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 cousin Mike has
approached her about a mortgage for a hous
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 than it would have if the firm
had opted for straight-
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
interested in. Value additivity says that PV(CF) = PV(A) +
P
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, what is
the debt-equity ratio that will maximize the v
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 to do is reinvest his dividends.
Dividends from 1000 sh
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*3500 = 292,800
Stock Repurchase
Number of shares repurcha
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 straight-line
depreciation? Why?
MACRS is better. With MA
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 other hand, there are some risks that affect all investme
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 other hand, there are some risks that affect all invest
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
5,000,000, and Locos Equity Multiplier equals 1.20.
Loc
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
option
u = 107/92 = 1.16304348
d = 81/92 = 0.88043478
rf =
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 depends, among ot
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(.115) + .30(.298) = .1086, or 10.86%
To calculate the stan
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 280,000/5,000 = $56.
$90,000 of debt is issued, to pur
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 depends, among other things, on the size of
the market
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 simple annual rate, we
must convert this to get the simp
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 consider the dividend stream in two parts.
Time
A
B
0
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 state, and then sum.
Recession
Normal
Boom
Expected Retur
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 these cash flows if the initial cost is $9,000? What if th
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
price
quantity
market cap
p
4X/3
91X + (10X/3) =
X(91 + 3.3
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 $4,600? What if it is $7,900?
7.24 Payback and NPV An inves
RWJJ 14.8
Current
Price
Shares
Market Cap
Debt
EBIT
Interest
NI=Aggregate Dividends
Dividends per share
Proposed
60
6500
390000
0
60
4225
253500
136500
34,000
0
34,000
5.2307692308
34,000
10920
23,080
5.4627218935
a. Ms Brown would get 523.08 per year.
b.
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 immediately, and there are no cash inflows until year 6
as sh
Ch12
1.
No. The cost of capital depends on the risk of the project, not the source of the money.
2.
Interest expense is tax-deductible. There is no difference between pretax and aftertax equity costs.
3.
You are assuming that the new projects risk is the
NAME_
Corporate Finance
Exam 4
Part 1. 16 points: Answer ALL of the following questions. (4 point per question).
1. When making a capital budgeting decision, suppose you do not take into consideration a
real option inherent in a project. What error might
1. The company should be careful if it decides to release a dividend. This could potentially decrease
the stock price by roughly the amount of the paid dividend. This could also lower the value of
the company because that extra cash value is no longer wit
1. Mikes monthly mortgage payment is $2577.71
2. The most significant risk Joi faces is interest rate risk. If interest rates rise before the date of the
mortgage, the value of the mortgage will decrease and Ian will not be willing to purchase the
mortgag
2. Jensens Alpha is the excess return on a stock. It is not explained by the Beta of the stock. If an asset
has a positive Jensens Alpha, that means it is above the SML. The residuals in the regression are the
errors in estimating it. Its the portion of t
Chapter 11
Conch Republic Electronics, Part 2
Input Area:
Equipment
Salvage value
R&D
Marketing study
$
$
$
$
Sales(units)
Depreciation rate
Sales of old PDA
Lost sales
Price
VC
FC
Price of old PDA
Price reduction
of old PDA
VC of old PDA
Tax rate
NWC per