QUESTION 1: Which of the following is not true of beta?
a. Levered beta is always bigger than unlevered beta for the same company.
b. Unlevered beta measures business risk only.
c. Levered beta measures financial risk only.
d. A firms' beta increases with financial leverage.
QUESTION 2: Estimate future FCF for fiscal year 2016 based on the following information- Forecasted numbers for fiscal year 2016: EBIT=100, Capital expenditure=60, Depreciation=30, total working capital=60. The working capital currently is 52. Marginal tax rate is 40%.
a. 18
b. 62
c. -30
d. 22
e. None of the other answers.
QUESTION 3: You estimated a firms' value of operating assets to be $400 million. The company's balance sheet shows $20 million in short-term investments that are unrelated to operations. The balance sheet also shows $170 million in debt and $100 million in total common equity. What is your estimated value of common equity?
a. 130
b. 150
c. 250
d. 230
e. None of the other answers is true.
Questions 4-8 are based on information below-
The company Youphone is expected to generate $48 million in FCFF next year. The firm currently is extremely over-levered with a debt to equity ratio of 4:1. The beta of the stock is now 2.72 and the pre-tax cost of debt is 12%. The marginal tax rate is 40%, the risk free rate is 4% and the market risk premium is 6%. You believe that new management can turn the firm around by restructuring the firm's financing mix, to make it 50% debt and 50% equity. That will reduce the pre-tax cost of debt to 8%. The firm is expected to have a 2% perpetual growth rate.
Question 4: The unlevered beta of the company is:
a. 1.84
b. 0.8
c. 2.35
d. 1.7
e. None of the other answers.
QUESTION 5: With the new financial structure (50% debt and 50% equity), estimate the new beta for the company.
a. 1.04
b. 1.12
c. 1.28
d. 2.57
e. None of the other answers.
QUESTION 6: What would be the new cost of equity under the new financial structure?
a. 19.44%
b. 6.24%
c. 11.68%
d. 10.24%
e. None of the other answers.
QUESTION 7: What would be the new cost of capital under the new financial structure?
a. 7.52%
b. 9.12%
c. 9.44%
d. 8.24%
e. None of the other answers.
QUESTION 8: What would the value of the firm be under the new financial structure?
a. 869.56
b. 769.23
c. 674.15
d. 645.16
e. None of the other answers.