Corporate Finance Mock Final, Exams of Finance

Download Corporate Finance Mock Final and more Exams Finance in PDF only on Docsity! Mock Final Exam 1: Short Questions 1A (1.5 points) In the CAPM, _______ reflects a _______ risk component of individual stocks relative to the market portfolio. a) individual stock volatility, non-systematic. b) market portfolio volatility, systematic. c) equity beta, non-systematic. d) individual stock volatility, systematic. e) equity beta, systematic. 1B (1.5 points) You are a CEO of a public company traded on NASDAQ. Which of these portfolios would you consider as the best practical proxy for the market portfolio to compute the value of your future investments? a) Value-weighted NASDAQ b) Equal-weighted S&P 500 c) Value-weighted S&P 500 d) Equal-weighted NASDAQ e) Value-weighted Vanguard Total Bond Market index 1C (1.5 points) When we use the APV method to value a firm and its debt stays constant over time: a) the present value of the firm’s tax shield should be discounted at the cost of capital of debt. b) the APV value and the WACC value (using the version of the WACC method discussed in class) are the same. c) the present value of the firm’s tax shield should be discounted at the “unlevered” cost of capital. d) the APV value is higher than the WACC value (using the version of the WACC method discussed in class). e) the APV value is lower than the WACC value (using the version of the WACC method discussed in class). 1D (1.5 points) A company in a financial distress: a) has the value of liabilities exceeding the value of assets. b) is liquidated, and the assets are sold either as a going concern or piecemeal. c) is restructured according to Chapter 11 of the bankruptcy code. d) has insufficient liquidity to repay interest on the debt it owes. e) did not choose its leverage ratio optimally. 1E (1 point) Since debt is a cheaper source of financing than equity: companies benefit from debt financing even when tax rates are zero. a) true. b) false. 2: Betas (2 points) Lumbar Barrel Stock (LBS) Corporation is a successful company located in London, UK. It currently has 10 million shares outstanding with a current price of GBP 20 per share. It also has debt with a market value of GBP 100 million. Its equity beta is 2.125 and its debt beta is 0.25. Because of recent UK’s law favouring LBS, the company does not pay any taxes. What is the asset beta of Lumbar Barrel Stock? 3: Weighted Average Cost of Capital (2 points) Assume perfect capital markets. Mezzanine Corp., of which you are the CFO, is currently financed 60% by equity and 40% by debt. Your expected free cash flow is $15 million per year and is expected to grow at a 5% annual rate forever. You estimate (based on your asset beta) that your assets should return approximately 15%. Your debt is risk-free and pays 7.5%. Ignore taxes. What is the expected return on equity of Mezzanine Corp.? 4: Valuation using Comparables (4 points) Note: your exam this year is multiple choice, so a long problem like this one will be split into several parts. E.g., the problem can have three parts with 2/1/1 point split. I will make sure that each subsequent part is independent from earlier parts, so that you can earn points even if earlier parts are incorrect. Riverwood Paper, a large privately-held paper and pulp manufacturer, has hired you to advise them on their cost of capital. Riverwood derives all its revenues from paper and pulp, and the projects it plans to undertake will not change that. The firm is all-equity financed. You have assembled the following data on the two closest competitors, both of which are publicly traded: Masau Paper Boise Paper and Slot Machines Equity Beta 1.2 1.5 Number of shares outstanding 100 million 140 million Stock price per share $15 $22 Book value of equity $1,050 million $490 million Market value of debt $180 million $230 million Excess cash $80 million $55 million Percentage of revenue from Paper and Pulp 97% 8% In the above, excess cash means that it is not used for operating purposes. You also estimated (using yield on debt) that Masau’s debt beta is 0.1 and Boise’s debt beta is 0.25. The leverage ratios of the two competitors have been constant in recent years and are expected to stay constant in the future. Ignore any tax benefits of debt financing. Assume that the CAPM holds, and that the annual riskless interest rate is 5% at all maturities. The annual expected return on the market portfolio is 11%. What is your best estimate for the cost of capital of Riverwood Paper? Explain your answer. 5: Capital Asset Pricing Model (2 points) Donald Trump is starring in a one-off episode of “The Apprentice” to celebrate the show’s quinceañera (15 th birthday, January 8, 2019). He has three young and very eager investment managers vying for the chance to manage his wealth. He has assigned each of the contestants the task of researching the market opportunities for making investments. He has also asked each of the contestants to report back to him the expected return and standard deviation of the portfolio they would form for him. Assume that all securities are priced according to the CAPM (Capital Asset Pricing Model) and that the riskless rate is 2% and the expected return on the market 2