4. (3 points) Henry is trying to value a firm but is struggling to do so because his boss   insists that his valuation model use the more realistic assumption that the firm’s        future cash flows are received throughout the year rather than at the end of the year  as typically done.  Using the simpler, end-of-year cash flow assumption, Henry has    already estimated the firm’s WACC as 15% and that its value (which includes $100    million in excess cash the firm currently has) as $500 million. What will be the firm’s value after he adjusts his assumption as insisted by his boss?

a.   $472 million

b.   $495 million

c.    $515 million

d.   $529 million

e.   $536 million

5. (3 points) Using our discussion from the Eaton case, if you think the interest rates on long-term U.S. Treasury bonds partially reflect a risk premium, then which of the      below statements about using CAPM is true?

a.   You should use the long-term U.S Treasury rates for both risk-free rates that are used in the CAPM model

b.   You should use the short-term U.S. Treasury rates for both risk-free rates that are used in the CAPM model

c.   You should use the long-term U.S. Treasury rate for the risk-free rate that     captures your opportunity cost, and the short-term U.S. Treasury rate for the risk-free rate used to calculate the market risk premium.

d.   None of the above

6. (3 points) AAA is a firm that has debt of $1,000, and its common equity stock price is $3 with 1,000 shares outstanding. Additionally, the firm has an equity beta of 1.2 and a cost of debt of 10%. Assume that the historical risk premium of the market            portfolio is 9%, the risk-free rate is 5%, and the tax rate is 30%. If AAA continuously rebalances its debt & equity mixture to maintain their target ratio, what would be the  firm’s cost of equity if it only included the business risk of the firm?

a.   14.35%

b.   15.8%

c.   13.31%

d.   16.1%

e.   12.57%

7. Multiples Valuation (3 points) Eleanor is trying to determine whether Techno Wiz  (TW), a publicly traded company, is over- or undervalued.  It shares currently trade at $4.50, and its latest earnings per share (EPS) are $1.50. The company has a long-run policy of paying out 1/5 of all earnings as dividends. Moreover, Wall Street’s analysts predict that, in the long-term, TW’s annual growth rate in earnings will be five            percent.  Investor’s required rate of return for holding TW stock is 15 percent.  If      Eleanor compares TW’s market-based PE ratio (PEM) to its PE ratio based on           fundamentals (PEF), which of the below statements is true?

a.   PEM  > PEF , which suggests TW’s stock is overvalued

b.   PEF  > PEM , which suggests TW’s stock is undervalued

c.    PEM  > PEF , which suggests TW’s stock is undervalued

d.   PEF  > PEM , which suggests TW’s stock is overvalued

e.   There isn’t enough information to answer this question

8. APV Valuation (3 points) Madeline is trying to value a project that will be funded   using a $20 million loan with at 10% interest rate.  The loan will be paid off in four  equal payments over the next four years, t=1-4, and the repayment schedule is given below.  If the firm’s marginal tax rate is 25% and the firm has sufficient profits to    take full advantage of the interest tax shields provided by this loan, what is the         present value of these interest tax shields (as of year t=0)?

a.   $1.08 million

b.   $2 million

c.    $2.75 million

d.   $5 million

e.    $5.23 million

f.    $20 million

9. Equity Beta for a Non-Public Company or Division (6 points) Toyo Inc. is an    auto supply company that we are trying to calculate a WACC for.  Since Toyo is        private, however, there is no readily available equity beta in which to estimate its cost of equity.  But fortunately, we do have information on two comparable companies,   Lapeer Motors Inc. and Imlay Parts Inc.  These two companies have equity betas of

1.2 and 1.6, debt-to-value ratios of 0.4 and 0.75, and annual revenues of $50 and $25  million respectively.  Making use of all this information and given Toyo maintains a   constant and continuously rebalanced debt-to-value target ratio of 0.5, what would be an appropriate equity beta to use to estimate Toyo’s cost of equity? [Note:Just assume the debt beta = 0 and make sureyou use a weighted average inyour answer.]

10. (6 points) FCF Calculation – At the end of this exam, you are given the financial   statements for CBA Corporation, a broadcasting and cable company. What is this    firm’s free cash flow in Year T+1?  Note: You should assume that “other current assets”   represents operating activities that were not real cashflows. And,you should assume that thefirm’s cash & cash equivalents are requiredfor thefirm’s operations.

11. Stock Valuation using WACC – Swatch, Inc. is thinking of acquiring Timex, Inc.,    and Swatch is attempting to determine the highest price per share it should be willing to pay for Timex.  It expects Timex’s FCF will equal $100 million next year (i.e. t =    1), $150 million the year after (i.e. t = 2), and then grow at 10 percent a year thereafter and continue doing so forever. While Timex has $10 million in cash on hand now, all of this cash is required for operations of the firm.  Timex also has $900 million in       debt and 100 million outstanding shares.  Timex’s WACC is 15 percent.

a.   (2 points) What is the terminal value of Timex in year 2?

b.   (2.5 points) Using the firm’s WACC and assuming that all future cash flows are received at the end of the year, what is the value of Timex, Inc.?

c.   (2.5 points) Using your answer from part (b), how much should Swatch, Inc. be willing to pay per share for Timex, Inc.?

12. Mergers & Acquisitions – Suppose that Fox Entertainment Group has just made    an offer to acquire CKX, the firm that owns American Idol.  Prior to the offer, CKX had 30 million shares outstanding that traded at a price of $25, and Fox had 50           million shares outstanding that traded at $40. As a result of the merger, Fox estimates that CKX’s operations will generate an additional $60 million FCF a year via               operational synergies. You should assume that the ra  for Fox is 10% and the ra  for      CKS is 15%.  The proposed merger will not affect the riskiness or value of either        company’s existing debt.  Use this information to answer the below questions, and      when possible, please express all answers in millions ofdollars.

a.   (1 point) If Fox is correct in its estimates, what will be the combined equity    value of the merged firm if it uses equity to finance the deal?  i.e. what is PVAB ?

b.   (1.5 points) Suppose that Fox offers to pay 5/6 a share of Fox for each share of CKS. What is the value gained by CKS shareholders from the deal?

Now suppose that another motivation for Fox’s offer was to avoid letting One          Equity Partners acquire CKS.  If this happened, Fox suspected its own free cash       flows would drop by about $20 million a year. You should assume that One Equity  Partners made its competing offer last week, and this expected loss for Fox is already priced by the market into Fox’s pre-offer share price of $40.

c.   (1.5 points) Given this, what is the most that Fox should now be willing to

pay to complete its acquisition of CKS?

d.   (1.5 points) Suppose that instead of exchanging shares, Fox issues $1.2 billion

in senior notes and uses the proceeds to pay $40 cash per share of CKS.

What will be the stock price of Fox after the deal is complete?

e.    (1.5 points) Now assume that the debt issue has reduced the market value of

Fox’s existing debt by $50 million because it is now riskier as a result of the    large debt issuance used to fund the acquisition.  Using your answer from part (d), what is the total gain to Fox’s shareholders?