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FIN350 midterm 1 Version B

EVA = After-tax __ After-tax

Operating Income Capital costs

= NOPAT – After-tax Cost of Capital

MVA = Market value __ Equity capital

of equity supplied (book value)

NOWC = Current assets - Non-interest bearing current liability

FCFs for all investors = OCF-Gross Investment in Operating Capital

= (OCF-Dep)-(Gross Investment in Operating Capital-Dep)

= NOPAT-Net Investment in Operating Capital

= NOPAT- Change in Total Operating Capital

Value of Equity= Present Value of Future FCFs for Common Stock Investors

FCFs for Common Stock Investors = NCF-Gross Investment in Operating Capital

= (NCF-Dep)-(Gross Investment in Operating Capital-Dep)

= NI-Net Investment in Operating Capital

= NI- Change in Total Operating Capital

Total Operating Capital = Net Operating Working Capital (NOWC) + Net Fixed Assets

= Current Assets-Non-interest Bearing Current Liabilities

+Net Fixed Assets

Change in Total Operating Capital = Total Operating Capital in Year t+1

- Total Operating Capital in Year t

NOPAT = EBIT*(1-Tax Rate)=EBIT-Tax Expense

If tax rate is available, you should use: NOPAT = EBIT*(1-Tax Rate)

To toggle between END and BEGIN model, press 2nd, BGN, 2nd, ENTER

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1. Which of the following could explain why a business might choose to organize as a corporation rather than as a sole proprietorship or a partnership?

a. Corporations generally face fewer regulations.

b. Corporations generally face lower taxes.

c. Corporations generally find it easier to raise capital.

d. Corporations enjoy unlimited liability.

e. Statements c and d are correct.

2. The primary goal of corporate management should be to:

A) maximize the shareholders’ wealth.

B) maximize the firm’s profit.

C) minimize the firm’s costs.

D) maximize the number of shareholders.

3. Which of the following statements is true regarding the corporate form of organization compared to that of the sole proprietorship?

a. The owners of the sole proprietorship have limited liability for the firm's debts.

b. Dividends received by the corporation's shareholders are tax-exempt.

c. The corporation has a limited life.

d. The sole proprietorship is the simplest business form to start-up.

e. It is more difficult to transfer ownership in a corporation.

4. Superior Medical System's 2005 balance sheet showed total common equity of $2,050,000. The company had 100,000 shares of stock outstanding which sold at a price of $57.25 per share. By how much did the firm's market value and book value per share differ?

a. $36.7 b. $38.25 c. $51.00 d. $40.25 e. $39.50

5. Scranton Shipyards has $20 million in total investor-supplied operating capital. The company’s after tax percentage cost of capital is 10 percent. The company has the following income statement:

Sales $10.0 million

Operating costs 6.0 million

Operating income (EBIT) $ 4.0 million

Interest expense 2.0 million

Earnings before taxes (EBT) $ 2.0 million

Taxes (40%) 0.8 million

Net income $ 1.2...
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