1. Holding all else constant, if you increase the units of production (Q), then total Fixed Costs will increase? True or False

1. Even if you are not told what the Equity in dollars is, the Capital Structure can be calculated if you have the dollar value of Assets as well as the Leverage Ratios? true or False
2. If the WACC is increased to adjust for a higher risk premium at the same time the rest of the analysis does not change, the NPV will also be increased.? True or Fasle
3. One of the advantages of the CAPM Model over the Dividend Growth Model is that the Risk-Free rate has remained constant since the CAPM Model was first used to determine the Cost of Equity.? True or False
4. If the yield to maturity of a corporate semi-annual bond is less than the bond's coupon rate, then the bond will sell at a premium.? True or False
5. On Christine's 25thbirthday, she started to plan for her retirement and deposited $10,000 into a Jaguar Mutual Fund account that she expected to earn 7% every year for the next 40 years (annual compounding). When Christine was 45 (exactly 20 years ago) she realized that the Jaguar account would not be enough to have $1,000,000 in retirement funds so she invested another lump sum into a Badger Mutual Fund account that appreciated exactly 10.70% every year (annual compounding).On Christine's 65thbirthday, she has a total of $1,000,000 from her two retirement accounts but she decides to buy a company instead of retiring.She never deposited more than the two original lump sums and she has never withdrawn any money from these accounts.How much did she originally deposit into the Badger Mutual Fund account?
6. Bert decided to sell his company, Smith Brothers, on a loan contract that would provide him equal monthly payments for 5 years starting next month.The buyer, Christine, offered $2,000,000 and Bert countered at $2,500,000.Being fair-minded people, they agreed to meet exactly in the middle on the sale price and the contract reflected a 6.20% annual interest rate since Bert was providing this payment method rather than receiving all the money up front.How much will Bert receive each month from Christine under this agreement?
7. Christine's loan officer at Lighthouse Bank quotes her a rate on a $2,700,000, 5-year revolving line of credit that she will use to make the monthly payments to the previous owner of Smith Brothers, the company she is buying.The bank is using her $1,000,000 in retirement funds as collateral.Being very financially sophisticated after going to Kelley, she feels like the deal Bert is offering her with an APR of 6% is a bargain and based on her credit rating, she plans to borrow from the bank at a great rate too.What is the Effective Annual Rate (EAR) on her revolving line of credit if Lighthouse Bank charges her an APR of 5.70 percent, compounded monthly?
8. Before finalizing the deal, Christine needs to feel confident she is not overpaying.She estimates the cash flows Smith Brothers will generate over the next 4 years and then estimates a terminal value in year 5 that represents the company's value into perpetuity.The total cash flows she calculates from the three divisions (commercial fishing, wholesale seafood sales, and retail/restaurant sales) are as follows:

$100,000,$150,000,$200,000,$300,000,$3,200,000.

If Christine has a cost of capital of 13 percent, how much are these future cash flows worth today?

9. Smith Brothers is a small company and it isn't publicly traded, but Christine wants to make sure that she understands the appropriate cost of equity to be used for her new company. When evaluating the three divisions, she found 5 publicly traded companies for the pure play method and the average beta was 1.41.She wants to determine the expected return on the market and believes there is a 25% probability of a recession when stocks are likely to lose 4%, a 50% chance of a normal economy when stocks will earn 10%, and a 25% probability that the economy will boom and earn 16%.The risk-free rate is 2.2 percent. What is the cost of equity after using the CAPM and adding 6% for the small equity size premium?

10. Smith Brothers doesn't issue bonds yet because it is a small, private C-Corporation but financial managers still need to figure out what the appropriate cost of debt will be.Since Lighthouse Bank is lending Christine the money for the revolving line of credit and they know her character, they are also offering to provide long-term loans for future project financing at a rate slightly above the WSJ Prime Rate of 3.10%.The bank loan committee assigns credit risk premiums of 2% for companies like this. What is the after-tax cost of debt for Smith Brothers?

11 .Three years after the acquisition, the company is doing very well and has taken on some debt from opening more and more restaurants.In fact, the company is mostly looked at as a seafood restaurant now despite its other divisions.The capital structure is similar to other companies in the seafood restaurant industry with NAICS code 722511.Smith Brothers has a debt-equity ratio of .54 and a tax rate of 21 percent. The cost of equity is now 16.3 percent and the after-tax cost of debt is 5.21 percent. What is the firm's weighted average cost of capital?

12 After Christine became CEO, she had so many ideas that have worked to make the company very large and profitable.One more successful project may make them attractive enough to be purchased by a large publicly traded competitor.Due to its uncertainty, the CFO assigns a Risk Adjusted WACC of 16% to the current project under consideration with the following initial investments(-) and cash flows(+) in the CFFA summary:

Initial investment in Net Working Capital of $100,000, Initial investment in Fixed Assets of $1,900,000,

Year 1: $400,000, Year 2: $500,000, Year 3: $600,000, Year 4: $700,000, Year 5: $1,400,000.

What are the NPV and IRR of this project?

13. Gertie Restaurants decides to purchase Smith Brothers and needs to finance the acquisition by issuing $100,000,000 of 5.65 percent coupon bonds with semiannual payments and a yield to maturity of 6.91 percent. The bonds will mature in 5 years. What is the market price per bond if the face value is $1,000?

14 .The acquisition of Smith Brothers makes stockholders of Gertie Restaurants happy and as a result, the expectations for estimated future dividends of the combined company are revised. Before the acquisition, they just paid a dividend of $3.00. Dividends next year will be cut to zero to absorb the new operations, then D2 will be $3.00, D3 will be 10% higher than D2, and then the dividend growth rate will fall off to a constant 3 percent thereafter. The required return is 13.11% percent. What is the current share price based upon these new dividend estimates?