Finance Final

11. Because of its excess funds, Grossman is thinking about raising its dividend to satisfy shareholders. How much in total dividends can Grossman pay to shareholders without needing to raise any external capital? (Hint: How much in dividend can Grossman pay before the AFN becomes positive?) a. $38,300 b. $48,300 c. $$28,000 d. $18,300

$38,300 (400*10% - (45+45)*10% - 900*(1+10%)*7%*(1-x%) = 0, find X, and x% is the payout ratio. so after getting the value of X, then 900*(1+10%)*7%*x% will be your total dividend AFN = 40-9-(Addition to RR) =0 To make AFN=0, your (Addition to RR) should be equal to (40-9)=31 = 990*0.07*(1-x), so 1-x = 31/(990*0.07) = 0.4473, so x = 1-0.4473=0.5527 =55.27%, so 900*(1+10%)*7%*55.27% = 38.3(K)

19. What is Tessio's total asset turnover ratio? a. 2.87 b. 1.85 c. 1.97 d. 2.22

d. 2.22(= sales/TA = 6000/2700)

31. Company A has a target weights of 30% for debt, 20% for preferred stock and 50% for retained earnings. What is company A's WACC if cost of retained Earnings generated from the CAPM is used for calculation ?

10.59% (=0.3X6.96% + 0.2X10% + 0.5X13% =2.08% + 2% + 6.5% = 10.59%)

29. (CAPM) Company A has a beta of 2 and risk-free rate of 5.0%, and the market risk premium is 4%. What is its cost of retained earning?

13% =5% + 2*4%

27. Company A. has a 10- year, 8% annual coupon bonds outstanding. The bonds have a current market price of $880 and a face value of (FV) of $1000, If this company's tax rate is 30%. What is its relevant after-tax component costs of debt, rd(1-T)?

6.96% (n=10, PMT= 80, PV= -880, FV= 1000, 1/Yr = ? (=9.95%), 9.95%*(1-30%)=6.96%

28. Company A has a preferred stock outstanding . Its current market price is at $80 per share and pay a fixed annual dividend of $8 per share. What is the cost of preferred stock (rp)?

8/80=0.1=10%

30. Company A' current stock is traded at $40. At the end of year, Company A is expected to pay an annual dividend of $4 per share, and the firms dividend is expected to grow at a constant rate of 4% per year. What is the firm's cost of retained earnings?

= Dividend Yield (D1/P0)] + growth rate of dividend (=growth rate of capital gain) = 4/40 + 4% = 10% + 4% = 14%

Karen's portfolio, which has a beta of 2, consists of three mutual funds: an international fund, a utility fund, and a technology fund. The international fund has a bet of 2 and makes up 15% of the portfolio. The utility fund has a beta of 1 and the technology has a beta of 3. How much of Karen's portfolio is invested in the technology fund? a. 42.5% b. 52.5% c. 30.5% d. 20.5%

A. 42.5% Check work on chapter 8 practice on your sheet from class

35. What is its expected dividend yield? a. 10% b. 0%

A. 10%

34. What is its expected capital gain yield? a. 10% b. 0%

B. 0%

33. Company's B preferred stock pays a perpetual of $7 annual dividend and sells for $70. The preferred stock price is expected to remain constant in the foreseeable future. What is its expected total return? a. 0% b. 10%

B. 10%

Jerry's portfolio is invested equally in five stocks (that is, each stock in the portfolio has a weight of 0.2) and has a required return of 16%. This risk-free rat is 4% and the market risk premium is 4%. What is the portfolio's beta? Assume Jerry's portfolio is on the SML. a. 4 b. 3 c. 2 d. 5

B. 3 RR=Rf+Beta(Market risk) 16%=4%+B(4%) Beta= 3

25. a. Sole proprietorship will encounter unlimited liability, limited life, stiff government regulation, high income tax rate and is difficult to obtain large sum of capital. b. Partnership will encounter unlimited liability, limited life, stiff government regulation, low income tax and is difficult to obtain large sum of capital. c. Public corporation will encounter limited liability, unlimited life, stiff government regulation, high income tax rate and is easy to obtain large sum of capital. The above are the three statements made by your friend, decide which one(s) are correct? A. a, b, c, B. a, b, C. a, c, D. c

D. c. Public corporation will encounter limited liability, unlimited life, stiff government regulation, high income tax rate and is easy to obtain large sum of capital.

26. Sometimes a manager's personal goals conflict with the corporation's goal of shareholder wealth maximization. Which of the following action helps ease that conflict and the manager's incentives with share holders' wealth? Which are the following statements correct? a. Pay the manager a large base salary b. Pay the manager a small base salary with a huge stock option package that matures on a single date c. Pay the manger a combination of salary and stock option (phased in over several years) that rewards the manager for consistently increasing shareholder wealth d. Let the manager know a takeover is possible if he or she doesn't perform well. e. Let the manager know he or she will be fired if the company's tock does not reach a certain target by the end of the year. A: a, b, c are correct answers B: b, c, d are correct answers C: only c is correct D: only c and d are correct E: only e is correct

D: only c and d are correct c. Pay the manger a combination of salary and stock option (phased in over several years) that rewards the manager for consistently increasing shareholder wealth d. Let the manager know a takeover is possible if he or she doesn't perform well.

36. Company A is expected to generate free cash flow (FCF) of $150 million this year (FCF1 = $150 million), and FCF is expected to grow at rate of 20% over the following two years (FCF2 and FCF3). After this third year, However, FCF is expected to grow at constant rate of 5% per year, forever (FCF4), if this company's weighted average cost of capital (WACC) is 11%, What is this firm's value?

PV(FCF1) = (1=n, 11=1/yr, PV=?, PMT=0, FV = 150, PV = -135.1351) , change the sign, (+/-) to make it positive and store this value to 1 (orange button + RCL + 1). FCF2 = 150*(1+20%) = 180, FCF3= FCF2*(1+20%) = 216, FCF4 = 216*(1+5%) = 226.8 PV(FCF2) = (2=n, 11=1/yr, PV=?, PMT=0, FV = 180, PV = -146.0920) , change the sign, (+/-) to make it positive and store this value to 2 (orange button + RCL + 1) PV(FCF3) = (3=n, 11=1/yr, PV=?, PMT=0, FV = 216, PV = -157.9373) , change the sign, (+/-) to make it positive and store this value to 3 (orange button + RCL + 1) P3 = FCF4/(WACC-g) = 226.8/(11%-5%) = 3780 PV(P3) = (3=n, 11=1/yr, PV=?, PMT=0, FV = 3780, PV = -2763.90) , change the sign, (+/-) to make it positive and store this value to 4 (orange button + RCL + 1) RCL 1+ RCL 2+ RCL3+ RCL 4 = $3203.07 = V0 Company A has a market value of $1,800 million debt and no preferred stock. If company A has 80 million shares of common stock outstanding , what is its estimated intrinsic value per share of common stock? (3203.07M- 1800M)/80M = $17.54 = P0

3. Your account has only $35,000 right now, which will not be enough to pay all your tuition costs. You have the opportunity to add money to your account at the end of each of the next three years. If your account continues to earn 10% per year and you will make three equal payment, how much money should you continue in each of these payments? a. $5760.17 b. $6307.84 c. $4589.45 d. $5071.87

a. $5760.17(n=3, 1/yr= 10, PMT=?, PV= -35000, FV= 65651.15)

2. The money in the investment account for your education earns an expected return of 10% per year. How much money needs to be in your account three years from today to pay for the TOTAL tuitions of graduate school (when you pay your first tuition bill)? Assume that you make no additional contributions to your account once you pay your first tuition bill? a. $65,651.15 b. $70,027.90 c. $80. 038.90

a. $65,651.15 {= 33745.92 + [35095.76/(1+10%)]}

7. Girard Inc. had sales of $2,700,000 last year on fixed assets of $270,000. However, Girad's fixed assets were being used at only 90%. What is Girard's current fixed assets turnover ratio? a. 10x b. 9x c. 8x d. 7x e. 6x

a. 10x (2700K/270K = 10)

17. What is Tessio's day sales outstanding (DSO)? a. 21.90 b. 28.96 c. 23.12 d. 25.89

a. 21.90 (= AR/Daily Sale = 360/(6000/365)

18. What is Tessio's Fixed assets turnover ratio? a. 4.17 b. 2.89 c. 4.97 d. 3.98

a. 4.17= (Sales/FA = 6000/1440)

23. How much is generated additionally through Debt-Free Current Liability during Year 2? a. 90 b. 100 c. 110 d. 120

a. 90 (=(430+360) - (400+300)=790-700)

20. What is after-tax EBIT during Year 2? a. 966 b. 800 c. 766 d. 560

a. 966(=1380*(1-30%)

4. An investment is expected to pay the following annual cash flows in the end of each period ($100 for period 1, $200 for period 2 and $300 for period 3). If an investor thinks the appropriate interest rate is 9%, what is the net present value (NPV) of this cash flow stream? a. $592.73 b. $491.73 c. $392.73 d. $292.73

b. $491.73(push your Financial calculator in this order, CFj, 100 CFj, 200 CFj, 300 CFj, 9, 1/yr, orange key, NPV)

5. Suppose you are informed that the price of this investment is actually $400. What is the expected rate of return of this investment? a. 18.44% b. 19.44% c. 20.17% d. 21.17%

b. 19.44%(push your Financial calculator in this order, -400, CFj, 100 CFj, 200 CFj, 300 CFj, orange key, IRR/YR)

14. What is the forecasted EPS for the next year? a. 1.50 b. 2.50 c. 3.50 d. 4.50

b. 2.50 (=2500K/#1000K)

13. What is P/E ratio this year? a. 10 b. 9 c. 8 d. 7

b. 9 (= 36/4)

8. How much sales could Girard have supported given its current level of fixed assets? a. $5,000,000 b. $4,000,000 c. $3,000,000 d. $2,000,000 e. $1,000,000

c. $3,000,000 (2700K/90% = x/100%, so x = 2700K/0.9 = 3000K)

9. Suppose Girard is forecasting sales growth of 20% for this year. If existing and new fixed assets are utilized at 100% capacity, what is the firm's expected fixed assets turnover ratio for this year? a. 13.11x b. 12.11x c. 11.11x d. 10.11x e. 9.11x

c. 11.11x (100% capacity - reflect on sales only (3000K), 3000K/270=11.11

21. How much is spent additionally on Net Fixed Asset during Year 2? a. 400 b. 300 c. 200 d. 100

c. 200(=1500-1300)

15. If Lane's forecast turns out to be right, and its price/earnings (P/E) ratio does not change. What doe Lane expect its stock price to be one year from now? a. 32.50. b. 37.46 c. 22.50 d. 20.00

c. 22.50 = (2.5*9)

22. How much is spent additionally on Current Asset during Year 2? a. 540 b. 440 c. 340 d. 240

c. 340(=1900-1560)

16. What is Tessio's inventory turnover ratio? a. 9.57 b. 7.57 c. 8.57 d. 6.57

c. 8.57 (= 6000/700)

1. You are considering going to graduate school in three years. Current total cost of graduate school are estimated to be $30,000 per year, but those costs are expected to grow each year at the rate of inflation (4% per year). You intend to enter a two-year program. Your first tuition bill is due at the end of three years (for the first year of school) and your second tuition bill is due at the end of four years (for the second year of school). How much are total costs expected to be in three and four years, respectively? a. First year's tuition is $35,995.65 and the second year is $37,435.47 b. First year's tuition is $32,995.65 and the second year is $39,435.47 c. First year's tuition is $33,745.92 and the second year is $35,095.76

c. First year's tuition is $33,745.92, (= 30000*(1+4%)^3 )and the second year is $35,095.76 (= 30000*(1+4%)^4 )

6. You want to join a club and this club has two options for paying memberships. The first option is $500 annual fee and this fee must be paid at the beginning of the year. You can also buy a lifetime membership today for $7,000. How many years must you remain a member of this club before the lifetime membership is cheaper (on a present-vale basis) than paying $500 in membership due each year? The appropriate interest rate is 5% (Round your number to the nearest year.) a. 28 year b. 21 year c. 14 year d. 23 year

d. 23 year (n=?, 1/yr = 5%, PV= -7000, PMT = 500, FV =0)

12. Lane Inc. Just reported net income of $2,000,000, and its current stock price is $36 per share. Lane is forecasting $2,500,000 in net income next year, but it also expects it will have to issue 500,000 new share of stock (raising its share outstanding from 500,000 to 1,000,000). What is earning per share (EPS) this year? a. 1.00 b. 2.00 c. 3.00 d. 4.00

d. 4.00 (=$2000K/#500K)

24. How much is Free Cash Flow (FCF) generated during Year 2? a. 216 b. 316 c. 416 d. 516

d. 516 (=you r answer of #20 - answer of #21 - answer of #22 + Answer of #23)

10. Grossman Industries' sales were $900,000 at the end of last year, sales are expected to grow by 10%, and Grossman expects to maintain its current profit margin of 7% and dividend payout ratio of 30%. The firm's total assets equaled $400,000 and were operated at full capacity. Grossman's balance sheet shows the following current liabilities: accounts payable of $45,000, notes payables of $25,000 and accrued liabilities of $45,000. Based on the AFN equation, What is the firm's AFN for 2006? a. -$16,432 b. -$19,510 c. -$13,498 d. -$15,350 e. -$17,510

e. -$17,510 ((= -17.51K =400K*10% - (45K+45K)*10% - 900K*(1+10%)*7%*(1-30%))

32. Company A has seen its business slowly wind down. it recently paid a dividend of $1.80 per share, But analysts expect the dividend to decrease by 5% per year. The risk-free rate is 6% and the market risk premium is 5%. If the company A's beta is 0.5 and the market is in equilibrium, what is the value of its stock? a. 12.89 b. 13.89 c. 10.92 d. 9.67 e. 12.67

e. 12.67 (=D1/r-g, = 1.71/[(8.5% - (-5%)] where D1 = 1.80[1+(-5%)]=1.71, g= -5%, r = 6+0.5*5 = 8.5(%))