TEST INSTRUCTIONS 1 For true false questions enter A on the scantron if the answer is TRUE and enter B on the scantron if the answer is FALSE 2 For multiple choice questions enter the answer that best completes the question For numerical answers select the choice that is closest to your answer as rounding may cause slight differences in your result and my posted answer 3 WE NEED YOUR TEST AND SCANTRON WHEN YOU TURN IN YOUR EXAM FAILURE TO DO EITHER WILL RESULT IN A 0 4 SHOW YOUR WORK FOR ALL PROBLEMS SECTION 1 TRUE FALSE 2 points each 1 The lower price of oil will likely cause Russia to maintain the natural gas supply to Western Europe this winter 2 Warren Buffett lost over 2 billion in the past month due to holdings in Sears and Coca Cola 3 Free cash flow represents the cash flow available to shareholders after all other investors have been paid 4 The weakness of the FCF valuation model is that we assume a long term growth rate in FCFs 5 Investment banks favor the FCF valuation model over the multiples approach 6 A project that uses MACRS will have a higher NPV than the same project using straight line depreciation 7 If we sell an asset at a loss the NSV is simply the MV as we do not have any taxes to calculate 8 A sunk cost can sometimes be recovered at the end of a project 9 The weighted average cost of capital represents the required return for equity owners in the firm 10 Sensitivity analysis shows the impact on NPV by changing the value of one variable at a time 11 Modigliani and Miller say that in a world with taxes firm value increases with leverage 12 Suppose that a project has greater systematic risk than the typical project for a firm If the firm uses its firm wide beta there is a chance that the firm will reject a project that actually has a positive NPV 13 Apple Pay is partnering with Visa and MasterCard to gain a foothold in the credit card processing business 14 We consider preferred stock to a variable income security like common stock 15 The optimal capital structure is the debt and equity combination that minimizes the weighted average cost of capital 16 Taylor Swift is one of few recording artists to embrace Spotify and Pandora 17 A firm that operates in a business that is more cyclical will have a higher beta all else equal 18 If a firm increases its debt holdings with no additional equity its beta will increase 19 A full service broker will typically charge 1 of your balance as an annual account fee 20 Google is facing investor pressure to issue a dividend 21 A firm has a cash flow operating leverage of 1 40 This means that a 1 40 increase in sales will result in a 1 increase in cash flow 22 On Shark Tank the sharks often use enterprise value divided by EBITDA as a multiple to value deals SECTION II CONCEPT MULTIPLE CHOICE 2 points each 23 Which statement correctly describes the impact of increasing leverage for a firm a Shareholder return increases and shareholder risk increases b Shareholder return increases and shareholder risk decreases c Shareholder return decreases and shareholder risk increases d Shareholder return decreases and shareholder risk decreases 24 Which type of firm would have the highest beta a Cyclical Low fixed cost Mainly equity financed b Non cyclical low fixed cost mainly equity financed c Cyclical high fixed cost mainly equity financed d Non cyclical high fixed cost mainly debt financed e Cyclical high fixed cost mainly debt financed 25 Which type of mutual fund would provide the most diversification a Income b Index c Growth d Sector e International SECTION III PROBLEMS 5 POINTS EACH UNLESS NOTED Consider the following information for problems 26 28 An analyst at CJ Megatron Investment Bank has been trying to value a growing fast food restaurant chain Chick Today He has the following financials for Chick Today 2014 INCOME STATEMENT AS OF 12 31 14 Sales 50 000 000 Cost of Goods 30 000 000 Gross Profit 20 000 000 Selling and Administrative 8 000 000 Depreciation and Amortization 1 000 000 EBIT 11 000 000 Interest 500 000 Earnings Before Taxes 10 500 000 Taxes 35 3 675 000 Net Income 6 825 000 2014 BALANCE SHEET AS OF 12 31 14 2014 2013 Cash 2 000 000 1 500 000 Accounts Receivable 4 000 000 3 500 000 Inventory 2 000 000 1 500 000 Current Assets 8 000 000 6 500 000 Net PPE 21 000 000 18 000 000 Total Assets 29 000 000 24 500 000 Accounts Payable Notes Payable Current Liabilities Long term Debt Total Liabilities Shareholder Equity Total Liabilities and Shareholder Equity 1 000 000 1 000 000 1 000 000 750 000 2 000 000 1 750 000 8 000 000 7 000 000 10 000 000 8 750 000 19 000 000 15 750 000 29 000 000 24 500 000 26 What was the FCF for 2014 a 2 650 000 b 2 900 000 c 3 650 000 d 3 900 000 e 3 950 000 27 The analyst has estimated the financials for Chick Today into the future After careful work the analyst has projected the following free cash flows for Chick Today YEAR 2015 2016 2017 FCF 3 75 million 4 25 million 4 50 million After 2017 the analyst conservatively estimates that free cash flows will grow at 4 forever If the cost of capital for Chick Today is 10 what is the estimated enterprise value today HINT The 2014 FCF is not part of this valuation a 59 00 million b 62 11 million c 63 58 million d 68 90 million e 72 56 million 28 The analyst would like to value Chick Today using another method He considers Mick Donald s a peer to Chick Today Currently the enterprise value for Mick Donald s is 100 billion while the EBITDA over the last year is 20 billion If we apply this multiple to Chick Today what is a rough estimate for Chick Today s common equity a 48 million b 49 million c 51 million d 53 million e 54 million 29 A company purchased a finishing machine 10 years ago for 200 000 At the time the company also paid 20 000 to have the machine installed and delivered The machine was straight line depreciated with a useful life of 20 years Today 10 years later the company decides to sell the finishing machine and has been offered 80 000 If the company has a tax rate of 40 what is the cash flow from selling the finishing machine a 87 600 b 88 000 c 92 000 d 96 400 e 100 800 QUESTIONS 30 and 31 are LINKED 30 Caterpillar CAT has debt valued at 40 billion on its balance sheet while the market value of its common stock is roughly 20 billion If the yield to maturity on the …