FIN125 Final Exam Practice Test

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Lehigh University *

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125

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Finance

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Feb 20, 2024

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FIN125 Final Exam Practice Test Mike the TA Guy Please Read: The questions I wrote are based off in-class examples, homework, quizzes, and recitations. This practice test is NOT in the format of the actual exam and is much longer than the actual test. Lastly, since the actual exam has not been written yet, there may be concepts on here that are NOT on the exam. Regardless, you should have an understanding of all of this. As always, I highly recommend showing all formulas (and timelines where applicable) before taking calculator shortcuts. Most problems, I will only show calculator steps. Reminder: If you need to show your work on an exam, calculator steps DO NOT count as showing your work. All of my intermediary steps for problem are rounded to 4 decimal places. On the answer key, I will not always show all of my work because I need to catch up on the new season of Rick & Morty. Good luck and may the odds be ever in your favor! Chapter 14 1) Stewie has decided to drop out of college after having a lucid dream in which she was a trout farmer. She decided to buy a fish farm located in Virginville, PA. 2 years into the operation, Professor Olena decided to stop by the farm looking to buy a few trout. The first question she asked Stewie when visiting was, “What is your weighted average cost of capital?” Stewie immediately starts to cry out of embarrassment and calls her pal Sofia for help. Stewie gives Sofia the following information: a. The current stock price is $21. The firm’s beta is .87. The current risk-free rate is 3.7% and the market risk premium is 6.1%. They just paid a dividend of $1.32 and they have a growth rate of 2%. There are 20,000 stock outstanding. Use both methods for cost of equity to find the Re for WACC (hint: take the average). b. The firm has debt with a par value of $400 per bond quoted at 95. The bonds pay 4% quarterly coupons and there are 5,000 bonds outstanding. The bonds mature in 12 years and have a tax rate of 19%. c. The firm has 2,000 preferred stocks outstanding with a price of $9 each with an annual dividend of $0.45. Help Sofia find the WACC for Stewie’s trout farm.

2) What are the capital weights of debt and equity given that the debt-equity ratio is .78? 3) Wade’s Wonderful Wiley Wilderness White Willows has two bond issues outstanding described below. Given a tax rate of 16%, what is the firm’s weighted average after-tax cost of debt? a. The first bond has a coupon rate of 7% compounded annually, a par value of $500, matures in 4 years, has a total face value of $2 million, and is quoted at 103. b. The second bond has a coupon rate of 3% compounded semiannually, a par value of $100, matures in 12 years, has a total face values of $3 million, and is quoted at 91. 4) The Alex saga continues. At the conclusion of the third season of the Mandalorian, Alex decides he wants to build his own lightsaber. Once again, his wife and kids leave him knowing this story is just too ridiculous to follow. They take a camping trip to Mt. Rainier. To build his lightsaber, Alex needs to obtain a Kyber crystal from the ice planet of Ilum. To get there though, he needs to build his own spaceship, which shockingly is not cheap. He believes constructing this spaceship and the travel expense will cost him roughly $154 million. Once obtaining the Kyber crystal, Alex figures he can make $60 million a year for the next 3 years. He decides to fund this project through a company he started that breeds piranhas which he called “Alex’s Fishies.” The company has the following information: equity with market value of $2 million, debt with market value of $1 million, cost of equity of 6.8%, cost of debt 4%, and tax rate of 14%. Using the companies WACC to find the required return rate to find the project, should Alex follow through with this project based on profitability index?

Chapter 16 5) Okay fine, I’ll chill on the story problems for a bit. An unlevered company has a cost of capital of 17% and earnings before interest and tax of $444,444. A levered company with the same operations and assets has a face value of debt of $10,555 with a coupon rate of 4.7% and is quoted at 78. At a tax rate of 16.5%, what is the value of the levered company? 6) Ethan Greater has a $780,000 bond issue outstanding. These bonds have a coupon rate of 4.36%, pay interest daily, sell at 54.6% of face value, and are taxed at 33%. What is the amount of the annual interest tax shield? 7) Jaden’s J’s (which manufactures knock-off knock-off Nike’s) is an all-equity firm with a total market value of $668,098 and has 17,000 shares of stock outstanding. Management believes that EBIT will be $74,000 if the economy is normal. If there is a recession, EBIT will be 14% lower. If there is a boom, EBIT will be 24% higher. Find the EPS in BOTH a boom and recession given a tax rate of 45%. 8) Andrew’s Australian Asexual Anteaters currently has 3,000 shares of stock outstanding. It is considering adding a debt of $45,000 at an interest rate of 4.9%. The break-level of EBIT between these two capital structures is $21,500. How many shares of stock will be repurchased if the company undergoes recapitalization? Ignore taxes.

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9) Katie’s Krustaceans (a company that specializes in crawfish and prawns) has the following information: EBIT = $11, Tax Rate = 32%, Debt = $50, Cost of Debt = 5.4%, Unlevered Cost of Capital = 10%. a. Find the value of the levered firm and the value of its equity. b. Find the cost of the firm’s business risk. 10) For each of the following scenarios, briefly describe the ideal capital structure. a. No taxes and no bankruptcy costs b. Taxes and no bankruptcy costs c. Taxes and bankruptcy costs

Chapter 10 11) You are considering a new project. Given the following information from pro-forma financial statements, please determine whether the firm should pursue this project. Assume the required rate of return is 13%. Explain briefly how you decided. Pro-forma Statement of Cash Flows, 2022 Year 0 1 2 3 4 Operating Cash Flows $1,000 $29,000 $77,000 $443,000 Change in NWC -$40,000 0 0 0 $40,000 Net Capital Spending -$7,558,000 0 0 0 0 Refer to the MACRS table for the next four problems.

Timmy decides to open a bakery that will become famous for exotic flavored macaroons. This new bakery would increase his annual sales by $504,777 with expenses of $45,000. The project will require the purchase of a new oven worth $75,000 that will depreciate using the above MACRS schedule over five-years. The company has a marginal tax rate of 12%. 12) What is the depreciation tax shield in year 3? 13) What is the depreciation tax shield over the first 4 years? 14) What is the depreciation expense in year 2? 15) What is the value of the oven in year 6? 16) Evander accepts a job at IncredibleBank and is relocated to Florida. Congrats to him! He was asked to help the bank answer a question based on the information below. The bank purchased a building 4 years ago for $450,000. After the bank spent $45,000 on new windows, they rented out the building for $40,000 a year. That lease is set to expire two years from today (meaning the bank should receive two more rent payments). Because of a real estate boom, the market value of the building went up to $740,000 and they are considering breaking the lease to sell the building. If they sell, they will incur $90,000 in fees. What cash flows are relevant to the decision to sell the building?

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