Questions Too

1.The Ramirez company last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% for two years after which dividends are expected to grow 6% forever. It is required return (rs)is 12%. Which is the best estimate of the current stock price?

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a. 41.58

b.42.64

c. 43.71

d. 44.80

45.92

2.Consider the information for the following four firms.

Firm

Cash

Debt

Equity

rD

rE

τc

Eenie

0

150

150

5%

10%

40%

Meenie

0

250

750

6%

12%

35%

Minie

25

175

325

6%

11%

35%

Moe

50

350

150

7.50%

15%

30%

Which is the weighted average cost of capital for Meenie closest to?

A) 10.5%

B) 7.4%

C) 10.0%

D) 8.8%

 

 

 

 

 

 

 

 

 

 

 

 

3. Zervos Inc. had the following data for 2008 (in millions). The new CFO believes (a) that an improved inventory management system could lower the average inventory by $4,000, (b) that improvements in the credit department could reduce receivables by $2,000, and (c) that the purchasing department could negotiate better credit terms and thereby increase accounts payable by $2,000. Furthermore, she thinks that these changes would not affect either sales or the costs of goods sold. If these changes were made, by how many days would the cash conversion cycle be lowered?

 

Original

Revised

Annual sales: unchanged
Cost of goods sold: unchanged
Average inventory: lowered by $4,000
Average receivables: lowered by $2,000
Average payables: increased by $2,000
Days in year

$110,000
$80,000
$20,000
$16,000
$10,000
365

$110,000
$80,000
$16,000
$14,000
$12,000
365


a. 34.0
b. 37.4
c. 41.2
d. 45.3
e. 49.8
(Points : 30)

 

4. Your firm is planning to invest in a new power generation system. Galt Industries is an all-equity firm that specializes in this business. Suppose Galt’s equity beta is 0.75, the risk-free rate is 3%, and the market risk premium is 6%. If your firm’s project is all equity financed, then which is your estimate of your cost of capital closest to?

A) 5.25%

B) 6.00%

C) 6.75%

D) 7.50%

(Points : 30)

(TCO D)

 

 

 

 

 

 

 

5.Which is the standard deviation of the returns on Stock A from 2000 to 2009 closest to?

  

Year End

Stock A Realized Return

(R – R)

(R – R)2

2000

46.3%

29.85%

0.0891023

2001

26.7%

10.25%

0.0105063

2002

86.9%

70.45%

0.4963203

2003

23.1%

6.65%

0.0044223

2004

0.2%

-16.25%

0.0264063

2005

-3.2%

-19.65%

0.0386123

2006

-27.0%

-43.45%

0.1887903

2007

27.9%

11.45%

0.0131103

2008

-5.1%

-21.55%

0.0464403

2009

-11.3%

-27.75%

0.0770063

A) 33.2%

B) 16.4%

C) 31.5%

D) 11.0%

 

6.

You expect CCM Corporation to generate the following free cash flows over the next 5 years.

Year

1

2

3

4

5

FCF ($ millions)

25

28

32

37

40

Following Year 5, you estimate that CCM’s free cash flows will grow at 5% per year and that CCM’s weighted average cost of capital is 13%.

Which is the enterprise value of CCM Corporation closest to?

A) $396 million

B) $290 million

C) $382 million

D) $350 million

(Points : 35)

 

7. TCO C) Bumpas Enterprises purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15, net 50. If the firm chooses to pay on time but does not take the discount, what is the effective annual percentage cost of its nonfree trade credit? (Assume a 365-day year.)

a. 20.11%

 b. 21.17%

 c. 22.28%

 d. 23.45%

 e. 24.63%

 

 (Points : 30)

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