ADV FIN FINAL

50

A firm has an average investment of $2,000 during the year. During the same time, the firm generates after-tax earnings of $250. Calculate the economic value added (EVA) for the firm. (The cost of capital is 10%)

NPV Most likely: 40 NPV Pessimistic: -50 NPV Optimistic: 100

A project has an initial investment of 100. You have come up with the following estimates of the project's cash flows (there are no taxes) Pessimistic. Most Likely. Optimistic. Revenues. 15. 24. 30 Costs. 12 10 8 Suppose the cash flows are perpetuities and the cost of capital is 10 percent. Conduct a sensitivity analysis of the project's NPV to variations in revenues.

52.94

Galaxy Air, previously a no-growth firm, has four million shares outstanding. Until now, it consistently earned $20 million per year on its assets. (It has no debt and pays out all earnings as dividends. Its cost of capital is 10 percent.) Due to its newly appointed CEO, Galaxy Air is now able to squeeze out 1.5 percent annual growth by plowing back 10 percent of earnings. Calculate its stock price per share.

16

Health and Wealth Company is financed entirely by common stock that is priced to offer a 12 percent expected return. If the company repurchases 50 percent of the common stock and substitutes an equal value of debt yielding 8 percent, what is the expected return on the common stock after refinancing?

Crane A NPV: -838,842.98, EAC 483,333.33. Crane B NPV: -887,039.82, EAC 356,691.84. Choose Crane B

OM Construction Company must choose between two types of cranes that have identical capacity and do exactly the same job. Crane A costs $700,000, will last for two years, and will require $80,000 in maintenance each year. Crane B costs $800,000, will last for three years, and will require $35,000 in maintenance each year. Maintenance costs for cranes A and B occur at the end of each year. The appropriate discount rate is 10% per year. Which machine should OM Construction purchase?

$1,848,000

Suppose that your firm's current unlevered value, V*, is $2,000,000, and its marginal corporate tax rate is 21 percent. Also, you model the firm's PV of financial distress as a function of its debt level according to the relation: PV of financial distress = 2,000,000 x (D/V*)^2. What is the firm's levered value if it issues $800,000 of perpetual debt to buy back stock?

13.97

Suppose the beta of Microsoft is 1.13, the risk-free rate is 2 percent, and the market risk premium is 9 percent. Calculate the expected return for Microsoft

104

The Following data on a merger are given: Firm A. Firm B. Firm AB Price Per Share. $100. $10. Total earnings. $500. $300 Shares outstanding 100. 40 Total value. $10,000. $400. $11,000 Firm A has proposed to acquire Firm B at a price of $15 per share for Firm B's stock. What will be the postmerger price per share for Firm A's stock if Firm A pays in cash?

.6579

What is the profitability index of an investment with cash flows in years 0 thru 3 of -300, 200, 200, and 200, respectively, and a discount rate of 10%?

1.19

You put 40% of your money in a stock portfolio that has an expected return of 20% and a standard deviation of 20%. You put 60% of your money in a risky bond portfolio that has an expected return of 12% and a standard deviation of 6%. The stock and bond portfolio have a correlation 0.5. The risk-free rate is 3%. What is the sharpe ratio of your portfolio?

a = -17m, b=42.88, c=42.19

Aaron Rocks Inc. is currently traded at $45/share with 8 million shares outstanding, and it has $200 million long-term debt. The probability of default is 10% at current debt levels. In the event of default, Aaron Rosenblum, the CEO of Aaron Rocks, estimates that the firm would incur direct and indirect costs having a present value of $50 million. Now the firm is considering the sale of $100 million in common equity at a price of $40 per share. The proceeds of this stock issue would be used entirely to reduce the firm's long-term debt. Aaron estimates that the probability of default would fall to 2% following the new stock issue. The corporate tax rate is 21%. (a) What would be the net impact of the stock issue on the total firm value? (b) What will be Aaron Rocks' stock price after the equity issue is announced? (c) What will be the stock price after the completion of the equity issue?

14.9

Alyeska Salmon Inc., a large salmon canning firm operating out of Valdez, Alaska, has a new automated production line project it is considering. The project has a cost of $240,000 and is expected to provide after-tax annual cash flows of $110,000 for three years. The firm's management is uncomfortable with the IRR reinvestment assumption and prefers the modified IRR approach. You have calculated a cost of capital for the firm of 10 percent. What is the project's MIRR?

115 million

Assume the marginal corporate tax rate is 30%. The firm has no debt in its capital structure. It is valued at $100 million. What would be the value of the firm if it issued $50 million in perpetual debt and repurchased the same amount of equity (assume no financial distress costs) still?