a.
[4 pts] Create the pro forma balance sheet for the next year by filling the table:
NOTE: 1) DO NOT include the plug variable
2) Equity account includes both common stocks and accumulated retained earnings
Current assets: 216
Current Liab: 432
Fixed assets: 2160
Long term liab: 700
Equity: 1100+27=1127
Total assets: 2376
Total financing: 2259
Next year’s equity is the sum of the last year’s equity and the projected ret. Earnings.
Projected ret. Earnings = $25 x1.08 = 27
b. [4 pts] Compute the external funds needed (EFN) based on (a)
Total assets- total financing = 2376-2259 = 117
If a formula is used instead, partial mark will be given.
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3. [13 pts] Consider a firm that has EPS of $10 at the end of the first year, a dividend payout ratio of
50%, a discount (or interest) rate of 15%, and a return on retained earnings of 20%.
a.
[4 pts] Compute the stock price per share using the Dividend Discount Model
g=ret. Ratio x return on ret. Earnings = 0.5*0.2=0.1
Thus, DDM price =Div_1/(r-g)=5/0.05=100
b. [6 pts] Compute the stock price per share using the NPVGO model
Price=EPS/r+NPVGO
1)
EPS/r=10/0.15=66.6667
2)
NPVGO=(-Div_1 +EPS*g/r)/(r-g)=33.3333
Price therefore is 1)+2) =100
c. [3 pts] Briefly discuss why the result of (a) and (b) should be the same (or should not be the same)
They should be the same because the dividend increases at a constant rate of 10%
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A corporation cannot default on an undeclared dividend
A) true
B) false
Ans: A)
If its YTM is less than its coupon rate, a bond will sell at a _____, and increases in YTM will _____.
A)
discount, decrease this discount.
B)
discount, increase this discount.
C)
premium,
decrease this premium.
D)
premium,
increase this premium.
E)
none of the above.
Answer: C )
An individual with no investment opportunities has income of $15,000 in period 0 and income of
$10,000 in period 1.
If the interest rate is 7%, which of the following points is on the individual's
consumption possibility line?
A)
$ 3,000 in period 0 and $21,215 in period 1
B)
$ 4,000 in period 0 and $21,116 in period 1
C)
$10,000 in period 0 and $15,350 in period 1
D)
$16,000 in period 0 and $ 9,000 in period
E)
$18,800 in period 0 and $ 6,200 in period 1.
Answer: C )
The discount rate in stock valuation can be thought of as the sum of what two parts?
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A)
ROE, retention ratio.
B)
Dividend yield, growth rate in dividends.
C)
Price, growth rate in dividends.
D)
Dividend yield, price.
E)
ROA, ROE.
Answer: B)
Growth can be reconciled with the goal of maximizing firm value:
A)
because greater growth always adds to value.
B)
because growth must be an outcome of decisions that maximize NPV.
C)
because growth and wealth maximization are the same.
D)
because growth of any type can not decrease value.

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