Questions for Final Exam - Intermediate Corporate Finance | FINC 422, Exams of Corporate Finance

Download Questions for Final Exam - Intermediate Corporate Finance | FINC 422 and more Exams Corporate Finance in PDF only on Docsity! FINC 422 Advanced Finance NAME______________________________ Dr. Gudikunst Fall 2003 FINAL EXAM Part B (80 points) Instructions: Open notes Exam portion, plus calculator Do all work in this test packet. Time limit: 2 ½ hours. 1. (20 points) The Han Lee Shipbuilding Company is considering three independent capital projects. Each project requires a $4 million investment. Project A has an IRR = 20%, Project B has IRR = 11 %, and Project X has IRR = 8%. The estimated Beta for project A is 2.0, for project B the Beta is estimated at 1.2, while project X has a Beta of 0.90 . The risk free rate is estimated to be 5% and the market risk premium is estimated to be 8 percent. The company’s desired capital structure is 40% debt and 60% equity, and debt funds cost 7 % interest rate . The firm estimates that this year its pre-tax profits will be $12 million, with a 30 % tax rate. a. What would be the minimum required rates of return for each of the projects? determine suitable WACC for each project- A= 14.56% B= 10.72% X= 9.28% b. Which projects would you recommend that the company accept? Explain briefly. only A and B have IRR greater than WACC c. If management follows the residual dividend theory, how much in dividends will the company be able to pay? Div= $12m (1-.3) - .6($8m) = $3.6m 2. (10 points) Referring to the UniSource Energy Corp Buyout article: a. Who is offering to buy the common stock from Unisource shareholders? b. The KKR company is a specialist in buying “public” companies and taking them “private”. Explain the difference between public and private companies. Why does KKR do this? c. What is the difference between being a general partner in Saguaro Utility Group LP, and being a limited partner? d. How would you classify this as an acquisition, i.e., horizontal, vertical or conglomerate? 3. (10 points) Referring to the article about Simon Property Group, Inc.: a. Explain how this is an illustration of a “forced conversion”, and why the shareholders of this stock cannot choose to keep their shares? b. What reason would Simon Property have for getting rid of this issue of preferred stock? c. What would be the impact on the capital structure and cost of capital of Simon Property if shareholders choose to convert their shares, rather than accepting redemption? 4. ( 10 points) Referring to the Oakwood Homes article: a. Why would Berkshire Hathaway Company be buying a bankrupt company ? b. From whom would Clayton Homes be “buying” Oakwood Homes, Inc.? c. Is this an example of a Chapter 11 or Chapter 7 bankruptcy? What is difference? d. Who will own the common stock in Oakwood Homes after this acquisition? e. Is this a vertical, horizontal or conglomerate acquisition for Berkshire Hathaway? 5. (10 points) Referring to the Kraft Foods announcement in the article: a. Why would this be considered a form of dividend decision by the company? b. How will common stockholders of Kraft Foods benefit from this action? c. From whom will Kraft Foods buy back its shares? d. Will this action lead to a dilution of earnings for shareholders? Explain briefly. 6. (10 points) Six years ago, the Penny Mart Stores sold a 30 year corporate bond with a 9 percent interest rate, paid semiannually. The bonds have a par value of $1000. The bonds can be called anytime after the tenth year after issuance, at a call price of 105. The bonds are now selling on the market at a yield to maturity of 7 percent. a. What is the market price of the bonds today? price= $1231 b. What is the “current yield” of this bond, and why is it different from the yield to maturity? cur. yld = 90/1231 = 7.3% c. What is the “yield to call” for this bond? YTC = 3.88% per year d. Will Penny Mart likely call the bond if interest rates remain stable? Explain. YES, YTM less than coupon rate