50 QUESTIONS ON FINANCE

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QUESTIONS :

CASE PROBLEM - II :

Heinz Corporation bonds carry a coupon of 8% and will mature in 5 years at \$1,000. Newly issued 5-year bonds with similar characteristics are yielding 4%. Calculate today's market price of the Heinz bond. Compute your answer, submit all your work, then answer the following questions.

14. What is the discount rate you used in your work ?

15. What is the annual interest in dollars paid by the Heinz bond ?

16. What is the pv of the yearly bond interest that the Heinz bond pays ? Could this yearly bond interest be computed as an annuity ? Why,or why not ?

17.What is the present value of the principal of the Heinz bond ?

18, What is the total present value of the Heinz bond- interest plus principal ?

Case Problem III.

Wall Street is forecasting yearly dividends for FNC as follows: \$1.00 (Year 1); \$1.50 (year 2); \$2.00 (Year 3); \$3.00 (Year 4). The consensus estimate is that FNC shares will trade at \$80 in four years. If the required return on the stock is 9%, calculate the value of FNC stock today. Show and submit all your work, then answer the following questions.

19. What is the discount rate you used in your work ?

20. Could the yearly FNC dividends be computed as an annuity ? Why, or why not ?

21. What is the total pv of the four yearly dividends ?

22. What is the pv of the forecasted share price ?

23. What is the total value of FNC today (pv of four dividends plus pv of forecasted share price) ?

Case Problem IV.

Madison Bakery is considering the installation of a new oven. Made in Milan, the oven would enable Madison to produce Old World breads which could be sold at premium prices.

Costs are estimated as follows: Milano Oven...\$1,150,000      Building Improvements...\$650,000      Additions to Working Capital...\$100,000

Madison Bakery's WACC is 7% and its tax rate is 30%. Assume straight-line depreciation, and a five-year life for the oven with no salvage value.

EBIT estimates are as follows: \$150,000 (Year 1); \$175,000 (Year 2); \$200,000 (Year 3); \$225,000 (Year 4); \$250,000 (Year 5).

Draw and submit a time line, including EBIT, taxes, depreciation, operating cash flow,  tvm factors, and discounted cash flow.

24. Is the "addition to working capital" a depreciable item ? Why, or why not ?

25. What is the project's present value ?

26. What is the project's NPV ?

27. What is the Payback Period, in years, using non-discounted operating cash flows ?

28. Based on your work, should Madison Bakery proceed with this proposed oven ? Briefly cite why, or why not.

Case Problem V.

Chatham Craft's capital structure consists of \$30 million of debt and \$90 million of equity. The Company's CFO has provided the following data: interest rate on debt is 8%; the Company's tax bracket is 30%; the current stock dividend is \$2.00; the expected dividend growth rate is 8%; the current stock price is \$40.

After submitting all your work, including formulas and calculations, answer the following questions.

29. What is Chatham's after-tax cost of debt ?

30. What is Chatham's cost of equity ?

31. What are the weightings of debt and equity ?

32. What is the WACC ?

33. If the proportion (weighting) of equity in Chatham's cap structure were to increase and the proportion of debt were to decrease, what would happen to the Company's WACC? Briefly explain why.

Section IV. True/False Questions

For the following, indicate whether the statement is true or false. Show the question number, and then write True or False.

Example: Q51. True

34. XYZ Corporation's cost of debt is less than its cost of equity. Therefore, XYZ should continue to issue more debt (instead of equity) in order to finance proposed capital projects.

35. The current ratio is a less strict evaluation of liquidity than the quick ratio.

36. For US corporations, the cost of debt is always less than the cost of equity.

37. A credit facility refers to the lending institution that provides corporate financing.

38. The present value of cash cannot be determined.

39. For any present value factor .abcd, the corresponding future value factor (for the same number of periods and at the same rate) would be .abcd divided by the number of years.

40. As the cost of capital increases, the NPV rule becomes more difficult to fulfill.

41. Book value is not necessarily a measure of how much an asset is worth today.

42. Annuity tables can be used when payments vary from year to year.

43. If an investment appreciates 100% in 10 years, its compound growth rate is approximately 10% per year.

44. Sarbanes Oxley legislation is relatively cost-free to implement.

45. Boeing's cash cycle is very long because of the time required to manufacture aircraft.

46. Stock dividends and bond interest payments are both legal obligations of the corporation.

47. The NPV is always a positive number because you cannot discount a future value to a pv less than zero.

48. Start-up tech companies generaly issue debt because their cost of equity is too high.

49. A dollar received today is worth more than a dollar to be received tomorrow.

50. CFO's are concerned with three major management topics: capital budgeting, capital structure, and capital maximization.

• 11 years ago