Scribd Logo
Upload

Welcome to Scribd!

  • 45 views

    MGMT 430-02 Practice Exam 1

    Uploaded by

    suruth242
    1. Firm A's free cash flow in 2018 was calculated using the formula: Free cash flow = EBITA - Taxes - Change in deferred taxes - Capex + Depreciation - Change in net working capital. Firm A's free cash flow in 2018 was $1,130 million. 2. Firm B's WACC at a 40% leverage ratio is 5.6%. At a 60% leverage ratio, Firm B's WACC is 6%. 3. A Firm-Value-to-Noplat multiple of 28 is not reasonable for calculating Firm C's continuation value based on the given assumptions about ROIC and reinvestment rates, which indicate a lower multiple would be more appropriate.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    MGMT 430-02 Practice Exam 1

    Uploaded by

    suruth242
    45 views2 pages
    1. Firm A's free cash flow in 2018 was calculated using the formula: Free cash flow = EBITA - Taxes - Change in deferred taxes - Capex + Depreciation - Change in net working capital. Firm A's free cash flow in 2018 was $1,130 million. 2. Firm B's WACC at a 40% leverage ratio is 5.6%. At a 60% leverage ratio, Firm B's WACC is 6%. 3. A Firm-Value-to-Noplat multiple of 28 is not reasonable for calculating Firm C's continuation value based on the given assumptions about ROIC and reinvestment rates, which indicate a lower multiple would be more appropriate.

    Original Title

    105893322

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    1. Firm A's free cash flow in 2018 was calculated using the formula: Free cash flow = EBITA - Taxes - Change in deferred taxes - Capex + Depreciation - Change in net working capital. Firm A's free cash flow in 2018 was $1,130 million. 2. Firm B's WACC at a 40% leverage ratio is 5.6%. At a 60% leverage ratio, Firm B's WACC is 6%. 3. A Firm-Value-to-Noplat multiple of 28 is not reasonable for calculating Firm C's continuation value based on the given assumptions about ROIC and reinvestment rates, which indicate a lower multiple would be more appropriate.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    45 views2 pages

    MGMT 430-02 Practice Exam 1

    Uploaded by

    suruth242
    1. Firm A's free cash flow in 2018 was calculated using the formula: Free cash flow = EBITA - Taxes - Change in deferred taxes - Capex + Depreciation - Change in net working capital. Firm A's free cash flow in 2018 was $1,130 million. 2. Firm B's WACC at a 40% leverage ratio is 5.6%. At a 60% leverage ratio, Firm B's WACC is 6%. 3. A Firm-Value-to-Noplat multiple of 28 is not reasonable for calculating Firm C's continuation value based on the given assumptions about ROIC and reinvestment rates, which indicate a lower multiple would be more appropriate.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    You are on page 1of 2

    MGMT 430-02

    Practice Exam 1

    1.) (20) In 2018, Firm A had reported taxes of $260 million and a decrease in deferred taxes
    by $12 million. EBITA was $1.3 billion and net working capital was the same fraction of
    sales as in 2017, 15%. In 2018, interest tax shields were $25 million and taxes on
    nonoperating income (interest income) were $11 million. Depreciation was $180 million
    in 2018. Sales were $10 billion in 2018 and $9 billion in 2017. Net PPE was 20% of sales
    in 2018 and 2017. There was no operating lease interest and no increase in net other
    assets in 2018. Calculate Firm A’s free cash flow (as appropriate in the WACC approach)
    in 2018. Show your calculations. Write down exactly which formula or expression you
    use and which numbers correspond to each term.

    2.) (15) Firm B’s debt is long-term and risk-free. The long-term risk-free rate is 1%, Firm
    B’s equity beta at its current leverage ratio (D/(D+E)) of 40% is 1.3, and the market risk
    premium is 6%. The marginal corporate tax rate is 15%.

    (a) (7) What is Firm B’s WACC under its current leverage ratio (D/(D+E)) of 40%?
    Show your calculations.

    (b) (8) Now suppose that Firm B wants to increase its leverage ratio (D/(D+E)) to 60%.
    Assume that Firm B’s level of debt remains constant after the change in capital structure
    and its debt remains risk-free. What is its WACC at the 60% leverage ratio (D/(D+E))?
    Show your calculations.

    3.) (15) Consider the calculation of the continuation value. Suppose Firm C has a WACC of
    6%. Firm C’s investment banker prepares a DCF valuation of Firm C using the WACC
    approach. In her DCF valuation, Firm C’s investment banker suggests to use a Firm-
    Valueto-Noplat multiple of 28 to calculate the continuation value after the explicit
    forecast period. That is, she suggests that instead of using a formula, one should just
    multiply Noplat in the year after the explicit forecast period (that is, Noplat in year T+1)
    by 28 to arrive at the continuation value. Assume that year T+1 is 2029.

    (a) (7) Reasonable estimates of Firm C’s return on invested capital on new investment
    (ROIC) for the long-term appropriate for the calculation of the continuation value are
    between 6% and 8%. Reasonable estimates of the reinvestment rate for Firm C for the
    longterm appropriate for the calculation of the continuation value range from 30% to
    50%. Do you think that under these assumptions the Firm-Value-to-Noplat multiple of 28
    is reasonable for the continuation value? Why or why not? Explain your reasoning
    carefully and show your calculations.
    (b) (8) Now suppose that Firm C is projected to have $140 million in Noplat and interest
    expense of $20 million in 2029 (year T+1). It is forecast to have $520 million in debt in
    2028 and 2029. Firm C has 90 million shares outstanding and this number will remain
    constant. The marginal corporate tax rate is 15%. The investment banker agrees that a
    reasonable range of PE (price-earnings) ratios for Firm C in 2028 and 2029 is between 20
    and 25. The assumptions on the reinvestment rate and return on invested capital from
    Question 3(a) do not apply here. Do you think that under these assumptions the Firm-
    Value-to-Noplat multiple of 28 is reasonable for the continuation value? Why or why not?
    Explain your reasoning carefully and show your calculations.

    4.) (20) Assume that the current stock price is $45. The stock price in one year can be
    either $62 or $25. The risk-free rate is 2%.

    (a) (10) Calculate today’s value of a one-year European call option on the stock with
    exercise price of $38 by using the binomial option pricing model. Explicitly calculate the
    replicating portfolio. Show your calculations.

    (b) (10) Calculate today’s value of a one-year European call option on the stock with
    exercise price of $38 by using risk-neutral probabilities. Explicitly calculate the risk-
    neutral probability of the stock price moving to $62. Show your calculations.

    5.) (15) Assume that the stock market index is trading at a level of 4,500. You can
    interpret this index level as a scaled price that was set at some point to 100 and
    appreciates as the stocks included in the index appreciate. The long-term risk-free rate is
    1.3%. The aggregate earnings (scaled in the same way as the index level) of the firms in
    the stock market index are expected to be 132 next year and the payout ratio (dividends
    as a percentage of earnings) has been 45% and is expected to remain 45%. What
    additional assumptions can justify the stock market index level of 4,500? Show your
    calculations and explain your reasoning carefully.

    6.) (15) Firm D has a firm value of $1.1 billion and outstanding zero coupon debt
    (without interest payments) with a 10-year maturity and a face value of $750 million. The
    volatility (that is, the annual standard deviation) of Firm D’s assets (or firm value) is
    40%. The risk-free rate is 1%.

    (a) (8) What is the yield to maturity for Firm D’s debt?

    (b) (7) Suppose an investment in a project does not change the volatility (that is, the
    annual standard deviation) of Firm D’s assets (or the annual standard deviation of firm
    value). The investment costs $50 million. What is the minimum NPV of the project (for
    the firm) that would allow Firm D to finance it by issuing new equity? Show your
    calculations.

    You might also like