FIN302 Cheat Sheet

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School

Drexel University *

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Course

302

Subject

Finance

Date

Feb 20, 2024

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docx

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Uploaded by ConstableComputerDuck8

1) Mendez Company has identified an investment project with the following cash flows. 2) Investment X offers to pay you $5,300 per year for eight years, whereas Investment Y offers to pay you $7,300 per year for five years.

3) An investment offers $3,850 per year for 15 years, with the first payment occurring one year from now. a) If the required return is 6 percent, what is the value of the investment? b) What would the value be if the payments occurred for 40 years? c) What would the value be if the payments occurred for 75 years? d) What would the value be if the payments occurred forever?

4) If you put up $45,000 today in exchange for a 6.4 percent, 15-year annuity, what will the annual cash flow be? 5) The Maybe Pay Life Insurance Company is trying to sell you an investment policy that will pay you and your heirs $30,000 per year forever. If the required return on this investment is 5.6 percent, how much will you pay for the policy? 6) The Maybe Pay Life Insurance Company is trying to sell you an investment policy that will pay you and your heirs $30,000 per year forever. Suppose a sales associate told you the policy costs $525,000. At what interest rate would this be a fair deal?

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7) The RLX Company just paid a dividend of $3.20 per share on its stock. The dividends are expected to grow at a constant rate of 4 percent per year indefinitely. Investors require a return of 10.5 percent on the company's stock. a) What is the current stock price? b) What will the stock price be in 3 years? c) What will the stock price be in 15 years?

8) Caccamise Company is expected to maintain a constant 3.4 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 5.3 percent, what is the required return on the company’s stock? 9) Metallica Bearings, Incorporated, is a young start-up company. No dividends will be paid on the stock over the next nine years because the firm needs to plow back its earnings to fuel growth. The company will pay a dividend of $14 per share 10 years from today and will increase the dividend by 3.9 percent per year thereafter. If the required return on this stock is 11.5 percent, what is the current share price? 10) McCabe Corporation is expected to pay the following dividends over the next four years: $15, $11, $9, and $2.95. Afterward, the company pledges to maintain a constant 4 percent growth rate in dividends forever. If the required return on the stock is 10.3 percent, what is the current share price?

11) The Tribiani Company just issued a dividend of $2.90 per share on its common stock. The company is expected to maintain a constant 4.5 percent growth rate in its dividends indefinitely. If the stock sells for $56 a share, what is the company’s cost of equity? 12) The Swanson Corporation’s common stock has a beta of 1.07. If the risk-free rate is 3.4 percent and the expected return on the market is 11 percent, what is the company’s cost of equity capital? 13) Savers has an issue of preferred stock with a stated dividend of $3.85 that just sold for $87 per share. What is the bank’s cost of preferred stock? 14) Tencent Corporation has a target capital structure of 70 percent common stock, 5 percent preferred stock, and 25 percent debt. Its cost of equity is 11 percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 6 percent. The relevant tax rate is 23 percent.

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15) Brannan Manufacturing has a target debt-equity ratio of .35. Its cost of equity is 11 percent, and its pretax cost of debt is 6 percent. If the tax rate is 21 percent, what is the company’s WACC? 16) Suppose your company needs $43 million to build a new assembly line. Your target debt-equity ratio is .75. The flotation cost for new equity is 6 percent, but the flotation cost for debt is only 2 percent. Your boss has decided to fund the project by borrowing money because the flotation costs are lower and the needed funds are relatively small. 17) Hassinah, Incorporated, is proposing a rights offering. Presently there are 435,000 shares outstanding at $71 each. There will be 50,000 new shares offered at $64 each.

18) The Woods Company and the Koepka Company have both announced IPOs at $40 per share. One of these is undervalued by $12, and the other is overvalued by $5, but you have no way of knowing which is which. You plan to buy 1,000 shares of each issue. If an issue is underpriced, it will be rationed, and only half your order will be filled. 19) Bell Buckle Manufacturing is considering a rights offer. The company has determined that the ex-rights price would be $71. The current price is $76 per share, and there are 29 million shares outstanding. The rights offer would raise a total of $95 million.

Multiple Choice Questions: As seen on the income statement of a tax-paying firm, depreciation reduces both the pretax income and the net income. Thornton Homes has multiple divisions which operate as separate lines of business and face risks unique to those lines. The firm uses its overall WACC as the discount rate to evaluate all proposed projects. Accordingly, each division within the firm will tend to prefer higher risk projects over lower risk projects. The difference between the underwriters' cost of buying shares in a firm commitment and the offering price of those securities to the public is called the gross spread. Poindexter is funded by a group of wealthy investors for the sole purpose of providing funding for individuals and small firms that are trying to convert their new ideas into viable products. What is this type of funding called? Venture capital HM Fox Industries is a fast-growing company that did an IPO of 1,000,000 shares 5 years ago. Their original stock was sold at a price of $10 per share. Since their IPO, the stock has increased in value and the market price is now $120 per share. They still have 1,000,000 shares outstanding. Fox has excess cash and has decided to repurchase some of their shares. Which of the following is true? The repurchase will increase EPS and decrease stockholders' equity, and Stockholders’ equity may become negative.

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1. Cupcakes by Colin has sales of $400, COGS of $150, OPEX of $100, Interest expense of $20, and depreciation of $50. The tax rate is 20%, What is the net income? 400-150-100-20-50 = 80 80 * (1-0.2) = $64 2. Jack wants to establish scholarships at his university. He wants to pay $75,000, 4 years from today. After the 1st payment, the scholarships will grow by 3% per year. The Fund can earn a fixed 11% annual return. How much money must he contribute to establish the fund? 3. Company has a pretax cost of debt of 8 percent, a cost of equity of 15 percent, and a cost of preferred stock of 9 percent. The firm has 80,000 shares of common stock outstanding at a market price of $20 per share. There are 20,000 shares of preferred stock outstanding at a market price of $40 per share. The bond issue has a face value of $1,000,000 and sells for 80% of face value. The company's tax rate is 20 percent. What is the weighted average cost of capital? Equity = 80,000 * 20 = 1,600,000 Preferred Stock = 20,000 * 40 = 800,000 Debt = 1,000,000 * 0.8 = 800,000 Weight of Equity, Preferred Stock, Debt = 50%, 25%, 25% Cost of Equity, Preferred Stock, Debt = 15%, 9%, 8% WACC = (0.5*0.15) + (0.25*0.09) + (0.25*0.08*(0.8)) = 0.1135 = 11.35% 4. Company has 6 percent preferred stock outstanding that is currently selling for $49 per share. The tax rate is 21 percent. What is the cost of preferred stock if its stated (Par) value is $100 per share? Dividend = 0.06*100 = 6 Cost of Pref Stock = 6/49 = 0.1224 = 12.24% 5. Company has decided to raise $6 million via a rights offering. The company will Issue one right for each share of stock outstanding. The subscription price is set at $20 per share. The current market price of the stock is $25 and there are 600,000 shares currently outstanding. What is the value of one right? 6,000,000/20 = 300,000 600,000/300,000 = 2 ((20+2*(25))/1+2) = 23.33 25 - 23.33 = 1.67 6. Company has multiple divisions which operate as separate lines of business and face risks unique to those lines. The firm uses its overall WACC as the discount rate to evaluate all proposed projects. The CEO is considering investing in a line of businesses that are significantly less risky than his other businesses. If he use the WACC to evaluate this investment, he is likely to: a. Reject this investment even though it has positive NPV b. Reject this investment because it has negative NPV c. Accept this investment because it has positive NPV d. Accept this investment even though it has negative PV e. None of the above

7. You currently own 10 percent of the outstanding shares of the Company. The current price per share is $50 and there are 400,000 shares outstanding.. The company has just announced a $2 million rights offering with one right issued for each share of stock. The company has not determined the subscription price. You have decided to participate in the rights offering to maintain your proportional ownership no matter what the subscription price is. How much will you have to pay in order to maintain the same proportional ownership as you have now? a. $100,000 b. 200,000 c. 400,000 d. 2,000,000 e. Answer can’t be determined from the information given 8. Gransbury Corp has 100,000 shares outstanding with a book value of $40 per share. The stock is now selling at $100 per share. Gransbury has decided to issue 50,000 new shares at their current market price. What is their new book value per share? Existing Book Value = 100,000 shares * $40 = 4,000,000 New Equity = 50,000 shares * $100 = 5,000,000 Total Equity = 9,000,000 New Book Value = 9,000,000 / 150,000 shares = $60 9. The Winner's Curse is: a. When investors seeking participation in IPO's receive a disproportionate percentage of issues that are overpriced. b. When investment banks are stuck with overpriced issues c. When the managing underwriter earns more than other underwriters in the syndicate d. When investors who earn high returns in one year earn lower returns the next 10. Calvin is the accountant for M&J Truck Stops. He has just completed the financial statements, which show that the company has $100,000 in cash. One of his assistants noted some mistakes in Calvin's calculations, specifically that Accounts Receivable are higher than Calvin thought they were and Accounts Payable were lower than Calvin thought they were. When Calvin redoes the calculations with the accurate figures, he will find that: a. He has more than $100,000 cash b. He has less than $100,000 cash c. Cash is unaffected by the new figures d. You cannot tell from the information given