Disclaimer: This study guide contains problems that you may use to practice for the final exam. This is not an exhausting list of problems by any means. Additional problems will also be included in the exam, as well as modifications to the problems’

structure/content/question may be introduced. In addition, the final exam will contain conceptual questions, that are not listed in this guide. To prepare for them, students need to read respective textbook chapters and to review lecture slides. In addition, I highly recommend students to review problems covered in class, in homework assignments and study guide for midterm exam #2.

Chapter #1

1)  Forms of business organization and their advantages and disadvantages (liability, taxation and etc.)

2)  Conflicts between company’s stakeholders

a.   Stockholder-Manager conflicts

b.   Stockholder-Debtholder conflicts

Chapter #2

1)  Financial markets and their participants

2)  Types and functions of financial institutions

3)   Market efficiency

Chapter #3

1)  Financial statements and related calculations:

a.   Balance Sheet

b.   Income statement

c.    Statement of Cash flows

2)   Free cash flows

Chapter #4

1)  Financial ratios: liquidity ratios, asset management ratios, debt management ratios, profitability ratios, market value ratios

2)   DuPont analysis

Chapter #5

1)  Calculation of PV, FV, PMT, I, N

2)  Uneven cash flows calculations

3)  Amortized loans and related calculations

Chapter #6

1)  Cost of money and factors that affect it

2)  Determinants of Interest Rates for corporate and treasury securities

3)  Term structure of interest rates and yield curve

4)  Pure expectation theory and its application

Chapter #7

1)  Types of bonds, bond’s key features and cash flows; premium and discount bonds

2)  Valuation of a bond (with all kinds of payments) and all related computations:

After year 3, growth rate become stable g=6%, so D4  = D3 (1 + 0.06) = 2.0152 We find horizon value in year 3:

Using CF register of your calculator find present value of those cash flows:

CF0=0

CF1=1.4375

F01=1

CF2=1.653125

F02=1

CF3=$1.901093+ $40.3032 = $42.2043

F03=1

I=11

Compute NPV=33.50

Answer: $33.50

Problem #6

UComp forecasts that it will have the free cash flows (in millions) shown below. Assume the firm has zero non-operating assets.  If the weighted average cost of capital is 15% and the    free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3, what is the firm’s total corporate value, in millions?

Solution:

1)  Find growth rate of free cash flows from year 2 to year 3

2)  Compute HV in year 3 because after year 3 growth rate becomes constant

3)  To find corporate value, compute present value of all future FCF (including Horizon value in year 3)

Input in CF register of your calculator:

CF0=0

CF1=-10

F01=1

CF2=50

F02=1

CF3=55+1210=1265

F03=1

I=15

Compute NPV=860.87

Answer: Corporate value = 860.87

Chapter #10

Problem #7

The Firm that has a target capital structure of $5 million of debt, $1 million of preferred       stock, and $4 million of common equity with respective before tax cost of 8%, 6% and 15%. Ifthe firm has marginal 26% tax rate:

1)  Calculate weight of each component of the cost of capital

2)  Calculate WACC

Solution:

1)  Total amount of invested capital = $5M+$1M+$4M=$10M Weight of debt = $5M/$10M=0.50

Weight of preferred equity= $1M/$10M=0.10

Weight of common equity= $4M/$10M=0.40

2) ACC = wd rd (1 − T) + wp rp  + wc rs

ACC = 0.50 × 8% × (1 − 0.26) + 0.10 × 6% + 0.40 × 15% = 9.56%

Problem #8

At the present time, ProperComp has 10-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,100 per bond, carry a   coupon rate of 12%, and distribute annual coupon payments. The company incurs a               federal-plus-state tax rate of 25%. If PC wants to issue new debt, what would be a                   reasonable estimate for its after-tax cost of debt?

Solution:

Find YTM of the bond

PV=-1100

PMT=120

Solution:

a)   Net Present Value (NPV)

To solve for NPV put cash flows in CF register of your financial calculator:

CF0=-1000

CF1=500

F01=1

CF2=600

F02=1

CF3=700

F03=1

CF4=800

F04=1

I=13

Compute NPV=$888.15598

b)  Internal rate of Return (IRR)

To solve for IRR put cash flows in CF register of your financial calculator:

CF0=-1000

CF1=500

F01=1

CF2=600

F02=1

CF3=700

F03=1

CF4=800

F04=1

Compute IRR=47.6272%

c)   Modified Internal Rate of Return (MIRR)

To find MIRR we need to find present value of cash outflow and future value of cash inflows.

Step 1. Find PV(Cash outflows)=-1000 since there is only 1 cash outflow in time=0 Step 2. Find FV of cash inflows.

1)  Find Present value of all inflows

Using CF register input only positive cash flows (cash inflows) in your calculator preserving their timing

CF0=0

CF1=500

F01=1

CF2=600

F02=1

CF3=700

F03=1

CF4=800

F04=1

I=13

Compute NPV=$1,888.15598

2)  After that, you need to find future value of the present value of all cash inflows from previous calculation.

Use 5 TVM variable in your calculator:

PV=-$1,888.15598

N=4

PMT=0

I=13

Compute FV=$3078.5885

Step 3. Using 5 TVM variable of your calculator calculate MIRR by using PV of outflows and FV of inflows computed in previous steps

PV=-1000

N=4

PMT=0

FV=3078.5885

Compute I=32.46096%

MIRR=32.46096%

Problem #11

Calculate the crossover for the following projects A and B.

Solution:

Compute differential cash flows:

Input differential cash flows in the CF register of your financial calculator

CF0=0

CF1=1,500,000

F01=1

CF2=1,000,000