VoyForums
[ Show ]
Support VoyForums
[ Shrink ]
VoyForums Announcement: Programming and providing support for this service has been a labor of love since 1997. We are one of the few services online who values our users' privacy, and have never sold your information. We have even fought hard to defend your privacy in legal cases; however, we've done it with almost no financial support -- paying out of pocket to continue providing the service. Due to the issues imposed on us by advertisers, we also stopped hosting most ads on the forums many years ago. We hope you appreciate our efforts.

Show your support by donating any amount. (Note: We are still technically a for-profit company, so your contribution is not tax-deductible.) PayPal Acct: Feedback:

Donate to VoyForums (PayPal):

[ Login ] [ Contact Forum Admin ] [ Main index ] [ Post a new message ] [ Search | Check update time | Archives: 1, [2] ]

[ Next Thread | Previous Thread | Next Message | Previous Message ]

Date Posted: 16:18:08 04/25/00 Tue
Author: Charles Hodges
Subject: Sample Final Exam

Exam 3 FI4300 Summer 1999 Your Name ___________________________

YOU HAVE 2 HOURS TO COMPLETE BOTH PARTS OF THIS EXAM
Instructions:
1) The part of the exam is closed book and closed notes. No scrap paper is allowed, use the back of the exam if necessary.
2) Read the entire exam before starting. The best strategy is generally to "cherry pick". In other words, solve the easiest (and/or most familiar) problems first. This will save time (and energy) that can be expended on the more difficult problems.
3) Partial points are based on readily observable evidence that you know at least part of the solution concept. The more evidence presented (and the clearer the evidence), the better the chance for partial points. In other words, SHOW ALL WORK!
4) If you have additional time remaining, give your work one last check.
5) True/False questions are worth 2 points. Multiple choice questions are worth 3 points. Short answer questions usually take less than three sentences and are worth 4 points. Problems are worth the number of points listed in the question.

MC1. According to the text, the primary goal for a firm's financial managers is to:
a. Maximize earnings per share. b. Maximize long run profits. c. Minimize firm risk.
d. Increase the firm's asset base. e. None of the above is the primary goal for a financial manager.

SA1. What is the optimal capital structure? Why?






SA2. What is the optimal dividend policy? Why?





SA3. What is the best capital budgeting decision rule? Why





SA4. Of the capital structure decision, dividend policy decision, and capital budgeting decision, Which is the most important? Why?




TF1. Over time, using the same risk-adjusted discount rate to discount all cash flows would encourage the firm to accept high-risk, negative NPV projects.
a. True b. False

TF2. Other things held constant, lower personal taxes should lead companies to pay higher dividends.
A. True B. False


SA5 (2 points) Real Options - fill in the blanks. If you need to describe the option more fully, write your description near the question. For the record, the type of option is either call or put. The underlying asset refers to the item, which upon a change in value, will impact the decision to exercise or not exercise the option.

d. You are offered a new higher-paying job in your current industry. You have a non-compete agreement that requires you to pay your current employer $500,000 if you take the other job.

Type of option ______ Who is long _________ Who is short ___________ Underlying Asset _________


TF3. In capital budgeting analysis, the investing and financing decisions are separated.
a. True b. False

TF4. In perfect capital markets, the way a firm finances its assets is irrelevant.
a. True b. False

MC1. Which statement is always correct ?
a) if the NPV of the project is positive then the IRR is smaller than 1.
b) if the NPV of the project is positive then the IRR is greater than 1.
c) if the NPV of the project is negative then the PI is greater than 1.
d) if the NPV of the project is negative then the PI is greater than discount rate.
e) if the NPV of the project is positive then the PI is greater than 1.

TF5. During the early years of a long-term capital budgeting project, using straight-line depreciation, as opposed to MACRS depreciation, will generally increase the net income of a project and thus increase the project's IRR.
a. True B. False

TF6. In perfect capital markets, the WACC is constant, regardless of the proportion of debt.
A. True B. False

TF7. In the real world, the expected value of bankruptcy costs is negatively related to the degree of specialization of the firm's assets.
A. True B. False


MC2. According to the pecking order view of capital structure, which is management's preferred order of preference?
a. Internal equity, debt, preferred stock, external equity
b. Debt, internal equity, preferred stock, external equity.
c. External equity, Internal equity, preferred stock, debt.
d. Preferred stock, internal equity, debt, external equity.
e. None of the above.

SA6. Explain what happens to a firm's value as leverage in increased, according to the capital markets imperfections/tradeoff view.





TF8. Restrictive covenants in bond contracts are primarily used to limit potential conflicts between stockholders and management.
A. True B. False

TF9. For most companies, dividends are more stable than earnings.
A. True B. False



MC3. The best explanation of payout ratios varying systematically across industries is probably;
a. taxes b. investment opportunities. c. risk
d. Transaction costs. e. Age of the average investor.


SA 7. Match the term with the date:
Record Date _________ April 12, 1999
Declaration Date _________ April 15, 1999
Ex-Dividend Date __________ April 30, 1999
Payment Date __________ April 1, 1999


Exam 3 Summer 1999 FI 4300 Your Name ______________________________

YOU HAVE 2 HOURS TO COMPLETE BOTH PARTS OF THIS EXAM
PROBLEM INSTRUCTIONS

* Show all work.
* Be sure to label each section of the answer.
* Use the back of the test if you need more room.
* This portion of the exam is open book, open notes.
* Set your calculator to four decimal places.
· Hint, if you cannot solve a problem due to a missing number, simply make up a reasonable number and use this number to complete the problem. As an example in problem 2, if you can't solve for leverage in part A, then assume some debt equity mix and use this in part B.

1. (4 points) consider the projects shown below. If you were rationed to $100 for the initial investment, which project(s) should you choose?

Project: A B C D E F G H I
Initial Cost: 15 20 25 30 35 40 45 10 15
NPV: 1.5 2.1 4.5 3.2 1.8 2.9 3.1 -2.7 -1.9




2. (6 points) Rollins Corporation is constructing its MCC schedule. The firm is at its target capital structure. Its bonds have a 9 percent coupon, paid semiannually, a current maturity of 17 years, and sell for $1,125. Rollins' beta is 1.1, the risk-free rate is 6 percent, and the expected return on the market is 12 percent. Rollins is a constant growth firm, which just paid a dividend of $3.00, sells for $27.00 per share, and has a growth rate of 8 percent. Rollins corporate tax rate is 40%.
The firm's book value balance sheet is as follows:
Asset $8,000 Long Term Debt $5,000
Equity ($1 par) $500
Retained Earnings $2500


(2)What is the firm's leverage ratio?



(4)Assuming the pre-tax cost of debt is 8.7%, and using CAPM estimate of the cost of retained earnings, what is Rollins' WACC?



2. (3 points) Albatros, Inc., an all equity firm, is considering buying a piece of equipment (a cyclotron) from Warren Piece for $47 million. By reducing Albatros's expenses for Proton-spectroscopy, the equipment will increase the company's net income by $2.3 million per year for next 20 years. At the end of year 20, the company can sell the cyclotron's magnetic alloys for $0.0 million. The depreciable life of the cyclotron is 20 years and company can use straight-line depreciation to $0 million salvage value. Albatros, Inc. estimated for this project a discount rate of 11 percent p.a. and corporate tax rate is 40 %.
What is the IRR of the equipment ?

3. (3 points) You have just won a lawsuit. The settlement will pay either a single lump sum settlement today, or the following cash flows (assume the following cash flows come at the end of the period):
Year 1: $15,000 Years 2-4: $ 4,000 Years 5 onward (forever): $ 5,000
You can presently earn 8% on your investments. What is the least you should accept today as a lump sum settlement?








4. (20 points) Use the following information for the next several questions. Consider a world of perfect capital markets. This world has no corporate or personal taxes, all investors have homogeneous expectations, no bankruptcy costs, and M&M's no-tax theory of capital structure is true.
Company Y is financed has the following market value balance sheet:

Assets = $ 200 Liabilities = $80
Equity = $120

The firm had $15 in EBIT last year. The firm has 25 shares outstanding. The firm expects this same return for the foreseeable future. The firm a is a zero growth firm, that pays out all excess earnings as dividends. Any time the firm changes its capital structure, it changes only the debt/equity mix and does not change its total assets. The firm's liabilities consists entirely of perpetual debt. The firm's debt is risk-less, perpetual, selling at par, and has a 5% yield. If the firm were to change its capital structure, new debt would still have a 5% yield. The expected return on the market is 14%. Given this information, answer the following questions:

A. (3 points) What is the firm's current weighted average cost of capital.



b. (3 points) What is the current price per share?



c. (2 points) What is the current dividend per share?



Now assume that the firm issues enough equity to repurchase all of the firm's debt. This change in capital structure reveals no new information about future firm prospects.

d. (2 points) What is the overall firm's new WACC?



e. (2 points) What is the stock's new beta?


Now consider a DIFFERENT COMPANY in a world that of perfect capital markets, with one change, CORPORATE TAXES DO EXIST. This world has no personal taxes, all investors have homogeneous expectations, no bankruptcy costs, and M&M's with corporate taxes theory of capital structure is true. Company Y is financed has the following market value balance sheet:

Assets = $ 165 Liabilities = $70
Equity = $95

The firm had $25 in EBIT last year. The firm has 19 shares outstanding. The firm expects the same return/profits for the foreseeable future. The firm a is a zero growth firm, that pays out all excess earnings as dividends. Any time the firm changes its capital structure, it changes only the debt/equity mix and does not change its total assets. Liabilities consist only of the firm's debt. The debt is riskless, perpetual, selling at par, and has a 8% pre-tax yield. If the firm were to change its capital structure, new debt would still have a 8% pre-tax yield. The firm's tax rate is 35%. Given this information, answer the following questions:

G. (2 points) What is the value of the firm's tax shield due to the use of perpetual debt?



H. (2 points) What is the current expected return on the firm's equity?



I. (2 points) What is the firm's current dividends per share?



J. (Fill in the blank, 2 points each) Now assume the firm issued an additional $20,000,000 in debt and used the funds to repurchase equity. Under this scenario, the required rate of return on the equity would _________________ (be lower/be higher/be unchanged), while the overall WACC of the firm would ________________(be lower/be higher/be unchanged).



1. (10 points) In 1997, the Lissa Company, a low growth firm, paid dividends of $12,000,000 on after-tax income (cash flow) of $16,000,000. Capital budget projects totaled $14,000,000 in 1997. 1997 was a normal year for earnings, dividends, and capital budgets. For the past 8 years, earning have grown at a constant rate of 11%. However, in 1998, earnings are expected to fall to $12,000,000 and the firm expects to have profitable investment opportunities will grow to 18,000,000. It is predicted that Lissa will not maintain the 1998 level of earnings growth, and the company will return to it previous 11% growth rate. Lissa's target debt ratio is 20%.

a. Calculate Lissa's total dividends for 1998 if its dividend payment is set to force dividends to grow at the long-run growth rate in earnings.



b. Calculate Lissa's total dividends for 1998 if it continues its 1997 dividend payout ratio.



c. Calculate Lissa's total dividends for 1998 if it uses a pure residual dividend.



d. Calculate Lissa's regular and special dividends for 1998 if it employs a regular dividend plus extras policy, with the regular dividend being based on the long-run growth rate and the extra dividend being set according to the residual policy.



e. Based on what you know about finance, what dividend should Lissa pay and why (i.e. should Lissa increase/decrease the dividend payout ratio)?

[ Next Thread | Previous Thread | Next Message | Previous Message ]

Replies:

[ Contact Forum Admin ]

Forum timezone: GMT-8
VF Version: 3.00b, ConfDB:
Before posting please read our privacy policy.
VoyForums(tm) is a Free Service from Voyager Info-Systems.
Copyright © 1998-2019 Voyager Info-Systems. All Rights Reserved.