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Quiz3_A(Answers)

Quiz3_A(Answers) - BADM 115 – Section 11 Prof Isabelle...

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Unformatted text preview: BADM 115 – Section 11 Prof. Isabelle Bajeux‐Besnainou Fall 2008 Form A QUIZ #3 1. (4 points) A company has an EPS of $12.00, a cash flow per share of $9.00, and a price/cash flow ratio of 10.0x. What is its P/E? EPS = CFPS = P/CF = P = P/E = $ 12.00 $ 9.00 10.0 $ 90.00 7.5x 10.00 * 9.00 = 90.00 / 12.00 = 2. (4 points) Central City Construction (CCC) needs $0.78 million of assets to get started, and it expects to have a basic earning power ratio of 35%. CCC will own no securities, so all of its income will be operating income. If it chooses to, CCC can finance up to 40% of its assets with debt, which will have a 10% interest rate. Assuming a 45% tax rate on all taxable income, what is the difference between its expected ROE if CCC finances with 40% debt versus its expected ROE if it finances entirely with common stock? TA = 780,000 Int. rate = 10.0% T = 45.0% BEP = 0.35 EBIT = 0.35 * 780000 = 273,000 Finance with debt D/A = Equity = 780000 * (1 ‐ 0.4) = Debt = Interest = EBT = Tax = NI = ROE = Difference in ROE = Finance with common stock D/A = Equity = 780000 * (1 ‐ 0) = Debt = Interest = EBT = Tax = NI = ROE = 0.4 468,000 312,000 31,200 241,800 108,810 132,990 28.4% 9.2% ‐ 780,000 ‐ ‐ 273,000 122,850 150,150 19.3% 3. (2 points) Is an initial public offering an example of a primary or a secondary market transaction? Explain. A primary market is the market in which corporations raise capital by issuing new securities. An initial public offering is a stock issue in which privately held firms go public. Therefore, an IPO would be an example of a primary market transaction. A ‐ 1 ...
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