exam2practiceproblems

exam2practiceproblems - FINC 3630: Advanced Business...

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1 FINC 3630: Advanced Business Finance Additional Practice Problems Accounting For Financial Management 1. Calculate free cash flow for Home Depot for the fiscal year-ended January 30, 2011 (the 2010 fiscal year). 2. Calculate MVA and EVA for Home Depot. Use the information given in class for market value data. Financial Statement Analysis 1. Use the DuPont equation to calculate return on equity for Home Depot for the fiscal years- end January 30, 2011 and January 31, 2010. Did it increase or decrease? Was the change in return on equity driven by changes in profitability, changes in how efficiently the firm used its assets, or changes in the extent to which the firm uses debt financing? Cost of Capital 1. Your boss has assigned you and your assistant the task of estimating the cost of common equity for your firm. Your assistant has gathered the following information. The company has $1,000 face value bonds outstanding with 9 years to maturity, a 7 percent coupon rate, paid semiannually, and currently selling for $936.70. Analysts have estimated a 10 percent growth rate for your firm for the foreseeable future. The company’s common stock currently has a dividend yield of 2 percent. Your assistant has estimated the beta of the stock to be 1.5. Using reasonable estimates for the risk-free rate and market risk premium, if necessary, what do you recommend as a reasonable estimate of the cost of common equity? Be sure to be able to justify your answer to your boss and the board of directors. 2. In addition to the information in the above problem, you know your company has 1,000 bonds outstanding, 20,000 shares of common stock, currently trading at $60, and a 40% marginal tax rate. You also know the firm has 12,000 shares of preferred stock, currently selling for $85 and paying a $8.50 annual dividend. What is your estimate of the firm’s cost of capital? 3. Assume all of the same information from the previous 2 problems, except now your boss tells you that your firm has a target debt-equity ratio of 1, where equity is equally divided between common and preferred stock. What is your estimate of the firm’s cost of capital now?
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2 Corporate Value 1. Your firm, GOP Enterprises, is evaluating Obama, Inc. for a possible acquisition. You believe free cash flows will grow at 8 percent for the foreseeable future. Obama, Inc. has $100 million in marketable securities that you believe is not necessary for the firm’s
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This note was uploaded on 12/11/2011 for the course FINC 3630 taught by Professor Jensen,m during the Summer '08 term at Auburn University.

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exam2practiceproblems - FINC 3630: Advanced Business...

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