Final exam
Question 1 (Analyzing the cash flow Statement) Goggle, Inc.
is an Internet firm that has experienced a period of very rapid growth in
revenues over the period 2008-2010. The cash flow statements for Goggle, Inc.
spanning the period are below.
Based solely on the cash flow statements for 2008 through
2010, select the statement that best describes the major activities of Goggle’s
management team over the period.
Question 2 When managers have little or no ownership in the
firm, they are less likely to work energetically for the company’s
shareholders. We call this type of conflict a(n) __________.
Question 3 (Analyzing the cash flow Statement) Goggle, Inc.
is an Internet firm that has experienced a period of very rapid growth in
revenues over the period 2007-2010. The cash flow statements for Goggle, Inc.
spanning the period are below. Choose the best answer for the following
question using the information found in these statements:
What years did Goggle generate positive cash flow from its
operations?
Question 4 (Analyzing the cash flow Statement) Goggle, Inc.
is an Internet firm that has experienced a period of very rapid growth in
revenues over the period 2008-2010. The cash flow statements for Goggle, Inc.
spanning the period are below. Choose the best answer for the following
question using the information found in these statements:
Describe Goggle’s main source of financing in the financial
markets over the period.
Question 5 (Analyzing
the cash flow Statement) Goggle, Inc. is an Internet firm that has experienced
a period of very rapid growth in revenues over the period 2008-2010. The cash
flow statements for Goggle, Inc. spanning the period are below. Choose the best
answer for the following question using the information found in these
statements:
Cash Flow Statement
How much did Goggle invest in new capital expenditures over
the period? (Round to the nearest integer.)
Question 6 (Bond valuation) The 8-year $1,000 par bonds of
Vail Inc. pay 12 percent interest. The market’s required yield to maturity on a
comparable-risk bond is 7 percent. The current market price for the bond is
$1,130.
What is your yield to maturity on the Vail bonds given the
current market price of the bonds? (Round to two decimal places.)
What should be the value of the Vail bonds given the yield
to maturity on a comparable risk bond? (Round to the nearest cent.)
Should you purchase the bond at the current market price?
Question 7 (Common stock valuation) The common stock of NCP
paid $1.21 in dividends last year. Dividends are expected to grow at an annual
rate of 6.40 percent for an indefinite number of years.
If your required rate of return is 9.30 percent, what is the
value of the stock for you?
Should you make the investment?
Question 8 (DuPont analysis) Dearborn Supplies has total
sales of $150 million, assets of $109 million, a return on equity of 30
percent, and a net profit margin of 7.6 percent. What is the firm’s debt ratio?
Question 9 (Expected rate of return and risk) Syntex, Inc.
is considering an investment in one of two common stocks.
Expected Rate of Return
Given the information in the table, what is the expected
rate of return for stock B?
What is the standard deviation of stock B?
What is the expected rate of return for stock A?
Based on the risk (as measured by the standard deviation)
and return of each stock which investment is better? (Round to 2 decimal
places)
Question 10 (Review of financial statements) Prepare a
balance sheet and income statement for the Warner Company from the scrambled
list of items found here in order to answer the question below. The statements
do not need to be submitted, only your response to the question.
Financial Statement
What can you say about the firm’s financial condition based
on the prepared financial statements?
Question 11 (Cost of preferred stock) The preferred stock of
Walter Industries Inc. currently sells for $35.67 a share and pays $3.49 in
dividends annually. What is the firm’s cost of capital for the preferred stock?
Question 12 (Cost of common equity) The common stock for the
Hetterbrand Corporation sells for $59.17, and the last dividend paid was $2.24.
Five years ago the firm paid $1.54 per share, and dividends are expected to
grow at the same annual rate in the figure as they did over the past five
years.
What is the estimated cost of common equity to the firm
using the dividend growth model? (Round to 2 decimal places.)
Hetterbrand’s CFO has asked his financial analyst to
estimate the firm’s cost of common equity using the CAPM as a way of validating
the earlier calculations. The risk-free rate of interest is currently 4.1
percent, the market risk premium is estimated to be 4.2 percent, and
Hetterbrand’s beta is 0.78. What is your estimate of the firm’s cost of common
equity using this method? (Round to 2 decimal places.)
Question 13 (Weighted average cost of capital) The target
capital structure for QM Industries is 37 percent common stock, 8 percent
preferred stock, and 54 percent debt. If the cost of common equity for the firm
is 17.6 percent, the cost of preferred stock is 10.6 percent, the before-tax
cost of debt is 7.7 percent, and the firm’s tax rate is 34 percent, what is
QM’s weighted average cost of capital?
Question 14 (Weighted average cost of capital) As a
consultant to GBH Skiwear, you have been asked to compute the appropriate
discount rate to use in the evaluation of the purchase of a new warehouse
facility. You have determined the market value of the firm’s current capital
structure (which the firm considers to be its target mix of financing sources)
as follows:
Weighted average cost of capital
To finance the purchase, GBH will sell 20-year bonds with a
$1,000 par value paying 8.4 percent per year (paid semiannually) at the market
price of $929. Preferred stock paying a $2.51 dividend can be sold for $34.03.
Common stock for GBH is currently selling for $49.09 per share. The firm paid a
$4.06 dividend last year and expects dividends to continue growing at a rate of
4.5 percent per year into the indefinite figure. The firm’s marginal tax rate
is 32 percent.
Calculate component weights of capital:
What is the weight of debt in the firm’s capital structure?
What is the weight of preferred stock in the firm’s capital
structure?
What is the weight of common stock in the firm’s capital
structure?
Calculate component costs of capital:
What is the after-tax cost of debt for the firm?
What is the cost of preferred stock for the firm?
What is the cost of common equity for the firm?
Calculate the firm’s weighted average cost of capital.
What is the discount rate you should use to evaluate the
warehouse project? (Round to 3 decimal places.)
