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Answer all problems in this section of the exam, showing as much of your work in the space provided as is feasible.

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INSTRUCTIONS: Answer all problems in this section of the exam, showing as much of your;work in the space provided as is feasible.;1. (10 Points). A company has a return on equity of 20 percent, a debt ratio of 55 percent, and a;profit margin of 12 percent. The companys total assets equal $500 million. Determine the level of;sales for this company?;2. (10 Points). Last year a company had $355,000 of assets, $26,275 of net income, and a debtto-total-assets ratio of 44%. Now suppose the newly hired CFO convinces the president to;increase the debt ratio to 58%. Sales and total assets will not be affected, but interest expenses;would increase. However, the CFO believes that better cost controls would be sufficient to offset;the higher interest expense and therefore keep net income unchanged.;What was the original return on equity (ROE) for this company? Assuming the president of the;firm allows the CFO to increase the debt ratio to 58%, what will be the new ROE?;3. (10 Points). Suppose you deposit $2,500 into a bank account at the beginning of every year;with the first deposit made today (on 8/14/2014). The bank account has a nominal annual interest;rate of 8 percent and interest is compounded annually. How much will you have in the account;(FV6) at the end of 6 years (or by 8/14/2020)?;4. (10 Points) A start-up company is seeking your advice concerning its debt ratio and capital;structure decisions. It will require $1,000,000 of total assets and anticipates sales during its first;year of operation to be $650,000. The sum of its operating costs and cost of goods sold will be;$525,000. The company can borrow funds at an interest rate of 8% however, because of its highrisk business plan, the lender will require the firm to maintain a TIE (times-interest-earned) ratio;of at least 5.0x. What is the maximum debt ratio the firm can use so as to meet its TIE ratio of;5.0x? Note that by the term debt ratio I imply Debt/Total Assets from the 13th edition of our text;which in the 14th edition is called the Liabilities-to-assets ratio and is defined as Total;liabilities/Total assets.;Hint: To determine the annual interest paid, use the following: INT($) = Debt x i;(where i = interest rate in %). Also, EBIT = Sales Operating costs Cost of goods sold.;5. (20 Points). The Mountain Fresh Company had earnings per share (EPS) of $6.32 in 2007;and $11.48 at the end of 2012. The company pays out 30 percent of its earnings as dividends per;share (DPS), and the companys stock price was $37.50 (at the end of 2012).;(a) Calculate the growth rate in dividends (g) over the given period.;Dividend Growth Rate (g) = _________________.;(b) Calculate the expected dividend per share next year (what is D1 at the end of 2013, assuming;the earnings and dividends of Mountain Fresh growth at a constant rate).;Expected Dividend (D2013) = __________________.;(c) Based on the information given above, what is the cost of retained earnings common equity;(rs) for Mountain Fresh Company?;Cost of Retained Earnings (rs) = __________________.;6. (20 Points). The director of capital budgeting for a firm has identified two mutually exclusive;projects, A and B, with the following expected net cash flows;Year;0;1;2;3;Expected Net Cash Flows;Project A;($120);80;60;30;Project B;($120);20;70;90;Both of the projects have a cost of capital of 14 percent.;(i);What is Project A's and Project Bs net present value (NPV)? (4 points);NPV for A = ____________________.;NPV for B = ____________________.;(ii) What is the profitability index (PI) for Project B? (3 points);Profitability Index for B = ____________________.;(iii);What is the modified internal rate of return for Project A? (3 points);MIRR for Project A = ____________________.;7a. (10 Points). Suppose you want to invest in a corporate bond which currently has 7 years;until maturity. The bond carries a coupon (legal) rate of 5.75 percent, payable annually, and has;a maturity value of $1,000. If you require a 10.5 percent yield to maturity (rd = 0.105), what;price should you expect to pay for the bond today (VB(2013))? Also, if the yield to maturity holds;constant over the next year and you think you might sell your investment at that point, what price;would you expect to receive for this bond next year (VB(2014))?;Bond Price Today (VB(2013)) = ______________________.;Bond Price Next Year (VB(2014)) = ______________________.;7b. (10 Points). Weaver Chocolate Co. expects to earn $3.50 per share during the current year, its;expected dividend payout ratio is 65%, its expected constant dividend growth rate (g) is 6.0%;and its common stock currently sells for $32.50 per share. New stock can be sold to the public at;the current price, but a flotation cost of 5% would be incurred (F = 0.05). What would be the;cost of retained earnings common equity (rs) for Weaver Chocolate Co.? What would be the;cost of equity from new common stock (re)?;Cost of Retained Earnings Common Equity (rs) = ____________________.;Cost of Newly Issued Common Stock (re) = ____________________.;8. (10 Points). Church Inc. is presently enjoying relatively high growth because of a surge in the;demand for its new product. Management expects earnings and dividends to grow at a rate of;25% for the next 3 years, after which competition will probably reduce the growth rate in;earnings and dividends to 6%, i.e., g = 0.06. The companys last dividend, D0, was $1.25, its;beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00% (Hint: You will;need this data to find the required return, rs, for Church, Inc.). What are the expected dividends;during the high-growth period (D1, D2, D3,). Also, what is the current price of the common stock;today (P0)?;D1 = _______________.;D2 = _______________.;D3 = _______________.;Stock Price Today (P0) = ____________________.;9. (20 Points). Alpha Products plans to finance its capital budget for next year by selling $50;million of 11 percent coupon rate bonds, with each bond having a maturity value (M) of $1,000;and a 20-year maturity. Flotation costs (F) will be 5% of the maturity value of each bond. The;balance of its $125 million capital budget will be financed with retained earnings (so that;retained earnings will be at least $75 million next year). Next year Alpha expects dividends will;increase at a 7 percent rate to $1.40 per share (so that D1 = $1.40), and the CFO expects;dividends and earnings to continue growing at the 7 percent rate for the foreseeable future. The;current market value of Alpha's stock is $30. The firm has a marginal tax rate of 40 percent.;Given its flotation cost on newly issued debt what is the cost of debt for Alpha Products (rd)?;What is the cost of retained earnings equity capital for Alpha Products (rs)? Finally, what is its;weighted average cost of capital for the coming year?;Cost of Newly Issued Debt (rd) = ____________________.;Cost of Retained Earnings Equity Capital (rs) = ____________________.;Weighted Average Cost of Capital (WACC) = ____________________.;10. (20 points) Suppose a company has hired you to estimate the cash flows arising from a;proposed capital project by replacing old equipment with a $0 market value and a book value of;$6000, and you have been handed the relevant data below. The project being considered has a 5year tax life, and at the end of year 5 the asset will be worthless (i.e. salvage value =0). The CFO;suggests that you depreciate the asset by using the straight-line method over the 5 year life of the;project. Revenues and other operating costs are as noted below, and will be constant over the;period.;Equipment cost: $150,000, Book value of old equipment: $6000;Delivery and installation cost of equipment and remove old equipment: $50,000;Straight-line depreciation rate: 20% (5-year);Sales revenue each year: $100,000;Operating costs (excluding depreciation): $30,000, Tax rate: 40%;10a. What are annual cash flows for the next five years? Hint: find CF0 to CF5;10b. Suppose CFO will borrow 50% of capital from a bank with 10% interest, and 50% of;capital through equity with 22% of require rate of return. What is the cost of capital for this;project?;10c. What is the net present value of this project and should you convince the CFO to accept or;reject the new equipment?;10d. If the firms CEO want to use IRR to value the project, will IRR has the same suggestion as;NPV? (please find IRR, and explain what it means);View Full Attachment;Additional Requirements;Level of Detail: Show all work;Other Requirements: provide step by step procedure.

 

Paper#19205 | Written in 18-Jul-2015

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