1. A) How much is the cash and retained earning in 2019?

B) Bigquiz can borrow at 10% interest rate, if the company starts to borrow, do you think borrowing will increase or decrease the firms ROE? Why?

C) If the firm targets a 30% growth rate next year, and the firm doesnt want to issue new equity, how to finance? (suppose profit margin, asset turnover ratio, payout ratio remain constant over the period).

2. Bigquiz Inc. is considering whether to introduce a new machine. The projected unit sales are 100, 175, and 125 units per year for the next three years, respectively. Price is $1 million per unit, variable cost is $0.5 million per unit, and fixed costs are 15 million per year. The equipment costs 150 million today and can be sold three years later at a market value of 20 million. The machine will be depreciated on a three-year MACRS schedule (33.3%, 44.44%, 14.8%, 7.4%). The machine also requires an initial working capital of 10 million, and in each year working capital is estimated as 10% of the total sales. All working capital will be recovered by the end of the projects life. Tax rate is 35%. The companys beta is 1.5, risk free rate is 2% and market risk premium is 4%, how much is NPV of the project?

3. Bigquiz is experiencing rapid growth. Dividends are expected to grow at 20% per year during the next three years. After that period, dividend will grow at 5% for ever. Using two stage dividend discount model, how much is the stock price today? Use the same discount rate in problem 2

4. A) In perfect market without tax, Rebacca has 100 shares, how much is her cash flow now? (suppose the firms payout ratio is 100%)

b) Suppose the company decides to borrow 200 million long-term debt and use the proceedings to buyback shares. How much is Rebaccas cash flow after the capital restructuring? (10 points)

c) Why do more and more companies prefer stock repurchase to cash dividend?

2018 2019 800 600 60 10.0% 40.0% 35.0% 30 sales cost of goods sold depreciation interest rate payout tax rate account receivable cash inventory net fixed asset account payable note payable long-term debt common stock retained earning shares outstanding 40 26 20 24 330 0 0 0 100 300 360 0 0 0 100 10 Bigquiz Corporation (in millions) 2018 2019 sales 800 cost of goods sold 600 depreciation 60 interest rate 10.0% payout 40.0% tax rate 35.0% account receivable 26 30 cash 20 inventory 24 40 net fixed asset 330 360 account payable 0 0 note payable 0 0 long-term debt 0 0 common stock 100 100 retained earning 300 shares outstanding 10 2018 2019 800 600 60 10.0% 40.0% 35.0% 30 sales cost of goods sold depreciation interest rate payout tax rate account receivable cash inventory net fixed asset account payable note payable long-term debt common stock retained earning shares outstanding 40 26 20 24 330 0 0 0 100 300 360 0 0 0 100 10 Bigquiz Corporation (in millions) 2018 2019 sales 800 cost of goods sold 600 depreciation 60 interest rate 10.0% payout 40.0% tax rate 35.0% account receivable 26 30 cash 20 inventory 24 40 net fixed asset 330 360 account payable 0 0 note payable 0 0 long-term debt 0 0 common stock 100 100 retained earning 300 shares outstanding 10