BrainMass



1) Assume that Rose Corporation's (RC) EBIT is not expected to grow in the future and that all earnings are paid out as dividends. RC is currently an all equity firm. It expects to generate earnings before interest and taxes (EBIT) of $6 million over the next year. Currently RC has 5 million shares outstanding and its stock is trading for a price of $12.00 per share. RC is considering borrowing $12 million at a rate of 6% and using the proceeds to repurchase shares at the current price of $12.00. Assume that the firm does not pay taxes.Following the borrowing of $12million and subsequent share repurchase, the expected earnings pershare for RC is closest to:2 Use the table for the question below.Consider the following Price and Dividend data for Ford Motor Company:Date Price ($) Dividend ($)December 31, 2004 $14.64January 26, 2005 $13.35 $0.10April 28, 2005 $9.14 $0.10July 29, 2005 $10.74 $0.10October 28, 2005 $8.02 $0.10December 30, 2005 $7.723) Assume that you purchased Ford Motor Company stock at the closing price on December 31, 2004and sold it after the dividend had been paid at the closing price on January 26, 2005. Calculate Your capital gains rate (yield) for this period4) Use the table for the question below.Consider the following probability distribution of returns for Alpha Corporation:Current Stock Price ($) Stock Price in One Year ($) Return R ProbabilityPR$35 40% 25%$25 $25 0% 50%$20 -20% 25% The standard deviation of the return on Alpha Corporation is closest can be calculated to be)Use the table for the question below.Consider the following average annual returns:Investment Average ReturnSmall Stocks 23.2%S&P 500 13.2%Corporate Bonds 7.5%Treasury Bonds 6.2%Treasury Bills 4.8%What is the excess return for Treasury Bills? 5)Use the information for the question below.Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation (BLL) at $40 per share.Suppose over the next year Ball has a return of 12.5%, Lowes has a return of 20%, and Abbott Labshas a return of -10%. The weight on Ball Corporation in your portfolio after one year is will be?6) You are considering purchasing a new automobile that will cost you $28,000. The car dealer offersyou 4.9% APR financing with monthly compounding for 60 months (with payments made at theend of the month). Assuming you finance the entire $28,000 and finance through the dealer, yourmonthly payments will be closest to:7) The effective annual rate (EAR) for a loan with a stated APR of 10% compounded quarterly isclosest to:8) Use the table for the question below.Project Cash flow todayCash flow in one year"eenie" -10 15"meenie" 10 -8"minie" -15 20"moe" 10 -15 If the risk-free interest rate is 10%, then the NPV for "eenie" will be: 9) Suppose that Luther's Beta is 0.9. If the market risk premium is 8% and the risk-free interest rate is4%, then expected return for Luther stock is?10) You are considering adding a micro brewery on to one of your firm's existing restaurants. This willentail an increase in inventory of $8,000, an increase in accounts payables of $2,500, and an increasein property, plant, and equipment of $40,000. All other accounts will remain unchanged. The change in net working capital resulting from the addition of the micro brewery is:11) Suppose a security with a risk-free cash flow of $1000 in one year trades for $909 today. If thereare no arbitrage opportunities, then the current risk-free interest rate is?12) You expect KT industries (KTI) will have earnings per share of $3 this year and expect that theywill pay out $1.50 of these earnings to shareholders in the form of a dividend. KTI's return on newinvestments is 15% and their equity cost of capital is 12%. The expected growth rate for KTI'sdividends is? 13)Use the table for the question below.Consider a project with the following cash flows:Year Cash Flow0 -10,0001 4,0002 4,0003 4,0004 4,000If the appropriate discount rate for this project is 15%, then the NPV is?14) You have been offered the following investment opportunity, if you pay $2500 today, you willreceive $1000 at the end of each of the next three years. Assuming that you could otherwise earn10% per year on your money, the NPV for this opportunity will be15) It has long been told that the Dutch purchased Manhattan island in 1626 for the value of 60 guilders($24). Assuming that the Dutch invested this money into an account earning 5%, approximatelyhow much would their investment be worth 380 years later in 2006?16) Assume that you presently have a monthly home mortgage with a stated interest rate of 7% APRwith monthly compounding. If your income tax rate is 20%, then the after-tax EAR for your homemortgage is? 17)Use the information for the question below.Flagstaff Enterprises expected to have free cash flow in the coming year of $8 million, and this free cash flow is expected to grow at a rate of 3% per year thereafter. Flagstaff has an equity cost of capital of 13%, a debt cost of capital of 7%, and it is in the 35% corporate tax bracket. If Flagstaff currently maintains a debt to equity ratio of 1, then the value of Flagstaff as a leveredfirm is?18)Use the table for the question below.Consider the following investment alternatives:Investment Rate CompoundingA 6.25% AnnualB 6.10% DailyC 6.125 QuarterlyD 6.120 Monthly Which alternative offers you the lowest effective rate of return? 19)Use the information for the question below.Larry the Cucumber has been offered $14 million to star in the lead role of the next three Larry Boy adventure movies. If Larry takes this offer, he will have to forgo acting in other Veggie movies that would pay him $5 million at the end of each of the next three years. Assume Larry's personal cost of capital is 10% per year.The IRR for Larry's three movie deal offer is?20)Use the information for the question below.The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semi-annually.23) Assuming the appropriate YTM on the Sisyphean bond is 9%, then this bond will trade at? 21)Use the table for the question below.Security Cash flow today Cash flow in one yearA 0 100B 100 0C 100 100If the risk-free rate of interest is 7.5%, then the value of security "A" is22)Use the table for the question below.The following table summarizes prices of various default-free zero-coupon bonds (expressed as a percentage of face value):Maturity (years) 1 2 3 4 5Price (per $100 face value) 94.52 89.68 85.40 81.65 78.35The yield to maturity for the three year zero-coupon bond is?23) Walgreen Company (NYSE: WAG) is currently trading at $48.75 on the NYSE. Walgreen Companyis also listed on NASDAQ and assume it is currently trading on NASDAQ at $48.50. Does an arbitrage opportunity exists and if so how would you exploit it and how much would you make on a block trade of 100 shares?24)Use the table for the question below.Consider the following income statement for Kroger Inc. (all figures in $ Millions):Year 2006 2005 2004Total Sales 60,553 56,434 53,791Cost of goods sold 45,565 42,140 39,637Selling, general & admin expenses 11,688 12,191 11,575Depreciation 1,265 1,256 1,209Operating Income 2,035 847 1,370Other Income 0 0 0EBIT 2,035 847 1,370Interest expense 510 557 604Earnings before tax 1,525 290 766Taxes (35%) 534 102 268Net Income 991 189 498 The income that would be available to equity holders in 2005 if Kroger was not levered is? 25) You are considering adding a micro brewery on to one of your firm's existing restaurants. This willentail an investment of $40,000 in new equipment. This equipment will be depreciated straight lineover five years. If your firm's marginal corporate tax rate is 35%, then what is the value of themicro brewery's depreciation tax shield in the first year of operation?26) Bubba Ho-Tep Company reported net income of $300 million for the most recent fiscal year. Thefirm had depreciation expenses of $125 million and capital expenditures of $150 million. Althoughthey had no interest expense, the firm did have an increase in net working capital of $20 million.What is Bubba Ho-Tep's free cash flow?27)Use the information for the question(s) below.Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects:Year 0 1 2 3Sales (Revenues) 100,000 100,000 100,000- Cost of Goods Sold (50% of Sales) 50,000 50,000 50,000- Depreciation 30,000 30,000 30,000= EBIT 20,000 20,000 20,000- Taxes (35%) 7000 7000 7000= unlevered net income 13,000 13,000 13,000+ Depreciation 30,000 30,000 30,000+ changes to working capital -5,000 -5,000 10,000- capital expenditures -90,000 The free cash flow for the first year of Epiphany's project is closest?ESSAY. Write your answer in the space provided.Use the information for the question(s) below.Kinston Industries is considering investing in a machine that will cost $125,000 and will last for three years. The machine will generate revenues of $120,000 each year and the cost of goods sold will be 50% of sales. At the end of year three the machine will be sold for $15,000. The appropriate cost of capital is 10% and Kinston is in the 35% tax bracket.32) Assume that Kinston's new machine will be depreciated using MACRS according to the following schedule:Year 3 Years1 33.33%2 44.45%3 14.81%4 7.41%What is the NPV of this project? ................
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