QUESTION 1 You are examining the protability of two firms. Selected data from their respective balance sheets and income statements are in the table below. Which of the following statements about the return on equity (ROE) is true? Select the best one. (Hint use the DuPont Identity) Select Balance Sheet Data [in 5millions) Select Income Statement Data (in 5millions) Other Liabilities Total Assets Total Debt [excluding Debt and Sales EBiT Net income Tax Rate Shareholders Equity] Firm Y 12,000 2,000 2,300 650 Firm Z 10,000 2,500 1,400 580 O |. The ROE for Firm Y is higher than the ROE for Firm Z because Firm Y has a higher asset turnover ratio than Firm 2. O H. The ROE for Firm Y is higher than the ROE for Firm Z because Firm Y has a higher equity multiplier than Firm Z. O |||.The ROE for Firm Y is lower than the ROE for Firm Z because Firm Y has a lower equity multiplier than Firm Z. O IV. The ROE for Firm Y is lower than the ROE for Firm 2 because Firm Y has a lower asset turnover ratio than Firm 2. O V. The ROE for Firm Y is equal to the ROE for Firm 2. QUESTION 2 You are examining the profitability of two firms. Selected data from their respective balance sheets and income statements are in the table below. What is the return on invested capital (ROIC) for Firm Y? Select the best one. Select Balance Sheet Data (in $-millions) Select Income Statement Data (in $-millions) Other Liabilities Total Assets Total Debt (excluding Debt and Sales EBIT Net Income Tax Rate Shareholders Equity) Firm Y 12,000 2,000 300 2,800 650 760.00 30% Firm Z 10,000 2,500 300 1,400 580 380.00 30% O I. 5.56% O II. 4.06% O III. 4.20% O IV. 7.84% O V. 3.89%QUESTION 3 You are a project manager for your company and you are faced with five potential projects that you can invest in. Free cash flow projections and additional relevant data are given for each project in the table below. Assume that there are no cash flows after year 3. Assume that you can only take each project once and that you can only choose one project. Which project would you invest in? Select the best answer. FCF Forecasts by Year (in $1,000) Interest Project 0 IRR 1 2 3 Rate (EAR) Project A (800) 0 0 1,350 15% 19.1% Project B (500) 280 400 0 15% 21.7% Project C (700) 150 270 420 10% 8.3% Project D (500) 0 320 500 12% 21.1% Project E (800) 880 0 0 12% 10.0% O I. Project E O Il. Project D Ill. Project C O IV. Project B O V. Project AQUESTION 4 Your firm has a choice of investing in a number of different projects. The Table below provides information on the individual projects. Assume that your firm has enough cash to invest in all projects, but your firm is constrained in the total amount of factory space it can allocate. Specifically, it can only afford to allocate 200,000 square feet of factory space across different projects. Which combination of projects should it choose? Select the best one. Project Initial Investment NPV Square feet of factory (in $ millions) (in $ millions) space required (in 1,000 sqft) 40 60 150 140 50 50 60 230 70 90 100 30 40 160 50 110 140 50 120 50 50 20 190 200 O I. Projects A and B O Il. Projects B, E, F, and G O III. Project H O IV. Projects A, C, F, and H O V. Projects C, D, E, and FQUESTION 5 Kaldi's Inc. only pays dividends to its shareholders. The current share price is $85, the company has 20 million shares outstanding, $400 million in outstanding debt, and $200 million in excess cash. Assume that the company will use all of its excess cash to pay its shareholders a dividend. For simplicity, also assume that the exdate is tomorrow and that the dividend will be paid on the ex- date. Assume that market are not perfect, and that the only market imperfection are taxes. If the tax rate on dividends is 20% and the tax rate on capital gains is 10%, what will happen to the share price on the ex-date? Select the best one. Q |. The share price will decline to $75. O H. The share price will remain at $85. O |||.The share price will increase to $95. C) IV. The share price will decline to $76.11. C) V. The share price will decline to $73.75. QUESTION 6 Supreme Roasters Inc. only pays dividends to its shareholders. The current share price is $200, the company has 15 million shares outstanding, $300 million in outstanding debt, and $150 million in excess cash. Assume that the company will use all of its excess cash to pay its shareholders a dividend. For simplicity, also assume that the exdate is tomorrow and that the dividend will be paid on the ex date. Assume that market are perfect (Le. there are no taxes, no transaction costs, and no information problems). What will happen to the share price on the exdate? Select the best one. Q I. The share price will decline to $190. C) II. The share price will increase to $210. O |||.Nothing, the share price will remain at $200. O IV. The share price will decline to $195. O V. The share price will increase to $205. QUESTION 7 You are a consultant that has been hired to recommend a payout policy for UBT Corp. You have compiled a table with the current tax rates that different types of investors in the stock market face (see table below). Assume that all of UBT's shareholders are investors of Type 2. Given this information, how should UBT structure its payout policy? Select the best one. Investor Type Tax Rate an Dividends Tax Rate on Capital Gains Q |_ The company should only repurchase shares, because the tax rate on dividends is higher than the tax rate on capital gains for this investor type. 0 II. This investor group will be indifferent between the company paying dividends or repurchasing shares. Q |||_The company should only repurchase shares. because the tax rate on capital gains is higher than the tax rate on dividends for this investor type. C) IV. The company should only pay dividends, because the tax rate on dividends is lower than the tax rate on capital gains for this investor type. O V_ The company should only pay dividends, because the tax rate on dividends is higher than the tax rate on capital gains for this investor type. QUESTION 8 You are a consultant that has been hired to recommend a payout policy for UBT Corp. You have compiled a table with the current tax rates that different types of investors in the stock market face (see table below). Assume that all of UBT's shareholders are investors of Type 1 and Type 2. Given this information, how should UBT structure its payout policy? Select the best one. investor Type Tax Rate on Dividends Tax Rate on Capital Gains Type 1 30:31: 19% Type 2 20:31: 20% Type 3 10% 20% Type a 0% 0% O |_ The company should only repurchase shares, because Type 1 investors will prefer repurchases and Type 2 investors will be indifferent between dividends and repurchases. 0 ||_ The company should only repurchase shares, because Type 2 investors will prefer repurchases and Type 1 investors will be indifferent between dividends and repurchases. C) III. Both investor groups will be indifferent between the company paying dividends or repurchasing shares. O N, The company should only pay dividends, because Type 1 investors will prefer dividends and Type 2 investors will be indifferent between dividends and repurchases. O V_ The company should only pay dividends, because Type 2 investors will prefer dividends and Type 1 investors will also pefer dividends QUESTION 9 You are trying to estimate the share price for DownStream Inc. You have forecasted the following information about earnings and payouts to shareholders for the next five years (see table below). In addition, you know that after year 5 the company will maintain a constant payout rate of 70% in perpetuity. The company's equity cost of capital ( rE) is 12%, its return on new investment is 13%. and it currently has 200 million shares outstanding. Based on the information provided, what is a good estimate for the rm's share price? Select the best one. Earnings and Payout Forecasts (in $-millions| Year 1 2 3 4 5 Total Earnings of the Firm [in S-millions] 1500 1650 1750 1830 1900 Total Dividends Paid [in S-millions] 600 800 900 900 1000 Total Share Repurchases [in S-millions] 0 0 0 200 300 O |. $51.16 0 N. $115.85 0 |||.$63.56 0 IV. $99.85 O V. $12,712 QUESTION 10 You are trying to estimate the share price for SolarStream Inc. You have forecasted the following information about earnings per share and dividends per share for the next five years (see table below). In addition, you know that after year 5 the company will maintain a constant payout rate of 60% in perpetuity. The company's equity cost of capital ( r ) is 12%, its return on new investment is 13%, and it currently has 100 million shares outstanding. Assume the company only pays dividends and does not repurchase any shares. Based on the information provided, what is a good estimate for the firm's share price? Select the best one. Earnings and Dividend Forecasts (in $) Year 1 2 3 4 5 Earnings per Share (in $) 3.00 4.50 5.00 5.50 5.80 Dividends per Share (in $) 0.00 0.40 1.00 2.80 3.40 O I. $34.59 O II. $110.85 O III. $67.53 O IV. $0.35 O V. $14.20