Exam Questions All questions are equally weighted Assume that a public corporation has 2,500,000 shares outstanding and faces a marginal tax rate of 27.5%. Also, assume this corporation: (a)...

Exam Questions

All questions are equally weighted

1. Assume that a public corporation has 2,500,000 shares outstanding and faces a marginal tax rate of 27.5%. Also, assume this corporation: (a) plows-back 40% of its net income into the firm for reinvestment and (b) has Gross Income of between $60,000,000 and $70,000,000 million for the last reporting period. First, you are to create the necessary Balance Sheets and Income Statement and then calculate the annual Cash Flow from Assets (aka: CFFA or Free Cash Flows (FCF)). A constraint here, however, is that your must range between $6,000,000 and $8,000,000 annually. Second, after calculating , you are to assume that this corporation is a constant-growth perpetuity and estimate its present value (aka: intrinsic value). Said another way, you are to replicate and explain the relevant parts of the textbook, notes, and lectures associated with this question. Teach the concept(s).

2. In class, we discussed the formulas for the present value of a perpetuity (aka: no-growth perpetuity) and the present value of an ordinary annuity (aka: finite series of cash flows):

(I)

(II)

With and . We know that converges to as n approaches. Create a numerical example to show that this is so and explain the relevance of this convergence with respect to the estimation of financial asset valuation.

3. In class, we discussed how bond values change through time. Teach me this concept taking care to explain the implication(s) this pattern has for interest rate risk – highlight the interest rate implication(s) at the end of your answer.

4. Pick a between $2,000,000 and $3,500,000 annually for a constant growth firm. We will call this firm the subject firm, and we will assume that this firm’s cash flows from assets are growing at a constant rate of 2% annually. Comparable constant growth firms are selling for $50,000,000 with of $2,750,000 and have a constant growth rate in their Cash Flows from Assets of 3%. Furthermore, assume that you have no reliable way to calculate the subject firm’s WACC. Given all of these conditions, you are to provide an estimate of value for the subject firm. Teach the concept(s).