Questions for the final exam for Managerial Finance,
I need the answer to be as the following (
1- formulas
2- show work or steps
3- short (couple sentences or comment) for the results.to let me understand the different issues.
4- during the exam, I'm allowed to have two or three pages of formula supported with steps or anything they need except numbers, so please create formula sheet beside the work so I can have it with me in the exam.
5- some of the questions can be solved by financial calculator so please show its steps beside the original answer so I can follow by using my calculator.
Question 1) ABC Technologies was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of Its earnings to support growth and thus has never paid a dividend.
Management has indicated that it plans to pay a $0.45 dividend 3 years from today, then to increase it at 20% rate for 2 years, and then to Increase It at a constant rate of 6.00% thereafter.
Assuming a required return of 10.00%. what is your estimate at the stock's current value?
Question 2) XYZ corp. just paid a dividend of $1.10 per share, and that dividend is expected to grams constant rate of 5% per year in the future. The company's beta is 1.2, the market risk. is 5.00%, and the risk-free rate is 2.00%. What is the company's current stock price?
Question 3) RRI is an oil company and its shares are currently trading at $60. They just paid annual dividend of $2.80 but due to low oil prices, they are expected to cut their dividends by 20% next year and 10% the following year. However, starting from year 3, anticipated long-run growth rate is 4%. RRI has a beta of 1.4. Market risk premium is 6% and risk-free rate is 1.8%. Are the RRI shares Currently overpriced, or underpriced, or fairly priced?
Question 4) FB Inc. balance sheet shows a total of noncallable $45 million long-term debt with a coupon rate of 7.00% and a yield to maturity of 6.00%. This debt currently has a market value of $40 million. The balance sheet also shows that the company has 10 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is $65 million. The current stock price is $30 per share; stockholders requited return, rs is 10.00%; and the firm's tax rate is 40%. The CFO thinks the WACC should be based on market value weights, but the president thinks book weights are more appropriate. What is the difference between these two WACCs?
Question 5) Assume that you are on the financial staff of FB Inc., and you have collected the following data: The yield on the company's outstanding bonds Is 6%; its tax rate is 40%; the next expected dividend is $1 a share, the dividend is expected to grow at a constant rate of 5.5 % a year, the price of stock is $50.00 per share; the flotation cost for selling new shares is F = 10%; and the target capital structure is 45% debt and 55% common equity.
What is the firm's WACC, assuming it must issue new stock to finance its capital budget?
Question 6) A company is censoring Projects S and L, who cash flows are shown below. These projects are mutually exclusive, equally risky, and are not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under some conditions choosing projects on the basis of the IRR will cause $0.00 value to be lost
| wACC: 8% |
|
|
|
|
|
| Year |
0 |
1 |
2 |
3 |
4 |
| CFs |
$1.05 |
$675 |
$650 |
|
|
| CFs |
$1.05 |
$360 |
$360 |
$360 |
$360 |
Question 7) OR Drilling Inc, is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection creation, while the CFO advocates the MIRR. If the decision is made by choosing the project with the higher IRR rather than the one with the higher MIRR, how much, if any value will be forgone? Note that "true value" is measured by NPV, and under some conditions the choice of IRR vs. MIRR will have no effect on the value lost.
| wACC: 7% |
|
|
|
|
|
| Year |
0 |
1 |
2 |
3 |
4 |
| CFs |
$1,100 |
$650 |
$600 |
$100
|
$100
|
| CFs |
$2,750 |
$725 |
$725 |
$800 |
$1,400 |