FIN 5203 – Financial Management Final Exam Review II
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FIN 5203 - Financial Management
Final Exam Review II
1. Imagine that your firm has an expected FCF of $10M next year. You also expect that the FCFs will grow at a constant rate of 5% per year indefinitely. Your firm’s capital structure is half equity and half debt while the cost of equity and cost of debt are 14% and 6%, respectively. If the corporate tax rate is 20%, what is the PV (Interest Tax Shield)?
a. $27,272,727
b. $23,522,818
c. $20,641,155
d. $29,818,800
e. $18,055,443
2. You are analyzing a project with an annual FCF of $6M for 12 years. You believe that the IRR of this project is 25% pa and your WACC is 11%. Under these circumstances, what is the profitability index (PI ratio) of this project?
a. 1.568
b. 1.649
c. 1.743
d. 1.795
e. 1.866
3. Stock X is trading at $58 today. You do not expect this stock to pay any dividends in the first three years. You expect the fourth-year dividend to be $2.50. If the cost of equity for firm X is 10.90%, what is the expected dividend growth rate after Year 4?
a. 7.95%
b. 7.84%
c. 7.74%
d. 7.63%
e. 7.53%
4. You are interested in a stock, and you want to know how risky this stock is based on future economic conditions. There are four possible states of the economy. The table below summarizes each state (with its probability and return in each scenario):
|
Scenario |
Probability |
Return |
|
Great |
25% |
24% |
|
Good |
20% |
15% |
|
Normal |
40% |
8% |
|
Bad |
15% |
-4% |
Based on this information, what is the risk level (standard deviation) of this stock?
a. 8.70%
b. 8.84%
c. 8.96%
d. 9.08%
e. 9.20%
5. You are trying to create the best portfolio for yourself by combining a risk-free asset and a risky portfolio (located on the efficient frontier). The risk-free rate is 4% pa. You have narrowed down your risk asset portfolio choices to five portfolios. Which one of them is your market portfolio?
a. Portfolio 1: E(R) = 0.18, StDev = 0.20
b. Portfolio 2: E(R) = 0.15, StDev = 0.17
c. Portfolio 3: E(R) = 0.12, StDev = 0.14
d. Portfolio 4: E(R) = 0.12, StDev = 0.12
e. Portfolio 5: E(R) = 0.10, StDev = 0.10
6. Imagine a project with an annual FCF of $68,000 per year for the next 10 years. If the payback period (PBP) of this project is 4.4 years, what is the IRR of this project?
a. 17.50%
b. 17.90%
c. 18.20%
d. 18.60%
e. 18.90%
7. The CFO of Firm X is trying to determine their WACC and asked your help with this task.
According to the CFO, they have 25M shares outstanding with the market price of $36. The cost of equity is 10.30% pa. They also have 500K units of annual-coupon bonds outstanding. The bond has a coupon rate of 5.80%, 20 years left to maturity, and the face value of $1,000. The bond currently trades at $1,000. Finally, there are 5M shares of preferred stocks. These stocks are trading at $50 per share and they offer a dividend of $4.40 per share per year. If the tax rate is 25%, what is the WACC of Firm X?
a. 8.27%
b. 8.10%
c. 7.95%
d. 7.78%
e. 7.62%
8. Imagine that you buy an asset for $340,000. The asset has an economic life of eight years, and you depreciate it to zero with the straight-line method. After using this asset for six years, you plan to sell it to another firm (as the project using this asset will be terminated). If your expected selling price at the end of year 6 is $95,000 and the corporate tax rate is 20%, what is the ending cash flow (ECF) of this asset?
a. $95,000
b. $93,000
c. $87,000
d. $85,000
e. $83,000
2023-12-19