Reference no: EM132443224

Question #1

Nielsen motors (NM) is a newly public firm with 25 million shares outstanding.  You are doing a valuation analysis of Nielsen and you estimate it's free cash flow in the coming year to be $40 million.  You expect the firm's free cash flow to grow by 4% per year in subsequent years because the firm has only been listed on the stock exchange for a short time, you do not have an accurate assessment of Nielsen equity Beta. However you have the following data for another firm in the same industry.

Equity Beta                         Debt Beta                            Debt -Equity Ratio

1.8                                          0.4                                          1.5

Nielson has much lower debt-equity ratio of .5, which is expected to remain stable, and Nielson's debt is risk free.  Nielson's corporate tax is 5% and the expected return on the market portfolio is 10%.

Nielsen estimated equity Bea is closest to:

a. 0.95

b. 1.45

c. 1.25

d. 1.00

Question #2

Wyatt Oil issue $100 million in perpetual debt (if par) with an equal coupon of 7%.  Wyatt Oil pay interest only on this debt.  Wyatt's magical tax rate is expected to be 40% for the foreseeable future. 

Wyatt's annual interest tax is closest to:

a. $2.8 million

b. $40 million

c. $7.0 million

d. $4.2 million

Question #3

Which of the following is nota step in the WACC valuation method?

a. Compute the weighted average costs of capital

b. Compute the value of the investment, including the leverage, by discounting the free cash flow of the investment using the WACC

c. Determine the free cash flow of the investment

d. Adjust the WACC for the firm's current debt equity, ratio.

Question #4

Rosewood Industries has EBIT of $450 million interest expense of $175 million and a corporate tax rate of 35%.

If Rosewood had no interest expense, its net income would be closest to:

a. $450 million

b. $290 million

c. $160 million

d. $405 million

Question #5

Omicron Technologies has $50 million in excess cash and no debt.  The firm expects to generate additional free cash flow of $40 million per year in subsequent years and will pay out these future free cash flows ad regular dividend.  Omicron unlevered cost of capital is 10% and there are 10 million shares outstanding.  Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as special dividend or to use it to repurchase shares of the firm's stock. 

a. $400 million

b. $900 million

c. $450 million

d. $500 million

Question #6

Anconia Copper is an all-equity firm with 60 million shares outstanding, which currently trading at $20 per share.  Last month of Anconia announced that it will change its capital structure by issuing $300 million in debt.  The $200 million raised by this issues, plus another $200 million in cash that Anconia already had, will be used to repurchase existing shares of stock.  Assume the capital markets are perfect.

At the conclusion of this transaction the value of a share of Anconia Copper will be closest to:

a. $18.33

b. $25.00

c. $20.00

d. $27.50

Question #7

Assume that Rose Corporation (RC) EBIT expected to grow in the future and that all earnings are paid out as dividends, ARC 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 0% and using the proceeds to repurchase shares at the current price of $12.00.

Following the borrowing of $12 and subsequent share repurchase the number of shares that RC will have outstanding is closer to:

a. 4.5 million

b. 6.0 million

c. 4.0 million

d. 4.9 million