quiz1 - Quiz 1 Name: Quiz 1: Fall 1997 1. You have been...

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Quiz 1 Name: 1 Quiz 1: Fall 1997 1. You have been asked to assess the implied risk premium on the Timbuktu Stock Exchange (TSE). The index is trading at 1050, and the dividend yield is 3%. The current long term bond rate is 6.5%, and the expected long term nominal growth rate in the economy is 6%. Estimate the implied risk premium for equities. 2. You have been provided the following information on CEL Inc, a manufacturer of high- end stereo systems. In the most recent year, which was a bad one, the company made only $ 40 million in net income. It expects next year to be more normal. The book value of equity at the company is $ 1 billion, and the average return on equity over the previous 10 years (assumed to be a normal period) was 10%. The company expects to make $ 80 million in new capital expenditures next year. It expects depreciation, which was $ 60 million this year, to grow 10% next year. The company had revenues of $ 1.5 billion this year, and it maintained a non-cash working capital investment of 10% of revenues. It expects revenues to increase 20% next year and working capital to decline to 9.5% of revenues. The firm expects to maintain its existing debt policy (in market value terms). The market value of equity is $ 1.5 billion and the book value of equity is 500 million. The debt outstanding (in both book and market terms) is $ 500 million. Estimate the FCFE next year. 3. Cello Inc. is a manufacturer of pianos. It earned an after-tax return on capital of 10% last year and expects to maintain this next year. If the current years after-tax operating income is $ 100 million and the firm reinvests 50% of this income back, estimate the free cash flow to the firm next year.(After-tax Operating Income = EBIT (1-t)]
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Quiz 1 Name: 2 Spring 1998: Quiz 1: Equity Instruments and Markets Answer all questions and show necessary work. Please be brief. This is an open books, open notes exam. 1. Risk Perspectives ( 1 point each) A. Recently, mutual funds and banks have started funds to do venture capital investing (Eg. Citicorp Venture Capital Fund). In what types of firms will these funds have an advantage over traditional venture capitalists (who tend to specialize in sectors)? o Firms which require a lot of resources o Firms where the returns are highest o Firms, where information about the firm is easily available to all potential investors, and which have good management in place o Other: ____________________________________________________________ _________________________________________________________________ B. In the last decade real estate investment trusts (REITs) have grown substantially, often at the expense of traditional real estate investors, who tended to be localized (in a particular area - eg. New York) or specialized (in a particular type of property - eg. malls). Which of the following factors best explains this growth? o Investors want to diversify into real estate o Real estate is more undervalued today, relative to values a decade ago and relative to other assets.
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This note was uploaded on 01/27/2012 for the course FIN 101 taught by Professor Cho during the Spring '08 term at NYU.

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quiz1 - Quiz 1 Name: Quiz 1: Fall 1997 1. You have been...

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