1) Meyer Henderson, CFA, is analyzing the financials of Roth Department Stores. He intends to use a free cash flow to the firm (FCFF) model to value Roth's common stock. In the 2016 financial statements and footnotes he has identified the following items:

Item # 1: Roth reported depreciation and software amortization of $23 million in 2016.

Item #2: The deferred tax liability increased by $17 million in 2016.

Item #3: Roth reported income of $6 million in 2016 from the reversal of previous restructuring charges related to store closings in 2015.

Item #4: Net income totaled $173 million in 2016.

Item #5: The net increase in noncash net working capital accounts was $47 million in 2016.

Item #6: Net capital spending totaled $86 million in 2016.

Item #7: Roth reported interest expense of $19 million.

Henderson estimated Roth's marginal tax rate to be 35%. He also expects Roth to be profitable for the foreseeable future, so he does not expect the deferred tax liability to reverse. As the base-year projection for his FCFF valuation, Henderson calculates FCFF for 2016 as:

FCFF2016= $173 + $23 + $6 + $17 + [$19(1 -0.35)] -$86 -$47 = $98.35 million

In implementing the FCFF model to value Roth, did Henderson correctly treat Items #1 and #2?

a.

Both items were treated correctly.

b.

One item was treated correctly and the other incorrectly.

c.

Neither item was treated correctly.

2)

Consider the following statements with respect to international considerations in determining the cost of capital.

Statement 1 : Exchange rates are an issue.

Statement 2: The country risk rating model uses a corresponding developed market as a benchmark and adds a premium for the emerging market.

Are the statements correct?

a.

No, because exchange rates are not an issue.

b.

Yes.

c.

No, because the country risk rating model estimates an equation for the equity risk premium for developed countries and then uses the equation and inputs associated with the emerging market to estimate the required return for emerging markets.

3)

An analyst wishes to estimate a beta for a public company and use it to compute a forward-looking required return. The analyst would most likely:

a.

delever the market beta and relever that value for the company.

b.

regress the returns of the company on returns on an equity market index and adjust the estimated beta for leverage.

c.

regress the returns of the company on returns on an equity market index and adjust the estimated beta for beta drift.

4)

The Gray Furniture Co. earned 3.50 per share last year. Investment in fixed capital was 2.00 per share, depreciation was 1.60, and the investment in working capital was 0.50 per share. Gray is currently operating at its target debt-to-asset ratio of 40%. Thus, 40% of annual investments in working capital and fixed capital will be financed with new borrowings. Shareholders require a return of 14% on their investment, and the expected growth rate is 4%. The value of Gray's stock is closest to:

a.

27.04.

b.

29.90.

c.

30.78

5)

The Anderson Door Co. earned C$30 million before interest and taxes on revenues of C$80 million last year. Capital expenditures were C$20 million, and depreciation was C$15 million. The additions to working capital were C$6 million. The firm's weighted average cost of capital is 12.45%, the marginal tax rate is 40%, and the expected cash flow growth is 5%. The market value of debt is C$25 million. The value of the firm's equity is closest to:

a.

C$98.70.

b.

C$73.70.

c.

C$93.96.

6)

Davy Jarvis, CPA, is performing an equity valuation as part of the planning and execution phase of the portfolio management process. His results will also be useful for:

a.

technical analysis.

b.

communication with analysts and investors.

c.

benchmarking.

7)

An analyst wishes to calculate the WACC for a company. The company's debt is twice that of the equity. The required returns on the company's debt and equity are 8% and 10 %, respectively. The company's marginal tax rate is 30%. The WACC is closest to:

a.

8.67%.

b.

6.07%.

c.

7.07%.

8)

Meyer Henderson, CFA, is analyzing the financials of Roth Department Stores. He intends to use a free cash flow to the firm (FCFF) model to value Roth's common stock. In the 2016 financial statements and footnotes he has identified the following items:

Item # 1: Roth reported depreciation and software amortization of $23 million in 2016.

Item #2: The deferred tax liability increased by $17 million in 2016.

Item #3: Roth reported income of $6 million in 2016 from the reversal of previous restructuring charges related to store closings in 2015.

Item #4: Net income totaled $173 million in 2016.

Item #5: The net increase in noncash net working capital accounts was $47 million in 2016.

Item #6: Net capital spending totaled $86 million in 2016.

Item #7: Roth reported interest expense of $19 million.

Henderson estimated Roth's marginal tax rate to be 35%. He also expects Roth to be profitable for the foreseeable future, so he does not expect the deferred tax liability to reverse. As the base-year projection for his FCFF valuation, Henderson calculates FCFF for 2016 as:

FCFF2016= $173 + $23 + $6 + $17 + [$19(1 -0.35)] -$86 -$47 = $98.35 million

In implementing the FCFF model to value Roth, did Henderson correctly treat Items #5 and #7?

a.

One item was treated correctly and the other incorrectly.

b.

Both items were treated correctly.

c.

Neither item was treated correctly.