Chapter 13: 1. Which of the following does NOT always increase a company?s market value? a. b. c. d. e. 2. Akyol Corporation is undergoing a restructuring, and its free cash flows are expected to be unstable during the next few years. However, FCF is expected to be $50 million in Year 5, i.e., FCF at t = 5 equals $50 million, and the FCF growth rate is expected to be constant at 6% beyond that point. If the weighted average cost of capital is 12%, what is the horizon value (in millions) at t = 5? Horizon value at t=5 = Cash flow in year 6/(WACC - Growth rate) FCF in year 6 = 50 X 1.06 = 53 WACC = 12% and growth rate = 6% Horizon value = 53/(12%-6%) = $883 million 3. Suppose Yon Sun Corporation?s free cash flow during the just-ended year (t = 0) was $100 million, and FCF is expected to grow at a constant rate of 5% in the future. If the weighted average cost of capital is 15%, what is the firm?s value of operations, in millions? 4. A company forecasts the free cash flows (in millions) shown below. The weighted average cost of capital is 18%, and the FCFs are expected to continue growing at a 5% rate after Year 4. Assuming that the ROIC is expected to remain constant in Year 4 and beyond, what is the Year 0 value of operations, in millions? 5. Based on the corporate valuation model, the value of a company's operations is $800 million. Its balance sheet shows $50 million in accounts receivable, $70 million in inventory, $40 million in short-term investments that are unrelated to operations, $25 million in accounts payable, $90 million in short-term notes payable, $100 million in long-term debt, $25 million in preferred stock, $150 million in retained earnings, and $280 million in total common equity. If the company has 20 million shares of common stock outstanding, what is the best estimate of the common stock's price per share? 6. Island Industries forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 10% and the free cash flows are expected to continue growing at the same rate after Year 4 as from Year 3 to Year 4, what is the Year 0 value of operations, in millions? 7. One of Island Industries' divisions has above average risk and so a divisional weighted average cost of capital of 20%. This division has current sales of $600,000, operating income of $250,000, total net operating capital of $300,000, and a marginal tax rate of 35%. What is the Market Value Added (MVA) for this division if the constant growth FCF model applies and the division expects a constant growth in sales and FCFs of 6%? 8. Use the information from Case 74: Electro Technology Corporation to answer this question. Use the earnings multiple method to estimate the value of ETC's equity with the average projected earnings over the first three years as the best estimate of ETC's normalized earnings. Assume that stocks of publicly traded firms with somewhat similar technologies sell at an average of 6.5 times earnings. Chapter 11: 9. Sing Oil Company is considering a new project whose data are shown below. The required equipment has a 3-year tax life, after which it will be worthless, and it will be depreciated by the straight line method over 3 years. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's Year 1 operating cash flow? 10. Moore & Moore (MM) is considering the purchase of a new machine for $50,000, installed. MM will use the MACRS accelerated method to depreciate the machine, which is classified as 5-year property. MM expects to sell the machine at the end of its 4-year operating life for $10,000. If MM's marginal tax rate is 40%, what will the after-tax cash flow be when it disposes of the machine at the end of Year 4? 11. Temple is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, would be depreciated by the straight line method over its 3-year life, and would have a zero salvage value. No new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV? 12. Sub-Prime Loan Company is thinking of opening a new office, and the key data are shown below. The company owns the building that would be used, and it could sell it for $100,000 after taxes if it decides not to open the new office. The equipment for the project has a 3 year class life and will be depreciated by the MACRS depreciation system over the project's 4 year life, and it will have zero salvage value at the end of the project. No new working capital will be required. What is the project's Profitability Index? 13. TexMex Products is considering a new salsa whose data are shown below. The equipment has a 3 year class life and will be depreciated by the MACRS depreciation system and it will have a positive pre-tax salvage value at the end of Year 3, when the project will be closed down. Also, some new working capital will be required, but it will be recovered at the end of the project's life. However, this project would compete with other TexMex products and would reduce their pre-tax annual cash flows. What is the project's MIRR? 14. Waste Industries is analyzing an average risk project, and the following data have been developed. Unit sales will be constant, but the sales price should increase with inflation. Fixed costs will also be constant, but variable costs should rise with inflation. The project should last for 3 years, it will be depreciated on a straight line basis, and there will be no salvage value. This is just one of many projects for the firm, so any losses can be used to offset gains on other firm projects. What is the project's NPV? 15. Use the information from Case 13C: Heavenly Foods Corporation to answer this question. In Case question 14 relating to Table 4, assume the best case NPV stays at $596,236 and the worst case NPV stays at ($258,628) but the base case or most likely NPV drops to $165,000. Also, the probabilities change to 60% probability for the base case and both the best and worst cases have a 20% probability of occurrence. Find the coefficient of variation for the project's expected NPV. 16. Use the information from Case 13C: Heavenly Foods Corporation to answer this question. Usually sensitivity analysis changes 1 key input and holds all the other inputs at their most likely or base case value. For question 16, we will change 3 inputs at the same time and hold the other inputs at their most likely or base case. Assume the unit sales drops 10% to 630,000 units, the initial sales price drops 10% to $1.80, and the WACC increases 10% to 13.2%. What is the project's new NPV? Chapter 25: 17. Which of the following will NOT increase the value of a real option? a. b. c. d. e. 18. Which of the following is most CORRECT? a. b. c. d. e. Multi-Part 25-1: Texas Wildcatters Inc. (TWI) is in the business of finding and developing oil properties, and then selling the successful ones to major oil refining companies. TWI is now considering a new potential field, and its geologists have developed the following data, in thousands of dollars. t = 0: t = 1: t = 2: t = 3: 19. Refer to Multi-Part 25-1. Since the project is considered to be quite risky, a 25% cost of capital is used. What is the project's expected NPV, in thousands of dollars? 20. Refer to Multi-Part 25-1. Calculate the project's coefficient of variation. Multi-Part 25-2: Small Pharmaceuticals Corporation (SPC) is considering a project that has an upfront cost at t = 0 of $2,000. (All dollars in this problem are in thousands.) The project's subsequent cash flows are critically dependent on whether a competitor's product is approved by the Food and Drug Administration. If the FDA rejects the competitive product, SPC's product will have high sales and cash flows, but if the competitive product is approved, that will negatively impact SPC. There is an 80% chance that the competitive product will be rejected, in which case SPC's expected cash flows will be $1250 at the end of each of the next seven years (t = 1 to 7). There is a 20% chance the competitor's product will be approved, in which case the expected cash flows will be only $100 at the end of each of the next seven years (t = 1 to 7). SPC will know for sure one year from today whether the competitor's product has been approved. SPC is considering whether to make the investment today or to wait a year to find out the FDA's decision. If it waits a year, the project's upfront cost at t = 1 will remain at $2,500, the subsequent cash flows will remain at $1250 per year if the competitor's product is rejected and $100 per year if the alternative product is approved. However, if SPC decides to wait, the subsequent cash flows will be received only for six years (t = 2 to 7). 21. Refer to Multi-Part 25-2. Assuming that all the cash flows are discounted at 9%, if SPC chooses to wait a year before proceeding, how much will this increase or decrease the project's expected NPV in today's dollars (i.e. at t = 0), relative to the NPV if it proceeds today? 22. Refer to Multi-Part 25-2. Calculate the effect of waiting on the project's risk. By how much will delaying reduce the project's standard deviation of the expected NPV? 23. Refer to Multi-Part 25-2. Next, we plan to use the Black-Scholes model to estimate the value of this option to delay. Calculate P = current stock price = PV as of time zero of all expected future cash flows if the project is delayed for 1 year. 24. Refer to problem 23. Now use the Black-Scholes model to estimate the value of this option to delay. Use the P that you calculated in problem 23, plus assume that the variance of the project's rate of return is 40% and that the risk-free rate of return is 6%. Chapter 22: 25. Which of the following statements is most correct? a. b. c. d. e. 26. What would be the priority of the claims as to the distribution of assets in a liquidation under Chapter 7 of the Bankruptcy Act? 1 is the highest claim, 5 is the lowest. a. b. c. d. e. Almost Made It Corporation (AMIC) had the following balance sheet at the time it filed for bankruptcy (in thousands of dollars): Cash Receivables Inventories Total Current Assets Net Plant Net Equipment Total Assets The mortgage bonds are secured by the plant but not by the equipment. The subordinated debentures are subordinated to the notes payable. The firm was unable to reorganize under Chapter 11; therefore, it was liquidated under Chapter 7. The trustee, whose legal and administrative fees amounted to $500,000, sold off the assets and received the following proceeds (in thousands of dollars): ASSET Plant Equipment Cash Receivables Inventories Total No single wage earner had over $2,000 in claims, and there were no unfunded pension plan liabilities. Use the information on AMIC to answer questions 28 through 32. 27. As priority claims, the trustee fees, wages payable, and taxes payable had the same percentage of their claim satisfied. What percentage of their claims were satisfied? 28. The preferred shareholders and common shareholders had the same percentage of their claim satisfied. What percentage of their claims were satisfied? 29. What percentage of the mortgage bonds claims were satisfied? 30. What percentage of the accounts payable claims were satisfied? 31. What percentage of the subordinated debentures claims were satisfied? 32. Use the information from Case 39: Mark X Company to answer this question. If the land and building proceeds were only $1,500 instead of $5,000, what percentage of the mortgage debt would be satisfied?
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