exam2practiceproblems - FINC 3630 Advanced Business Finance...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
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?
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern