Practice Final Exam FIN 600

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California State University, Fullerton *

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600

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Finance

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Jan 9, 2024

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FIN 600 Practice Final Exam Multiple Choice Questions (30 points) 1. On December 6 2021 Jack in the Box announced the purchase of a popular West Coast chain Del Taco for $575 million. This is an example of A. horizontal merger. B. vertical merger. C. conglomerate merger. 2. The following are sensible motives for mergers: I. Prevent target fi rm from wasting surplus funds; II. eliminate target fi rm ineﬃciencies; III. complementary resources; IV. diversification A. I only B. I and IV only C. I, II, and III only 3. Firm A has a value of $200 million and Firm B has a value of $120 million. Merging the two would enable cost savings with a present value of $40 million. Firm A purchases Firm B for $145 million. How much do Firm A's and Firm B's shareholders gain from this merger? A. Firm A's shareholders $30 million, Firm B's shareholders $20 million B. Firm A's shareholders $15 million, Firm B's shareholders $25 million C. Firm A's shareholders $20 million, Firm B's shareholders $20 million 4. Assume the marginal corporate tax rate is 21 percent. The fi rm has no debt in its capital structure. It is valued at $100 million. What would be the value of the fi rm if it issued $40 million in perpetual debt and repurchased the same amount of equity? A. $108.4 million B. $110.5 million C. $100 million 5. When the no taxes and no costs to fi nancial distress assumptions of Modigliani & Miller Theorem are relaxed, the value of a levered firm is a function of: I) value of the fi rm if all-equity- fi nanced; II) the present value of tax shield; III) the present value of costs of fi nancial distress; IV) the present value of omitted dividend payments A. I only B. I + II − III C. I + II - III – IV

6. According to the Pecking Order Theory of capital structure A. fi rms prefer internal equity to debt or external equity B. fi rms prefer external equity to debt fi nancing. C. fi rms have no preference over any fi nancing alternative because MM theorems show that the choice of financing is irrelevant and it is not possible to increase the value of a firm by changing the mix of fi nancing 7. Assume the following data for MaxTop Company: Debt (D) = $100 million; Equity (E) = $400 million; r D = 5%; r E = 12%; and T c = 21%. Calculate the after-tax weighted average cost of capital (WACC): A. 10.39% B. 15.00 % C. 10.05 % 8. Which of the following cash distributions of a company is never in the form of cash? I) regular dividend; II) special dividend; III) tender repurchases; IV) stock dividend; A. II only B. IV only C. I, II, and III only 9. Generally, fi rms engage in stock repurchases during I) boom times as fi rms accumulate excess cash; II) recessions due to low stock prices; III) times when competitors' stock prices are dropping IV) When there is a high probability of hostile takeover as they believe their stock is undervalued A. I only B. I and IV only C. III only 10. Generally, investors interpret the announcement of a decrease in dividends as A. bad news, and the stock price drops. That is mostly due to the asymmetric information between managers and shareholders. B. good news, and the stock price increases. As it signals new investments with positive NPVs. C. a nonevent that does not affect the stock prices. As Modigliani & Miller argues investors can actually create their own preferred stream of dividends by selling their stocks.

11. Generally, investors view the announcement of an open-market repurchase program as a. bad news, and the stock price drops. As the company has no good opportunities with positive NPV for investment. b. good news, and the stock price increases. As the company has surplus funds due to recent very good performance. c. very bad news and the stock price plunges. As it signals lower than expected cashﬂows and lower dividends in the future 12. DD Company is considering investing in a new project. The project will need an initial investment of $1,200,000 and will generate $600,000 (after-tax) cash ﬂ ows for three years. However, at the end of the fourth year, the project will generate -$200,000 of after- tax cash ﬂow due to dismantling costs. Calculate the IRR (internal rate of return) for the project. A. 11.52 percent B. 12.64 percent C. 18.08 percent 13. Caresol Inc. expects to pay a dividend of $2.5 per share at the end of year 1 ( Div 1 ) and these dividends are expected to grow at a constant rate of 7 percent per year forever. If the required rate of return on the stock is 12 percent, what is the current value of the stock today? A. $25 B. $50 C. $100 14. You buy a 12-year 10 percent annual coupon bond at par value, $1,000. You sell the bond two years later for $1,100. What is your rate of return over this two-year period? A. 10% B. 20% C. 30% 15. We can imagine the fi nancial manager doing several things on behalf of the firm’s stockholders. But in well-functioning capital markets, shareholders will vote for only one of these goals. Which one? A. Make shareholders as wealthy as possible by investing in real assets. B. Modify the firm’s investment plan to help shareholders achieve a particular time pattern of consumption. C. Choose high- or low-risk assets to match shareholders’ risk preferences.

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Questions (70 points) 1. (20 points) A Financial Analyst estimated the following data for the Konsept Corporation:  FCF1=$7 million; FCF2=$45 million; FCF3=$55 million.  Free cash flow grows at a constant rate of 4 percent for year 4 and beyond.  The weighted average cost of capital is 12 percent  Firm is 100% equity financed  Number of shares outstanding is 10 million a. Calculate the Free cash flow for year 4. b. Calculate the Horizon Value at the end of year 3 c. Calculate the total value of the firm now. (V 0 ) d. Calculate the per share price of Konsept Corporation

2. (20 points) This question is about the Winfield Refuse Management Inc case about their financing decision. a. (10 points) What was the right financing decision for Winfield Refuse Management Inc case for your team? Why did your team choose this alternative? b. (10 points) Did your team agree with Andrea Winfield’s following arguments for issuing stock rather than bond? 1. Annual principal payments for the bond issue should be considered for the final financing decision 2. Adding debt on top of other fixed commitments of long-term lease increases the risk of bankruptcy, so it should be avoided.

3. (20 points) This question is about your managerial decision project. a. (10 points) How did your team analyze the managerial decision that you choose to work on? What is the data, tools and concepts used in your analysis? b. (10 points) Did the shareholders benefited from the decision given by the managers in your project? How did you analyze the total benefits to the shareholders

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4. (10 points) What are the two important concepts that you learned in this course? Explain the theoretical foundations and practical applications of these concepts. How can you use this knowledge while making decisions as a financial manager?