the key information concerning TM Industry: Yield-to-Maturity on long-term government bonds 3.4% Yield-to-Maturity on TM industry's long-term bonds 8.1% Market risk premium 6.0% Estimated company equity beta 1.4 Stock price per share $30.00 Number of share outstanding 60 million TM industry's debt value $1.2 billion tax rate 25% Its cost of equity capital is:

11.80%

Suppose you invested $59 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of 0.38 today and then you sold it for $66. What was your return on the investment?

12.51%

Luther CorporationConsolidated Income StatementYear ended December 31 (in $millions) 2006 2005 Total sales 610.1 579.1 Cost of sales -500.2 -378.8 Gross profit 109.9 200.3 Selling, general, and administrative expenses -40.5 -39.6 Research and development -24.6 -20.9 Depreciation and amortization -3.6 -3.7 Operating income 41.2 136.1 Other income -- -- Earnings before interest and taxes (EBIT) 41.2 136.1 Interest income (expense) -25.1 -15.2 Pretax income 16.1 120.9 Taxes -5.5 -42.315 Net income 10.6 78.585 Price per share $16 $15 Sharing outstanding (millions) 10.2 8.0 Stock options outstanding (millions) 0.3 0.2 Stockholders' Equity 126.6 63.6 Total Liabilities and Stockholders' Equity 533.1 386.7 Refer to the income statement above. Luther's return on equity (ROE) for the year ending December 31, 2005 is closest to ________.

123.56% According to your textbook : ROE = Net Income / total equity = 78.585/63.3 = 1.2356 or 123.56% Note: In real life and in the CFA exam, ROE = net income/average equity so it would be 78.585/((126.6+63.3)/2) = 78.585/94.95 = 0.8276 or 82.63% which actually makes much more sense to me

What is the WACC for a firm with 50% debt and 50% equity that pays 12% on its debt, 20% on its equity, and has a 40% tax rate?

13.6%

Assume the risk-free interest rate is 7% and the market return is 12%. If the beta of a stock is 1.4, according to CAPM, what is the required rate of return on the stock?

14%

Ford Motor Company had realized returns of 10%, 20%, -10%, and -10% over four quarters. What is the quarterly standard deviation of returns for Ford?

15.00%

SIROM Scientific Solutions has $10 million of outstanding equity and $5 million of bank debt. The bank debt costs 5% per year. The estimated equity beta is 2. If the market risk premium is 9% and the risk-free rate is 3%, compute the weighted average cost of capital if the firm's tax rate is 30%.

15.17% The equity weight is : 10/(10 + 5) = 2/3 The debt weight is: 5/(10+5) = 1/3 The cost of equity: 3% + 2 x 9% =21% The WACC is: 5%x 1/3 x (1-30%) + 2/3 x 21% = 15.17%

Your estimate of the market risk premium is 7%. The risk-free rate of return is 4% and General Motors has a beta of 1.6. What is General Motors' cost of equity capital?

15.2% The cost of equity capital is the expected return by equity investors.Using CAPM:4% + 1.6 x 7% = 15.2%

Your estimate of the market risk premium is 9%. The risk-free rate of return is 3.8% and General Motors has a beta of 1.4. According to the Capital Asset Pricing Model (CAPM), what is its expected return?

16.4% E(r) = Rf + Beta x (Market Risk Premium) = 0.038 + 1.4x 0.09 =0.164

Luther CorporationConsolidated Income StatementYear ended December 31 (in $millions) 2006 2005 Total sales 610.1 573.3 Cost of sales -500.2 -389.6 Gross profit 109.9 183.7 Selling, general, and administrative expenses -40.5 -39.8 Research and development -24.6 -22.7 Depreciation and amortization -3.6 -3.2 Operating income 41.2 118 Other income -- -- Earnings before interest and taxes (EBIT) 41.2 118 Interest income (expense) -25.1 -14.3 Pretax income 16.1 103.7 Taxes -5.5 -36.295 Net income 10.6 67.405 Price per share $16 $15 Sharing outstanding (millions) 10.2 8.0 Stock options outstanding (millions) 0.3 0.2 Stockholders' Equity 126.6 63.6 Total Liabilities and Stockholders' Equity 533.1 386.7 Refer to the income statement above. Luther's return on assets (ROA) for the year ending December 31, 2005 is closest to ________.

17.43% Total Asset = Total Liabilities + Equity ROA =Net income / total assets = 67.405 / 386.7 = 67.405/386.7= 17.43%

Taggart Transcontinental is considering adding a trucking division to expand the coverage of its existing rail lines. The trucking division will cost $1,000,000 and is expected to generate free cash flows of $100,000 for each of the next five years. Taggart Transcontinental forecasts that future free cash flows after year 5 will grow at 2% per year, forever. Taggart Transcontinental's cost of capital is 10%.The NPV for the trucking division is closest to:

170,750 Continuation value (year 5) = PMT x (1 + g) / (r - g) = 100,000(1.02)/(.10 - .02) = 1,275,000PMT = 100,000, FV = 1,275,000, N = 5, I = 10, Compute PV = 1,170,753.36 NPV = 1,170,753.36- 1,000,000 = 170,753.36

Consider the following probability distribution of returns for Alpha Corporation: Current Stock Price ($) Stock Price in One Year ($) Return R Probability PR $35 40% 25% $25 $25 0% 50% $20 -20% 25 The standard deviation of the return on Alpha Corporation is closest to:

21.8%

Consider the following probability distribution of returns for Alpha Corporation: Current Stock Price ($) Stock Price in One Year ($) Return R Probability PR $25 $35 40% 25% $25 0% 50% $20 -20% 25% The standard deviation of the return on Alpha Corporation is closest to:

21.8% Explanation: Standard deviation (STDV) = sqrt (VAR) = sqrt(0.0475) = 0.218

Consider the following probability distribution of returns for Alpha Corporation: Current Stock Price ($) Stock Price in One Year ($) Return R Probability PR $25 $35 40% 25% $25 0% 50% $20 -20% 25% The variance of the return on Alpha Corporation is closest to:

4.75% VAR= ((0.4 -0.05)^2 x 0.25 + (0 - 0.05)^2 x 50% + ( -0.2 -0.05)^2 x 25%) = 0.0475

Consider the following probability distribution of returns for Alpha Corporation: Current Stock Price ($) Stock Price in One Year ($) Return R Probability PR $35 40% 25% $25 $25 0% 50% $20 -20% 25% The expected return for Alpha Corporation is closest to:

5.00%

Question (1) Consider the following probability distribution of returns for Alpha Corporation: Current Stock Price ($) Stock Price in One Year ($) Return R Probability PR $25 $35 40% 25% $25 0% 50% $20 -20% 25% The expected return for Alpha Corporation is closest to:

5.00% Explanation: Expected return (ER) = R1*P1 + R2*P2+R3*P3 = = 0.4x 25% + 0 - 0.2x 25% =10%-0%-5% = 5%

Outstanding debt of Home Depot trades with a yield to maturity of 8%. The tax rate of Home Depot is 30%. What is the effective cost of debt of Home Depot?

5.60%

A firm has a pre-tax cost of debt of 9.0%. If the firm has a marginal tax rate of 35%, what is its effective cost of debt?

5.9%

If a firm has twice as much debt as equity in its capital structure, then the firm has:

66.7% debt

Below is the key information concerning TM Industry: Yield-to-Maturity on long-term government bonds 3.4% Yield-to-Maturity on TM industry's long-term bonds 8.1% Market risk premium 6.0% Estimated company equity beta 1.4 Stock price per share $30.00 Number of share outstanding 60 million TM industry's debt value $1.2 billion tax rate 25% Its WACC is

9.51%

The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0. The cane manufacturing machine will result in sales of 2000 canes in year 1. Sales are estimated to grow by 10% per year each year through year three. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each.Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 35% tax bracket, and has a cost of capital of 10%.

An increase of $360

Question (2) Holden Bicycles has 1,000 shares outstanding each with a par value of $0.10. If they are sold to shareholders at $10 each, what would the capital surplus be?

Capital Surplus: ($10.00 - $0.10) * 1,000 = $9,900.

Company A has current assets of $42 billion and current liabilities of $41 billion. Company B has current assets of $2.7 billion and current liabilities of $1.8 billion. Which of the following statements is correct, based on this information?

Company A is less likely than Company B to have sufficient working capital to meet its short-term needs.

Firm A: Firm B: Assets Assets Current assets 4 Current assets 7 Fixed assets 10 Fixed assets 7 Total assets 14 Total assets 14 Firm A: Firm B: Total sales 12 Total sales 12 Cost of sales -5 Cost of sales -7 Gross Profit 7 Gross Profit 5 Above are portions of the balance sheet and income statement for two companies in 2008. Based upon this information, which of the following statements is most likely to be true?

Fixed asset turnover ratios indicate that firm A generating fewer sales for the assets it employs than firm B.

The standard deviation of returns of ________. I. small stocks is higher than that of large stocks II. corporate bonds is higher than that of Treasury bills III. large stocks is lower than that of corporate bonds Which statement(s) is/are true?

I and II

Which of the following statements concerning risk are correct? I. Systematic risk is measured by beta. II. Systematic risk is the only part of total risk that affects asset prices and returns. III. The risk premium increases as unsystematic increases. IV Diversifiable risk is the market risk you cannot avoid

I and II only

AOS Industries Statement of Cash Flows for 2008 Operating activities Net Income 3.2 Depreciation and amortization 1.4 Cash effect of changes in Accounts receivable -2.1 Accounts payable 1.1 Inventory -0.8 Cash from operating activities 2.8 Investment activities Capital expenditures -2.2 Acquisitions and other investing activity -0.4 Cash from investing activities -2.6 Financing activities Dividends paid -1.5 Sale or purchase of stock 2.1 Increase in short-term borrowing 1.4 Increase in long-term borrowing 3.2 Cash from financing activities 5.2 Change in Cash and Cash Equivalents 5.4

It charged more on its accounts payable back than it paid back.

Balance Sheet Assets Liabilities Current Assets Current Liabilities Cash 50 Accounts payable 42 Accounts receivable 22 Notes payable/short-term debt 7 Inventories 17 Total current assets 89 Total current liabilities 49 Long-Term Assets Long-Term Liabilities Net property, plant, and equipment 121 Long-term debt 128 Total long-term assets 121 Total long-term liabilities 128 Total Liabilities 177 Stockholders' Equity 33 Total Assets 210 Total Liabilities and Stockholders' Equity 210 Income Statement Total sales 312 Cost of sales -210 Gross Profit 102 Selling, general, and administrative expenses -34 Research and development -10 Depreciation and amortization -5 Operating Income 53 Other income - Earnings before interest and taxes (EBIT) 53 Interest income (expense) -20 Pretax income 33 Taxes -8 Net Income 25 The balance sheet and income statement of a particular firm are shown above. What does the account receivable days ratio tell you about this company?

It takes on average about 4 weeks to collect payment from its customers.

) The Lory Bookstore used internal financing as a source of long-term financing for 80% of its total needs in 2008. The company borrowed an additional 27% of its total needs in the long-term debt markets in 2008. What were Lory's net new stock issues in that year?

Net new issues = - 7%, as more stock was repurchased than issued. (100% - (80 + 27)) = (100 - 107) = -7%.

B- Rework the shareholder's equity as it appears on the books if the company issues 40,000 new shares of common at $70 per share.

Now, the number of shares = 175,000 + 40,000 = 215,000 So the value of common shares = 215000*2 = $430,000 Total equity = 350,000 + 7,800,000 + (40,000*70) = 10,950,000 Then, the capital in excess of par = 10,950,000 - 430,000 - 7,800,000 = 2,720,000

Information on shareholder's equity as currently shown on the books of the Eaton Corporation is given as: A-From this information, calculate Eaton's book value per share.

Number of shares = $350,000 /$2 = 175,000, Book value of the firm = book value of equity = common shares+ capital in excess + retained earnings = $350,000 + $7,800,000 = $8,150,000 Book Value per Share = $8,150,000/175,000 = $46.57

Rockwell Corporation had net income of $150,000 for the year ending 2008. The company decided to payout 40% of earnings per share as a dividend. Rockwell has 120,000 shares issued and outstanding. What are the retained earnings for 2008?

RE = NI (1 - payout ratio) = $150,000 (1 - .4) = $90,000.

Which of the following statements is FALSE?

The risk premium of a security is equal to the market risk premium divided by the amount of market risk present in the security's returns measured by its beta with the market.

Which of the following is NOT an operating expense?

interest expense

Historically, Treasury bills have delivered a ________ return on average compared to stocks but have experienced ________ fluctuations in values.

lower, lower

Which of the following investments offered the highest overall return over the past eighty years?

small stocks

The ________ of a firm's debt can be used as the firm's current cost of debt.

yield to maturity