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College Baruch Finance 3610 Professor J. Wang Spring 2005 Final Exam (Practice Problems) Note: These practice problems are from Chapters 11, 15 and 16 only. However, the final exam is cumulative. All chapters from 4 to 16 (excluding 12, 13 and 14) will be covered in the final exam. 1. The return that shareholders require on their investment in the firm is called the: a. Dividend yield. b. Cost of equity. c. Capital gains yield. d. Cost of capital. e. Income return. 2. All else the same, a higher corporate tax rate . a. will decrease the WACC of a firm with some debt in its capital structure b. will increase the WACC of a firm with some debt in its capital structure c. will not affect the WACC of a firm with some debt in its capital structure d. will decrease the WACC of a firm with no debt in its capital structure e. will change the WACC of a firm with some debt in its capital structure, but the direction is unclear. A firm is expected to pay a dividend of $3.50 per share in one year. This dividend, along with the firm's earnings, is expected to grow at a rate of 7% forever. If the current market price for a share is $67, what is the cost of equity? a. 7.00% b. 12.22% c. 15.64% d. 14.00% e. 13.46% The long-term debt of your firm is currently selling for 109% of its face value. The issue matures in 12 years and pays an annual coupon of 7.5%. What is the cost of debt? a. 5.60% b. 6.40% c. 7.50% d. 8.90% e. 9.30% 3. 4. Use the following information to answer questions #5 through #12. A 3-year project will cost $60,000 to construct. This will be depreciated straight-line to zero over the 3-year life. Fixed costs = $30,000 per year. The tax rate = 30% and the required return = 15%. Unit Sales Price/unit Variable cost/unit 5 Base Case 3,000 $30 $10 Lower Bound 2,500 $27 $8 Upper Bound 3,500 $33 $12 What is the base case NPV for the project? a. $ 1,647 b. $ 2,989 c. $10,320 d. $17,909 e. $24,755 What is the worst case NPV for the project? a. $34,313 b. $12,056 c. $ 5,880 d. $ 1,373 e. $ 8,401 What is the best case NPV for the project? a. $ 9,247 b. $26,462 c. $45,599 d. $62,327 e. $84,252 Suppose you want to conduct a sensitivity analysis for the possible changes in unit sales. What is the IRR when the sales level equals 3,200 units? a. 18.6% b. 22.9% c. 37.9% d. 58.6% e. 81.5% Suppose you are interested in the project's sensitivity to unit price. What is the NPV at a price of $31 per unit? a. $12,056 b. $ 3,738 c. $ 3,652 d. $ 6,441 e. $10,434 6 7 8 9 10 What is the base case accounting break-even point? a. 1,500 b. 2,500 c. 2,814 d. 3,000 e. 3,212 11 What is the base case cash break-even point? a. b. c. d. e. 1,500 2,500 2,814 3,000 3,212 12 What is the base case financial break-even point? Ignore taxes. a. 1,500 b. 2,500 c. 2,814 d. 3,000 e. 3,212 13. A firm needs to raise $5 million in a rights offering. If the subscription price is $10 per share, the stock price is $13 per share, and there are 2 million shares outstanding, what is the value of a right? a) $0.19 b) $0.50 c) $0.60 d) $1.25 e) $3.00 14. A firm needs to raise $250 million for a project. If external financing is used, the firm faces flotation costs of 15% for equity and 4% for debt. If the project is to be financed 70% with equity and 30% with debt, how much cash must the firm raise in order to finance the project? a. $220.8 million b. $223.8 million c. $250.0 million d. $279.3 million e. $283.1 million 15. Given the following information, what is the firm's weighted average cost of capital? Market value of equity = $30 million; market value of debt = $20 million; cost of equity = 15%; cost of debt = 9%; equity beta = 1.4; tax rate = 35%. a. 11.34% b. 12.60% c. 12.97% d. 13.32% e. 14.08% 16. A proposed project lasts 3 years and has an initial investment of $500,000. The aftertax cash flows are estimated at $120,000 for year 1, $240,000 for year 2, and $240,000 for year 3. The firm has a target debt/equity ratio of 0.6. The firm's cost of equity is 15% and its cost of debt is 8%. The tax rate is 35%. What is the NPV of this project? a. $24,600 b. $ 0 c. $ 180 d. $ 9,627 e. $41,845 17. A public offering of securities where existing shareholders of the firm have the first opportunity to buy the new securities, exclusive from the public, general is called a: a. Best efforts offer. b. Firm commitment offer. c. General cash offer. d. Rights offer. e. Red herring offer. 18. The difference between the underwriters' buying price and the offering price of the securities to the public is called the . a. spread b. underpricing c. filing fee d. new issue premium e. extortion premium 19. The beginning of the period when stock trades in the market without a recently declared right is called the: a. Pre-issue date. b. Aftermarket. c. Declaration date. d. Holder-of-record date. e. Ex-rights date. 20. In a rights offering, the price of a share will drop by approximately the value of a right on the date. a. standby b. ex-rights c. record d. announcement e. expiration 21. A firm has 480,000 shares outstanding at a market price of $90 a share. It wants to raise $6 million via a rights offering. The subscription price is $75 per share. How many rights are required to purchase one of the new shares? a. 0.9 b. 1.5 c. 2.4 d. 4.8 e. 6.0 22. A firm has 500,000 shares outstanding at a market price of $70 a share. It wants to raise $10 million via a rights offering. The subscription price is $50 per share. What will the firm be worth after the offering? a. $29 million b. $35 million c. $38 million d. $45 million e. $51 million 23. A proposed project lasts 3 years and requires an initial investment of $480,000. The aftertax cash flows are estimated at $120,000 for year 1, $240,000 for year 2, and $240,000 for year 3. The require return for the project is 10%. The firm needs to raise money using a mixture of debt and equity, and the firm wants to keep the debt-to-asset ratio at 0.4. The floatation cost of equity is 7% and the floatation cost of debt is 3%. What is the NPV of this project after considering the floatation costs? a. $19,646 b. $ 0 c. $ 7,754 d. $ 9,627 e. $41,845 Answers: 1. b 2. a WACC=wD(1-T)RD + wERE, T increases, WACC decreases. 3. b R=D1/P + g = 3.5/67+0.07=12.22% 4. b PV=-1090, FV=1000, PMT=75, N=12, CPT, I/Y=6.40% 5. a Depreciation=60000/3=20000, EBIT=3000*30-3000*10-30000-20000=10000 Taxes=10000*0.3=3000 OCF=10000+20000-3000=27000 CF0=-60000, CF1=27000, F01=3, I=15, CPT NPV=1647.08 6. a Depreciation=60000/3=20000, EBIT=2500*27-2500*12-30000-20000= -12500 Taxes= -12500*0.3= -3750 OCF= -12500+20000-(-3750)=11250 CF0=-60000, CF1=11250, F01=3, I=15, CPT NPV=-34313 7. c Depreciation=60000/3=20000, EBIT=3500*33-3500*8-30000-20000= 37500 Taxes= 44500*0.3= 11250 OCF= 37500+20000-(11250)=46,250 CF0=-60000, CF1=46,250, F01=3, I=15, CPT NPV=45,599 8. b Deprecia...