Practice Final
I.MultipleChoices(30points)
1. The optimal capital structure of a firm _ the marketed claims and _ the nonmarketed
claims against the cash flows of the firm.
minimizes; minimizes
minimizes; maximizes
maximizes; minimizes
maximizes; maximize

Quiz 2
Q1: A firm is equally likely to be worth $50 million, $80 million, $120 million, or $150
million. There is one bond outstanding that promises to pay $100 million at an interest
rate of 6%. The appropriate cost of capital for the firms projects is 1

1. A firm is equally likely to be worth $50 million, $80 million, $120 million, or $150
million. There is one bond outstanding that promises to pay $100 million at an
interest rate of 6%. The appropriate cost of capital for the firms projects is 12%.
Refe

A Case Study of Modigliani- Miller Capital Structure Theory
Part 1- Static Theory
An enduring controversy within financial theory concerns the effect of financial leverage on the
value and stock price of a company. Can a company affect its overall value b

First National Bank
Investment Decision: ATM
Four years ago the First National Bank of California installed an automated teller machine
(ATM) at one of its branches. The machine had the capacity to accept deposits, make
withdrawals, and handle inquiries r

EDO CORPORATION
On January 2, 2003, in the strategic committee meeting of the company, James Smith Chairman,
President and Chief Executive Officer said, we are optimistic about 2003 and the years beyond.
The proposed projects presently under consideration

Finance Formulas
Financial Cash Flow
Cash flow from Assets = Cash flow to creditors + Cash flow to stockholders
1. Cash flow from assets = EBIT + DEP - Taxes - Net Capital Exp. - Change (NWC)
2. Cash flow to creditors = Interest paid - New Borrowing
3. Ca

Chapter 16
Financial Distress,
Managerial Incentives,
and Information
Chapter Outline
16.1 Default and Bankruptcy in a Perfect Market
16.2
The Costs of Bankruptcy and Financial Dis
tress
16.3 Financial Distress Costs and Firm Value
16.4
Optimal Capital St

Chapter 17
Payout Policy
Chapter Outline
17.1 Distributions to Shareholders
17.2
Comparison of Dividends and Share Repu
rchases
17.3 The Tax Disadvantage of Dividends
17.4 Dividend Capture and Tax Clienteles
17.5 Payout Versus Retention of Cash
Chapter Ou

Example: Setting the Bid Price
The Army is seeking bids on Multiple Use Digitizing Devices (MUDDs). The contract calls for 4 units per
year for 3 years. Labor and material costs are estimated at $10,000 per MUDD. Production space can be
leased for $12,000

Business 134
Section 001
November 2, 2015
Marriott Corporation: The Cost of Capital
Decision Formulation Plan
Marriott Corporation relied heavily on measuring the opportunity cost of capital by using the
WACC concept. The WACC, weighted average cost of ca

Equity
Payouts
Dividends and Share repurchases Mechanics
Perfect-Market Irrelevance
Imperfect-Market Considerations
Dividends
Payments made by a corporation to its
shareholders.
Cash dividends
Regular dividends
Special dividends
Dividends in kind
19-2
Pro

Introduction to
Corporate
Finance
The Study of Corporate Finance
The Concept of Valuation
Career Relevance
A variety of career tracks
Corporate financial positions
Investment banking
Mutual fund or hedge fund investing
Advisory
Consultancy
Academic
1-2
Co

Practice Midterm
I.MultipleChoices(30points)
1. The primary reason that company projects with positive net present values are considered acceptable is that:
A. the project's rate of return exceeds the rate of inflation.
B. they create value for the owners

Final Study Guide
Recommended reviewing method:
1. Go over lecture slides together with the notes taken in class. Pay special attention to new
concepts and examples. When confused, refer to the corresponding section in your textbook.
The topics listed in

Midterm Study Guide
Recommended reviewing method:
1. Go over lecture slides together with the notes taken in class. Pay special attention to new
concepts and examples. When confused, refer to the corresponding section in your textbook.
The topics listed i

Cost of
Capital
Understanding the Discount Rate
Unequal Rates: the Yield Curve
Uncertainty: Risk and Return
CAPM and WACC
The Essence of r
Discount rate / required rate of return / cost of
capital / interest rate
The opportunity cost of using capital in t

Valuation
Basics
Time Value of Money
Discounted Cash Flow
You Have Won a Cash Prize!
You have two payment options:
CONGRATULATIONS!
A. Receive $1,000,000 now
OR
B. Receive $1,000,000 in ten years
5-2
Money has Time Value
A $100 bill has the same value as

RealWorld
Applications
Projecting Cash Flows
Variations of Assumptions
Estimating Cost of Capital
Financial Cash Flow
The actual cash flow generated by the firms
assets that is free to distribute to the firms
capital providers.
How do we estimate the cash

Capital
Structure
Basic Concepts
Theory of Optimal Capital Structure
Practical considerations
How are Firms Financed?
Firms get funds through
Fund providers get
Issuing equity (stock), debt (bonds), and etc.
Claims on cash generated by the firms assets.
T

Capital
Budgeting
Rules
Overview
NPV
IRR
Payback Period
Maintained Assumptions
We assume perfect markets:
No differences in opinion.
No taxes.
No transaction costs.
No big sellers/buyers
We assume perfect certainty.
For the most part, we assume equal rate

PRUFFIOCK CORPORATION
Balance Sheets as of December 31, 2001 and 2002
(S in millions
2001 2002 Change
Assets
7 Current assets
" Cash ' S 84 $ 98 +35 14.
Accounts receivable 165 188 + 23
Inventory 393 422 + 29
Total, I s 642 $ 708 +$ 66

BUS 134
Corporate Finance
A. Sohrabian
Homework #8
1.
MM Proposition I without Taxes: Alpha Corporation and Beta Corporation are
identical in every way except their capital structures. Alpha Corporation, an allequity firm, has 10,000 shares of stock outst

BUS 134
Corporate Finance
A. Sohrabian
Homework #7
1. WACC and NPV: Och, Inc., is considering a project that will result in initial after cash
savings of $3.5 million at the end of the first year, and these savings will grow at a rate of
5 percent per yea

ECON 135: THE STOCK MARKET
DISCUSSION PROBLEMS #3
This problem set is due at the end of the class. You may form your own groups or choose to work on
your own. If you work in a group, each person in the group MUST put his or her name on the paper
to be tur

ECON 135: THE STOCK MARKET
DISCUSSION PROBLEMS #1
This problem set is due at the end of the class. You may form your own groups or choose to work on
your own. If you work in a group, each person in the group MUST put his or her name on the paper
to be tur

ECON 135: THE STOCK MARKET
DISCUSSION PROBLEMS #2
This problem set is due at the end of the class. You may form your own groups or choose to work on
your own. If you work in a group, each person in the group MUST put his or her name on the paper
to be tur

BUS 134 Solution to HW #6 A. Sohrabian
The capected return of an asset is the sum of the probability of each return occurring times the
probabihty of that return occumng. So, the expected retina of each stock is:
131111) = .33(.082) + .33(.095) + .33(.063