1.The Muggle Co. has just paid a dividend of $1 per share. The dividends are expected to grow at 20% per year for the next three years and at the rate of 5% per year thereafter. If the required rate of return on the stock is 15%(APR), what is the current value of the stock?

The firm has only twenty million to invest. What is the maximum NPV that the company can obtain?

3.Stock A has an expected return of 20% and Stock B has an expected return of 12%. The risk of stock A as measured by the variance is three times that of stock B. If the correlation coefficient between the two stocks is zero, what proportion of investment in each stock gives the minimum portfolio variance (minimum risk)?

4.The historical returns data for the past three years for Stock B and the stock market portfolio are:
Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%.

a. Calculate the expected return for Stock B and the market portfolio.
b. Calculate the variance in the market.
c. Calculate the covariance of returns between Stock B and the market portfolio.
d. Calculate the beta for Stock B.
e. If the risk-free rate is 4%, calculate the market risk premium.
f. Calculate the required rate of return (cost of equity) for Stock B using CAPM.

5.If a firm borrows $25 million for one year at an interest rate of 10%, what is the present value of the interest tax shield? Assume a 35% tax rate.

6.The Basilisk Company has total assets of $30 million, of which $10 million are financed by debt and $20 million by equity. The EBIT (earnings before interest and tax) is $6 million. If the firm's tax rate is 34%, and the interest rate on debt is 10%, calculate its after-tax cash flow.

7.Suppose that a company can direct $1 to either debt interest...

...Chapter 6: Discussion Question #4 (p. 223)
4. Why is it usually easier to forecast sales for seasoned firms in contrast with early-stage ventures?
Typically, it is easier to forecast a seasoned firm’s sales to that of an early-stage venture because the seasoned firm will have an operational history. Basing current sales on historical data is easier to do than trying to estimate sales based on little to no historical data to benchmark from. If you are a start-up / early-stage venture and you are tasked with forecasting sales, competitors’ operational histories and past sales data could possibly be used as a helpful reference. However, if you are the first of your kind, it will be especially difficult to predict / forecast sales or financials as there is nothing for you to use as a benchmark guide.
Chapter 6: Pharma BioTech Mini Case (pp. 229-230, Part A only)
Pharma Biotech is interested in developing an initial “big picture” of the size of financing that might be needed to support its rapid growth objectives for 2011 and 2012.
A. Calculate the following financial ratios (as covered in Chapter 5) for Pharma Biotech for 2010: (a) net profit margin, (b) sales-to-total-assets ratio, (c) equity multiplier, and (d) total-debt-to-total-assets. Apply the return on assets and return on equity models. Discuss your observations.
Net Profit Margin (NPM) = Net Income / Net Sales
NPM = 960 / 15,000 (in thousands)
NPM = 6.4%
Sales-to-total-assets (STTA) = Net...

...Федеральное государственное бюджетное образовательное учреждение высшего профессионального
образования
РОССИЙСКАЯ АКАДЕМИЯ НАРОДНОГО ХОЗЯЙСТВА И ГОСУДАРСТВЕННОЙ
СЛУЖБЫ ПРИ ПРЕЗИДЕНТЕ РФ
ИНСТИТУТ БИЗНЕСА И ДЕЛОВОГО АДМИНИСТРИРОВАНИЯ
ФАКУЛЬТЕТ МЕЖДУНАРОДНОГО БИЗНЕСА И ДЕЛОВОГО АДМИНИСТРИРОВАНИЯ
Groupe Ariel S.A. Case
Artyom Kirillov
Polina Dzyuba
Moscow
2011
Groupe Ariel S.A. : Parity Conditions and Cross-Border Valuation
Question 1
There are two ways to compute the projects NPV. The first approach is to calculate it in
Mexican Pesos and then change the resulting figure into Euros at the spot rate of MXN15.99/EUR. Note
that the discount rate that we have used was the yield on the long-term peso-denominated corporate
bonds. Below is the screenshot showing how we have done this.
Computing NPV in Mexican Pesos (resulting NPV in Euros is 138,902)
Question 2
The second approach is to transfer each cash flow from Mexican Pesos into Euros using the
future rates (e.g. in year 5 we use the rate for this particular year rather than the spot rate). Note that the
discount rate that we have used was the yield on the French 10-year government bonds. Once again,
below you will find a screenshot.
Computing NPV in Euros (resulting NPV in Euros is 144,633)
In case the required rate of return on the project is higher than that on the 10-year
government bonds (for instance, 8%), the resulting NPV will be lower than the one we received in our
previous...

...Fin 350 Exam 2, Fall 2010 Name ___________________________
This has answers to the problems which I believe, but cannot guarantee, are correct.
1. Under certain conditions, a particular project may have more than one IRR. One condition under which this situation can occur is if, in addition to the initial investment at time = 0, a negative cash flow occurs at the end of the project's life.
a. True
b. False
2. The modified IRR (MIRR) method has wide appeal to professors, but most business executives prefer the NPV method to either the regular or modified IRR.
a. True
b. False
3. A firm should never undertake an investment if accepting the project would cause an increase in the firm's cost of capital.
a. True
b. False
4. A decrease in the firm's discount rate (r) will increase NPV, which could change the accept/reject decision for a potential project. However, such a change would have no impact on the project's IRR, hence on the accept/reject decision under the IRR method.
a. True
b. False
5. If the IRR of normal Project X is greater than the IRR of mutually exclusive Project Y (also normal), we can conclude that the firm will select X rather than Y if X has a NPV > 0.
a. True
b. False
6. Estimating project cash flows is considered the most difficult step in the capital budgeting process. Both the number of variables and the interdepartmental nature of the process contribute to the difficulty of estimating cash...

...Congoleum Corporation
Executive Summary
In valuing the target company Congoleum after an LBO by First Boston found the expected free cash flows generated by this firm from 1980 to 1984. These numbers were based on values provided in the case. From there, we employed the Adjusted Present Value method to discount these cash flows because we assumed that Congoleum was varying its Debt to Equity ratio during those years. We discounted these cash flows by the required return on assets that was in turn calculated through use of the Modigliani-Miller unlevering formula (to derive the Asset Beta) and the Capital Asset Pricing Model. The required return on Congoleum debt was calculated by the expected return of the average CCC-company’s debt and the expected return of debt under default. Then, the present value of financial side effects was taken into account by discounting the interest tax shield by the required return on debt. Finally, we calculated the terminal value of cash flows by assuming a constant 4.14% growth rate in perpetuity and a constant D/E ratio for the years after 1984. Thus, these cash flows were initially discounted under WACC-ME. From there, we factored in prior debt and cash that Congoleum had generated to calculate the total equity value of the firm after the LBO had taken place.
Background
Congoleum is a firm active in three product market segments: home furnishings, shipbuilding, automotive, and industrial distribution. In the summer of 1979, First...

...P = price V = variable cost Fc = fixed cost t = time in yrs
Chapter 11 quiz
Q , P , V , FC (based-plan, lower, upper) DEP = F0Costs / # yr’s
Based price for (Q , P , V , FC) multiply them each by WITHIN 10%, .10 than add, subtract
Best case +P, +Q, -V, -FC Worst case –P, -Q, +V, +FC
Best case scenario: OFC = [(Q+ x P+) – (Q+ x V-) – FC- – DEP] (1 - TAX RATE) +DEP high rev, low cost
Worst case scenario: OCF= [(Q- x P-) – (Q- x V+) – FC+ – DEP] (1 - TAX RATE) +DEP high cost, low rev
Plug OCF as payment and solve for (PV)
PV – FC = best case
TI-83 2nd finance, calc NVP, (% return on proj (given), - CF0 (cost given),
{ (OCF) best, worst case answer, repeat best case answer for how many years } )
Total cost: TC = VC +FC or FC + (Q)(V)
Avg cost = (total cost / # of units) # of units (FC / V + Q)
Break-even point = (FC + DEP) / (P– V)
Total production cost: TPC = (material cost + variable labor exp) (production) + FC
= (V x Q) + FV
Marginal cost per pair: MCPP = material cost + variable labor exp
Avg cost per pair: ACPP = TPC / production
Total revenue: TR = (# of items) x (Marginal cost per pair)
ACCT break even = (FC + DEP) / (P-V) contribution margin
Cash break-even point: when OCF = 0 Q = FC / (P-V)
Financial break-even: when NVP = 0 FC + (OCF) / P – V
Compute PMT if OCF not given
Degree of operating leverage: the change in OCF / % of change in Q
DOL = 1 + (FC / OCF)
Chapter 12 Capital gain = ending share price – initial share price
Total...

...determining the debt-equity mix that maximizes expected EPS.
The optimal capital structure simultaneously maximizes EPS and minimizes the WACC.
The optimal capital structure minimizes the cost of equity, which is a necessary condition for maximizing the stock price.
The optimal capital structure simultaneously minimizes the cost of debt, the cost of equity, and the WACC.
The optimal capital structure simultaneously maximizes stock price and minimizes the WACC.
2 points
Question 29
Which of the following would increase the likelihood that a company would increase its debt ratio, other things held constant?
Answer
An increase in costs incurred when filing for bankruptcy.
An increase in the corporate tax rate.
An increase in the personal tax rate.
534 FIN QUIZ 10 (CHAPTER 17)
Question 1 2 out of 2 points
Suppose 6 months ago a Swiss investor bought a 6-month U.S. Treasury bill at a price of $9,708.74, with a maturity value of $10,000. The exchange rate at that time was 1.420 Swiss francs per dollar. Today, at maturity, the exchange rate is 1.324 Swiss francs per dollar. What is the annualized rate of return to the Swiss investor?
Question 2 2 out of 2 points
Suppose hockey skates sell in Canada for 105 Canadian dollars, and 1 Canadian dollar equals 0.71 U.S. dollars. If purchasing power parity (PPP) holds, what is the price of hockey skates in the United States?
Question 3 2 out of 2 points
A box of candy costs 28.80 Swiss francs in Switzerland and $20 in the...

...$750,000
e) None of the above
Value Y* - Acq. Cost = $810,000 - $750,000 = $60,000
13. What is the value of post merger firm if X acquires Y by stock?
a) $3,810,000
b) $3,840,000
c) $4,500,000
d) $4,560,000
e) $4,590,000
Value X + Value Y* = $3,750,000 + $ 810,000 = $4,560,000
14. What is the price per share of the post-merger firm if X acquires Y by stock ?
a) $29.80
b) $30.00
c) $31.04
d) $32.20
e) None of the above
(1) (Nn*Pn) = $750,000
(2) (Nn*Pn) + (No*Po) = $4,560,000
(2) – (1): NoPo = $3,810,000, Po = (3810000/125,000) = $30.48
Use the following Balance Sheet information to answer the next question:
XYZ Corp.
Current Assets $16,000 Current Liabbilities $8,000
Net Fixed Assets $24,000
Equity $32,000
Toral Assets $40,000 Total Liab. & Eq. $40,000
ABC Corp.
Current Assets $1,500 Current Liabilities $1,500
Net Fixed Assets $4,500
Equity $4,500
Toral Assets $6,000 Total Liab. & Eq. $6,000
Company XYZ pays $9,000 to acquire ABC. Suppose the Net Fixed Assets of ABC has a fair market value of $7,000.
15. What is the amount of Goodwill under the Purchase Method?
a) $1,000
b) $2,500
c) $3,000
d) $4,500
e) None of the above
Fair market value of ABC Assets = Net Fixed Assets + NWC
= $7000 + ($1,500 - $1,500) = $7,000
Goodwill = $9,000 - $7,000 = $2,000
16. A proposed acquisition of Canadian Imperial Bank of Commerce (CIBC) by Bank of Nova...

...UNIVERSITY OF ILLINOIS AT CHICAGO
FINANCE 431 – MANAGEMENT IN THE FINANCIAL SERVICES INDUSTRY
PRACTICE SET 1 – BANK CAPITAL PROJECTS AND LEASE FINANCING
Note: Problems 1,3,5,7 are from Chapter 4 in the textbook.
1. A group of businesspeople from Gwynne Island are considering filing an application with the state banking commission to charter a new bank. Due to a lack of current banking facilities within a 10-mile radius of the community, the organizing group estimates that the initial banking facility would cost about $2.7 million to build along with another $500,000 in other organizing expenses and would last for about 20 years. Total revenues are projected to be $410,000 the first year, while total operating expenses are projected to reach $180,000 in year 1. Revenues are expected to increase 5 percent annually after the first year, while expenses will grow an estimated 3 percent annually after year 1. If the organizers require a minimum of a 10 percent annual rate of return on their investment of capital in the proposed new bank, are they likely to proceed with their charter application given the above estimates?
2. Do problem 1 under the following assumptions: a tax rate of 30% and straight line depreciation of physical assets.
3. Hampton Savings Bank is considering the establishment of a new branch office at the corner of Queen Street and Victoria Boulevard. The savings association’s economics department projects annual operating revenues...

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