Problem Set 1
Valuing Cash Flows
Exercise 1 (Ex. 11.2 - 11.6 GT): Assume that Marriott’s restaurant division has the following joint distribution with the market return: Market Scenario Bad Good Great .25 .50 .25 Probability Market Return (%) -15 5 25 YR 1. Cash Flow Forecast $40 million $50 million $60 million

Assume also that the CAPM holds. 11.2 Compute the expected year 1 restaurant cash ﬂow for Marriott. 11.3 Find the covariance of the cash ﬂow with the market return and its cash ﬂow beta. 11.4 Assuming that historical data suggests that the market risk premium is 8.4 percent per year and the market standard deviation is 40 percent per year, ﬁnd the certainty equivalent of the year 1 cash ﬂow. What are the advantages and disadvantages of using such historical data for market inputs as opposed to inputs from a set of scenarios, like those given in the table above exercise 11.2? 11.5 Discount your answer in exercise 11.4 at a risk-free rate of 4 percent per year to obtain the present value. 11.6 Explain why the answer to exercise 11.5 diﬀers from the answer in Example 11.2.

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Advanced Corporate Finance I SS 2012

Problem Set 1 Valuing Cash Flows

Exercise 2 (Ex. 13.1 - 13.7 GT):) Exercises 13.1 - 13.7 make use of the following data: In 1985, General Motors (GM) was evaluating the acquisition of Hughes Aircraft Corporation. Recognizing that the appropriate WACC for discounting the projected cash ﬂows for Hughes was diﬀerent from General Motors’ WACC, GM assumed that Hughes was of approximately the same risk as Lockheed or Northrop, which had low-risk defense contracts and products that were similar to those of Hughes. Speciﬁcally, assume the Hamada model of debt interest tax shields and the inputs in the table at right. Comparision ﬁrm GM Lockheed Northrop βE 1.20 0.90 0.85 D/E 0.40 0.90 0.70

Target D/E for acquisition of Hughes = 1 Hughes’s expected unlevered cash...

...CorporateFinance Exam with Answers
Posted on May 10, 2012 by Sam
CorporateFinance, Chapters 8, 9 & 10. Exam Questions:
1. A project’s opportunity cost of capital is: A. The forgone return from investing in the project.
2. Which of the following statements is correct for a project with a positive NPV? A. The IRR must be greater than 1.
3. What is the NPV of a project that costs $100,000 and returns $50,000 annually for 3...

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CORPORATEFINANCE CASE STUDY
SUPERMAR VALUATION
Question 1 - Find SUPERMAR’S current firm and equity values under the following capital structure scenarios:
In order to calculate the cash flows the first step is to calculate the necessary inputs for the WACC. The case indicates that the current capital structure is 14% debt. We have all of the other inputs needed to calculate the cost of equity, cost of debt and WACC. The inputs are the...

...operated in perfect capital markets without any taxes (no corporate or personal taxes), how will RMO’s market value change if the firm decides to issue 50 million € of debt, buying back 50 million € of common stock in return? In this scenario RMO will pay interest only on this debt and plans to hold that amount of debt permanently without further adjustments in the future. (2 points) b) In contrast to a) above assume now that there is a corporate tax with statutory...

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NEW YORK UNIVERSITY
STERN SCHOOL OF BUSINESS
UB008.001 ADVANCEDCORPORATEFINANCE
Spring 2015
Monday Wednesday 9:30am-10:45pm
General Information
Professor Nikolay Halov
Office: KMC 9-151
E-mail: nhalov@stern.nyu.edu
Phone: 212-998-0836
Office Hours
• Tuesday 5-7pm
• Other times by Appointment
TA: Ryan Liu
E:mail: ryan.liu@stern.nyu.edu
Office hours: Friday 4-5pm
Room: E&Y Lounge, LL in Tisch
Course Objective
By the end of this...

...costs each year. The machine will have a useful life of 10 years. For tax purposes, straight-line depreciation will be used with an estimated salvage value of $300,000 (which will be the market value at that time). The discount rate is 12% and the corporate tax rate is 32%. What is the NPV of this proposal?
11.3 After examining a potential project’s NPV analysis, the manager advises that the initial fixed capital outlay be increased by $480,000. The initial fixed capital...

...Final Exam CorporateFinance FINC 650 1. Which of the following is not considered a capital component for the purpose of calculating the weighted average cost of capital as it applies to capital budgeting? a. b. c. d. e. Long-term debt. Common stock. Short-term debt used to finance seasonal current assets. Preferred stock. All of the above are considered capital components for WACC and capital budgeting purposes.
2. A company has a capital...

...bankruptcy increases. This increased probability will increase the expected bankruptcy costs
Case 1: no taxes or bankruptcy costs. No optimal capital structure
Case 2: corporate taxes but no bankruptcy costs. Each additional dollar of debt increases the cash flow of the firm. Optimal capital structure is 100% debt
Case 3: corporate taxes and bankruptcy costs. There is a trade-off between the benefit from an additional dollar of debt and the increase in expected...

...firm
* VL = VU + PV (Tax Benefits) + Corporate Benefits (Debt) – Costs of Financial Distress
* VL is the value of the firm with leverage, VU is the value of the all-equity firm
* 2 methods used to incorporate tax benefits to previous valuation techniques: APV & WACC
* APV (Adjusted Present Value – adjusts for tax by increasing the cash flows due to the tax benefit
* Increase each annual CF by Debt capacity * Debt Rate * Corporate Tax...