Hi. I can't understand the solutions to questions 7,11,13,19,24.

Thanks

Some practice questions for the final exam Corporate Finance Note: This is a fast production, I assume there is always one correct answer but I may have made mistakes. We will try to go through these questions under a time constraint. 1. Firm A is unlevered and has an equity beta of 1.2 and a firm value of 100. Firm B has the same asset risk but it is levered. The debt of firm B is riskfree and its current market value is 20. What is the equity beta of firm B? 2. Stock Z in one year's time is expected to pay a $4 dividend. So far it has been paying out as dividends 80% of earnings. The dividends are expected to grow at 5% a year. Suppose stock Z continues on this growth trend. What is the stock price today if investors require a longrun rate of return of 10%? What part of the stock price is attributable to the present value of growth opportunities? 3. Compute the present value of interest tax shields generated by the following three debt issues a company is considering. Consider corporate taxes only. Assume the appropriate discount rate is identical to the yield of the debt. The marginal tax rate is Tc=40%. A $1,200 oneyear loan at 9%. A sevenyear loan of $1,200 at 9%, no principal is repaid until maturity. A $1,200 perpetuity at 8%. 4. The static tradeoff theory implies that allelse equal: A. The value of a firm does not depend on the level of corporate tax rates B. The value of a firm is higher for firms located in countries with higher corporate tax rates C. The tax shield of debt is higher for firms located in countries with higher corporate tax rates D. The tax shield of debt is lower for firms located in countries with higher corporate tax rates 5. How much money would you have on your bank account in 3 years from now if you invest 100 EUR today? The current termstructure of interest rates is: 3% p.a. for 1 year, 4% p.a. for 2 years and 5% p.a. for 3 years. A. 115.7625 EUR B. 112.4760 EUR C. 115.0000 EUR D. 112.4864 EUR 6. A 2year bond with annual coupon payments of 5% and face value of 1000 has a price of 900, and another 2year with annual coupon payments of 10% and face value of 1000 has a price of 950. Calculate the twoyear spot rate. A. 17.64% B. 8.46% C. 7.54% D. 10% 7. The historical returns data for the past three years for Company A's stock is 6.0%, 15%, 15% and that of the market portfolio is 10%, 10% and 16%. If the risk free rate of return is 4%, what is the cost of equity capital (required rate of return of company A's common stock) using CAPM? A. 18% B. 14% C. 10% D. 12% 8. The ABC company is in financial distress, has $10,000 in cash, and debt with face value $50,000 due next year. The ABC company has the possibility to invest in a project which requires an investment of all of its $10,000 cash and is expected to produce a cash flow next year of $100,000 with probability 5%, and $10,000 otherwise. Assume a discount rate of 20% throughout. By implementing the project versus doing nothing, by how much does shareholder value increase? A. Roughly 2083. B. Roughly 12083. C. Roughly 4167. D. Roughly 8333. 9. Which statement concerning cashflows is wrong? A. Depreciation is not a cashflow. B. Changes in net working capital do affect cashflows. C. Inconsistent treatment of inflation does not change the NPV. D. The taxshield depends on the tax rate. 10. Firm X is expected to generate cash flows of $10 next year, and then expect due to competition a decrease in its future cash flows at a rate of 6 percent per year in perpetuity. The appropriate discount rate is 10 percent. What is the present value of all firm X cash flows? A. 250 B. 62.5 C. 100 D. 166.7 11. AAA firm under its existing debt covenants is prohibited from issuing more senior debt unless tangible assets exceed 150% of senior debt. Currently the company has outstanding 100 million of senior debt and tangible assets of 189 million. How much more debt can AAA issue? A. 284 million B. 26 million C. 126 million D. 183 million 12. The current earnings per share of a company are 4 and the firm's stock price is 100. Analysts estimate that around 80 percent of the firm's stock price comes from growth opportunities. What is the implied return on the stock? A. 0 % B. 20 % C. 25 % D. 10 % 13. AAA Company is financed entirely by common stock that is priced to offer a 15% expected return. The common stock price is $40/share. The earnings per share (EPS) is expected to be $6. If the company repurchases 25% of the common stock and substitutes an equal value of debt yielding 6%, what is the expected value of earnings per share after refinancing? (Ignore taxes.) A. $6.00 B. $7.20 C. $8.26 D. $7.52 14. Given the following data for a stock: beta = 0.9; riskfree rate = 4%; market rate of return = 14%; and Expected rate of return on the stock = 13%. Then the stock is: A. over or underpriced, depending on what other securities the investor holds B. under priced C. correctly priced D. overpriced 15. Consider a portfolio of two stocks, X and Y, whose standard deviation of returns are respectively 20% and 10%. The correlation coefficient between the returns of stock X and Y is 0.4. If an investor desires a portfolio with a standard deviation of returns of 12.85%, what is the portfolio weight in stock X? A. 0.8 B. 0.2 C. 0.5 D. 0 16. A lawyer works for a firm that advises corporate firms planning to sue other corporations for antitrust damages. He finds that he can "beat the market" by short selling the stock of the firm that will be sued. This finding is in violation of: A. Weak form market efficiency B. No form of market efficiency C. Strong form market efficiency D. Semistrong form market efficiency 17. Maui has $10 million invested in long-term corporate bonds. This bond portfolio's expected annual rate of return is 13%, and the annual standard deviation is 13%. Moana's financial adviser, Moana, recommends that Maui consider investing in an index fund that closely tracks the SP500 index. The index has an expected return of 18%, and its standard deviation is 18%. Could Maui do better by putting his money in a combination of the index fund and Treasury bills, without changing the risk of his portfolio? The treasury yield is 6%. A. B. C. D. Yes, he could improve his return by 1.53%. Yes, he could improve his return by 1.81%. Yes, he could improve his return by 1.67%. Yes, he could improve his return by 1.44%. 18. The AAA Company has a debt to total value ratio of 0.5. The cost of debt is 8% and that of unlevered equity is 12%. Calculate the weighted average cost of capital if the tax rate is 30%. A. 12.0% B. 14.8% C. None of the other values D. 10.2% 19. The AAA Corporation has decided to build a new facility. The cost of the facility is estimated to be $470,000. AAA wishes to finance this project using its traditional debttoequity ratio of 1.5. The issue cost of equity is 6% and the issue cost of debt is 1%. What is the total cost of raising funds (i.e. total floatation cost)? A. $18,330 B. $770,800 C. $10,071 D. $14,100 20. The outcome of the Brexit referendum was a surprise to the market. The stock market in the U.K. reacted negatively to the outcome, while the US market reacted positively. Which of the statements is correct? A. The U.K. market is more efficient than the US market. B. The US market is only semistrong efficient C. Both markets are equally efficient. D. The US market is only weakly efficient. 21. Given the following data for a stock: riskfree rate = 5%; beta (market) = 1.5; beta (size) = 0.3; beta (booktomarket) = 1.1; market risk premium = 7%; size risk premium = 3.7%; and booktomarket risk premium = 5.2%. Calculate the expected return on the stock using the FamaFrench threefactor model. A. 12% B. 11.5% C. 22.3% D. 7.8% 22. Next year's earnings and dividends of stock X are respectively $2 and $1. The required rate of return on stock X is 10% and investors anticipate perpetual growth at 5% per year. What is the associated current price of stock X? A. 40 B. 20 C. 0.05 D. 0.025 23. Stock X has a standard deviation of return of 10%. Stock Y has a standard deviation of return of 20%. The correlation coefficient between stocks is 0.5. If you invest 60% of the funds in stock X and 40% in stock Y, what is the standard deviation of a portfolio? A. 10% B. 20% C. 8.4% D. 12.2% 24. Assume firm B sells all its output to firm A. The following table shows selected financial data, in millions, for the two firms: A B SALES 100 20 INTEREST 4 1 NET INCOME 10 4 ASSETS 50 20 Assume that the two firms merge. If A continues to sell goods worth 100, what will the new firm's return on assets? A. 0.14 B. 0.20 C. 0.08 D. 0.17