Cheet sheet Past year paper

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Feb 20, 2024

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Regional fast food chain, McKing Corp., has 10,000 bonds outstanding, each with a par value of $1,000 and have a market price of $950. They are semiannual, mature in 5 years, and pay a coupon of 4%. It has 1,000 share of preferred stock that sells at $100 per share and pays a dividend of $6 per share. Its market capitalization of common equity is $20 million and beta is 1.2. Assume that the risk-free rate is 3%, market risk premium is 8%, and corporate tax rate is 30%. What is McKing Corp.'s WACC? C) 9.69%. Paula owes $32,000 on a monthly car loan with a 5 year term and APR of 4.80%. However, she is making payments of $700 per month to pay it off early. In how many months will she pay off the loan? A) 50.6 months . Last year, Bryant Builders had a profit margin of 10%, total assets turnover of 0.5, and a debt -to- assets ratio of 20%. (The company is financed with debt and equity, no preferred stock.) This year, the CFO wants to double ROE. She expects total asset turnover will remain at 0.5 and the profit margin will increase to 15%. What debt -to- assets ratio will the company need to double its ROE? D) 40% 4) A $1,000,000 portfolio of 10 stocks holds $100,000 of one stock with a beta of 0.85. The portfolio's beta is 0.95. In an effort to raise is average returns, the portfolio manager is seeking to replace this stock with another with a higher beta to make the portfolio beta exactly 1.05. (The manager may be trying to trick investors by hoping they do not realize that systematic risk also will rise due to this switch.) What should the new stock's beta be? B) 1.85 . 5) GRP Corporation's EPS is $3, and it pays out 100% of its earnings. Its currently stock trades at $30, but this is before new information comes out that earnings will decline by 5% every year. What will the new share price today once this new growth rate is known? A) $19.00 . Fedex has a beta of 1.6, and Costco has a beta of 0.6. The risk-free rate of interest is 4% and the market risk premium is 9%. What is the expected return on a portfolio with 30% of its money in Fedex and the balance in Costco? A) 12.10% B) 12.71% C) 9.00% D) 11.86% E) 11.50%. 7) A portfolio consists of 30% in Esther Enterprises stock and 70% in Jude & Company stock. The standard deviations of Esther Enterprises stock is 40% and Jude & company's is 20%. Given a correlation of 0.30, what is the portfolio's standard deviation? A) 30% B) 26% C) 21% D) 44% E) 29%. 8) Sarah owns 100 shares of Acme, a C- Corp. In the year that just ended, Acme's earnings before interest and taxes (EBIT) was $1 billion. It had interest expenses of $200 million and 100 million shares outstanding. It pays out 30% of its net income as dividends. Acme's corporate tax rate is 35%, and Sarah's personal income tax rate is 25%. What is Sarah's after-tax income from her ownership of 100 Acme shares? A) $96 B) $152 C) $144 D) $117 E) $72. 9) Ice cream maker, Jen & Berry's, will add only one new flavor to its offerings based on current trends that are expected to pass after three years. Both cost $200,000 this year to develop. One flavor option, The Heart Bern, is expected to generate cash flows over the next three years of $500,000, $100,000, and $25,000, respectively. The second flavor option, Hillary's Celery, is expected to generate cash flows of $300,000, $250,000, and $150,000 over the same three years. Jen & Berry's cost of capital for developing both flavors is 12%. Which flavor should be offered, and what is its IRR? A) The Heart Bern. Its IRR is 149%. B) The Heart Bern. Its IRR is 213%. C) Hillary's Celery. Its IRR is 122%. D) The Heart Bern. Its IRR is 170%. E) Hillary's Celery. Its IRR is 200%. 10) Manufacturing company, Widget Makers Inc., owns land that it could sell for $1 million after taxes. It is considering building a new plant on this land that will cost $10 million to build in ye ar 0, which will be straight-line depreciated to zero over 10 years. It will produce goods that will generate $2 million in revenue in year 1. Revenues will grow at 3% for 10 years. The plant will be shut down in 10 years and sold for $2 million. Operating expenses will be 60% of revenues. The new plant will require $500,000 in cash and incur $400,000 in accounts payable that will be recovered at the end of the project. Its tax rate is 35%. Widget Makers paid Booz Allen & Hamilton $90,000 to generate these forecasts. What is the period 10 cash flow of this project? A) $1,928.248.48 B) $2,428,482.06 C) $2,520,000.00 D) $3,128,842.60 E) $1,182,482.12 11) Over the past four years, stock BHO had the following returns: 30%, -10%, -5%, and 5%. Using these four years of returns, what was its standard deviation? A) 23.75% B) 17.80% C) 12.50% D) 14.51% E) 31.67% 12) In 2016, Main Street Dry Cleaners is projected to have $2 million in revenues, and operating margin of 20%. It will purchase new equipment worth $400,000. Its depreciation expense will be $200,000. Accounts receivable will go up by $50,000, and accounts payable will go up by $25,000. It pays 25% in taxes. What is its 2016 projected free cash flow? A) -$225,000 B) -$25,000 C) $350,000 D) $325,000 E) -$75,000 13) A firm expects the following free cash flows: Year 1: $10 million Year 2: $12 million Year 3: $15 million After year 3, free cash flows are expected to grow at a constant 5% a year indefinitely. The discount rate is 10%. The firm has debt of $50 million, cash of $20 million and has 10,000,000 shares outstanding. What is the price of the stock? 23.69 14) Rebekah turns 25 years old today and also began her first job with an annual salary of $50,000. Assume she gets paid at the end of each year of work. She is given the opportunity to contribute a percentage of her income to her employer's savings plan. The plan is expected to return 8% every year, and she expects her salary to grow at 3% every year. She wants to save enough so that she can withdraw $150,000 every year for 20 years in retirement. She will stop work on her 65th birthday, take her first withdrawal on her 66th birthday, and take her last withdrawal on her 85th birthday. Her money will remain in the same account that will earn 8% per year. What percentage of her salary should she contribute to her savings plan? A) 7.98% B) 16.25% C) 1.02% D) 4.55% E) 5.89% After spending $250,000 on research and development on possible improvements to productivity, a firm is considering a new project that will generate cash revenue of $1,300,000 and cash expenses of $700,000 per year for four years. The equipment necessary for the project will cost $300,000 and will be depreciated straight line to zero over four years. At the end of the project, you expect to sell the equipment for $50,000. The project requires net working capital of $10,000, which will be recovered at the end of the project. The firm's marginal tax rate is 35%. What is the expected free cash flow at the last year of the project (year 4)? A) $458,750 B) $521,625 C) $416,250 D) $642,500 E) $342,500 Walmart's earnings per share of the year that just ended was $3.00 and it paid $2.08 in dividends. Its return on equity is expected to remain constant at 12.58%. The required rate of return on this stock is 5.80%. If its dividend payout rate is expected to remain the same, what should a share of Walmart sell for today? A) $39.68 B) $15.86 C) $58.21 D) $111.23 E) $154.08. Suppose that a young couple has just had their first baby and they wish to insure that enough money will be available to pay for their child's college education. They decide to make deposits into an educational savings account on each of their daughter's birthdays, starting with her first birthday. Assume that the educational savings account will return a constant 9%. The parents deposit $2400 on their daughter's first birthday and plan to increase the size of their deposits by 7% each year. Assuming that the parents have already made the deposit for their daughter's 18 th birthday, then the amount available for the daughter's college expenses on her 18th birthday is closest to A) $176,509B) $112,324 C) $160,463 D) $80,232 E) $43,200. Given that the inflation rate in 2006 was about 3.15%, while a short-term municipal bond offered a rate of 2.87%, which of the following statements is correct? A) The purchasing power of investors in these bonds grew over the course of the year. B) The real interest rate for investors in these bonds was greater than the rate of inflation. C) The nominal interest rate offered by these bonds gave the true increase in purchasing power that resulted from investing in these bonds. D) Investors in these bonds were able to buy less at the end of the year than they could have purchased at the start of the year. E) The nominal interest rate indicates that the real purchasing power has increased over the year. Which of the following is NOT a relevant cash flow when estimating cash flows for deciding whether to invest in making a new product? A) The inventory of the new product B) The salaries paid to the managers who decide which projects to take C) The reduction in sales of the outdated product that customers will abandon in favor of the new product D) The tax rate times the depreciation of the asset purchased when the project begins E) Today's market value of land that the company already owns and will use in the project Kappa Company is a new company that had earnings of -$2.40 million and sales of $3.73 million this year. It has 100,000 shares outstanding. The median Price-to-Earnings (P/E) ratio of profitable firms in the industry is 15, and the median Price-to-Sales ratio of all firms in its industry is 6.2. What is the best estimate of the stock price using multiples valuation? A) $559.50 B) $231.26 C) -$359.00 D) $0 E) $148.80 An investment opportunity will pay you $10,000 every six months for the next 15 years. An alternative investment that has the same risk pays 8% compounded weekly. What is the most you should pay for this new opportunity today? A) $250,000 B) $171,297 C) $203,936 D) $189,330 E) $179,220 After owning a house for ten years, you sell it. You had financed it with a 30-year $350,000 mortgage with fixed monthly payments. The APR was 5% when you took it out. After you sell the house, how much will you have to pay the lender to cover the remaining balance? A) $166,667 B) $284,697 C) $271,910 D) $175,808 E) $233,333 Kaiser Industries has bonds on the market making annual payments, with 14 years to maturity, and selling for $1,382.01. At this price, the bonds yield 7.5 percent. What is the coupon rate? A) 8.00% B) 8.50% C) 9.00% D) 10.50% E) 12.00% Which of the following best describes the valuation principle? D) The value of a commodity or an asset to a firm or its investors is determined by its competitive market price. When the value of the benefits exceeds the value of the costs in terms of market prices, the decision will increase the market value of the firm. In 2014, James Inc. issued a $1000 semiannual coupon bond at par that pays a 6% coupon and matures

at 2024. In 2015, the bond's market price was $1,125. If the bond's yield to maturity did not change since 2015, what was its market price in 2016? A) $960 B) $1,125 C) $1,173 D) $1,113 E) $1,266

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Ma, Inc. has a market value capital structure of 30% debt and 70% equity. The tax rate is 30%. Thefirm’s bonds currently trade in the market for $1035.00. These bonds have a face value of $1,000,coupon rate of 8% paid semiannually, and 10 years remaining to maturity. The firm’s common stocktrades for $20 per share. The firm has just paid a dividend of $2. Future dividends are expected to growat 2% per year. Based on this information, Ma, Inc.’s WACC is _____%. Cream and Crimson has a capital structure of 60% debt and 40% equity. The tax rate is 34%. The firm’sbonds currently trade in the market for $784. These face value $1,000 bonds have a coupon rate of 8%,paid semiannually, with 7 years to maturity. The firm’s common stock trades for $15 per share and thecompany’s beta is 1.28. The risk-free rate (Rf) = 3.2% and the market risk premium (Rm – Rf) = 8.1%.Given this information, Cream and Crimson’s WACC is _____%.

Simone's Sweets is an all-equity firm that has 9,100 shares of stock outstanding at a market price of $27 per share. The firm's management has decided to issue $88,000 worth of debt at an interest rate of 6 percent. The funds will be used to repurchase shares of the outstanding stock. What are the earnings per share at the break-even EBIT?

WorldTrans is an all-equity firm with 500,000 shares outstanding. It has $2,000,000 of EBIT, and EBIT is expected to remain constant in the future. The company pays out all of its earnings, so earnings per share (EPS) equal dividends per share (DPS), and its tax rate is 25%. The company is considering issuing $3,000,000 of 9.00% bonds and using the proceeds to repurchase stock. The risk-free rate is 4.5%, the market risk premium is 5.0%, and the firm's beta is currently 1.05. However, the CFO believes the beta would rise to 1.25 if the recapitalization occurs. Assuming the shares could be repurchased at the price that existed prior to the recapitalization, what would the price per share be following the recapitalization? (Hint: P0= EPS/rs because EPS = DPS.) Group of answer choices $35.43 $33.20 $29.99 $31.92 $26.81

Given the following information for Electric Transport, find the WACC. Assume the company's tax rate is 34 percent.Debt: 7,500, 8.4 percent coupon bonds outstanding. $1,000 par value, 22 years to maturity, selling for 103 percent of par, the bonds make semiannual payments.Common stock: 195,000 shares outstanding, selling for $78 per share, beta is 1.21.Preferred stock: 11,000 shares of 6.35 percent preferred stock outstanding, currently selling for $76 per share.Market: 8 percent market risk premium and 5.1 percent risk-free rate.

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