Corporate Financial Problems
FIN412. 1 & 2
Team Problem Set I Solution
Problem 1
Assume a yearly discount rate of 10%. What is the present value of:
We will be using the formula for growing perpetuity: .
a. A perpetual cash flow of $10 that recurs every y
Corporate Financial Problems, FIN412.1 & 2
Team Problem Set I
Note: Submitting your answers is optional.
If you submit, please do so in-class.
Please submit a paper copy of your team problem set solution at the beginning of class. I
encourage you also to
Corporate Financial Problems, FIN412.1 & 2
Team Problem Set II, Please submit in-class on due date.
Problem 1 (similar to Problem 9.16 in GT) (15 points) (This is a review question for NPV &DCF)
Jones Inc is considering a prospective project with the foll
Team Problem Set IV Solutions
FIN 412, Spring 2012
Problem 1 (30 points) Risk-Shifting Example
The corporate insiders of Avon Products Inc (a major beauty products firm) have two alternative
processes (called project A and project B) available to manufact
Corporate Financial Problems (412)
Name:
LUBO (version 2 note
dot in left bottom corner)
First Exam: Spring 2012, FIN 412
1) You have 1 hour & 13 minutes (or 73 minutes total) to complete the exam.
2) I suggest you start exam by browsing all questions fir
Midlands Case Report: Group 2M
Arteen Arabshahi, Zhiwen Wang, Nick Dlugas, Jake Lawrence, Michael Schorr
Midlands Energy Case Study
1) Mortensens estimates of Midlands cost of capital were used for asset appraisals for
capital budgeting and financial a
Team Problem Set V
FIN 412, Spring 2012
Due 5/2, beginning of class
Problem 1 (50 points) Initial Public Offerings
Please describe in a short essay format the upcoming Facebook IPO. What are the risks
associated with this IPO? What would be the benefits f
GROUP 2M:
Arteen Arabshahi, Nick Dlugas, Mike Schorr, Zhiwen Wang, Jake Lawrence
Team Problem Set V
FIN 412, Spring 2012
Due 5/2, beginning of class
Problem 1 (50 points) Initial Public Offerings
Please describe in a short essay format the upcoming Facebo
Corporate Financial Problems, FIN412.1 & 2
Team Problem Set III Solutions
Please note that the assigned BMA and AD chapters questions do have available solutions in the
solutions manuals posted on Blackboard under Materials.
Problem 1 (Question 2 from Cha
Memo Replies, 2/22/12
If your company gives you 2 option for the year bonus: 1) Options to buy stock; 2) cash. Which one is
better? Depends on the present value or anything else? What if both options work PV=$50,000,
which one to choose?
If both offers ha
Memo Questions: 2/29
1. While seeing the betas of a stock, we learn how to measure risk and compensation required
for bearing that risk. How would you do a risk analysis for a privately held company? How
would you analyze risk if the company operates in a
Memo Replies, 3/5/12
1. Is PEG=
Can you show a simple example?
Yes, it is. Here is an example. Suppose P=20$, current EPS=1.5$ and expected growth next year is
5%. That would be a PEG ratio of (20/1.5)/5% = 2.66.
Here is a second example. Suppose that we
Memo Replies, 3/7/12
When a company goes into bankruptcy protection what does this mean for the company
and its debt and shareholders?
This is a very important question. When a company announces bankruptcy, two things
immediately happen: the company cease
Replies to Memo Questions, 3/19/2012
Will there be a time where the maturity matters in a tax shields problem? If so, is there an
example of it?
As far as capital structure is being studied, the maturity will never be relevant. However if you value the
ta
Memo Replies, 3/21/12
Can you explain personal equity tax gain?
The personal equity tax is the tax on capital gains (15%) and the tax on dividends (currently
15%, previously 28% - that being prior to June 2003). This is the tax paid if you sell stock on t
Memo Replies, 3/28/12
Can you explain how bankruptcy costs differ for public and private firms?
There is no difference between the two types of firms when they go into either reorganization (chapter
11) or into liquidation (chapter 7) of the bankruptcy co
Replies to Memo Question, 4/2/12
Why doesn't MM's proposition 1 apply in the risk shifting example?
Great question! M&M proposition 1 assumes that there are no changes to the investment policy
when a company includes debt in its capital structure. But bec
Replies to Your Memo Questions, 4/4/12
1. Is my intuition correct on the first non-graded quiz question correct? Potential answer:
True. It would not change because you would not sell back to them for $9 per share when
they are worth $10 per share.
Yes, y
Replies to Memo Questions, 4/11/12
Can you explain what investment distortion is?
The investment distortion is the loss of firm value associated with the choice of a project that has lower
NPV. Such choice of a project with lower NPV could result from, fo
Levering & Unlevering Betas: Suggested Practice Questions (FIN 412, Lubomir Litov)
Problem 1
For the purposes of solving this problem ignore taxes . Hilton Hotels is a major hotel chain. Hilton has $10B in
outstanding equity & $2B in outstanding debt ($2B
Practice Problem on Valuation (FCFE & FCFF)
New York & Company (ticker NWY), a specialty retailer of fashion-oriented merchandise, is considering
opening a new store in downtown Saint Louis in 2008. The store is an extension of the existing assets.
Foreca
Guidelines on how to prepare for the FIN 412 first exam
First Exam Date: 2/27/2012, MCCLD 125
I. Topics included in the first exam
Here is a recap of all the topics to be covered for the midterm (the corresponding readings
from BMA are shown in the syllab
Memo Replies 2/20/12
How do you calculate terminal (or continuation) value?
Thank you, this is an important question. We calculate the terminal value in three possible ways, as
per the discussion slide from the DCF slides.
The most common assumption for i
Memo Replies: 2/15/12
What exactly does a multiple mean? I get the evaluation part, but what does a multiple
mean to the firm?
Multiple means the ratio that we have chosen. For example the price earnings ratio you can
think of it as the price being a mult
Memo Replies, 2/13/12
I think a good investment is high return, high risk. For bonds, grade AAA bonds risk is
much lower than grade BB junk bonds. Does that mean the returns of grade AAA bonds
are also lower than grade BBB bonds? The risk of grade AAA bon
Extra Credit toward FIN 412 Second Exam, 3/29/12
You can receive extra credit if you attend the Fathauer Distinguished Lecture Series by Dr.
Simeon Djankov, Deputy Prime Minister and Minister of Finance of the European Union (EU)
state of Bulgaria, on Thu
Extra Credit Assignment
Arteen Arabshahi
Please prepare a short essay discussing your views of whether Apple is undervalued or
overvalued, or simply properly valued. You can use the op-ed piece that is attached
here from Ashwath Damodaran as a basis for y
Guidelines to prepare for FIN 412 Exam #4, Monday, 5/7/12, in-class
(Review Session on 4/26, 5:15-6:30pm, MCLD 125)
I. List of Topics
Here is the list of all topics to be covered on the upcoming exam (the corresponding readings
from BMA & GT are shown in
Guide for Preparation for the Exam #3, 4/16, Monday, in-class.
(Review Session on 4/11, 5:15-6:30pm, MCLD 125)
List of Topics
Here is the list of all topics to be covered on the second exam:
1. Capital structure decisions & bankruptcy costs.
Direct costs
Guide for Preparation for the Exam #2, 3/26, Monday, in-class.
(Review Session is on 3/21, 5:15-7pm, MCLD 125)
List of Topics
Here is the list of all topics to be covered on the second exam:
1. Relative Valuation
a. Understand the steps involved in multip