QUESTION 1
- Goal of a Corporation is to:
| Maximize Market share of its Business | ||
| Minimize Operating costs | ||
| Maximize Stockholders Wealth AKA price per share (PPS) | ||
| Maximize Earnings per share (EPS) | ||
| Minimize Income Taxes | ||
| Minimize Total Operating Expenses |
10 points
QUESTION 2
Modigliani & Miller (M&M) Theorem of Finance is used to explain the relationship between the Value (V) of Firm and its Capital Structure, Debt/Equity (D/E) ratio. According to M&M the Value of a Form (V) is maximized when:
| Since Cost of Debt is higher than Cost of Equity-this means the WACC will be Minimum when D is Equal to 0% and E is equal to 100 0%. | ||
| At a certain D/E ratio, where the Cost of Bankruptcy is Minimum. | ||
| At a certain D/E ratio, where Weighted Avg. Cost of Capital (WACC) is Maximum. | ||
| At a certain D/E ratio, where Weighted Avg. Cost of Capital (WACC) is minimum. | ||
| Since Cost of Equity is higher than Cost of Debt-this means the WACC will be Minimum when D is Equal to100% and E is equal to 0%. | ||
| Since, V = D + E, no matter, what is the value of D/E ratio, the V is constant. |
10 points
QUESTION 3
- XYZ CORPORATION has a rather High Beta Coefficient (B) of 1.35 because it has outstanding Bonds worth $ 600 million as a compared it’s Shareholders’ Equity of $ 400 million. You have been asked by the XYZ to calculate the $-amount of Bonds that it must either pay off or buyback to reduce its Beta to 1.25. Your approximate answer is:
Note: Assume XYZ is 21% Marginal Tax Bracket (MTB)
| $ 97m | ||
| $ 82 m | ||
| $ 120m | ||
| $ 37m | ||
| $ 95m | ||
| $ 75 m |
10 points
QUESTION 4
- Calculate the Discounted Payback (DPBK) for the following Cash Flows using a Discount Rate of 12%.
| Yr | CF |
| 0 | $ (100.00) |
| 1 | $ 50.00 |
| 2 | $ 35.00 |
| 3 | $ 25.00 |
| 4 | $ 20.00 |
| 5 | $ 40.00 |
| a. | 4.21 | |
| b. | 3.51 Yrs | |
| c. | 3.76 years | |
| d. | 4.20 yrs | |
| e. | 2.60 years | |
| f. | 3.00 |
10 points
QUESTION 5
- The CAPM model was introduced by Jack Treynor (1961, 1962) William Sharpe (1964), John Lintner(1965) and Jan Mossin (1966) independently. CAPM formula is:
Ks = Krf + (Km- Krf) B
Where, Ks= Cost of Issuing a Security = Investors Required Return = 15%
Krf = Risk Free Rate of Return as measured by Avg Return of T-Bills = ?
Km = Avg Market Return measured by S&P-500 or some other as Proxy for the whole Market = 12.5%
B = Beta Coefficient of the Issuer of the Security = 1.25
Estimated Risk Free Rate of Return (Krf) is:
| a. | 4.17% | |
| b. | 2.25% | |
| c. | 2.50% | |
| d. | 0.96% | |
| e. | 1.75% | |
| f. | 10.8% |
10 points
QUESTION 6
- The difference between Scenario Analysis and Sensitivity Analysis, with respect to the NPV of a Capital Budgeting Project is:
| a. | Sensitive Analysis forecasts the Calculated Value NPV, when the values of more than one input variables are changed. On the other hand, Scenario Analysis forecasts the Calculated Value of NPV when, the value of only one input Variable is changed. | |
| b. | Both Analyses calculate the Value of NPV by changing all of the Input Variables. | |
| c. | Both Analyses are used to detect the right values of input variables that would maximize the calculated Value of NPV. | |
| d. | For all practical purposes, there is little or no difference between Scenario and Sensitivity Analyses, because both are known as What-If-Analyses. | |
| e. | Scenario Analysis forecasts the Calculated Value NPV, when the values of more than one input variables are changed. On the other hand, Sensitivity Analysis forecasts the Calculated Value of NPV when, the value of only one input Variable is changed. |
10 points
QUESTION 7
- ABC Corporation’s Project X 22 with initial investment of $ 20m shows a Profitability Index of 1.60. What is the NPV of this Project:
| a. | $ 10m | |
| b. | $ 20m | |
| c. | $ 32m | |
| d. | $ 12m | |
| e. | $ 44m | |
| f. | $ 15m |
10 points
QUESTION 8
- According to most of the Text Books in Finance, the Capital Budgeting Criteria is NPV, But, according to to Prof. Kalia the best Capital Budgeting Criteria is Discounted Payabck (DPBK) Method, Because:
| a. | It can be used to calculate all of the Capital Budgeting Criteria. | |
| b. | It is based on old reliable Decision Making AAR method. | |
| c. | Because DPBK is More Important in Decision Making process than NPV. | |
| d. | It calculates NPV as well as DPBK at the same time. | |
| e. | It can also calculate PI | |
| f. | it calculates NPV as well as IRR at the same time. |
10 points
QUESTION 9
- In case of a Corporation going bankrupt, priority claim on the assets is:
| BondsDebenturesPf StockCommon Shares | ||
| Common SharesPf SharesBondsDebentures | ||
| 1. Common Shares2. Pf Shares3. Debentures4. Bonds | ||
| 1. Bonds2. Common Shares3. Debentures4. Pf Shares | ||
| 1. Bonds2. Debentures3. Common Shares4. Pf Shares | ||
| 1. Pf Shares2. Debentures3. Common Shares4. Bonds |
10 points
QUESTION 10
- Fact Set of a Capital Budgeting Project:
ALL FIGURES ARE IN THOUSANDS OF $.
| Mechanical Robot = | $ 200.00 |
| Installation + Training= | $ 20.00 |
| Robot’s Life in Yrs= | 5 |
| Salvage Value = | 0 |
| ST Investment= | $ 50.00 |
| ST Investment Recovery= | 20% |
| Marginal Revenue/yr = | $ 100.00 |
| Marginal Exp/yr= | $ 20.00 |
| Marginal Tax Rate = | 21% |
| Discount Rate = | 10% |
USE Straight Line Depreciation to a Book Value of Zero. Installation and Training Costs along with Cost of Robots are Depreciable.
According to your calculations, THE NPV for this project in Thousands of Dollars is:
| a. | $ 23.99 | |
| b. | $ 12.57 | |
| c. | $ 68,24 | |
| d. | $44,40 | |
| e. | $102.70 | |
| f. | $18.77 |
10 points
QUESTION 11
Modigliani & Miller (M&M) Theorem of Finance is used to explain the relationship between the Value (V) of Firm and its Capital Structure, Debt/Equity (D/E) ratio. According to M&M the Value of a Form (V) is maximized when:
| At a certain D/E ratio, where Weighted Avg. Cost of Capital (WACC) is Maximum. | ||
| Since, V = D + E, no matter, what is the value of D/E ratio, the V is constant. | ||
| At a certain D/E ratio, where Weighted Avg. Cost of Capital (WACC) is minimum. | ||
| Since Cost of Debt is higher than Cost of Equity-this means the WACC will be Minimum when D is Equal to 0% and E is equal to 100 0%. | ||
| At a certain D/E ratio, where the Cost of Bankruptcy is Minimum. | ||
| Since Cost of Equity is higher than Cost of Debt-this means the WACC will be Minimum when D is Equal to100% and E is equal to 0%. |
10 points
QUESTION 12
- . XYZ Corp assembles I-Pods in its manufacturing Plant at Worcester MA. XYZ’s top Corp Bosses wants to increase its Net Operating Income by 10%. Last years Income Statement is given below:
| Quantity Sold (Q)= | $ 70,000.00 |
| Unit Price (p) = | $ 50.00 |
| Unit Variable cost (v)= | $ 30.00 |
| Revenue = pQ = | $ 3,500,000.00 |
| – Variable cost = vQ | $ 2,100,000.00 |
| Contribution Margin (CM)= | $ 1,400,000.00 |
| -Fixed Cost (F) = | $ 1,000,000.00 |
| Net Operating Income (NOI)= | $ 400,000.00 |
In a high level meeting of the Top Mgt team, it was decided to take the following action:
| PROPOSAL | |
| Increase unit Price by = | 0% |
| Decrease Variable Cost by= | 2.50% |
| Increase Fixed Cost by for additional Ads = | 10% |
| Additional Ads would Increase the Q sold by = | 6.00% |
You have been asked to calculate the Expected % Change in the NOI if the above changes are implemented. Your Calculation shows that the % increase in NOI is:
| a. | Between 9% and 10% | |
| b. | Between 10% and 11% | |
| c. | Exactly equal to 10% | |
| d. | Between 8% and 9% | |
| e. | Exactly 6.5% | |
| f. | Between 11% and 12% |
10 points
QUESTION 13
- XYZ Hi-Tech Firm manufactures I-Pads using Chips made in its plant at Worcester MA. It uses 10 million Chips a year. The Fixed Cost for the Chip Manufacturing Plant are estimated to be $ 5m per year. The variable cost per chip is $ 1.50. XYZ is planning to outsource the Chip Manufacturing functions to Mexico. This would reduce its Fixed Cost of $ 5m per year to $ 1m, but the Cost of buying each Chip from Mexico would be $ 1.75 per chip. What should XYZ do?
| a. | It is patriotic to produce in USA even at a loss | |
| b. | It should be outsourced because it would reduce the Cost | |
| c. | Increase the R&D to make chip here at Worcester at less than $ 1.50 each. | |
| d. | It is better to outsource to China than Mexico | |
| e. | Total Cost of in-house = Total cost out-sourcing. Both Choices are equally good | |
| f. | It should not be outsourced because it would increase the Cost |
10 points
QUESTION 14
| ABC CORPORATION | |
| 2017 Income StatementFigures are Thousands 0f $ | |
| Sales = | $ 34,630.00 |
| -COGS= | $ 6,200.00 |
| GM= | $28,430.00 |
| -Op Exp= | $ 4,140.00 |
| – Deper= | $ 2,520.00 |
| EBIT= | $21,770.00 |
| – Int Exp= | $ 1,750.00 |
| EBT= | $20,020.00 |
| Taxes@35%)= | $7,007.00 |
| NI= | $13,013.00 |
- Above is the current Income State of ABC Corp, which the Board of Directors of your Firm are interested in buying. As a new hire with the Firm, you have been asked to calculate the value of the Firm using 3.0 times the Operating Cash Flow (OCF). Based on your calculations, your answer is:
| $85,290.00 | ||
| $60,060.00 | ||
| $46,599.00 | ||
| $39,039.00 | ||
| $65,310.00 | ||
| $ 51,849.00 |
10 points
QUESTION 15
- Following statements are true about Dividends and Dividend Policy, EXCEPT:
| Dividend Policy concerns both Common as well as Preferred Shares of the Firm. | ||
| Dividends can be declared only by the Board of Directors. Once declared, it cannot be undeclared. | ||
| One of Dividend Theory says “Dividend is Irrelevant” meaning Investors’ value Dividends and Capital Gains equally. | ||
| Optimum Dividend is the one that would maximize the Price Per Share (PPS) of the Firm by having a balance between Dividend and future growth rate. | ||
| Dividend policy can affect the Debt/Equity ratio of the Firm and hence the Weighted Avg. cost of Capital (WACC). | ||
| Dividend Policy concerns only the Common Shares of the Firm. | ||
| Some Investors, who are in the high-Income Bracket, don’t like Dividends because they are Taxable. They only like Capital Gains. | ||
| Some-Investors’, such as Retirees, like to have Dividends that keep pace with the Rate of Inflation to supplement their incomes. |
10 points
QUESTION 16
- As a NEW HIRE with, ABC Corp. you have been asked to evaluate and select the most profitable opportunity between one of the following two projects.
| PROJECT-S | PROJECT-T | |
| Yr | CF-S in m | CF-T in m |
| 0 | $ (100.00) | $ (275.00) |
| 1 | $ 40.00 | $ 50.00 |
| 2 | $ 30.00 | $ 40.00 |
| 3 | $ 50.00 | $ 60.00 |
| 4 | $ 60.00 | $ 70.00 |
| 5 | $ 70.00 | $ 80.00 |
| 6 | $ 90.00 | |
| 7 | $ 95.00 | |
| 8 | $ 100.00 |
- Note: ABC’s Policy is to use a Discount Rate of 10%.
- According to your calculations, you have decided to select Project-S, because the difference between the Equivalent Annuity PMTs of Project S – Project T is approximately:
| a. | $4.6 m | |
| b. | $ 5.1 m | |
| c. | $ 4.2m | |
| d. | $ 9.1 m | |
| e. | $ 7.8 m | |
| f. | $ 6.5 m |
10 points
QUESTION 17
- XYZ Corp has selected the Project L at DR of 8% because it has higher NPV than that of Project S. Lately
Interest Rates have been rising at a rate faster than expected. Assuming DR = New Interest Rate, after
what Interest Rate, AKA Cross-over rate, the NPVs of the two projects would invert?,
X-OVER RATE PROBLEM
| Year | Project S | Project L |
| 0 | ($1,000) | ($1,000) |
| 1 | 500 | 100 |
| 2 | 400 | 300 |
| 3 | 300 | 400 |
| 4 | 100 | 675 |
According to your calculations, the Cross over Discount Rate between the above two Projects is approximately:
| a. | 18% | |
| b. | 11% | |
| c. | 10% | |
| d. | 9% | |
| e. | 16% | |
| f. | 12% |
10 points
QUESTION 18
- As a New Hire with the ABC Corp., you have been asked to recommend an appropriate Discount Rate (DR) for all capital Budgeting Projects, using the following formula:
DR = WACC + 1.5%
You have collected the following Data to calculate the Appropriate WACC:
NOTE: ABC is the 21% Marginal Tax Bracket (MTB)
Total Mkt Value of ABC = $1.20 billions
| SECURITY | % Weight | REMARKS |
| 1 BONDS | 40% | 8% Bond with Remaining Maturity of 15 yrs. Mkt Price= 110 per Bond |
| 2 Pf Stocks | 10% | PPS = $ 87.00, Div per yr = $ 6.00 |
| 3 CS | 50% | PPS = $92.00, Div = $ 4.50 per yr, Div Growth Rate (g) = 5% |
CS = Common Share: PPS = Price per share and Pf = Preferred
Based on your calculations, you are recommending a DR of:
| a. | 12.5% | |
| b. | 10.0% | |
| c. | 7.9% | |
| d. | 9.3% | |
| e. | 8.6%\ | |
| f. | 11.2% |
10 points
QUESTION 19
- According to Accounting Equation, A = L+E, Assets of a Firm belongs to Stockholders and Creditors. This Means Cash Flows generated from Assets (CFA) AKA Free Cash Flow (FCF) should also belong to Stockholders & creditors. The following data from Income Statement of ABC is provided to you for figuring out the CFA AKA FCF.
ABC INCOME STATEMENT for 2018 Data
| 1 | Net Sales = | $ 650,000.00 |
| 2 | COGS = | $ 260,000.00 |
| 3 | Selling Exp= | $ 120,000.00 |
| 4 | Admin Exp= | $ 150,000.00 |
| 5 | Depreciation= | $ 55,000.00 |
| 6 | Int Ep= | $ 15,000.00 |
| 7 | Tax Rate= | 21% |
Based on your calculations, the CFA AKA FCF =
| a. | $ 4,500 | |
| b. | $ 19,500 | |
| c. | $ 34,500 | |
| d. | $ 94,500 | |
| e. | $ 109,500 | |
| f. | $ 65,000 |
10 points
QUESTION 20
- Supposing you are working with a Corporation that wants to either Merge or Acquire a Firm. You have been asked to select the appropriate Ratios for the valuation of the subject Firm. The following ratios selected by you have been judged to be appropriate EXCEPT:
| NI/Total Equity = Return on Equity (ROE)PE RATIO=Price Per Share/Earnings Per SharePPS/BVPS = Mkt Value per Share/Book Value per sharePPS/SPS= Price per Share/Sales per ShareEV/OCF = Enterprise Value/Operating Cash FlowEV/EBITDA= Enterprise Value/Earnings before Interest Taxes Depreciation & Amortization | ||
| PE RATIO=Price Per Share/Earnings Per Share | ||
| PPS/BVPS = Mkt Value per Share/Book Value per share | ||
| PPS/SPS= Price per Share/Sales per Share | ||
| EV/OCF = Enterprise Value/Operating Cash Flow | ||
| EV/EBITDA= Enterprise Value/Earnings before Interest Taxes Depreciation & Amortization |
10 points
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