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Corporate Finance: Sample Test Problems

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Sample Test Problems 9.1 Which type of secondary market provides the most efficient market for securities? 9.2 Is preferred stock classified as debt or equity? 9.3 Burnes, Inc. is a mature firm that is growing at a constant rate of 5.5 percent per year. The firm’s last dividend was $1.50. If the required rate of return is 12 percent, what is the market value of this stock assuming dividend growth equals the growth rate of the firm? 9.4 Abacus Corp. will pay dividends of $2.25, $2.95 and $3.15 for the next three years. After three years, the firm will grow at a constant rate of 4 percent. If the required rate of return is 14.5 percent, what is the current value of the stock? 9.5 The preferred stock of Wellcare Inc. is currently …show more content…

11.4 Central Embroidery needs to purchase a new monogram machine and is considering two options. The first machine costs $100,000 and is expected to last 5 years, and the second machine costs $160,000 and is expected to last 8 years. Assume that the opportunity cost of capital is 8 percent. Which machine should Central Embroidery purchase? 11.5 You have inherited an apple orchard and want to sell it in the next four years. An expert in this type of valuation has estimated the after-tax cash flow you would receive as follows: $1,000,000 if sold in one year; $1,300,000 if sold in two years; $1,500,000 if sold in three years; and $1,600,000 if sold in four years. Your opportunity cost of capital is 10 percent. When should you sell the orchard? 12.1. Retro Inc. sells vintage style football jerseys for $72 each. Current variable costs per unit are $58. Total fixed costs (including depreciation and amortization expense) are $84,000 per year. If forecasted sales next year are 8,000 jerseys, how much can variable costs per unit increase without causing a negative EBIT? 12.2 Roy’s Restaurant has determined that if its revenues were to increase by 20 percent, then EBIT would increase by 45 percent to $87,000. The cash fixed costs for the business are $35,000. Given the same 20 percent increase in revenues, what would be the corresponding change in EBITDA? 12.3 How would a capital intensive company fare during good and poor economic times as compared with other

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