FIN 534 Quiz 7

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**FIN 534 Quiz 7 ** •  Question 1 Which of the following statements is CORRECT? •  Question 2 Spontaneous funds are generally defined as follows: •  Question 3 Which of the following statements is CORRECT? •  Question 4 Which of the following statements is CORRECT? •  Question 5 A company expects sales to increase during the coming year, and it is using the AFN equation to forecast the additional capital that it must raise.  Which of the following conditions would cause the AFN to increase? •  Question 6 Last year Godinho Corp. had $250 million of sales, and it had$75 million of fixed assets that were being operated at 80% of capacity.  In millions, how large could sales have been if the company had operated at full capacity? •  Question 7 The capital intensity ratio is generally defined as follows: •  Question 8 Which of the following statements is CORRECT? •  Question 9 Last year Handorf-Zhu Inc. had $850 million of sales, and it had$425 million of fixed assets that were used at only 60% of capacity.  What is the maximum sales growth rate the company could achieve before it had to increase its fixed assets? •  Question 10 Which of the following is NOT a key element in strategic planning as it is described in the text? •  Question 11 Which of the following assumptions is embodied in the AFN equation? •  Question 12 The term “additional funds needed (AFN)” is generally defined as follows: •  Question 13 Which of the following statements is CORRECT? •  Question 14 Which of the following is NOT one of the steps taken in the financial planning process? •  Question 15 Last year Wei Guan Inc. had $350 million of sales, and it had$270 million of fixed assets that were used at 65% of capacity.  In millions, by how much could Wei Guan's sales increase before it is required to increase its fixed assets? •  Question 16 Zhdanov Inc. forecasts that its free cash flow in the coming year, i.e., at t = 1, will be -$10 million, but its FCF at t = 2 will be$20 million.  After Year 2, FCF is expected to grow at a constant rate of 4% forever.  If the weighted average cost of capital is 14%, what is the firm’s value of operations, in millions? •  Question 17 Based on the corporate valuation model, the value of a company’s operations is $1,200 million. The company’s balance sheet shows$80 million in accounts receivable, $60 million in inventory, and$100 million in short-term investments that are unrelated to operations.  The balance sheet also shows $90 million in accounts payable,$120 million in notes payable, $300 million in long-term debt,$50 million in preferred stock, $180 million in retained earnings, and$800 million in total common equity.  If the company has 30 million shares of stock outstanding, what is the best estimate of the stock’s price per share? •  Question 18 Based on the corporate valuation model, the value of a company’s operations is $900 million. Its balance sheet shows$70 million in accounts receivable, $50 million in inventory,$30 million in short-term investments that are unrelated to operations, $20 million in accounts payable,$110 million in notes payable, $90 million in long-term debt,$20 million in preferred stock, $140 million in retained earnings, and$280 million in total common equity.  If the company has 25 million shares of stock outstanding, what is the best estimate of the stock’s price per share? •  Question 19 Leak Inc. forecasts the free cash flows (in millions) shown below.  If the weighted average cost of capital is 11% and FCF is expected to grow at a rate of 5% after Year 2, what is the Year 0 value of operations, in millions?  Assume that the ROIC is expected to remain constant in Year 2 and beyond (and do not make any half-year adjustments). Year:                                      1                      2 Free cash flow:                    -$50$100 •  Question 20 Which of the following is NOT normally regarded as being a barrier to hostile takeovers? •  Question 21 Which of the following statements is NOT CORRECT? •  Question 22 Which of the following is NOT normally regarded as being a good reason to establish an ESOP? •  Question 23 Simonyan Inc. forecasts a free cash flow of $40 million in Year 3, i.e., at t = 3, and it expects FCF to grow at a constant rate of 5% thereafter. If the weighted average cost of capital is 10% and the cost of equity is 15%, what is the horizon value, in millions at t = 3? • Question 24 Which of the following does NOT always increase a company’s market value? • Question 25 Based on the corporate valuation model, Bernile Inc.’s value of operations is$750 million.  Its balance sheet shows $50 million of short-term investments that are unrelated to operations,$100 million of accounts payable, $100 million of notes payable,$200 million of long-term debt, $40 million of common stock (par plus paid-in-capital), and$160 million of retained earnings.  What is the best estimate for the firm’s value of equity, in millions? •  Question 26 Suppose Yon Sun Corporation’s free cash flow during the just-ended year (t = 0) was $100 million, and FCF is expected to grow at a constant rate of 5% in the future. If the weighted average cost of capital is 15%, what is the firm’s value of operations, in millions? • Question 27 A company forecasts the free cash flows (in millions) shown below. The weighted average cost of capital is 13%, and the FCFs are expected to continue growing at a 5% rate after Year 3. Assuming that the ROIC is expected to remain constant in Year 3 and beyond, what is the Year 0 value of operations, in millions? Year: 1 2 3 Free cash flow: -$15                 $10$40   •  Question 28 Suppose Leonard, Nixon, & Shull Corporation’s projected free cash flow for next year is $100,000, and FCF is expected to grow at a constant rate of 6%. If the company’s weighted average cost of capital is 11%, what is the value of its operations? • Question 29 Based on the corporate valuation model, Hunsader’s value of operations is$300 million.  The balance sheet shows $20 million of short-term investments that are unrelated to operations,$50 million of accounts payable, $90 million of notes payable,$30 million of long-term debt, $40 million of preferred stock, and$100 million of common equity.  The company has 10 million shares of stock outstanding.  What is the best estimate of the stock’s price per share? •  Question 30 Akyol Corporation is undergoing a restructuring, and its free cash flows are expected to be unstable during the next few years.  However, FCF is expected to be $50 million in Year 5, i.e., FCF at t = 5 equals$50 million, and the FCF growth rate is expected to be constant at 6% beyond that point.  If the weighted average cost of capital is 12%, what is the horizon value (in millions) at t = 5?

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