corporate finance
Given are the following data for Outsource Company: PV (of FCFs for years 1-3) = $35 million; PV (horizon value) = $65 million. Calculate the value of the firm.
$100 million
Assume the marginal corporate tax rate is 21 percent. 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?
$110.5 million
`Consider the following data: FCF1 = $20 million; FCF2 = $20 million; FCF3 = $20 million. Assume that free cash flow grows at a rate of 5 percent for year 4 and beyond. If the weighted average cost of capital is 12 percent, calculate the value of the firm.
$261.57 million
Wealth and Health Company is financed entirely by common stock that is priced to offer a 15 percent expected return. The common stock price is $40/share. The earnings per share (EPS) is expected to be $6. If the company repurchases 25 percent of the common stock and substitutes an equal value of debt yielding 6 percent, what is the expected value of earnings per share after refinancing? (Ignore taxes.)
$7.20
Consider the following data for Kriya Company: Year: 1 2 3 4 Free Cash Flow (FCF) (in millions): 4 5 6 6.24 A constant growth rate of 4 percent is sustained forever after year 3. The weighted average cost of capital is 10 percent. Calculate the present value of the horizon value. (Assume that the horizon value includes the 6.24M FCF in year 4.)
$78.1 million
A firm has debt beta of 0.2 and an asset beta of 1.9. If the debt-equity ratio is 75 percent, what is the levered equity beta?
3.18
_________ tax rate is the amount of tax payable on the next dollar earned.
Marginal
Learn and Earn Company is financed entirely by common stock that is priced to offer a 20 percent expected rate of return. The stock price is $60 and the earnings per share are $12. The company wishes to repurchase 50 percent of the stock and substitutes an equal value of debt yielding 8 percent. Suppose that before refinancing, an investor owned 100 shares of Learn and Earn common stock. What should he do if he wishes to ensure that risk and expected return on his investment are unaffected by this refinancing?
Sell 50 shares and purchase $3,000 of 8 percent debt (bonds).
What signal is sent to the market when a firm decides to issue new stock to raise capital?
Stock price is too high.
To calculate the total value of the firm (V), one should rely on the
market values of debt and equity.
Samuel Corp. provides the following information: EBIT = $286.50 Tax (TC ) = 35% Debt = $810 RU = 15% What is the value of the firm?
$1,241.53
Lollipop Corp. provides the following information: EBIT = $286.50 Tax (TC )= 35% Debt= $810 Cost of debt capital = 10% RU = 15% What is the value of the firm?
$1,525.03
Given are the following data for year 1: Profits after taxes = $20 million; Depreciation = $6 million; Interest expense = $4 million; Investment in fixed assets = $12 million; Investment in working capital = $4 million. The corporate tax rate is 25 percent. Calculate the free cash flow (FCF) for year 1.
$13 million
Given are the following data for Outsource Company: PV (of FCFs for years 1-3) = $35 million; PV (horizon value) = $65 million. Suppose that the market value of the debt = $30 million and the number of shares outstanding = 5 million. Calculate the share price.
$14
Consider the following data: FCF1 = $7 million; FCF2 = $45 million; FCF3 = $55 million. Assume that free cash flow grows at a rate of 4 percent for year 4 and beyond. If the weighted average cost of capital is 10 percent, calculate the value of the firm.
$801.12 million
Samuel Corp. provides the following information: EBIT = $386.50 Tax (TC ) = 35% Debt = $810 RU = 15% What is the value of Samuel's equity?
$864.83
Given are the following data for year 1: Profits after taxes = $14 million; Depreciation = $6 million; Interest expense = $6 million; Investment in fixed assets = $12 million; Investment in working capital = $3 million. The corporate tax rate is 25 percent. Calculate the free cash flow (FCF) for year 1.`
$9.5 million
Consider the following data for Kriya Company: Year: 1 2 3 4 Free Cash Flow (FCF) (in millions): 4 5 6 6.24 A constant growth rate of 4 percent is sustained forever after year 3. The weighted average cost of capital is 10 percent. Calculate the value of the firm.
$90.4 million
A firm's equity beta is 1.2 and its debt is risk free. Given a 0.7 debt to equity ratio, what is the firm's asset beta? (Assume no taxes.)
0.7
Given are the following data for Vinyard Corporation: Vinyard Corporation (Book values, $Millions) Asset Value $2,500 $1,000 Debt $1,500 Equity $2,500 $2,500 Vinyard Corporation (Market values, $Millions) Asset Value $4,000 $1,000 Debt $3,000 Equity $4,000 $4,000 Vinyard Corporation (Liquidating values, $Millions) Asset Value $1,500 $750 Debt $750 Equity $1,500 $1,500 Calculate the proportions of debt (D/V) and equity (E/V) that you would use for estimating Vinyard's weighted average cost of capital (WACC).
25 percent debt and 75 percent equity
Benson Company has 150,000 outstanding shares @ $20/share. The company has declared a two-for-one stock split. How many shares will be outstanding and at what value after the split?
300,000 shares @ $10/share
Given are the following data for Golf Corporation: Market price/share = $12; Book value/share = $10; Number of shares outstanding = 100 million; Market price/bond = $800; Face value/bond = $1,000; Number of bonds outstanding = 1 million. Calculate the proportions of debt (D/V) and equity (E/V) for Golf Corporation that you should use for estimating its weighted average cost of capital (WACC).
40 percent debt and 60 percent equity
In the following example, the proposed debt issue would raise $4,000,000; the interest rate would be 10%. In addition, the EBIT would be $2,000,000. What would be the increase in the Return on Equity (ROE) from to current to the proposed structure? Current Proposed Assets $ 10,000,000 $ 10,000,000 Debt $ 0 $ 4,000,000 Equity $ 10,000,000 $ 6,000,000 Debt-Equity Ratio 0 0.67 Share Price $ 25 $ 25 Shares Outstanding 400,000 240,000 Interest Rate N/A 10 %
6.67%
Given are the following data: Cost of debt = rD = 6.0%; Cost of equity = rE = 12.1%; Marginal tax rate = 21%; and the firm has 50 percent debt and 50 percent equity. Calculate the after-tax weighted average cost of capital (WACC).
8.42 percent
Company X has 100 shares outstanding. It earns $1,000 per year and announces that it will use all $1,000 to repurchase its shares in the open market instead of paying dividends. Calculate the number of shares outstanding at the end of year 1, after the first share repurchase, if the required rate of return is 10 percent.
90.91
Dividend Reinvestment Plans have the option of:
Automatically reinvesting some or all of their cash dividends in shares of stock.
One calculates the after-tax weighted average cost of capital (WACC) as
WACC = rD (1 − TC)(D/V) + rE (E/V); (where V = D + E).
Which of the following lists events in chronological order from earliest to latest?
Declaration date, ex-dividend date, record date
Consider the procedure whereby the firm states a series of prices at which it is prepared to repurchase stock. Shareholders then submit offers indicating how many shares they wish to sell and at which price. The firm then calculates the lowest price at which it is able to buy the desired number of shares. This procedure is known as a(n)
Dutch auction.
The effect of financial leverage depends on the company's _____________.
Earnings before interest and taxes.
When financial distress is a possibility, the value of a levered firm is a function of: I) value of the firm if all-equity-financed; II) present value of tax shield; III) present value of costs of financial distress; IV) present value of omitted dividend payments
I + II − III
If a corporation cannot use its interest payments as a tax shield for a particular year because it has suffered a loss, it is still possible to use the tax shield because: I) the carry-back provision allows corporations to carry back the loss and receive a tax refund up to the amount of taxes paid in the previous two years; II) the carry-forward provision allows corporations to carry forward the loss and use it to shield income in subsequent years
I and II
When using the weighted average cost of capital (WACC) to discount cash flows from a project, we assume the following: I) The project's risks are the same as those of the firm's other assets and remain so for the life of the project. II) The project supports the same fraction of debt to value as the firm's overall capital structure, and that fraction remains constant for the life of the project. III) The cash flows from the project occur in perpetuity.
I and II only
Dividend policy may affect firm value because I) there is an unsatisfied clientele that prefer dividends to capital gains; II) there are sufficient loopholes in the tax system that wealthy shareholders can avoid taxes on dividends; III) well-managed companies prefer to signal their worth by paying high dividends
I and III only
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
I and III only
Although the use of debt provides tax benefits to the firm, debt also puts pressure on the firm to: I) meet interest and principal payments, which if not met can put the company into financial distress; II) make dividend payments, which if not met can put the company into financial distress; III) meet both interest and dividend payments, which when met increase the firm cash flow; IV) meet increased tax payments, thereby increasing firm value
I only
Firms can repurchase shares in the following ways: I) open market repurchase; II) tender offer; III) Dutch auction; IV) direct negotiation with a major shareholder
I, II, III, and IV
Lowering the debt-equity ratio of the firm can change the firm's I) financial leverage; II) cost of equity; III) cost of debt; IV) effective tax rate
I, II, III, and IV
Capital structure is irrelevant if I) capital markets are efficient; II) each investor can borrow/lend on the same terms as the firm; III) there are no tax benefits to debt
I, II, and III
Which of the following are true? I) Firms have long-run target dividend payout ratios. II) Dividend changes follow shifts in long-term, sustainable earnings. III) Managers are reluctant to make dividend changes that might have to be reversed.
I, II, and III
Free cash flow (FCF) and net income (NI) differ in the following ways: I) Net income accrues to shareholders, calculated after interest expense; free cash flow is calculated assuming all flows go to equity holders. II) Net income is calculated after various noncash expenses, including depreciation; FCF adds back depreciation. III) Capital expenditures and investments in working capital do not appear in net income calculations; they do reduce free cash flows. IV) Net income is never negative; free cash flows can be negative for rapidly growing firms, even if the firm is profitable, because investments can exceed cash flows from operations.
I, II, and III only
The MM theory with taxes implies that firms should issue maximum debt. In practice, this is not true because: I) debt is more risky than equity; II) bankruptcy and its attendant costs are a disadvantage to debt; III) the payment of personal taxes may offset the tax benefit of debt
II and III only
The capital structure of the firm can be defined as I) the firm's mix of different debt securities; II) the firm's mix of different securities used to finance assets; III) the market imperfection that the firm's managers can exploit
II only
What are some of the possible consequences of financial distress? I) Bondholders, who face the prospect of getting only part of their money back, will likely want the company to take additional risks. II) Equity investors would like the company to cut its dividend payments to conserve cash. III) Equity investors would like the firm to shift toward riskier lines of business.
III only
While calculating the weighted average cost of capital, which values should one use for D, E, and V?
Market values
A stock split is characterized by all of the following, except:
Paid in cash to outstanding shareholders.
The equation for M & M Proposition I, without taxes, is best shown as:
VL = VU
The equation for M & M Proposition I, with taxes, is best shown as:
VL = VU + Tc × D
Project M requires an initial investment of $25 million. The project is expected to generate $2.25 million in after-tax cash flow each year forever. If the weighted average cost of capital (WACC) is 9 percent, calculate the NPV of the project.
Zero
When one uses the after-tax weighted average cost of capital (WACC) to value a levered firm, the interest tax shield is
automatically considered because the after-tax cost of debt is included within the WACC formula.
The effect of financial leverage on the performance of the firm depends on the
firm's level of operating income.
Generally, investors interpret the announcement of an increase in dividends as
good news, and the stock price increases.
Generally, investors view the announcement of an open-market repurchase program as
good news, and the stock price increases.
In order to calculate the tax shields provided by debt, the tax rate used is the
marginal corporate tax rate.
If MM's Proposition I holds, minimizing the weighted average cost of capital (WACC) is the same as maximizing the
market value of the firm.
If dividends are taxed more heavily than capital gains, then investors
should be willing to pay more for stocks with low dividend yields.
