Corporate Finance Practice MC

You are given the following data for year 1: Revenues = 100: Fixed costs = 40 Depreciation is 10); Total variable costs = 50; Tax rate = 21 percent. Calculate the after tax cash flow for the project in year 1

$10

Acacia Co. expects to pay a dividend of $3.00 per share one year from now out of earnings of $7.50 per share. If the required rate of return on the stock is 15 percent and its dividends are growing at a constant rate of 12 percent per year, calculate the present value of growth opportunities for the stock (PVGO).

$30

A project requires an initial investment in equipment of $90,000 and then requires an initial investment in working capital of $10,000 (at t = 0). You expect the project to produce sales revenue of $120,000 per year for three years. You estimate manufacturing costs at 60 percent of revenues. (Assume all revenues and costs occur at year-end [i.e., t = 1, t = 2, and t = 3]). The equipment depreciates using straight-line depreciation over three years. At the end of the project, the firm can sell the equipment for $10,000 and also recover the investment in net working capital. The corporate tax rate is 21 percent and the cost of capital is 15 percent. What is the NPV of the project if the revenues were higher by 10 percent and the costs were 65 percent of the revenues?

$9,487

Petroleum Inc. (PI) controls offshore oil leases. It is considering the construction of a deep- sea oil rig at a cost of $500 million. The price of oil is $100/bbl. and extraction costs are $50/bbl. PI expects prices and costs to remain constant. The rig will produce an estimated 1,200,000 bbl. per year forever. The risk-free rate is 10 percent per year, which is also the cost of capital. (Ignore taxes). Calculate the NPV to invest today.

100,000,000

If depreciation is $600,000 and the marginal tax rate is 21 percent, then the tax shield due to depreciation is:

126,000

Given the following data for Project M, calculate the NPV of the project: cash flow nominal terms: Co = -100 01 = 75 C2 = 60 Real discount rate = 5% Nominal discount rate = 10%

17.77

Health and Wealth Company is financed entirely by common stock that is priced to offer a 15 percent expected return. If the company repurchases 25 percent of the common stock and substitutes an equal value of debt yielding 6 percent, what is the expected return on the common stock after refinancing? (Ignore taxes.)

18%

Assume the following data: Current assets = 500; Current liabilities = 250; Inventory = 200; Accounts receivable = 200. Calculate the cash ratio. (Assume that the firm has no marketable securities.)

2

The beta of an all-equity firm is 1.2. Suppose the firm changes its capital structure to 50 percent debt and 50 percent equity using 8 percent debt financing. What is the equity beta of the levered firm? The beta of debt is 0.2.

2.2

Assume the following data: Sales = 3,200; Cost of goods sold = 1,600; Receivables = 200. Calculate the accounts receivable days.

22.8

A convertible bond is selling for $985. It has 15 years to maturity, $1,000 face value, pays 8 percent coupon interest payments annually. Similar straight bonds (nonconvertible are priced to yield 8.75 percent and trade at 95.848% of par. The conversion ratio is 20.

26.52

Tucker Co. decides to undertake a rights issue at €5.25 a share of one new share for every five shares held. Before the issue, there were 10 million shares outstanding and the shar price was €6.25. What is the value of a right?

6.08

Assume the following data: EBIT = 100; Depreciation = 40; Interest = 20; Dividends = 10. Calculate the cash coverage ratio.

7

Company A now acquires B by offering one (new) share of A for every two shares of B (that is, after the merger, there are 2,500 shares of A outstanding). If investors are aware that there are no economic gains from the merger, what is the price-earnings ratio of A's stock after the merger?

8.3

The market value of PG Corporation's common stock is $40 million and the market value of its risk-free debt is $60 million. The beta of the company's common stock is 0.8 and the expected market risk premium is 10 percent. If the Treasury bill rate is 6 percent, what is the firm's cost of capital? (Assume no taxes.)

9.2%

In the Berkshire Partners: Bidding for Carter's Case, there is a discussion about "staple on" financing provided by Goldman Sachs. What is this?

A debt-financing package offered by the seller's investment bank available to prospective buyers

One of the complexities faced by the protagonist in the Heinz case is the fact that Heinz financed itself only with commercial paper thus limiting his ability to find a representative cost of long-term debt. (1 point)

False

Historically, merger activity increases with which market condition?

High stock market prices

If a firm uses the same company cost of capital for evaluating all projects, which situation(s) will likely occur? I) The firm will reject good low-risk projects; II) The firm will accept poor high-risk projects; III) The firm will correctly accept projects with average risk

I, II, III

Leveraged buyouts (LBOs) almost always involve which of the following? I) a large part of the purchase price is financed by debt; II) most of the issued debt is below investment grade (i.e., junk); III) the firm goes private and its shares are no longer traded on the open market

I, II, III

Project analysis, beyond simply calculating NPV, includes the following procedures: I) sensitivity analysis; II) break-even analysis; III) Monte Carlo simulation; IV) scenario analysis

I, II, III, IV

The following are advantages of spin-offs: I) They widen investor choice by allowing them to invest in just one part of the business. II) They can improve incentives for managers. III) By spinning off businesses with "poor fit," parent firms can concentrate on their core businesses. IV) They relieve investors of the worry that funds will be siphoned off from one business to support unprofitable capital investments in another.

I, II, III, 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

The following are characteristics of preferred stock except it I) pays fixed dividends; II) can demand payments of cumulative dividends; III) has voting rights

III only

For Project Viking, in year 2, inventories increase by $12,000 and accounts payable increase by $2,000. Accounts receivable remain the same. Calculate the increase or decrease in net working capital for year 2

Increases by $10,000

Assuming a cost of capital of 10%, which of the following streams of cash flows would you prefer?

Project A

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).

Based on the conversation in class with Tim George, after TPG walked away from the Burger King deal due to the lack of financing, how did Diage ultimately complete the sale of Burger King?

TPG lowered its price to $1 billion and financed the transaction largely with equity and an investment from Ameriking

One calculates the after-tax weighted average cost of capital (WACC) using which of the following formulas?

WACC = (rD) (1 − TC) (D/V) + (rE) (E/V), where V = D + E.

RainMan Inc. is in the business of producing rain upon request. They must decide between two investment projects: a new airplane for seeding rain clouds or a new weather control machine built by Dr. Nutzbaum. The discount rate for the new airplane is 9 percent, while the discount rate for the weather machine is 39 percent (it happens to have higher market risk). Which investment should the company select and why? (Assume a 0 percent inflation rate and that projected costs do not change over time.)

Weather machine, because it has a higher equivalent annual cash flow

You are given the following net future values for harvesting trees from a plot of forestland.(This is a one-time harvest.) If the cost of capital is 15 percent, calculate the optimal year to harvest.

Year 3

which of the following are not a standard valuation ratio?

aggregate value/EBITDA

For a levered firm,

as EBIT increases, EPS increases by a larger percentage.

On a graph with common stock returns on the y-axis and market returns on the x-axis, the slope of the regression line represents

beta

Assets are listed on the balance sheet in order of

decreasing liquidity

Even if both dividends and capital gains are taxed at the same ordinary income tax rate, the effect of each type of tax is different because

dividends are taxed when distributed, while capital gains are deferred until the stock is sold.

Firm A is planning to acquire Firm B. If Firm A prefers to make a cash offer for the merger, it indicates that

firm A's managers are optimistic about the postmerger value of A.

A reduction in the sales of existing products caused by the introduction of a new product is an example of

incidental effects

Two in-court options for dealing with firms in financial distress are

liquidation and reorganization.

A loan guarantee provided by the government on a corporate bond acts like what kind of derivative security for the investor?

long put

The written agreement between a corporation and its bondholders contains a limitation on the dividends that the corporation can pay. This limitation is a

negative covenant

which of the folllowing is not a defensive measure in the context of a hostile takeover offer?

stock split

The call policy that maximizes shareholder wealth is to call a bond issue when

the bond's price equals or exceeds the call price.

Project Y has the following cash flows: Co = +2,000, C, = -1,150, and C2 = -1,150. If the IRRof the project is 9.85 percent and if the cost of capital is 12.00 percent, you would:

Accept the project

f the present value of $1 received n years from today at an interest rate of r is 0.621, then what is the future value of $1 invested today at an interest rate of r% for n years?

B) $1.610

Which of the following was not a feature of Musk's acquisition of Twitter?

By threatening to walk away, Musk succeeded in getting the Twitter board to agree to a reduced price of $51.40 as opposed to the previously agreed $54.20

Suppose that there are no taxes, transactions costs, or other market imperfections. Which of the following actions is most likely to make shareholders better off?

Eliminate negative-NPV projects.

Which of the following is a valid argument against the share repurchase proposal discussed in the Blaine Kitchenware case?

The repurchase would potentially hurt Blaine's ability to pursue acquisitions