NAME_
Corporate Finance
Exam 1
Part 1. 16 points: Answer ALL of the following questions. (4 point per question).
1. The Income Statement for Loco Corporation is shown below. Total Assets for Loco are
1
What is an appropriate required rate of return against which to
evaluate the prospective IRRs from the Boeing 7E7?
The computed IRR based on the case study is stated as 15.66%,
thus, the required ra
UniversityofCincinnati
ProfessorSapnotiEswar
Assignment 2: Discount Rates
Solutions
Q1: Suppose a stock had an initial price of $73 per share, paid a dividend of $1.20 per
share during the year, and h
Chatman Mortgage, Inc.
Joi Chatman recently received her finance degree and has decided to enter the mortgage broker
business. Rather than working for someone else, she will open her own shop. Her cou
Question 1
A company that utilizes the MACRS system of depreciation:
Answers will have equal depreciation costs each year of an asset's life.
:
will have a greater tax shield in year two of a project
RWJJ 14.1
EBIT
Recession
14700
No Debt
Number of Shares
5000
NI equals EBIT since there is no debt, and no taxes
NI
EPS
EPS relative to Normal Scenario
14700
2.94
-0.3
With Debt
The price per share is
NAME_
Corporate Finance
Exam 3
Part 1. 16 points: Answer ALL of the following questions. (4 point per question).
1. In a world with no taxes, no transactions costs, and no costs of financial distress,
RWJJ 16.15
Current CF
PV of Future CF
shares outstanding
a. Current Stock Price
b. If Gibson distributes
the firm is worth
and the share price will drop to
52.0547945205
0.75
18.25
50
c. All Jeff has
RWJJ 16.13
Current shares: 3,500
Current price: 87
a.
Dividend paid
The dividend per share is 11,700/3500 = 3.3429
So the share price would drop = 83.6571
Market value of the company is now 83.6571*35
NAME_
Corporate Finance
Exam 2
Part 1. 16 points: Answer ALL of the following questions. Show all work. (4 point per
question).
1. Given the choice, would a firm prefer to use MACRS depreciation or st
Chapter 11
7.
The expected return of an asset is the sum of each return times the probability of that return
occurring. So, the expected return of the stock is:
E(RA) = .05(.325) + .15(.147) + .50(.11
CH11
1.
Some of the risk in holding any asset is unique to the asset in question. By investing in a variety of assets, this unique
portion of the total risk can be eliminated at little cost. On the ot
CH11
1. Some of the risk in holding any asset is unique to the asset in question. By investing in a variety of assets, this unique portion
of the total risk can be eliminated at little cost. On the
RWJJ 17.22
Draw the binomial trees for the underlying asset, and for
the put option:
107
92
Max(95-107,0) = 0
put
81
Max(95-81,0) = 14
a. Use the binomial model to calculate the value of the call
opti
The Starlight Electric Corporation (SEC) is confronted with the problem of building
a large or small plant for producing a newly-developed product which has an
economic lif
The Starlight Electric Corporation (SEC) is confronted with the problem
of building a large or small plant for producing a newly-developed product which has
an economic life of 10 years. The decision
RWJJ 4.43
Diagram of the cash flows:
Time
CF
0
1
6
0
7
3800
8
3800
3800
30
3800
Using the value additivity principle, we notice that CF A
and CF B (as shown below) combine to equal the CF we are
inter
RWJJ 4.63
Diagram of the cash flows (using time monthly periods):
Time
back pay
fut pay
p & s
Court
-24
37
-12
39
0
1
2
3
60
3.583 3.583 3.583 3.583 3.583
150
25
Assuming the 9% interest rate is the s
RWJJ 6.25
Diagram of the dividends:
Time
Div
0
1
.65
2
.65
.65
12
.65
1.1% Growth
The fundamental value of a share is equal to the present
value of all future dividends. Using value additivity, we
can
RWJJ 11.6
State of
Probability of
Economy
State of Economy
Recession
0.15
Normal
0.5
Boom
0.35
Return on
Stock A
0.02
0.08
0.12
To get the expected value, multiply probability time outcome for
each st
7.3 Calculating Discounted Payback An investment project has annual cash inflows of $5,800, $6,200, $6,700, and $5,900, and a
discount rate of 12 percent. What is the discounted payback period for the
RWJJ 19.12
Before the rights offer
price
quantity
market cap
91
X
91X
The rights offer will issue one new share for every three shares.
So there will be (X/3) new shares, and 10X/3 dollars raised
pric
7.2 Calculating Payback An investment project projects cash inflows of $825 per year for eight years. What is the project payback period if the
initial cost is $3,200? What if the initial cost is $4,6
RWJJ 7.24
Suppose the project has future cash flows of C1, C2, C3, to
Cn.
If the payback is 6 years, then C1 + C2 + C6 = 738,000
The worst pattern of cash flows is that the initial cost is
paid immedi