14. A is correct. In evaluating capitalstructure, a financial analyst must look at the capitalstructure of a company over time, the capitalstructure of competitors with similar business risk, and company-specific factors, such as the quality of corporate governance, that may affect agency costs among other factors. Section 3.2.
Rachel Moore, an analyst with Dawson Corporation, is discussing a potential capital project with her colleague, Phillip Cora. The project involves producing a new product that will be sold in discount retail stores. If sales for the new product are favorable, Dawson has the ability to purchase new equipment for the existing production facility that will expand production to double its current rate. However, Moore is concerned that other companies may easily replicate the product and that low barriers to entry will reduce Dawson's profitability. If sales for the new product are disappointing after the first two years, Dawson has a potential buyer that will pay $2 million for the production facility. Moore explains these facts to Cora and asks him for help in computing an accurate net present value (NPV) for the project. Cora replies with the following statements: Statement 1: You cannot compute a dollar value for the project that includes both the expansion option and the abandonment option, since only
5. A is correct. The interest expense and its tax deduction are already accounted for in the net income therefore no adjustment is needed to calculate FCFE. The value of debt repayments and working capital investment is subtracted from net income to calculate FCFE. Section 3.4. 6. A is correct. After-tax interest expense should be added to and fixed capital investment
boom-like conditions in the country, it is most likely that in the near term, the real exchange rate is increasing. At the same time, expected inflation in the EM country is also likely increasing and — given the enthusiasm for EM assets — that the risk premia is decreasing. 10. B is correct. Under conditions of high capital mobility we have:
8. Cannon Co. is a small private leather goods’ manufacturer. An analyst estimates that the beta of similar public companies is 1.1, the risk free rate is 4% and market risk premium is 6%. In addition, the small stock premium is estimated at 2% and company-specific risk premium is 1%. The estimated cost of capital using CAPM and expanded CAPM is closest to:
3. CRG is in the manufacturing industry. The company has found it difficult to pay dividends over the years due to debt financing requirements. Moreover, even though the company has been profitable over the last few years, its free cash flows have been negative owing to large capital investment requirements. The debt retirement over the years has made its capitalstructure quite volatile. Which of the following is least likely true with respect to identifying a model to value the company? A. A dividend discount model is unsuitable.
company's allocation of capital to different business divisions is inefficient since the overall value does not increase, and that the company may have diversified in order to hide poor operating performance. The liquidation value being less than going concern value is NOT a reason for the application of conglomerate discounts. Section 3.3.3.
8. A is correct. Based on a debt-to-asset ratio of 0.40 and debt of $50,000, the value of assets is = $125,000 out of which equity is 125,000 - 50,000 = $75,000. The profit and fresh issue will increase equity by $20,000 from 75,000 to 95,000. As equity is 60% of assets, total assets will be 95,000/0.6 = 158,333. Hence debt will be 158,333 - 95,000 = 63,333. Section 2.5. 9. B is correct. Higher earnings without capital investment increases return on capital.
8. C is correct. Non-ICT spending should eventually result in capital deepening and thus have less impact on potential GDP growth. In contrast, a growing share of ICT investments in the economy, through their externality impacts, may actually boost the growth rate of potential GDP.
4. C is correct. Long-run profitability can be measured by the return on invested capital or ROIC. ROIC conveys how efficiently managers are using the capital resources of the company (including the risk capital provided by stockholders) to produce profits. Section: Profitability, Profit Growth, and Stakeholder Claims.
20. B is correct. The residual dividend policy is based on paying out dividends from internally generated funds after financing the current year’s capital expenditures. Liz’s current earnings = $100 million. Expected capital expenditure is $80 million. Internal financing from retained earnings according to target capitalstructure = 80% x 80 = $64 million. Residual cash flow = dividend = $100 - $64 = $36 million. Implied payout ratio = 36/100 = 36%. Section 4.1.3.
8. Brune Company has a budget of $10 million and must choose an optimal subset from the following five profitable projects that fits within its capital budget. The outlays and NPVs of the five projects are given below. Brune cannot buy fractional projects and its required rate of return is 10%.
The new CEO, Dietmar Schulz, is attempting to turn around the firm's loss of market value, and reviving the attractiveness of the firm as an investment. BCP's sales have been strong, growing by more than 5 percent during the past year to a new record. Firm profits, while not growing at the pace he believes that they can, remain positive, and measures of profitability remain within what he considers to be acceptable bounds. Therefore, he believes that the firm's valuation problem may emanate from the choice of capitalstructure, which is currently 30 percent equity and 70 percent debt.
86. Alex Karachanis, CFA, is an independent financial advisor with a roster of over 100 clients. Along with advisory services, he also facilitates in executing the trades for his clients and manages their portfolio. Adonia Papadakis signed up Alex in November 2013 to advise and manage her portfolio. After detailed discussions on Adonia‟s circumstances and return requirements, it was agreed that only large cap equity investments will be made. In mid-2013 Alex felt that large cap stocks were excessively overvalued and shifted 50% of the portfolio to small-cap stocks. Over the next six months, small-cap stocks significantly outperformed large cap stocks. It is now January 2014 and Adonia has just received her account statement for 2013. She is very happy with the performance of her portfolio. Which standard did Alex least likely violate?
Ø Evaluate capital projects and determine the optimal capital project in situations of 1) mutually exclusive projects with unequal lives, using either the least com- mon multiple of lives approach or the equivalent annual annuity approach, and2) capital rationing.
3. Analyst 1: While running a simulation, if there is a strong correlation across two inputs, we can pick only one of the two inputs. We can pick the input that has a bigger impact on value. Analyst 2: While running a simulation, if there is a strong correlation across two inputs, then we can build the correlation explicitly into the simulation.
Two dividend-paying companies A and B directly compete with each other. Both are all-equity financed and have recent dividend payout ratios averaging 35 percent. The corporate governance practices at Company B are weaker than at Company A. Recently, profitable
10. B is correct. The p-value of 0.1526 means that the smallest level of significance at which we can conclude that – ‘The quarters of the year effect is significant for explaining stock returns’ is 15.26%. Hence at 5% level of significance we cannot conclude that the quarter of the year effect is significant for explaining stock returns. Hence, Option B is correct.