Preparation Questions for the Final Exam

  1. Garfield’s stock is selling for $10 per share. The firm's income, assets, and stock price have been growing at an annual 15% rate and are expected to continue to grow at this rate for 3 more years. No dividends have been declared as yet, but the firm intends to declare a dividend of D3 = $2.00 at the end of the last year of its supernormal growth. After that, dividends are expected to grow at the firm's normal growth rate of 6%. The firm's required rate of return is 18%. The stock is:

Answer: Undervalued by $1.97

  1. Two fellow financial analysts are evaluating a project with the following net cash flows:

Year Cash Flow

0 +$ 10,000,000

1 -$ 70,000,000

2 +$120,000,000

One analyst says that the project has an IRR of 200%. The other analyst calculates an IRR of 300%, but fears he was drunk while calculating it. You agree to settle the dispute by analyzing the project cash flows. Which statement best describes the IRR for this project?

Answer: IRR1 = 200%, IRR2 = 300%

  1. 90-day investments (one quarter) in France have a 6% annualized return. In the U.S., 90-day investments of similar risk have a 4% annualized return. In the 90-day forward market, one French Franc equals $1.65. If interest rate parity holds, what is the spot exchange rate?

Answer: 1 FF = $ 1.6582

  1. Bearcats Inc. expects to pay a $3.00 per share dividend on its common stock at the end of the first year. The dividend is expected to grow 25% per year until t = 3. After that the dividend is expected to grow at a constant rate of 5% per year. The stock’s beta is 1.2, the risk-free interest rate is 6%, and the rate of return on the market is 11%. What is the Bearcats current stock price?

Answer: $59.05

  1. Kremerica Industries has been presented with an investment opportunity which will yield end-of-year cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm's cost of capital is 10%. What is the NPV for this investment?

Answer: $51,138

  1. Winnie Inc., a large teddy bears manufacturer operating in Russia, has a new automated production line project it is considering. The project has a cost of $275,000 and is expected to provide after-tax annual cash flows of $73,306 for eight years. You have calculated a cost of capital for the firm of 12%. What is the project's MIRR?

Answer: 16.0%

  1. One Euro can purchase 1.30 U.S. dollars today in the foreign exchange market and currency forecasters predict that the U.S. dollar will depreciate by 16% against the Euro over the next 30 days. How many dollars will a Euro buy in 30 days?

Answer: 1.51

  1. Trump Towers Inc. has a weighted average cost of capital of 11.5%. Its target capital structure is 55% equity and 45% debt. The company has sufficient retained earnings to fund the equity portion of its capital budget. The before-tax cost of debt is 9%, and the company’s tax rate is 30%. If the expected dividend next period and current stock price are $5 and $45, respectively, what is the company’s growth rate?

Answer: 4.64%

  1. Goldman Sachs's 8% coupon rate, quarterly payment, $1,000 par value bond, which matures in 20 years, currently sells at a price of $686.86. The company's tax rate is 40%. Based on the nominal interest rate (and not the EAR), what is Goldman’s component cost of debt (after tax) for purposes of calculating the WACC?

Answer: 7.32%

  1. Suppose you believe that a stock price is going to decline from its current level sometime during the next 3 years. For $510.25 you could buy a 3-year put option giving you the right to sell 100 shares at a price of $83.00 per share. If you bought this put option and the stock price actually dropped to $63.00, you would make

Answer: $1,489.75

  1. An analyst is interested to value a call option on the stock of Parnes Education LLC. The analyst has obtained the following data:

The price of the stock is $40.

The strike price is $40.

The option matures in 3 months.

The standard deviation of the stock’s returns is 0.40.

The risk-free rate is 12%.

Given this information, the analyst is then able to calculate the call option price, which is:

Answer: $3.76

  1. A toy car sells in Taiwan for 875 NT dollars. Currently, one NT dollar equals 0.34 U.S. dollars. If purchasing power parity (PPP) holds, what is the price of the toy car in the United States?

Answer: $297.5

  1. Six months ago, a Swiss investor bought a 6-month U.S. Treasury bill at a price of $9,708.74, with a maturity value of $10,000. The exchange rate at that time was 1.420 Swiss francs per dollar. Today, at maturity, the exchange rate is 1.324 Swiss francs per dollar. What is the annualized rate of return to the Swiss investor?

Answer: -7.92%

  1. Suppose the exchange rate between U.S. dollars and Swiss francs is SF 1.41 = $1.00 and the exchange rate between the U.S. dollar and the Euro is $1.00 = 1.64 Euro. What is the cross-rate of Swiss francs to Euro?

Answer: 0.86

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